ISLAMIC BANKING AND FINANCE: MALAYSIA’S EXPERIENCE AND ACHIEVEMENTS 13 June 2006 Victoria University of Wellington Presented by: Bakarudin Ishak Director Islamic Banking and Takaful Department Bank Negara Malaysia

1. ISLAMIC BANKING AND FINANCE: MALAYSIA’S EXPERIENCE AND ACHIEVEMENTS 13 June 2006 Victoria University of Wellington Presented by: Bakarudin Ishak Director Islamic Banking and Takaful Department Bank Negara Malaysia ISLAMIC BANKING & FINANCE IN MALAYSIA

5. STAGES OF DEVELOPMENT Gradual and pragmatic .. achieved significant milestones in building comprehensive and integrated Islamic financial system with diversity of players …. Milestones 1969 1983 1993 2003 Pilgrimage Fund Boar d Bank Islam Malaysia Bhd. Bank Muamalat Malaysia Bhd. Foreign Islamic banks Full-fledged Islamic banks Conventional banks offer Islamic window Takaful Operators Syarikat Takaful Malaysia Bhd. Takaful Nasional, Mayban Takaful, Takaful Iklhas, Commerce Takaful Islamic subsidiary Islamic money markets

7. Institutional & Regulatory development Product and market development Legal and Shariah framework Enhancement of knowledge and expertise DEVELOPMENTAL FOCUS

12. LEADING INITIATIVES IN ISLAMIC FINANCE … for global integration 2005 Islamic Financial Services Board Malaysia global sukuk 2002 2003 2004 Islamic securities/ Sukuks by multilateral dev’t banks Malaysia-IDB MoU Shariah scholars dialogue Financial liberalisation Financial Market Islamic Index Foreign Islamic FIs, 49% foreign equity in Islamic banks and takaful companies Forex liberalisation Promotion of trade, investment, takaful, financial market & ICT International Islamic standard-setting body Attract international investors First global sovereign sukuk Greater Shariah harmonisation Financial Sector Master Plan Malaysia as international hub/ Labuan’s niche in Islamic finance

13. Meeting the education needs of all levels of Islamic finance practitioners Level of knowledge: Elementary Focus: Short training courses to meet industry’s needs IBFIM INCEIF ICLIF Level of knowledge: Intermediate & advanced Focus: International professional certification and post-graduate programs Focus: Leadership programs Institutions of higher learning Other training providers Human Capital Development in Islamic Finance

15. “… Islamic banking and finance will emerge as a force to be reckoned with in shaping the future development of global finance …”

17. COMPREHENSIVE ISLAMIC FINANCIAL SYSTEM ISLAMIC BANKING & FINANCE IN MALAYSIA

18. Conventional banks Islamic banks Conventional financial system Islamic financial system Conventional banks window MALAYSIA’S PARALLEL DUAL FINANCIAL SYSTEM Conventional banks Islamic Banking Subsidiaries Insurance Companies Takaful Operators ISLAMIC BANKING & FINANCE IN MALAYSIA

20. THANK YOU

22. DEPOSITORS/ INVESTORS BANK PROFIT FINANCING AND INVESTMENT ACTIVITIES LOSS 30% 70% 100% INVESTMENT ACCOUNTS INVEST FUNDS (MUDHARABAH) Pre-agreed Profit- Sharing Ratio ISLAMIC BANKING & FINANCE IN MALAYSIA

23. Ijarah Istisna Bai’ al salam Musyarakah Mudharabah Bai’ bithaman ajil Murabahah EXAMPLES OF ISLAMIC CONTRACTS Lease Commission to manufacture (progressive payment) (price is paid in advance, goods delivered in the future) Islamic forward sale Partnership financing Profit Sharing contract D eferred payment sale Cost –plus or mark-up

24. Sources of funds Non-mudharabah deposits Mudharabah deposits SHF Application of funds General pool Specific account I Specific account II Profit    Distribution of profit Depositors Bank Depositors or ISLAMIC BANKING & FINANCE IN MALAYSIA ISLAMIC BANKING OPERATIONS

25. Owners’ Equity Investment risk reserve Profit equalization reserve Profit sharing investment accounts Equity of Profit Sharing Investment Accounts (PSIA) Other liabilities Current accounts LIABILITIES STYLIZED BALANCE SHEET OF AN IIFS Fixed assets Other assets Inventories Equity investment in capital ventures Equity investment in joint ventures Investment in real estate Investment in leased assets Investment in securities Sales receivables Cash & cash equivalents ASSETS

26. TAKAFUL (e.g. Family, General) TABARRU’ (Donation) PROFIT SHARING ON SURPLUS A contract among participants to reciprocally help each other against defined loss Commercial profit sharing contract between participants and takaful operator Agreement to relinquish certain portion of contribution as donation to fulfil obligation of mutual help and joint guarantee Concepts Based on……. Takaful