Islamic Banking & Takaful

Islamic banking refers to a system of banking that complies with Islamic law also known as Shariah law. The underlying principles that govern Islamic banking are mutual risk and profit sharing between parties, the assurance of fairness for all and that transactions are based on an underlying business activity or asset.

These principles are supported by Islamic banking's core values whereby activities that cultivate entrepreneurship, trade and commerce and bring societal development or benefit is encouraged. Activities that involve interest (riba), gambling (maisir) and speculative trading (gharar) are prohibited.

Through the use of various Islamic finance concepts such as ijarah (leasing), mudharabah (profit sharing), musyarakah (partnership), financial institutions have a great deal of flexibility, creativity and choice in the creation of Islamic finance products. Furthermore, by emphasising the need for transactions to be supported by genuine trade or business related activities, Islamic banking sets a higher standard for investments and promotes greater accountability and risk mitigation.

Islamic finance has grown tremendously since it first emerged in the 1970's. Current global Islamic financial assets and assets under management have reached USD2.88 trillion with annual growth of 14% as at December 2019. ¹

There are over 1500 Islamic financial institutions worldwide across 80 countries. According to the Asian Banker Research Group, the world's 100 largest Islamic banks have set an average asset growth rate of 13%. ³

Malaysia's Islamic finance industry has been in existence for over 30 years.  The enactment of the Islamic Banking Act 1983 enabled the country's first Islamic Bank to be established and thereafter, with the liberalisation of the Islamic financial system, more Islamic financial institutions have been established

Malaysia's long track record of building a successful domestic Islamic financial industry of over 30 years gives the country a solid foundation - financial bedrock of stability that adds to the richness, diversity and maturity of the financial system. Presently, Malaysia's Islamic banking assets reached USD 254 billion as at December 2019 with total funds placed with Islamic banks now represent 38.0% of total banking sector deposits. ⁴

Today, Malaysia's Islamic finance continues to grow rapidly, supported by a conducive environment that is renowned for continuous product innovation, a diversity of financial institutions from across the world, a broad range of innovative Islamic investment instruments, a comprehensive financial infrastructure and adopting global regulatory and legal best practices. Malaysia has also placed a strong emphasis on human capital development alongside the development of the Islamic financial industry to ensure the availability of Islamic finance talent. All of these value propositions have transformed Malaysia into one of the most developed Islamic banking markets in the world.

Rapid liberalisation in the Islamic finance industry, coupled with facilitative business environment has encouraged foreign financial institutions to make Malaysia their destination of choice to conduct Islamic banking business. This has created a diverse and growing community of local and international financial institutions.

Currently, Malaysia has a significant number of full-fledged Islamic banks including several foreign owned entities; conventional institutions who have established Islamic subsidiaries and also entities who are conducting foreign currency business. All financial institutions are given permission to conduct both ringgit and non-ringgit businesses.

Malaysia continues to progress and to build on the industry by inviting foreign financial institutions to establish international Islamic banking business in Malaysia to conduct foreign currency business.   

The domestic Islamic financial institutions may also apply for ICBU, a dedicated division to conduct foreign currency business. ICBU will also be accorded various tax incentives and privileges that lead to reduction in the cost of doing business and expedient market entry in foreign currency Islamic finance business. For more information on the establishment and application procedure for ICBU, please contact MIFC Secretariat.

Early development of takaful industry

• The development of the takaful industry in Malaysia in the early 1980s was inspired by the prevailing needs of the Muslim public for a Shariah-compliant alternative to conventional insurance, as well as to complement the operation of the Islamic bank that was established in 1983.?
• It was, to a large extent, triggered by the decree issued by the Malaysian National Fatwa Committee which ruled that life insurance in its present form is a void contract due to the presence of the elements of Gharar (uncertainty), Riba’ (usury) and Maisir (gambling).

State of global takaful industry (no of institutions, total asset and growth)

• There are over 300 takaful operators worldwide across 47 countries.
• Global takaful assets grew 10% to US$51 billion in 2019.

Current asset size of Malaysia takaful industry

Presently, Malaysia's takaful assets reached USD 9.1 billion as at December 2019 with the share of takaful net contributions as a proportion of the total insurance and takaful business increased further to 18.3%.

1 Source : ICD-REFINITIV, Islamic Finance Development Report 2020, “Progressing Through Adversity”)
2 Ibid
3 Source: ICD-REFINITIV, Islamic Finance Development Report 2020, “Progressing Through Adversity”), The Asian Banker : Strongest Islamic Banks, theasianbanker.com
4 Source : Bank Negara Malaysia, Financial Stability Review – Second Half 2019, Annual Report 2020
5 Source : Malaysian Takaful Industry 1984-2004 in conjunction of Takaful Industry 20th anniversary, Bank Negara Malaysia
6 Source : ICD-REFINITIV, Islamic Finance Development Report 2020, “Progressing Through Adversity”
7 Source : Bank Negara Malaysia, Financial Stability Review – Second Half 2019, Annual Report 2020