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Recommendation on Islamic Financial System in Malaysia

i) Institutional Capacity Enhancement


a. Introduce Benchmarking Programme
Omar, Mohd Azmi, Azman Md Noor and Ahamed Kameel Mydin Meera. 2010.
“An Islamic Pricing Benchmark”, ISRA Research Paper No. 17/2010.
Benchmarking programme is very important for Islamic Banking Industry to be at
par with international best practices. Thus, a benchmarking programme or
practice should be introduced in order to assist Islamic Banking Industry in
assessing their relative efficiency, spotting the performance gaps and formulating
strategies to improve and deliver the best results.
Omar et al (2010), had created an alternative pricing benchmark based for
Malaysia that they compared to KLIBOR based on industrial production, the
money supply, equity prices and the Ringgit exchange rate (plus a suggestion for
incorporating firm- and sector-specific factors). Using historical data, they found
that their benchmark was more stable than the KLIBOR alternative.
Nonetheless, Goud. B (2010), argued that the methodology had been using ‘real’
economy factors to determine benchmark when it is not clear that the cost of
financing in the Islamic finance industry operates today should be based on these
factors and not an interest rate. Counter with that, there is the hurdle that the
usage of interest rate benchmark in Islamic financial products may not be halal.
As a result, it may be sensible to create an Islamic Pricing Benchmark for the
expansion of Islamic Finance in Malaysia.

b. Increase Islamic Market Competitiveness


Various efforts have been initiated to restructure the international financial system
by international institutions to address the weaknesses that have contributed to
recent crisis. Thus, Islamic finance industry needs to advanced, by strengthening
effectiveness and competitiveness.
In order to drive growth and capitalize on competition, there is a need of more
full-fledged Islamic banks over the medium term. As a short term measure,
potential eligible players could be developed by reviewing Islamic Banking
Division Structures, subsequently formulate policies to reinforce them. This
would be seen as the base to identify potential players that have accomplished
adequate infrastructure to operate as full-fledged Islamic banks. Besides, certain
amount of consideration should be allocated to present foreign Islamic banking
players. There are up to date nine takaful operators and four retakaful operators
(three foreign institutions).
The rapid liberalization of Malaysia’s Islamic financial industry has encouraged
foreign institutions’ participation, hence creates a diverse community of domestic
and international takaful operators. To stimulate competitiveness, number of
takaful operators should be increased. It is essential to speed up the expansion of
takaful business, aligns with the advanced Islamic banking system. It would lead
to greater competition in terms of pricing, product innovation, customer service
and operational efficiency. Besides, all these would help to facilitate retakaful
operators in line with Syariah Principle.

ii) Legal and Syariah Framework


Zeti Akhtar Aziz. (2010). “The Global Islamic Financial Market Today: Challenges
and Way Forward”. http://www.mifc.com/index.php?
ch=menu_med&pg=menu_med_spe&ac=1294

Given the forces of change happening worldwide, it is crucial to strengthen the legal
framework for the Islamic financial industry. In a timely rejoinder to the global
Islamic finance, Malaysia needs to develop a legal framework for Islamic finance that
is “internationally facilitative."
A legal framework which is aligned with market developments would provide more
certainty and predictability to financial transactions and innovations, thus instills
public confidence. Islamic Banking Act (IBA) 1983 should be revised, in order to
take into consideration of divergent characteristics of Islamic banking. It is important
to address specific elements that could result in a comparative disadvantage to the
industry.
In addition, BAFIA needs modifications to accommodate the unique features to the
requirements of Islamic finance in order to ensure neutrality of treatment. It should
be further regulated to ensure that the risk management profile of the banking
institutions is in-line with Islamic banking operations.
Islamic banking and finance must be matched correspondently with Syariah opinions,
to promote market development. The regulatory framework for Islamic banking needs
development by introducing a separate capital adequacy, statutory reserve and
liquidity requirement for both Islamic banks and IBS banks. ***further explains

iii) Product and Market Development


Product and market development is a complicated and difficult process that embodies
creative thinking, extensive knowledge, patience, perseverance and an encouraging
business environment. Strong management teams are definitely required in doing so.
Islamic banks and industry should employs experienced and qualified staff includes
those expatriates to facilitate transfer of knowledge and expertise. This also
complements the efforts made to build the skills of domestic industry players.
Islamic PDS are bonds and notes issued by corporations to raise short and long-term
funds. Grant incentives should be given to structure Islamic PDS as it is one of the
efforts to nurture major domestic players and market makers in Islamic capital
market.
Islamic banking industry should be allocated incentives to originate and arrange
Islamic PDS.
In order to further promote Malaysia as an Islamic hub, a deep market structure
would be essential, thus research and development should be intensified in this field.
These initiatives of running R&D could be undertaken individually by Islamic
banking industry, or by the above mentioned industry-owed R&D institute.
There are different kinds of contractual relationship between Islamic banks and their
customers, and this attributes to distinct risk. A comprehensive risk management and
appropriate mechanisms should be developed to mitigate risk. Besides, it is important
that Islamic banking industry to pay attention to build a financially sound portfolio.
This is to sustain the competitiveness of Islamic naming in dual financial system in
Malaysia.

iv) Enhancement Knowledge and Expertise

The sustainable growth of Islamic economic and financial development will depend
on the availability of professional talent to meet the diverse needs of the industry,
especially to facilitate product innovation, research and development, and Shariah
jurisdiction. Therefore, it is vital to increase the pool of bankers and takaful operators,
as well as enhance their knowledge and competency.

An industry-owed institution on Islamic banking and finance should be established, in


order to provide sufficient training for Islamic bankers and takaful operators. It would
also promote human capital development to support the ideal growth of the industry.
Islamic banking industry and takaful operators should be required to allocate
adequate budget for research and development.

Such an institution should also take up the responsibility to create and increase
awareness amongst the public on the concept and benefits of Islamic banking and
takaful, on top of customer education on misperceptions. All these could be achieved
by encouraging Islamic banking industry to embark on regular promotional
programmes on Islamic financial products and services. Islamic banking industry
should be encouraged to form strategic coalition with tertiary education, sequentially
to improve knowledge on Islamic banking and services.

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