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
international best practices
financial
institutions
governed
by
• 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
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 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 hub/
Labuan’s niche in
Islamic finance
Financial
Sector Master
Plan
2002
Islamic
Financial
Services Board
First global
sovereign sukuk
Malaysia global
sukuk
2003
Financial
liberalisation
Promotion of
trade, investment,
takaful, financial
market & ICT
Malaysia-IDB
MoU
2004
Financial
Market Islamic
Index
2005
Islamic
securities/
Sukuks by
multilateral
dev’t banks
Greater Shariah
harmonisation
Shariah scholars
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 industry’s
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
Distribution of profit
Depositors

Bank
Mudharabah
deposits
SHF
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
Other liabilities
Sales receivables
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
Surplus on Maturity
x%
x%
Wakalah fees
Contributions
Participants’
Account (PA)
Participants’ Risk
Account (PRA)
Less
•Retakaful
•Reserves
•Claims
Investment Profit
x%
x%
100%
-x%
Takaful
Operators
Surplus/
(Deficit)
100% -x%
Less
Operating
Expenses
ISLAMIC
BANKING
ISLAMIC
BANKING &&
SEKTOR KEWANGAN ISLAM
DI MALAYSIA
FINANCE
IN
FINANCE INMALAYSIA
MALAYSIA