Islamic Finance Hub

Malaysia,
Asias Islamic
nance hub
PwC
2 MALAYSIA, ASIAS ISLAMIC FINANCE HUB | 2008
MALAYSIA, ASIAS ISLAMIC FINANCE HUB | 2008 3
Since our 2006 thought leadership publication entitled, Malaysia as an Islamic
Finance Powerhouse, Malaysia has further established itself as a leading
international and regional hub of Islamic nance in the Asian region.
Among Malaysias key Islamic nancial initiatives are the issuance of new licences
to foreign interests within the domestic Islamic nancial institutions, as well as
international Islamic banks and Takaful operators. Listing rules have also been
liberalised to promote cross-border listings, and Malaysia is now the worlds largest
Islamic bond market with over two-thirds of global outstanding Sukuk.
Worldwide, Islamic nance continues to make signicant strides as awareness of
its advantages spreads. Total Islamic nancial assets are expected to reach US$2
trillion in 2010 from the current estimated US$900 billion. The number of Islamic
nancial institutions globally has increased to more than 300, spanning more than
75 countries in East and West.
Islamic nance is the fastest growing nancial segment in the world and
PricewaterhouseCoopers expects this to continue.
We hope this publication will provide fresh insights on Malaysias progress in Islamic
nance and also the outlook for the global Islamic nance industry as a whole.
Dato Johan Raslan
Executive Chairman
PricewaterhouseCoopers Malaysia
August 2008
Foreword
From powerhouse
to regional hub
DISCLAIMER
Malaysia, Asias Islamic Finance Hub is published by
PricewaterhouseCoopers (PwC) for distribution to its
business associates. This publication includes information
obtained or derived from a variety of publicly available
sources. PwC has not sought to establish the reliability
of these sources or veried such information. All such
information is provided as is and PwC does not give any
representation or warranty of any kind (whether expressed
or implied) about the suitability, reliability, timeliness,
completeness and accuracy of this publication. This
publication is for general guidance only and should not be
construed as investment advice or any other professional
advice. Accordingly, it is not intended to form the basis
of any decision and you are advised to seek specic
professional advice on any transaction or matter that may
be affected by this publication and/or before making any
decision or taking any action.
2008 PricewaterhouseCoopers. All rights reserved.
PricewaterhouseCoopers refers to the individual members
of the PricewaterhouseCoopers organisation in Malaysia
each of which is a separate legal entity or, as the context
requires, other member rms of PricewaterhouseCoopers
International Limited, each of which is a separate and
independent legal entity.
ACKNOWLEDGMENT
We would like to acknowledge
Bank Negara Malaysia,
Securities Commission
Malaysia, Malaysia International
Islamic Financial Centre and
other organisations for the use
of information extracted from
their publications and websites.
Featured extensively in this publication are images of the Petronas Twin Towers which was designed
to symbolise strength and grace using geometric principles typied in Islamic architecture.
Malaysia
Leading with
world rsts
2002
Issuance of
global sovereign
Islamic bond or
Sukuk - US$600
million (RM2.2
billion) Malaysian
Global Sukuk
Issuance of global
corporate Islamic
bond - US$150
million (RM540
million) Ijarah by
Kumpulan Guthrie
Bhd
2004 2005 2006

Issuance of domestic
corporate Islamic
bond based on Ijarah
- US$44 million
(RM160 million)
modelled after the
Malaysian Global
Sukuk, issued by
Ingress Corporation
Bhd
Issuance of Ringgit-
denominated
Islamic bond
- US$139 million
(RM500 million) by a
supranational body,
International Finance
Corporation, the
private arm of the
World Bank
Global nancing
for a sub-federal
entity (state) in Asia
- US$350 million
(RM1.3 billion)
Sarawak Corporate
Sukuk
Issuance of
Mudharabah Islamic
Bond (prot-sharing)
valued at US$22
million (RM80 million)
by PG Municipal
Assets Bhd
Issuance of Sukuk
Musharakah Bond
worth US$694 million
(RM2.5 billion) by
Musharakah One
Capital Bhd
Islamic residential
mortgage-backed
securities by
Cagamas MBS Bhd
under the prot and
loss-sharing principle
(Musharakah)
Global Sukuk
index Dow
Jones Citigroup
Sukuk Index was
launched
Islamic
exchangeable
bonds - Khazanah
Nasional Bhd to
raise US$750
million (RM2.7
billion)
Islamic REITs - Al-
Aqar KPJ REIT,
fund size of US$50
million (RM180
million) was
launched

Other
milestones
2002 2005 2006 2007
Founding
member
and host
country of
the Islamic
Financial
Services
Board (IFSB)
Largest
supranational
deal in the ringgit
bond market:
The World Bank
issued US$211
million (RM760
million) Ringgit-
denominated
Islamic bonds
that will mature
in 2010
Establishment of
the International
Centre for
Education in
Islamic Finance
(INCEIF)
Dow Jones &
Co Inc and RHB
Capital Bhd
launched the
Dow Jones-RHB
Islamic Malaysia
Index, a co-
branded Islamic
index
Issuance of the worlds

largest corporate Sukuk
to-date valued at US$4.8
billion (RM15.4 billion)
by Binariang GSM Sdn
Bhd to facilitate the
privatisation of a cellular
phone operator
The rst Asian Islamic
exchange traded
fund by i-Valuecap
Management, which
has exposure to the top
25 listed companies on
Bursa Malaysia, with an
authorised fund size of
10 billion units and an
initial fund size of 840
million units
Saudi company, Dar
Al-Arkan International
Sukuk Co listed its US$1
billion (RM0.3 billion)
Sukuk Al-Ijara on the
Labuan International
Financial Exchange (LFX)
Tesco Stores (Malaysia)
Sdn Bhd raised US$204
million (RM700 million)
Sukuk Musharakah for its
expansion in Malaysia
2008
Telekom Malaysia
Bhd issued the
largest Islamic asset-
backed Sukuk Ijarah
via Menara ABS Bhd
amounting to US$310
million (RM1 billion)
The Islamic
Development Bank to
issue US$155 million
(RM500 million)
Sukuk to nance its
infrastructure projects
Industrial Bank of
Korea and Export-
Import Bank of Korea
each proposed to
issue up to US$0.9
billion (RM3 billion)
conventional and/or
Islamic Medium-Term
Notes Programme
MALAYSIA AS AN ISLAMIC FINANCE POWERHOUSE | 2008 7

8 MALAYSIA AS AN ISLAMIC FINANCE POWERHOUSE | 2008
Contents
10 Malaysia as Asias Islamic nance hub
14 Malaysia as an international Islamic nance centre
22 Islamic capital market
34 Islamic banking & Takaful
46 Islamic nance products & concepts
54 Regulation & tax incentives
64 PwC Malaysia Islamic Finance Services
66 Islamic nance glossary
69 Acronyms
MALAYSIA AS AN ISLAMIC FINANCE POWERHOUSE | 2008 9
Malaysia as Asias
Islamic nance hub
Location
Strategically located between
Middle East and Asia Pacic
Time zone
GMT+8; Kuala Lumpur, same as Hong
Kong and an hour behind Tokyo
Population
27.2 million (2008); 38.9 miilion (2050)
Young population (1/3 below 14 years
old)
Ethnic
Malay 50% (who are Muslim); Chinese
25%; Indigenous 11%; Indian 7%
Language
Bahasa Malaysia (ofcial); English is widely
used; Other popular ones: Chinese and Indian
dialects
Legal
English Common Law
Economic
Stable and diverse - Worlds largest producer
of rubber, palm oil, pepper and tropical
hardwoods and net exporter of crude oil
Malaysia is fast emerging as
a global and regional hub for
multinational corporations (MNCs)
Regional HQ
1
for over 1,000 MNCs from 30 nationalities, including:
Technology centre
Ericsson (education, hardware, services & repair)
Motorola (knowledge, IT outsourcing)
Shell (IT)
IBM (IT)
South East Asia, Middle East, Africa

Global
Global
Asia Pacic
Finance centre
HSBC
Standard Chartered
OCBC
21 countries
Asia, Africa, Middle East
Asia Pacic
Logistics centre
DHL Asia Pacic
Operational HQs include:
Brambles Corporation, LaFarge Asia, Novartis, Kajima, Asea Brown Boveri, Du Pont, Alcan
Nikkei Asia, Agfa, Aarhus, etc
1 The Government has introduced various MSC (Multimedia Super Corridor) incentives to attract MNCs to establish their regional and/or global hub in the
shared services outsourcing market. These MSC status companies are located in a wide corridor, spanning 15km by 50km, between KLIA airport, CyberJaya
to KLCC city centre and other cyber centres. MSC status also extended to other cyber cities e.g. Penang.
Driving factors
Mature Islamic banking & nance industry Facilitative government
14 Islamic banks
Four foreign banks
Foreign equity participation in two domestic
banks
More than 50% of customers are non-Muslim
Eight Takaful operators
Growing Islamic nance market share of nance
sector (Islamic bond over half of outstanding bond)
Main centre for global Sukuk issuance for
Malaysian, Asian and Middle Eastern companies
Highly attractive tax incentives

Strong & robust regulatory framework
Business-friendly policies and initiatives
Talent development initiatives by the Government
e.g. INCEIF
Investment opportunities Global connectivity

Future economic growth corridors:
North Corridor Economic Region (NCER)
Iskandar Development Region (IDR)
East Coast Economic Region (ECER)
Sabah Development Corridor (SDC)
Sarawak Corridor of Renewable Energy (SCORE)
Located at the heart of Asia Pacic

Regional transport hub
Two international airports
One low cost carrier terminal (LCCT)
Seven international ports
NCER
ECER
SDC
IDR
SCORE
Malaysias Financial Sector Master Plan
sets out specic recommendations
to create an efcient, progressive and
comprehensive Islamic nancial system
Financial infrastructure development
Increasing the number of Islamic
banks to stimulate competition
Increasing the number of Takaful
operators
Deepening the Islamic nancial
market
Institutional capacity enhancement

Introducing a benchmarking
programme for Islamic banking
institutions to be at par with
international best practices
Enhancing knowledge and
expertise
Building strong management
teams
Granting incentives to structure
Islamic private debt securities
Regulatory framework development

Strengthening the regulatory
framework for Islamic banking
Improving the regulatory
framework for Takaful
Establishing an effective regulatory
structure
Creating a favourable tax regime

MALAYSIA,
ASIAS ISLAMIC FINANCE HUB
Malaysia as an
international Islamic
nancial centre
Overview of Malaysia as an
international Islamic nancial centre
Malaysian International Islamic
Financial Centre

Overview of
Malaysia as an
international Islamic
nancial centre
Malaysias success in Islamic nance was
not achieved overnight. Its progressive
journey started in 1963 with the
establishment of Tabung Haji, the pilgrims
corporation fund.
Twenty years later in 1983, Malaysias
rst Islamic bank, Bank Islam Malaysia
commenced operations followed by the rst
Takaful operator, Syarikat Takaful Malaysia
in 1985.
Malaysias Sukuk market started in 1990
with a modest issue size of US$39 million
(RM125 million) by Shell MDS Sdn Bhd.
Two Shariah Advisory Councils (SACs),
under Securities Commission Malaysia (SC)
and Bank Negara Malaysia (BNM), were
subsequently set up to provide regulatory
guidance on the development of the Islamic
nance market, instruments and institutions.
In 2000, BNM and SC set out a 10-year
development Master Plan for Malaysias
nancial sector and capital market, which
outlined the strategic directions for the
countrys Islamic nance sector.
In late 2006, the Malaysian International
Islamic Financial Centre (MIFC) was set up
in a concerted effort by the Government
and various nancial regulatory bodies to
transform Malaysia into a vibrant, innovative
and competitive Islamic nancial hub.
Source: International Islamic Finance Market, 2007
Chart 1: The evolution of the global Islamic nance industry
Commercial
banking
Commercial
banking
Project
nance &
syndications
Commercial
banking
Project
nance &
syndications
Equity
Ijarah
Commercial
banking
Project nance
& syndications
Equity
Ijarah
Sukuk (Ijarah,
Musharakah,
Istisnaa)
Structured
alternative
asset
Commercial
banking
Project nance &
syndications
Investment
banking
Equity/ securities/
indices
Sukuks (common
& hybird)
Structured
alternative asset
Liquidity
management
tools
Takaful &
reTakaful
1970s 1980s 1990s 2000s 2007

Chart 2: Malaysias relative position in global Islamic nance
Level of
commitment
Market research
Business
innovation
Market
innovation
Competitor
matching
Minimum
Presense
Monitor
development
Wait and see
Cluster 1
Cluster 2
Cluster 3
Cluster 4
Explore
market
potential
Sporadic
development
Market
development
activities
Market
expansion
activities
China, lndia, Hong Kong,
Azerbaijan
Syria, Lebanon, Germany, USA,
Singapore
Brunei, lndonesia,
South Africa, Morocco,
Turkey, Qatar
Kuwait, S. Arabia,
UAE, Bahrain
Source: Kuwait Finance House, 2006
Over the last decade, the cumulative Government policies,
actions and initiatives have resulted in Malaysia being at the
forefront of Islamic nance as well as having one of the largest
Islamic nance markets in the world.
The industry has also experienced double digit growth over the
last ve years. Between 2004 and 2007, total outstanding Sukuk
increased on average 33% p.a. to US$62 billion (RM213 billion),
while Islamic banks total assets grew at 18% p.a. to US$46
billion (RM157 billion) over the same period.
Malaysia as a gateway for
Middle East funds into Asia
Holistic and integrated approach
Malaysias advantage over other
regional nancial centres is its
holistic and integrated approach
in developing its Islamic nancial
centre. Its Islamic nance industry
development strategy covers multiple
areas such as:
Shariah governance framework
Market efciency (e.g. pricing)
Product innovation
Human resource development
Incentives (e.g. tax, licensing,
market and product liberalisation)
Facilitative rules and regulations
Integrated infrastructure
(coordinated effort by
Government, regulators,
intermediaries and exchanges to
develop Islamic nance sector)
With its experience and expertise in Islamic nance, Malaysia is well-

positioned to play a strategic role as a gateway for global funds to
nance Asias development needs. In particular, the petrodollar boom
from the oil-rich Islamic Middle East countries has led to an estimated
over US$2 trillion in funds
4
from high net worth individuals as well as
State Wealth Funds (SWFs) to nance Asias development needs.
Asia, which houses the fastest growing economies in the world such
as China, India and Vietnam, needs an estimated US$1 trillion for
infrastructure between 2007 and 2012 to fuel its economic growth.
Asset size in 2007
RM billion US$ billion
Islamic banking
1
157 46
Takaful 9 3
Sukuk outstanding 213 62
Unit trust (NAV)
2
17 5
Total
3
396 116
1 Excludes the six development nancial institutions offering Islamic banking services which are prescribed
under the Development Financial Institutions Act 2002
2 - NAV - Net asset value
3 Excludes market capitalisation of the 853 Shariah-compliant securities
4 - The wealth of high net worth individuals in the Middle East is estimated to grow at 8% p.a, to reach US$1.8 trillion by 2010. According to Morgan
Stanley, the regions combined SWFs account for more than half the US$2.5 trillion total assets of global SWFs.
Cumulative actions and initiatives taken to develop the market have
put Malaysia at the forefront of Islamic nance as well as having one
of the largest Islamic nance markets in the world with assets worth
US$116 billion (RM396 billion) in 2007.
Table 1: Size of the Malaysian Islamic nance industry
Chart 3: Integrated and
coordinated approach
taken to develop
Malaysias international
Islamic nance position
Conducive environment
for Islamic nance
Breadth and depth of
nancial market
Malaysia
as a global
Islamic nancial
centre
Well-dened
Shariah governance
framework
Facilitative rules
for issuance
process
Comprehensive
infrastructure
Incentives for
investment activities
Innovative
structures and
human capital
development
Competitive
pricing
Source: Bank Negara Malaysia
International player presence
Several key initiatives have
been taken to position Malaysia
as an Islamic nance gateway
between Middle East and Asia
Pacic. Among others, BNM
has issued three new Islamic
banking licences to major Gulf
Islamic nancial institutions such
as Saudi-based Al Rajhi Bank,
Kuwait-based Kuwait Finance
House and Gulf-based Asian
Finance Bank
5
.
Besides participating in the local
market, the new licences provide
opportunities for the Middle
Eastern players to use Malaysia
as a platform to expand their
Islamic nance services to the
rest of Asia.
For example, in 2008, Kuwait-
based Al-Aqeelah Group
and Bahrain-based Unicorn
Investment Bank have been
granted licences to establish
International Islamic Bank (IIB)
subsidiary in Malaysia under the
MIFC programme.
Under the MIFC initiatives,
international Islamic banks
are allowed to conduct a wide
array of Shariah-based banking
business in Malaysia with
non-residents in international
currencies other than the Ringgit.
In the case of Al-Aqeelah IIB,
it will have US$100 million
capital and will be the Kuwaiti
groups platform for setting up new
overseas banks. Another Gulf bank,
Al Rajhi Bank, which has a domestic
Islamic banking licence, is also
getting an IIB licence, which will
allow it to ride on the parent groups
huge balance sheet to do large non-
Ringgit deals.
Malaysia has also opened its Islamic
banking sector to international
banks. In 2007, two locally
incorporated foreign banks, HSBC
Bank and OCBC Bank were granted
Islamic banking licences by BNM
to establish separate and wholly-
owned Islamic banking subsidiaries
in the country. In addition, HSBC
Group is also making Malaysia
as the regional hub for its Islamic
banking services.
Besides the two banks, Standard
Chartered and ABN Amro are
considering similar moves. Standard
Chartered already uses Malaysia as
a test bed to launch all its Islamic
nance products before offering
them to other markets.
The increasing presence of foreign
players will drive competition,
innovation and add greater depth
and breadth to both the domestic
and offshore Islamic nancial
market. It will also strengthen
Malaysias stature as the regions
Islamic nance hub.
Malaysia leads in innovative
Islamic nance products
Worlds largest issuer of Sukuks
with 69% or US$62 billion (RM213
billion) of the global outstanding
Sukuks as at end 2007
Worlds largest Islamic unit trust
industry with 134 Islamic unit trust
funds and NAV of US$5 billion as
at end 2007
853 or 86% of total listed
securities on Bursa Malaysia are
Shariah-compliant, with a market
capitalisation of US$213 billion
(RM705 billion) or 64% of total
market capitalisation as at end
2007
Track record for product
innovation, leading with worlds rst
product launches such as global
sovereign and corporate Sukuk,
Mudharabah and Musharakah
Sukuks, exchangeable Sukuk and
Islamic REITs
Landmark Islamic Sukuk and
securities launches include Islamic
exchangeable bonds, Islamic REITs
and global sovereign and corporate
Sukuks
MIFC named the Best International
Islamic Finance Centre at the
London Sukuk Summit Awards of
Excellence in 2008
5
Asian Finance Bank is supported by Qatar Islamic Bank, RUSD Investment Bank
Inc of Saudi Arabia and Global Investment House of Kuwait
Malaysian International Islamic
Financial Centre (MIFC)
Capitalising on Malaysias long and
progressive track record of experience
and expertise in Islamic nance, the
Government and regulators have set
up the MIFC in 2006 with the aim of
promoting Malaysia as an international
Islamic nancial centre.
The MIFC initiative is specically
undertaken by the collective efforts of the
countrys nancial and market regulators
- BNM, SC, Labuan Offshore Financial
Services Authority (LOFSA) and Bursa
Malaysia - to provide an integrated
and comprehensive approach to the
development of MIFC.
Among the objectives of MIFC are to
develop Malaysia into a centre for the
origination, distribution and trading
of Islamic capital market instruments,
for example, Sukuks and treasury
instruments, as well as Islamic fund
and wealth management. Products and
services under the MIFC can be in any
currency and can be offered to both
residents and non-residents.
In efforts to promote MIFC, BNM has
introduced several new offshore Islamic
banking and Takaful licences:
IIB licence to conduct international banking
businesses in international currencies
International Takaful Operator (ITO) licence
to conduct international Takaful businesses
in international currencies
Existing Islamic banks and Takaful operators
can set up International Currency Business
Units (ICBUs) to conduct the full range of
Islamic banking or Takaful services with
non-residents and residents in international
currencies
Flexibility for Labuan offshore Islamic banks,
Islamic divisions of the offshore banks as
well as offshore Takaful operators to open
ofces anywhere in Malaysia
Aside from the issuance of the above licences,
SC has introduced Islamic fund management
licence to conduct Islamic fund management
services in Malaysia. The Government has
announced a wide range of incentives in efforts
to create the necessary critical mass of players
and increase the scale of Islamic nance
activities.

In addition to the many incentives, the Government has further liberalised the foreign exchange administration
rules to allow multilateral nancial institutions, multinationals and other national corporations to issue both Ringgit
and non-Ringgit denominated instruments from Malaysias capital market. The effort will help deepen and widen
the Sukuk markets, provide linkages with international issuers and investors, and reinforce the international
dimension of Malaysia as an international Islamic nancial centre.
MIFC incentives
10-year tax exemption for IIB and
ITO up to 2016
Tax exemption up to 2016 on the
management fees received by fund
managers for managing Islamic
funds
10-year tax exemption for existing
Islamic banks and Takaful operators
to set up ICBUs
Tax deductibility on certain expenses
incurred to establish Islamic broking
companies
Tax exemption on prots paid by
licensed Islamic banks in Malaysia
to non-resident customers
Withholding tax exemptions on
prots received from Sukuks issued
in Malaysia
Tax deduction up to year of
assessment (YA) 2010 for issuance
costs of Sukuks approved by SC
10-year stamp duty exemption on
instruments executed by ICBU, IIB
and ITO under MIFC
20% stamp duty remission
on certain principal or primary
instrument of nancing made
according to the principles of
Shariah and approved by BNM or
SC
Removal of restrictions on
ownership and investment abroad
for Islamic fund companies
The Employee Provident Fund (EPF)
has undertaken to provide US$2
billion (RM7 billion) in investment
mandates to Islamic fund managers
Chart 4: Malaysias Islamic nance industry is globally integrated

lslamic capital market lslamic financial market
Takafu| Is|am|c bond
market
Is|am|c equ|ty
market
Is|am|c bank|ng
Financing
Deposit financing
Trade financing
lslamic lnterbank
Money Market
(llMMj
Shariah-compliant
securities
Shariah-based
RElTs
Shariah-compliant
indices
lslamic financial market
lnternational lslamic
banks
lnternational Takaful
operators
lslamic fund managers
lnternational Currency
Business Unit for lslamic
banks
lnternational Currency
Business Unit for Takaful
operators
Government Sukuk
Corporate Sukuk
ljarah
Musharakah
Mudharabah
Murabahah
Bai Bithaman-Ajil
lslamic
stockbroking
services
Family Takaful
General Takaful
lslamic financial system
Domestic
lnternational
Labuan lnternational
Offshore Financial
Centre (lOFCj
Takaful lslamic banking
Shariah-based unit
trust/mutual funds
lslamic structured
investment products
Fund/unit trust
management
companies
lnvestment
banks
lslamic banks
Takaful
operators
lslamic financial institutions
lslamic capital market
lnternational Sukuk market
Pilgrim
fund
board
lslamic financial products and services
in non-Ringgit/international currencies
lnternational
Currency Business
Unit (lCBUj
lnternational lslamic
financial institutions
Offshore lslamic banks
Offshore Takaful
operators
Labuan lnternational
Financial Exchange (LFXj
MlFC
Global Sukuk lndex
lslamic exchangeable bond
Domestic
lnternational
Islamic capital
market
MALAYSIA,
Islamic debt securities (Sukuk)
Shariah-compliant equities and indices
Shariah-based unit trust funds

Strong and steady
growth in Malaysias
Islamic capital market,
from Sukuks to
Islamic equities, has
transformed Malaysia
into Asias Islamic
nance hub
Malaysia accounts
for over two-thirds of
global outstanding
Sukuks
Global awareness and interest
The Islamic capital market refers
to capital market activities that
are carried out in ways which do
not conict with Islamic principles
i.e. free from prohibited activities
and elements such as riba (usury),
maisir (gambling) and gharar
(ambiguity).
In the last decade, there has been
strong global awareness and
interest in Islamic nance, not
only among Muslims but a wide
range of investors who perceive
Islamic nancing as a fairer way of
doing business.
The Malaysian scene
Over the last decade, Malaysia
has developed to be not just
Asias Islamic nance hub but also
becoming a leading international
hub for Islamic nance. The key
driving factors include:
Central Asian location at the
epicentre of a populous Islamic
community, between ASEAN
1

and the Middle East
Well-established Islamic
banking system
Close ties to the global Islamic
nancial community
Comprehensive regulatory
framework that provides
certainty to investors; and
Track record of product
innovation
These factors have enabled
Malaysia to successfully attract
global investors and issuers as a
preferred investment destination.
The Malaysian capital market

largely comprises Islamic bonds
(Sukuk), Shariah-compliant equities
with accompanying Shariah
benchmark indices and unit trusts.
In 2007, Malaysia had the largest
Sukuk outstanding in the world,
accounting for over two-thirds or
69% of global Sukuks outstanding.
The number of Malaysian Sukuk
issuances approved by the SC
were also almost three times
the value in 2006 and they were
predominantly based on the
principle of Musharakah.
Today, Malaysia has achieved
international recognition as a centre
for the origination, distribution
and trading of Islamic private debt
securities, offering a wide range of
world-class products.
This strong growth also has
extended to the Islamic unit trust
industry which has experienced
exponential 48% average growth
p.a. in NAV in the last ve years.
In the Malaysian stock market, 86%
of all listed equities are Shariah-
compliant with a combined market
capitalisation of US$213 billion
(RM705 billion) as at end 2007.
The growing popularity of Shariah-
compliant equities has led to the
introduction of two new indices by
Bursa Malaysia in collaboration with
the FTSE Group.
1 ASEAN - Association of South East Asian Nations
Islamic debt
securities (Sukuk)
Sukuk is the fastest
emerging form of
Islamic nance, with
Malaysia leading in
innovation
Exponential global growth in
Sukuks
The Sukuk market is the fastest
emerging form of Islamic nance,
experiencing rapid growth in the
past few years especially in the
Middle East and Asia, spurred by
high levels of surplus savings and
reserves. The Sukuk market more
than doubled in 2007, continuing its
explosive growth at an average rate
of 40% since 2000.
The size of the global market of
Sukuks denominated in domestic
currencies has risen sharply from
just US$336 million (RM1.3 billion)
in 2000 to an estimated US$82
billion (RM281 billion) in 2007. The
Sukuk market has expanded widely
across the globe, attracting issuers
from a larger number of countries.
In 2007, more than 100 Sukuks
were issued from 10 countries.
This trend is set to continue and
other non-Muslim countries like
United Kingdom, Hong Kong,
Singapore and Japan are expected
to participate in future.
Malaysia Sukuk growth
Over the last ve years, the
Malaysian Sukuk market registered
an average growth rate of 33%.
In 2007, the SC approved a total
of 120 bond issues, of which 59
issues were Sukuk valued at US$35
billion (RM121 billion). The value
represented 76% of total new
bond issues approved, the largest
ever portion of Sukuks approved
in a year. Over the period 2003
to 2007, the CAGR (compound
annual growth rate) of approved
Sukuk issuances was at an
unprecedented growth rate of
78%.
Malaysia leads in innovative
Sukuks
Malaysia also leads in the
development of the Sukuk market,
introducing innovative and
competitive Sukuk structures that
appeal to a wider investor base.
An example of Malaysias
pioneering efforts in facilitating
innovative structures include the
US$750 million (RM2.7 billion)
exchangeable Sukuk Musharakah
by Khazanah Nasional Bhd,
the state investment arm of the
Malaysian Government. This
is the worlds rst Sukuk that
incorporates full convertibility
features that were previously
common only to conventional
equity-linked transactions.
2007 was a landmark year for
Malaysia-originated Sukuk with
the issuance of the worlds largest
corporate Sukuk to-date valued
at US$4.8 billion (RM15.4 billion)
by Binariang GSM Sdn Bhd. This
Sukuk was twice oversubscribed
despite its signicant size.
Table 2: Notable Sukuk programmes
and issuances in 2007
2,500
2,890++
2,997
15,366
60,000+
Amount
(RM millionj
728
841
872
4,473
17,466
Amount
(US$ millionj
Mudharabah MlSC Bhd*
Musharakah Khazanah Nasional Bhd
ljarah
Telekom Malaysia Bhd &
Hijrah Pertama Bhd
Musharakah Binariang GSM Sdn Bhd
Multiple Cagamas Bhd*
Shariah
principle
lssuer
+ A combination of a few Islamic principles and
conventional bonds
++ Issued out of Labuan amounting to US$850 million
* Programmes
Source: Securities Commission Malaysia, 2007
0
50
l00
l50
200
250
300
350
400
PM billion
Chart 5: Outstanding Sukuks vs. bonds
Source: Bank Negara Malaysia, 2007
Bond Sukuk
2001 2002 2003 2004 2005 2006 2007
Musharakah Sukuks
account for over half
of Malaysian Sukuks
Sukuk structures
The common Sukuk structures used in
nancing include Ijarah, Murabahah,
Istisnaa, Mudharabah, Musharakah and
Bai Bithaman-Ajil.
In Malaysia, the bulk of Sukuks issued
is in the form of Musharakah (prot-
sharing), accounting for 58% of total
Sukuks approved in 2007, followed by
Murabahah (cost-plus prot margin) with
19% and Ijarah (lease-based agreement)
with 11%.
Key growth drivers for Sukuks in
Malaysia
Growing sophistication
of structures
Sukuks have evolved from
Murabahah to Ijarah, Musharakah,
Istisnaa (pre-delivery and leasing)
and hybrid structures to meet the
requirements and preferences of
different target markets.
Clarity of regulatory treatment
The adoption of Capital Adequacy
Standard issued by the Islamic
Financial Services Board (IFSB),
which species the prudential
treatment of Sukuk transactions
for regulatory capital purposes
has provided regulatory certainty
to Islamic nancial institutions
with regard to their investments.
Strategic focus to develop
comprehensive Islamic nancial
system
Sukuks play a vital role in
supporting the increasing
number of structured products
offered by Islamic banks, Takaful
operators and fund management
companies.
Chart 6: Size of Sukuks approved in 2007

9%
11%
19%
2%
1%
58% Musharakah
Bai Bithaman-Ajil
Murabahah
Ijarah
Istisnaa
Mudharabah
Table 3: Innovative Sukuk structures
Year Sukuk structures US$ million RM million
1990
First Bai Bithaman-Ajil Islamic debt securities by Shell
MDS Sdn Bhd
46 125
1994 First Sukuk Mudharabah by Cagamas Bhd 11 30
2001 First corporate Sukuk Ijarah by Kumpulan Guthrie Bhd 150 570
2002
First sovereign Sukuk Ijarah by the Government of
Malaysia
600 2,280
2003 First tradable Sukuk Istisna by SKS Power Sdn Bhd 1,500 5,600
2005 First Sukuk Musharakah by Musharakah One Capital Bhd 660 2,500
2006 First exchangeable Sukuk by Khazanah Nasional Bhd 750 2,800
2007 Largest corporate Sukuk by Binariang GSM Sdn Bhd 4,800 15,400
2008
Largest Sukuk Ijarah by Telekom Malaysia Bhd via Menara
ABS Sdn Bhd
310 1,000
Shariah-compliant
equities and indices
Shariah-compliant
equities accounted for
the majority or 86%
of all listed stocks in
2007
Shariah-compliant equities
In 2007, there were a total of 853 Shariah-
compliant equities, accounting for 86% of
total stocks listed on Bursa Malaysia.
The market capitalisation of Shariah-
compliant equities were valued at US$213
billion (RM705 billion) at the end of 2007,
rising sharply by 29% from the previous
year. They represented 64% of the total
listed securities by market capitalisation.
Bursa Malaysias Main Board has the
highest listings of Shariah-compliant
equities at 59% followed by the Second
Board with 27% market share and
MESDAQ
2
with 14%.
The Shariah-compliant equities have a
broad coverage across many sectors
except nance. The prominent market
sectors with Shariah-compliant equities
include industrial products with 33% market
share and trading services at 20%.
2 MESDAQ - Malaysian Exchange of Securities Dealing & Automated Quotation
14%
86% 64%
14%
27%
59%
33%
20%
12%
14%
9%
6%
6%
Shariah
non-compliant
equities
Shariah-compliant
equities
Shariah
non- compliant
securities
Shariah-
compliant
securities
MESDAQ
Second Board
Main Board
lndustrial products
Trading/services Consumer products
Technology
Properties
Construction
Others
36%
Chart 7: Total listed securities by volume Chart 8: Total listed securities by market capitalisation value
Chart 10: Shariah-compliant equities by market sector
14%
86% 64%
14%
27%
59%
33%
20%
12%
14%
9%
6%
6%
Shariah
non-compliant
equities
Shariah-compliant
equities
Shariah
non- compliant
securities
Shariah-
compliant
securities
MESDAQ market
Second Board
Main Board
lndustrial products
Technology
Properties
Construction
Others
36%
14%
86% 64%
14%
27%
59%
33%
20%
12%
14%
9%
6%
6%
Shariah
non-compliant
equities
Shariah-compliant
equities
Shariah
non- compliant
securities
Shariah-
compliant
securities
MESDAQ market
Second Board
Main Board
lndustrial products
Technology
Properties
Construction
Others
36%
Chart 9: Shariah-compliant equities by board listing
14%
86% 64%
14%
27%
59%
33%
20%
12%
14%
9%
6%
6%
Shariah
non-compliant
equities
Shariah-compliant
equities
Shariah
non- compliant
securities
Shariah-
compliant
securities
MESDAQ market
Second Board
Main Board
lndustrial products
Technology
Properties
Construction
Others
36%
Bursa Malaysia and
FTSE Group launched two
new Shariah-compliant
indices in 2007
Islamic equity indices
The availability of Shariah-compliant
equities led to the development of the
Islamic equity index in 1999 known as
the Kuala Lumpur Shariah Index.
This Index was introduced to meet the
growing demand of local and foreign
investors seeking to invest in securities
consistent with Shariah principles.
In 2007, Bursa Malaysia introduced
two new indices for Shariah-compliant
equities in collaboration with the FTSE
Group, the global index provider. The
rst index is the FTSE Bursa Malaysia
EMAS Shariah Index and the second
is the FTSE Bursa Malaysia Hijrah
Index. The two indices are subject to
international indexing features, namely
free oat adjustment, liquidity and
Shariah screening.
The launch of these new indices will
help Bursa Malaysia position itself
as a destination for global Islamic
investment dollars and in enhancing
Malaysias position as Asias leading
Islamic nance hub.
Shariah-based
unit trust funds
The Malaysian Islamic
unit trust industry,
albeit small, is still the
largest in the world
The Malaysian Islamic
unit trust industry
The size of the Malaysian Islamic
unit trust industry is small
compared to the overall domestic
unit trust industry as reected by
the relatively low number of Islamic
funds and its corresponding NAV.
Nonetheless, it is the worlds largest
Islamic unit trust industry.
As at end 2007, the number of
Shariah-compliant funds were 134
with an NAV of US$5 billion (RM17
billion) or 10% of the total NAV of
the industry. Despite their small
numbers and NAV, Islamic unit
trusts have experienced signicant
growth over the last ve years with
CAGR in NAV of 41% while the
total industry funds value recorded
a CAGR of 28%. Underpinning the
industrys strong growth prospects
is the rising afuence of Muslim
investors and the expansion of
the range of Islamic capital market
products. Also, the Malaysian
Government in its efforts to promote
the growth of the Islamic fund
management industry has offered
several incentives to attract global
players to establish Islamic fund
management operations in Malaysia.
Besides tax incentives and
liberalisation of investment policies,
Malaysias EPF will outsource US$2
billion (RM7 billion) of its management
funds to Islamic fund management
companies.
Of the Shariah-based unit trust funds
in Malaysia, 61% or US$3 billion
(RM10 billion) in NAV were equity
funds, 11% (US$0.5 billion/RM1.8
billion) were balanced funds and 10%
(US$0.49 billion/RM1.7 billion) were
Sukuk funds.
Chart 11: Number of Islamic funds vs total industry
0
100
200
300
400
500
600
N
u
m
b
e
r

o
f

f
u
n
d
s
No. of lslamic Funds Total Funds
0
10
20
30
40
50
60
2003 2004 2005 2006 2007
U
S
$

b
i
l
l
i
o
n
NAv of lslamic Funds Total NAv
11%
10%
18% 61%
Equity fund
Sukuk
fund
Balanced
fund
Others*
2003 2004 2005 2006 2007
0
100
200
300
400
500
600
N
u
m
b
e
r

o
f

f
u
n
d
s
No. of lslamic Funds Total Funds
0
10
20
30
40
50
60
2003 2004 2005 2006 2007
U
S
$

b
i
l
l
i
o
n
NAv of lslamic Funds Total NAv
11%
10%
18% 61%
Equity fund
Sukuk
fund
Balanced
fund
Others*
2003 2004 2005 2006 2007
Chart 12: NAV of Shariah-based unit
trust funds by category
Chart 13: Size of Islamic funds vs total industry
Note: *Including feeder funds, xed income funds, money
market funds, structured product and mixed asset funds
Growth*
41
%
28
%
Islamic
funds
Total funds
*NAV growth p.a. 2003-2007
Islamic banking
& Takaful
MALAYSIA,
Islamic banking & nance
Takaful industry

Islamic banking
& nance
The Islamic nance
industry has rapidly
expanded beyond
Muslim countries and
even powered its way
into mainstream nance
Malaysias Islamic
system operates in
parallel to conventional
Rapid global expansion
The Islamic nance industry has
expanded beyond Muslim countries in
the Middle East and South East Asia
to enter international nancial markets
like London, Tokyo and Hong Kong.
In view of the rapid and signicant
market expansion of Islamic nance,
the total assets are projected to reach
US$2 trillion in 2010, with growth of
around 15% to 20% p.a.
Malaysias competitive dual banking
system
Since its introduction in 1983, the
Islamic nancial system in Malaysia
has progressed markedly despite
an increasingly liberalised and
competitive environment.
Malaysias Islamic nancial system,
based on the concept of prot-sharing
as opposed to the use of interest in
the conventional nancial system, has
evolved as a competitive component
of the overall nancial system. It
complements and competes with the
conventional nancial system and is
recognised as a driver of economic
growth and development.
Through economic policies and
regulations, Malaysia continues to
foster the expansion of the dual
banking system with both the Islamic
and conventional systems operating
in parallel to deliver innovative and
competitive nancial products and
services.
In 2007
In the early phase of its
development, Islamic nance
was essentially domestic-centric,
focusing on retail nancing, trade
nancing and the nancing of other
commercial business activities.
However, the drive to diversify the
domestic nancial infrastructure
to avoid over dependence on
the banking sector and the push
towards greater liberalisation of the
nancial system has encouraged
the rapid development of Islamic
nance. These two policy drivers
have spurred the development
of the domestic Islamic nancial
market and rapidly integrated it into
the international nancial system.
Today, foreign participation
in Malaysias conventional
and more recently, its Islamic
nancial system, has further
internationalised Malaysias
nancial system.
300
IFIs
operating in
countries,
managing
75
US$
900
billion
assets
(estimates)
2010 Islamic banking
target: 20% market
share of total banking
assets
Increasing market share over
conventional banking
The proportion of total Islamic
banking assets to conventional
assets has reached 30% in Gulf
Co-operation Council (GCC)
countries and is projected to rise
to 40% in the next three years.
In Saudi Arabia, 95% of all retail
banking transactions are now
done through Islamic banking
institutions.
In the UK, major banks are
offering Shariah-compliant
products and the Islamic
mortgage market there has grown
to half a billion pounds since
2003, with an increase of about
50% in 2006 alone.
In Malaysia, the Islamic banking
share of total banking system
assets is targeted to reach 20%
by 2010 from the current 13%.
Both the share of Islamic banking
nancing and deposits over the
total banking system are currently
14% respectively.
Chart 14: Market share of
Islamic banking in Malaysia in
2007
lslamic
banking
14%
Conventional
banking
86%
Deposits
Conventional
banking
87%
lslamic
banking
13%
Assets
Conventional
banking
86%
lslamic
banking
14%
Financing
Liberalisation of Malaysias
Islamic banking market
The liberalisation of Malaysias Islamic banking
market commenced with the opening of the rst
foreign Islamic bank in August 2005
1
.
The conversion of all Islamic banking windows of
domestic banking groups into Islamic subsidiaries
in 2007 reects the increasing domestic focus on
Islamic banking business, supported by clearer
accountabilities achieved under separate Board and
management structures.
Malaysias Islamic banking system is serviced by 13
full-edged Islamic banks and seven participating
commercial banks in the Islamic Banking Scheme
(commercial banks with dedicated Islamic banking
windows). Other nancial institutions that offer
Islamic banking services include six investment
banks and one international Islamic bank. Three of
the full-edged Islamic banks are foreign-owned.
They are the Kuwait Finance House (Malaysia) Bhd,
Al Rajhi Banking & Investment Corporation (Malaysia)
Bank Bhd and Asian Finance Bank Bhd. There are
also six development nancial institutions offering
Islamic banking services.
In May 2008, two additional full-edged Islamic bank
licences have been approved i.e. Maybank Islamic
Bhd and Alliance Islamic Malaysia Bank Bhd.
1 Foreign and local Islamic banks are licensed under the Islamic Banking Act 1983
Malaysias banking
assets doubled in
size over the last
ve years
Islamic banking size and growth
Malaysias Islamic banking
industry has shown signicant
growth, with banking assets
doubling from US$22 billion
(RM82 billion) in 2003 to US$46
billion (RM157 billion) in 2007,
growing at 18% p.a. Total
nancing of Islamic banking
institutions grew at 17% p.a.
to US$26 billion (RM90 billion)
while total deposits grew at 19%
p.a. to US$35 billion (RM122
billion) in 2007. There is ample
liquidity and nancing capacity
in Malaysian Islamic banking
institutions, with a nancing to
deposits ratio of 1:2.8.
Chart 15: Total assets, nancing and deposits of
Malaysian Islamic banking institutions
0
5
10
15
20
25
30
35
40
45
50
2003 2004 2005 2006 2007
Total assets Total financing Total deposits
US$ billion
2X
Assets
US$ bil
2003
22
Financing
US$ bil
2003
13
Deposits
US$ bil
2003
16
US$ bil
2007
46
US$ bil
2007
26
US$ bil
2007
35
Bai
Bithaman- Ajil
37%
33%
ljarah
Thumma
Al-Bai
30%
ljarah
Murabahah
11%
2%
19%
1%
lstisnaa
Others
Others
Purchase
of non-
residential
property
Purchase
of residential
property
Personal
use
Working
capital
Purchase
of transport
vehicles
24%
20%
8%
4%
11%
Bai Bithaman-
Ajil and Ijarah
Thumma Al-Bai
are the most
popular nancing
concepts in
Malaysia
Signicant household nancing
activities
Supported by strong consumer
spending, the household sector
continued to account for the
largest component (61%) of
nancing extended by Islamic
banking institutions in 2007.
Household sector loans are
largely for the purchase of
passenger cars (32%) and
residential properties (20%). This
signicant household demand
was the result of attractive and
competitive nancing packages
offered by Islamic banking
institutions.
Islamic banking is also widely
used for working capital
purposes, making up 24% of
total nancing in 2007.
In terms of nancing concepts,
nancing based on the Bai
Bithaman-Ajil concept remained
dominant, constituting over a
third or 37% of total nancing.
The Ijarah Thumma Al-Bai
and Murabahah concept is
gaining more share at 30% and
11% respectively in 2007 as
compared to 29% and 7% in
2006.
Chart 16: Major nancing concepts in 2007
Chart 17: Major nancing purposes in 2007
Islamic interbank money
market transaction is twice
the size of Islamic banking
total assets
The Islamic Interbank Money Market (IIMM)
The Islamic money market is integral to the
functioning of the Islamic banking system.
Firstly, in providing Islamic nancial institutions
with the facility for funding and adjusting
portfolios over the short-term, and secondly,
serving as a channel for the transmission of
monetary policy. Financial instruments and
interbank investment would allow surplus
banks to channel funds to decit banks,
thereby maintaining the funding and liquidity
mechanisms necessary to promote stability in
the system.
The Islamic Interbank Money Market (IIMM)
was introduced in January 1994 as a short-
term intermediary to provide a ready source
of short-term investment outlets based on
the Shariah principle. Through the IIMM, the
Islamic banks and banks participating in the
Islamic Banking Scheme would be able to
match the funding requirements effectively and
efciently. BNM issued the Guidelines on the
IIMM in December 1993 to facilitate proper
implementation of the IIMM.
The Islamic interbank market has been very
active with US$112 billion (RM385 billion)
worth of transactions in 2007 which is twice the
size of the total assets of the Islamic banking
industry in 2007.
Transactions in the interbank money market
mainly revolves around Mudharabah-
based instruments. BNM is also promoting
commodity Murabahah to the market as
part of its continuing efforts to promote
product innovation and facilitate the liquidity
management of Islamic nancial institutions.
Takaful industry
The Takaful
penetration rate in
Malaysia is expected
to reach 20% by
2010 from 6.5%
currently
Emerging global growth area
The global Islamic insurance
(Takaful) is an emerging growth
area with signicant growth
momentum and increasing
participation of Takaful players in
the global market.
Total global Takaful premiums are
expected to grow by some 15%
to 20% p.a. to reach US$7 billion
in 2015 from about US$2 billion
to US$3 billion currently. To date,
global Takaful assets is estimated
to be around US$20 billion.
The strong growth is attributed
to the increasing number of
companies offering Takaful
services across jurisdictions.
Currently, there are more than
250 Takaful operators worldwide,
operating in over 20 countries.
An important development is that
there is growing participation of
established conventional players in
the Takaful and reTakaful industry.
Large conventional players from
the United Kingdom, United States
and Germany have set up Takaful
or reTakaful companies within their
groups.
Following the phenomenal
growth of various components
in the Islamic nancial system,
particularly the Islamic banking
sector and the Islamic capital
market, there is now an emerging
global demand for Takaful
products.
The advancement by both
sectors contributed towards the
strong growth of the Takaful and
reTakaful industry. For instance,
the tremendous growth of Islamic
nancing and mortgages provide
complementary demand for
mortgage protection with Takaful
covered as part of mortgage
protection packages.
Meanwhile, the increasing
popularity of Sukuk issuance with
longer tenure to match investment
and risk management of longer-
term liability is spurring the growth
of investment-linked Takaful
products.
Malaysian Takaful market
doubled in asset size over
last ve years
Growing Malaysian market
The Malaysian Takaful market has
achieved commendable growth
since its inception in 1984 when
the rst Takaful operator, Syarikat
Takaful Malaysia was established
under the Takaful Act 1982 to
fulll the needs of the general
public to be protected based on
Islamic principles.
Malaysian Takaful fund assets
is now about US$3 billion (RM9
billion) in 2007, representing
7% of the total assets of the
insurance and Takaful industry in
Malaysia.
The number of registered Takaful
operators grew from two to eight
composite Takaful operators,
with about US$0.8 billion (RM3
billion) contribution in 2007.
Based on the current global
Takaful contributions estimated
at US$4 billion, Malaysia is the
largest player with over 20% of
the market.
The Malaysian Takaful market
also presents huge growth
opportunities, given the existing
Muslim population of about
15 million and the low Takaful
market penetration rate, which
has risen slowly from less
than 1% in 1990 to 7% in 2006.
This is still very low compared to the
conventional insurance market, where
the penetration rate is almost 40%
currently.
Given that Takaful contributions in
Muslim countries constitute only 1%
of the total global insurance premiums,
and that Muslims account for 22% of
the worlds population, there is high
potential for Takafuls global growth.
ReTakaful is a vital part of the Takaful
sector to provide risk-mitigating
mechanism, capital relief provision and
importantly, to provide the essential
technical capabilities in managing risks.
There are only about 10 to 15 reTakaful
companies available to support over
250 Takaful operators worldwide. Two
are in Malaysia.
Currently, the Takaful industry is still
dependent on conventional reinsurance
due to limited capacity in the reTakaful
market. Hence, there is a need to build
reTakaful capacity, which would cater
to the unique principles of Takaful and
credible reTakaful industry which is
crucial in promoting the expansion of
the industry worldwide.
Chart 18: Net contributions, 2003 - 2007
US$ million
US$ million
0
500
1,000
1,500
2,000
2,500
3,000
General
Family
13%
14%
14%
16%
16%
87%
86%
86%
84%
84%
2003 2004 2005 2006 2007
0
200
400
600
800
2003 2004 2005 2006 2007
General
Family
25%
29%
27%
28%
22%
75%
71%
73%
72%
78%
Chart 19: Total assets, 2003 - 2007
Two most commonly
used models
in Malaysia are
Mudharabah and
Wakalah contracts

Operating models in Malaysia
In Malaysia, participants contribute
a sum of money into a common
fund, which is used to mutually
assist them against a dened loss.
The fund is managed by a Takaful
operator, who runs the operation
as an economic venture, deriving
income from investment of the
shareholders fund and a share of
the Takaful fund, agency fees and
surpluses of the Takaful fund.
The operating contract between
the participants and the Takaful
operator depends largely on the
needs and preferences of the
parties. Malaysia has adopted a
exible framework for operators
to choose a suitable model, with
the condition that parameters are
drawn based on Shariah principles
and prudential requirements.
However, the future may see
some form of streamlining by the
regulators to a common operating
model.
The Takaful industry started with
two operators who adopted the
Mudharabah (prot-sharing)
model, under which Takaful
contracts set out a prot-sharing
basis between operator and
participant.
The subsequent incorporation of
new operators saw the Wakalah
(agency) operating model being
adopted. The Takaful contract
under Wakalah works on the basis
of Wakalah fees being charged.
It is generally perceived that the
Wakalah Takaful contract is simpler.
Regardless of the type of model,
the contract needs to be clearly
worded and transparent to the
participants in terms of the basis
for charges or prot sharing, other
related expenses to be borne by the
operators and/or participants, and
the basis of returns to participants
in the form of Mudharabah or return
of capital.
The distribution channel
The main distribution channel
was the direct marketing channel,
comprising the branch network
of Takaful operators and direct
marketing.
Over 2004 and 2005, there
was a sharp switch of business
marketed by the direct channel
to bancaTakaful, i.e. distribution
through banks and other nancial
institutions.
As depicted in Chart 20, Takaful
contributions distributed by direct
marketing constituted 61% of
contributions in 2004, and this
fell sharply by 17% to 44% in
2005. Meanwhile, business via
bancaTakaful increased from 7%
in 2004 to 20% in 2005. Other
signicant channels are the agency
force (19%) and the broking business
(14%).
The growth in the bancaTakaful
channel started primarily from Takaful
operators leveraging on their group
structure with banking businesses
and also strategic alliances formed
with local banks with a wider branch
network. More structured and
integrated bancaTakaful distribution
arrangements are still in the formative
stage in Malaysia.
Chart 20: Contributions by
distribution channels
0%
20%
40%
60%
80%
100%
2004 2005
Others Brokers Agents
Direct marketing BancaTakaful
7%
61%
17%
15%
20%
44%
19%
14%
3%
Motor-
others
Fire
Personal accident
Miscellaneous
'Act' cover
Contractor &
engineering risk
Marine, aviation &
transit
lnvestment-
linked
Temporary-
mortgage
Endowment-
others
Temporary-
others
Medical & health
Endowment-
education
Others
3%
3%
5%
6%
7%
36%
40%
1%
3%
5%
5%
8%
19%
59%
Family Takaful
overtakes general
Takaful market

Product development and
innovation
At its infancy stage, the
Takaful market in Malaysia
predominantly focused on
the general Takaful market. In
1990, the composition of net
contributions between general
and family Takaful was 70%
and 30%, respectively. In 2007,
it was the reverse with family
Takaful net contribution making
up 78% of the Takaful market.
The switch in composition
indicates increased retail
consumer awareness towards
Takaful and more effective
distribution channels.
Takafuls potential growth
lies primarily in family Takaful
as evident from the present
market penetration rate in the
Takaful market of around 5%,
compared to the conventional
life insurance rate of almost
40%.
Over the years, the composition
of family products offered
has varied. The breakdown of
new business contributions
from family Takaful is reected
in Chart 21 while Chart 22
shows the distribution of
net contributions for general
Takaful.
Chart 21: Family Takaful - Distribution of
new contributions by plan, 2007
Chart 22: General Takaful Distribution by plan, 2007
Islamic nance
products &
concepts
MALAYSIA,
Islamic banking
Islamic interbank money products
Islamic debt securities (Sukuk)
Shariah-compliant equity & indices
Shriah-based unit trust funds
Other Islamic investment products
Takaful
Islamic retail products

Islamic banking
Modern Islamic nance was developed
as an intermediation channel for Muslims
to conduct their savings and investment
activities in accordance with Islamic
principles.
Today, over three-quarters of Islamic bank
nancing revolves around three nancing
concepts, namely:
Bai Bithaman-Ajil (deferred payment sale)
Ijarah (leasing)
Murabahah (cost-plus prot margin)
Bai Bithaman-Ajil
Bai Bithaman-Ajil is a contract for sale of
goods on a deferred payment basis for
property, vehicle and nancing of other
consumer goods. Under the scheme, the
property or asset will be purchased by
the nancier and sold at an agreed price
once the tenure and manner of repayment
is agreed upon. The repayment amount is
usually xed throughout the whole period of
contract.
1.
2.
3.
Ijarah
Ijarah is a lease nancing structure. In the
lease arrangement, the nancier leases
equipment, building or other facilities to a
client at agreed rental fees or charges.
In one of the leasing products, Ijarah Thumma
Al-Bai, the lease agreement includes the
subsequent purchase of leased asset at the
end of the lease tenure.
Murabahah
Under Murabahah, the seller purchases
the asset at cost and sells it back to the
customer at a marked-up price agreed to by
both parties. It is an agreement that refers
to the sale and purchase transaction for the
nancing of an asset or project, whereby the
costs and prot margin are made known and
agreed by all parties involved.
Islamic interbank
money products
The IIMM covers the
Mudharabah interbank
investment and interbank
trading of Islamic nancial
instruments which are
essential in managing short
term liquidity needs of
Islamic banks.
The commonly traded
Islamic interbank money
products in the money
market include:
Mudharabah Interbank
Investment
Government Investment
Issues
Malaysian Islamic
Treasury Bills
Bank Negara Negotiable
Notes-i
Commodity Murabahah
Mudharabah Interbank Investment

(MII)
MII refers to a mechanism whereby
a decit Islamic banking institution
(investee bank) can obtain investment
from a surplus Islamic banking
institution (investor bank) based on
Mudharabah (prot-sharing). The
investment period is from overnight
to 12 months, while the rate of return
is based on the rate of gross prot
before distribution for investment
of one year of the investee bank.
The prot-sharing ratio is negotiable
between both parties.
At the time of negotiation, the investor
bank and investee bank will agree to
the prot-sharing rate upfront.
Government Investment Issues (GII)
The Malaysian Government issues
non-interest bearing certicates
known as GII to facilitate Islamic
banks purchase of liquid securities
to meet the statutory liquidity
requirements as well as to park idle
funds. The GII was introduced in July
1983 under the concept of Qard Al-
Hasan.
Malaysian Islamic Treasury Bills (MITB)
MITB are short-term securities issued
by the Malaysian Government based on
Bai Al-Inah principle (sale and immediate
purchase). BNM on behalf of the
Government will sell the Governments
assets through tender to form the
underlying transaction of the deal. The
MITB price is determined after prot
element is imputed (discounting factor) and
issued to successful bidders to represent
the debt created in return for the cash
receipt. The bidders will subsequently sell
back the assets to the Government at par
based on credit term.
Bank Negara Negotiable Notes-i (BNNN-i)
BNNN-i are Islamic securities issued by
BNM using Islamic principles which are
deemed acceptable to Shariah requirement.
Issuances of BNNN-i can be either on a
discounted or a coupon-bearing basis
depending on investors demand. Discount-
based BNNN-i will be traded using the
same market convention as MITB while the
prot-based BNNN-i will adopt the market
convention of GII.
Commodity Murabahah
Commodity Murabahah is a sale of certain
specied commodity, at cost plus mark-up.
The Commodity Murabahah Programme
launched by BNM in 2007 utilises crude
palm oil-based contract as an underlying
asset. CMP provides certainty of returns
as it is undertaken based on pre-agreed
margin or mark-up from the sale and
purchase of the underlying assets.
Islamic debt
securities (Sukuk)
Sukuks are Islamic
bonds which have similar
characteristics with a
conventional bond with the
difference being that they are
asset-backed
1
and free from
usury (interest).
Sukuks are structured with
no interest element. They are
linked to the returns and cash
ows of the nancing to the
assets purchased or the returns
generated from the assets
purchased. This is done to
avoid trading of debts, which
is prohibited under Shariah.
Among the major Sukuk-based
concepts in Malaysia are:
Musharakah
Murabahah
Ijarah
Istisnaa
Musharakah
Musharakah is a partnership
nancing agreement between two
parties or more to engage in a
specic business activity. All the
partners are entitled to a share in
the prots of a project at a mutually
agreed ratio, while losses are
shared in proportion to the amount
invested. In addition, partners who
contribute funds have the right to
exercise executive powers in the
project, similar to a conventional
partnership structure and the
holding of voting stocks in a limited
company.
Murabahah
Murabahah is a contract of cost-
plus prot margin. It involves a
nancier acquiring an asset for
a purchaser. A price margin is
imputed into the sale of the asset
from the nancier to the end
purchaser. Typically, commodity
trade nancing is accomplished
with Murabahah Sukuk.
Ijarah
Ijarah which is equivalent to
leasing, involves the transfer
of the property against the
consideration of periodic rentals.
Ijarah arrangement can help
nanciers create a secondary
market through securitisation
of the leased assets. Since the
lessor in Ijarah owns the leased
assets, the lessor can sell the
assets to a third party who
replaces the sellers rights and
obligations.
Istisnaa
Under Istisnaa (pre-delivery and
leasing), the nancier provides
funds to the supplier, who agrees
to produce, manufacture or
construct a specic asset. The
nancier thus acquires the title
of the asset and will sell or lease
the asset back. Manufacturing
and construction nancing are
common projects supported with
nancing via Istisnaa. Istisnaa is
also suited for long term project
nancing e.g. infrastructure
construction.
1 Sukuks are linked to the returns and cash ows of the nancing to the assets purchased or the returns generated from
the assets purchased. This is done to avoid trading of debts, which is prohibited under Shariah
Shariah-compliant
equities and indices
Islamic equity
The Islamic equity sector comprises products
such as Shariah-compliant securities listed
on Bursa Malaysia and Islamic mutual funds
or Islamic unit trust funds. The SCs SAC
list of Shariah-compliant securities provides
essential reference as well as condence for
Muslim investors in identifying and investing in
Shariah-compliant securities.
Islamic equity indices
The availability of Shariah-compliant securities
have led to the introduction of the Islamic
stock equity index in 1999, known as the
Kuala Lumpur Shariah Index, to meet the
demands of local and foreign investors
who seek to invest in Shariah-compliant
securities. This Index facilitates the tracking
and benchmarking of the performance of
such securities listed on the Main Board of
Bursa Malaysia. The Index was subsequently
replaced in 2007 when the FTSE Bursa
Malaysia EMAS Shariah and FTSE Bursa
Malaysia Hijrah Indices were introduced.
The FTSE Bursa Malaysia EMAS Shariah Index
is designed to provide investors with a broad
benchmark for Shariah-compliant investment for
the Malaysian market. This Index features:
Constituents of the FTSE Bursa Malaysia EMAS
Index
Equities that are in compliance with the
screening requirements of SCs SAC
The Index takes the constituents of the FTSE
Bursa Malaysia EMAS Index, which has been
free oat weighted and liquidity screened, and
overlays the SCs SAC screening methodology to
derive a highly investable and transparent Shariah-
compliant index.
The FTSE Bursa Malaysia Hijrah Index is targeted
to attract global investors. This Index comprises:
The largest 30 companies of the FTSE Bursa
Malaysia EMAS Index
Equities that are screened by the SAC and
global Shariah consultancy, Yasaar Ltd to meet
the requirements of international Shariah-
compliant investors.
There is also a Dow Jones Islamic Market Index
series which RHB Capital Bhd and Dow Jones &
Co Inc launched in 2005. The Dow Jones-RHB
Islamic Malaysia Index, a co-branded Islamic
Index adopts the methodology of the Shariah-
compliant index family.

Shariah-based
unit trust funds
The Shariah-based unit trust funds are
collective investment funds that offer
investors with the opportunity to invest in
a diversied portfolio of Shariah-compliant
securities managed by professional
managers in accordance with Shariah
principles. The schemes are available in
many forms such as Islamic equity funds,
bond funds, index funds and others.
With the availability of Shariah-compliant
securities to facilitate Islamic investment,
the Islamic unit trust fund industry has
experienced signicant growth. From only
two Islamic funds rst introduced in 1993,
the industry today has 134 Islamic funds,
representing 26% of the total number of unit
trust funds in the country.
Islamic Real Estate Investment Trusts (Islamic REITs)
Islamic REITs are collective investment funds that
pool money from investors to buy, manage and sell
real estate through Shariah-compliant capital market
instruments. A REIT contract is binding on all investors
through a musharakah or partnership structure.
There are currently two Islamic REITs in the market.
The rst REIT was launched by the healthcare sector,
the Al-Aqar KPJ REITs, in 2006 with a fund size of
US$49 million (RM180 million). The other Islamic
REIT is the Al-Hadharah Boustead REIT which made
its debut in 2007 with US$67 million (RM230 million)
raised.
Islamic structured investment products
Structured investment products are synthetic
investments which can be an alternative to direct
investments, as part of the asset allocation process
to reduce risk exposure of a portfolio or to leverage
current market trends. Similar to its conventional
counterpart, Islamic structured investment products
have become an increasingly important investment
tool for both investors and wealth managers.
A new addition to Islamic structured investment
products is the CIMB Islamic All-Stars Global
Restricted Mudharabah Structured Investment. The
structured investment product combines 100% capital
protection, if held to its ve-year maturity period, with
returns linked to the performance of 20 global blue-
chip MNCs.
Islamic stockbroking services
Islamic stockbroking services began in 1994.
Currently, there are three players which provide both
conventional and Islamic stockbroking services.
Given the growing investor demand, several more
conventional stockbrokers are expected to offer
Islamic stockbroking services soon.
Other Islamic
investment products
Takaful
Takaful is an insurance concept
in Shariah whereby a group
of participants mutually
agree among themselves to
guarantee each other against
dened loss or damage that
may be inicted upon any of
them by contributing as tabarru
or donation to the Takaful funds
operated by a Takaful operator.
It emphasises unity and co-
operation among participants.
Tabarru (donation, gift or
contribution) is the core of the
Takaful system that makes the
uncertainty element allowable
under the Takaful contract.

General Takaful
General Takaful refers to Takaful scheme
for short-term basis, usually 12 months,
to compensate its participants for any
material loss, damage or destruction they
might suffer arising from a misfortune that
might be inicted upon their properties or
belongings.
If at the end of the period there is a
net surplus in the general Takaful fund,
the surplus shall be shared between
the participants and the operator
in accordance with the principle of
Mudharabah. This is provided that the
participant has not incurred any claims
and/or received any benets under the
general Takaful certicate.
Family Takaful
The family Takaful plan is a combination
of long-term investment and mutual
nancial assistance scheme similar to the
conventional life insurance. The objectives
of this plan are to save regularly to earn
investment returns in accordance with
Islamic principles and to obtain coverage
in the event of death prior to maturity from
a mutual aid scheme. Each contribution
paid is credited into two separate accounts
for contribution and savings or investment.
Islamic retail products
Malaysia offers a comprehensive array of Islamic nancial
products and services, onshore and offshore, ranging from
retail to wholesale banking, Takaful, money as well as capital
and bond markets.
Islamic banking products Takaful products Investment products

Financing
Hire purchase
Cash line facility
Share nancing
Leasing
Fixed asset nancing
Term nancing
Working capital nancing
Revolving credit facility
Equipment nancing
Project nancing
Contract nancing
Joint venture
Bridging nancing
Export credit renancing
Trade Financing
Letter of credit
Accepted bill
Trust receipt
Bank/shipping guarantee
Inward/outward bills for collection
Multi-currency trade nancing facility
Indirect exported nancing scheme
Family Takaful
Endowment Takaful
Medical and health Takaful
Investment-linked Takaful
Education plan Takaful
Mortgage Takaful
Annuity Takaful
Travel Takaful
General Takaful
Motor Takaful
Fire Takaful
Personal accident Takaful
Engineering Takaful
Marine, aviation and transit Takaful
Contractors all risks and
engineering Takaful
Liability Takaful
Workmen compensation Takaful
Shariah-compliant stocks
Islamic REITs
Islamic structured investment
products
Islamic stockbroking services
Regulation &
tax incentives
MALAYSIA,
Regulation & supporting frameworks
Tax incentives

Regulation &
supporting
frameworks
Malaysia has taken an
integrated approach
to the regulation and
supervision of Islamic
nance, catering to the
unique characteristics
of Islamic nance
operations
The regulatory
framework is robust
and comprehensive,
accommodating an
Islamic nancial system
that operates in parallel
with the conventional
system
Regulatory framework
Regulation
The Malaysian Islamic nance
experience has been unique. Malaysia
has successfully developed an
Islamic nancial system that operates
in parallel with its conventional
counterpart. For example, while
Islamic banking in Malaysia is
governed by its own legal framework
(Islamic Banking Act 1983), it is also
subjected to a similar regulatory and
supervisory framework as that of
conventional banking.
In the Malaysian Islamic banking
landscape, there are full edged
Islamic banks as well as conventional
banking institutions with an Islamic
banking window that offers Islamic
products and services.
Licensing and supervision
The licensing and regulation of
Islamic banking institutions and
Takaful operators in Malaysia are
governed by the Islamic Banking Act
1983 and Takaful Act 1984 as well as
the Banking and Financial Institutions
Act 1989 and Development Financial
Institutions Act 2002. These Acts fall
under the purview of BNM, which
regulates and supervises the Islamic
banking and Takaful sectors.
In the Islamic capital market, SC is
responsible for issuing licences to
market intermediaries and guidelines
on the offering of Islamic securities
1
.
Shariah Advisory Council
To ensure that all Islamic capital
market products comply with
the Shariah principles, BNM and
SC have both established their
respective Shariah Advisory Council
(SAC). The SAC comprises prominent
Shariah scholars, jurists and market
practitioners. Their role is to advise
regulators on matters relating to
Islamic nancial markets and provide
Shariah guidance on Islamic nancial
products, services, transactions and
activities.
BNM SAC
2
is the central Shariah
Authority in Islamic banking and
Takaful. Its roles include issuing
fatwa
3
to be implemented by
Islamic bank and Takafuls Shariah
Committee and reference point for
Shariah Committee on Shariah issues
in relation to product and operations.
The SCs SAC
4
serves as a single
point of reference on Islamic capital
market (ICM), providing guidance to
all participants in the ICM on matters
pertaining to Shariah compliance.
As part of the ongoing initiatives
to build good Shariah governance
among Islamic nancial institutions,
both banks and Takaful are required
to establish Shariah Committee.
The purpose of the committee is to
advise Islamic nancial institutions on
the shariah compliance in all aspects
of its operations.
1 Provided under the Securities Commission Act, 1993 and Capital Market and Services Act 2007
2 BNMs SAC was established on 1 May 1997 under the Central Bank Act 1958
3 Fatwa Islamic rules derived from Quran and Sunnah
4 SCs SAC was set-up on 1 July 1996 under the Securities Commission Act 1993
Capital market
Financial market
AAOlFl
lFSB
llFM
lDB
BlS
lMF
World
Bank
lOSCO lAASB
lASB
Conventional lslamic
Banking and Finance
Multilateral Organisations
lOFC
BNM
SC
LOFSA
MASB
Banks
lnsurers
Equities
Bonds
RElTs
Unit trust
funds
The Banking &
Financial lnstitutions
Act 1989
Central Bank of
Malaysia Act 1958
lnsurance Act 1996
Securities
Commission Act 1993
Securities lndustry
Act 1983
Labuan Offshore
Financial Services
Authority Act 1996
Offshore Banking
Act 1990
Offshore lnsurance
Act 1990
Financial Reporting
Act 1997
lslamic
banks
Takaful
operators
lslamic
equities
Sukuk
lslamic
RElTs
Shariah -
based unit
trust funds
lslamic Banking
Act 1983
Takaful Act 1984
MlFC
Shariah Advisory
Council (BNM's and
SC'sj
Acronyms:
AAOIFI Accounting & Auditing Organisation for Islamic Financial Institutions
BIS Bank for International Settlements
IAASB International Auditing & Assurance Standards Board
IASB International Accounting Standards Board
IDB Islamic Development Bank
IFSB - Islamic Financial Services Board
Chart 23: Malaysias Islamic nancial system operates in parallel with conventional system
IIFM -International Islamic Financial Market
IMF International Monetary Fund
IOFC International Offshore Financial Centre
IOSCO - International Organisation of Securities Commissions
MIFC - Malaysian International Islamic Financial Centre
Supporting framework
Tax
In efforts to facilitate the Islamic
nance market and transactions
in Malaysia, the Government has
made changes to the tax regime
to streamline the tax structure on
Islamic nance transactions.
Under this tax neutrality
framework, amendments were
made to the Income Tax Act
1967, the Real Property Gains
Tax Act 1976 and the Stamp Act
1949. Under the tax neutrality
framework, additional instruments
and transactions executed to
fulll Shariah requirements are
exempted from additional stamp
duty and tax payment.
Sovereign Sukuk
The Government Investment
Act 1983 and the Government
Funding Act 1983 were enacted
to facilitate the development
of the government Sukuks
in accordance with Shariah
principles. This in turn has helped
to provide liquidity in the Islamic
interbank market through short-
term Government Islamic notes
benchmark returns for corporate
Sukuks and established the
market for Malaysia to raise
international Sukuks.
Unique characteristics of
Shariah Islamic nancing
Shariah is the key pillar of Islamic nance
from which Islamic nance derives its unique
characteristics. The Shariah injunctions require that
Islamic nancial transactions be accompanied by
an underlying productive activity. In Islamic nance,
there is always a close link between nancial and
productive ows.
In addition, under the required risk sharing principle,
Islamic nancial institutions will share the prot
or the loss incurred by the entrepreneur. There is
an explicit sharing of risk by the nancier and the
borrower. This arrangement will thus entail the
appropriate due diligence and the integrating of the
risks associated with the real investment activity
into the nancial transaction. In this arrangement,
the real activity is expected to generate sufcient
wealth to compensate for the risks.
In contrast, conventional instruments generally
separate such risks from the underlying assets. As a
result, risk management and wealth creation may, at
times, move in different or even opposite directions.
Conventional nancial instruments also allow for
the commoditisation of risks. This has led to its
proliferation through multiple layers of leveraging
and disproportionate distribution, which in turn,
could result in higher systemic risks, thus increasing
the potential for instability in the nancial system.
Regulatory Framework
Islamic finance
institutions
Islamic capital market Tax Government sukuk
Regulatory
bodies
Bank Negara Malaysia
Malaysia
Inland Revenue Board;
Royal Malaysian
Customs
Ministry of Finance;
Bank Negara Malaysia
National Shariah
Advisory Council
Shariah Advisory
Council
Tax neutrality
framework
Issuance of
sovereign Sukuk
Islamic Financial
Services Board
(IFSB)
Accounting & Auditing
Organisation for
Islamic Finance
Institutions (AAOIFI)
International
Islamic Financial
Market (IIFM)
Malaysian International
Islamic Financial
Centre (MIFC)
Labuan Offshore
Financial Services
Authority (LOFSA)
Other
regulatory and
developing
bodies
Islamic Banking Act 1983
Takaful Act 1983
Development Financial
Institutions Act 2002
Central Bank Act of
Malaysia 1958
Income Tax 1967
Real Property Gains
Tax Act 1976
Stamp Act 1949
Government
Investment Act 1983
Government Funding
Act 1983
Legal Acts
Act 1993
Capital Market and
Services Act 2007
Supporting Framework
Chart 24: Islamic nance regulatory and supporting frameworks
Other regulatory and
developing bodies
Labuan Offshore Financial Services
Authority (LOFSA)
LOFSA was established as a single
regulatory agency
4
responsible for
setting national objectives, policies
and priorities for the development
and administration of the Labuan
International Offshore Financial
Centre (IOFC).
LOFSAs role is pivotal in developing
offshore Islamic banks and Takaful
operators as well as supervising
active primary and secondary
market for listing and trading of
offshore Islamic instruments through
the Labuan Financial Exchange.
Malaysia International Islamic
Financial Centre (MIFC)
MIFC
5
was formed as part of the
Malaysian Governments initiative to
position Malaysia as an international
Islamic nancial centre. MIFC
comprises a diversied range of
nancial institutions operating from
anywhere in Malaysia, offering
Islamic nancial products and
services in any currency to non-
residents and residents.
The MIFC Executive Committee
(Committee) acts as a single
coordinating body to provide
direction and ensure smooth
implementation and efcient delivery
of MIFC-related initiatives. The
Committee is assisted by the MIFC
Secretariat, which acts on behalf of
the Committee to coordinate and
implement the MIFC initiatives.
International Islamic Financial
Market (IIFM)
The establishment of the IIFM,
an infrastructure institution
which is based in Saudi Arabia,
provides the market mechanism
for the advancement and
standardisation of Islamic
nancial instruments and the
issuance of guidelines and
recommendations for the
enhancement of Islamic capital
and money market globally.
Islamic Financial Services Board
(IFSB)
IFSB
6
is an international
standard-setting organisation
that promotes and enhances the
soundness and stability of the
Islamic nancial services industry
by issuing global prudential
standards and guiding principles
for the industry. This includes
the banking, capital markets and
insurance sectors.
Since its inception, the IFSB
has issued seven standards:
guiding principles and technical
note for the Islamic nancial
services industry focusing
on risk management, capital
adequacy, corporate governance,
supervisory review process,
transparency and market
discipline, recognition of ratings
on Shariah-compliant nancial
instruments as well as the
development of Islamic money
markets.
Accounting & Auditing Organisation
for Islamic Finance Institutions
(AAOIFI)
AAOIFI
7
was established in
Bahrain to address accounting
issues concerning Islamic nancial
institutions. To date, AAOIFI has
issued 70 standards on accounting,
auditing, governance, ethics and
Shariah standards. The standards
are currently in use in some Gulf
states and selectively in other
countries.
Professional bodies
Several institutions of higher learning
and centres of research and study of
all relevant areas of Islamic banking,
nance and economics have been
established in order to increase
the necessary pool of talent for the
industry:
The International Centre for
Education in Islamic Finance
(INCEIF) provides professional
certication and post-graduate
studies in Islamic nance
The Islamic Banking and Finance
Institute Malaysia (IBFIM) offers
technical courses in Islamic
banking and nance
The International Centre for
Leadership in Finance (ICLIF)
provides leadership development
and management training for
nancial institutions including
Islamic nancial institutions
The International Shariah
Research Academy for Islamic
Finance (ISRA) promotes applied
research in the area of Shariah
and Islamic nance
4 LOFSA was established on 15 February 1996. 5 MIFC was unveiled on 14 August 2006.
6 IFSB commenced operations on 10 March 2003. 7 AAOIFI was established on 26 February 1990.
Tax
incentives
In line with
the Malaysian
Governments efforts
to promote Malaysia
as an International
Islamic nancial
centre, substantial
tax incentives have
been provided in
the area of Islamic
Finance
Tax exemption of
Islamic banks and
Takaful companies
10-year tax exemption to Islamic banks and
Islamic banking units licensed under the
Islamic Banking Act 1983 on income derived
from Islamic banking business conducted
in international currencies, including
transactions with Malaysian residents; and
10-year tax exemption to Takaful companies
and Takaful units licensed under the
Takaful Act 1984 on income derived from
Takaful business conducted in international
currencies including transactions with
Malaysian residents.

These incentives are effective from YA 2007
to YA 2016.
Exemption from
withholding tax
Effective 2 September 2006:
Prots received by non-residents from
nancial institutions established under the
Islamic Banking Act 1983, and other nancial
institutions approved by the Minister of
Finance be exempt from tax as well. This is to
streamline tax treatment on prots received
by foreign non-resident customers from all
nancial institutions
Any prots paid out by an Islamic bank to
foreign non-resident customers need not be
subject to tax in Malaysia, thus providing equal
treatment with conventional banks foreign
customers. This means that there will be no
withholding tax on prot payments made by
all licensed banks in Malaysia to non-resident
customers.
Facilitation of
nancing
transactions
The denition of partnership for tax purpose
is very wide and includes all types of
partnerships. Hence, any type of partnership,
unless specically excluded, would have to le
tax returns.
In recognising and promoting Islamic
nancing structures based on the concept of
Musharakah or Mudharabah, such nancing
transactions need not le partnership tax
returns.
This is effective from YA 2007.
Tax exemption
of fund managers
Effective from YA 2008 YA 2016:
10-year tax exemption for local and foreign
companies managing funds established under
the Shariah principles and approved by SC.
Real Estate
Investment Trusts
(REITs)
REITs have also been provided with further
boost through several tax initiatives:
So long as REITs distribute at least 90% of
income to investors, the REITs will not have to
pay tax.
Distributions to certain investors will be
subject to reduced tax for ve years, namely:
Non-corporate investors, including resident
and non-resident individuals, that receive
dividends from approved REITs, be subject
to a nal withholding tax of 15%; and
Foreign institutional investors, especially
pension funds and collective investment
funds, that receive dividends from
approved REITs, be subject to a nal
withholding tax of 20%.
Corporate investors (resident and non-resident)
will continue to be subject to normal corporate
income tax at 26% (to be reduced to 25% from
YA 2009).

Human capital In encouraging Malaysians to explore Islamic
nance as a career choice, tax relief not
exceeding RM5,000 (US$1,552) p.a. is also
provided on Islamic nance courses approved
by BNM or SC at local institutions.
Extension of tax
deduction on issuance
costs of Islamic
securities
Extension of three years to 2010, tax
deduction on the expenses incurred on the
issuance of Islamic securities based on Ijarah,
Istisnaa, Mudharabah, Musharakah and other
Islamic securities.
Stamp duty Further stamp duty exemption of 20% on
instruments used in Islamic nancing products
approved by the SAC of BNM or SC for a
period of three years, up to 31 December
2009. This means that Islamic transactions will
suffer less stamp duty by 20% compared to
conventional nancing instruments.
100% stamp duty exemption for 10 years up
to 31 December 2016 on foreign currency
instruments executed by International
Currency Islamic nancial institutions.
Others Other tax initiatives include:
Pre-commencement expenses of an Islamic
stockbroking business will be allowed as tax
deduction so long as business is commenced
within two years from approval by SC.
Applications have to be received by SC from
2 September 2006 to 31 December 2009.
Special purpose vehicles established solely
for the purposes of issuance of Islamic
bonds need not be subject to tax or tax
administrative procedures, subject to certain
conditions.

PwC Malaysia
Islamic Finance
Services
MALAYSIA,
With the enhanced focus and expansion
of Islamic nance to all areas of nancial
services globally, it becomes increasingly
important to have advisors who can apply
their knowledge to products and services
relating to Islamic nance locally and globally.
The PwC Malaysia Islamic Finance team has
been at the forefront of Islamic nance and
banking developments in Malaysia, working
with regulators to achieve their strategy to
evolve Malaysia as an integrated international
Islamic banking and nancial hub. Our Islamic
nance team has performed audit reviews,
and provided advisory services and tax
advice to local and international banks and
regulatory bodies.
Besides being a Partner of PwC Malaysia,
Mohammad Faiz Azmi is also the PwC Global
Leader in Islamic Finance, leading the Global
Islamic Finance Team (GIFT) with team
members in Kuala Lumpur, Dubai, Bahrain
and London. GIFT acts as a coordinating unit
to manage PwCs service offering globally in
areas as diverse as new setups, structured
products, Sukuk taxation and market
research.
Global reach, local knowledge
Connect with us for these services:
Start-up support for new entities or ventures in banking,
Takaful or capital market related
Strategy and business planning
Transaction support on acquisition of assets or entities
Statutory audits and tax advisory
Accounting and taxation support on structures and
products such as Sukuks
Process improvement of banks and Takaful operators
Basel II work in relation to the implementation of IFSB
Capital Adequacy Standard
Internal audit training and Shariah audits
Training on subjects such as AAOIFI standards
Feasibility studies and business plans
Licensing and legal vehicle assessment and selection
Licence application and other regulatory approval
Inventorise and advise on local regulatory obligations and
expectations of local regulators
Develop and implement local compliance requirements,
including standards, policies and procedures
We can assist foreign clients in the following areas:
Application of licences:
International Islamic Banking licence
International Takaful Operator licence
Feasibility studies and business plans for submission
during licence application
Liaise with MIFC regulators i.e. BNM, SC, LOFSA and
Bursa Malaysia
Provide advisory services to related Malaysian laws such
as Islamic Banking Act 1983, Takaful Act 1984, Exchange
Control Act 1953
Contact us
PricewaterhouseCoopers
Level 15, 1 Sentral
Jalan Travers
Kuala Lumpur Sentral
P O Box 10192
50706 Kuala Lumpur, Malaysia
Telephone: + 60 (3) 21731188
Facsimile: +60 (3) 21731288
Email: pwcmsia.info@my.pwc.com
Website: www.pwc.com/my
GIFT Malaysia
Mohammad Faiz Azmi
Global Islamic Finance Leader
Partner, PwC Malaysia
mohammad.faiz.azmi@my.pwc.com
Jennifer Chang
Senior Executive Director, PwC Malaysia
jennifer.chang@my.pwc.com
Manjit Singh
Executive Director, PwC Malaysia
manjit.singh@my.pwc.com
GIFT Global
PwC Bahrain
Madhukar Shenoy
Partner
madhukar.shenoy@bh.pwc.com
PwC UAE
Ashruff Jamall
Partner
ashruff.jamall@ae.pwc.com
PwC UK
Mohammed Amin
Partner
mohammed.amin@uk.pwc.com
Islamic nance
glossary
MALAYSIA,
Islamic term Denition
Bai Sale
Bai Al-Inah A contract of sale and purchase of an asset whereby
the seller sells to buyer in cash and subsequently buys
back the asset at a marked up deferred price
A contract of sale and purchase of an asset whereby
the seller sells to buyer at a deferred price and
subsequently buys back at a lower cash price
1.
2.
Bai Bithaman-Ajil Contract for sale of goods on a deferred payment basis
for property, vehicle and other consumer goods
Fatwa Islamic rules derived from Quran and Sunnah
General Takaful Lease agreement with option to own leased asset at the
end of the lease tenure
Gharar Ambiguity, uncertainty
Hadith Words and deeds of the Prophet (PBUH)
Halal Permissible, Lawful
Haram Prohibited, forbidden
Hijrah Muslim calendar
Ijarah Thumma
Al-Bai
Lease agreement and subsequent purchase of leased
asset at the end of the lease tenure
Istisnaa A contract of sale of specied items to be manufactured
or constructed, with an obligation on the part of the
manufacturer or builder (contractor) to deliver them to the
customer upon completion
Maisir Gambling
Mudharabah Agreement between capital provider and entrepreneur to
enable the entrepreneur to carry out business activities.
Prot will be shared on pre-determined ratio and losses
will be borne by capital provider
Murabahah The sale of goods at cost plus agreed prot mark-up
Musharakah Partnership nancing agreement between two parties or
more to engage in a specic business activity
Qard Al-Hasan Benevolent loan, interest-free loan
Riba Usury, interest
Shariah Shariah is the set of rules derived from both the holy
Quran and the authentic traditions (Sunnah) of the
Prophet (PBUH) and the scholarly opinions (ijtihad) based
on Quran and Sunnah
Shariah advisor Independent professional, usually a classically trained
Islamic legal Scholar that advises an Islamic bank on the
compliance of its products and services with the Islamic
law
Shariah compliant Act or activity that complies with the requirements of the
Shariah principle
Shariah principle Principle derived from the Quran and Sunnah
Sukuk Islamic bonds. These bonds have similar characteristics
with a conventional bond with some differences
Tabarru Donation, gift or contribution
Wakalah A contract of agency whereby a person appoints another
party to perform a task on his behalf for a fee
Zakat Obligation in respect of funds paid for a specied type of
purpose and for specied categories. It is prescribed by
Allah for those who are entitled to zakat as specied in
the Quran
Note: With the difculty in transcribing the Arabic words into English, spellings of
the glossary are done with the closest match to its Arabic origins. There is also no
capitalisation of Arabic words except as specied or when grammar requires it.
Acronyms
MALAYSIA,
AAOIFI Accounting and Auditing Organisation for Islamic
Financial Institutions
ASEAN Association of Southeast Asian Nations, ASEAN countries
include Brunei, Cambodia, Indonesia, Lao PDR, Malaysia,
Philippines, Singapore, Thailand and Vietnam
BIS Bank for International Settlements
BNM Bank Negara Malaysia / Central Bank of Malaysia
BNNN-i Bank Negara Negotiable Notes-i
CAGR Compound annual growth rate
EPF Employees Provident Fund
GCC Gulf Cooperation Council. GCC countries include Saudi
Arabia, Bahrain, Kuwait, Qatar, Oman and the United
Arab Emirates
GII Government Investment Issue
HQ Headquarter
IAASB International Auditing and Assurance Standards Board
IASB International Accounting Standards Board
IBFIM Islamic Banking and Finance Institute of Malaysia
ICBU International Currency Business Unit
ICLIF International Centre for Leadership in Finance
ICM Islamic Capital Market
IDB Islamic Development Bank
IFI Islamic Financial Institution
IFSB Islamic Financial Services Board
IFM International Fund Management
IIFM International Islamic Financial Market
IIB International Islamic Bank
IIMM International Interbank Money Market
IMF International Monetary Fund
INCEIF International Centre for Education in Islamic Finance
IOFC International Offshore Financial Centre
IOSCO International Organisational of Securities Commissions
ITO International Takaful Operator
LFX Labuan International Financial Exchange
LOFSA Labuan Offshore Financial Services Authority
MESDAQ Malaysian Exchange of Securities Dealing & Automated
Quotation
MIFC Malaysian International Islamic Financial Centre
MII Mudharabah Interbank Investment
MITB Malaysian Islamic Treasury Bills
MNC Multinational companies
NAV Net asset value
OHQ Operational headquarter
REIT Real Estate Investment Trust
RHQ Regional headquarter
SAC Shariah Advisory Council
SC Securities Commission of Malaysia
SWF Sovereign Wealth Fund
YA Year assessment
pwc.com
2008 PricewaterhouseCoopers. All rights reserved. PricewaterhouseCoopers refers to the individual members of the PricewaterhouseCoopers
organisation in Malaysia each of which is a separate legal entity or, as the context requires, other member rms of PricewaterhouseCoopers International
Limited, each of which is a separate and independent legal entity. Cs02032

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Malaysia,

2004 2005 2006

6 MALAYSIA, ASIAS ISLAMIC FINANCE HUB | 2008

Issuance of the worlds

MALAYSIA AS AN ISLAMIC FINANCE POWERHOUSE | 2008 7

South East Asia, Middle East, Africa

Highly attractive tax incentives

Investment opportunities Global connectivity

Located at the heart of Asia Pacic

Institutional capacity enhancement

Regulatory framework development

14 MALAYSIA, ASIAS ISLAMIC FINANCE HUB | 2008

MALAYSIA, ASIAS ISLAMIC FINANCE HUB | 2008 15

1970s 1980s 1990s 2000s 2007

With its experience and expertise in Islamic nance, Malaysia is well-

MALAYSIA, ASIAS ISLAMIC FINANCE HUB | 2008 21

Chart 4: Malaysias Islamic nance industry is globally integrated

MALAYSIA, ASIAS ISLAMIC FINANCE HUB | 2008 23

The Malaysian capital market

Chart 6: Size of Sukuks approved in 2007

MALAYSIA, ASIAS ISLAMIC FINANCE HUB | 2008 35

MALAYSIA, ASIAS ISLAMIC FINANCE HUB | 2008 47

Mudharabah Interbank Investment

MALAYSIA, ASIAS ISLAMIC FINANCE HUB | 2008 51

MALAYSIA, ASIAS ISLAMIC FINANCE HUB | 2008 55

MALAYSIA, ASIAS ISLAMIC FINANCE HUB | 2008 63

64 MALAYSIA, ASIAS ISLAMIC FINANCE HUB | 2008

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