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Introduction to Islamic Finance
Islamic finance refers to a system of finance that complies with Islamic law. The underlying principles that govern Islamic banking are mutual risk and profit sharing between parties, the assurance of fairness for all and that transactions are based on an underlying business activity or asset.
 
These principles are supported by Islamic finance’s core values in which activities that cultivate entrepreneurship, trade and commerce, and bring societal development or benefit is encouraged. Activities that involve interest (riba), gambling (maisir) and speculative trading (gharar) are prohibited.
 
Through the use of various Islamic finance concepts such as ijarah (leasing), mudharabah (profit sharing), musyarakah (partnership), financial institutions have a great deal of flexibility, creativity and choice in the creation of Islamic finance products. Furthermore, by emphasising that transactions be supported by genuine trade or business related activities, Islamic finance sets a higher standard for investments and promotes greater accountability and risk mitigation.
 
Islamic finance has grown tremendously since its inception over 30 years. According to global financial intelligence group, The Banker, there are 614 Islamic financial institutions worldwide across 47 countries, The Top 500 Islamic Financial Institutions (TIFI) reported the global total of Shariah-compliant assets grew by 27.6% to reach USD639.1billion.
 
The enactment of the Islamic Banking Act 1983 enabled the country's first Islamic Bank to be established and thereafter, with the liberalisation of the Islamic financial system, more Islamic financial institutions have been set up.
 
As at end 2008, Malaysia's Islamic banking assets reached USD72.5 billion with an average growth rate of 20% annually.
 
Today, Malaysia's Islamic finance sector continues to grow rapidly, supported by an environment that is renowned for continuous product innovation, a diversity of financial institutions from across the world, a broad range of innovative Islamic investment instruments, a comprehensive financial infrastructure and the implementation of global regulatory and legal best practices.
 
Malaysia has also placed a strong emphasis on human capital development alongside the growth of the Islamic financial industry to ensure the availability of Islamic finance talent. All of these value propositions have transformed Malaysia into one of the most viable Islamic banking markets in the world.
 
Rapid liberalisation in the Islamic finance industry, coupled with facilitative business environment has encouraged foreign financial institutions to make Malaysia their destination of choice to conduct Islamic banking business. This has created a diverse and growing community of local and international financial institutions.
 
Currently, Malaysia has a significant number of full-fledged Islamic banks including several foreign owned entities; conventional institutions who have established Islamic subsidiaries and also entities who are conducting foreign currency business. All financial institutions are given permission to conduct both ringgit and non-ringgit businesses.
 
Malaysia continues to progress and to build on the industry by inviting foreign financial institutions to establish international Islamic banking operations and conduct business in foregin currency.