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Digitalization And Islamic Finance: A Key Thrust in Malaysia’s Agenda to Accelerate Recovery of And Path to Achieving Sustainable and Inclusive Economy
Dec 21, 2022
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Malaysia has formulated various policies to drive its economic development and transformation toward becoming a high-income and sustainable nation. The Shared Prosperity Vision 2030, which was introduced in 2019, has underscored Islamic finance and an Islamic digital economy as among the key economic growth activities. The country weathered the unprecedented COVID-19 pandemic, transitioned into endemicity and is now moving toward a recovery phase, with digitalization as the key thrust.
Review of 2022
The COVID-19 era emphasized the need to pivot toward and capitalise on the digital trend for a broader market reach and to spur economic growth, with 2022 witnessing a number of initiatives laid out by financial regulators to stimulate economic recovery post-pandemic. The common theme in those initiatives is the strategic role that Islamic finance plays in accelerating the move toward a sustainable and inclusive economy via digitalization and financial technology (fintech).
As a start, in January 2022, Bank Negara Malaysia (BNM) launched the Financial Sector Blueprint 2022–2026, a five-year strategic plan that reinforces Malaysia’s proposition to serve as an international gateway for Islamic finance, augmenting the Malaysia International Islamic Financial Centre agenda.
To support the recovery of economic activities and reduce inflationary pressures, BNM has increased the overnight policy rate thrice this year, from 1.75% in March to 2.5% in September. In addition, the Malaysia Islamic Overnight Rate or MYOR-i — the first global transaction-based Islamic benchmark — was introduced in March 2022 as a risk-free alternative reference rate for overnight ringgit interbank placements. BNM also debuted the Standardised Base Rate as a main reference rate for new retail floating-rate loans and financing facilities, to replace the Base Rate, effective August 2022.
In April 2022, BNM awarded digital banking licenses to five successful consortia, two of which are Islamic digital banks. Meanwhile, Bank Islam launched ‘Be U’, its digital banking application, in July 2022. To create a holistic digitalized financial sector ecosystem, the central bank released a discussion paper on the Licensing Framework for Digital Insurers and Takaful Operators early this year.
Digital insurance licences are expected to be issued by 2023. Digital licenses recognize the importance of digitalization and fintech — with Islamic finance playing a primary role — as key enablers to reach wider market segments to bolster greater financial inclusion and economic resilience. Fintech in Malaysia has grown exponentially, with 33% of the world’s fintech companies headquartered in the country.
In June 2022, the Malaysian Takaful Association launched the Value-based Intermediation for Takaful (VBIT) Roadmap — an extension of the VBIT Framework and the earlier VBI for the banking sector introduced in 2021 and 2017 respectively — to help unlock the Takaful industry’s potential for achieving a sustainable finance ecosystem while increasing Malaysia’s Takaful industry penetration to more than 19%. According to the 2021 VBI Full Report, Islamic banks intermediated RM146.6 billion (US$31.56 billion) in VBI-related financing, investments and deposits, and distributed RM65.2 million (US$14.04 million) using Islamic social finance instruments such as Zakat Waqf and Sadaqah between 2020 and 2021.
The Islamic money market in Malaysia marched ahead with the introduction of the first ESG Islamic repurchase agreement in June 2022, inked by CIMB Islamic and Standard Chartered Saadiq. This landmark deal will contribute toward the development of the Islamic repurchase market, which registered a volume of RM39.4 billion (US$8.48 billion) in 2021, and encourage more sustainability practices that are aligned with the VBI agenda.
Malaysia remains a dominant global Islamic capital market (ICM) hub, with Sukuk issuance making up 45% (US$51.1 billion) of global issuance, supported by a healthy growth of outstanding Sukuk which accounted for US$262.8 billion or 38% of global outstanding Sukuk as at the third quarter of 2022.
Meanwhile, Shariah compliant securities had a market capitalization of RM1.15 trillion (US$247.58 billion) as at May 2022. The ICM has already developed an encouraging track record in the sustainable finance space, evident from sovereign and corporate sustainability Sukuk issuances.
For the first half of 2022, RM2.48 billion (US$533.92 million) of SRI Sukuk comprising green, sustainability (combination of green and social) and sustainability-linked (proceeds for general purposes and not solely for green, social, sustainable purposes, but linked to sustainability performance targets) Sukuk were issued.
The launch of the SRI-linked Sukuk Framework by Securities Commission Malaysia (SC) in June 2022 will further drive the national agenda to help businesses, especially those in high-emitting industries, to transition into a low-carbon or net-zero carbon economy. SRI funds also charted impressive growth, with 60 such funds issued as at the 13th September 2022 (31st December 2021: 39), of which 20 (33%) are Islamic SRI funds.
Bursa Malaysia’s anticipated SRI Taxonomy Framework — to be launched by end of 2022 — will encourage a larger capital allocation for sustainable initiatives. The framework will shape transparency on climate risk management and transition financing, broaden stakeholder engagements and nurture continued ESG-aligned economic activities and sustainability adoption.
Preview of 2023
The outlook for global growth next year will be more challenging amid high inflation and intensified geopolitical tensions, which have fueled global food and energy security concerns. These challenges, in addition to global recession fears, will pose hurdles to green and climate transitions.
Nonetheless, the strategic national initiatives put in place are expected to enable the Islamic finance industry in Malaysia to weather the shocks. The game changer for the industry in 2023 will continue to center on the following three themes, as in 2022, but with more concerted efforts from different stakeholders:
Review of 2022
The COVID-19 era emphasized the need to pivot toward and capitalise on the digital trend for a broader market reach and to spur economic growth, with 2022 witnessing a number of initiatives laid out by financial regulators to stimulate economic recovery post-pandemic. The common theme in those initiatives is the strategic role that Islamic finance plays in accelerating the move toward a sustainable and inclusive economy via digitalization and financial technology (fintech).
As a start, in January 2022, Bank Negara Malaysia (BNM) launched the Financial Sector Blueprint 2022–2026, a five-year strategic plan that reinforces Malaysia’s proposition to serve as an international gateway for Islamic finance, augmenting the Malaysia International Islamic Financial Centre agenda.
To support the recovery of economic activities and reduce inflationary pressures, BNM has increased the overnight policy rate thrice this year, from 1.75% in March to 2.5% in September. In addition, the Malaysia Islamic Overnight Rate or MYOR-i — the first global transaction-based Islamic benchmark — was introduced in March 2022 as a risk-free alternative reference rate for overnight ringgit interbank placements. BNM also debuted the Standardised Base Rate as a main reference rate for new retail floating-rate loans and financing facilities, to replace the Base Rate, effective August 2022.
In April 2022, BNM awarded digital banking licenses to five successful consortia, two of which are Islamic digital banks. Meanwhile, Bank Islam launched ‘Be U’, its digital banking application, in July 2022. To create a holistic digitalized financial sector ecosystem, the central bank released a discussion paper on the Licensing Framework for Digital Insurers and Takaful Operators early this year.
Digital insurance licences are expected to be issued by 2023. Digital licenses recognize the importance of digitalization and fintech — with Islamic finance playing a primary role — as key enablers to reach wider market segments to bolster greater financial inclusion and economic resilience. Fintech in Malaysia has grown exponentially, with 33% of the world’s fintech companies headquartered in the country.
In June 2022, the Malaysian Takaful Association launched the Value-based Intermediation for Takaful (VBIT) Roadmap — an extension of the VBIT Framework and the earlier VBI for the banking sector introduced in 2021 and 2017 respectively — to help unlock the Takaful industry’s potential for achieving a sustainable finance ecosystem while increasing Malaysia’s Takaful industry penetration to more than 19%. According to the 2021 VBI Full Report, Islamic banks intermediated RM146.6 billion (US$31.56 billion) in VBI-related financing, investments and deposits, and distributed RM65.2 million (US$14.04 million) using Islamic social finance instruments such as Zakat Waqf and Sadaqah between 2020 and 2021.
The Islamic money market in Malaysia marched ahead with the introduction of the first ESG Islamic repurchase agreement in June 2022, inked by CIMB Islamic and Standard Chartered Saadiq. This landmark deal will contribute toward the development of the Islamic repurchase market, which registered a volume of RM39.4 billion (US$8.48 billion) in 2021, and encourage more sustainability practices that are aligned with the VBI agenda.
Malaysia remains a dominant global Islamic capital market (ICM) hub, with Sukuk issuance making up 45% (US$51.1 billion) of global issuance, supported by a healthy growth of outstanding Sukuk which accounted for US$262.8 billion or 38% of global outstanding Sukuk as at the third quarter of 2022.
Meanwhile, Shariah compliant securities had a market capitalization of RM1.15 trillion (US$247.58 billion) as at May 2022. The ICM has already developed an encouraging track record in the sustainable finance space, evident from sovereign and corporate sustainability Sukuk issuances.
For the first half of 2022, RM2.48 billion (US$533.92 million) of SRI Sukuk comprising green, sustainability (combination of green and social) and sustainability-linked (proceeds for general purposes and not solely for green, social, sustainable purposes, but linked to sustainability performance targets) Sukuk were issued.
The launch of the SRI-linked Sukuk Framework by Securities Commission Malaysia (SC) in June 2022 will further drive the national agenda to help businesses, especially those in high-emitting industries, to transition into a low-carbon or net-zero carbon economy. SRI funds also charted impressive growth, with 60 such funds issued as at the 13th September 2022 (31st December 2021: 39), of which 20 (33%) are Islamic SRI funds.
Bursa Malaysia’s anticipated SRI Taxonomy Framework — to be launched by end of 2022 — will encourage a larger capital allocation for sustainable initiatives. The framework will shape transparency on climate risk management and transition financing, broaden stakeholder engagements and nurture continued ESG-aligned economic activities and sustainability adoption.
Preview of 2023
The outlook for global growth next year will be more challenging amid high inflation and intensified geopolitical tensions, which have fueled global food and energy security concerns. These challenges, in addition to global recession fears, will pose hurdles to green and climate transitions.
Nonetheless, the strategic national initiatives put in place are expected to enable the Islamic finance industry in Malaysia to weather the shocks. The game changer for the industry in 2023 will continue to center on the following three themes, as in 2022, but with more concerted efforts from different stakeholders:
- Digitalization by embedding fintech into the current financial system.
- Sustainability by embracing sustainable, responsible and impactful investing and financing approaches in line with the VBI, ESG and SDGs.
- Inclusivity via the integration of social finance within the core offerings of Islamic financial institutions.
Conclusion
All sectors of the industry are making big strides toward achieving a prosperous, sustainable and inclusive economy while leveraging on digitalization and fintech to escalate progress. This is a testament of Malaysia’s leadership in advancing Islamic finance, parallel to modern trends and global agendas, without compromising Shariah requirements.
Written by: Siew Suet Ming, Chief Rating Officer at RAM Ratings
Source: Digitalization And Islamic Finance: A Key Thrust in Malaysia’s Agenda to Accelerate Recovery of And Path to Achieving Sustainable and Inclusive Economy (2022, 16 December). IFN Islamic Finance news. Retrieved from https://www.islamicfinancenews.com/digitalization-and-islamic-finance-a-key-thrust-in-malaysias-agenda-to-accelerate-recovery-of-and-path-to-achieving-sustainable-and-inclusive-economy
Disclaimer
The information provided in this report is of a general nature and has been prepared for information purposes only. It is not intended to constitute research or as advice for any investor. The information in this report is not and should not be construed or considered as an offer, recommendation or solicitation for investments. Investors are advised to make their own independent evaluation of the information contained in this report, consider their own individual investment objectives, financial situation and particular needs and should seek appropriate personalised financial advice from a qualified professional to suit individual circumstances and risk profile.
The information contained in this report is prepared from data believed to be correct and reliable at the time of issuance of this report. While every effort is made to ensure the information is up-to-date and correct, Bond and Sukuk Information Platform Sdn Bhd (“the Company”) does not make any guarantee, representation or warranty, express or implied, as to the adequacy, accuracy, completeness, reliability or fairness of any such information contained in this report and accordingly, neither the Company nor any of its affiliates nor its related persons shall not be liable in any manner whatsoever for any consequences (including but not limited to any direct, indirect or consequential losses, loss of profits and damages) of any reliance thereon or usage thereof.
All sectors of the industry are making big strides toward achieving a prosperous, sustainable and inclusive economy while leveraging on digitalization and fintech to escalate progress. This is a testament of Malaysia’s leadership in advancing Islamic finance, parallel to modern trends and global agendas, without compromising Shariah requirements.
Written by: Siew Suet Ming, Chief Rating Officer at RAM Ratings
Source: Digitalization And Islamic Finance: A Key Thrust in Malaysia’s Agenda to Accelerate Recovery of And Path to Achieving Sustainable and Inclusive Economy (2022, 16 December). IFN Islamic Finance news. Retrieved from https://www.islamicfinancenews.com/digitalization-and-islamic-finance-a-key-thrust-in-malaysias-agenda-to-accelerate-recovery-of-and-path-to-achieving-sustainable-and-inclusive-economy
Disclaimer
The information provided in this report is of a general nature and has been prepared for information purposes only. It is not intended to constitute research or as advice for any investor. The information in this report is not and should not be construed or considered as an offer, recommendation or solicitation for investments. Investors are advised to make their own independent evaluation of the information contained in this report, consider their own individual investment objectives, financial situation and particular needs and should seek appropriate personalised financial advice from a qualified professional to suit individual circumstances and risk profile.
The information contained in this report is prepared from data believed to be correct and reliable at the time of issuance of this report. While every effort is made to ensure the information is up-to-date and correct, Bond and Sukuk Information Platform Sdn Bhd (“the Company”) does not make any guarantee, representation or warranty, express or implied, as to the adequacy, accuracy, completeness, reliability or fairness of any such information contained in this report and accordingly, neither the Company nor any of its affiliates nor its related persons shall not be liable in any manner whatsoever for any consequences (including but not limited to any direct, indirect or consequential losses, loss of profits and damages) of any reliance thereon or usage thereof.
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