Malaysia – on the brink of a breakthrough?

Malaysia has since featured among the doom-mongers’ principal targets. The cost of living is rising as subsidies are cut. Household debt and property prices are on the up. China and the US are two of its largest trading partners. Some analysts have prophesied that its bubble will burst alongside China’s.

Yet the Malaysian government has big plans. It recently unveiled an audacious scheme to transform the capital, Kuala Lumpur, into a financial centre in an attempt to raise the country’s profile and encourage international trade.

Covering 70 acres and featuring 11 new buildings with 25 or more floors, the proposed Tun Razak Exchange (TRX) has already been dubbed ‘Asia’s Canary Wharf’. If the Malaysian government is to be believed, this intrepid upstart will compete with existing regional financial superpowers such as Singapore and Hong Kong and might one day even be mentioned in the same breath as the likes of London and New York.

The critical question for investors, of course, is whether the idea is commendably ambitious or completely unrealistic. Is it genuinely possible that TRX could become a dedicated international financial hub that promotes Kuala Lumpur – and, by extension, Malaysia – as a new nucleus of economic growth? Could it really create the critical mass needed to boost productivity and make Malaysia a high-income economy by 2020, as the government suggests?

The Global Financial Centres Index offers a stark illustration of the scale of the task. Although still in the Asian top 10, Kuala Lumpur fell in the most recent rankings and is now placed 22nd worldwide. London and New York lead the pack by a country mile. Singapore and Hong Kong, TRX’s intended immediate competitors, are third and fourth.

One option for Malaysia would be to adopt a more niche approach and build on its established strength in the rapidly expanding Islamic financial marketplace. Demand for Islamic financial services is increasing both regionally and globally, and Malaysia is well placed to take advantage of this shift. According to the country’s Central Bank, Malaysia’s Islamic banking assets currently stand at $168.4bn (£101.2bn). This accounts for a quarter of the Malaysian banking system, which in turn accounts for more than 10 per cent of the world’s total Islamic banking assets.

The country’s Islamic financial sector is also characterised by a robust and shariah-compliant regulatory climate and has a solid sukuk (Islamic bond) market – more than 60 per cent of the global total.

Yet this may not be sufficient. To have any hope of succeeding, Malaysia will also need to address the significant issues associated with the supply of human capital.

The effectiveness of any international financial centre, after all, is underpinned by the quality of its people and business environment, its ability to access international markets, its infrastructure and its general competitiveness. Malaysia may be able to tick some of these boxes, but others will present sizeable obstacles.

Access to international markets, for example, may well depend on luring key players from elsewhere. The Central Bank estimates up to 56,000 new finance industry positions – including as many as 40,000 in Islamic finance – will have to be filled in the next decade, yet there are persistent concerns about the quality and employability of graduates.

Similarly, poor scores in international student assessments and declining English-language capabilities do not augur well. In short, Malaysia has a people problem. The chances of TRX outshining even its Asian rivals in light of such shortcomings may be thin.

All in all, the nascent saga of TRX makes for one of the most intriguing stories of the emerging market scene, where many commentators are arguing that policymakers’ decisions and responses are set to play an ever more crucial role in determining investor sentiment.

The Malaysian government is certainly making a bold statement, and its proposals should not be dismissed out of hand. It may well be able to build world-class facilities in Kuala Lumpur; it will almost inevitably offer tax breaks and other incentives to companies looking to operate from TRX; and Islamic finance is likely to give Malaysia a profitable niche to exploit. But it is a lack of human capital that could tell in the long run. In Malaysia’s case there is definitely a will; now it remains to be seen if there is a way.

Professor Christine Ennew is a member of Nottingham University Business School’s Centre for Risk, Banking and Financial Services and CEO of the University of Nottingham’s Malaysia Campus. Dr Nafis Alam is an Associate Professor of Finance at the University of Nottingham’s Malaysia Campus.

MALAYSIAN FUTURE

TUN RAZAK EXCHANGE

Malaysian prime minister Najib Razak explains the reasoning behind TRX:

“What began as an idea for Kuala Lumpur International Financial District has evolved into something larger and more inclusive. The Tun Razak Exchange is a 70-acre haven for new investment opportunities, estimated to generate a gross development value of RM26bn ($8bn/£4.8bn).

“We also expect more than 250 of the world’s leading companies to locate here, creating 500,000 jobs directly and indirectly by the time it is fully completed. 40,000 wil be knowledge workers specified to financial services, reflecting our ambition for the Tun Razak Exchage to be home to a strong, vibrant and diverse international business community.”