Malaysia And Islamic Finance

218746-banking-1311798400-473-640x480As the popularity of Islamic finance in Malaysia rises, so does the consumer’s awareness and understanding of what Islamic finance is, how it works, and how it differs from conventional banking.

In fact, Islamic finance in Malaysia is growing by leaps and bounds and at such a rapid pace that the world has begun to take notice. A World Islamic Banking Competitiveness Report 2015-16 published by Ernst and Young shows that Malaysia is among the most competitive countries for Islamic finance.

Malaysia’s market share took a short dip between 2014 and 2016, but it still commands a strong 15.5% of the global market. Other countries appear to have more annual growth; however, this is likely due to the smaller nature of the markets. As opposed to Malaysia’s more mature Islamic finance economy.

CountryFive-year compound annual growth rate (CAGR)Market share
Saudi Arabia20%33%


What sets Malaysia apart?

Despite being a country where a majority of its population are Muslims, Malaysia ranks far below Indonesia in terms of Muslim population. Further, richer Gulf states and Saudi Arabia are homes to bigger Islamic banks. So, what sets Malaysia apart? The answer: the country, its support structure, and its people. 

The country

The Economist, in its report titled Banking on the Ummah: Malaysia Leads Charge in Islamic Finance, recognised Malaysia as the world’s most important Islamic finance centre in its own ways and has awarded Malaysia top marks for its progressive leadership in Islamic finance – in particular its dominance in Islamic bonds (also known as sukuk).

In 2002, Malaysia issued the world’s first sovereign Islamic bond or sukuk and by the first three quarters of 2012, was responsible for almost three-quarters of total global issuance.

In Malaysia, Sukuk is an additional investment instrument based on Shariah principles for citizens aged 21 and above. In 2010, the Ministry of Finance issued Sukuk 1Malaysia 2010 amounting to RM3 billion with a 3-year tenure and an annual return of 5%.

Malaysia also houses the Islamic Financial Services Board, an international standard-setting board that promotes and enhances the soundness and stability of the Islamic financial services industry by issuing global prudential standards and guiding principles.

The support structure

In Malaysia, two institutions set up by Bank Negara Malaysia (BNM) play a huge role in developing and growing Islamic Finance. The first of these two is the International Centre for Education in Islamic Finance (INCEIF), which incidentally is also the world’s leading university for the study of Islamic finance.

The university also houses the International Shari’ah Research Academy, produces internationally accepted rule book for Islamic Finance.

The second institution, the Islamic Banking and Finance Institute of Malaysia (IBFIM) focuses on providing vocational training and also acts in a consultancy capacity to banks and firms that want to become Shariah-compliant.

The people

Malaysia has no shortage of talent in the area of Islamic finance. Aside from those produced by INCEIF and IBFIM, an article published by Free Malaysia Today states that according to a list in the February 2014 issue of ISFIRE, a quarterly magazine published by London-based Edbiz Consulting Ltd, 15 out of 20 top women in Islamic finance are Malaysians. Most notable among them was Tan Sri Dr Zeti Akhtar Aziz, the former governor of Bank Negara Malaysia (BNM), Malaysia’s central bank.

These three components combined has propelled Malaysia to the top in the world of Islamic finance which in turn will inspire confidence in consumers and increase take-up.

Not familiar with Islamic Banking? Find out how it works here. 

Considering an Islamic home loan? Find out what the pros and cons are here.

This article was originally published on 24 February 2014. It has been updated to reflect the latest reports and financial statistics

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