(Photo by Alex Tan)

Before summer, Malaysia will likely have opened its doors to foreign law firms for the first time. The question now: who wants in?

“It’s a call we’ll need to make,” says Jeff Smith, the Singapore-based head of the Southeast Asia practice for Norton Rose Fulbright. “Is it necessary?”

Singapore is just about an hour’s flight to the Malaysian capital of Kuala Lumpur, and that proximity is the main reason many lawyers question the necessity of an office in the latter. Many firms have already invested heavily in building up their offices in Singapore, which is the major legal and financial hub for region.

But the Malaysian government is hoping that the burgeoning market in the country for Islamic financial products will prove a draw to some international law firms. Malaysian issues of sukuk, a type of sharia-compliant bond, reached $148 billion last year, up from just $1.5 billion in 2001. The government wants Kuala Lumpur to emerge as the leading international hub for Islamic finance and thinks liberalizing the legal market will help it get there.

Currently, international firms are not allowed to even have offices in Malaysia. That will change with the amended Legal Professionals Act, which was passed by the Malaysian parliament in October and is expected to come into effect in the next few months.

The amended law will allow up to five foreign firms to be granted Qualified Foreign Law Firm (QFLF) licenses, permitting them to open offices in the country to advise on international law. The government has said the QFLF licenses will be given to firms that have strong Islamic finance practices.

At the same time, other international firms will be allowed to tie up with Malaysian firms in what are called International Partnerships, and local firms will also be able to hire foreign lawyers to work in Malaysia. Foreign lawyers in general will also explicitly be able to work in the country on a fly-in, fly-out basis for up to 60 days a year. Foreign firms, even QFLFs, will still be barred from practicing Malaysian law.

Still, even firms that are major players in Islamic finance aren’t fully convinced.

“We’re one of the leaders in Islamic finance, and to the extent that we think Malaysia would continue to be a hub there, that might be a reason to open an office,” says Allen & Overy Singapore managing partner Kenneth Aboud. But he thinks it’s just as likely that the firm continues to advise on such matters from Singapore.

Many lawyers in the practice say that, despite its growth, Islamic finance is still considered niche.

“For every 10 conventional products, you might get one Islamic product,” says Davide Barzilai, Norton Rose Fulbright’s Islamic finance practice head for Asia. It’s more of a “bolt-on” to a broader structured finance practice than its own practice.

“You have to consider the profitability factors of opening an office in Malaysia if you already have one in Singapore,” he says.

Smith agrees that a Kuala Lumpur office mainly devoted to Islamic finance might not be sustainable, but he says there is other work in Malaysia for clients in the transport, energy, infrastructure and financial sectors.

“We have a number of important Malaysian clients, some of whom we have worked with for a decade or more,” he says, citing Petroliam Nasional Bhd., better known as Petronas, sovereign wealth fund Khazanah Nasional Bhd. and private conglomerate Genting Bhd. “Having a presence on the ground would enable us to stay closer to them.”

One British firm without a Singapore office thinks Malaysian might be good point of entry into the Southeast Asian market. London-based Trowers & Hamlins launched a nontrading representative office in Kuala Lumpur in 2012. Regional managing partner Nick White says the firm will apply for a QFLF as soon as it is available.

He says Trowers & Hamlins began doing business for Malaysian clients in the Middle East, where the firm has four offices. He points to the firm’s work with Malaysian electric utility Tenaga Nasional Bhd. on power projects in the Middle East, as well as its representation of asset management company Permodalan Nasional Bhd. on property investments in the United Kingdom.

White says 95 percent of the firm’s Southeast Asian work is linked to Malaysia, so it would be “pointless” to have an office in Singapore instead of Kuala Lumpur.

“We can use Malaysia as an excellent hub for exploring opportunities in the ASEAN region,” he says.

Smith says Norton Rose Fulbright will be canvassing Malaysian clients to find out if they want the firm to open in Kuala Lumpur. He says the firm also needs to find out more particulars about QFLFs.

“I guess we need to know more about it, what restrictions there are, the types of licenses, what you can do, what you can’t do,” says Smith. “We’re interested, happy to look at it, but certainly haven’t made a decision either way.”

While there was some initial pushback against liberalization by Malaysian lawyers, that has largely subsided. Some still express concerns though.

Chew Seng Kok, managing partner of Malaysian firm Zaid Ibrahim & Co, says he is concerned that international firms may be able to lure away some of the firm’s partners with higher pay. He says he is also worried that Malaysian clients might cut out local firms, which often refer matters to international ones, and go straight to the international firms.

“That’s a major concern for us, frankly,” says Chew.

But partner Yon See Ting of Kuala Lumpur’s Christopher & Lee Ong says Malaysian clients are already doing that. “The lucrative corporate work is being serviced by [international firms] anyway out of Singapore and Hong Kong without the need to set up an office here,” she says. Her firm entered into a strategic alliance with Singapore’s Rajah & Tann last July.

Such alliances, which are already permitted, are another option for firms. Baker & McKenzie currently has an arrangement with Malaysian firm Wong & Partners.

Kherk Ying Chew, a partner at Wong & Partners, says there are no plans to change the current arrangement into the new International Partnership, which carries certain restrictions and requirements. “I don’t think [the new law] will have much impact for us,” she says. “We’ll continue to do what we do.”

She’s not sure international firms will be exactly banging on the door in any case. She notes the large number of international firms that have recently launched alliances with local firms in Indonesia, which also does not permit foreign law firms to have offices. Squire Sanders, White & Case, Clyde & Co, DLA Piper and Taylor Wessing all formed associations with local firms last year.

“Jakarta seems to be more interesting to them than Malaysia,” says Chew.

Email: tbrennan@alm.com.