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Islamic Finance Policy Measures – Malaysia Budget 2023

Finance Minister Anwar Ibrahim Urges Islamic Finance Industry to Boost its Relevance to the Current Economic and Societal Needs of the Country as he Prioritises SRI Sukuk Issuance Through 5-Year Tax Incentives in his 2023 National Budget to Enhance the Sustainability Agenda

The Malaysian Prime Minister, Dato’ Seri Anwar bin Ibrahim, has thrown down the gauntlet to the Islamic finance industry by urging a greater connectivity with the economic and social needs of the country and society especially in an era of heightened global uncertainties and various risks. Mushtak Parker assesses the latest policy initiatives relating to the Islamic finance industry of Prime Minister Anwar Ibrahim, who also doubles up as the country’s Finance Minister, an unusual convention first adopted by his former mentor, ex-Prime Minister Dr Mahathir Mohamed, as highlighted in his 2023 National Budget presented to the Dewan Rakyat in March

Despite the sustained growth trajectory, albeit at a slower rate during the last three years of the Covid-19 pandemic, and the resilience of Malaysia’s Islamic banking and Islamic capital market sector, Prime Minister Dato’ Seri Anwar bin Ibrahim lost no time in consolidating his policy of a greater but better coordinated Islamic finance engagement with the Malaysian economy, especially its response together with the conventional finance sector to the deep cost-of-living crisis the economy is faced with.

The Islamic finance sector, he maintained, has still not reached its full potential based on values to fulfil contemporary economic and social needs. Therefore, new initiatives are needed “to empower the Islamic finance system by emphasising the principle of driving growth, wider participation, and equitable wealth distribution, as well as not only focused on company and conglomerate profits.”

Similarly, during a visit to Saudi Arabia and the Islamic Development Bank (IsDB) at end March 2023, he was candid and advised IsDB President Dr Muhammad Al-Jasser that “we need to rethink the concept of Islamic banks to make it fit with Maqasid Al-Sharia’a. It should also explore new challenges, including digitalization, Science and Technology, and food security. We should also promote the fundamental principles such as anti-corruption and good governance.”

The reality is that Malaysia’s Islamic finance sector in 2022 contributed 1.2% to Malaysia’s GDP according to Bank Negara Malaysia – RM185 billion (US$42.02 billion) through Sukuk issuances to fund real economic sectors (RM153 billion or US$34.75 billion in 2021); 11.9% business financing growth to meet business demand across economic sectors (2021: 8.8%); 9.4% household financing growth to meet household demand (2021: 8.9%); 24.7% growth financing disbursed to microenterprises and SMEs; and 20.1% sustained penetration rate of Family Takaful (2021: 18.6%). This is without parallel the most active and comprehensive engagement of an Islamic finance industry in any of the IsDB member states.

Prime Minister Ibrahim, as the Minister of Finance and in his youth a fiery leader of the Malaysian Islamic Youth Movement (ABIM), announced a range of measures pertaining to the Islamic finance, Sukuk, Takaful and Waqf sectors in his 2023 National Budget in March.

He is prioritising the issuance of Sustainable and Responsible Investment Linked Sukuk (SRI Sukuk) through tax and issuance cost incentives spanning five years. The Securities Commission Malaysia (SC) earlier in 2023 introduced the Framework on Sustainable and Responsible Investment Sukuk (SRI) which enables fundraising by companies through financing towards improving sustainability practices and supporting the transition to low carbon activities.

The framework on SRI-linked Sukuk aims to address a wider range of financing needs for companies at different stages of their sustainability journey, providing companies more opportunities for transition to net zero carbon targets and further meet the Government’s desire to achieve net zero carbon emissions targets by 2050.

According to Finance Minister Anwar Ibrahim, “to provide an innovative Sharia’a compliant financing and place Malaysia as a regional hub of SRI-linked Sukuk issuance, it is proposed tax deduction on the cost of issuing SRI-linked Sukuk that is approved or permitted or deposited with the Securities Commission Malaysia be given for a period of 5 years. The effective date is from the year of assessment 2023 until the year of assessment 2027.”

This is part of a focussed strategy linking and aligning Islamic finance to sustainability and manifested through the Government’s Belanjawan MADANI vision on how Islamic finance can further leverage on the sustainability concept for the development of the sector. Its three pillars are i) inclusive and sustainable economic growth; ii) institutional reforms and good governance to restore confidence; and iii) combating inequality through social justice.

According to Adnan Zaylani Mohamad Zahid, Assistant Governor of Bank Negara Malaysia, the word MADANI has its roots in Arabic and means “being developed in terms of thinking, spirituality and mentality”. The Malaysia MADANI concept – or civil society – he emphasised, “envisions a country that looks beyond economic wellbeing and materialism to one which emphasises humanity and good values like fair, just and effective governance. MADANI is an acronym for a policy that embraces six core values – keMampanan (Sustainability), KesejAhteraan (Prosperity), Daya Cipta (Innovation), hormAt (Respect), keyakiNan (Trust) and Ihsan (Compassion).”

The SC has introduced several initiatives to develop a facilitative sustainable and responsible investment (SRI) ecosystem in Malaysia, including the SRI Sukuk Framework in 2014 and updated several times since then, Guidelines on SRI Funds in 2017, and a Waqf-Featured Fund Framework in 2021 which emphasised the close alignment between SRI and Islamic finance.

Similarly, the SC’s Capital Market Masterplan (CMP3) identifies SRI as one of the key development thrusts for the capital market over the next five years. It highlights the importance of SRI towards shaping a more sustainable and socially inclusive stakeholder economy in Malaysia that facilitates long-term value creation beyond short-term profits that would cater to broader stakeholder needs.

“Several key trends, including the new wave of global climate action, are also expected to give rise to greater efforts surrounding SRI which are geared towards supporting Malaysia’s transition to a net-zero economy, including greater integration of environmental, social and governance (ESG) considerations into investment risks, facilitating transition finance and encouraging greater transparency on sustainability-related data and reporting standards,” says the SC.

The Commission recognised that an SRI Taxonomy for the Malaysian capital market will further accelerate the development of the SRI ecosystem towards achieving national environmental and sustainability objectives. In line with the recommendation of the SC’s SRI Roadmap, a Principles-based Sustainable and Responsible Investment Taxonomy (SRI Taxonomy) has been developed to enable the Malaysian capital market and its constituents in identifying economic activities that are aligned with environmental, social and sustainability objectives.

“Given Malaysia’s global leadership position in Islamic finance and the alignment of Islamic finance with sustainability, particularly from the social and ethical investing perspectives,” stressed SC Chairman Dato’ Seri Dr Awang Adek Hussin, “the development of the SRI Taxonomy in Malaysia also includes a social component, in addition to the environmental component. The SRI Taxonomy will serve to enhance the standardisation and comparability of sustainable investment assets, and act as a critical building block to facilitate greater product diversity. This will in turn accelerate the development of SRI as an asset class, in line with the aspiration and recommendations of the SRI Roadmap.”

Not surprisingly, Dr Awang Adek Hussin, welcomed the tax deduction on the cost of issuing SRI-linked Sukuk. “This demonstrates the role of the capital market in enabling the country’s transition towards a greener and more sustainable economy, by mobilisation of capital towards initiatives that provide more positive impacts to society,” he stressed.

In his budget speech, Finance Minister Anwar Ibrahim reminded that “plenty of our family members used to save money under their pillows. From there I realised the importance of an Islamic bank that operates on the principle of social justice, zero interest to convince not only Muslims but also non-Muslims to invest and save in this banking system that is now used globally. Malaysia continues to lead the global Islamic finance sector since it was introduced four decades ago with the operationalisation of Bank Islam in 1983. We also maintained our top ranking in the global sukuk market and lead in Islamic finance expertise.”

In an effort to further rationalise the Islamic finance industry to enhance certainty of processes especially relating to the vexed issue of co-mingling of Islamic and conventional funds and assets, with regards to the state national pension entity, Employees Provident Fund (EPf’s) Sharia’a savings, these assets are currently invested alongside Sharia’a compliant assets in conventional savings. “From 2024, Sharia’a savings assets,” declared Anwar Ibrahim, “will be fully separated to give competitive returns to the 1.25 million members who own Sharia’a accounts.”

In line with the MADANI framework, Waqf (endowment trusts), according to Ibrahim, is one of the redistributive mechanisms that contribute to universal prosperity. The success of the Bank Islam Tower development in Kuala Lumpur’s golden triangle on the Waqf of Ahmad Dawjee Dadabhoy, which is of high value, he reminded, indicates the Waqf sector’s real potential towards the development agenda.

Similarly, Waqf Seetee Aisyah and Waqf Simpang Enam in Penang can be used as reference points in developing local socioeconomic centers. In fact, Wakaf FELDA “proves that there is a paradigm shift on the part of settlers whereby they are no longer simply aid recipients but have started sharing their Rizq with the accumulated Waqf exceeding RM27 million despite the Waqf fund being launched in 2021. So far, only around 3,500 hectares or 12% of registered Waqf land have been successfully developed. Fresh efforts in developing Waqf land and assets need to be continuously explored.”

Finance Minister Anwar Ibrahim also revealed that the Government has received a private commitment to establish Wakaf MADANI comprising assets worth more than RM1 billion (US$220 million). These assets, which comprise land, mosque building, health and education facilities, will be optimised for the benefit of the poor, low-income earners, and other vulnerable groups

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