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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. MALAYSIA AT A GLANCE.

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islamic banking and finance malaysia s experience and achievements

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

malaysia at a glance
MALAYSIA AT A GLANCE
  • Population – 26.1 m
    • Muslim – 15.4 m (59%)
  • Strong GDP growth
    • 1st quarter 2006 5.3%
  • Low inflation
slide3

WHY ISLAMIC BANKING IS IMPORTANT?

  • In response to the needs of Muslim community
  • Acts as a catalyst to fill the gap to mobilise funds for productive purposes, in particular for Muslim communities
  • Significant untapped business potential
  • Proven to be a viable financial intermediation channel in supporting economic growth
  • Fulfilled the demands of not only the Muslims but non-Muslim population as well
slide4

MALAYSIAN ISLAMIC FINANCIAL SYSTEM

  • Comprehensive Islamic financial system covering all financial sectors
    • operating in parallel with conventional financial system
  • Diversities of players
    • Twelve full-fledged Islamic banking institutions
      • 2 domestic Islamic banks
      • 3 full-fledged foreign owned Islamic banks
      • 7 Islamic banking subsidiaries
    • 9 takaful operators
  • Sound and robust Islamic financial institutions governed by international best practices
  • Rapid growth with wide range of product and services
    • Retail, corporate & investment banking
  • Internationally integrated with international Islamic financial system
slide5

STAGES OF DEVELOPMENT

Gradual and pragmatic

Milestones

1969

1983

1993

2003

Pilgrimage Fund Board

Full-fledged Islamic banks

Bank Islam Malaysia Bhd.

Bank Muamalat Malaysia Bhd.

Foreign Islamic banks

Conventional banks offer Islamic window

Islamic subsidiary

Islamic money markets

Takaful Operators

Syarikat Takaful Malaysia Bhd.

Takaful Nasional, Mayban Takaful, Takaful Iklhas, Commerce Takaful

..achieved significant milestones in building comprehensive and integrated Islamic financial system with diversity of players….

slide6

DEVELOPMENTAL FOCUS

Institutional & Regulatory

development

Enhancement of

knowledge and

expertise

Product and market

development

Legal and Shariah

framework

slide7

ENABLING INFRASTRUCTURE

  • Legal
  • Islamic Banking Act, 1983
  • Takaful Act, 1984
  • Government Investment Act, 1983
  • Legal Redress Framework
  • Shariah
  • Two Shariah governing committees
    • National Shariah Advisory Council at Bank Negara Malaysia
    • Shariah committee at Islamic financial institution
  • Regulatory
  • Adopted international standards
slide8

ROLE OF BANK NEGARA MALAYSIA

Islamic financial system

Islamic Banking Act 1983

Takaful Act

Islamic banks

Takaful operators

Non-banking institutions

Money market

Capital market

Supervisory objective

  • Financial stability
  • Consumer protection

BNM

  • Separate clearing and settlement system
  • Liquidity management
    • Specific monetary policy instruments

Malaysia Deposit Insurance Corporation

Customer

Dispute resolution

  • Judicial system
  • KL Regional Arbitration Centre
  • Financial Mediation Bureau

Conventional banks

Insurance companies

Non-banking institutions

Money market

Capital market

Conventional financial system

BAFIA 1989

Insurance Act 1996

comprehensive islamic financial system

Institutional development

  • Domestic & foreign Islamic banks, Islamic banking windows
  • Islamic capital market players
  • Offshore players
  • Liberalised equity policy for Islamic subsidiaries and takaful

Legal, Shariah & Reg

Product & market

  • Comprehensive legislation
  • Dispute resolution
    • Dedicated high court
    • Arbitration centre
    • Financial Mediation Bureau
  • Tax neutrality policy
  • Shariah Advisory Council and its governance
  • International best practices - IFSB
  • Comprehensive product range in banking, takaful & financial markets
  • Global sukuk - sovereign & multilateral institutions

Knowledge and education

  • Consumer Education & Awareness Programmes
  • Complete training infrastructure
    • INCEIF, IBFIM & ICLIF
  • International conferences
  • Fund for Shariah Scholars
    • Promote Shariah dialogues
    • Scholarship
    • Research grant
COMPREHENSIVE ISLAMIC FINANCIAL SYSTEM
slide10

VISION TO BECOME ISLAMIC FINANCIAL HUB

  • Sustaining Malaysia’s competitive edge as leading IFC following:-
    • progressive development
    • achievements of domestic mkt
    • integration & liberalisation
  • Moving forward, hub envisioned in Financial Sector Master Plan
  • Growing interest from Middle East investors now seen
  • Opportunity to improve trade & investment ties, and linkages between Malaysia & other parts of the world
slide11

International Islamic standard-setting body

Malaysia as international hub/ Labuan’s niche in Islamic finance

2002

Financial Sector Master Plan

Islamic Financial Services Board

Foreign Islamic FIs, 49% foreign equity in Islamic banks and takaful companies

2003

Financial liberalisation

Malaysia global sukuk

First global sovereign sukuk

Promotion of trade, investment, takaful, financial market & ICT

Financial Market Islamic Index

Attract international investors

2004

Malaysia-IDB MoU

Islamic securities/ Sukuks by multilateral dev’t banks

Greater Shariah harmonisation

2005

Shariah scholars dialogue

Forex liberalisation

LEADING INITIATIVES IN ISLAMIC FINANCE

… for global integration

slide12

Human Capital Development in Islamic Finance

IBFIM

INCEIF

ICLIF

Level of knowledge:

Intermediate & advanced

Focus:

International professional certification and post-graduate programs

Focus:

Leadership programs

Level of knowledge:

Elementary

Focus:

Short training courses to meet industry’s needs

Other training providers

Institutions of higher learning

Meeting the education needs ofall levelsof Islamic finance practitioners

slide14

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

slide16

CHARACTERISTICSOF ISLAMIC BANKING

  • Islamic financial transactions based on Shariah principles:
    • Contract (aqad)
    • No elements of usury (riba)
    • No elements of uncertainty (gharar) and gambling (maisir)
  • Multi-faceted roles based on nature of financial transactions engagement:

ISLAMIC FINANCIAL CONTRACTS

    • Savings and Current Accounts
    • Investment Account
    • Asset Creation

ISLAMIC BANKING &

FINANCE IN MALAYSIA

slide17

ISLAMIC BANKING OPERATIONS

Sources of funds

Application of funds

Profit

Distribution of profit

Non-mudharabah

deposits

General

pool

Depositors

Bank

Mudharabah

deposits

Specific account I

Depositors

SHF

or

Specific account II

ISLAMIC BANKING &

FINANCE IN MALAYSIA

slide18

ASSETS

Cash & cash equivalents

Sales receivables

Investment in securities

Investment in leased assets

Investment in real estate

Equity investment in joint ventures

Equity investment in capital ventures

Inventories

Other assets

Fixed assets

STYLIZED BALANCE SHEET OF AN IIFS

LIABILITIES

Current accounts

Other liabilities

Equity of Profit Sharing Investment Accounts (PSIA)

Profit sharing investment accounts

Profit equalization reserve

Investment risk reserve

Owners’ Equity

takaful e g family general

Takaful

Concepts Based on…….

A contract among participants to reciprocally help each other against defined loss

Agreement to relinquish certain portion of contribution as donation to fulfil obligation of mutual help and joint guarantee

TABARRU’

(Donation)

TAKAFUL

(e.g. Family, General)

Commercial profit sharing contract between participants and takaful operator

PROFIT SHARING ON SURPLUS

slide20

Takaful Model

2 Models: Mudharabah or Wakalah

x%

Surplus on Maturity

Participants

x%

Wakalah fees

Contributions

Participants’ Account (PA)

Participants’ Risk

Account (PRA)

  • Retakaful
  • Reserves
  • Claims

Less

Investment Profit

x%

x%

Surplus/ (Deficit)

100%-x%

100% -x%

Takaful Operators

Less

Operating Expenses

ISLAMIC BANKING &

FINANCE IN MALAYSIA