ISLAMIC BANKING AND FINANCE: MALAYSIA

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ISLAMIC BANKING AND FINANCE MALAYSIAS
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
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MALAYSIA AT A GLANCE

• Population 26.1 m
• Muslim 15.4 m (59)
• Strong GDP growth
• 1st quarter 2006 5.3
• Low inflation

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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

4
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

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STAGES OF DEVELOPMENT
Gradual and pragmatic
Milestones
1969
1983
1993
2003
Pilgrimage Fund Board
Bank Islam Malaysia Bhd.
Bank Muamalat Malaysia Bhd.
Foreign Islamic banks
Full-fledged 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.
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CONVENTIONAL BANKS WITH ISLAMIC WINDOW
. total segregation of funds to meet Shariah
requirement

• Dedicated Islamic Banking Division
• Dedicated minimum capital as Islamic Banking Fund
• Separate clearing account with the Central Bank
• Separate cheque clearing system
• Separate submission of statistical reports in
  Financial Inst. Statistical System on monthly
  basis
• Additional disclosure of Islamic banking
  portfolio in financial statements

7
DEVELOPMENTAL FOCUS
Institutional Regulatory development
Enhancement of knowledge and expertise
Product and market development
Legal and Shariah framework
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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

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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
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COMPREHENSIVE ISLAMIC FINANCIAL SYSTEM
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VISION TO BECOME ISLAMIC FINANCIAL HUB

• Sustaining Malaysias 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

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LEADING INITIATIVES IN ISLAMIC FINANCE


for global integration
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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 industrys needs


Other training providers
Institutions of higher learning
Meeting the education needs of all levels of
Islamic finance practitioners
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CIFP PROGRAMME MODULES
Part 1 (Building Knowledge) Part 2 (Building Skills) Part 3 (Actual Work)
Islamic Economics and Finance Theory Ethics Islamic Financial Institutions and Markets Islamic Finance Regulations and Governance Applied Shariah in Financial Transactions Deposits Mobilization and Financing Management Wealth Planning and Management ASSOCIATE MEMBER Common Modules Structuring Financing Requirements Issuing Managing Islamic Securities Shariah Audits and Compliance Customer Relationship Management Issues in Islamic Financial Institutions Markets Specialized (Banking) Modules Deposit Financing Practices of Islamic banks Managing Islamic Banks Treasury and Risk Management for Islamic Banks Legal aspects of Deposits Financing Specialized (Takaful) Modules Managing Takaful Institutions Risk Management in Takaful Operational Aspects of Takaful Actuarial Concepts Practices PROFICIENT MEMBER Articleship PRACTISING MEMBER
Pedagogical approach Self-study (on-site and online learning), exams, case studies, simulation Pedagogical approach Self-study (on-site and online learning), exams, case studies, simulation Hands-on activities role play
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Islamic banking and finance will emerge
as a force to be reckoned with in shaping the
future development of global finance
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INTERNATIONAL DEVELOPMENT IN ISLAMIC FINANCE

• Presently
• Rapid growth of Islamic banking in the global
  financial world
• Various parts of the world are actively promoting
  Islamic banking and finance in their respective
  jurisdictions
• Emergence of global conventional players
  venturing into Islamic financial activities

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COMPREHENSIVE ISLAMIC FINANCIAL SYSTEM
ISLAMIC BANKING FINANCE IN MALAYSIA
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MALAYSIAS PARALLEL DUAL FINANCIAL SYSTEM
Conventional banks
Islamic banks
Conventional banks
window
Conventional banks
Islamic Banking Subsidiaries
Insurance Companies
Takaful Operators
Conventional financial system Islamic
financial system
ISLAMIC BANKING FINANCE IN MALAYSIA
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GROWTH OF ISLAMIC BANKING AND FINANCE

• Market share of Islamic banking sector (as at
  March 2006)
• Assets 11.6 or RM113.5 b
• Deposits 11.6 or RM85.0 b
• Financing 15.7 or RM67.5 b
• Growing at 19 p.a. since 2000
• Market share of takaful sector (as at March 2006)
• Assets 5.9 or RM6.2 b
• Market 5.9
• penetration
• Performance of Islamic financial markets (as at
  March 2006)
• Active money market activities
• monthly trading investment turnover of RM21
  billion
• Wide range capital market investment avenue

Islamic Banking Assets
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THANK YOU
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CHARACTERISTICS OF 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
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INVESTMENT ACCOUNTS
BANK
DEPOSITORS/ INVESTORS
INVEST FUNDS
(MUDHARABAH)
30
Pre-agreed Profit- Sharing Ratio
FINANCING AND INVESTMENT ACTIVITIES
70
PROFIT
LOSS
100
ISLAMIC BANKING FINANCE IN MALAYSIA
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EXAMPLES OF ISLAMIC CONTRACTS
Murabahah
Bai bithaman ajil
Mudharabah
Musyarakah
Bai al salam
Istisna
Ijarah
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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
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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
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Concepts Based on.

• TAKAFUL
• (e.g. Family, General)

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)
Commercial profit sharing contract between
participants and takaful operator
PROFIT SHARING ON SURPLUS
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2 Models Mudharabah or Wakalah
x
Surplus on Maturity
Participants
x
Contributions
Wakalah fees
Participants Risk Account (PRA)
Participants Account (PA)

• Retakaful
• Reserves
• Claims

Less
Investment Profit
x
Surplus/ (Deficit)
x
100-x
100 -x
Takaful Operators
Less
Operating Expenses
ISLAMIC BANKING FINANCE IN MALAYSIA