Malaysian Budgets 1999 -2009: Setting forth the Government’s commitment to developing Islamic finance
By Suapi Shaffaii, 15 September 2008
Developing Milestone in Islamic Finance from the Malaysian Budget Perspectives:
Budget 1999 – Towards restoring the financial sector and improving governance on the public and private sectors.
Budget 2000 – Standardizing stamp duty rates on Islamic banking products similar to its conventional counterparts.
Budget 2001 – Continuing to provide equal stamp duty rates on Islamic banking products to its conventional counterparts.
Budget 2002 – No specific provision for Islamic banking and finance. The aim was for corporate restructuring which directly impacting Islamic institutions.
Budget 2003 - Accelerating efforts to develop Islamic financial market. Streamlining the stamp duty treatment on Islamic banking products, promoting the issuance of Islamic PDS etc.
Budget 2004 -Expanding the Islamic finance.
Budget 2005 -Developing Islamic financial center.
Budget 2006 – Strengthening the capital market. No specific provision for the Islamic banking and finance.
Budget 2007 - Accelerating the development of Islamic finance.
Budget 2008 - Positioning Malaysia as an International financial center.
Budget 2009 – Enhancing Malaysia’s position as a hub for Islamic capital markets.
1. The annual budget tabling at the Parliament House has been a much awaited event for Malaysians since the last few years. The recent tabling of Budget 2009 by the Malaysian Prime Minister is no exception. While fingers may be crossed at every budget pronouncements for possible Government incentives affecting individuals and business entities, for policy-making and industry observers, the budgets would provide them a good perspective of the Government direction in terms of the policies. The size of budget allocations accorded to each policy item would give an inkling for the Government’s measured commitments.
2. Based on this observation, it is worth noting that the Malaysian budgets especially from 1999 until the recent 2009’s showcased the Government’s perseverance to foster a conducive environment for seamless implementation of the Islamic financial services in Malaysia. Most importantly, the positioning of Malaysia as an international Islamic financial center was rather a strategic move initiated after deploying at the domestic front, strong and structured institutional framework and enhanced business competitiveness for Islamic financial institutions.
3. On a historical note, Malaysia’s first foray into the Islamic financial services industry had begun as early as in 1962, with the setting up of the Pilgrims Fund Board (Tabung Haji) in November the very same year. The Tabung Haji outfit which availed the Muslim community in Malaysia a savings fund for their pilgrimage in Mecca was a novelty which had earmarked the emerging force of the Islamic financial services industry in Malaysia. Having had the start up setting for Islamic financial services, it took the Malaysian Government only about 21 years later to embark fully into the Islamic financial services industry. There were no known reasons behind this apparent delay. Perhaps, the rising Islamic sentiments in Malaysia during the late 1970s had re-ignited the Government’s interest in Islamic finance and thus laid down the foundations for Islamic financial services in Malaysia in early 1980s.
4. Between 1983-1984, a set of substantial Islamic finance legislation in the form of the Islamic Banking Act, Government Funding Act and Takaful Act were promulgated in the Parliament. While the main legislation set the pivotal benchmark for the development of comprehensive and conducive Islamic finance framework in Malaysia, it is the Government’s continued commitment in steering the direction of Islamic finance in Malaysia and ensuring smooth implementation of the Islamic financial services industry that transforms it to what it is today. The Malaysian budgets from 1999 until 2009 mirrored this steadfast determination.
Budgets 1999 – 2000: Forging institutional reform and enhancing competitiveness of Islamic finance
5. Reeling from the aftermath of the regional financial crisis, the focus of the Government was pointed towards restructuring the financial sector and improving governance in the public and private sectors. The crisis which had sent the business entities including financial institutions down in the red needed a specific address by the Government. Hence, the 1999 Budget. Although there was no specific mention about the Islamic finance, the 1999 Budget seemed to have far reaching effect to require mandatory institutional reforms which also included Islamic financial institutions to be more resilient to withstand the shock of similar nature in future.
6. With the institutional reform proposed by Budget 1999 and the softened impact of the financial crisis, there begun to be a shift of focus to Islamic banking in Budget 2000. The Budget proposed for a standard stamp duty rates on Al Ijarah Term Loan instruments akin to their equivalent conventional products. This was aimed at creating a level playing field between Islamic banking products and their conventional counterparts as multiple sets of documents required for Shariah financing would attract double stamp duties. Without this sweetener, the Islamic financing products would lose out to cheaper conventional products. It was also announced that the Capital Market Plan was under way to deepen the Malaysian capital market. This would be achieved by widening and diversifying the activities of the financial market including the equity and Islamic capital market. The announcement marked the interest of the Government to initiate a ground breaking effort for comprehensive Islamic capital market to complement the existing Islamic banking industry in Malaysia.
Budgets 2001 – 2002: Promoting level playing field and encouraging creation of mega institutions
7. The Islamic financial services consistently remained the focus of the Government in 2001 when it proposed an equal stamp duty treatment for security instruments under the Shariah principles to their conventional counterparts. Takaful business had its first mention in the Budget where it was proposed to be accorded a similar tax enjoyment as of conventional insurance business. Note that for two years in a row, the Government offered a package of tax incentives mostly in the form of tax equalizers to promote a healthy competition between Islamic financial institutions and the conventional ones. This was also to ensure that the Islamic financial services would run in parallel with the mainstream financial system without being slighted by unfair tax treatments.
8. Again, as in1999, Budget 2002 responded to a financial crisis. The September 11 attack had caused the global financial crisis which impacted countries including Malaysia. As expected, there was no specific focus on the Islamic banking therein where corporate restructuring was mooted. It was announced that the Securities Commission was to restructure distressed public listed companies as well as the implementation of the circuit breaker mechanism in the Stock Exchange as practised in the developed countries. The circuit breaker would enable trading to be halted temporarily for huge declines experienced during a trading day to maintain investor and market confidence especially in uncertain environment. At the same time, banking consolidation was encouraged by the Government to strengthen the banking and financial institutions in Malaysia. The tax holiday for banking mergers for a specific period of time was announced to expedite this process. Note that, as a result of Budgets 1999 and 2002, with the proposed institutional reforms and consolidation, Islamic financial institutions had indirectly emerged in a good stead to withstand future downturn and more importantly, to prepare them for possible global competitions if Malaysia chose to open up.
Budget 2003 – 2006: Building a fortress of Islamic banking and capital market
9. The Budgets 2003 – 2006 were crucial to further consolidate the Government’s efforts in charting the direction of Islamic finance in Malaysia. The streamlining of stamp duty treatment for Islamic banking products with their conventional counterparts continued to be introduced in 2003 and 2004. The stamp duty exemption was also proposed in 2003 to cover the financing facilities such as for restructuring or rescheduling of the original financing facility, limited to the outstanding balance and for renewal of Islamic revolving financing facilities.
10. There were notably significant plans to accelerate the development Islamic capital market as the Government begun to realize its potential. In 2003 and 2005, the Government went on steadfastly to enliven the Islamic capital market by endorsing Islamic securities products, namely, Islamic private debt securities and Islamic treasury bills. The issuance of Islamic private debt securities (PDS) under the mudharabah, musharakah and ijarah principles were mainly to attract foreign investors where expenditure incurred on issuance of Islamic PDS was proposed to be allowed as a deduction for income tax purpose for 5 years commencing the year of assessment of 2003. This was to ensure there would be more opportunity for corporate sector to access financing through the Islamic capital market. Whereas Islamic treasury bills were issued to strengthen the Islamic money market as one of the main components of the Islamic financial services. This included the simultaneously proposed increase of Shariah compliant Government investment issues.
11. The Government also mulled in 2005 about more comprehensive tax treatment provided similar to conventional securities as it sought to expand the Islamic finance by increasing financing through the issuance of Islamic securities. It was also proposed that deductions to given on expenses incurred in the issuance of Islamic securities based on istisna’ principles for 5 years where property under construction could also be used to back such bond. The Government further committed on widening the use of Islamic financial instruments in the Asian Bond Market initiative (ABMI) based on Malaysia’s expertise in developing the Islamic financial system. ABMI was initiated by the finance ministries of East Asia to provide long term financial instruments to finance private sector investments.
12. The Government was firm on strengthening the capital market where in 2006, mergers and acquisitions were encouraged with the objective of enabling public listed companies to extend corporation, enhance capital base and achieve better economies of scale. Exempt stamp duties and real property gains tax on the M&A of such companies were proposed apart from affecting the legislative amendments under the Companies Act to facilitate the restructuring. The capacity and effectiveness of the Securities Commission’s enforcement in dealing with corporate misconduct was enhanced to ensure investors’ confidence in the capital market while the Management Leadership and Directors Academy would be established as a center of leadership excellence to produce mass competent managers.
13. In 2005, the Government made it clear about positioning Malaysia as a hub for Islamic financial services. Concerned with the current shortage of Islamic finance experts, the Government thus announced a proposed establishment of an international financial training institute in Malaysia. Cross the border partnerships were also encouraged where overseas branches and local banks in Malaysia would venture out overseas to provide Islamic banking services.
Budgets 2007 -2009: Marching ahead to becoming Islamic international financial hub
14. Budgets 2007-2009 were the most crucial budgets ever as they prominently manifest the Government’s sheer determination to levitate the status of the Islamic financial services industry in Malaysia to a global standing. Readily furnished with a strong foundation and framework of the Islamic finance in Malaysia as a result of persistent transformation of the financial and capital market industries over the years, it was just a step upward for the country to be poised towards attaining a hub status for Islamic financial services. Measures were immediately proposed in 2007 to expedite this hub strategy, as follows:
(a) income tax exemption for 10 years to Islamic banking and takaful entities which conduct business in foreign currencies and licensed under the Islamic Banking Act and Takaful Act, respectively.
(b) additional 20% stamp duty exemption given to Islamic financing instruments for 3 years apart from providing for the tax neutrality between conventional and Islamic financing.
(c) income tax exemption for 10 years given to local or foreign fund managers who manage Islamic funds for foreign investors.
(d) personal tax relief on study fees up to a maximum of RM5,000 per year extended to Islamic financial studies conducted in institutions of higher learning including INCEIF.
(e) tax deduction given on expenses incurred in establishing an Islmaic stock broking firm.
(f) tax deduction on expenses incurred in the issuance of Islamic products be extended from the year of assessment 2008-2010.
18. Going on the same momentum, the Government continued implementing in 2008 the following measures:
(a) Islamic fund management companies allowed to be wholly foreign owned by foreigners.
(b) RM7 billion fund to be channeled by the Employee Provident Fund to be managed by Islamic fund management companies.
(c) Islamic fund management companies be allowed to invest all their assets abroad.
(d) fund management companies be given income tax exemption on all fees received in respect of Islamic fund management activities until year of assessment 2016.
15. In achieveing a hub status, the Government was all for promoting investments from the Middle East where tax incentives were given to existing stockbroking companies to set up Islamic stockbroking subsidiaries. Furthermore, 3 new stockbroking licences would be issued to leading stockbroking companies to encourage flow of funds from the Middle East to Malaysia. To bolster the competitiveness of the takaful industry, the Government proposed enhanced tax treatment including tax deductions on the share of distributed profits.
16. The Islamic finance hub would never complete without its other core component apart from banking. Islamic capital market that is. It was just aptly considered with the focus of Budget 2009 for a vibrant capital market. In order to stimulate non ringgit sukuk issuance, the Government proposed that tax exemption be given for a period of three years for fees and profits earned by institutions undertaking activities relating to the arranging, underwriting, distributing and trading of non-ringgit sukuk issued in Malaysia and distributed outside Malaysia. This is to enhance Malaysia’s position as a hub for Islamic capital markets.
17. Having stated the foregoing, the Islamic financial industry in Malaysia was not the outcome of an overnight strategy. It was the long term planning by the Government to successfully putting in place the right foundation for the implementation of the domestic Islamic financial services industry prior to embarking into a global hub ambition. Previously the unchartered territory, now Islamic finance is a force to be reckoned with. The aggressive pursuit of Malaysia in promoting Islamic finance to the global front had won the praises of the international financial community with some had been following its footstep. Without sheer determination and steadfast resolution of the Government, the Islamic finance in Malaysia would never evolve and prosper. Of course, the role of related regulatory agencies is undeniably significant behind this evolution and prosperity.