Alhuda CIBE - Takaful in Malaysia by Bakarudin Ishak

SEKTOR KEWANGAN ISLAM DI MALAYSIA ISLAMIC BANKING &FINANCE IN MALAYSIA

ISLAMIC BANKING AND FINANCE: ISLAMIC BANKING AND FINANCE: MALAYSIA’S EXPERIENCE AND MALAYSIA’S EXPERIENCE AND

ACHIEVEMENTSACHIEVEMENTS

13 June 2006Victoria University of Wellington

Presented by:Bakarudin IshakDirectorIslamic Banking and Takaful DepartmentBank Negara 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


• 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?


• 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


STAGES OF DEVELOPMENTGradual 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


Institutional & Regulatory development

Product and marketdevelopment

Legal and Shariahframework

Enhancement of knowledge and

expertise

DEVELOPMENTAL FOCUS


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


ROLE OF BANK NEGARA MALAYSIA

BNM

Conventional financial system

Islamic banksTakaful operatorsNon-banking institutions

Money market Capital market

Customer

Islamic financial system

Conventional banksInsurance companiesNon-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 1983Takaful Act

BAFIA 1989Insurance Act 1996


COMPREHENSIVE ISLAMIC FINANCIAL SYSTEM

Legal, Shariah & Reg

Institutional development

Product & market

Knowledge and education

• Comprehensive legislation• Dispute resolution

o Dedicated high courto Arbitration centreo 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 infrastructureo INCEIF, IBFIM & ICLIF

• International conferences

• Domestic & foreign Islamic banks, Islamic banking windows

• Islamic capital market players

• Fund for Shariah Scholarso Promote Shariah dialogues o Scholarshipo Research grant

• Offshore players• Liberalised equity policy for Islamic

subsidiaries and takaful


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


LEADING INITIATIVES IN ISLAMIC FINANCE

2005

Islamic Financial

Services Board

Malaysia global sukuk

2002

2003

2004

Islamic securities/ Sukuks by multilateral dev’t banks

Malaysia-IDB MoU

Shariah scholars dialogue

Financial liberalisation

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

Malaysia as international hub/ Labuan’s niche in Islamic finance

… for global integration


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


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


“… Islamic banking and finance will emerge as a force to be reckoned with in shaping the future development of global finance …”



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



Sources of funds

Non-mudharabahdeposits

Mudharabahdeposits

SHF

Application of funds

Generalpool

Specific account I

Specific account II

Profit

Distribution of profit

Depositors

Bank

Depositors

or


ISLAMIC BANKING OPERATIONS


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


TAKAFULTAKAFUL(e.g. Family, General)(e.g. Family, General)

TABARRU’TABARRU’(Donation)(Donation)

PROFIT SHARING ON PROFIT SHARING ON SURPLUS SURPLUS

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


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%


Takaful Model

Wakalah feesx%

x%

100% -x%

2 Models: Mudharabah or Wakalah

Business

Alhuda CIBE - Takaful in Malaysia by Bakarudin Ishak