VZCZCXRO1748
RR RUEHCHI RUEHDT RUEHHM RUEHNH
DE RUEHKL #1429/01 2620941
ZNR UUUUU ZZH
R 190941Z SEP 07
FM AMEMBASSY KUALA LUMPUR
TO RUEHC/SECSTATE WASHDC 9986
INFO RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUCPDOC/USDOC WASHDC
RUEHGV/USMISSION GENEVA 1507
RUCNASE/ASEAN MEMBER COLLECTIVE

UNCLAS SECTION 01 OF 02 KUALA LUMPUR 001429 
 
SIPDIS 
 
STATE PASS USTR - WEISEL AND JENSEN 
STATE PASS FEDERAL RESERVE AND EXIMBANK 
STATE PASS FEDERAL RESERVE SAN FRANCISCO TCURRAN 
USDOC FOR 4430/MAC/EAP/J.BAKER 
TREASURY FOR OASIA AND IRS 
GENEVA FOR USTR 
SENSITIVE 
 
SIPDIS 
E.O. 12958: N/A 
TAGS: ECON EFIN EINV MY
SUBJECT:  Malaysia Promotes Islamic Finance:  US Firms Concerned 
over Governmental Preferences 
 
REF A: Kuala Lumpur 1106 
REF B: Kuala Lumpur 1317 
REF C: Kuala Lumpur 1404 
 
¶1. (U) Summary:  Demand for Islamic financial paper continues to 
outstrip supply, due in large part to the growing interest of Middle 
East petrodollar holders to park their money in Sharia compliant 
instruments.  The biggest success story to date is the Islamic bond 
(sukuk), the only product Islamic scholars from different parts of 
the globe have reached consensus on regarding their permissibility 
under Islamic law.  The Government of Malaysia (GOM) continues to 
push for global consensus on a wider range of Islamic products and 
it is implementing regulatory and tax preferences for firms offering 
such products in an effort to make Malaysia a global hub for the 
industry in this growing niche market.  As part of the GOM promotion 
effort, Malaysian Central Bank Governor Dr. Zeti Aziz has agreed to 
be the keynote speaker (see para 7) at a conference on Islamic 
Finance organized by the American-Malaysian Chamber of Commerce in 
Washington this October. Private sector views on the potential for 
Islamic finance are mixed but some U.S. firms have expressed concern 
that the GOM's preferential policies are creating an uneven playing 
field in Malaysia's financial market. End summary. 
 
 
Lack of Consensus on Sharia Compliance 
is a Major Constraint 
-------------------------------------- 
 
¶2. (U) A primary constraint in developing the Islamic finance 
industry is the lack of consensus among Islamic scholars from the 
Middle East and Southeast Asia on what is permissible under Sharia 
(Islamic law).  Two fundamental differences account for the main 
barriers between how Islamic finance is practiced in Malaysia vs. 
the Middle East:  the selling of debt instruments and the mingling 
of conventional and Islamic funds. 
 
¶3. (U) In Malaysia, Islamic scholars have accepted the practice of 
selling a debt instrument, while Middle Eastern scholars have 
determined that this is forbidden.  In the Middle East, a bank 
practicing both conventional and Islamic finance conducts both types 
of business off the same balance sheet. In Malaysia a conventional 
bank engaging in Islamic finance is required to maintain a separate 
"window" with a separate set of books. 
 
 
 
The Islamic Bond: No Secret about its Success 
--------------------------------------------- 
 
¶4. (U)  The concept of an "Islamic bond," however, has been accepted 
as Sharia-compliant by Islamic Scholars in both Southeast Asia and 
the Middle East.  In fact, it is the only Islamic financial product 
on which consensus has been reached.  This consensus is widely 
credited for driving demand for it through the roof.  For example, 
earlier this year Khazanah, a Malaysian government-owned investment 
corporation, decided to offer a US$600 million equity-linked Islamic 
bond denominated in U.S. dollars.  The bond was thirteen times 
oversubscribed; subsequently Khazanah decided to increase the amount 
on offer by 42% to US$850 million (REF A), with fifty percent of the 
issuance allocated to investors from the Middle East. 
 
 
Building Consensus on Other Islamic Principles 
--------------------------------------------- - 
 
¶5. (U) Recognizing that consensus on Sharia compliance will be 
essential to developing this niche market, the GOM has established 
the Malaysian International Islamic Finance Center (MIFC) which 
includes a board of Islamic scholars from an array of different 
Muslim-majority countries.  The GOM sponsors board meetings in 
Paris, London, and elsewhere in an effort to encourage 
consensus-building on Sharia compliant financial instruments. 
Central Bank Governor Dr. Zeti Akhtar Aziz told U.S. Ambassador 
Lafleur that she expected broad consensus among Southeast Asian and 
Middle Eastern Sharia scholars within two years (REF B).  Consistent 
with the GOM's effort to promote Islamic finance, Central Bank 
Governor Dr. Zeti has agreed to deliver the keynote address at a 
conference in Washington, D.C. on October 18 entitled "Islamic 
Finance in Southeast Asia:  Local Practice, Global Impact." 
 
 
Malaysia's Federal Budget Delivers 
 
KUALA LUMP 00001429  002 OF 002 
 
 
More Favors for Islamic Finance 
---------------------------------- 
 
¶6. (U) The GOM is also using its Federal Budget Proposal for 2008, 
released September 7, to introduce provisions designed to promote 
Malaysia as a hub for Islamic Finance.  These include: 
 
--  Non-resident experts in Islamic finance will be exempt from 
income tax, subject to verification of their credentials by the 
Malaysian International Islamic Financial Center (MIFC).  This is 
designed to attract more talent from countries in the Middle East, 
many of which do not impose income tax.  (This provision was 
championed by Citibank Malaysia which engages in both conventional 
and Islamic finance.) 
 
--  An existing tax exemption for management fees for Islamic funds 
for foreign investors will be extended to Islamic funds managed for 
local investors as well. 
 
-- Tax exemptions for issuers of Islamic Financing through Special 
Purpose Vehicles will be expanded. 
 
-- Specific tax provisions for Islamic insurance (takaful) operators 
will be introduced. 
 
 
Players Get Energized 
--------------------- 
 
¶7.  (U) With such strong GOM encouragement, interest in Islamic 
finance is accelerating in Malaysia.  On September 17 Bank Islam 
Malaysia signed a strategic partnership with London-based European 
Islamic Investment Bank PLC, according to press reports.  The 
partnership is intended to link up the European and Asian markets 
for financial products that are compliant with the principles of 
Sharia (Islamic law).  Bank Islam Managing Director Zukri Samat told 
reporters the bank planned to bid on arranging several Islamic bond 
issues, including one for US$300 million jointly with its new 
partner. 
 
Conventional Finance Being Crowded Out? 
--------------------------------------- 
 
¶8. (SBU) Brad Bennett, CEO of American Home Assurance Company 
Malaysia, a wholly-owned subsidiary of U.S.-based American Insurance 
Group, told ECONOFF he was concerned that preferential regulatory 
treatment of Islamic Insurance (takaful) was crowding out 
conventional insurance products in Malaysia.  The company had 
applied for a license to do Islamic insurance in Malaysia, but has 
yet to receive approval. Meanwhile, customers are switching, he 
said.  On August 29, Central Bank Deputy Governor Zamani Abdul Ghani 
invited applications for reinsurance licenses (REF C). 
 
¶9. (SBU)  Citigroup Malaysia CEO Sanjeev Nanavati expressed similar 
concerns, saying the GOM's special concessions and incentives for 
Islamic finance gave its practitioners an unfair advantage.  But 
Citi continues to believe Islamic finance faces so many obstacles 
that it will continue to struggle, even with GOM support. 
 
¶10. (U) Comment:  The Government of Malaysia is determined to make 
the country a global hub for the industry and thereby maintain the 
leading edge its financial firms currently possess in this growing 
niche.  Moreover, it is coming through with the funding, the 
political pressure, and the regulatory and tax advantages to smooth 
development for financial companies in this highly regulated 
economy.  Obstacles and opportunities in this niche market will be 
reviewed septel.