This document provides an overview of the development of Islamic banking and finance in Malaysia. It discusses the historical milestones and stages of development of Islamic banking, takaful (Islamic insurance), the Islamic capital market, and the roles of the Shariah Advisory Council and Labuan International Offshore Financial Centre in developing the Islamic financial system. The framework established in Malaysia has served as a model for the development of comprehensive Islamic financial systems internationally.

1. ISLAMIC
BANKING AND
FINANCE
Mahyuddin Khalid
emkay@salam.uitm.edu.my
FRAMEWORK OF ISLAMIC FINANCIAL
SYSTEM

2. CONTENT
 HISTORICAL DEVELOPMENT OF ISLAMIC FINANCIAL
SYSTEM
 DEVELOPMENT OF ISLAMIC BANKING
 DEVELOPMENT OF TAKAFUL
 DEVELOPMENT OF ISLAMIC CAPITAL MARKET
 ISLAMIC MONEY MARKET
 SHARIAH ADVISORY COUNCIL (SAC)
 LABUAN AS ISLAMIC IOFC
 INTERNATIONAL ISLAMIC FINANCIAL MARKET
 ISLAMIC FINANCIAL SERVICE BOARD
 LICENSING OF FOREIGN ISLAMIC BANKS AND
ISLAMIC BANKS SUBSIDIARIES
 FINANCIAL SECTOR MASTER PLAN
2

3. • Mit Ghamr, Egypt1963
• Pilgrims’ Fund Board (Lembaga Tabung Haji), Malaysia1969
• Oil boom1970
• Islamic Development Bank, Saudi Arabia
• Dubai Islamic Bank, UAE1975
• Fatwa issued by the Fiqh Council of Muslim World League in favor of Islamic insurance
(takaful)1977
• Luxembourg Islamic Bank (1st attempt in the West )1978
• Sudanese Islamic Insurance Company is established as the world’s 1st Takaful company by
Faisal Islamic Bank of Sudan1979
• Malaysia passes comprehensive legislation on Islamic finance (Islamic Banking Act)1983
• OIC Islamic Fiqh Academy legitimizes Sukuk which paves the way to the development of
Islamic debt securities1988
• World 1st sukuk issued in Malaysia (Based on BBA) by Shell MDS worth USD 30 million1990
• AAOIFI , Bahrain1991
• IFSB, Malaysia2002
• International Islamic Liquidity Management (IILM), Malaysia2011
HISTORICAL LANDMARKS IN ISLAMIC FINANCE
DEVELOPMENT
3

4. 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 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
STAGES OF DEVELOPMENT
4

5. 1ST PHASE : 1963-1992
1963
• Establishment of
the Pilgrims Fund
Board
• It is saving
mechanism -
Malaysian Muslim
set aside regular
funds to cover
them performing
annual pilgrimage
1969
• Pilgrims Fund
Board combined
with Pilgrim’s
Management Fund
Board/ Lembaga
Urusan dan
Tabung Haji
(LUTH)
1980
• Several parties
were calling for
establishment of
Islamic bank due
to resurgence that
happened in the
Middle East
• Eg: Malaysian
government had
being offered by
Bumiputra
Economic
Congress to set up
Islamic Bank in
this country
1981
• Set up National
Steering
Committee (NSC),
chaired by Raja
Mohar
Badiozaman
• NSC undertake
study and make
recommendations
to government on
all aspects relating
Islamic Bank in
Malaysia, including
legal, religious and
operational
aspects.
• LUTH take over
the secretarial
functions
1983
• July : NSC
submitted their
report to
government
• The first Islamic
bank was
established in
Malaysia- Bank
Islam Malaysia
Berhad (BIMB)
under Islamic
Banking Act 1983
5

6. 2ND PHASE : 1993-2000
1993
• March: Interest-Free
banking Scheme
(IFSB)/ Skim
Perbankan Tanpa
Faedah (SPTF) was
launched on a pilot
basis involving
Malayan Banking
Bhd. , Bank
Bumiputra Malaysia
Berhad and United
Malayan Banking
Corporation Bhd.
• July: Commercial
banks, merchant
banks and finance
companies begun to
offer Islamic
banking products
and services under
the Islamic Banking
Scheme (IBS
banks).
May 1997
• BNM establish
Shariah Advisory
Council (SAC)
which consist of
academicians and
Shariah experts in
Islamic Banking and
Takaful
• Role:
• Harmonize
different opinion in
Shariah
• Advise BNM
• Analyze Shariah
aspects of new
products
submitted by
banking
institutions and
takaful companies
December 1998
• The IFSB/SPTF
was replaced with
Islamic Banking
Scheme (IBS)/
Sistem Perbankan
Islam
October 1999
• Establishment 2nd
Islamic Bank, Bank
Muamalat Malaysia
Berhad ( merger
between Bank
Bumiputera
Malaysia Bhd. +
Bank Commerce
(M) Berhad
6

7. 3RD PHASE : 2001-2010
2001
• March: BNM had
launched Financial
Sector Master Plan
(FSMP) –
incorporated a
comprehensive 10
year master plan
for Islamic banking
and Takaful
• Declaration of
Labuan as
International
Offshore Financial
Centre (IOFC) to
promote Malaysia
as International
financial system
2002
• Establishment of
Islamic Financial
Services Board
(IFSB) in Kuala
Lumpur
2004
• Financial liberation
of Islamic Banking
sector with the
issuance of three
new Islamic
license under IB
Act 1983, from
Middle East to
Islamic financial
institution
Today
• Implementing dual
banking system
• Become the first
nation have full-
fledge Islamic
system operating
side-by-side with
conventional
system
7

8. TAKAFUL
 Arabic word ) ‘) guaranteeing each other’ / ‘joint guarantee’.
 It is an Islamic insurance concept which is grounded in Islamic
muamalat, observing the rules and regulations of Islamic law.
 Basic concept
 Social solidarity
 Cooperation
 Mutual indemnification of losses among members
 Principles
 Policyholders (Takaful partners) cooperate among themselves for their
common good. (wakalah)
 Every policyholder pays his subscription to help those who need
assistance (tabarru’)
 Losses are divided and liabilities spread according to the community
pooling system. (mudharabah)
 Uncertainty (gharar) is eliminated concerning subscription and
compensation.
 It does not derive advantage at the cost of others. (no riba’)
8

9. HISTORICAL DEVELOPMENT OF TAKAFUL IN
MALAYSIA
1983
• The
development
of takaful
industry in
Malaysia was
inspired
through the
establishment
of Bank Islam
Malaysia
Berhad (BIMB)
in 1983
1984
• The Takaful Act
was drafted
• Syarikat
Takaful
Malaysia
Berhad
(Takaful
Malaysia)was
established as
the pioneer
takaful
operator in
Malaysia
1985
• Takaful
Malaysia
offering Family
Takaful &
General
Takaful
Business
1996
• July-Takaful
Malaysia was
listed on the
Main Board of
Bursa
Malaysia
1997
• May- BNM
established
NSAC on
Islamic
banking and
Takaful
9

10. COMPARISON BETWEEN TAKAFUL AND
INSURANCE
TAKAFUL CRITERIA INSURANCE
Prohibited all of this
elements because it’s
contradict with Shariah.
Elements Of
Gharar
(uncertainty),
Maisir(gambling
), And Riba’
Contains all these
elements
Objective is to ensure that
the activities of company
are carried out according
to principles of Shariah.
Shariah
Supervision
Don’t have Shariah
Supervision
The account is known as
general insurance account
and life insurance account
of fund.
Accounts The account known as
Tabarru’ which means
donation, the other one is
treated in line with the
principle of Mudharabah.
10

11. COMPARISON BETWEEN TAKAFUL AND
INSURANCE
TAKAFUL CRITERIA INSURANCE
Specifies from the outset how
the profits from.
Takaful investment are to be
shared between the
operator(mudharib) and the
participants(sahib ul-mal).
Bonus May offer bonus or profit in
general terms only especially
with profit policies, there is no
exact specification with regard
to the profit-sharing in
contract.
It may also decide to give or
not to give bonus for any
particular year depending on
the result of the investment
return.
The funds shall be invested in
any interest free from Shariah
justified scheme.
The entire procedure shall
comply the guidelines of the
Shariah investment return
must not be driven by any
unethical commercial
activities.
Investment The funds may also be
invested in an interest-based
scheme.
They can also be invested in
any scheme or project, which
may not be supported by the
Shariah discipline.
11

12. COMPARISON BETWEEN TAKAFUL AND
INSURANCE
TAKAFUL CRITERIA INSURANCE
The entire operation aims
at paying the way of
brotherhood, solidarity and
mutual cooperation.
Nature The operation aims a
commercial gain on the
basis of the principles of
business.
Regulations affecting
Takaful are based on the
Divine sanction (Qur’an
and Hadith)
Regulations Insurance law is based on
the human thoughts and
cultures
Participants own the
Takaful fund and managed
by the operator.
Participants give up
individual rights to gain
collective rights over
contribution and benefits
Contract Insurance is a buy-sale
contract in which policies
are sold and the policy
holders are the
purchasers.
12

13. ISLAMIC CAPITAL MARKET
 Islamic capital market means where
investment and financing activities and
products are structured in accordance with
Shariah principles.
 The Islamic Capital Market (ICM) refers to the
market where activities are carried out in
ways which doesn’t conflict with the principles
of Islam.
 The ICM represents an assertion of religious
law in capital market transactions where the
market is free from prohibited activities and
elements such as riba, maysir and gharar
13

14. 14
ISLAMIC CAPITAL MARKET
 The SC’s efforts to develop the ICM by setting up of
the necessary infrastructure:
 Establishing an Islamic Capital Market Unit (ICMU)
 to carry out research and development of ICM instruments
 analyzing the existing securities from Shariah perspectives
 Establishing Islamic Instruments Study Group (IISG)
 to advise the SC on development ICM
 to study issues related to the operation of the ICM
 Establishing Shariah Advisory Council (SAC) of SC
 succeeded the role and function of IISG
 to ensure that the operation of the ICM conform to Shariah
principles
 to advise the SC on all matters related to the development of
the Islamic capital market
 as a reference center for issues related to Islamic capital
market.

15. ISLAMIC CAPITAL MARKET
YEAR CRITICAL MILESTONES
1990 SHELL MDS Sdn. Bhd. Issued the first Islamic bond.
1993 Launch of first Islamic Equity unit trust fund by Arab-
Malaysian Unit Trust Bhd
1994 BIMB Securities Sdn. Bhd was established.
1995 SC established ICM Unit.
1996 The Shariah Advisory Council (SAC) was established.
RHB launched the country’s first Islamic equity index,
comprising shares of KLSE main board companies.
1997 The SC introduced an official list of Shariah approved
securities traded on the KLSE.
1999 The KLSE launched the country’s second Islamic equity
index, the KLSE Shariah index (KLSI)
15

16. ISLAMIC CAPITAL MARKET
YEAR CRITICAL MILESTONES
2000 • The SC imposed the requirement to engage independent
Shariah adviser for issuing Islamic Bonds, as stipulated in the
Guidelines on the Offering of Private Debt Securities.
• Islamic Bond Fund launched.
2001 • The minister of Finance launched the Capital Market Master
plan.
• Issuance of the world’s first Global Sukuk by Kumpulan
Guthrie
2002 • First Global Islamic Bond Issues.
• The Prime Minister launched the book, resolutions of the
Securities Commission SAC.
• Issuance of the world’s first Global Sovereign Sukuk
2003 • The Malaysia Government, in its Federal Budget 2004,
allowed tax deduction for 5 years on expenses occurred in
the issuance of Islamic bonds, based on Shariah principles
of Istisna’.
16

17. ISLAMIC MONEY MARKET
 The Islamic Money Market (IIMM) is integral
to the functioning of the Islamic banking
system.
 IIMM provide the Islamic financial institutions
with the facility for funding and adjusting
portfolios over the short-term and serving as
a channel for the transmission of monetary
policy.
 Financial instrument and interbank
investment would allow surplus banks
channel funds to deficit banks, also
maintaining the funding and liquidity
mechanism necessary to promote stability in
17

18. ISLAMIC MONEY MARKET
 IIMM was introduced on January 3, 1994 as a
short-term intermediary to provide a ready
source of short-term investment outlets based
on Shariah principle.
 The Islamic banks and banks participating in
the Islamic Banking Scheme (IBS) would be
able to match the funding requirements
effectively and efficiently.
 Bank Negara Malaysia (BNM) issued the
guidelines to facilitate proper implementation
of the IIMM.
18

19. 19
SHARIAH ADVISORY COUNCIL (SAC) OF THE
BNM
 BNM established its Shariah Advisory Council (SAC)
on Islamic Banking and Takaful on 1 May 1997 to
streamline and harmonize the Shariah interpretations
among banks and takaful companies.
 The SAC is the highest authority in deciding Shariah
issues pertaining to Islamic banking and takaful
operations in Malaysia.
 The primary objectives of SAC are as follows:
 To act as the sole authoritative body to advise BNM on
Islamic banking and takaful operations
 To co-ordinate Shariah issues with respect to Islamic
banking, finance and takaful
 To analyze and evaluate Shariah aspects of new
products/ schemes submitted by the banking institutions
and takaful companies.

20. 20
DEVELOPMENT FINANCIAL INSTITUTIONS
(DFIS)
 The aspiration of BNM to develop a
comprehensive Islamic banking system had
stimulated the non-banking financial
intermediaries to offer Islamic banking
products and services includes:
 Bank Simpanan Nasional (BSN)
 Bank Kerjasama Rakyat Malaysia (BR)
 Development Finance Institutions (DFIs) i.e.
Bank Pembangunan dan Infrastruktur Malaysia
(BPIM) and Bank Pertanian Malaysia (BPM).

21. 21
LABUAN AS AN ISLAMIC IOFC
 Government has made a decision to promote
Labuan as an International Offshore Financial Centre
(IOFC) to position itself as an international center for
offshore Islamic banking and finance with the
objectives:
 To complement domestic financial activities in Kuala
Lumpur
 To strengthen the contribution of the financial services
sector in the gross national product of Malaysia
 To promote the economic development of Labuan
 Labuan with the status of IOFC has the advantage to
attract international banking business by:
 Reducing or eliminating the need for full compliance with
local capital requirements
 Having lower license fees, corporate taxes and other
business levies

22. 22
INTERNATIONAL ISLAMIC FINANCIAL
MARKET (IIFM)
 Labuan Offshore Financial Services Authority (LOFSA) was
established and responsible for setting national objectives,
policies and priorities for the development and
administration of offshore financial services in Labuan.
 In its efforts to develop Labuan as an Islamic IOFC, LOFSA
worked with Islamic scholars to identify potential offshore
activities as well as to develop viable Islamic financial
instruments which would attract Islamic investors to the
Labuan
 Following this, Malaysia, Bahrain, Indonesia, Sudan, Iran
and the Islamic Development Bank (IDB) established an
IIFM Board April 2002
 The IIFM Board was entrusted to develop and supervise the
development of the IIFM and supported by two committees,
the Market and Product Development Committee MPDC
and the Shariah Supervisory Committee (SSC).

23. 23
FIRST SOVEREIGN GLOBAL ISLAMIC
SUKUK
 Malaysia successfully launched the first
Sovereign Global Islamic Sukuk, structured
on the principle of ijarah on 25 June 2002.
 The launching of the global Islamic bond
signified Malaysia’s strong commitment in
supporting the development of Islamic
banking and finance on the global front.
 The move to access the international Islamic
capital market would give impetus to the
development of the Islamic financial market.

24. 24
INTERNATIONAL ISLAMIC FINANCIAL
MARKET (IIFM)
 LOFSA initiated the establishment of a global
network of Islamic financial markets known as
International Islamic Financial Market (IIFM) with
the objectives:
 To establish a structured global financial market that
is based on Shariah principles
 To enhance the cooperative framework among
Islamic countries and financial institutions
 To generate the liquidity, creation and trading of
financial instruments, thus enhancing investment
opportunities and spins-off of other related services
and activities such as custodial, brokerage and
treasury.
 To promote greater awareness of Islamic banking
and finance, and facilitate cross border transactions.

25. 25
ISLAMIC FINANCIAL SERVICES BOARD
(IFSB)
 Islamic Financial Services Board (IFSB) was
established in 2002.
 The establishment of the IFSB will set the stage for
the adaptation, harmonization and development of
the international regulatory and supervisory
standards as well as best practices for the
governance of all financial institutions offering Islamic
financial services and products.
 The nine founding members are Bahrain, Indonesia,
Iran, Kuwait, Malaysia, Pakistan, Saudi Arabia,
Sudan and the Islamic Development Bank, The IFSB
secretariat is located in Kuala Lumpur. Malaysia.
 The Board will also contribute towards ensuring the
soundness and stability of the Islamic financial
system, thus paving the way for Islamic banking to
expand globally.

26. 26
LICENSING OF FOREIGN ISLAMIC BANKS AND
ISLAMIC BANKS SUBSIDIARIES
 The financial liberation of the Islamic banking sector
was introduced on 2007 with the issuance of three
new Islamic bank licenses under the Islamic Banking
Act 1983 (IBA)
 The new entries of the foreign Islamic banks were in
line with the recommendations of the Financial
Sector Master plan (FCMP) to position Malaysia as
an international Islamic financial hub.
 The presence of foreign players will promote healthy
competition which is necessary to elevate the
industry to new levels of dynamism as well as to
accelerate the global integration the domestic Islamic
banking system.
 It will also promote greater economic and financial
linkages between Malaysia and the Middle East, and
foster greater harmonization in terms of Shariah
interpretation and understanding.

27. 27
LICENSING OF FOREIGN ISLAMIC BANKS AND
ISLAMIC BANKS SUBSIDIARIES
 In 2004, BNM also continued to further
strengthen the overall infrastructure development
of the Islamic banking system as the Islamic
banking industry entered a more advanced stage
of development.
 The window-based’ institutional structure was
reviewed to further strengthen and elevate the
development of domestic Islamic banking
industry through a new enabling institutional
structure.
 The domestic banking groups and foreign Islamic
Banking Scheme (IBS) banks were encouraged
to set up Islamic subsidiaries (IS) as full-fledged
Islamic banks which would be licensed under the

28. 28
FINANCIAL SECTOR MASTER PELAN FOR ISLAMIC
BANKING
 Financial Sector Master Plan was launched on
March 2001 incorporates 10 years master plan
for Islamic banking a
 FSMP’s aim is to create an efficient, progressive
and comprehensive Islamic financial system that
contributes significantly to the effectiveness and
efficiency of then Malaysian financial sector.
 FSMP provides recommendations which focus
on three main areas:
 Institutional capacity enhancement
 Financial infrastructure development
 Regulatory framework development

29. 29
VISION OF ISLAMIC BANKING AND
TAKAFUL
 Malaysia as a regional Islamic financial center.
 Constitute 20% of the banking and insurance market
share with an effective contribution to the financial
sector of the Malaysian economy
 Represented by a number of strong and highly
capitalized IBIs and takaful operators
 Offering a comprehensive and complete range of
Islamic financial products and services
 Underpinned by a comprehensive and conducive
Shariah and regulatory framework
 Supported by a dedicated institution (Shariah
commercial court) in the judiciary system that
addresses legal issues
 Supported by a sufficient number individuals and
management teams with the required expertise

30. 30
CONCLUSION
 Islamic banking system has experienced a rapid
growth and tremendous development since its first
debut in 1983
 Various measures have been adopted by the
authorities in implementing the Islamic banking
system with a step by step and open-minded
approach with each step taken after careful
consideration of all implications.
 In order to he a viable Islamic banking system, all the
basic elements towards this purpose were being
established by the authority.
 These include a large number of products,
instruments and institutions and the establishment of
an Islamic money and capital market which would
link the institutions and the instruments.

31. END OF CHAPTER31