Islamic Finance in Malaysia

- Overview & Achievements

Asian Regional Public Debt Management Summit

Ahmad Hizzad Baharuddin
Islamic Banking & Takaful Department
5 November 2009

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Contents

• Financial System Landscape

• Legal, Regulatory and Shariah framework
• Supporting Institutions
• Malaysia International Islamic Finance Centre – MIFC
• Discussion

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Malaysia has developed a dual financial system…

Malaysian Malaysian
Conventional Islamic
Financial Financial
Landscape Financial system Financial system
System

Conventional Financial System Islamic Financial System

• Conventional banking • Islamic banking
Comprehensive • Insurance • Takaful
System • Capital market • Islamic capital market
• Money market • Islamic money market

• BAFIA 1989 • Islamic Banking Act 1983

Legal Governance • Insurance Act 1996 • Takaful Act 1984
• Loan Local Act 1959 • Government Funding Act 2005
• Treasury Bills Local Act 1946 • Capital Market & Services Act 2007
• Capital Market & Services Act 2007

Central Bank Act 2009*: “The financial system shall consist of conventional & Islamic financial
system”… demonstrated Government’s commitment…

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Increasing market share & encouraging growth for
Islamic banking and takaful…
Total Islamic Banking Assets, Financing & Deposits*
(2000- 2008)

Asset Avg. annual growth

RM ‘ 000 million

Deposit
rate: 19.0% (2000-2008) Islamic Banking
Financing
• Market share of total banking assets 19%
• Average annual growth rate on 19% in 2000-
2008

# Including DFI

Total Assets & Contributions of Takaful Companies*

(2000- 2008) Takaful
– Market share: Assets 7.7%
• Takaful industry market share of total fund
RM ‘ 000 million

Assets Avg. annual growth

Contribution rate: 24.8% (2000-2008) assets 7.5%
• Average growth rate of 25% in 2000-2008

* Source: BNM Financial Institutions Statistical System & INSIDES

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BNM1

Ensuring Shariah compliance in the financial system…

• Promote harmonization and uniformity of

interpretations
Shariah • Highest authority on Shariah matters
Advisory • Reference point for court decision
Council
• Advise IFIs on Shariah matters independently
• Endorse Shariah compliance manuals &
Shariah product documentations
Committees • Oversee internal audit on Shariah compliance

• Provide check and balance

•Shariah Division • Undertake regular review
•Shariah Audit • Ensure compliance

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Slide 5

BNM1 Bank Negara Malaysia, 04/11/2009

 Value proposition of Islamic finance consistent with
universal values…
KEY ELEMENTS OF ISLAMIC FINANCE

• Direct link to real economy • Avoidance of unethical activities

• Certainty – supported by underlying activities e.g. hoarding
(avoidance of gharar - uncertainty) • Avoidance of maisir (gambling) &
• Prohibits excessive leveraging riba (interest) & non-permissible

es
goods & services

iti
• Money is not commodity

iv

Et
• Screening investment

ct

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la
Shariah

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• Forbearance for customers in

a
Re

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values difficulties
consistent
with
• Greater transparency & disclosure universal

ip
Go • Different contractual relationship

sh
9 additional Shariah governance values
ve

er
r • Equity-based & risk-sharing
9 unique risks na

rt n
nc transactions

Pa
• Greater fiduciary duties & e
• Clearly defined risk & profit-sharing
accountability characteristic serve as additional
• Emphasis on clear documentation & built-in mechanisms
contract add to soundness & stability

‘…the traditional values of Islamic finance are growing in appeal for Western
investors seeking safe haven from the current financial storms’ Source: Arthur D Little
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Distinct features of Islamic banking regulatory framework…
Corporate ƒ Governance principles peculiar to Islamic finance
Governance ƒ Fiduciary duties as Mudharib ie fund manager
ƒ Elevated stature of takaful participants and investment
account holders

Risk Management ƒ Unique risks e.g. Shariah risk, rate of return risk, displaced
commercial risk & equity investment risk

Capital Adequacy ƒ Risk profiles & exposures determined based on underlying

Standard Shariah contracts

Firewalls for ƒ Separate accounting, clearing and settlement system

Infrastructure ƒ Separate prudential requirements – liquidity, single
customer limit

Consumer protection & ƒ Transparency and disclosures

fair dealing ƒ Dispute resolution mechanism
ƒ Rate of return framework

ƒ Islamic deposit insurance

Financial safety net

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IFSB as an international standard setting body…
Standards issued…

• Islamic Financial Services Board

established in 2002

• Significant progress in addressing

regulatory framework for Islamic
financial institutions

• Promote international convergence of

standards

• Provide platform for knowledge

sharing

• 193 members to date, including 46

regulators

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Initiatives for improving Islamic financial market…

The launching of Bursa Suq Al-Sila’

• A world first international Shariah-compliant commodity platform for liquidity
management among Islamic financial institutions
• Crude palm oil as underlying commodity
• Cooperation between Bank Negara Malaysia and Bursa Malaysia under MIFC initiative

Shariah Parameter
• Shariah-compliant reference in issuing new product and services for Islamic financial
institutions
• 6 Shariah Parameters– Ijarah, Istisna, Wadiah Mudharabah,Murabahah & Musyarakah,

Corporate Murabahah Agreement (CMA) and Interbank Murabahah

Master Agreement (IMMA)
• Standard agremeent to increase liquidity management by Islamic financial institutions

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 Comprehensive human capital developments – focusing in
education, research and training…
• Established in 2003
• Leadership development program for financial institutions & business
corporations

• Established in 2006
• Global university in Islamic finance offering certification & post
INCEIF graduate studies in Islamic finance
• Attract > 1000 students from > 50 countries

• Established in 2008
ISRA • Leading centre in Shariah & fiqh muamalat research
• Platform for discourse among scholars academicians, regulators &
practitioners

Asian • Established in early 2009 to reinforce cooperation between 3 financial

training institutions
Institute of • Further improved quality, efficiency and effectiveness of human
Finance capital development infrastructure in financial industry

ibfim MII IBBM

ICLIF – International Centre for Leadership in Finance IBFIM – Islamic Banking and Finance Institute Malaysia
INCEIF – International Centre for Education in Islamic Finance MII – Malaysian Institute of Insurance
ISRA – International Shariah Research Academy for Islamic Finance IBBM – Institut Bank-Bank Malaysia

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Malaysia as an international Islamic financial centre…

Sukuk Origination
• Unwavering support
from the Government
Islamic Fund & Wealth Management • International
recognition toward
MIFC -
Malaysia contribution
Malaysia
in Islamic finance
International International Islamic Banking
Islamic • Cooperative
Financial arrangements with
Centre financial centers and
International Takaful
multilateral
organisation

Human Capital Development

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Liberalisation in Islamic finance - enhancing global inter-
linkages & realisation of MIFC agenda

Issuance of new • Admission of up to 2 mega IBs with min. paid up capital of USD1b each
licenses • Licensing of up to 2 new family takaful licenses
• Increase foreign equity limit of up to 70%:

Increase in foreign - Domestic IBs subject to paid up capital of at least USD1b

equity limits - Takaful companies
¾ Scaling up domestic players’ operations & enhancing global inter-linkages
¾ Strengthening resilience & competitiveness of domestic players

• No restriction on bancatakaful between banking Institutions and foreign

Granting operational takaful companies
flexibilities • No restriction on new branches nationwide by foreign takaful companies
¾ Improving takaful penetration in the country

• stand alone international law firms may set up office in Malaysia

Service infrastructure
¾ Support MIFC initiatives

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Discussion

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