Monem Salam:  
Welcome to Halal Money Matters, sponsored by Saturna. I'm Monem Salam. We talk a lot about Islamic investing, Islamic finance, and today we have a very special guest, Mustafa Aydemir who actually works for Saturna Malaysia, and he's going to be going over the history of Islamic investing in Malaysia itself. Malaysia has been known from the very beginning, back in the 80s, to being a pioneer in many different products when it comes to Islamic finance and Islamic investing. And I'm really excited to be able to hear Mustafa talk about the history of that subject in today's show. Let's get started.

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All right, thank you, Mustafa for joining, you know, just wanted to kind of, you know, take this session to be able to talk a little bit about, you know, the history of Islamic finance, and particularly Islamic investing in Malaysia. I say that because, you know, Malaysia has been known as the, kind of, the leader when it comes to Islamic finance, and in some cases, the pioneer also. And so I just wanted to start off, maybe talk a little bit about the history, and talk about, you know, what's led to the, you know, Malaysia being a pioneer. And then maybe talk a little bit of what's happening right now. And then along the way, we can talk a little bit about market perception, penetration, those type of things. So welcome to the show.

Mustafa Aydemir:  
Thanks for having me.

Monem Salam:  
Yeah, thanks. So let's start off with the history, right? So what do you think about the you know how Islamic finance actually gets started in Malaysia?

Mustafa Aydemir:  
So Malaysia is a beautiful country located in Asia, more particularly in Southeast Asia. Malaysia is divided into two geographically, East Malaysia and West Malaysia, and the land size is huge. However, the population is around 33 million at the moment, so Malaysia is not a big country, but economy wise, and specifically in the Muslim world, it has a special place. One of the things Malaysia is well known of is Islamic finance, and they started very early and bypassed a lot of other countries in the same space, specifically because the government is supporting the cause.

Monem Salam:  
So why? What? What happened the very beginning that kind of instigated all this?

Mustafa Aydemir:  
So Malaysia in the 60s, separated from the colonial times and catapulted into the new area, and one of the policies was to cater for the Muslim population in Malaysia, and one way of doing that was to establish institutions that somehow serve the Muslim community. Yeah. Most famous institution from that period is Tabung Haji, an institution that collects small payments and savings from Muslims until the money is enough to go for the Hajj, the pilgrimage.

Monem Salam:  
You know, there's an urban legend that I was told when I would came to Malaysia, and that was, and maybe you can confirm it, or maybe you can, but, you know, it was basically that, you know, they basically figured out that a lot of people in the country used to save for Hajj by, you know, putting their money underneath mattresses or in their houses or those type of things, and it wasn't being used in the economy. And so the Malaysian government wanted that money to be able to be used in the economy, and then, at the same time, benefit the hajjis who were going to for to perform the pilgrimage. And so that's why they started this program where they collected the money from the people they almost like, almost guaranteed it. They invested it back into the economy, and then when it was time for them to be able to go for Hajj, they were able to provide them, not only with the what the means to do it, but also the services while they were that in Mecca and Medina. Do you know anything about this?

Mustafa Aydemir:  
Yes, that's correct. So we call it pillow money, and the rumors is true. So how do you activate people's money at home, where you basically have no data, you don't really know, you're just guessing how much money is like saved in their homes in, you know, like in the old times, in terms of jewelry, in terms of gold, in terms of cash or other valuable items. Yeah. So Tabung Haji was able to capture what we call the pillow money under the pillow money by guaranteeing savers that their money will be okay and not lost against purchasing power.

Monem Salam:  
And now, I mean, I think when they, when they started collecting the money back in the 60s, and they started, they made investments, and I'm assuming, because it was used for Hajj purposes, they kept the money, quote, unquote Islamic?

Mustafa Aydemir:  
Right. So the story of Tabung Haji tells us a lot about Islamic finance and how to advance in that area. Once the money was collected, it was actually so much that Tabung Haji, the Hajj organization of Malaysia, didn't know what to do with so much money, and they divided their units, their departments, into three, the collecting side, the banking side, if you want, or the saving side. And on the other side, we had the travel agencies. But the money was so much they couldn't spend all of the money. So they started investment unit, and the investment unit needed then places to invest the money. So the government was pretty fast in deciding a strategic area, the capital market. So they started Islamic capital markets very early on, and then encourage local companies to IPO and become investable.

Monem Salam:  
And that's what so Tamil Haji was doing both the private companies and then eventually the public companies, and also, I guess, at the same time, helping to make the market more liquid for people to invest in.

Mustafa Aydemir:  
Yeah, if you want to add some numbers. Currently we have the Islamic capital, Islamic capital market for a small company a country like Malaysia, in comparison to other countries, is quite big. So we have around 1000 listed companies in the Malaysian stock market, and 700 of them are declared Sharia-compliant.

Monem Salam:  
That's,that's quite a bit. 70% is quite it's a huge number.

Mustafa Aydemir:  
And guess who's investing in those Sharia-compliant companies, Tabung Haji and the other funds that developed over the years in Malaysia? Yeah. So it serves two big purposes, and we, of course, as Saturna, we are benefiting from that development. You cannot only invest in companies as a normal consumer, but the country's funds are able to invest in their own companies, hence increasing their valuation, and then make protecting them from foreign, unwanted takeovers.

Monem Salam:  
Yeah. So then let's forward. So then early on, you know, Tabung Haji has this money. They try to make investments. And at that time, you know, I don't think there was a difference between my honor. Maybe there was a difference between, you know, what's an Islamic company or Halal company, not, you know I mean, but I guess there was because they would have to invest in something. Do you know how what the criteria was at the time?

Mustafa Aydemir:  
So during the 70s, we had, slowly a recognition of Sharia compliance and Islamic investing coming from the old times, from the Ottoman area and so on. But the main difference started when the government established the IFSP, the standard setting organization for institutions and central banks in Malaysia and Bahrain. At the same time, developed the AAOIFI, which is the standard setting organization for Islamic financial institutions and their Sharia advisors, slowly discussing and debating what makes a stock or what makes an investment Islamic. And so the standards were being developed, is my point.

Monem Salam:  
So the early on in the very early stages, I would assume it was only stay away from certain types of industries.

Mustafa Aydemir:  
Yeah, it was negative screening, as we know. Yeah. So you cannot invest in alcohol, you cannot invest in swine products, things like that. So the obvious sectors.

Monem Salam:  
And then slowly, I mean, they began to develop and stuff. Then, so what in the 80s, then you have Bank Islam.

Mustafa Aydemir:  
Yeah, Bank Islam, like, what Malaysia did first was they decided to allow normal banks, conventional banks, at that time, the only banks in Malaysia to open windows that offer Islamic products.

Monem Salam:  
And that was back in the 80s as well.

Mustafa Aydemir:  
That's correct, that was in the beginning of the 80s. And then there were, of course, critics saying, look, it's the same bank, but offering different contracts. So we call it the Islamic window. Yeah, and it's so...

Monem Salam:  
So just to be clear, then like an Islamic window would be a conventional bank that basically offers Islamic deposits and loans, but they do segregate the conventional money from the Islamic money, right?

Mustafa Aydemir:  
That's correct. So basically, it's the same balance sheet, if you want to be more technical, but they're separating the operations as much as they can from the Islamic and Sharia-compliant, okay. But that's banking. Let's go back to Islamic capital markets. So interestingly, we had to get new laws, new legislation that allowed Islamic banks to own and buy and sell and basically execute Islamic contracts. At the same time that the standards were being developed and that allowed funds and the fund management industry to excel in Malaysia as well.

Monem Salam:  
And that started very early on as well. I think the first Islamic fund that was launched in Malaysia for the retail was in 1979.

Mustafa Aydemir:  
That's correct.

Monem Salam:  
Yeah. And then, so now, now you look at, you know, going to the 80s and those things. I mean, if as you know, as much as I do, that the real, the standards that we're using now, which is both on the on the negative screening of industries and companies, and also the financial ratios, that wasn't developed until mid 90s, 1997 when the Dow Jones Fatwa came out. So what, what was, was Malaysia already ahead of its time doing that as well? Or were they doing something different?

Mustafa Aydemir:  
So Malaysia, driven by the success of Tabung Haji, started other funds during that period. So we have the PNB, the Fund for the Malay population. Then we have the EPF, the pension fund of Malaysia, and the LTAT which is armed forces fund of Malaysia. And what these funds have together in common is that their investment aspirations were able because they wanted to have some portion of their money in Sharia-compliant stocks. And hence we had not only Tabung Haji investing in the stock market, but all the other funds in Malaysia as well. So the end result was that we had a vibrant capital market where not only the big funds were supporting the stocks, but also the smaller fund houses were able to survive and operate profitable.

Monem Salam:  
But I mean, that's not, I mean that's not, let's not paint the very rosy picture, because there were large institutions that didn't really care about Islamic investing at all, right. EPF didn't start their Sharia retirement scheme until much later, like 2015, 2016.

Mustafa Aydemir:  
That's correct. So let's talk about the reasons for that. We used to have a term, Monem. You remember that called the cost of being Muslims. Cost of being Muslim basically, is a concept where it says you need additional governance around Sharia-compliant products, and you need Sharia advisors and other processes like reviews and audits. So that will cost money, and hence, a Muslim would pay generally a little bit more than the conventional products they would use. So the EPF was very strict on I don't want to pay additional money. So bring down the cost. Do your Sharia-compliant industry? Please bring down the cost and make the cost of being Muslim basically zero. Okay, so that's what they did.

Monem Salam:  
Okay, so then, but, but then prior to that, as you're mentioning, like, when, when did they, like, when did they Malaysia, start developing, like, for example, the standards for Islamic investing that were beyond just the industry screening?

Mustafa Aydemir:  
So Malaysia's Securities Commission and the Central Bank of Malaysia, called Bank Negara, they have, they are employing. It's like different than the Western countries. My observation here in Malaysia is that the best brains don't work in the private sector, necessarily. The regulators in Malaysia are able to attract really good talent in Malaysia, and these talents were on the forefront of developing a framework that serve the Muslim community, or say, the Islamic, the Sharia-compliant community. But I also want to mention that more than the Muslims, everybody is using, like, a huge portion of the population is using Sharia-compliant products you so you basically walk into an institution and whatever conventional is available, they also have an alternative that is Sharia-compliant. So this is due to the standards that they developed in the 80s. IFSP regulates or develops standards for the regulators. And Malaysia also adopted AAOIFI standards for the Islamic financial institutions, but they also have their own set of filters and Sharia compliance standards.

Monem Salam:  
So let’s talk about their own their own filters and those type of things. Because I know for a long time there was this idea that Malaysia was very liberal in applying their Islamic Sharia screening standards. So is that legitimate or?

Mustafa Aydemir:  
Yes. Basically what Malaysia has decided very early on is that scale matters. They wanted to increase the industry as fast as possible. And what they did is the like some Middle Eastern countries would criticize Malaysia for allowing contracts that are, let's say, a bit easier on the Sharia-compliant restriction list. For example, they had not so many filters for Sharia screening. They had the 5% haram income as a screen. For example, there will be easier to follow than other AAOIFI standards.

Monem Salam:  
But the 5% Haram is also by AAOIFI, has that standard too, right?

Mustafa Aydemir:  
Yeah. Over the time, the standards have converged. Now we have a clearer picture of what would make an investment share your complaint or not.

Monem Salam:  
So what was it before, before they implemented this 5% on either side? Why? I mean, why? Why did people consider Malaysia to be so liberal?

Mustafa Aydemir:  
So I don't have all the numbers in my head right now.

Monem Salam:  
I mean, I think in the capital markets, I think what one of the things that they that people talk about is that the Malaysian scholars based on some, some very based on evidence, not just out of out of the air, but they did allow trading of debt on in certain, in certain cases, where, in general, the view amongst the scholars in the Gulf, Arabian Gulf, is that it's not allowed. I think that was one of the reasons that was there. But also, at the same time, you know, they had a very large tolerance for the amount that a company was involved with something haram, or even on the debt side, or on the other side, and I think that's until they tighten the standards. I think that was what, what led people to do that now and now, the standards are the same, but the perception is still stayed.

Mustafa Aydemir:  
That's right. I mean, the one thing that struck my mind when I came to Malaysia 15 years ago was that they had a contract that they would use extensively in Malaysia called by Ina. So I would sell something to you, and you would sell it back to me, without going too much into detail, some scholars would say this concept is like fictitious like, why would they sell something to you, and you would sell back to me, and then I would sell it back to you, and you would sell it back to me, but that wants to raise money in a banking product, but this, meanwhile, is phased out, and they are more in line with the global Sharia-compliant rules and regulations.

Monem Salam:  
Do you find that the standards globally were like what did they move to more towards Malaysia? Or did Malaysia move more towards those global standards?

Mustafa Aydemir:  
We have to be, like, clear about one thing, yeah, like with so many decades the industry is operating. We had harmony in 95% of (good point) all the topics. So we are talking about a minority of discrepancies. And yeah, over time, these discrepancies would reduce, because of innovation, partially, but also things like you mentioned by al Din. The trading of debt was allowed, but now it's not and also by Ina was allowed now it's not in we have to not forget, innovation continues right now, probably in the near future, we will talk about the Maqasid, the objectives of the Sharia. And Malaysia has started a huge initiative last year, catapulting, probably the industry into the future where they are talking about aspirations derived from the Islamic wisdom and Islamic knowledge.

Monem Salam:  
Yeah. Well, well, we'll, we'll come back to that one. But I wanted to focus on one other thing before we did that, and that is that it seems, you know that if you look at on the surface, and also when you when you look a little deeper into Malaysia, you know they really had, there's two things that were going for Malaysia. Number one is that the government was involved from the beginning, so they didn't leave it up to market forces to do whatever they wanted. When it came to Sharia compliance. But the other one was that they really took it on as an evolutionary process, you know, rather than a, you know, a zero to hero or automatically, like a revolutionary, the gap to do this today or tomorrow at some, some other governments have done in the past. And what, what I feel, is that that that evolutionary process allowed an entire ecosystem to build around Islamic finance and investing.

Mustafa Aydemir:  
Totally agree. And I think what, what I would add to that is that Malaysia is quite pragmatic, like they have a population. The Muslim population is around 60 to 65% but the rest is not so they need to develop products and the entire banking industry in the ecosystem that serves all the communities, yeah. So inclusivity and equitable treatment of all the communities is in the core of their processes.

Monem Salam:  
Yeah. So, I mean, you know, I mean, even going back to the time even Tabung Haji, which was a government entity. So they first started the fund, and then you have basically Securities Commission Malaysia, or before that bank, negara, you know, they really came up with guidelines. And so that the industry could, could actually, you know, not have to, kind of innovate on that, the Sharia aspect of it. They could, they could innovate on product and what was needed for the clientele and for the clients and then, and then, what they ended up doing was, you know, it's a trifecta, if you want to call it right, you have, you need a pipeline of individuals in coming into the industry. So that would be education. You need individuals that know the Sharia right away, which is the scholars. But then you need a system to be able to be able to regulate it, and that would be the way the government steps in.

Mustafa Aydemir:  
Absolutely and see, Malaysia was like quite successful in developing these ecosystems, because like this, the people they trust the governance of the industry. So while other countries would question the standards, would question and debate continuously those Sharia-compliant or not Sharia-compliant filters. In Malaysia, they would say, okay, it is from our governance system approved. So I will just go ahead and use the product.

Monem Salam:  
So I know, not to single out any one country. I know you lived in and spent a considerable amount of time in the Arabian Gulf. So can you give me another example of something that like we're talking about an ecosystem. Can you give me another example of a country that didn't do that, and what, what's been happening there, but without naming a country, just kind of just generally?

Mustafa Aydemir:  
So I was lucky to live in Bahrain, and Bahrain is similar to Malaysia, quite pragmatic with their with the industry development. But my parents are from Turkey, from Turkiya and in Turkey, the discussion on what is Sharia-compliant and what’s not is still ongoing, and the end result is that the Sharia-compliant market, like Islamic capital markets or the Islamic banking is not growing a lot. So it's in Turkey the Sharia-compliant assets is around 7% of total financial assets, where in Malaysia we bypass the 50% already.

Monem Salam:  
So it's basically, you're saying there's no confusion, because the standards are being set by a higher authority, which is the government.

Mustafa Aydemir:  
Yeah, let's break it down. Why would Malaysians believe in the system more than Turkey, for example, and it is because we have developed, Malaysia was in the forefront of developing two tier governance system. The central bank has a Sharia governance committee or Sharia advisory board, and the Securities Commission has their own Sharia advisory committee. So these committees make sure that new products that are like coming to the market are following the industries, industry standards, and they are auditing them continuously. And other countries do not have a central Sharia committee. So Malaysia invented, or was on the forefront of starting with the governance standards first. So they have the central bank telling the financial institutions, look, if you are doubtful, or if you have questions on your product development, come reach out to us and we'll check it for you. And the capital market authority, the Securities Commission, has the same. So we have two central Sharia boards here, which is, which is now become industry norm. Now, Turkey is developing the same. Bahrain has the same. The Middle Eastern countries have the same. This Malaysian model seems to be working well.

Monem Salam:  
Okay, that's great. And then part of that also you have the regulator, you have the scholars that we talked about. But the other part of this is the pipeline, and I guess, as the industry was growing, and then, you know, Malaysia took, took it upon itself to not only develop institutions, but also bring people from abroad to be able to study that these institutions as well.

Mustafa Aydemir:  
Right. Malaysia, let's talk a bit about their success in the education industry. Malaysia is a country where not many countries, not many people need a visa to enter, so it offers a huge landscape of education institutions, higher education institutions, where people from war torn countries conflict areas can simply come to Malaysia or send their children to study. So we have a lot of we have a good community of Iranian Persian people here. We have Syrians here. We have Bosnians here. They came here when their country was in trouble and just stayed here, learned the Islamic financial education and went back home, or stayed here and spread the Malaysian model.

Monem Salam:  
Yeah. And then local universities were created some of them by the regulators, but some of them, like already existing ones, and just adopted and taught their students Islamic finance.

Mustafa Aydemir:  
Right. They're producing, on average, more students than the industry can absorb, which keeps the salary levels for employers in check.

Monem Salam:  
Yeah, that's great. So let's turn now to, you know, some latest developments. We talked a little bit about the history and how the guidelines were different, and now they're coming the same, and now we're getting into more the innovative part and one of the things that I discovered, and maybe you can help us explain exactly what this means. But what Malaysia is doing now is looking at the Maqasid of Sharia. Maqasid means the objectives of the Sharia, and really building a system around that. So can you explain that a bit

Mustafa Aydemir:  
more? Yeah, basically the Maqasid is a principle based guidance on the Islamic capital market, it is in the forefront of Islamic education here in Malaysia, in the finance sector. And the SC last year, unveiled principle based guidance on the Maqasid al Sharia. Basically made the word Maqasid al Sharia more tangible, and how, how they did that is they break it down and created aspirations. So there are six aspirations that they derive from the Maqasid. Aspiration, one, for example, is humanity. Aspiration, two is justice and benevolence. Aspiration three is clarity and transparency. Aspiration four is flexibility and innovation. Five is fiduciary and accountability. Six is accessibility, inclusivity. And you know, whenever the regulator is on a conference and speaking on this topic, they would just pick one aspiration and explain to the audience what they mean with that by that.

Monem Salam:  
Now, this, this, Maqasid, this the model that they've developed. How does that help the individual investor, the retail investor that it's that's in Malaysia.

Mustafa Aydemir:  
So there's like, if you think about principles rather than rule based approach, the principle would teach you, like the overall guidance, why is something good and why is something not good? Think about the entire crypto space is a hugely attractive space with a lot of speculation with a lot of risk, and these principles derived from the Maqasid should give, readers should give the audience should give the participants more guidance on why is something good or preferred, and why not.

Monem Salam:  
So in this particular case, since we're talking about crypto, are you basically saying that the rules based system might say that crypto is haram, or as the principles based or Maqasid based system might say that's halal, or vice versa?

Mustafa Aydemir:  
No, what I'm saying is. Like we used to think in rules, right? We are used to getting the rules, okay, Bitcoin or crypto is not halal, and that's it. That's the rule, right? And they'll come up with a resolution, and you can't basically understand how they in the wisdom of their rulings. In this new approach from the Securities Commission on the principles it would give you guidance why something is friendly and why it is not, in this case, the regulator would say, think about justice. One wins, one loses in a speculative environment using crypto or the other one is accountability, like you would try to get rich by over exposing to higher risk. And that would, that would lead to hardship eventually.

Monem Salam:  
So I'm trying to understand this a little bit better, right? So as like, as an individual investor who's investing in a mutual fund or Unit Trust Fund in Malaysia, how does I still don't understand how this benefits me?

Mustafa Aydemir:  
So this is a new initiative, Monem. So over time, we are getting pieces, a piece by piece, more details on this new, innovative approach to the Maqasid. But what I'm hearing until now is that is very welcomed, and it is helping us in understanding the principles behind the rulings, so that we have, like, a better understanding on the resolutions to develop new products for our community and the customers.

Monem Salam:  
I see, and then, so, okay, So it's just still more to come, I guess is the way is the way, is the way to put that?

Mustafa Aydemir:  
Yeah, I have the principles in front of me, but it would be another podcast to go through them.

Monem Salam:  
We might, we might have to do that at a later point Inshallah. So let's talk a little bit about, you know, the just the market in general, you know, what's appealing, you know? And I mean, at the end of the day, sometimes it's all about performance, right? So is, are Islamic funds doing better than, say, conventional what's kind of the lay of the land?

Mustafa Aydemir:  
Yeah, that's a good question. So let's start with what's the objective of an investor? We want to invest and get some returns, but we also want to invest based on our risk profile. So a super developed country like Malaysia, in financial terms, so in the capital market, provides ample opportunity for the investors to choose investments based on their risk profile. And that's a beautiful thing, right? Think about higher risk investors. They are able to invest in small and mid cap companies and in equities, or the more risk averse investor, they would choose fixed income products like Sukuk funds and everything is plentily available in Malaysia.

Monem Salam:  
Yeah. I mean, definitely the choice. And I guess the, you can really do a good asset allocation based on all the products that are there where, you know, sometimes in other countries, you're not able to do it at all.

Mustafa Aydemir:  
Right. So, because Malaysia is so well regulated, first of all, the trust is given, right? You have the ecosystem that provides you with the product you need, and the accessibility to these products are there. For example, we have this group, usually attractive, ASEAN market, the ASEAN five countries, Indonesia, Thailand, Philippines, Singapore and Malaysia. And you have regional funds that that benefit from the growth of the of the region, or the Malaysian market performed quite well this year. And you have plenty of Malaysian funds and Malaysian stocks that you can invest in.

Monem Salam:  
Right. So the choice, choices are a lot more from doing that. That's that kind of benefits the investor and plus, and then also there's more competition. So ideally, the fees or the cost to the investor might come down as well.

Mustafa Aydemir:  
Yeah, when it comes to fees, the Malaysians are not very efficient, to be honest, there is still significant, significant amounts of upfront fees that people are willing to pay without questioning it, maybe because they did so in the past, but now, with the with funds that don't have upfront fees, investors are advised to check the prospectus when it comes to fee structure.

Monem Salam:  
Yeah. Well, great. I appreciate the time. Is there any last things in the last comments you want to make before we close it off?

Mustafa Aydemir:  
Yeah. Malaysia is a beautiful country. People are very friendly. I encourage everyone to come visit Malaysia if you live overseas, and for every Malaysian who's interested in knowing more about capital markets, reach out to me.

Monem Salam:  
Great. Thank you so much. Mustafa, for your time.

Mustafa Aydemir:  
Thank you. Thanks for having me.

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Monem Salam:  
Thank you for listening to Halal Money Matters. If you like what you hear, please do rate us on the app stores and also leave us a review. It helps other people find us a lot easier.

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