Malaysian Islamic Finance at Cross Roads

Following its recent Sukuk default, the IMDB corruption scandals continues to cast a dark shadow over the Malaysian financial sector with this week the United States moving to seize more than $1bn in assets, ranging from plush properties to a private jet, from people connected to Prime Minister Najib Razak.

Against this backdrop, Islamic finance activity in Malaysia continues to move in the right direction with Sukuk activity picking up post Ramadan and the Malaysian based Labuan Financial Centre reporting annual growth in deals financed by Islamic finance compliant contracts, as well as continued growth in the field of Islamic wealth management.

1MDB Continues to Tarnish Brand Malaysia as US and Switzerland Investigate

The asset seizure by the US would be the largest ever by the Justice Department’s anti-corruption unit. Set up in 2009 by Prime Minister Najib Razak, 1Malaysia Development Bhd (1MDB) hoped turn Kuala Lumpur into a financial hub. The project turned sour in 2015 when the Wall Street Journal reported it had seen a paper trail that allegedly traced close to $700m from the fund to Mr Najib’s personal bank accounts.

In April, 1MDB defaulted on its 5 billion ringgit sukuk due in 2039 and a 2.4 billion ringgit sukuk due between 2021 and 2024.

“The Malaysian people were defrauded on an enormous scale,” Deputy FBI Director Andrew McCabe said at a news conference, as the US opens a new front in its fight against global corruption after having snared FIFA in 2015. The use of the US Dollar and the engagement of US institutions in transactions gives US authorities jurisdiction to intervene.

Earlier this year neighbouring Singapore closed down Swiss bank BSI for breaking its money-laundering laws in its dealings with 1MDB, whilst authorities in Switzerland have opened criminal proceedings related to 1MDB on “suspected corruption of public foreign officials, dishonest management of public interests and money laundering”.

Domestic Market Remains Active

Two large prints were recorded the past week in Malaysia as the post Ramadan Sukuk market kicked off. The Malaysian based body, the International Islamic Liquidity Management Corporation (IILM) issued a $1.11 billion short-term Sukuk at a profit rate of 1.14910%. The Sukuk achieved an order book of $1,421 billion from 14 bids, and consisted of a $860 million reissuance and a $250 million new issuance.

Separately the Government of Malaysia through the central bank, Bank Negara issued a domestic currency ringgit Murabahah Sukuk for MYR3.5 billion. The 5-year issuance achieved a profit rate of 3.743% from 211 bids for an order book of MYR8,590 billion.

The Malaysian offshore centre, the Labuan International Business and Financial Centre reported Islamic financing increased significantly by 55% to $1.8 billion compared to $993.3 million a year before. Non-residents dominated 77.3% of total Islamic financing. The centre is a leading player in Islamic wealth management where the regulatory authority introduced the Labuan international waqf guidelines in 2015, placing Labuan as the first IBFC to facilitate the establishment of a waqf under common laws.