Photo for illustrative purposes only. People waving national flags during a rehearsal celebration of Malaysia's Independence day on August 27, 2016 in Kuala Lumpur, Malaysia. Mohd Zaki Shamsu

Halal Industry Islamic Finance Islamic Lifestyle

Malaysia still world’s leading Islamic economy but must continue to raise its game

*Correction: In third para, Zahid Aziz's comment "...deny funds to small- and medium-sized enterprises (SMEs) which generally deliver 80 percent of a nation's economy." corrected to: "deny funds to small- and medium-sized enterprises (SMEs) which generally deliver 80 percent of a nation's employment."

For the fifth year running, Malaysia is the overall leader in the global Islamic Economy, according to the State of the Global Islamic Economy 2018/19 report. Experts give Islamic financial services, food and travel clean bill of health, but warn of shortcomings.

KUALA LUMPUR - Malaysia’s Islamic finance industry needs to move on to better deal with the social responsibility of creating wealth, Zahid Aziz, president of Muamalah Financial Consulting in Kuala Lumpur, told Salaam Gateway.

“As creators of over 90 percent of the nation's money, banks--both Islamic and conventional--have an effect on inflation and purchasing power, and are direct contributors to the widening gap between the rich and poor,” said Aziz. Muamalah was Malaysia’s first company to be licensed by the Securities Commission as Shariah adviser for the Islamic Capital Market in 2000.

“[Banks'] fixation with debt financing makes them direct contributors to graduate and youth unemployment, and deny funds to small- and medium-sized enterprises (SMEs) which generally deliver 80 percent of a nation's employment,” he added.

He urges the finance industry to end its “outdated economics” and “talk realities”.

He also predicts that a new breed of Malaysian fintech businesses will flourish if they enable equity investments to overtake or replace debt financing.

A new government, voted in this May after over 60 years of opposition, will go some way to remove corruption and greed, but the overall financial system needs attention, Aziz asserted.

“When the fault is inbuilt into the system, high prices, unemployment and widening poverty gaps will remain unless it is reformed,” he added.

“Malaysia must attend to its monetary and banking system to achieve currently unachievable economic objectives.”


Gerry Ambrose, chief executive of Aberdeen Islamic Asset Management, said Malaysia’s Islamic finance industry has been “treading water” this year.

Only the bigger, better-known funds have been raising money on the capital markets through sukuk in 2018, Ambrose told Salaam Gateway. Otherwise, there has been little movement since the run-up to the May 9 general election.

The Islamic finance system has also been hindered by constraints placed on investment in the equities market. This is especially the case for pension fund the Employees Provident Fund (EPF), which is largely prevented from investing its substantial assets in other countries.

In a bid to leverage its funds despite this prohibition by the central bank, which is intended to prevent damage to the ringgit, the EPF has set aside around 100 billion Malaysian ringgit ($24 billion) this year for Shariah-compliant investments—amounting to about 65-70 percent in the market, Ambrose told Salaam Gateway.

“Of course, EPF has got a problem in a sense that it’s not able to invest very much overseas at the moment, so it’s getting funds in like it’s going out of fashion—something like 800 billion ringgit ($192 billion), which is a serious amount of money in any currency,” he said.

Facing the same problem are the civil service pension fund KWAP and Tabung Haji, which facilitates savings for haj pilgrims.

Over the past year, the Islamic capital market has been growing moderately, albeit not at a pace the government would like it to achieve.

At the same time, Islamic financial services growth has been stifled due to rule-tightening by the Shariah Advisory Council of the Securities Commission, according to Ambrose.

“They have been getting stricter on what is and isn’t Islamic over the past couple of years. Whereas before they were very relaxed, they now enforce rules that say, for instance, a company can’t have more than 30 percent of its assets in the form of cash, and they can’t have more than 30 percent of their money in debt either—and a percentage of that debt has to be Shariah-compliant debt,” said Ambrose.

“Doing this has made Shariah investing slightly trickier,” he said.

Despite Islamic finance’s sluggish performance this year, Malaysia is unlikely to see its grip on the global industry weaken due to a well-developed infrastructure. This, Ambrose believes, gives it the edge on other regions vying to topple Malaysia’s hegemony.

“There is an educational system all the way up to tertiary training in Islamic finance, guidelines on Shariah finance set up by Bursa Malaysia, and you have strict interpretations of different types of product structures being Shariah-compliant."


Other, non-financial segments of the Islamic economy have been performing well, though Malaysia must not rest on its laurels, industry experts told Salaam Gateway.

The food industry, bolstered by a strong accreditation authority, can only gain from the launch in January of the International Halal Accreditation Board (IHAB), a world body to unify halal standards.

The initiative, led by Malaysia’s Department of Islamic Development (JAKIM), which aims to help steer an authority charged with harmonising regulations in Muslim-majority countries, is desperately needed, according to Lina Mustafa, executive director of Selangor food manufacturer Thalia Muslim Kitchen.

“The main issue that we have in the halal food scene is a lack of consistency in certification across the food chain,” she said.

“It is not streamlined. Certification for a supplier in another country is not necessarily endorsed by JAKIM,” said Mustafa.

“This is an age-old problem but it really needs to be addressed now, with more global supply chains at all levels of the food processing industry. We are hoping that something comes from IHAB to address this and streamline the process among all accreditation bodies,” she added.

On the other hand, technology is proving to be a boon for food processors, with halal audits now being supported by online databases that can draw on international data, and applications becoming increasingly automated, she said.


From a supply point of view, though, competition among other segments of the halal industry is intensifying, leading to shortages of raw materials and rising costs for food processors.

“There has been a shift in the priorities of some suppliers towards value-added halal products, like cosmetics. They are starting to see halal food as becoming secondary to other segments that use similar raw materials to ours, like fruit and vegetable extracts,” said Mustafa.

“There has been a constant increase in the cost of buying materials, along with high demand and low supply available. That has put a lot of pressure on food manufacturers.”


Malaysia’s third big Islamic market, travel and tourism, shows little sign of wilting, despite growing competition from overseas.

Malaysia has been one of the top destinations for Muslim travellers for some time, and has benefited from the growth of the Muslim travel market, said Fazal Bahardeen, chief executive of CrescentRating, a Singapore consultancy which monitors Muslim-friendly travel.

“From our global ranking of countries, Malaysia has been topping the ranking for the last four years,” he said. “It’s particularly well-positioned to attract this market, though it is getting some competition from neighbouring countries.”

For a number of years, Malaysia hasn’t been shy to promote itself as a Muslim destination; it’s the first Southeast Asian country to be part of the Arabian Travel Market, and celebrated its twenty-fifth outing at the show this year. Yet Malaysia’s main challenge comes from a nearby Muslim-majority country.

“The biggest competition is from Indonesia, which is now targeting the Muslim tourists,” said Bahardeen.

“Malaysia has to keep track of the competition and keep improving its services. Places like Indonesia—and even Japan—are now reinventing themselves. From a services point of view, Malaysia has all the bases covered, but it needs to go beyond providing standard services to Muslims and innovate more.” 

(Reporting by Richard Whitehead; Editing by Emmy Abdul Alim

Our Standards: The Thomson Reuters Trust Principles

© 2018 All Rights Reserved


SGIE 2018
Author Profile Image
Richard Whitehead