Islamic Banking in Malaysia


Islamic banking is a branch of banking that is exclusively compliant with the Shariah (Islamic) law. The main underlying concepts and principles that encompass Islamic banking are profit-sharing between industry players and mutual risk, all the while ensuring justice and fairness for participants, transactions are based on an underlying asset or business operation and prohibited activities (interest, gambling, speculative trading) are avoided at all costs.

Islamic finance caters to every segment and niche of the society regardless of race, beliefs and gender. It has grown and helped develop and shape the real economy as well.


The Islamic finance industry had been initiated and developed in Malaysia over 30 years ago and to this date, it has no intention of slowing down. The implementation of the Islamic Banking Act 1983 enabled Malaysia’s first Islamic bank to be established, opening up various channels for the liberalisation of the Islamic financial system and the sprouting of several Islamic financial institutions. Malaysia is the leading country in terms of the Islamic Capital Market (ICM). As of the end of 2015, the size of Malaysia’s ICM stood at RM 1.7 trillion which is about 60% of the total value.

Islamic banking assets take up 27% of Malaysia’s overall banking system whereas Takaful penetration accounts for 14.8% of the population.

A growing Muslim population is likely to drive an even bigger expansion in Islamic finance and it is estimated that the worldwide assets pertaining to Shariah-compliant finance will double by 2018 to RM 15 trillion from 2013. Muslims in Malaysia constitute 60% of the total population and so it is one of the government’s goals to have 40% of the banking sector comply with the tenets of the Quran by 2020.

Performance Of Islamic Finance In Malaysia Vs. Other Regions

When compared to Indonesia, Malaysia demonstrates a greater consistency in growth with superior asset quality, despite both systems facing similar macroeconomics hurdles. The better performance of Malaysian Islamic banks could be explained by its relatively established franchising, effective market penetration, a more diversified portfolio mix and strong regulatory controls. The Malaysian Islamic banking industry comprised of 27% of the total banking system assets in 2015, whereas in Indonesia, it was only 5%.

As of 2013, Malaysia possesses the largest number of Islamic banking assets valued at RM 697.15 billion and the Southeast Asia region in which Malaysia is situated, accounts for 15% of the market share. Malaysia also has relatively lower levels of credit risk, averaging around 6% in a period of three years (2010-2013).

While Sukuk that are US dollar-denominated are indeed growing, the ones denominated in Malaysian Ringgit are dominating the market with rapid growth, resulting in Malaysia spearheading the Sukuk market in Asia.

Between 2001 and 2014, the cumulative amount of Sukuk issued in Asia was RM 2836 billion (75%) which was the highest compared to others, such as the MENA region issuing only RM 479 billion’s worth of Sukuk (13%).

Maybank Islamic

The Maybank Islamic in Malaysia happens to be the world’s third-largest Islamic lender apart from Iran, following Al Rajhi Bank in Saudi Arabia and Kuwait Finance House. The bank’s profit before tax surged to around 18.6% in the last few years, standing at RM 1.64 billion in 2015. Its market shares for loans and deposits amounted to 33.5% and 26.3% respectively. For the first time in the year 2015, more Islamic loans were provided by Malayan Banking Bhd. than conventional financing, causing the business to become more profitable. About 51% of the financings belonging to the nation’s biggest lender were contributed by Maybank Islamic Bhd., which was a rise from 44% in 2014.

Areas To Improve Upon

The Islamic finance industry must strive to achieve resilience and robustness, whilst being able to attract Muslims and otherwise. In order to garner interest, respect and recognition worldwide, it should work on continually repositioning itself to become facilitative. One of the challenges the industry faces is the lack of awareness. This is due to the shortage of qualified field experts who can potentially educate and relay to the general public regarding the alternative modes of Islamic banking, investment channels and Islamic insurance that are otherwise going unnoticed.

Training and development of the human capital involved are required to allow for greater awareness among potential consumers as well as the generation of innovative products. Legal and regulatory guidelines and frameworks should be accommodating and resilient. Dispute resolution mechanisms need to be in line with Islamic teachings to avoid mishaps and inaccurate legal judgements in Islamic banking cases. Countries including Malaysia, Bahrain and Oman have created separate legal and regulatory structures specifically for Islamic banks to adhere to and the Islamic Development Bank (IDB) has recently called for greater uniformity by voicing the need for a Global Shariah advisory board. Moreover, the Association of Shariah Advisors in Islamic Finance (ASAS) had been registered officially in 2011 as a global establishment to keep a check on the level of professionalism amongst advisors and industry experts. One of its aims is to “develop Malaysia as a reference center for Islamic financial transactions” by developing human capital as well as establishing the required legal, supervisory and regulatory frameworks.

Innovation And Digitisation

Malaysia has recently taken the financial technology (fintench) route by incorporating Islamic concepts to its financial regulatory guidelines. An Islamic Finance initiative that is bank-intermediated called the Investment Account Platform (IAP) is Malaysia’s first fintech platform which could renew the role of Islamic lenders to investment intermediaries. IAP was launched by six Malaysian Islamic banks (Affin Holdings, Bank Islam Malaysia, Bank Muamalat Malaysia, Maybank Islamic, Bank Kerjasama Rakyat Malaysia, Bank Simpanan Nasional) with an initial investment of RM 150 million and its main purpose is to bring together banks, lenders and establishments seeking funds in one place. Moreover, six banks backing the initiative will contribute to a margin of increased accessibility, reach and price transparency to potential investors and other capital seekers.

With the help of this digitised platform, key industry players are able to convert operational models into much more efficient and effective ones of a much greater scale and degree of specialisation, with minimum wastage and enhanced customer experience.