Sector Summary

Islamic Finance


Historical overview

The Malaysian Islamic finance sector was originally established to satisfy the need for a savings option in line with Sharia law. As a result, the country’s first Islamic financial institution, the Muslim Pilgrims Savings Corporation, was established in 1963. Six years later, in 1969, this organisation was merged with the Pilgrims Control Office to become the Pilgrims Management and Fund Board, which is more commonly known as Tabung Haji. The original objective of Tabung Haji was to develop a savings plan offering in order to provide welfare and protection services to pilgrims undertaking the hajj, or pilgrimage to Mecca; one of the key tenets of the Islamic faith.

Following the enactment of the Islamic Banking Act 1983, the first fully fledged Islamic bank was established in Malaysia, and financial institutions increasingly began to develop their own Sharia-compliant products and services. The incorporation of takaful companies under the Takaful Act 1984, and the subsequent launch of the Islamic Interbank Money Market (IIMM) in 1994, helped the dual financial system to flourish further. As a result, throughout the 1990s and early 2000s the Malaysian Islamic finance sector continued to evolve, primarily due to greater and more widespread liberalisation. In turn, this ensured a continued offering of increasingly complex products and the entrance of foreign players into the country, which was accompanied by further growth. To this end, Malaysia’s global sukuk outstanding share increased from US$7.62 billion in 2003 to US$172.8 billion in total. The passage of the Financial Services Act 2013 (FSA) and the Islamic Financial Services Act 2013 (IFSA) further enhanced the regulatory framework governing the segment in Malaysia. Moreover, these legislative acts have been fundamental in contributing to the sector in relation to its ambition to serve as a global and regional hub for Islamic finance.

 

Timeline


1963 Establishment of Muslim Pilgrims Savings Corporation

1969 Creation of Pilgrims Management and Fund Board (Tabung Haji)

1983 Islamic Banking Act

1984 Takaful Act

1985 Establishment of first takaful company

1990 Entrance of first foreign Islamic bank

1994 Launch of the Islamic Interbank Money Market (IIMM)

2006 Creation of the Malaysia International Islamic Financial Centre (MIFC)

2013 Financial Services Act (FSA) and Islamic Financial Services Act (IFSA)


 

State of the market

Malaysia is globally recognised for its sophisticated and highly developed Islamic finance sector. The combination of robust regulatory Sharia and legal frameworks, with a deep primary and active secondary sukuk market has contributed to the country’s emergence as an Islamic finance hub for the region.

Malaysia has taken a number of significant steps to support sector growth in distinct areas. For example, the country has transformed itself into the world’s largest sukuk market, holding a market share of 46.6 per cent of total issuances in 2016. In terms of Islamic assets under management (AUM), as of 2015 Malaysia was second only to Saudi Arabia, accounting for 28 per cent of the global total. And in regard to the insurance industry, in the first half of 2016, the expanding subsector of family takaful made up almost two-thirds of the entire takaful segment and 30 per cent of the life insurance market in terms of new business premiums.

The enactment of the FSA and IFSA in 2013 has propelled financial institutions in Malaysia, and the financial sector overall, toward greater transparency, innovation and risk-sharing. As a result, both the conventional and Islamic financial sectors continue to experience a significant period of evolution.

 

How the market operates

Bank Negara Malaysia (BNM)

The Central Bank of Malaysia, BNM, is responsible for overseeing the conduct of monetary policy, as well as establishing and maintaining the stability of financial sector infrastructure. The statutory body, which is wholly owned by the State, reports directly to the Minister of Finance. In line with the provisions of the Financial Services Act and Islamic Financial Services Act, BNM is responsible for overseeing all financial groups by introducing the concept of a Financial Holding Company (FHC), as well as promoting compliance with Sharia principles in accordance with its role as Sharia regulator.

Malaysia International Islamic Financial Centre (MIFC)

The MIFC was established with the purpose of promoting Malaysia as a hub for Islamic finance. It consists of a network of financial sector regulators that include Bank Negara Malaysia, the Securities Commission Malaysia, and numerous government ministries and agencies, as well as industry players from the Islamic banking, takaful, retakaful and Islamic capital market segments. Among the focus areas of MIFC are sukuk origination, Islamic fund and wealth management, international Islamic banking, international takaful and human capital development.

Ministry of Finance (MOF)

The MOF is responsible for government expenditure and revenue raising, as well as developing economic policy and preparing the federal budget. In addition, the ministry oversees financial legislation and regulation.

Securities Commission Malaysia (SC)

The SC was established under the Securities Commission Act 1993 and is the sole agency in Malaysia tasked with the regulation and development of capital markets. The statutory body, which reports to the Minister of Finance, is directly responsible for supervising and monitoring the activities of market institutions, as well as the regulation of all persons licensed under the Capital Markets and Services Act 2007.

Bursa Malaysia

A direct descendent of the very first stock exchange in Malaysia, Bursa Malaysia is an exchange holding company supervised by the Securities Commission Malaysia. Its principal activities are to provide and maintain the central marketplace and facility for buyers and sellers to transact business in shares, bonds and different types of securities of the companies listed on the stock exchange. It has several subsidiaries and affiliate companies and is governed by the Securities Industry Act 1983.

 

Investment climate

Malaysia is a highly attractive investment destination that boasts strong regulatory oversight of the Islamic finance segment, as well as an open economy with liberal investment policies. The government actively promotes the sector in a number of ways. For example, through an initiative of the Malaysia International Islamic Financial Centre, the authorities are seeking to foster institutional and individual investment in an effort to ensure the country remains a key player in the Islamic finance market. Furthermore, and in order to provide an equal footing for the growing hub with respect to traditional banking and finance products, the government has introduced a number of incentives aimed at increasing investment in Sharia-complaint products. These include various tax withholding and tax exemption schemes directed at Islamic banking, Islamic fund management companies and takaful businesses, including a special purpose vehicle (SPV) specifically relating to Islamic financing.

 

Main players and market share

As an epicentre for Islamic finance, Malaysia hosts a large number of Islamic finance operators offering a diverse range of services to customers. Important players operating in the Islamic banking sector include RHB Islamic Bank, CIMB Islamic and Maybank Islamic. In total, there are 16 fully fledged Islamic banks in the country, six of which are foreign. In terms of the growing takaful industry in the country, the sector is dominated by the family takaful segment. Regarding the primary actors in the national market, the key general/non-life insurance takaful players include AM General, Allianz General, MSIC and Etiqa, while the biggest companies in the life/family takaful segment are Great Eastern, AIA and Prudential.