5 Contributing Factors Behind Malaysia’s Prominence in the World of Islamic Finance

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5 Contributing Factors Behind Malaysia’s Prominence in the World of Islamic Finance

Malaysia is one of the most important global players in the Islamic finance ecosystem. As of 2017, the country ranks third after Iran and Saudi Arabia with total assets worth $204.4 billion under the Islamic finance market.

While Thomson Reuters recognised Malaysia as the most developed Islamic finance market for the fifth consecutive year, the Islamic Finance Country Index ranked it first for international Islamic finance leadership. It is, thus, not surprising that Bank Negara Malaysia aims for 40 per cent market share in total banking assets for the industry by 2020.

But how did it all happen, you might wonder. Let us take you through 5 contributing factors which sealed Malaysia’s prominent position in the world of Islamic finance.

1. Inclusive and innovative products

The Malaysian Islamic finance system benefits from an integrated approach as it leverages the strength of its dual banking system. The sector cross-promotes Islamic banking products to the existing conventional banking customers.

The Islamic banks in Malaysia focus on the entire market’s needs and development as they provide a number of competitive products and services. Such features make Islamic financial instruments attractive options for both local and foreign investors.

Also, the micro-financing offered by Islamic banks helps in raising the living standards of low-income households. They also play a crucial role in increasing the number of small and medium entrepreneurs in the country. In fact, the Malaysian government-mandated Amanah Ikhtiar Malaysia (AIM), which offers micro-financing, saw near-to-perfect repayment at a whopping 95% rate!

Related: Opinion: 5 Reasons to Choose Islamic Banking over Conventional Banking

2. Government and regulatory support and standardisation

The Bank Negara Malaysia has developed an extensive roadmap for Islamic banking in the country. As a result, it formulated possibly the world’s most structured and advanced Syariah Governance Framework (SGF). The effective SGF enhances stakeholders’ certainty, integrity and confidence in the system.

In 1997, the country formed the National Syariah Advisory Council which ensures the banks’ adherence to the principles of Islam. In 2009, the Muamalat Court began operations at the Kuala Lumpur High Court. The body ensures greater efficiency, strengthens accountability and builds a contract-based regulatory framework.

Malaysia also enacted the Development Financial Institutions Act 2002 and Islamic Financial Services Act 2013 to regulate the industry. In 2003, the Islamic Financial Services Board (IFSB) started operating in Kuala Lumpur. The international body formulates standards to guide Islamic banks, regulators and supervisory agencies worldwide.

Also, the Association of Syariah Advisors in Islamic Finance (ASAS) launched the Certified Syariah Advisor (CSA) in 2017 to ensure a high level of professionalism in Syariah professional works.

Related: Opinion: 5 Reasons Why Islamic Banking Makes Sense for Everyone

3. Conducive local landscape and strong industry involvement

Malaysia adopts a holistic approach to the implementation of Islamic finance. The environment is vibrant with a diverse set of industry players. These include the BNM, independent advisory governmental bodies, and financial institutions. Accountants, auditors, legal practitioners, and consumers complete the ecosystem.

The government aspired to turn Malaysia into a leading Islamic financial hub in the world. Islamic banks contributed to this vision by increasing their asset sizes and making them more retail-driven.

The BNM has worked with the industry players for over three decades now. The first full-fledged Islamic bank, Bank Islam Malaysia Berhad, started operation in 1983. Syarikat Takaful Malaysia Berhad, the first full-fledged takaful company, followed in 1984.

Commercial banks, merchant banks and finance companies started coming on board in 1993. They utilised the opportunity by offering Islamic banking products and services. This sparked an interest in Islamic banking among conventional banking customers. The purpose was to offer banking solutions to people while simultaneously fulfilling Syariah’s need for greater compliance.

Ten years later, these financial institutions progressed to become full-fledged Islamic banking subsidiaries.

In 2004, Bank Negara Malaysia issued Islamic banking licenses to three foreign banks — Kuwait Finance House (KFH), Al Rajhi Investment Bank, and Qatar Investment Group. As of today, there are 16 full-fledged licensed Islamic financial institutions in the country which includes five foreign-owned entities.

Related: 4 Key Differences Between Islamic Banking and Conventional Banking

4. Sustainable banking and the introduction of Value Based Intermediation

5 Contributing Factors Behind Malaysia’s Prominence in the World of Islamic Finance

Bank Negara Malaysia in Jalan Sultan Salahhudin, KL. Image source: Gwoeii/Shutterstock

Sustainable banking is the need of the hour and more and more consumers are realising this and seeking options. The asset-backed, equity-based and ethical financial approach of Islamic banking addresses the concerns as it promotes risk sharing, connects the financial sector with the real economy and works towards environment-friendly models. In fact, financial inclusion and social welfare are the cornerstones of Islamic finance.

As such, the sustainable banking model of Islamic financial institutions contributes to complete socio-economic development. It is in this context that BNM’s recent introduction of Value Based Intermediation (VBI) for Islamic banks becomes hugely significant and can be perceived as a major differentiator from conventional banks.

“VBI-oriented Islamic financial institutions can, and indeed should, also play an important role in mobilising resources to finance climate change mitigation and adaptation initiatives,” BNM governor Shamsiah Mohd Yunus said in her keynote address at the Global Islamic Finance Forum 2018 on October 3, reported The Star Online.

Thus, the BNM designed VBI to deliver the intended financing outcomes of the Syariah to the economy, community and the environment and will work towards ensuring sustainable returns for shareholders and protect their long-term interests.

Related: Takaful Insurance Explained: 10 Common Terms You Should Know

5. Human capital development

Malaysia emphasises human capital development and expertise in Islamic banking. The country fosters high-calibre Islamic finance professionals and Syariah advisors through several initiatives.

Malaysia set up the Islamic Banking and Finance Institute Malaysia (IBFIM), a training centre devoted to supplying a pool of Islamic finance professionals. The country also formed the International Centre for Education in Islamic Finance (INCEIF), the world’s first and only university dedicated to Islamic finance.

The International Syariah Research Academy for Islamic Finance (ISRA) further complements these two bodies. This research centre promotes Syariah-centric researches in Islamic finance.

Syariah scholars then formed the Association of Syariah Advisors. This body further stimulates the degree of professionalism and talent development within the Islamic finance eco-space. Various private and public providers offer academic courses, training and certification programmes. Diverse market players and training institutions also embark on strategic collaborations and partnerships. They strive to bridge the gap between talent development and the industry’s needs.

These five factors majorly contributed to Malaysia becoming a global hub for Islamic finance. The country has the comprehensive market infrastructure, robust regulatory framework, and dynamic participants to further fuel this growth.

You may also like: Your Ultimate Guide to Zakat on Income


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