Islamic Banking And Finance Malaysia’s Experience And Achiev
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 Part 2 Part 3
(Building Knowledge) (Building Skills) (Actual Work)
• Islamic Economics and Common Modules Articleship
Finance • Structuring Financing Requirements
• Theory & Ethics • Issuing & Managing Islamic Securities
• Islamic Financial Institutions • Shariah Audits and Compliance
and Markets • Customer Relationship Management
• Islamic Finance Regulations • Issues in Islamic Financial Institutions &
and Governance Markets
• Applied Shariah in Financial Specialized (Banking) Modules
Transactions • Deposit & Financing Practices of Islamic
• Deposits Mobilization and banks
Financing Management • Managing Islamic Banks
• Wealth Planning and • Treasury and Risk Management for
Management 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 PRACTISING MEMBER
Pedagogical approach: Hands-on activities &
Self-study (on-site and online learning), exams, case studies, simulation 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
BANKING &&
ISLAMICBANKING
ISLAMIC
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
BANKING &&
ISLAMICBANKING
ISLAMIC
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
Based on…….
ConceptsTakaful
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 INMALAYSIA
FINANCE IN MALAYSIA
