Islamic Finance: Driving winds of positive changes in the Malaysian investment climate

The growing Muslim population in South East Asia has accelerated the growth of Islamic finance in this region. A recent study by S&P Global Ratings put the current estimate of the Islamic banking sector in South East Asia at US$290 billion.

And over the next couple of years, Islamic finance is estimated to grow at a compound rate of 8 per cent annually in South East Asia. Malaysia and Indonesia are expected to be at the forefront of this astounding development.

Growth and opportunities for organisations looking for international expansion in Malaysia, using Islamic Finance

Malaysia is one of the few countries in South East Asia that has a robust Islamic financial system and investor-friendly market laws. These factors make Malaysia one of the fastest developing Asian economies. Since its establishment in 2016, the Malaysian Hub has been collaborating with Malaysian counterparts in putting the country on the global leadership map in Islamic finance.

According to Fitch ratings, Islamic financing constituted 37 per cent of the total banking system in Malaysia by the end of 2020. This figure was a sharp 2 per cent rise from the previous year amidst the pandemic where the contribution of Islamic financing was also an encouraging 35 per cent in the total banking system.

International expansion, however, is not just about setting up entities or local staff overseas. It is about knowing where the right place to invest and having a genuine commitment to effectively fund this expansion. Up-to-date local insights and intelligence are important to aid businesses in making the right choices.

What makes Malaysia the world leader in Islamic finance?

Malaysia has considerable opportunities for companies looking to expand in the country, with the help of Islamic finance. And among all the industries that have a bright prospects in Malaysia, fintech seems to be one of the front-runners.

According to the executive director of the Islamic Market Capital Development of the Malaysian Securities Commission, the country’s fintech development, accelerated by the growth of innovative solutions will support the Muslim economy. While other factors like Islamic Social Finance and socially responsible investing (SRI) will also chart the growth trajectory of the Malaysian Islamic Capital Market or MICM in the future, the director believes.

The country’s additional emphasis on digital transformation has resulted in the following:

  •  Better connectivity enables the issuers, intermediaries, and investors to access both existing and fresh markets more efficiently and cost-effectively.
  • Small businesses and 40 per cent of the lower rung household income earners can utilise financial technology solutions to generate more income opportunities.
  • The International Sustainability Sukuk plays a pivotal role in the development of the Islamic market and banking sector. It complies with Sharia in improving the living conditions in Islamic society by funding large projects that are off-limits for individuals and companies.
  •  Top Islamic banks in Malaysia can benefit from the issuance of green Sukuk.
  • Sukuk helps in the redistribution of wealth and implementation of social justice, which are the two most important pillars of Islamic finance.
  • Using Sukuk to fund big projects means the following. The investors are encouraged to help develop economies by generating and creating, instead of consuming or manoeuvring others.

Investor-friendly approaches to financing

Having said this, the nitty-gritty of financing cannot be undermined. It is a vast area that requires meticulous planning and strategising. As a company which is looking to make forays into the international market or aiming to consolidate its existing base on international soil, having a reliable partner is of paramount importance. As they can help these companies by weaving a strong financial strategy based on intensive research and experience.

Green Initiatives

Malaysia is a country with a strong agenda for eco-friendly investments. So partnering with companies with a focus on sustainability can help these investors set up businesses in Malaysia successfully.

What does it all mean?

The rise of Islamic finance in Malaysia has fostered sustainable development in the country, thus creating more growth opportunities for businesses. But as mentioned earlier, to make investment a success story in Malaysia, a local partner who understands the landscape is a must. Somebody who can help investors from start to finish. These include helping them with setting up their entities, hiring staff and running payroll, managing ongoing compliance and working with them to identify and fully leverage local and regional opportunities. 

Malaysia is a great place to start a business in APAC. The cost of labour and office infrastructure is often better value than some of its regional counterparts, doing business in Malaysia is very straightforward and there is a very disciplined adherence to the rule of law. Transport links are excellent and the infrastructure in Malaysia is world-class. It also happens to be a fabulous tourist destination to tag on a few extra days to a business trip. Malaysia is used by many companies as both a great local business opportunity as well as a hub for tapping into the tremendous opportunities in the wider South East Asian economies.