The document summarizes Malaysia's experience and achievements in Islamic banking and finance. Key points include: Malaysia has established a comprehensive parallel Islamic financial system operating alongside the conventional system, with twelve full-fledged Islamic banks and nine takaful operators. Islamic banking assets have grown rapidly in recent years and now account for around 11-16% of various sectors. The country's central bank, Bank Negara Malaysia, has played a leading role in developing the regulatory and enabling infrastructure to support the growth of the Islamic finance industry.
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
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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
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7. Institutional & Regulatory development Product and market development Legal and Shariah framework Enhancement of knowledge and expertise DEVELOPMENTAL FOCUS
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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
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15. “… Islamic banking and finance will emerge as a force to be reckoned with in shaping the future development of global finance …”
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
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Notas del editor
Population distribution by race: Malay – 50.4% Chinese – 23.7% Indigenous – 11.0% Indian – 7.1% Others – 7.8% GDP 1Q 2006: RM66.2 b End 2005: RM262 b
Islamic financial institutions has been in existence since the establishment of the Pilgimage fund board in 1969. The Islamic financial system in Malaysia has evolved as a viable and competitive component of the overall financial system. The strategy adopted by Malaysia has been to develop a comprehensive Islamic financial system that operates in parallel with the conventional system. Emphasis was given to the development of a comprehensive financial infrastructure that includes the Islamic banking industry, Takaful operators and Islamic financial markets (Islamic money and capital market). The intra-dependecy of these key structural components creates a comprehensive enabling environment for the financial system to effectively plays its role as an efficient conduit to mobilise resources and provide financing to economic sector. Malaysia started the establishment of one Islamic bank (Bank Islamic Malaysia Berhad, 1983) to spearhead the introduction of Islamic banking products and services and followed by the establishment of Takaful operator (Syarikat Takaful Malaysia Berhad), 1984. To provide atrong support to Islamic banking system and Takaful industry, the Islamic money market was established in 1994. Today, Islamic financial system in Malaysia has emerged as important components that contributes to the growth and development of Malaysian economy with the creation diversity of players encompasses the domestic as well as the foreign banking players. The Islamic banking system is currently represented by 29 Islamic banking institutions, comprising of 2 Islamic banks, 2 Islamic subsidiaries and 25 Islamic banking scheme banks offering comprehensive and wide range of Islamic financial products and services. The takaful industry is currently represented by 4 Takaful operators. Greater details will be elaborated in this presentation.
In Malaysia separate banking legislation was enacted for Islamic banking institutions to exist side-by-side with the conventional banks. The government played significant role in the enactment of various legislation that enable the establishment of Islamic bank & Takaful operator. The Islamic banking Act (IBA) 1983 enacted by the parliament facilitated the establishment of Bank Islam Malaysia Berhad (BIMB). The IBA allows these institutions to carry out their business along Shariah principles. The IBA also allows BNM with powers to supervise and regulate Islamic banks . In addition, t he Government Investment Act 1983 was also enacted at the same time to empower the Government of Malaysia to issue Government Investment Is sues (GII), which is the government securities issued based on Syariah principles . As the GII is regarded as liquid assets, the Islamic banks could invest in the GII to meet the prescribed liquidity requirements as well as to invest s t their surplus funds. In 1984, the Takaful Act (TA) was enacted that paved the establishment of Syarikat Takaful Malaysia . This act govern the conduct of Takaful business. The establishment of Takaful was inspired by the demand for Shariah compliant alternative to conventional insurance, as well as to complement the operation of the Islamic bank. In terms of Shariah infrastructure, the IBA and the TA requires the Islamic Bank Takaful operator to establish Shariah advisory council to ensure their operation satisfy with Shariah requirements. On the prudential regulation, in the interim (pending IFSB standard) BIMB and TA has to observed similar regulatory requirements adopted by the conventional institutions. For instance, BIMB has to observe a minimum risk weighted capital ratio, liquidity requirement and statutory reserve requirement. BIMB has proved that Islmic banking is viable and demonstrated capability to operate in parallel with the conventional banks, where in 1992 it was listed in the KLSE
Islamic Financial Services Board has 84 members, incl. 7 multilateral institutions Dow Jones RHB Islamic Malaysia Index lists 74 Shariah compliant counters (< 10% of total listed securities) Total market capitalisation is RM192 billion (~28% of total) as of end-2005 A Malaysian sits on the Dow Jones Shariah Supervisory Board (Dr. Daud) RHB Group will launch the first index fund due in June 2006, namely, the Dow Jones RHB Islamic Malaysia Index Fund Following the liberalisation of the foreign exchange administrative rules in April 2004, the World Bank and International Finance Corporation issued sukuks in ringgit denominated currency (Wawasan Bond of RM760 million and RM500 million respectively)
Source General Council for Islamic Banks And Financial Institutions (CIBAFI), World Wealth Report & Dow Jones Islamic banking assets (IBs & windows) - >USD400 billion Islamic mutual funds - > USD300 billion Islamic sovereign & corporate sukuk – USD15 billion Global market capitalisation of Dow Jones Islamic Index - >USD10 trillion Middle East high net worth individuals – USD1.5 trillion & expected to reach USD2 trillion
In Malaysia’s dual financial system:- i. Islamic banks operate side-by-side conventional banks ii. conventional banks offering Islamic banking services iii. several conventional banks with windows also have Islamic branches iv. To date, 3 conventional banks (RHB, BCB & HL) have set up Islamic banking subsidiaries within the banking groups. 3 more will be operational soon v. Insurance companies operate side-by-side takaful operators Background information on development in the region Indonesia, Brunei and Thailand have introduced Islamic banking Indonesia has set up its first Islamic bank in 1992 and now has two Islamic commercial banks (Bank Muamalat and the converted Mandiri Bank) and a few rural banks operating on Shariah principles Brunei established in 1993 its first Islamic Bank, Islamic Bank of Brunei, followed by the converted Islamic Development Bank of Brunei in 2000 State-owned Krung Thai Bank has launch ed Islamic banking services for the first time in the country , making it be the first commercial bank in the country to launch the services (c urrently, only the Government Savings Bank provides Islamic banking services in Thailand ) The Thai Bank for Agriculture and Agricultural Cooperative ha s opened 30 branch offices in 14 provinces for its special banking service based on the Islamic principle Labuan IOFC has five Islamic offshore banks and investment offshore banks (including Bank Islam, Bank Muamalat, Al Hidayah and Rusd)
In Malaysia’s dual financial system:- i. Islamic banks operate side-by-side conventional banks ii. conventional banks offering Islamic banking services iii. several conventional banks with windows also have Islamic branches iv. To date, 3 conventional banks (RHB, BCB & HL) have set up Islamic banking subsidiaries within the banking groups. 3 more will be operational soon v. Insurance companies operate side-by-side takaful operators Background information on development in the region Indonesia, Brunei and Thailand have introduced Islamic banking Indonesia has set up its first Islamic bank in 1992 and now has two Islamic commercial banks (Bank Muamalat and the converted Mandiri Bank) and a few rural banks operating on Shariah principles Brunei established in 1993 its first Islamic Bank, Islamic Bank of Brunei, followed by the converted Islamic Development Bank of Brunei in 2000 State-owned Krung Thai Bank has launch ed Islamic banking services for the first time in the country , making it be the first commercial bank in the country to launch the services (c urrently, only the Government Savings Bank provides Islamic banking services in Thailand ) The Thai Bank for Agriculture and Agricultural Cooperative ha s opened 30 branch offices in 14 provinces for its special banking service based on the Islamic principle Labuan IOFC has five Islamic offshore banks and investment offshore banks (including Bank Islam, Bank Muamalat, Al Hidayah and Rusd)
Total Islamic banking assets increased to RM113.5 billion , which accounted for 11.6% of the total assets in the banking system. The Islamic deposits and financing increased to RM85.0 billion and RM67.5 billion to constitute 11.6% and 15.7% respectively of the total amounts in the banking system. The takaful sector sustained a steady growth momentum, assets increased to RM6.2 billion , capturing 5.9 % of the total assets of the insurance sector. Market penetration of the takaful sector increased from 5.1% in 2004 to 5.9% as at March 2005. The Islamic money market registered a monthly turnover of RM21 billion in terms of trading and investment activities. Islamic private debt securities (PDS) accounted for 40% of the total outstanding PDS . A significant development in the mortgage securities segment was the issuance of the first Islamic residential mortgage backed securities based on musyarakah concept by Cagamas MBS Berhad , a special purpose company established by the Cagamas Berhad. The total issuance of this securities amounted to RM2.05 billion , of which the underlying assets are represented by the government’s Islamic house financing.
Three underlying Islamic principles in takaful i.e.: AL-TAKAFUL - the pact among a group of participants, reciprocally guaranteeing each other against loss or damage that may befall anyone of them AL-MUDHARABAH - is a commercial profit sharing contract between the provider of fund i.e. the participants and the entrepreneur who conducts the business i.e. the takaful company. If profits made, it is shared between the participants and the company after the obligation of assisting fellow participants has been fulfilled AL-TABARRU’ - an agreement by a participant to relinquish as donation a certain proportion of the takaful contribution that he agrees to pay, thus enabling him to fulfil obligation of mutual help should anyone of his fellow participants suffers a defined loss al-tabarru’ eliminates the element of uncertainty in a takaful contract whereby, in the event of a loss, the fellow participant who received the compensation knows the source of the loss coverage is definitely from the al-tabarru’ fund the operation of takaful is confined within the &quot; tijari &quot; sector or popularly known as the commercial sector the transactional aspect of the commercial activity of takaful must be subject to the Islamic contractual laws to ensure its compliance with the Syariah
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