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Islamic Finance Industry In Malaysia

Within a span of five years, Malaysian Islamic banking assets have nearly doubled, from RM303 billion (US $93 billion) in December 2009 to RM557 billion (US $171 billion) in December 2013

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Definition / Scope

  • Malaysia's Islamic banking assets touched US$65.6 billion, growing at an average rate of 18-20% annually. As of 2015, Islamic banking accounts for 25.7% share of the total banking assets in Malaysia, including DFIs.[1][2]
  • Quick liberalization in the Islamic finance industry, paired with conducive business environment has motivated global financial institutions, making Malaysia the top destination for conducting Islamic banking business, leading to a diverse and developing community of local and foreign financial institutions.[1]
  • In 2013, Malaysia passed the Islamic Financial Services Act, which encompasses the entire gamut of earlier regulations passed in Malaysia in relation to Islamic finance to manage operations within the country.
  • As other countries make a foray into Islamic finance, particularly Sukuk, Malaysia faces a threat as it faces challenges in terms of cost pricing and providing better returns to investors.    

Market Overview

  • Islamic finance is an alternate form of finance in which financial institutions, including banks and non-banking financial corporations, are regulated according to Shariah laws. The fundamental concepts of Islamic finance are the prohibition of dealing in interest (Riba’), as ordained in Shariah law, and risk-sharing for raising capital.[3]
  • Islamic finance agreements include (i) Mudarabah (profit and loss sharing contracts), (ii) Musharakah (partnership and jointcstock ownership), (iii) 'Ijarah/'ijar (Leasing) and (iv) ‘Salam and ‘Istisna (IslamicForwards).
  • Islamic investment channels include (i) Equities – only in case of companies not engaged in any haram (prohibited) activities, (ii) Fixed Income Funds – Retirement funds and Sukuk (bonds).
  • Takaful (Islamic insurance) is a cooperative fund, wherein investors contribute in syndicated funds, invested in a Shariah compliant manner. Funds are withdrawn to fulfill claims, with the rest disbursed among investors.
  • Malaysia leads in terms of global market share for Islamic finance assets, second only to Iran, followed by Saudi Arabia and UAE.[4]

Key Metrics

Metrics Value Explanation
Base Year 2016 Researched through internet


Market Risks

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Market Drivers

  • Product innovations, presence of foreign institutions, an array of innovative Islamic investment instruments, an extensive financial infrastructure and adoption of global best practices, both legal and regulatory, has led to rapid growth of Islamic finance in Malaysia.[5]
  • Malaysia has a well-instituted and distinguished competitive advantage in Islamic finance which is continually reinforced by developing regulations, favourable tax rules and, most significantly, supportive authorities within the country.[5]
  • In terms of talent development, Malaysia has 50 course providers and 18 universities offering degree programs. In terms of research papers, Malaysia bags the top spot with 100 plus peer-reviewed research papers published during the past three years.[6]

Regulatory Trends

  • Malaysia passed the Islamic Financial Services Act in 2013, built upon the earlier Islamic Banking Act of 1983 to oversee operations within the country.
  • The main objective of IFSA is to promote financial stability and compliance with the Shariah principles.[6][5]
  • Implementation of the Islamic Financial Services Act 2013 (IFSA) has been the driver of a new development phase in the country; IFSA consolidates various separate laws into one legislative model and has annulled the Islamic Banking Act 1983, the Takaful Act 1984, the Payment System Act 2003 and the Exchange Control Act 1953.[5]
  • The implementation of IFSA connotes the commitment by the government via the Central Bank to boost Malaysia’s status as an Islamic finance hub.[5]
  • IFSA will define the way for the evolution of an end-to-end Shariah confirming regulatory model, re-enforcing the effectiveness of Shariah rules and regulations in the operation of Islamic financial institutions.[5] 

Other Key Market Trends

  • Islamic finance has a strong foothold in Malaysia due to its 30 year presence in the country. Within a span of five years, Malaysian Islamic banking assets have nearly doubled, from RM303 billion (US $93 billion) in December 2009 to RM557 billion (US $171 billion) in December 2013.[5]
  • In 2013, Islamic banking assets constituted 25 percent of the total Malaysian banking system’s assets, compared to 19.6 percent in 2009. Total deposits in 2013 constituted 26.6 percent of the total Malaysian banking deposits, an increase of 5.9 percent versus 2009.[5]
  • Islamic financing represented 27.5 percent of total banking financing in 2013, from 21.6 percent in 2009.[5]
  • As of now, Malaysia has a substantial count of fully-fledged Islamic banks including various non-domestic entities; mainstream institutions who have established Islamic subsidiaries and also entities who are conducting foreign currency activity, with all institutions legally authorized to deal in both local and foreign business activities.[7]
  • The speedy liberalization of Malaysia's Islamic financial industry has promoted foreign institutions' involvement in Malaysia, thus producing a diverse and maturing community of domestic and international takaful players. Presently there are eight takaful operators and two retakaful operators, with five external participation from the UK, Bahrain, Germany and Japan. These takaful operators engage both in local and foreign currency business.[7]
  • Malaysia is also strongly focused on human capital advancement, in parallel with the maturing Islamic finance industry to ensure availability of Islamic finance talent.[7]

Market Outlook

  • Malaysia is on track to becoming an Islamic finance hub as its Islamic finance sector continues to record double-digit growth, with increasing presence in the global market.[8]
  • Institutions such as the Islamic Banking and Finance Institute of Malaysia (IBFIM) and International Centre for Education in Islamic Finance (INCEIF) have played their role in enhancing the knowledge of those in the existing workforce.[8]
  • The Islamic banking sector in Malaysia is set to transition into a more sophisticated market, spurred by evolving and forward-looking regulatory changes. The implementation of the Islamic Financial Services Act (IFSA) 2013 will change the industry and is a conscious effort by the regulator towards achieving end-to-end Shariah compliance.[9]
  • Malaysia continues to be a key Sukuk issuance market with more than US$25 billion worth Sukuk maturing in 2014.[9]
  • The Sukuk market in Malaysia will remain a significant source of funds for the Malaysian government and institutions alike, due to pricing and availability of investors. The market is also anticipated to appeal to increased foreign issuers, including from at least one Turkish financial institution.[9]

Key Market Players

  • Affin Islamic Bank Berhad
  • Al Rajhi Banking & Investment Corporation (Malaysia) Berhad
  • Alliance Islamic Bank Berhad
  • AmIslamic Bank Berhad
  • Asian Finance Bank Berhad
  • Bank Muamalat Malaysia Berhad
  • Bank Muamalat Malaysia Berhad
  • CIMB Islamic Bank Berhad
  • HSBC Amanah Malaysia Berhad
  • Hong Leong Islamic Bank Berhad
  • Kuwait Finance House (Malaysia) Berhad
  • Maybank Islamic Berhad
  • OCBC Al-Amin Bank Berhad
  • Public Islamic Bank Berhad
  • RHB Islamic Bank Berhad
  • Standard Chartered Saadiq Berhad


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