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The International Islamic University, Malaysia has the only undergraduate and post-graduate institution in the world dedicated to Islamic finance, known as the IIUM Institute of Islamic Banking and Finance.  The government is intent on building the import of Malaysia as an Islamic financial centre and has recently created incentives to meet that objective that has also created opportunities for investment.   I will share those key points in this article.

In the announcement of Malaysia’s 2016 Budget, the Minister of Finance, who is also the Prime Minister of Malaysia, YAB Dato’ Sri Mohd Najib Tun Haji Abdul Razak, has announced several incentives benefiting the development of Islamic Finance in Malaysia. It is expected that the incentives announced will create a more vibrant financial market and to further strengthen the country’s position as an international Islamic financial centre and most importantly, create opportunities for growth. 

Finance Opportunities 

To stimulate the capital market, the Government will implement several initiatives. This includes a tax deduction on the issuance cost on Sustainable and Responsible Investments (SRI) sukuks.   First announced in the 2014 Budget, it is hoped that the implementation of  this incentive will stimulate the issuance of SRI sukuks to finance social and responsible investments. To date, only Khazanah Nasional Berhad has issued the SRI sukuks to raise funds for its Trust schools programme, under Yayasan AMIR, so it clear that there is much room for growth in this program. 

It was also announced that there will be double deduction on additional issuance cost of retail bonds and sukuks under the principles of Mudharabah, Musyarakah, Istisna', Murabahah and Bai' Bithaman Ajil based on Tawarruq and in addition, further deduction for additional issuance cost of sukuks based on Ijarah and Wakalah principles for another three years (year of assessment 2016 to 2018). These incentives are expected to encourage more issuance of retail bonds and sukuks by the private sector to boost the capital market and encourage individual investors to invest.

There is also good news for Syariah compliant fund management companies certified by Securities Commission Malaysia. Syariah compliant management companies that provides fund management services to, local investors, foreign investors and business trusts or real estate investment trusts in Malaysia are given tax exemption on the income extended to 4 years of assessment (Effective year of assessment 2017 to 2020).

Small Business Initiatives

For the small and medium enterprise (SME), the 2016 Budget has also allocated an additional RM1 Billion for the Syariah-compliant SME Financing Scheme until 31 December 2017 with the Government subsidising 2% of the financing profit rate charged on the financing provided by eligible financial institutions. Currently, there are about 13 licensed financial institutions that are eligible to be chosen by the SMEs for this incentive and the purpose of such financing can be used by the SME for working capital, asset acquisition and upgrading of businesses.

However, it remains to be seen the impact on Islamic financing in Malaysia that the stamp duty remission provided under Stamp Duty (Remission) (No.2) Order 2009 is not extended under Budget 2016. Under the Order, 20% of the stamp duty payable and chargeable on the principal or primary instrument of financing made according to the Syariah principles pursuant to subparagraph 22(1)(a) or subparagraph 27(a) of the First Schedule of the Stamp Act 1949 is remitted subject to the condition that the instrument is approved by the Syariah Advisory Council of Bank Negara Malaysia or the Securities Commission, as the case may be. It is no secret that Islamic financing in Malaysia flourishes and enjoyed tremendous growth when the incentive was announced back in 2006 as the retail and commercial sector took advantage of the cheaper cost of financing offered by this incentive.

Personal Opportunities

For house buyers, stamp duty exemption of 20% on instruments of Syariah-compliant financing for the purchase of0 residential property will be extended for another 2 years provided that the financing documents are executed on or before 1 January 2016 and not later than 31 December 2017. It is noted that this incentive is an extension of the stamp duty exemption announced in 2013 for Syariah compliant financing. This incentive will continue making Islamic financing as a cheaper option compared to its conventional counterpart whereby it lowers the cost for purchase of houses and consequently easing the financial burden of home ownership in Malaysia.

The Future Looks Bright

So how will the 2016 Budget affect the Islamic finance sector in Malaysia, which strives to be the leading Islamic financial hub? Based on the incentives announced under the 2016 Budget, it is encouraging to note that the government provides practical incentives for the Islamic financial industry for 2016. In addition to the incentives provided under the 2016 Budget and looking from a macro point of view, Malaysia now has an established Islamic financial system with proper regulatory bodies, recognized accreditation bodies and a solid educational system that is replete with recognized experts.  Malaysia is on the right road, as the government has done its part to spearhead Malaysia into a vibrant Islamic financial centre.   It is up to the other stakeholders and industry players to spur growth in 2016 and beyond.  If you, or your company, want to explore those opportunities, we can provide the legal expertise.  Feel free to contact me:

Shazana Abdul Aziz

Senior Associate

 Mohamed Ridza & Co.

Tel. +603-20924822

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