Money markets

November 15, 2013, by CRBFS Professor James Devlin

Malaysia plans to be the first Islamic financial superpower

Could a new upstart be about the join the likes of London, New York and Tokyo as a global financial superpower? The Malaysian government would like to think so, at least. Recently it announced bold plans to transform the country’s capital Kuala Lumpur into a major financial centre in a bid to raise its profile and spark greater international trade and investment.

The proposed new financial district, covering 70 acres and featuring 11 new buildings with 25 or more floors, has been dubbed “Asia’s Canary Wharf”. Known as the Tun Razak Exchange (TRX), the government believes this project is the foundation on which Malaysia will compete with regional financial superpowers such as Singapore and Hong Kong.

So is this a dream or can it be transformed into a reality? The Global Financial Centres Index, a research-informed measure of the competitiveness of a range of cities worldwide highlights the challenge that lies ahead for emerging centres like Kuala Lumpur.

In the most recent rankings the city dropped one place to 22nd globally but still featured in the Asian top 10. With London and New York ahead of the pack, Singapore and Hong Kong already in strong positions and the dynamism of Shanghai and Shenzhen to contend with, gaining ground on the superpowers will be tough for Malaysia.

And it may be too tough, unless TRX turns to a more niche approach and builds on the country’s established strength in the rapidly growing Islamic financial marketplace.

Islamic strengths

Demand for Islamic financial services is growing both regionally and globally, and Malaysia has been well placed to take advantage of this. It is Islamic finance that provides Malaysia with its advantage over neighbouring financial centres, and those mapping out the country’s future business model would be wise to play to their strengths.

According to its central bank, Malaysia’s Islamic banking assets total US$168.4 billion, a quarter of its banking system. This in turn accounts for over 10% of the world’s total Islamic banking assets.

The country’s Islamic financial sector is characterised by a robust and shariah-compliant regulatory system. It has a strong sukuk (Islamic bond) market – over 60% of the global total – making Malaysia one of the world’s leading Islamic capital marketplaces. This attracts institutions from across the globe and an associated pool of liquid cash.

Banking on finance

Malaysia is banking on the TRX to be a dedicated international financial hub, promoting Kuala Lumpur as a new nucleus of global economic growth. The project is seen as a crucial to the government’s economic plans, creating the critical mass needed to significantly boost productivity and accelerate Malaysia’s growth. The aim is to become a high-income economy by 2020.

But, if Malaysia is to join the top flight of international financial centres, it must leverage its status as an established Islamic finance hub. And it must address the challenges associated with the supply of high quality human capital.

The performance of international financial centres is underpinned by the quality of people, of the business environment, access to international markets, infrastructure and general competitiveness. To outperform Asian rivals on these attributes will be a challenge; there are continued concerns about the quality and employability of graduates, and while the World Bank says the ease of doing business has improved, there are still problems with infrastructure and general competitiveness. And the country’s ability to access international financial markets may depend on attracting major players away from established rivals.

Authorities are confident, however, that they will be able to attract these new players. The central bank estimates that up to 56,000 new finance industry positions will be needed in the next decade, including up to 40,000 jobs in Islamic finance.

However poor scores in international student assessments, declining English language capabilities and persistent concerns about the employability of graduates do not augur well.

Malaysia still has a people problem. Yes, the government may be able to build world-class facilities in Kuala Lumpur and offer tax breaks and other incentives to companies looking to operate from the new district. And yes, Islamic finance will still give the country a profitable niche to exploit.

But without a supply of educated, English-speaking workers, hopes of challenging regional neighbours in Hong Kong and Singapore may be little more than a Malaysian pipe dream.

 

 

This blog post first appeared at The Conversation (see  https://theconversation.com/malaysia-plans-to-be-the-first-islamic-financial-superpower-19922)

 

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