The development of Islamic finance began during the pre-Islamic period in the Middle East as traders followed customary commercial practices. With the rise of Islam, these practices were evaluated and reformed to align with Islamic principles. During the Prophet Muhammad's time, many financial operations and concepts emerged that were documented in the Quran and hadith. Malaysia was an early adopter of Islamic finance in the 1960s with the establishment of organizations to help Muslims save for the hajj pilgrimage. Over subsequent decades, Malaysia established the first full-fledged Islamic bank and takaful provider and has continued developing its Islamic financial system with dedicated regulation, oversight bodies, and requirements for end-to-end Sharia compliance. Malaysia

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Development of Islamic Finance in Malaysia
The development of Islamic finance can be seen in the pre-Islamic period where the
inhabitats of Middle East and Arabian peninsula have conducted trade and business
partnerships. They have followed certain customary commerical practices and traditions.
With the introduction of Islam, they re-evaluated the commercial practices so that they are
consistent with Islamic legal principles.
During the era of Prophet Muhammad SAW, the doctrine of financial operations are derived
from Holy Quran, sunnah or Prophet Muhammad’s SAW examples. To illustrate, Prophet
Muhammad SAW, in numerous sayings, has bought credit, taken financing, give npersonal
property as security or lien and acted as an agent in mudarabah contract with an investment
from Khadijah.
Following the passing of Prophet Muhammad SAW in 632 AD, the spread of Islam began,
together with its Islamic methods and finance.
The first attempts in Islamic finance can be traced to Malaysia and Egypt in the early 1960s.
The first institution that was involved in Islamic finance in Malaysia was the Muslim Pilgrim’s
Savings Corporation, set up in 1963, to help people to save on a regular basis to pay for
their pilgrimage to Makkah. In 1969, this corporation evolved into the Pilgrim’s Management
and Fund Board, or Lembaga Tabung Haji. The success of Lembaga Tabung Haji has
provided the main impetus for establishing Bank Islam Malaysia Berhad (BIMB) which
represents a full-fledged Islamic commercial bank in Malaysia.
Below shows the journey of Islamic Finance in Malaysia:
1960s 1980s 1990s 2000s
1. Pilgrims
Management and
Funboard or
Lembaga Urusan
dan Tabung Haji,
Malaysia
1. Bank Islam
Malaysian
Berhad
2. Syarikat
Takaful
Malaysia
Berhad
1. Islamic
Interbank
Money Market
(IIMM),
Malaysia
2. Bank Muamalat
Malaysia
Berhad
1. Islamic Financial
Services Board
(IFSB), Kuala
Lumpur
2. International
Islamic Liquidity
Management
Corporation
(IILM), Kuala
Lumpur
Malaysia started with the establishment of one Islamic bank in 1983 to spearhead the
introduction of Islamic banking products and services. Takaful was introduced in 1984 to
complement Islamic banking operations as it provides amongst other things, coverage for
Islamic house mortgages.
In addition, Malaysia has also initiated the issuance of Islamic financial instruments by the
government and central bank, Bank Negara Malaysia (BN). In order to achieve uniformity of
shariah decisions and to advise BNM on shariah issues, the Shariah Advisory Council of
BNM (SAC-BNM) was established in May 1997. Its role was enhanced in 2003 when it was
accorded the sole authoritative body on Shariah matters pertaining to Islamic banking,
takaful and finance.
The table below shows Malaysia’s approach in building its Islamic financial system:

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1980s 1990s 2000s 2010s
Phase I
Distinct aspect of
Shariah compliance
in Islamic financial
transactions
Phase II
Specific regulation
allowing
establishment of
Islamimc windows
Phase III
Recognition on the
dual financing
system in Malaysia
Phase IV
Requiremet to
observe end-to-end
Shariah compliance
by IFIs
Malaysia has now evolved into a comprehensive domestic Islamic financial system that is
diversified in terms of its institutions, markets and players.