Malaysia forms ties to the Gulf to develop Islamic financial services

A cooperation agreement between the bourses of Malaysia and Saudi Arabia – the world’s two largest Islamic financial services markets – stands to help the industry grow at a greater clip in both countries.

The deal, signed on February 20, will see the exchanges in Kuala Lumpur and Riyadh share expertise and develop human resources jointly. It covers topics such as equities, mutual funds and sukuk (Islamic bonds), and comes after an agreement between Malaysia’s central bank and the UAE in October on bolstering economic ties, including in the arena of IFS.

Combined, Malaysia and Saudi Arabia hold $682bn in Islamic banking assets, according to Reuters. The Saudi exchange, Tadawul, lists the world’s biggest Islamic banks, while Bursa Malaysia hosts the largest and most liquid market for sukuk.

Expanding its draw

The Malaysian market in particular is set to expand this year thanks to greater international interest, according to ratings agency Standard & Poor’s (S&P). “Malaysia already benefits from a broad sukuk investor base and liquid debt market. So the increased interest from issuers – notably in the Middle East and Asia – in tapping the Malaysian ringgit and dollar market should in our view continue over the next few years as Malaysia cements its leading position in the industry,” S&P wrote on February 4.

Major international investors, too, are extending Malaysia’s clout in IFS. AIG, the US-based insurance company, revealed in early February that by June it plans to start a sharia-compliant reinsurance business in Malaysia – a country that accounted for 11% of the $20bn global takaful (Islamic insurance) market in 2013, according to a February 13 report from the Malaysia International Islamic Financial Centre

Also in February, Libya’s ambassador to Malaysia, Anwar A Y Elfeitori, said his country was seeking more cooperation with Malaysia to assist in the development of its Islamic banking sector.

As a result of such global positioning, the IFS market has the potential to provide a significant boost to the economy, particularly in talent and employment, Adnan Alias, CEO of the Islamic Banking and Finance Institute Malaysia, told the local media recently.

“Malaysia has the right landscape and regulatory framework to further spur the development of talent in Islamic finance,” he said, adding that the IFS workforce was expected to grow from 144,000 to 200,000 in the next eight years. He noted the contribution of IFS to GDP was set to be around 10-12% in 2020, compared with the latest figure of 8.6% in 2010.

Steps toward further growth

While Malaysia has had a significant degree of success in the international IFS market – the Kuala Lumpur-based IFS Board, for example, is one of two global standards-setting bodies – the South-east Asian country faces increasing competition. Potential competitors include Dubai, which in recent months has signalled its intentions to establish the emirate as a centre for IFS.

According to some observers, Malaysia could be doing more to ensure continued growth in the IFS market. Islamic banking and finance could account for 50% of the financial sector if domestic banks like Maybank and CIMB Group give “a big push” to their IFS strategies, Humayon Dar, visiting professor of Islamic Finance at the Academy for Contemporary Islamic Studies, Universiti Teknologi MARA, wrote in an op-ed published by Malaysian Reserve on February 24.

Humayon said this would involve “Islamising” businesses by making more procedures sharia-compliant. “This is perhaps the time for the government to consider converting Cagamas [the Malaysian national mortgage company] into a fully-fledged Islamic financial institution, as almost 50% of its business is already sharia-compliant,” he added.

Others say the local IFS sector could receive a boost if Malaysia were to adopt sharia-compliant laws. Speaking in February at a conference on Islamic banking and finance law in Kuala Lumpur, former chief justice Tun Abdul Hamid Mohamad pointed out that many countries have set up regulatory frameworks to facilitate the development of Islamic finance products such as sukuk, but none has drafted sharia-compliant laws that could be used to settle the disputes that arise from their use. This could provide an edge for Malaysia, which is already viewed as a “model Islamic country”, he said.

As the global market grows – Islamic financial assets are currently valued at $1.3trn and S&P expects the industry to grow 20% annually from 2011 to 2015 – Malaysia is in pole position to capitalise on its early entry into the sector. While linking up with Gulf countries will help spread and develop Malaysian expertise on Islamic finance, new competitors in the sector continue to arise. This means that Kuala Lumpur must strive for the innovation that will keep its IFS sector ahead of developing trends.

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Malaysia: New entrant raises air travel competition

The budget airline market in Malaysia is continuing to evolve. A new entrant, Malindo Air, is challenging the dominant player, AirAsia, as the latter plans an initial public offering (IPO) for its long-haul division and is facing delays at Kuala Lumpur’s new low-cost airport.

A joint venture between Malaysia’s National Aerospace and Defence Industries (51%) and rising Indonesian budget carrier Lion Air (49%), Malindo Air launched operations in March 2013 with flights between Kuala Lumpur International Airport (KLIA) and Kota Kinabalu, the capital of the state of Sabah. The airline has since added flights between KLIA and Kuching, the capital of the state of Sarawak, and it hopes to cover 12 destinations by the end of 2013.

As of mid-June, the company was already offering ten routes, including to Kuala Lumpur, Kuching and Kota Kinabalu; Johor Bahru, in southern Peninsular Malaysia, to the north of Singapore; Kota Bharu, in the north-east of Peninsular Malaysia; Miri and Sibu in Sarawak; Subang, near Kuala Lumpur; Tawau in Sabah; and Penang, on the island of the same name, which is a centre for business and tourism in north-west Malaysia. The links to Sarawak are likely to be widely welcomed, as its tourism sector has high potential but relatively limited development due to poor connectivity.

Malindo Air’s first international link, New Delhi, is expected to be one of the next destinations from KLIA, and is set to be followed by one or more cities in southern China, with Guangzhou, Hong Kong, Shenzhen and Kunming all on the radar, according to Malindo Air’s CEO, Chandran Ramamurthy. Press reports suggest that Kochi and Trichy in India may also be targets – as they are already well-performing routes for AirAsia – as well as Singapore and even Jakarta, which are currently served by Lion Air itself.

Malindo Air has said that it will be able to attract customers from budget airlines, such as AirAsia, as well as from full-service carriers, such as Malaysia Airlines, by providing amenities like hot meals, but all at low fares. Indeed, Malindo Air bills itself as “Not Just Low Cost” and offers more perks than most budget airlines, including free luggage up to 15 kg, free snacks and in-flight entertainment, as well as business class, which may appeal to some travellers currently flying in economy-only cabins of its budget rivals.

The shot of competition that Malindo Air has brought to the market has already brought down prices; flights from KLIA to Kuching and Kota Kinabalu fell 18.6% and 12.6%, respectively, between March 2013 and May 2013, according to travel website Skyscanner, as reported by the local press.

Still, these are very early days for Malindo Air – which was barely a concept this time last year – so making hard and fast predictions about its effect on the airline market in Malaysia and the wider region is difficult. Certainly, the new airline’s swift emergence will be watched closely by AirAsia, which has recently seen stellar success in expanding across the region and already has a fleet of 124 planes. Despite its geographical reach, 80% of the carrier’s profits still come from Malaysia, driving group-operating profit margins to 19.5% – fairly fat by airline industry standards. The company’s profits fell 39% in the first quarter of 2013, partly due to higher financing costs.

AirAsia owner Tony Fernandes and the CEO of the company’s Malaysian operations, Aireen Omar, have both played down the competition that Malindo Air poses, and Omar told the Malaysian National News Agency that the airline is on target for network expansion. AirAsia X, the long-haul division of the carrier, launched an up-to-$370m IPO in early June, saying that it would use the funds to finance the purchase of new planes.

But the budget airline faces challenges besides Malindo Air, including delays in the construction of the new international terminal, KLIA2, which will replace the Low Cost Carrier Terminal (LCCT) at KLIA and is expected to handle about 45m passengers each year. In January 2013 the government had said the facility would open on June 28 of the same year, but in May, Malaysia Airports Holding, the operator of the airport, said that it would be indefinitely delayed and gave no new opening date. AirAsia has since called for the establishment of an independent entity to review progress on the project, as well as to determine a completion date and the estimated cost.

For now, AirAsia will continue operating out of LCCT, which is not used by Malindo Air. The latter flies from KLIA’s main terminal building, generally considered more convenient for making international connections, providing one reason for customers to choose the upstart over its more established rival.

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Malaysia: Retail optimism tempered by caution

A gradually improving economic climate is expected to support continued retail growth in Malaysia in 2013. However, downside risks from the international environment and political uncertainty may affect economic expansion before the year is through.

In January, local press reports suggested the retail market would grow by 5-6% this year. The sector is expected to track or even outstrip broader economic growth, which official estimates suggest will come in at 4.5-5.5%.

Retail Group Malaysia, a local retail consulting firm, said in a recent report the sector would grow by 6% in 2013, following growth of 6.9%, 5.9%, 4.8% and 5.7% in the four quarters of 2012. The organisation said the market would receive a fillip in the first quarter of 2013 from the second round of the government’s 1Malaysia People’s Aid (Bantuan Raykat), which began in January.

Segments that are expected to benefit include electrical and electronics, largely due to a RM200 ($65) rebate on smartphone purchases for 21-30-year-olds who have monthly incomes that do not exceed RM3000 ($965); and bookshops capitalising on the RM250 ($80) book tokens to be given to all university students.

Spending associated with Chinese New Year should also have provided another boost at the beginning of 2013. Retailers often offer promotions during the holiday period, adding momentum during what is already a busy time of year. However, the holiday is usually followed by a dip in sales.

At the beginning of the year, Yen Global, a Malaysian clothes manufacturer, wholesaler and retailer, said the fashion and lifestyle segment had grown by a “modest” 5% in 2012. However, the company considers the outlook good enough to undertake significant investments in expansion, extending its branch network, revamping its products and providing incentives for frontline staff.

“Retail companies that want to chart a growth path will need to expand cautiously, and with the right timing and location in order to rise above the competition,” said Goh Kok Beng, executive chairman of Yen Global, in the company’s annual report.

Similarly, CapitaMalls Malaysia Trust, a real estate investment trust, said in January that it was continuing to look into mall acquisitions, expecting 6% retail growth in 2013 after a successful 2012. The fund focuses on suburban “neighbourhood” malls in which people do day-to-day shopping, a model that has become increasingly popular in recent years as the “destination mall” market has become more saturated.

The single-biggest reason for optimism among retailers, wholesalers and mall investors is Malaysia’s continued strong economic performance, despite a difficult international situation coloured by the eurozone crisis and the US’s debt troubles. Consumer confidence is currently at a two-year high. Momentum is being maintained by a variety of factors, including high prices for Malaysia’s commodity exports, but more importantly, domestic demand supported by investment, a favourable interest rate environment and low inflation.

Public and private investments under the Economic Transformation Programme (ETP), which seeks to boost value-added in the economy and put the private sector at the forefront of growth, is particularly important. The ETP, which involves a raft of investments and reforms, is being rolled out through to 2020 as part of Malaysia’s ambition to become a high-income country by the end of the decade.

Meanwhile, inflation in 2012 averaged 1.6%, half the level recorded in 2011. Analyst surveys forecast that the central bank will keep rates on hold until the second half of the year.

While these factors mean there is good reason to be upbeat about the outlook, there are a number of downside risks to take into account. First and foremost is the broader economy, which could take a hit if the global situation worsens. Significant softening in commodity prices, a worsening in the eurozone crisis affecting the international economy or other unforeseen challenges (such as an oil price spike caused by conflict in the Middle East) could all cool growth in Malaysia.

Another factor that retailers are taking into account is the general election, which is expected by June. Opinion is divided about the impact of the run-up to the poll on the sector; while some expect there to be little effect, others are already reporting a degree of caution among shoppers, particularly regarding big-ticket purchases. Depending on the result of the election, uncertainty after the vote could cause both investor and customer sentiment to dip.

The Malaysian retail sector performed well in 2012, and looks set for another good year in 2013. However, a number of factors, both internal and external, could have a dramatic impact on growth as the year unfolds.

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Malaysia: Steady and growing

Despite global uncertainty, Malaysia looks set to achieve its GDP growth target this year, thanks to a benign domestic climate, rising investment and fiscal stimulus.

According to Ahmad Husni Hanadzlah, the second minister of finance, Malaysia is on track to achieve its target of 4.5-5% economic growth for 2012. Husni, who was speaking to reporters on the side lines of a conference on October 16, said that he expected growth to be on the upper side of the target range, despite an expected slowdown in the third quarter.

Growth picked up to 5.4% in the second quarter from 4.7% in the first, but the third-quarter figure is expected to be lower, particularly after disappointing results in August, when exports fell by 4.5% year-on-year – the sharpest drop in three years – and industrial production shrank by 0.7%. The minister attributed the dip to the effects of the global economic environment.

However, Zeti Akhtar Aziz, the governor of the central bank, said that both the third and fourth quarters should show “good growth”, and indeed, the markets seem to agree, with the ringgit lifting in the first two weeks of October. The Malaysian currency has been trending broadly upwards against the dollar since June.

In an interview with the international press in October, Zeti said that she expected growth in 2013 to be “much the same” as this year, barring a deterioration of the world economic climate.

Thus far, Malaysia has performed remarkably well, despite the international uncertainties caused by the eurozone crisis, the US debt crunch and a slowdown in China. According to Zeti, domestic demand and consumption are both growing at 7%, while investment is running at 10%. The stock market hit all-time highs in October.

There are a number of reasons for Malaysia’s strong performance, including relatively high prices for some of the commodities it produces, including crude oil. Low inflation (1.4%) in the year to August has allowed the central bank to keep interest rates on hold for eight successive meetings. Meanwhile, the banking system is stable and well capitalised. Investors looking to shift portfolios towards emerging markets and away from the troubled economies of the EU and the US have alighted on Malaysia, helping to sustain growth. Further quantitative easing in developed economies, including the US, is expected to increase the flow of capital to emerging markets such as Malaysia.

Malaysia is also starting to benefit from the government’s Economic Transformation Programme (ETP), a wide-ranging series of reforms intended to release the economy’s latent potential in the quest to achieve “developed nation status” by 2020. A central aim of the ETP is to strengthen value-added industries and services, raise incomes and reduce the historic reliance on volatile commodity earnings.

While the ETP’s raft of schemes is feeding through into the economy over the long term, there has also been a significant fillip from the 2013 budget, which is already buoying consumer confidence and should help support domestic demand. The budget lays out RM251.6bn ($81.73bn) in spending, including more generous benefits for the poor, bonuses for public sector workers, as well as tax cuts. The largesse is partly linked to next year’s election, in which the ruling Barisan Nasional will face a strong challenge from the opposition.

After the election, however, the government may need to tighten its belt. While the 2013 budget foresees the deficit being reduced from 4.5% to 4% of GDP, this is still quite a high ratio, particularly as it adds to Malaysia’s debt pile, which currently stands at 52.6% of GDP – the highest in Asia after India and Pakistan, according to the international press. Malaysia is being urged to ponder long-term tax reforms to increase income and reduce its dependence on revenues from state oil and gas giant Petronas, which currently provides around 40% of government funds.

Should the global economic situation worsen, Malaysia will have limited scope for further fiscal stimulus without running the risk of undermining stability. Domestic demand has been an important factor in maintaining growth of late, which is a positive development both for the country and its international partners. But as a globalised economy, and an exporter, Malaysia cannot be isolated from the effects of international crises.

Nonetheless, Malaysia’s baseline scenario is continued impressive growth for the remainder of this year and 2013. The country is thus in a fortunate situation compared to much of the world, and it is now in a position to implement the investments and reforms that can keep it on course for its 2020 target.

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Malaysia: Steady and growing

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