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FINANCIAL STABILITY
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 pro t
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 bene t is
encouraged. Activities that involve interest (riba), gambling (maisir) and speculative trading
(gharar) are prohibited.

Through the use of various Islamic nance concepts such as ijarah (leasing), mudharabah
(pro t sharing), musyarakah (partnership), nancial institutions have a great deal of exibility,
creativity and choice in the creation of Islamic nance 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 nance has grown tremendously since it rst emerged in the 1970's. Current global
Islamic banking assets and assets under management have reached USD750 billion and is
expected to hit USD1 trillion by 2010.1

There are over 300 Islamic nancial institutions worldwide across 75 countries According to
the Asian Banker Research Group, The World's 100 largest Islamic banks have set an annual
asset growth rate of 26.7%2 and the global Islamic Finance industry is experiencing average
growth of 15-20% annually.3

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

Malaysia's long track record of building a successful domestic Islamic nancial industry of
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over 30 years gives the country a solid foundation - nancial bedrock of stability that adds to
the richness, diversity and maturity of the nancial system. Presently, Malaysia's Islamic
banking assets reached USD65.6 billion with an average growth rate of 18-20% annually.4

Today, Malaysia's Islamic nance continues to grow rapidly, supported by a conducive

environment that is renowned for continuous product innovation, a diversity of nancial
institutions from across the world, a broad range of innovative Islamic investment
instruments, a comprehensive nancial 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 nancial industry to ensure the
availability of Islamic nance 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 nance industry, coupled with facilitative business
environment has encouraged foreign nancial 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 nancial institutions.

Currently, Malaysia has a signi cant number of full- edged Islamic banks including several
foreign owned entities; conventional institutions who have established Islamic subsidiaries
and also entities who are conducting foreign currency business. All nancial 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 nancial
institutions to establish international Islamic banking business in Malaysia to conduct foreign
currency business.   

The domestic Islamic nancial 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 nance business. For more information on the establishment and
application procedure for ICBU, please contact MIFC Secretariat.

  1 Mckinsey, The World Islamic Banking Competitiveness Report 2007-08, "Capturing The Trillion Dollar Opportunity"
2 Ibid
3 Ibid
4 Bank Negara Malaysia: Annual Banking Statistics 2007

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