ISLAMIC BANKING AND FINANCE: MALAYSIA’S EXPERIENCE AND ACHIEVEMENTS

1. 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

2. MALAYSIA AT A GLANCE • Population – 26.1 m • Muslim – 15.4 m (59%) • Strong GDP growth • 1st quarter 2006 5.3% • Low inflation

3. 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

5. 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….

6. DEVELOPMENTAL FOCUS Institutional & Regulatory development Enhancement of knowledge and expertise Product and market development Legal and Shariah framework

7. 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

8. 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

9. 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

10. 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

11. 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

12. 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

13. CIFP PROGRAMME MODULES

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

15. THANK YOU

16. 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

17. 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

18. 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

19. 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

20. 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