Finalised operating standards to strengthen Malaysia's Islamic banking industry

Securing its position as Indonesia attempts to create a mega bank.

The finalisation of operating standards for all major Islamic finance contracts by Bank Negara Malaysia (BNM) will be positive for the continued development of the Islamic banking industry in Malaysia.

According to a research note from BMI Research, this will mark the first comprehensive set of practical guidelines for the industry and will enable Malaysia to maintain its dominant position despite rival Indonesia's ongoing attempts to create a mega-Islamic bank.

According to reports, BNM will finalise operating standards for all major Islamic finance contracts by the end of 2015, a move that would mark the creation of the first comprehensive set of practical guidelines for the industry.

Here's more from BMI Research:

The set of 11 standards will complement existing guidelines and seek to address the current inconsistencies in the use of Islamic contracts.

As many standards are not legally enforceable, market practices vary across the industry, and the finalisation of procedures will help to minimise discrepancies within the industry.

While Malaysia's current Islamic banking standards are enforceable and have been in place for many years, they are technical instead of practical and are still open to interpretation.

The new standard will therefore help ensure conformity across the domestic industry and help regulators in other countries that are seeking guidance for their own markets.

We believe that this bodes well for the continued development of the Islamic banking sector in Malaysia as it will enable the country to consolidate its position as the industry forerunner.

Furthermore, the increased clarity provided to both banks and consumers alike will further help spur growth in the
sector. Stronger guidelines will also act as a tailwind to the sector that is currently on track to meet its target of 40 .0% of total financing by 2020.

Combined with the government's ongoing efforts to initiate cross-border regulations as well as between regulators and international bodies in a bid to expand cross-border activities, we expect the finalised regulations to further strengthen the existing regulatory and supervisory framework, providing a firm foundation for the Islamic banking industry.

Indeed, Malaysia's Islamic banking industry has been growing steadily, with foreign issuers having issued MYR28bn (USD7.4bn) worth of Islamic bonds from 2006-2014, and this is likely to continue as Malays ia further consolidates its position as leader in the industry.