Alhuda CIBE - Takaful in Malaysia by Bakarudin Ishak
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Alhuda CIBE - Takaful in Malaysia by Bakarudin Ishak
- 1. SEKTOR KEWANGAN ISLAM DI MALAYSIA ISLAMIC BANKING & FINANCE IN MALAYSIA ISLAMIC BANKING AND FINANCE:ISLAMIC BANKING AND FINANCE: MALAYSIA’S EXPERIENCE ANDMALAYSIA’S EXPERIENCE AND ACHIEVEMENTSACHIEVEMENTS 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. SEKTOR KEWANGAN ISLAM DI MALAYSIA ISLAMIC BANKING & FINANCE IN MALAYSIA MALAYSIA AT A GLANCE • Population – 26.1 m • Muslim – 15.4 m (59%) • Strong GDP growth • 1st quarter 2006 5.3% • Low inflation
- 3. SEKTOR KEWANGAN ISLAM DI MALAYSIA ISLAMIC BANKING & FINANCE IN MALAYSIA • 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 WHY ISLAMIC BANKING IS IMPORTANT?
- 4. SEKTOR KEWANGAN ISLAM DI MALAYSIA ISLAMIC BANKING & FINANCE IN MALAYSIA • 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 MALAYSIAN ISLAMIC FINANCIAL SYSTEM
- 5. SEKTOR KEWANGAN ISLAM DI MALAYSIA ISLAMIC BANKING & FINANCE IN MALAYSIA STAGES OF DEVELOPMENT Gradual and pragmatic ..achieved significant milestones in building comprehensive and integrated Islamic financial system with diversity of players…. Milestones 1969 1983 1993 2003 Pilgrimage Fund BoardPilgrimage Fund Board Bank Islam Malaysia Bhd. Bank Muamalat Malaysia Bhd. Foreign Islamic banks Full-fledged Islamic banks Conventional banks offer Islamic window Takaful Operators Syarikat Takaful Malaysia Bhd. Takaful Nasional, Mayban Takaful, Takaful Iklhas, Commerce Takaful Islamic subsidiary Islamic money markets
- 6. SEKTOR KEWANGAN ISLAM DI MALAYSIA ISLAMIC BANKING & FINANCE IN MALAYSIA Institutional & Regulatory development Product and market development Legal and Shariah framework Enhancement of knowledge and expertise DEVELOPMENTAL FOCUS
- 7. SEKTOR KEWANGAN ISLAM DI MALAYSIA ISLAMIC BANKING & FINANCE IN MALAYSIA 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. SEKTOR KEWANGAN ISLAM DI MALAYSIA ISLAMIC BANKING & FINANCE IN MALAYSIA ROLE OF BANK NEGARA MALAYSIA BNM Conventional financial system Islamic banks Takaful operators Non-banking institutions Money market Capital market Customer Islamic financial system Conventional banks Insurance companies Non-banking institutions Money market Capital market Malaysia Deposit Insurance Corporation Dispute resolution Judicial system KL Regional Arbitration Centre Financial Mediation Bureau Supervisory objective • Financial stability • Consumer protection - Separate clearing and settlement system - Liquidity management Specific monetary policy instruments Islamic Banking Act 1983 Takaful Act BAFIA 1989 Insurance Act 1996
- 9. SEKTOR KEWANGAN ISLAM DI MALAYSIA ISLAMIC BANKING & FINANCE IN MALAYSIA COMPREHENSIVE ISLAMIC FINANCIAL SYSTEM Legal, Shariah & Reg Institutional development Product & market Knowledge and education • Comprehensive legislation • Dispute resolution o Dedicated high court o Arbitration centre o 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 • Consumer Education & Awareness Programmes • Complete training infrastructure o INCEIF, IBFIM & ICLIF • International conferences • Domestic & foreign Islamic banks, Islamic banking windows • Islamic capital market players • Fund for Shariah Scholars o Promote Shariah dialogues o Scholarship o Research grant • Offshore players • Liberalised equity policy for Islamic subsidiaries and takaful
- 10. SEKTOR KEWANGAN ISLAM DI MALAYSIA ISLAMIC BANKING & FINANCE IN MALAYSIA 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. SEKTOR KEWANGAN ISLAM DI MALAYSIA ISLAMIC BANKING & FINANCE IN MALAYSIA LEADING INITIATIVES IN ISLAMIC FINANCE 2005 Islamic Financial Services Board Islamic Financial Services Board Malaysia global sukuk Malaysia global sukuk 2002 2003 2004 Islamic securities/ Sukuks by multilateral dev’t banks Islamic securities/ Sukuks by multilateral dev’t banks Malaysia-IDB MoU Malaysia-IDB MoU Shariah scholars dialogue Shariah scholars dialogue Financial liberalisation Financial liberalisation Financial Market Islamic Index Financial Market Islamic Index Foreign Islamic FIs, 49% foreign equity in Islamic banks and takaful companies Forex liberalisation Promotion of trade, investment, takaful, financial market & ICT International Islamic standard- setting body Attract international investors First global sovereign sukuk Greater Shariah harmonisation Financial Sector Master Plan Financial Sector Master Plan Malaysia as international hub/ Labuan’s niche in Islamic finance … for global integration
- 12. SEKTOR KEWANGAN ISLAM DI MALAYSIA ISLAMIC BANKING & FINANCE IN MALAYSIA Meeting the education needs of all levels of Islamic finance practitioners Level of knowledge: Elementary Focus: Short training courses to meet industry’s needs IBFIM INCEIF ICLIF Level of knowledge: Intermediate & advanced Focus: International professional certification and post- graduate programs Focus: Leadership programs Institutions of higher learning Other training providers Human Capital Development in Islamic Finance
- 13. SEKTOR KEWANGAN ISLAM DI MALAYSIA ISLAMIC BANKING & FINANCE IN MALAYSIA 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 Hands-on activities & role play CIFP PROGRAMME MODULES
- 14. SEKTOR KEWANGAN ISLAM DI MALAYSIA ISLAMIC BANKING & FINANCE IN MALAYSIA “… Islamic banking and finance will emerge as a force to be reckoned with in shaping the future development of global finance …”
- 15. SEKTOR KEWANGAN ISLAM DI MALAYSIA ISLAMIC BANKING & FINANCE IN MALAYSIA
- 16. SEKTOR KEWANGAN ISLAM DI MALAYSIA ISLAMIC BANKING & FINANCE IN MALAYSIA 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
- 17. SEKTOR KEWANGAN ISLAM DI MALAYSIA ISLAMIC BANKING & FINANCE IN MALAYSIA Sources of funds Non-mudharabah deposits Mudharabah deposits SHF Application of funds General pool Specific account I Specific account II Profit ∏ ∏ ∏ Distribution of profit Depositors Bank Depositors or ISLAMIC BANKING & FINANCE IN MALAYSIA ISLAMIC BANKING OPERATIONS
- 18. SEKTOR KEWANGAN ISLAM DI MALAYSIA ISLAMIC BANKING & FINANCE IN MALAYSIA Fixed assets Other assets Inventories Equity investment in capital ventures Equity investment in joint ventures Investment in real estate Investment in leased assets Investment in securities Sales receivables Cash & cash equivalents ASSETS Owners’ Equity Investment risk reserve Profit equalization reserve Profit sharing investment accounts Equity of Profit Sharing Investment Accounts (PSIA) Other liabilities Current accounts LIABILITIES STYLIZED BALANCE SHEET OF AN IIFS
- 19. SEKTOR KEWANGAN ISLAM DI MALAYSIA ISLAMIC BANKING & FINANCE IN MALAYSIA TAKAFULTAKAFUL (e.g. Family, General)(e.g. Family, General) TABARRU’TABARRU’ (Donation)(Donation) PROFIT SHARING ONPROFIT SHARING ON SURPLUSSURPLUS A contract among participants to reciprocally help each other against defined loss Commercial profit sharing contract between participants and takaful operator Agreement to relinquish certain portion of contribution as donation to fulfil obligation of mutual help and joint guarantee Concepts Based on…….Takaful
- 20. SEKTOR KEWANGAN ISLAM DI MALAYSIA ISLAMIC BANKING & FINANCE IN MALAYSIA Surplus/ (Deficit) Participants’ Risk Account (PRA) Participants’ Account (PA) Investment Profit Takaful Operators Less Less Operating Expenses •Retakaful •Reserves •Claims Participants Contributions 100% -x% Surplus on Maturity x%x% ISLAMIC BANKING & FINANCE IN MALAYSIA Takaful Model Wakalah fees x% x% 100% -x% 2 Models: Mudharabah or Wakalah
Editor's Notes
- Population distribution by race: Malay – 50.4% Chinese – 23.7% Indigenous – 11.0% Indian – 7.1% Others – 7.8% GDP 1Q 2006: RM66.2 b End 2005: RM262 b
- Islamic financial institutions has been in existence since the establishment of the Pilgimage fund board in 1969. The Islamic financial system in Malaysia has evolved as a viable and competitive component of the overall financial system. The strategy adopted by Malaysia has been to develop a comprehensive Islamic financial system that operates in parallel with the conventional system. Emphasis was given to the development of a comprehensive financial infrastructure that includes the Islamic banking industry, Takaful operators and Islamic financial markets (Islamic money and capital market). The intra-dependecy of these key structural components creates a comprehensive enabling environment for the financial system to effectively plays its role as an efficient conduit to mobilise resources and provide financing to economic sector. Malaysia started the establishment of one Islamic bank (Bank Islamic Malaysia Berhad, 1983) to spearhead the introduction of Islamic banking products and services and followed by the establishment of Takaful operator (Syarikat Takaful Malaysia Berhad), 1984. To provide atrong support to Islamic banking system and Takaful industry, the Islamic money market was established in 1994. Today, Islamic financial system in Malaysia has emerged as important components that contributes to the growth and development of Malaysian economy with the creation diversity of players encompasses the domestic as well as the foreign banking players. The Islamic banking system is currently represented by 29 Islamic banking institutions, comprising of 2 Islamic banks, 2 Islamic subsidiaries and 25 Islamic banking scheme banks offering comprehensive and wide range of Islamic financial products and services. The takaful industry is currently represented by 4 Takaful operators. Greater details will be elaborated in this presentation.
- In Malaysia separate banking legislation was enacted for Islamic banking institutions to exist side-by-side with the conventional banks. The government played significant role in the enactment of various legislation that enable the establishment of Islamic bank & Takaful operator. The Islamic banking Act (IBA) 1983 enacted by the parliament facilitated the establishment of Bank Islam Malaysia Berhad (BIMB). The IBA allows these institutions to carry out their business along Shariah principles. The IBA also allows BNM with powers to supervise and regulate Islamic banks. In addition, the Government Investment Act 1983 was also enacted at the same time to empower the Government of Malaysia to issue Government Investment Issues (GII), which is the government securities issued based on Syariah principles. As the GII is regarded as liquid assets, the Islamic banks could invest in the GII to meet the prescribed liquidity requirements as well as to investst their surplus funds. In 1984, the Takaful Act (TA) was enacted that paved the establishment of Syarikat Takaful Malaysia. This act govern the conduct of Takaful business. The establishment of Takaful was inspired by the demand for Shariah compliant alternative to conventional insurance, as well as to complement the operation of the Islamic bank. In terms of Shariah infrastructure, the IBA and the TA requires the Islamic Bank Takaful operator to establish Shariah advisory council to ensure their operation satisfy with Shariah requirements. On the prudential regulation, in the interim (pending IFSB standard) BIMB and TA has to observed similar regulatory requirements adopted by the conventional institutions. For instance, BIMB has to observe a minimum risk weighted capital ratio, liquidity requirement and statutory reserve requirement. BIMB has proved that Islmic banking is viable and demonstrated capability to operate in parallel with the conventional banks, where in 1992 it was listed in the KLSE
- Source General Council for Islamic Banks And Financial Institutions (CIBAFI), World Wealth Report & Dow Jones Islamic banking assets (IBs & windows) - >USD400 billion Islamic mutual funds - > USD300 billion Islamic sovereign & corporate sukuk – USD15 billion Global market capitalisation of Dow Jones Islamic Index - >USD10 trillion Middle East high net worth individuals – USD1.5 trillion & expected to reach USD2 trillion
- Total Islamic banking assets increased to RM113.5 billion, which accounted for 11.6% of the total assets in the banking system. The Islamic deposits and financing increased to RM85.0 billion and RM67.5 billion to constitute 11.6% and 15.7% respectively of the total amounts in the banking system. The takaful sector sustained a steady growth momentum, assets increased to RM6.2 billion, capturing 5.9% of the total assets of the insurance sector. Market penetration of the takaful sector increased from 5.1% in 2004 to 5.9% as at March 2005. The Islamic money market registered a monthly turnover of RM21 billion in terms of trading and investment activities. Islamic private debt securities (PDS) accounted for 40% of the total outstanding PDS. A significant development in the mortgage securities segment was the issuance of the first Islamic residential mortgage backed securities based on musyarakah concept by Cagamas MBS Berhad, a special purpose company established by the Cagamas Berhad. The total issuance of this securities amounted to RM2.05 billion, of which the underlying assets are represented by the government’s Islamic house financing.
- Three underlying Islamic principles in takaful i.e.: AL-TAKAFUL - the pact among a group of participants, reciprocally guaranteeing each other against loss or damage that may befall anyone of them AL-MUDHARABAH - is a commercial profit sharing contract between the provider of fund i.e. the participants and the entrepreneur who conducts the business i.e. the takaful company. If profits made, it is shared between the participants and the company after the obligation of assisting fellow participants has been fulfilled AL-TABARRU’ - an agreement by a participant to relinquish as donation a certain proportion of the takaful contribution that he agrees to pay, thus enabling him to fulfil obligation of mutual help should anyone of his fellow participants suffers a defined loss al-tabarru’ eliminates the element of uncertainty in a takaful contract whereby, in the event of a loss, the fellow participant who received the compensation knows the source of the loss coverage is definitely from the al-tabarru’ fund the operation of takaful is confined within the "tijari" sector or popularly known as the commercial sector the transactional aspect of the commercial activity of takaful must be subject to the Islamic contractual laws to ensure its compliance with the Syariah