ISLAMIC BANKING AND FINANCE:

MALAYSIAS 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
1 quarter 2006 5.3%
Low inflation
st

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

Pilgrimage Fund Board
Full-fledged
Islamic banks

Bank Islam
Malaysia Bhd.

Bank Muamalat
Malaysia Bhd.

Foreign Islamic
banks

Conventional banks offer Islamic window

Islamic subsidiary

Islamic money markets

Takaful
Operators

Syarikat Takaful
Malaysia Bhd.

Takaful Nasional, Mayban Takaful, Takaful

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
knowledge and
expertise

Product and market

development

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
Takaful Act

Islamic financial system

Islamic banks
Takaful operators

Money market

Capital market

Non-banking
institutions

Supervisory
objective
Financial
stability

Customer

BNM

Consumer
protection

- Separate clearing
and settlement
system

Malaysia Deposit
Insurance
Corporation

- Liquidity
management

Dispute resolution

Specific

monetary
policy
instruments
Conventional banks
Insurance companies
Non-banking
institutions

Money market

Conventional financial system

Judicial
system
KL Regional
Arbitration
Centre
Financial
Mediation
Bureau

Capital market

BAFIA 1989
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 product
range in banking, takaful
& financial markets
Global sukuk - sovereign
& multilateral institutions

Knowledge and education

Comprehensive legislation
Dispute resolution
o Dedicated high court
o Arbitration centre
o Financial Mediation
Bureau
Tax neutrality policy
Shariah Advisory Council
and its governance
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 Malaysias 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 hub/
Labuans niche in
Islamic finance
First global
sovereign sukuk
Promotion of trade,
investment,
takaful, financial
market & ICT
Greater Shariah
harmonisation

Financial
Financial
Sector
SectorMaster
Master
Plan
Plan

2002

Islamic
Islamic
Financial
Financial
Services
ServicesBoard
Board

Malaysia
Malaysiaglobal
global
sukuk
sukuk

2003

Financial
Financial
liberalisation
liberalisation

Malaysia-IDB
Malaysia-IDB
MoU
MoU

2004

Financial
Financial
Market
MarketIslamic
Islamic
Index
Index

2005

Islamic
Islamic
securities/
securities/
Sukuks
Sukuksby
by
multilateral
multilateral
devt
devtbanks
banks

Shariah
Shariahscholars
scholars
dialogue
dialogue

for global integration

International
Islamic standardsetting body
Foreign Islamic FIs,
49% foreign equity
in Islamic banks and
takaful companies
Attract
international
investors

Forex liberalisation

ISLAMIC BANKING &

SEKTOR KEWANGAN ISLAM DI MALAYSIA
FINANCE IN MALAYSIA

Human Capital Development in Islamic Finance

IBFIM

ICLIF

INCEIF

Level of knowledge:
Elementary
Focus:
Short training courses
to meet industrys
needs

Institutions
of higher
learning

Level of knowledge:
Intermediate &
advanced

Focus:
Leadership programs

Focus:
International
professional
certification and postgraduate programs

Other
training
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

Part 2
(Building Skills)

Part 3
(Actual Work)

Common Modules
Structuring Financing Requirements
Issuing & Managing Islamic Securities
Shariah Audits and Compliance
Customer Relationship Management
Issues in Islamic Financial Institutions &
Markets

Articleship

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

ASSOCIATE MEMBER

PROFICIENT MEMBER

Pedagogical approach:
Self-study (on-site and online learning), exams, case studies, simulation

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

ISLAMIC BANKING OPERATIONS

Sources of funds

Application of funds

Non-mudharabah
deposits

General
pool

Profit

Depositors

Bank

Mudharabah
deposits
SHF

Distribution of profit

Specific account I

Specific account II

Depositors

or

ISLAMICBANKING
BANKING&&
ISLAMIC
SEKTOR KEWANGAN ISLAM
DI MALAYSIA
FINANCE
MALAYSIA
FINANCE
ININ
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
Investment in real estate
Equity investment in joint ventures
Equity investment in capital ventures
Inventories
Other assets

Fixed assets

Equity of Profit Sharing Investment

Accounts (PSIA)
Profit sharing investment accounts
Profit equalization reserve
Investment risk reserve

Owners Equity

ISLAMIC BANKING &

SEKTOR KEWANGAN ISLAM DI MALAYSIA
FINANCE IN MALAYSIA

ConceptsTakaful
Based on.

TAKAFUL
(e.g. Family, General)

A contract among participants to

reciprocally help each other against
defined loss

TABARRU
(Donation)

Agreement to relinquish certain portion of

contribution as donation to fulfil obligation
of mutual help and joint guarantee

PROFIT SHARING ON
SURPLUS

Commercial profit sharing contract

between participants and takaful operator

ISLAMIC BANKING &

SEKTOR KEWANGAN ISLAM DI MALAYSIA
FINANCE IN MALAYSIA

Takaful Model
2 Models: Mudharabah or Wakalah
Participants
Wakalah fees

x%

Surplus on Maturity

x%

Contributions

Participants
Account (PA)

Participants Risk
Account (PRA)

Investment Profit
x%
100%
-x%

Takaful
Operators

Less

x%
100% -x%

Retakaful
Reserves
Claims
Surplus/
(Deficit)

Less

Operating
Expenses

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