Islamic finance and liberalisation in Malaysia

Malaysia's central bank, Bank Negara Malaysia, plans to make Malaysia an international islamic financial centre (MIFC) that will be a hub for Islamic fund raising and product origination. Whilst
the figures differ, in 2007 it was reported that Malaysia's percentile share of the global Islamic bond (sukuk) market was 65% of outstanding instruments, or roughly US$62 billion. Its competitive advantage is clear. Documentation for sukuk musharakah, sukuk ijarah, sukuk mudharabah, sukuk bai bithaman ajil, as well as for a whole range of other loan products, are all common place in Malaysia. However much of the demand has come from domestic issuers. Bank Negara realizes that in order for Malaysia to become a significant global financial player it needs to be a point of origination for a wide array of international issuers as well, and to do this it must make Malaysia an attractive international destination for Islamic fund raising. To succeed Malaysia must also provide an environment that permits key capital markets players to relocate and operate in Malaysia with minimal restrictions. One obstacle remains the restrictions imposed on the entry of foreign law firms and this is seen as a hindrance to the development of the MIFC. Unlike Singapore or Hong Kong, Malaysia does not have a structure whereby foreign law firms may be licensed to practise foreign law along side its own local law practitioners. Although the Malaysian Bar has submitted a proposal to the Malaysian government to permit the formation of joint ventures between foreign law firms and local firms, the proposal is appropriate only if foreign law firms wish to practise Malaysian law. In all likelihood, leading international law firms hired for their country specific expertise are unlikely to want to practice in a tight local market at the outset, if at all. On the other hand what may be desired is a local presence to provide foreign law services to their international clients - a category of activity which the Malaysian Bar Council does not promote.

The resistance of the Malaysian Bar to the entry of foreign firms to practise foreign law seems somewhat misplaced given that local law firms do not practise foreign law and it is difficult to see how the practice of foreign law in Malaysia by foreign firms would encroach into the traditional work of local law firms. Some Malaysian lawyers who oppose the idea of liberalization also rely on the argument that as Islamic finance is well developed in Malaysia, there is no need for foreign players. This view misconceives the position of shari'iah principles in financing documents and may also overstate the level of local documentation expertise for cross border transactions. Islamic financial products cannot exist in isolation from a national legal system and must be expressed and given effect under a national law (see, Shamil Bank of Bahrain EC vs. Beximco Pharmaceuticals Ltd, CA [2004] 2 All E.R. 1072). In order for Malaysia to be viewed as an important international player, international issuers and investors must be free to choose the national law by which their obligations ill be regulated, and this will often be a law that is not Malaysian. So it stands to reason that the presence of foreign law practitioners in Malaysia remains critical to the development of the MIFC.

This firm profile was written by Loong Caesar (pictured), Partner, Raslan Loong.