ISLAMIC BANKING AND FINANCE:

MALAYSIA’S EXPERIENCE AND

ACHIEVEMENTS

13 June 2006
Victoria University of Wellington

Presented by:
Bakarudin Ishak
Director
Islamic Banking and Takaful Department
Bank Negara Malaysia

ISLAMIC BANKING &

SEKTOR KEWANGAN ISLAM DI MALAYSIA
FINANCE IN MALAYSIA
MALAYSIA AT A GLANCE

• Population – 26.1 m
• Muslim – 15.4 m (59%)
• Strong GDP growth
• 1st quarter 2006 5.3%

• Low inflation

ISLAMIC BANKING &

SEKTOR KEWANGAN ISLAM DI MALAYSIA
FINANCE IN MALAYSIA
 WHY ISLAMIC BANKING IS IMPORTANT?

• In response to the needs of Muslim community

• Acts as a catalyst to fill the gap to mobilise funds for productive

purposes, in particular for Muslim communities

• Significant untapped business potential

• Proven to be a viable financial intermediation channel in supporting

economic growth

• Fulfilled the demands of not only the Muslims but non-Muslim

population as well

ISLAMIC BANKING &

SEKTOR KEWANGAN ISLAM DI MALAYSIA
FINANCE IN MALAYSIA
 MALAYSIAN ISLAMIC FINANCIAL SYSTEM

• Comprehensive Islamic financial system covering all financial sectors

– operating in parallel with conventional financial system

• Diversities of players
– Twelve full-fledged Islamic banking institutions
– 2 domestic Islamic banks
– 3 full-fledged foreign owned Islamic banks
– 7 Islamic banking subsidiaries
– 9 takaful operators

• Sound and robust Islamic financial institutions governed by

international best practices

• Rapid growth with wide range of product and services

– Retail, corporate & investment banking

• Internationally integrated with international Islamic financial system

ISLAMIC BANKING &
SEKTOR KEWANGAN ISLAM DI MALAYSIA
FINANCE IN MALAYSIA
 STAGES OF DEVELOPMENT
Gradual and pragmatic

Milestones
1969 1983 1993 2003

Pilgrimage Fund Board

Full-fledged Bank Islam Bank Muamalat Foreign Islamic

Islamic banks Malaysia Bhd. Malaysia Bhd. banks

Conventional banks offer Islamic window

Islamic subsidiary

Islamic money markets

Takaful Syarikat Takaful Takaful Nasional, Mayban Takaful, Takaful

Operators Malaysia Bhd. Iklhas, Commerce Takaful

..achieved significant milestones in building comprehensive and integrated Islamic financial

system with diversity of players….

ISLAMIC BANKING &

SEKTOR KEWANGAN ISLAM DI MALAYSIA
FINANCE IN MALAYSIA
 DEVELOPMENTAL FOCUS

Institutional & Regulatory

development

Enhancement of
Product and market
knowledge and
development
expertise

Legal and Shariah

framework

ISLAMIC BANKING &

SEKTOR KEWANGAN ISLAM DI MALAYSIA
FINANCE IN MALAYSIA
 ENABLING INFRASTRUCTURE

Legal
 Islamic Banking Act, 1983
 Takaful Act, 1984
 Government Investment Act, 1983
 Legal Redress Framework

Shariah
 Two Shariah governing committees
• National Shariah Advisory Council at
Bank Negara Malaysia
• Shariah committee at Islamic financial
institution

Regulatory
 Adopted international standards

ISLAMIC BANKING &

SEKTOR KEWANGAN ISLAM DI MALAYSIA
FINANCE IN MALAYSIA
 ROLE OF BANK NEGARA MALAYSIA
Islamic Banking Act 1983
Islamic financial system
Takaful Act
Islamic banks
Takaful operators
Money market Capital market
Non-banking
institutions Supervisory
objective
• Financial
stability
• Consumer
BNM protection

- Separate clearing Malaysia Deposit

and settlement Insurance
system Corporation
Customer
- Liquidity
Dispute resolution
management
 Judicial
 Specific
system
monetary
policy  KL Regional
instruments Arbitration
Centre
Conventional banks
Insurance companies  Financial
Money market Capital market
Non-banking Mediation
institutions Bureau
BAFIA 1989
Conventional financial system Insurance Act 1996

ISLAMIC BANKING &

SEKTOR KEWANGAN ISLAM DI MALAYSIA
FINANCE IN MALAYSIA
 COMPREHENSIVE ISLAMIC FINANCIAL SYSTEM
Institutional development

• Domestic & foreign Islamic banks, • Offshore players

Islamic banking windows • Liberalised equity policy for Islamic
• Islamic capital market players subsidiaries and takaful
Legal, Shariah & Reg
Product & market
• Comprehensive legislation
• Comprehensive product • Dispute resolution
range in banking, takaful o Dedicated high court
& financial markets o Arbitration centre
• Global sukuk - sovereign o Financial Mediation
& multilateral institutions Bureau
• Tax neutrality policy
• Shariah Advisory Council
and its governance
Knowledge and education • International best practices
- IFSB
• Consumer Education & • Fund for Shariah Scholars
Awareness Programmes o Promote Shariah dialogues
• Complete training infrastructure o Scholarship
o INCEIF, IBFIM & ICLIF o Research grant
• International conferences
ISLAMIC BANKING &
SEKTOR KEWANGAN ISLAM DI MALAYSIA
FINANCE IN MALAYSIA
VISION TO BECOME ISLAMIC FINANCIAL HUB

 Sustaining Malaysia’s competitive

edge as leading IFC following:-
 progressive development
 achievements of domestic mkt
 integration & liberalisation
 Moving forward, hub envisioned in
Financial Sector Master Plan
 Growing interest from Middle East
investors now seen
 Opportunity to improve trade &
investment ties, and linkages
between Malaysia & other parts of
the world

ISLAMIC BANKING &

SEKTOR KEWANGAN ISLAM DI MALAYSIA
FINANCE IN MALAYSIA
 LEADING INITIATIVES IN ISLAMIC FINANCE

Malaysia as International
Financial 2002 Islamic
Islamic standard-
international hub/ Sector Master Financial
Labuan’s niche in setting body
Plan Services Board
Islamic finance
Foreign Islamic FIs,
First global Malaysia global 2003 Financial 49% foreign equity
sovereign sukuk sukuk liberalisation in Islamic banks and
takaful companies
Promotion of
trade, investment, Malaysia-IDB 2004 Financial Attract
takaful, financial MoU Market Islamic international
market & ICT Index investors

Greater Shariah Shariah scholars 2005 Islamic

harmonisation dialogue securities/ Forex liberalisation
Sukuks by
multilateral
dev’t banks
… for global integration

ISLAMIC BANKING &

SEKTOR KEWANGAN ISLAM DI MALAYSIA
FINANCE IN MALAYSIA
Human Capital Development in Islamic Finance

IBFIM INCEIF ICLIF

Level of knowledge: Level of knowledge: Focus:
Elementary Intermediate & Leadership programs
advanced
Focus:
Short training courses Focus:
to meet industry’s International
needs professional
certification and post-
graduate programs

Institutions Other
of higher training
learning providers

Meeting the education needs of all levels of Islamic finance

practitioners
ISLAMIC BANKING &
SEKTOR KEWANGAN ISLAM DI MALAYSIA
FINANCE IN MALAYSIA
 CIFP PROGRAMME MODULES
Part 1
(Building Knowledge)
• Islamic Economics and
Finance
• Theory & Ethics
• Islamic Financial Institutions
and Markets
• Islamic Finance Regulations
and Governance
• Applied Shariah in Financial
Transactions
• Deposits Mobilization and
Financing Management
• Wealth Planning and
Management
ASSOCIATE MEMBER
Pedagogical approach:
Self-study (on-site and online learning), exams, case studies, simulation
Part 2 Part 3
(Building Skills) (Actual Work)
Common Modules Articleship
• Structuring Financing Requirements
• Issuing & Managing Islamic Securities
• Shariah Audits and Compliance
• Customer Relationship Management
• Issues in Islamic Financial Institutions &
Markets
Specialized (Banking) Modules
• Deposit & Financing Practices of Islamic
banks
• Managing Islamic Banks
• Treasury and Risk Management for
Islamic Banks
• Legal aspects of Deposits & Financing
Specialized (Takaful) Modules
• Managing Takaful Institutions
• Risk Management in Takaful
• Operational Aspects of Takaful
• Actuarial Concepts & Practices
PROFICIENT MEMBER PRACTISING MEMBER
Hands-on activities &
role play
ISLAMIC BANKING &
SEKTOR KEWANGAN ISLAM DI MALAYSIA
FINANCE IN MALAYSIA
“… Islamic banking and finance will emerge as a
force to be reckoned with in shaping the future
development of global finance …”

ISLAMIC BANKING &

SEKTOR KEWANGAN ISLAM DI MALAYSIA
FINANCE IN MALAYSIA
 ISLAMIC BANKING &
SEKTOR KEWANGAN ISLAM DI MALAYSIA
FINANCE IN MALAYSIA
 CHARACTERISTICS OF ISLAMIC BANKING

• Islamic financial transactions based on Shariah

principles:
• Contract (aqad)
• No elements of usury (riba)
• No elements of uncertainty (gharar) and gambling
(maisir)

• Multi-faceted roles based on nature of financial

transactions engagement:

ISLAMIC FINANCIAL CONTRACTS

• Savings and Current Accounts
• Investment Account
• Asset Creation

ISLAMICBANKING
ISLAMIC BANKING&&
SEKTOR KEWANGAN ISLAM DI MALAYSIA
FINANCE
FINANCE ININ MALAYSIA
MALAYSIA
 ISLAMIC BANKING OPERATIONS

Sources of funds Application of funds Profit Distribution of profit

Non-mudharabah Depositors
deposits General

pool
Bank
Mudharabah
deposits
Specific account I  Depositors
SHF or
Specific account II 

ISLAMICBANKING
ISLAMIC BANKING&&
SEKTOR KEWANGAN ISLAM DI MALAYSIA
FINANCE
FINANCE ININ MALAYSIA
MALAYSIA
 STYLIZED BALANCE SHEET OF AN IIFS

ASSETS LIABILITIES

Cash & cash equivalents Current accounts

Sales receivables Other liabilities
Investment in securities
Investment in leased assets Equity of Profit Sharing Investment
Accounts (PSIA)
Investment in real estate
Equity investment in joint ventures Profit sharing investment accounts
Profit equalization reserve
Equity investment in capital ventures
Investment risk reserve
Inventories
Other assets
Owners’ Equity
Fixed assets

ISLAMIC BANKING &

SEKTOR KEWANGAN ISLAM DI MALAYSIA
FINANCE IN MALAYSIA
 ConceptsTakaful
Based on…….

TAKAFUL A contract among participants to

(e.g. Family, General) reciprocally help each other against
defined loss

Agreement to relinquish certain portion of

TABARRU’ contribution as donation to fulfil obligation
(Donation) of mutual help and joint guarantee

PROFIT SHARING ON Commercial profit sharing contract

SURPLUS between participants and takaful operator

ISLAMIC BANKING &

SEKTOR KEWANGAN ISLAM DI MALAYSIA
FINANCE IN MALAYSIA
 Takaful Model
2 Models: Mudharabah or Wakalah
x%
Surplus on Maturity
Participants
x%
Wakalah fees Contributions

Participants’ Participants’ Risk Less •Retakaful

Account (PA) Account (PRA) •Reserves
•Claims
Investment Profit
x% x%
Surplus/
100%
-x%
(Deficit)
100% -x%
Takaful
Operators
Less
Operating
Expenses

ISLAMIC
ISLAMIC BANKING
BANKING &&
SEKTOR KEWANGAN ISLAM DI MALAYSIA
FINANCE
FINANCE INMALAYSIA
IN MALAYSIA