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The Evolution of Islamic Finance in Malaysia
Islamic finance in Malaysia began with an Islamic savings institution known as the Pilgrims Management and Fund Board (Lembaga Tabung Haji) in 1969. As awareness of Shariah-compliant finance increased, a step-by-step approach was implemented to develop a comprehensive Islamic financial industry.
 
The first full-fledged Islamic bank1 was established on the back of the Islamic Banking Act 1983. The introduction of Islamic “windows,” which allowed conventional financial institutions to offer Shariah- compliant banking products and services, enabled the Islamic banking industry to grow organically. This further facilitated the creation of a dual-financial system, in which Islamic finance operates alongside the conventional financial system.
 
The launch of the Islamic interbank money market in 1994 allowed the Islamic banking industry to continue to flourish. Takaful companies were subsequently incorporated under the Takaful Act 1984. Meanwhile, the Islamic financial industry progressively liberalized over the years, allowing more foreign participation.
 
Notable milestones in the evolution of Malaysia’s Islamic financial industry include the first sukuk issued by a foreign-owned company2 in 1990, the entry into Malaysia of the first foreign Islamic bank3 from the Middle East in 2005 and establishment of the country’s first Islamic banking subsidiary4 of a locally incorporated foreign bank in 2008. 
 
The issuance of licences to foreign Islamic financial institutions promoted healthy competition and added to the dynamism of the Islamic financial industry. Robust market demand was met with highly innovative Shariah-compliant products.
 
Over the years, Malaysia’s Islamic capital market grew deeper and broader as multilateral financial institutions and multinational corporations found Shariah-compliant products such as sukuk to be an attractive alternative means of raising capital.
 
Progressive liberalisation of the country’s foreign exchange administration rules further buoyed the sukuk market.
 
Other pioneering innovations that were introduced include the first global sovereign sukuk in 2002 and the first Islamic real estate trust fund (I- REIT)5 in 2006.
 
These products received wide acceptance and proved the effectiveness and competitiveness of Islamic finance as a form of financial intermediation.
 
After more than three decades, Malaysia’s Islamic financial industry is now home to a critical mass of international and domestic financial institution and a diverse range of innovative products and services. Malaysia’s Islamic financial community also started globalising their business offering to strengthen economic and financial linkages with other global financial centres.
 
In 2006, the MIFC initiative was launched to position Malaysia as an international Islamic financial hub. Malaysia is the place to foster Islamic finance business linkages especially within the Asian region, and to take advantage of pro-business policies and market incentives.
 
Malaysia hosts the Islamic Financial Services Board (IFSB). This international prudential standard-setting organisation promotes soundness and stability of the Islamic financial industry by issuing global prudential standards and guiding principles. Its international membership base includes regulatory and supervisory authorities, intergovernmental organisations and financial market players.
 
Malaysia continues to contribute to the strengthening and soundness of global Islamic finance. Recent initiatives include participating in a Task Force on Liquidity Management and a Task Force on Islamic Finance and Global Financial Stability. Both these task forces were established by the IFSB and the Islamic Development Bank (IDB). The outcome of these task forces led to the establishment of the International Islamic Liquidity Management Corporation (IILM) to facilitate global cross-border liquidity management; a report with recommendations to strengthen the global financial infrastructure, and the formation of Islamic Financial infrastructure, and the formation of the Islamic Financial Stability Forum.

References: (1) Bank Islam; (2) Shell MDS; (3) Kuwait Finance House (Malaysia); (4) HSBC Amanah Malaysia; (5) Al-’Aqar