landscape in Malaysia.

Secondly, it discusses the various approaches undertaken by

the Malaysian Authorities in the development of an Islamic banking system in
Malaysia. And finally, some issues and future directions in the implementation of
Islamic banking in Malaysia.
PART 1
Overview
The Islamic financial system in Malaysia may be broadly classified into three
categories, namely the Islamic banking system, the non-bank Islamic financial
intermediaries and the Islamic financial markets. The system may also be
characterised in three different forms as follows:Full-fledged Islamic financial institutions;
Conventional financial institutions with Islamic windows; and
Conventional financial institutions with Islamic windows and full-fledged Islamic
banking branches.
Islamic Banking System
The Islamic banking system comprises Bank Negara Malaysia (BNM) as the central
bank vested with powers under the Islamic Banking Act 1983 and the Banking and
Financial Institutions Act 1989 (BAFIA) to regulate and supervise Islamic banking
operations in Malaysia; the Islamic bank; and the commercial banks, finance
companies, merchant banks and discount house participating in the Skim Perbankan
Islam (SPI) (Note: the English translation is the Islamic Banking Scheme). The
Islamic bank and the commercial banks are the only institutions allowed to offer
Islamic current accounts.
Islamic banks
There is currently one Islamic bank operating in Malaysia, namely Bank Islam
Malaysia Berhad (BIMB), established in 1983 under the Islamic Banking Act 1983.
The Act provides BNM with powers to supervise and regulate Islamic banks, similar
to the case of other licensed banks. BIMB operates a total of 80 branches with staff
strength of 1,600 people.
A second Islamic bank, to be known as Bank Bumi-Muamalat Malaysia Berhad
(BBMMB) will be established following the merger of Bank Bumiputra Malaysia
Berhad (BBMB) and Bank of Commerce (M) Berhad (BOCB). Under the arrangement,
all conventional banking assets and liabilities of BBMB will be transferred to BOCB
while the Islamic banking assets and liabilities of BOCB and BBMB Kewangan Berhad
will be migrated to BBMB. BBMMB is expected to commence operations by the
fourth quarter of 1999.

Commercial banks
The commercial banks participating in the SPI (SPI commercial banks) form the
largest group of financial institutions in the Islamic banking system. The number of
SPI commercial banks as at end-June 1999 was 24, of which four are foreign-owned
locally incorporated banks. Total assets of the SPI commercial banks as at end-May
1999 was RM18.7 billion, while deposits and financing totalled RM14.5 billion and
RM5.3 billion respectively. Islamic banking facilities are available in 1,663 branches
of the SPI commercial banks, including 7 full-fledged Islamic banking branches.
Finance companies
The second largest group of banking institutions in the Islamic banking system are
the finance companies. There are 18 finance companies participating in the SPI (SPI
finance companies) as at end-May 1999. Total assets of SPI finance companies as at
end-May 1999 was RM5.1 billion while deposits and financing each amounted to
RM4.1 billion and RM2.3 billion respectively. Islamic banking facilities are available
in 820 branches of the SPI finance companies, including 3 full-fledged Islamic
banking branches.
Merchant banks
Merchant banks as a group are relatively small in the Islamic banking system.
Although there are only 5 SPI merchant banks, most of the Islamic banking activities
are dominated by two large merchant banks, which represent 93% of the SPI
merchant bank's assets. As at end-May 1999, total assets of the SPI merchant banks
amounted to RM733 million while deposits and financing totalled RM238 million and
RM438 million respectively.
Discount houses
The discount houses are the new entrants in the Islamic banking system, when they
are allowed to participate in the SPI since December 1998. All the seven discount
houses are participating in SPI and they focus on short-term Islamic money market
operations and underwriting/ arranging of Islamic debt securities.
Non-Bank Islamic Financial Intermediaries
The non-bank Islamic financial intermediaries may be broadly divided into four
groups of institutions, as follows:
the takaful companies;
the savings institutions;
the development financial institutions; and

other financial intermediaries which offer Islamic banking services such as Islamic
leasing companies and National Mortgage Corporation.
Takaful companies (Islamic insurance)
Takaful operations are regulated and supervised by BNM since 1988 with the
appointment of the BNM Governor as the Director-General of Insurance and Takaful.
There are presently two takaful operators, namely Syarikat Takaful Malaysia Berhad
(STMB) and Takaful Nasional Sendirian Berhad (TNSB) operating a total of 113
takaful offices throughout the country. As at end-March 1999, total assets of the
family takaful funds and the general takaful funds amounted to RM572 million and
RM205 million respectively.
Savings institutions
The most prominent Islamic savings institution is the Pilgrims and Management
Fund Board or popularly known as Tabung Haji. Tabung Haji is considered the first
Islamic financial institution in Malaysia, established by statute in August 1969. The
objective of Tabung Haji is to promote and mobilise savings of Muslims intending to
go on pilgrimage, and co-ordinate activities connected with Muslims going on
pilgrimage. Tabung Haji manages a fund derived mainly from the accumulation of
savings of intended pilgrims. The total assets of Tabung Haji as at end-June 1999
were RM7.66 billion. The growth of Tabung Haji was derived mainly from its
expanded savings base due mainly to the increase in the number of depos