Malaysia Leads Global Islamic Economy Indicator for Eighth Consecutive Years – Driven by Strong Islamic Finance Initiatives and Ecosystem

Malaysia continues to forge the way ahead in Islamic economy and finance, leading the way for the eighth consecutive year based on the ranking by the Global Islamic Economy Indicator (GIEI). Its burgeoning Islamic FinTech and economy sectors continue to flourish aided by governmental support and Malaysia Digital Economy Corporation’s (MDEC) continuous push to expand the digitalisation of the economy and an aggressive creation of a conducive ecosystem for which it can thrive on.

For years, the government of Malaysia has identified Islamic finance and Islamic digital economy as Key Economic Growth Activities (KEGA) towards achieving and maintaining its position as the global Islamic FinTech hub. Malaysia is the largest Sukuk issuer in the world as well as having one of the best Halal standards globally.

“These global recognitions pave the way for Malaysia to continue to lead as the global Islamic FinTech hub and towards becoming the Heart of Digital ASEAN. With our strong digital economy ecosystem within the Organisation of Islamic Cooperation (OIC) member nations, we have comparative advantage over others in providing Shariah-compliant Islamic finance and FinTech services globally.

“We are extremely proud of our leadership position and MDEC will continue to work with financial regulators and industry partners from all relevant areas to further enhance our capabilities, facilities and capacities to ensure we maintain our global leadership position,” said Mr Gopi Ganesalingam, MDEC Vice President, Digitally-Powered Businesses division.

According to the State of the Global Islamic Economy Report (GIER) 2019/20, Muslims are expected to spend US$2.4 trillion by 2024, up from US$2.2 trillion in 2018. GIEI also revealed that 66% of consumers are willing to pay more for ethical products while a report from Thomson Reuters projected Shariah-compliant assets worldwide will reach US$3.8 trillion by 2022. On top of the recently-signed Regional Comprehensive Economic Partnership (RCEP) Agreement which created the world’s largest trading bloc, Malaysia stand to capture 30 per cent of the world population.

A new economic frontier has opened up for Malaysia.

“To continue stimulating growth in the Islamic digital economy, a collective effort and commitment from various parties will be crucial to identify opportunities, issues and challenges. Effective collaboration will improve innovation. The key towards achieving inclusive financial growth is to have a strong effort to embed Fourth Industrial Revolution (4IR) technologies like Islamic FinTech to ensure fair and equitable distribution across income groups and a shared prosperity for all in line with the recently-announced Malaysia Digital Economy Blueprint (MyDIGITAL) and Malaysia 5.0,”said Datuk Wira Dr. Hj. Hussin Mohamed Ariff, Chairman of MDEC.

Malaysia’s excellent track record in fundraising augurs well overall, with the Securities Commission reporting a 130 percent increase on 2018 involving 1,449 SMEs, 18,700 investors (91 percent increase) and 5,612 campaigns (131 percent increase) launched. Islamic capital market grew by eight percent, to RM2 trillion, outpacing overall capital market growth of three percent.

Malaysia also offers the perfect platform for Islamic FinTech companies to roll out their product offerings before tapping into other Muslim-majority countries. Bank Negara Malaysia, BNM (Malaysia Central Bank) and the Securities Commission have allowed for innovation in FinTech to proliferate such expansion.

The Malaysia government, through MDEC, have implemented various measures and initiatives. In partnership with regulators, agencies, corporations, financial institutions, accelerators and other relevant bodies, MDEC continues to roll out and introduce plans and programmes to conquer this new economic opportunity.

One such initiative is the Digital Financial Inclusion which is aimed at improving the knowledge of the B40 (bottom 40 percent earners) and micro SMEs on financial services. The collaborative programme, in partnership with 11 FinTech companies have onboarded 2,300 users from the three main product offerings mainly the micro financing, micro investment and micro insurance.

While FinTech Booster, in collaboration with BNM, is a capacity-boosting programme by MDEC to assist FinTech companies, both local and international, to develop their products and services via three strategic modules; Legal and Compliance, Business Model and Technology. Since its launch, there have been six public workshops and nineteen private workshops conducted with over 400 registrations as of March 2021 on the website, ranging from both local and foreign companies.

The second pillar, to be launched this year, will be on market access and business opportunities for FinTech, and the third, technological integration.
Malaysia have all the right makings and ecosystem to make it the global Islamic FinTech hub which includes having a matured Islamic finance environment and has a conducive and cost-effective business setting. It is also blessed with talents, from having world-renowned academicians, Shariah scholars to Islamic finance experts as well as a steady stream of local and international talent pool in FinTech and Islamic finance. All these factors bode well in maintaining its driving seat in the Wave 2.0 of Islamic finance. Malaysia is ready and waiting.

Cabotage policy – Let’s Get Clever

There are two strong opposing views on the issue of the cabotage policy impacting the undersea internet cable industry, and both seem to have a strong argument with good intention that requires clarity.

However, on balance, the view that exemption from the cabotage policy for the industry is the right thing to do, must be given precedence for the sake of making our country an attractive investment destination for digital infrastructure, especially in light of our aspirations set out in the MYDIGITAL Blueprint and to truly be the Heart of Digital ASEAN.

Let’s first discuss the view that the cabotage policy is detrimental in making Malaysia the choice for investment destination especially high value digital investment.

The Global Digital Economy runs on top of the Internet, a digital infrastructure that spans the globe, consisting of data centers to house all the data and optical fiber cables that move data around the world. The only way for global data connectivity to take place in this digital infrastructure is via crisscrossing cables under seas and oceans to reach every country, and hence they are called submarine cables.

They are essential strategic assets for countries to be part of the global digital infrastructure, as economic activities riding on the back of submarine cables include e-commerce, data transfer, financial transactions, business processing, digital exports, social interactions, services delivery and communications impacting national security.

An RTI International report in August 2020 on Economic Impacts of Submarine Fiber Optic Cables and Broadband Connectivity in Malaysia showed submarine cables landing had contributed to a 6.9% increase in GDP per capita and a 3.6% increase in employment in the services sector between 2008 and 2015.

Submarine cables are extremely expensive, require partners from different countries, and take three to four years from planning to be operational and ready for service. Maintenance of such cables is also an expensive affair and cable owners collaborate to share the costs.

Specialized ships, called submarine cable ships, are used to deploy the cable under the sea as well as maintain and repair these cables in case of breakage from earthquakes, storms or damage from ship anchors, mining and fishing. There are fewer than 60 such ships in the world today and therefore they have to be shared.

A cable ship is required to stay in one position at sea during a repair and is equipped with a Dynamic Positioning (DP) system consisting of thrusters and computer systems to precisely maintain its position without drifting, regardless of wind and sea conditions.

Depending on their capability to maintain their position accurately under different conditions such as weather, depth of the sea, ability for the ship to withstand equipment failure, flooding and fire, such ships are classified as:

  1. DP1 class ships – suitable for shallow water use with low risk of equipment failure but will have to abandon the repair job if any important equipment like the computer or thrusters fail, causing the ship to drift out of position.
  2. DP2 class ships – with a built-in redundancy such as two DP computer systems and multiple thrusters to maintain position accurately even after sustaining failure in one important system.
  3. DP3 class of ships – similar to DP2 class ships but can additionally handle a fire or flooding in one compartment.

Cable owners today require the use of DP2 class ships to minimize the risk of repair work being interrupted by equipment failure as well as prevent further damage to the cable, other cables or oil and gas pipelines nearby, when the ship drifted out of position.

Whenever there is a cable outage, the cable owner will immediately identify the nearest available ship capable of performing the repair as quickly as possible. However, very often the best available ship may not be registered, or flagged, by the country whose territorial waters lies in the area where the cable is located.

This is where the issue of cabotage, a law which protects the local shipping industry from foreign competition, becomes relevant. In Malaysia, our cabotage law prevents foreign ships from picking up passengers or cargo from, say Penang to Port Kelang.

Unlike countries like the USA, Taiwan and Philippines, Malaysian cabotage law also covers maritime services, which includes submarine cable deployment and repair, which means when the best ship available for a cable repair is a foreign ship, a Domestic Shipping License Exemption (DSLE) is required and before this can be issued, local ship owners are asked for their consent through the Malaysia Ship Owners Association (MASA). In fact, ship owners who think they can handle the repair job can block the issuance of the DSLE.

In the case of submarine cable repair, there is one Malaysian company in the business which has four cable ships and two barges for shallow water cable laying. All its vessels are DP1 class and this has been the key point of dispute resulting in long delays for arbitration as the cable owners want DP2 class vessels.

When Malaysia started to attract data centre investments, one of the key issues highlighted by both foreign investors was the long delays in obtaining permits for submarine cable repairs — prior to 2019 the average was 27 days with one case taking longer than 100 days.

Local telecom companies with submarine cable investments like Telekom Malaysia and Time DotCom also appealed to the Government to exempt submarine cable repairs from cabotage.

Hence, in April 2019, the then Minister of Transport, Anthony Loke issued an exemption order. This was positively received by investors and local telcos and plans were made to land cables in Malaysia.

However, in November 2020, the current Minister of Transport, Wee Ka Siong revoked the cabotage exemption for submarine cable repair, much to the surprise of investors and local telcos.

This reversal is a step backward, as investors have expressed strong interest and some were in the final stage of committing investments, recognising that the exemption will reduce repair times and increase reliability.

Hence, the industry is shocked by the abrupt decision on the reversal of cabotage exemption without meaningful stakeholders’ consultation to protect a single company. It creates risks to Malaysia’s critical digital infrastructure and growing digital economy by making it less attractive for infrastructure investment.

Now, let’s look at the arguments forwarded by the other side, which mainly rests on the critical need to develop local capabilities.

The occurrence of submarine cable faults in Malaysia is between six to nine annually in the past few years and this shows the real domestic market opportunities is not high enough to make it feasible to invest in DP2 or DP3 vessels.

Furthermore, there are other maritime services within Malaysian waters with larger market opportunities and lower entry cost that local players can participate and build up capabilities to compete.

More importantly, investors look for certainty and stability when they choose investment locations. Digital infrastructure investments such as data centres and submarine cables are hugely expensive and require multi-decade commitments.

When government policies impacting investors are arbitrarily changed without prior consultation, there is no certainty or stability that would provide assurance to the investors.

When the other side of the divide says the delay in repair works has already been reduced to 10 days, and thereby harping on cabotage exemption is a minor issue, it misses the point in the sense that it’s not so much the delay but the changing of policy wilfully without consulting the relevant stakeholders is the issue, as it strongly signals uncertainty and increased risk on the part of the investors. What if other policies change suddenly and arbitrarily?

The impact in the reversal of cabotage exemption is immediate – two new cables were announced by Facebook and Google to be landing in Singapore and Indonesia recently, both without any landing in Malaysia.

There are also strong industry sources indicating three new cables originally planned to be landing in Malaysia are now, “under review”. Also under review are potential data centre investments between RM12 to RM15 billion in FDI. Emerging from the pandemic, Malaysia needs such investments more than ever and in doing so, we cannot afford to play the same old, same old protectionist games.

Submarine fault occurrence in Malaysia in a year as mentioned above is small but for every minute of outage, there are huge economic, reputational and opportunity losses to Malaysia, as the outage can run into days, weeks or even months.

The longer the time it takes to repair the submarine cables, the longer we will be in the state of being digitally disconnect, thus depriving Malaysians from the basic fundamental right of modern-day utility, which is connectivity.

What is needed now is not only the restoration of the cabotage exemption immediately but also, in the longer term, the critical need to have the legislation amended to remove submarine cable activities from our definition of cabotage for the sake of attracting more investments, especially the higher value digital investments.

To reiterate:

  1. Everything boils down to one common denominator — transport

Did we not notice that industries in the transportation business got wiped out or almost wiped out by the recent gyrations of a global pandemic? Did we also not notice how just one ship blocking the Suez for 7 days put industries and people into distress, causing US$400 million (RM1.652 billion) an hour in trade and US$9.6 billion (RM39.65 billion) in westbound/eastbound traffic daily !

On the same note and in line with the theme on transportation, In this internet age where every information will need to be transported, processed and acted upon, the single most important commodity that glues the data pods is your transport networks. In our case this is a combination of land-based terrestrial coupled with the massive and growing global undersea fibre optic networks. Try messing with just this one component in its functional chain and you will cause the same havoc. Cabotage and landing rights are the 2 significant show stoppers for Tech (Foreign Direct Investments) FDIs in building capacity and investing in capabilities in any country.

  • This is an Service Level Agreement (SLA) and Service Level Guarantees (SLG) driven industry

The telecommunications service providers are operating at a 99.99% uptime at the minimum for their core networks. This is equivalent to about 53-minute outage for an entire year. So, when there is a fibre cut, the KPI is to get it fixed immediately. Negotiating at the point of catastrophic is not an option. What more if there is one party to negotiate with – How clever is that?

  • Data Centres and Undersea cables are tied to the hip

From a regional and global perspective, it is very obvious for some time now that we have all the 3 pieces for a perfect land grab for Data Centres investments. Good affordable power source, low cost and more importantly stable geophysical land banks, good value for money skilled knowledge workers ready to build and maintain them. Whilst we have this part figured out why are we rocking the boat when it comes to undersea fibre cable network when this is clearly the highest point of failure in a broader ecosystems due to cuts and outages? Let’s get clever !

  • Tech FDIs need clarity and simplicity

Facebook, Google, Microsoft, AWS and the likes of them are in a trillion-dollar market transition which is growing and they will look for options. Don’t discount the global Telco’s that are waking up to this demand for capacity. Countries that understand and manage this are going to be winners. We don’t even need to compete. Just be there with the right policy framework to support wave. Insert one variation of the standard business practice or expectations and it’s a great excuse to look elsewhere. Let’s get clever !

© 2020 Malaysia Digital Economy Corporation Sdn Bhd (389346-D). All rights reserved.