Malaysia’s universities working to make the grade

Universities in Malaysia have been given a key role in government plans to raise the country to developed-nation status within the decade, but more investments may be necessary if higher education institutions are to meet the targets that have been set by the state.

According to government figures, 25% of all Malaysians between the ages of 18 and 24 are taking part in some form of higher education, a level of participation that Prime Minister Najib Razak says will help the country overcome income inequality and reach its goal of being a high-income nation by 2020.

“The odds of people succeeding in their socioeconomic upward mobility are significantly improved by raising access to education,” he said while attending a ceremony at the Unitar International University in Kelana Jaya on February 27. “Only with equity can we narrow the gap of income inequality and achieve a resilient national unity.”

Working to make the grade

However, it is not just greater access to higher education that is in the government’s sights – Malaysia is aiming to boost the quality of academics as well. The goal is to have at least one local institution ranked among the top 50 global universities by 2020, with a minimum of three in the top 100.

Meeting this target may prove difficult to achieve by the deadline set. In the latest edition of the QS World University Rankings, the preferred benchmark according to the Ministry of Education, the highest-placed Malaysian institution was Universiti Malaya, which came in at 167, followed by Universiti Kebangsaan Malaysia (269), Universiti Sains Malaysia (355) and Universiti Teknologi Malaysia (355).

Malaysia’s universities fared better in the QS World University Rankings by Subject, however, which was released at the end of February. Eight institutions are rated within the top 200 in at least one of the 30 disciplines reviewed, two more than made the grade last year.

Best-performing was Universiti Sains Malaysia, which ranked 28 for environmental sciences, while also joining the top 100 for computer science and information systems, chemical engineering, civil engineering and mechanical engineering. Universiti Malaya reached the top 100 in six categories, including computer science and information systems, chemical engineering, electrical engineering and mechanical engineering.

This year’s results show that Malaysian universities are operating at an increasingly high level within a range of academic disciplines, QS head of research, Ben Sowter, told the local media.

“Overall, the performance of Malaysian institutions has improved compared to last year,” he said. “Through taking a more targeted approach to ranking universities, we have been able to pick up on the particular strengths of Malaysian institutions much more effectively than is possible in overall institutional rankings.”

Academic credence, economic gain

Apart from gaining credibility in the academic world, success in various ratings surveys are of importance to individual universities and the country, and can bring clear financial benefits. Better rankings help universities attract more international students, staff, business investment and research partners.

Another advantage of a stronger higher education system could be a reduction in the flow of Malaysian students overseas, with up to 80,000 studying abroad annually, of whom roughly one third have some form of sponsorship. While a similar number of international students come to Malaysia, the balance of revenue from higher education could be swung more firmly in the country’s favour if it was able to keep more of its students at home while attracting additional fee-paying foreigners from other markets.

One encouraging fact is that many of the disciplines where Malaysian universities scored high in the QS rankings were in technical and scientific fields, indicating strength in areas that have practical applications for economic development. Though Malaysia may find it a challenge to reach the upper tiers of global university rankings, the country appears to be making the grade in terms of moving closer to its national economic targets.

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Malaysia braced for austerity challenge

While rising domestic demand in Malaysia helped reassure investors after last summer’s regional downturn, concerns remain that the country is displaying an over-reliance on high domestic consumption levels to prop up growth.

According to the World Bank’s latest projections, Malaysia is expected to achieve 4.3% GDP growth in 2013, despite substantial capital outflows and a nearly 10% depreciation in the ringgit during the second half of the year.

Domestic demand’s key role

The significant contribution that strong domestic demand has made to Malaysia’s economic resilience is widely acknowledged, with officials, including Zeti Akhtar Aziz, the governor of Bank Negara Malaysia, the central bank, highlighting its impact.

“The domestic sector has been solid and the anchor to drive our growth during this more challenging period,” Zeti told Bloomberg in November. “Global trade slowed down very significantly [in 2013], and of course, that affected us because of the openness of our economy. But had we not rebalanced our economy, we would have had 1-2% growth.”

In the same month, Bank Negara Malaysia announced domestic demand grew 8.3% year-on-year in the third quarter of 2013.

High household debt

In December ratings agency Standard & Poor’s, said increasing levels of household debt in Malaysia, which now exceed 80% of GDP, would be “problematic” if the country’s growth rate slowed. The agency had cut its credit outlook for four Malaysian lenders in the preceding weeks over concerns stemming from a rise in home prices and consumer leverage.

Just two weeks earlier, Nancy Shukri, the minister in the prime minister’s department, said that 16,306 people, or an average of 60 Malaysians daily, had been declared bankrupt in the first nine months of 2013.

Malaysia has one of the highest ratios of household debt to disposable income in the world, with its current level of 140% outstripping even that of the US (123%).

In a move to slow consumer credit growth, in July the central bank introduced certain restrictions on lending, including a ten-year ceiling on personal loans, a maximum tenure of 35 years on property mortgages and a ban on pre-approved personal finance products.

However, conditions may not be as dire as some have made them out to be. As Zeti pointed out in September, less than 2% of household loans were non-performing as of that time.

Effect of new budget

While national efforts to rein in spending are taking shape, they follow a wave of populist interventions, including wage hikes for civil servants introduced ahead of last May’s elections, which almost certainly boosted domestic consumption.

However, Malaysia has been more generally moving to tighten its fiscal position. Under the 2014 budget introduced in October, the government will reduce certain subsidies this year and introduce a new goods and services tax (GST) in 2015. Everyday goods and services will be subjected to a 6% levy, although basic food items and some methods of transport are to be exempt.

International critics have urged Malaysia to break the cyclical nature of spending patterns, suggesting that a new strategy would improve investor sentiment in the long term.

“The new government elected in May must consolidate its credibility by meeting its commitments to reduce the public debt without reneging on its electoral promises,” wrote BNP Paribas in an October analysis. “The prime minister also said the 2014 budget would be marked by austerity … [But] these measures … will only stabilise the public debt ratio at best, without reducing it.”

Public debt stands at around 54% of GDP. According to Douglas McWilliams, economic advisor to the Institute of Chartered Accountants in England and Wales, keeping this figure under 60% is important in terms of maintaining investor confidence and, with reforms in place, is an attainable goal.

“The fast growth is helping taxation revenues and government’s budgetary consolidation, particularly on subsidies but also GST, which means Malaysia’s debt ratio will be below 60%,” he told the local media in December.

The national drive to slow lending to consumers and keep government spending in check has been given a largely positive reception. However, accelerating initiatives and increasing their impact may well help the country in its efforts to attract investors and allay their concerns.

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Oxford Business Group | Budget shake-up for Malaysian real estate

The Malaysian government has taken steps to cool speculation in the property market by imposing a capital gains levy on real estate sales, tightening up regulations governing developers and raising the price bar for foreign investors, moves that have won mixed reviews from analysts.

On October 25 Prime Minister Najib Tun Razak tabled the draft budget for 2014, which has a strong emphasis on raising state revenue and cutting spending. According to the plan, subsidies will be restructured in the coming years and public debt – currently at 53% of GDP – will be lowered.

Among the revenue-generating proposals are a number of new taxes, including a real property gains tax (RPGT), which is also intended to ease property speculation and reduce inflation in housing. Under the new provisions, set to come into effect on January 1, a tax of 30% is to be imposed on gains from real estate sales on properties owned for three years or less, with the rate sliding to 20% if the property is sold in the fourth year of ownership and 15% in the fifth. Any sales after the fifth year will not be charged a capital gains levy. Previously, the capital gains tax on property sales had been set at 10% when introduced in 2010 and later increased to 15%, and applied to sales within two years of purchase.

For foreign property buyers, a different tax scale will be applied, with non-citizens required to pay a tax of 30% on the capital gains for a property sold at any time over the first five years of ownership, after which the rate falls to 5%.

Another move, one seen as even more likely to cool speculation, was the banning of developer interest bearing schemes (DIBS). As their name suggests, developers that offer DIBS agree to pay any interest on home loans during the construction period, making the purchase more attractive to potential buyers. The new provisions also prevent commercial lenders from involving themselves in DIBS-related projects. This measure will probably result in a slowing of off-plan sales by developers, while also reducing the property lending component of some of Malaysia’s larger banks.

While many in the sector have said banning DIBS was a positive move, one that would directly target speculation, others believed it would make it more difficult for first-home buyers to enter the market. One critic of the reform was Michael KC Yam, the president of the Real Estate and Housing Developers Association. Yam told the local media on October 25 that DIBS had been of benefit to many.

“We think that innovative home financing packages such as the DIBS offered by developers of high premium properties should be encouraged to facilitate financing and promote home ownership,” he said.

The RPGT also had its supporters and opponents, with Foo Gee Jen, managing director at property consultancy CH Williams Talhar and Wong, describing the increased levy as a measure that would boost stability in the market.

“The increase in RPGT is a wake-up call for flippers,” he told the local media on November 6. “Investors will have to go back to investing in property fundamentals, such as location and yield.”

However, some analysts have queried whether speculation is as rife in the sector as has been suggested, saying that the higher tax rate on capital gains will do little to reduce price increases for residential properties, one of the stated aims of the bolstered levy.

Foreigners eased out of the low end of the market

The budget also lifts the minimum value of a property that foreign investors can buy from the current RM500,000 ($161,000) to RM1,000,000 ($322,000), a move that may cool some of the speculation by overseas players.

Given the still relatively low price and solid value of Malaysian property, even the increased threshold may not curb foreign interest, though Chang Kim Loong, the honorary secretary-general of the National House Buyers Association, believed the higher ceiling will ease pricing pressures for Malaysian buyers.

“Foreigners must be prevented from snapping up property meant for the lower- and middle-income and thus artificially inflating property prices and creating a domino effect which can result in higher property prices across the industry,” he said in a statement issued the day after the budget was handed down.

Boost for low-cost residential segment

The budget also lays out a plan to add 223,000 new residential units to the national accommodation stocks in 2014, with both the government and the private sector expected to play a role.

The state will directly provide funding for the construction of low-cost housing, while at the same time offering a subsidy of $6000 per unit to private developers that build homes directed at low- and middle-income buyers.

It will be well into the new year before the full impact of the 2014 budget articles dealing with real estate will become apparent. To some degree at least, the buoyancy of the property market will depend on the strength of the Malaysian economy. The government has predicted growth of 5-5.5% in 2014, though ratings agencies and analysts are predicting GDP expansion may fall somewhat short of this target, at 4-4.5%. It could be that a relatively sluggish economy, rather than any increased tax, could slow activity in the property market.

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Malaysia’s palm oil industry faces tough market

The palm oil industry in Malaysia appears set for an uncertain few months, with a number of factors coming into play over the last quarter of the year that could push already low prices down even further, just at the time when production is about to peak.

As of the end of September, Malaysian palm oil prices were down 6% on the beginning of the year. Moving into October, the commodity was trading at $716 a tonne, with predictions it could fall further in the lead-up to the new year.

Malaysia has seen output rise monthly through to August, and while September’s figures have yet to be released, it is expected that volume will again be up. Some estimates put September’s production at close to 2m tonnes, a sharp jump from the 1.74m tonnes of the month before, which itself represented a 3.6% rise over July. This continued increase in output, which is likely to be maintained for the rest of the year – the high season – could further force down global prices as supply overtakes demand.

Also bearing on palm oil prices is the rising tide of soy oil flowing into the market, with the US soy crop set for a better-than-expected harvest and soybean stocks at higher levels than normal for this time of year. This has pushed soybean prices down to near two-year lows as of early October, a trend that will undercut demand for Malaysian palm oil.

Falling oil prices also set to weigh on sales

Another factor weighing down palm oil sales and pressuring prices is the drop in the cost of conventional crude oil. With oil prices falling, there is less appeal for biofuels in the market, and rising output from Libya combined with concerns over demand in the US as part of the fall-out from the shutdown of government, have pushed oil prices down. Benchmark Brent crude was trading at less than $108 a barrel in early October; WTI crude was lower still, dipping below $102, with analysts predicting a further decline in the weeks ahead as price instability posed by a potential US military strike against Syria recedes.

According to Dorab Mistry, head of vegetable oil trading with Indian conglomerate Godrej Industries, palm oil could fall to a four-year low of $617 a tonne in 2014 if crude oil prices go below the $100-a-barrel mark. This would represent a 13% fall on present prices, Mistry told an industry conference in late September.

“The fundamentals of the oilseed and vegetable oils complex are clearly bearish,” he said.

One factor that could boost sales is the drop in the value of the ringgit, which has retreated almost 9% since May. This has made exports more appealing, at least in some markets, though not in those that, like Malaysia, have been hit by the outflow of funds from developing economies. While the weaker ringgit may boost overseas sales, an easing of local currencies against the dollar has taken place in many of Malaysia’s key markets, such as India where the rupee has fallen by 12% since the beginning of the year. This means that any advantage accrued from the devaluation of the ringgit is offset by similar downward moves elsewhere.

Government plans could drain off excess

While palm oil producers may face difficulties in boosting sales abroad, help may be at hand at home. The government has said it is considering lifting the levels of palm oil added to diesel fuel as a way of boosting domestic demand. Malaysia requires a 5% palm oil additive to diesel; the resulting biofuel accounts for a significant portion of palm oil consumption, with nearly 250,000 tonnes of palm oil/diesel blend consumed in 2012, a figure the state aims to double by 2014. Indonesia recently announced it would be raising its palm oil input to biodiesel from 7.5% to 10% next year. Any similar move by Malaysia would help soak up excess production, though the government has yet to set any timeframe for an increase or how far above the current levels the rise would be.

Further state support came in mid-September, when the government decided to keep taxes on palm oil exports unchanged in October, maintaining the 4.5% tariff that has been in place since March. The decision is expected to help boost overseas sales during the peak harvest season and reduce the risk of a large build-up in stockpiles.

It may not be until well into the new year, when local production tapers off, that prices may start to move upwards to any significant degree, though crop losses due to adverse weather or a sudden jump in crude oil prices could give a boost to Malaysia’s palm oil sales. For the present, it seems the best producers can hope for are steady sales and for prices to remain at current levels.

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Malaysia’s oil and gas services looking farther afield

Companies servicing Malaysia’s oil and gas sector are using the experience and expertise gained during collaborative ventures with foreign firms as a launchpad for overseas expansion.

Four decades of developing solutions for Malaysia’s operational environment, under the state-owned hydrocarbons producer, Petronas, have put local outfits on a solid footing to enter the rapidly expanding global oil services industry.

However, the fast pace of growth has also produced challenges for firms embarking on international expansion, including project delays and equipment shortages, which are taking their toll on margins.

Production on the rise

At home, Malaysia’s oil sector services providers have benefited from Petronas’s efforts to galvanise production in recent years, spearheaded by a $30bn investment aimed at ramping up output, developing new offshore reserves and extending the production life of existing fields.

The country is looking to return oil and condensate production to more than 600,000 barrels per day (bpd) equivalent, having reversed a decline which saw output fall to a 20-year low in 2011 of 569,000 bpd.

Malaysia is also aggressively developing its natural gas resources. The country is now the world’s second-largest liquid natural gas (LNG) exporter behind Qatar. Like most of its oil fields, the majority of Malaysia’s gas reserves are located offshore, offering many growth opportunities for service providers.

With their overseas expansion well on track, key Malaysian firms now rank among the largest serving the international oil and gas sector. SapuraKencana has evolved to become a major provider of support platforms for drilling rigs after expanding its fleet to 24.

Firms eye new ventures

At the end of August, meanwhile, the Malaysian offshore oilfield services company, Bumi Armada, announced it had signed a joint venture agreement with Dutch geo-science specialist, Fugro, to provide well services.

Bumi Armada’s CEO, Hassan Basma, told the press that the initiative marked a new direction for the company, which has, to date, focused on floating production storage and offloading (FPSO), transport and installation, and offshore supply.

“This investment will represent our first foray into the lucrative and expanding subsea market where Bumi Armada intends to make its presence felt. These additional services will contribute to our footprint on a global scale with focus on our core markets,” he said. Bumi Armada will have a 51% stake in the new firm.

State-backed services provider UMW Oil &Gas Corporation is also eyeing expansion, with its plans to launch an initial public offering (IPO), tentatively valued at $850m, already generating considerable interest. The provider is expected to begin taking orders for its offering in October, while a scheduled listing is set to come in the following weeks. The Wall Street Journal reported in mid-September that both J P Morgan and US financial group Fidelity Investments have agreed to be two of eight key institutional investors in the IPO.

Funds raised will likely be used to pay down existing debt and boost capital expenditure for future expansion. A total of 39% of the company’s shares will be offered through the listing.

Offshore drilling fuels demand

Malaysia-based Scomi Group has already extended its reach into Africa, the Caucasus region and Asia, with the firm’s oil services unit underpinning a 13.3% increase in revenue in the quarter ending June 30 and posting profits of $7.3m.
“Strong demand for drilling fluids and drilling waste-management solutions in Malaysia, Thailand, Turkmenistan and West Africa contributed significantly to the group’s financial performance,” the company said in a statement filed with Bursa Malaysia in late August.

The firm’s expansion reflects the heightened activity taking place in the global offshore oil and gas industry. However, the rapid pace of expansion has also put several regional players under pressure, leading to cost overruns and increasing competition for both equipment and manpower, resulting in a squeeze on margins.

Reuters reported that despite winning work, Singapore’s Ezra Holdings posted a 68% fall in profits for the three months ended May 31, due to project delays and cost overruns incurred by its subsea division. SapuraKencana said it faced similar risks, Reuters added.

Operators will be aware of the pitfalls that rapid expansion can produce. However, with exploration and exploitation activities set to increase in the coming years, particularly across the offshore segment, Malaysia’s firms will be well placed to tap into the services that the global oil and gas sector requires.

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Malaysia 2020 targets elusive at current trajectory

Despite a low inflation rate and relatively stable sovereign and corporate balance sheets, Malaysia is set to miss the targets set out in its Vision 2020. As part of a long-term analysis of the South-east Asian country, Oxford Business Group recently contributed an article entitled ‘The Malaysian Quandary’ to local media website FMT, looking at the basis for this assessment and calling into question the private sector’s reliance on the government.

We invite you to read the full article and join a vibrant discussion about the Oxford Business Group view on Malaysia . We encourage you to share the link with others who might be interested.

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Malaysia’s real estate prices raise concerns

The property sector in Malaysia has been attracting plenty of attention from foreign investors and could draw in even more. But after a period of strong price growth, new regulations on lending and slower economic expansion may cool the market, leading developers and the government to target projects and investment incentives more carefully.

Malaysia’s real estate market has significant growth potential, according to Singapore-based real estate agent Kenny Tan, the local press reported in July. Tan, a group division director at ERA Realty Network, was reported as saying that Malaysia had particular appeal for Singaporean investors, given high prices on the Singaporean market and Malaysia’s proximity to the city-state – among other competitive advantages.

Iskandar Malaysia, a development region near Johor and adjacent to Singapore across the Strait of Johor, has proved particularly popular with Singaporeans looking for investment properties and second homes. Tan added that property prices in Kuala Lumpur have displayed steadier growth since 2004 than those in Singapore, which have fluctuated.

Tan’s views were echoed in August by Kayseon Yuen, regional president for Malaysia at Hong-Kong-listed Country Garden Holdings, one of China’s biggest property developers. The company’s only solo project outside China is its RM18bn ($5.52bn) Danga Bay project in Iskandar Malaysia. Country Garden entered Malaysia in 2012 in a joint venture with Malaysia Land Properties, with which it is developing high-end townships in Selangor state.

Like many developers in Iskandar Malaysia, Yuen is targeting foreign buyers (who account for 60-70% of home buyers in the development region), particularly from China. He is confident that Malaysia My Second Home, a government programme to promote foreign investment in property, is seeing success in attracting buyers. The right to buy freehold land in Malaysia is particularly attractive for Chinese buyers, as most property in China is leasehold.

Since 2006, Iskandar has attracted RM118.93bn ($36.5bn) in committed investment, making it a leading light for development in Malaysia. But substantial foreign and domestic investment has also come to Kuala Lumpur, the capital, which the government is working to establish as a regional business centre. While it is not yet truly challenging Hong Kong and Singapore as South-east Asia’s business capital, low prices in Kuala Lumpur are helping draw in foreign investors.

However, partly thanks to growing foreign investment, as well as increasing affluence among Malaysians, Kuala Lumpur is not as cheap as it used to be, with prices having more than doubled compared to five years ago, according to local developers. There is concern about occupancy rates at the higher end of the market, and as a result, some developers are moving towards building smaller, more affordable units.

The market has already been cooled to a degree by external factors – firstly a slowdown in the second quarter of the year as investors waited for the results of Malaysia’s general election. While the re-election of the Barisan Nasional government reduced the political risk element that was likely holding back investment, moves by the Bank Negara, the central bank, to tighten property lending conditions are expected to pull back demand. Loans for residential and non-residential properties will now have a maximum tenure of 35 years, down from 45 years.

Significantly, Bank Negara has opted not to raise its benchmark policy rate, which has remained unchanged mid-2011. An increase could have a significant effect on the real estate market, as the majority of mortgages in Malaysia are adjustable rate. A worst-case scenario would see a rise in defaults, leading to a sell-off of distressed property and a decline in prices.

However, that is the pessimistic viewpoint, and Malaysia’s economy is expected to rack up a good pace of growth this year, at around 5.1%, according to the IMF. Even with the world economy still in troubled waters, South-east Asia has been performing well. Squeezing some of the speculation out of the Malaysian real estate market should make it healthier in the long run, even at the cost of price moderation.

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Malaysia: New regulations to boost market for takaful

An overhaul of Malaysia’s Islamic finance regulations is expected to increase take-up of sharia-compliant insurance (takaful) products, although the new rules could encourage smaller operators to join forces with more established rivals.

New legislation came into effect on June 30, along with parallel laws revamping the operations and regulation of the conventional financial sector. The new Islamic Financial Services Act (IFSA) replaces previous legislation enacted over the past 30 years, strengthening regulatory oversight and boosting industry transparency.

According to a statement from Bank Negara, the central bank, the new rules will provide “a comprehensive legal framework that is fully consistent with sharia in all aspects of regulation and supervision”.

Under the new act, religious advisers will be held legally accountable for financial products. They will also be subject to monetary penalties and could face imprisonment if found to be in breach of the laws.

In the takaful sector, the IFSA will require insurers to separate their life and non-life business lines. Firms that hold composite licences will need to divide their operations within five years.

The new rules are expected to help ensure the rights of takaful consumers, setting out disclosure requirements and mandating that insurers provide a minimum level of information to customers at each stage of the contract process.

“The IFSA will lead to greater consumer protection and subsequently greater confidence in takaful,” Mohamed Rafick, CEO of Munich RE Retakaful, told OBG in an interview in mid-July. “It will also hold takaful companies accountable for their pricing strategies by ensuring that risk funds are sustainable.”

The stringent pricing accountability could put pressure on smaller operators in the industry, Rafick added. They could also face challenges in meeting the new higher capital requirements that are specified by the IFSA.

While there are around a dozen takaful operators in the market, the sector is dominated by a few firms that, between them, account for about 90% of the estimated combined $6bn worth of assets held.

Some of the larger players have expressed interest in acquiring smaller outfits in the wake of the new regulations.

In July, Hassan Kamil, group managing director of Syarikat Takaful Malaysia, the second-largest Islamic insurer, told Reuters his company might be in the market to absorb smaller rivals. “If their portfolio is attractive, we could be buying up business,” he said.

However, analysts are confident that the new regulations will help the sector to expand.

Ahmad Rizlan Azman, CEO of Etiqa Takaful, said the improved regulatory environment, alongside growing public understanding of takaful products, would help the sector to develop into 2015 and beyond.

“Recent reports indicate that the Malaysian takaful industry is expected to grow by 20% per annum for the next two years as consumer acceptance grows and regulatory changes provide a stronger and more stable infrastructure for the shariah-compliant insurance industry,” he told a conference in Kuala Lumpur in late June.

However, the takaful sector still lacks the level of consumer acceptance required to underpin strong growth. Many products in the takaful range, as yet, have limited exposure in the Malaysian market. The penetration rate for life takaful stands at 13%, considerably lower than that of conventional life insurance, at 55%.

According to a recent survey commissioned by Swiss Re, about 30% of Muslims in Malaysia have a good understanding of takaful, while 16.5% hold policies. Though this is a far higher rate than in Indonesia, where only 5% of the population were found to be familiar with takaful and 1% choosing to hold the sharia-compliant product, the survey indicates that more work needs to be undertaken to boost penetration rates.

By tightening up the regulatory structure of its takaful segment, Malaysia will further bolster confidence in both the product and the broader Islamic financial sector and may well set the benchmark for other countries seeking to boost accountability and transparency in their own sharia-compliant markets.

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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: New entrant raises air travel competition

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Malaysia: Religious tourism boost

Having been ranked the friendliest country for Muslim holidaymakers for the third year running, Malaysia has confirmed its position as a premier halal tourism destination. However, its position – and the revenue that comes with it – could be challenged by regional rivals seeking to cash in on the lucrative market.

The tourism sector is already a major contributor to the Malaysian economy, directly generating $21.4bn in 2012, the equivalent of 7% GDP, according to the latest report on the global industry’s economic impact, issued by the World Travel & Tourism Council (WTTC). The council’s report for 2013, released at the end of February, said tourism provided direct employment to more than 800,000 Malaysians, some 6.5% of the active workforce.

However, when indirect factors – such as state spending on tourism-related infrastructure and support, the supply and purchase of goods and services, transport, information technology and utilities – are taken into consideration, tourism’s total contribution to the economy came to $48bn, or 15.6% of GDP, and accounted for 1.7m jobs, 13.6% of the total.

The WTTC has also forecast Malaysia will continue to build on its achievements, with total tourism revenues expected to reach $81.5bn by 2023 on the back of a sharp increase in arrival numbers over the coming decade, as the number of visitors is projected to rise from 27m in 2013 to 45m in 10 years.

According to Jamil Bidin, CEO of local firm Halal Industry Development Corporation (HDC), Malaysia has made itself into a leading destination for visitors from the Middle East by making its halal brand what he called, “a seal of guarantee for consumers”. “If you want to encourage Muslim tourists to come to your country, halal-certified products and services are required,” Bidin told reporters at a halal trade fair in Kuala Lumpur in early April.

The international halal tourism trade is estimated to be worth more than $125bn per year, some 12.3% of the global outbound tourism market. This figure is set to rise by an estimated 4.8% annually through to 2020 – well above the forecast 3.8% global average – as disposable incomes in many Asian and Middle Eastern countries increase. Malaysia has already positioned itself to take a significant slice of the existing and future trade, being ranked first for the past three years in an international survey for being halal tourism friendly.

The annual market assessment, based on a number of factors, including the availability of halal food, prayer facilities, and halal-friendly accommodation, was carried out by Singapore-based consultancy and research firm Crescentrating. According to Fazal Bahardeen, CEO of the firm, the survey was conducted from the point of view of the traveller, meaning that it measured the ease of access by Muslim tourists rather than locals to halal food and services, with Malaysia scoring well across the board.

Malaysia’s continued strong showing was largely due to the fact that authorities have been focusing on the market for a number of years, he said. “Malaysia remains the top destination for Muslim holidaymakers,” said Fazal. “It is still the best place to enjoy your holiday and at the same time be completely worry-free when it comes to finding halal food and prayer places almost everywhere.”

Malaysia also benefits from being within a single flight of much of the world’s 1.7bn Muslims, as it has direct links to the Middle East, the Indian subcontinent and Asia.

While Malaysia may head the Crescentrating rankings, it is likely to face increasing competition from regional rivals in the years to come. The survey found that Indonesia was lagging when it came to catering for halal tourism, though Jakarta has announced it will launch a multi-faceted programme in June that aims to better Indonesia’s tourism sector to perform in the sharia-compliant segment of the global market. Singapore and Thailand also have strong market potential and hope to begin competing with Malaysia.

Under the government’s Tourism Transformation Plan 2020, launched in 2010, Malaysia is aiming to attract 36m overseas visitors by the end of the decade, a target it seems to be well on track to achieving, having seen arrivals hit a record 25m in 2012, some 40% up on the 2005 total. Similar progress over the next seven years will put Kuala Lumpur’s goal well within reach and on the road to the 45m the WTTC has forecast for 2023.

The Ministry of Tourism estimates that almost one-quarter of inbound visitors come from Muslim countries, which makes the need to maintain the flow of new services and facilities for this market essential to further growth and development of the sector, as well as to ensure it stays ahead of regional and international rivals.

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Malaysia: Religious tourism boost

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