Islamic Finance

Development

93 Islamic Banking
96 Takaful
98 Regulatory and Supervisory Framework
99 Talent Development
102 Regional and International Interlinkages
 Islamic Finance Development

ISLAMIC BANKING During the year, Islamic deposits and investment

accounts expanded by 11.7% (2016: 9.4%) to
Performance of the Islamic banking sector RM672.6 billion. Of this, investment accounts
increased by 6.9%, amounting to RM78.7 billion,
Shariah-compliant financial solutions offered by the reflecting a growing recognition of investment accounts
Islamic banking industry (including by development by customers as an alternative investment instrument and
financial institutions), continued to support the diverse further diversification of funding sources by Islamic banks.
needs of the economy in 2017. Islamic financing grew
by 9.4% to RM605.5 billion (2016: 11.8%) during the Islamic banks remained on a strong financial footing. The
year (Chart 4.1), amid a moderate growth of 1.3% in industry’s common equity tier 1 (CET1), tier 1 and total
conventional loans (2016: 2.4%). capital ratios of 13.2%, 13.7% and 17.6% respectively
(2016: 13.0%, 13.0% and 16.6%), were well above
Islamic financing of businesses sustained its the minimum regulatory requirements. Asset quality
positive growth of 7.8% (2016: 12.2%) and was remained sound with a net impaired financing ratio of
channelled mainly to the finance, insurance and 0.9% (2016: 1.0%). Sufficient liquidity buffers were
business services and manufacturing sectors. maintained, with the industry reporting a liquidity
Business financing was driven by small and coverage ratio of 149.2% (2016: 124.9%).
medium enterprises (SMEs), which grew by 12.5%
(2016: 13.3%), amid the more moderate growth In 2017, Islamic banks recorded higher pre-tax profits of
in conventional lending to SMEs (3.1%). Islamic RM6.7 billion (2016: RM5.6 billion). This was driven mainly
home financing also continued to exhibit strong by an increase in net financing income derived from term
growth of 17.5% (2016: 16.3%, conventional financing for the purchase of properties. Returns on assets
loans 6.0%), reflecting the growing acceptance of and equity were stable at 1.1% and 14.3% (2016: 1% and
Shariah-compliant home financing solutions. 13.1%) respectively.

Chart 4.1: Growth of Islamic Financing

Positive growth of Islamic financing driven by household sector

RM billion
620
+8.9 +8.5 605.5
600
580 +20.1 +1.7

560 +3.8
553.4 +9.1
540
520
500

2016 SMEs Large Home Vehicle Other HH Others 2017

corporates

YoY
12.5% 4.2% 17.5% 2.5% 5.9% 16.0% 9.4%
Growth

Business financing: 7.8% Household (HH) financing : 9.1%

Source: Bank Negara Malaysia

Financial Stability and Payment Systems Report 2017 93

 Development of the Islamic banking sector supplemented with an assessment of the positive
impact of the financing to the community and the
Creating an impact on society and economy economy. For business financing in particular, such
through value-based intermediation (VBI) an assessment will be based on a wider set of
The Islamic banking industry in Malaysia has advanced considerations which may include the potential for the
significantly over the years. From a market share of financing to contribute towards generating sustainable
5.3% in 2000, Islamic financing now accounts for 34.9% employment opportunities and entrepreneurship.
of total loans and financing. Islamic banks also offer
a wide range of competitive and innovative products, The expectation is for such an impact-driven
complementing solutions offered by conventional banks. mindset to be embedded within and well-integrated
into the risk management practices and product
development strategies of Islamic banks. By being
VBI aims to achieve the intended more customer-driven, Islamic banks are expected
outcomes of Shariah in promoting good to be more responsive to the unique circumstances
and preventing harm of individual customers through the offering of solutions
that address their differentiated needs. For example, the
While the growing depth and breadth of Islamic practice of complementing financing with financial
finance is an important barometer of progress, equally capability advice is expected to be more prevalent within
important is ensuring that Islamic finance delivers a the Islamic banking industry going forward. Islamic
positive and sustainable impact on the community, banks, in collaboration with other relevant industry experts,
economy and environment. This vision is being are also expected to offer business and technical
realised through the adoption of VBI by Islamic banks, skills training to help young and new entrepreneurs
which reinforces the intent of Shariah to promote better commercialise their ideas. Another approach
good and prevent harm (Diagram 4.1). being considered is to directly link the incentive structures
of Islamic banks, not just with the volume and value
VBI is being advanced to bring about a transformation of financing disbursed, but also with the ability of
in the business models and day-to-day conduct customers to service the financing over a long
of Islamic banks. This was captured in a strategy horizon. This is expected to lead to Islamic banks and
paper that was developed in collaboration with the their employees taking a longer-view of the financial
industry and issued by the Bank in July 2017. The well-being and commercial success of their customers.
vision under VBI is for Islamic banks to be more
Islamic Finance Development

impact-driven in the design and offering of products, The implementation of VBI by Islamic banks is
and in their dealings with customers. Important industry-driven, factoring in the different levels of
areas of focus include enhanced assessments of readiness and capacity of individual Islamic banks
a customer’s application for financing, where the to initiate and sustain the adoption of new business
traditional credit assessment methodology would be models and internal practices that are consistent
Diagram 4.1

Overview of VBI
What is VBI? Embed the Support
culture of entrepreneurial
An intermediation function that aims to deliver the intended outcomes self-discipline activities by
l
ria

within the providing

u
G ver

of Shariah through practices, conduct and offerings that generate

G

et ne
oo n
o

operations and comprehensive

ds re
d an

positive and sustainable impact to the economy, community and

in ep
Se ce

practices of and relevant

M ntr

environment.
lf-

Islamic banks offerings

VBI shares its purpose with other movements and initiatives in the VBI
world of business and finance to deliver economic, social and Key
environmental benefits for wider stakeholders. Thrusts

However, a number of characteristics set VBI apart:

C mp
om o
E
du st

1. Underpinned by Shariah; Continuous

m we

Create positive
on Be
ct

un rm

2. Embedded in and integrated with the business model, consistent effort to improve impact through
ity en

with long-term shareholder value creation; and offerings, effective

C

3. Reflected in day-to-day practices and conduct, going beyond processes and solutions to
t

philanthropy and employee volunteerism. dealings with help affected

stakeholders communities

Source: Bank Negara Malaysia

94 Financial Stability and Payment Systems Report 2017

with VBI. To support changes by the industry, a strengthening the competency of frontliners in
Community of Practitioners (CoP) comprising nine Islamic marketing investment accounts and ensuring effective
banks was established to spearhead VBI implementation. customer suitability assessments.
The CoP serves as an effective platform for members to
share knowledge and pursue collective efforts to develop The Investment Account Platform (IAP) – which
and execute VBI strategies in collaboration with strategic commenced operations in 2016 – is gradually
partners beyond the financial fraternity. emerging as an important enabling infrastructure to
mobilise and channel investment accounts towards
The CoP also aims to leverage its connections with funding entrepreneurial ventures. In 2017, funds raised
established value-based institutions, such as the through IAP listings quadrupled to RM95.3 million
Global Alliance for Banking on Values and Triodos (2016: RM20.0 million) from four ventures. To provide a
Bank, to advance the understanding and practice of more convenient, seamless and efficient experience for
VBI among Islamic banks in Malaysia. Observations new investors, the industry embarked on the development
of successful VBI models indicate that they have a of a multilateral framework for customer on-boarding.
number of features in common: leadership-driven Under this framework, IAP banks will mutually recognise
strategies and values that are aligned from the each other’s customer due diligence practices, thus
top, an enterprise-wide culture that is consistently removing the need for a customer to visit the branch of
demonstrated in business plans and operations, and IAP sponsoring banks to open a new bank account. The
a system that encourages constructive engagements framework is expected to be finalised and operational by
with and accountability to broader stakeholders. the first half of 2018.

As the VBI initiative progresses to its implementation Another concrete example of VBI in action is the
phase, the immediate focus in 2018 will be on empowerment of local communities, both Muslims and
developing tools for operationalisation and performance non-Muslims, seen through the growing involvement of
measurement. Guidance on applications and approaches Islamic banks in social finance. In September 2017, six
to VBI will be developed to help Islamic banks navigate Islamic banks entered into a collaboration agreement to
implementation challenges associated with different develop cash waqf (endowment) funds with the State
business models and maturity of individual Islamic bank’s Islamic Religious Councils (SIRCs). Under this initiative,
operations. In addition, a scorecard will be introduced participating Islamic banks will partner with SIRCs of 10
to measure both financial and non-financial progress of states to modernise the collection of cash waqf through
Islamic banks towards VBI adoption. This is expected to their access points, and internet and mobile banking

Islamic Finance Development

yield changes in the financing portfolios of Islamic banks, services. Funds collected will be invested in Shariah-
with at least half of new business and personal financing compliant instruments. Returns generated from these
channelled to purposes that are consistent with VBI by investments will in turn be channelled to fund projects
2020. Going forward, further targets will be set upon that promote economic empowerment, education and
implementation of the scorecard. health (Diagram 4.2). As part of this agreement, Islamic
Diagram 4.2
While the industry is still at early stages in its journey
towards VBI, there are already concrete examples Cash Waqf Fund
of VBI being put into action today. For instance, State Islamic Bank A A lead bank is
Religious Council (Lead bank) appointed to
funds raised through investment accounts are oversee the
being channelled to a variety of purposes, including Role of JMC: management of
• Oversee the cash waqf Joint cash waqf fund
to provide risk capital for entrepreneurs, such as fund as well as monitor the Management for each state
impact of social projects Committee
SMEs. During the year, efforts were directed at (JMC) Role of lead bank:
aligning and strengthening industry practices to • Invest funds in
Bank
BankAA Shariah-compliant
ensure that investment accounts function truly Donations investments
collected Bank B • Distribute surplus
as ‘risk capital’ instruments. The Bank issued from Bank C to high impact
regulatory guidance on the accounting treatment customers
and the Bank D
social projects
Cash Waqf
for restricted investment accounts to ensure that wider
Bank E Fund
public
cash flows are managed in a way that allows such Bank F
accounts to be treated off-balance sheet. Focus Source: Bank Negara Malaysia
was also directed at improving product disclosures,

Financial Stability and Payment Systems Report 2017 95

 banks have also committed to the development of These include commitments to support specific
knowledge and expertise in managing the investment and strategies for the Islamic banking business and to
distribution of waqf funds. As part of this commitment, the increase investments to develop capacity within
Association of Islamic Banking Institutions Malaysia will Islamic subsidiaries. The industry is expected to
develop a Code of Governance and Transparency for the reflect these commitments in the annual business
management of waqf funds in 2018 to set benchmark plan and group-level service agreements starting
standards for industry practice. from 2018.

Strengthening institutional capabilities of TAKAFUL

Islamic banking subsidiaries
Islamic banking subsidiaries play an important role Performance of the takaful sector
in the Islamic banking sector. The 11 subsidiaries
account for 65.7% of the industry’s assets and Sustained domestic demand for Shariah-compliant
as members of large financial groups, are able to protection continued to support takaful growth in
leverage on their groups’ shared services functions, 2017. The combined net contributions of family and
such as branch networks, technological platforms general takaful business increased by 9.5% to
and human resources. This flexibility has helped RM8.3 billion (2016: 10.5%), while the market share
expedite the growth of Islamic finance, allowing for of the takaful industry, in terms of net premiums and
efficient deployment of resources and wider access contributions, rose to 15.2% (2016: 14.6%).
to banking services for customers.
In family takaful, new business expanded by 10.0%
Islamic banking subsidiaries however remain fully (2016: 8.6%), largely attributable to mortgage term,
accountable for ensuring that these operational investment-linked and medical products which
flexibilities do not compromise the Shariah compliance accounted for 76.1% of total new business. A
of business practices and product offerings. A number of new and innovative family takaful
development of some concern has been resource products were launched during the year. These
sharing practices that are driven solely by operational include three takaful products under Perlindungan
and cost efficiency considerations, accompanied by Tenang (refer to box article on ‘Expanding Insurance
under-investments in internal capacity within Islamic and Takaful Solutions for the Underserved Segment’)
banking subsidiaries. This has resulted in higher which are affordable and designed to support
incidences of Shariah non-compliance and mis-selling simpler sales and claims processes. In the general
Islamic Finance Development

of Islamic financial products. takaful sector, business grew by 6.4% (2016: 4.7%),
with the motor, fire and personal accident segments
To encourage more optimal outcomes from resource commanding 91.3% of total gross contributions.
sharing management, the Bank engaged with the
senior management of Islamic banking subsidiaries Takaful and retakaful operators remained well
and their respective financial groups during the year to capitalised, with an aggregate capital adequacy
draw commitment from the industry to take specific ratio of 209.4% (2016: 205.3%) and capital buffers
actions to improve current practices (Diagram 4.3). totalling RM4.0 billion. Takaful risks remained largely
unchanged, reflecting a stable business mix and
Diagram 4.3 healthy reserve level to meet takaful liabilities. Total
takaful fund assets increased by 9.4% (2016: 8.4%)
Commitments to Enhance Resource Sharing to reach RM29.3 billion, with corporate sukuk, cash
Practices of Islamic Banking Subsidiaries and deposits accounting for 69.1% of total takaful
Set clear vision, policy and Commit to undertaking
fund assets. Profitability of the takaful sector was
strategy for the Islamic capacity building initiatives mixed in 2017. Family takaful recorded higher profits
banking business to facilitate future growth
of RM2.6 billion, up 27.2% from 2016 (RM2.0 billion)
mainly driven by better investment results. The
Provide commitment Enhance service level
to focus on Islamic agreements to improve general takaful sector however recorded weaker
banking business shared services functions profits of RM0.3 billion, down 28.3% from the
Source: Bank Negara Malaysia previous year (RM0.4 billion) on account of higher
management expenses and claims payout.

96 Financial Stability and Payment Systems Report 2017

Development of the takaful sector Malaysian Takaful Association (MTA), successfully
obtained agreement from the National Registration
Developing a conducive ecosystem for Department (NRD) to develop an automated
innovation and growth mechanism that will allow takaful operators to
A key focus in developing the takaful sector in 2017 regularly check the status of policy owners against
was the positioning of products and services to better the national death registry. By leveraging on the
meet the protection needs of businesses. In support of NRD’s existing infrastructure, requirements for
Malaysia’s aspiration to become a global halal hub, the documentation and procedures for verifying claims
Bank aims to publish an exposure draft outlining a clear will also be simplified, thereby expediting the
and facilitative regulatory framework for the offering of payment of death benefits. This initiative is expected
trade credit takaful in the first half of 2018. This is also in to be operationalised in 2018.
response to the large and growing halal market, estimated
at USD2.0 trillion in 20161. As a Shariah-compliant
The claiming of death benefits will be
product which complements trade credit insurance,
trade credit takaful can help protect businesses from made simpler and faster with a new
the risk of defaults in international trade, allowing them automated mechanism
to further grow their export business. Islamic banks may
also use the product as a tool to mitigate credit risk and In the area of retakaful, efforts were directed at
increase their trade financing capacity. developing an industry-wide retakaful pool to expand
the underwriting capacity of the general takaful
As part of efforts to expedite the process for claiming industry, while reducing reliance on conventional
death benefits, the Bank, in collaboration with the reinsurance capacity to support the takaful sector.

Diagram 4.4

Mechanism for Retakaful Pool

Takaful Risk Takaful Risk Takaful Risk

Fund A Fund B Fund C

Islamic Finance Development

1 Each takaful fund cedes a portion
of takaful risks into retakaful pool

2 A pool manager is appointed to Managed by

oversee the management of the Retakaful
retakaful pool
Pool
3 Risks underwritten by the retakaful
Pool Manager
pool are shared among
participating takaful and retakaful
operators

Takaful Takaful Takaful Takaful Retakaful Retakaful

Operator A Operator B Operator C Operator D Operator A Operator B

The retakaful pool will increase the overall industry’s underwriting capacity

Note: The number of participating takaful and retakaful operators is for illustrative purpose only

Source: Bank Negara Malaysia

1
Source: State of Global Islamic Economy 2017-2018
Report,Thomson Reuters.

Financial Stability and Payment Systems Report 2017 97

 The initiative, led by the MTA, enables individual standards on wa`d (promise) and kafalah (guarantee) were
takaful and retakaful operators to combine their finalised, bringing the number of total standards issued
capacity to underwrite larger and more complex risks to date to 12. In addition, exposure drafts on two new
that would otherwise be beyond the risk appetites standards, namely rahn (pledge) and bai` al-sarf (exchange
of individual operators (Diagram 4.4). The enlarged of money), were also published for industry consultation,
underwriting capacity is expected to result in with the view to finalise the standards in 2018 (Table 4.1
a reduction in the share of general takaful gross outlines the salient features of these four standards). The
contributions ceded to the conventional reinsurance completion of the compendium of standards will not only
market, which currently stands at 9.2% (RM236.2 million). strengthen Shariah compliance and governance, but also
enhance public confidence in Islamic financial transactions
Amendments to the Income Tax Act 1967 were and encourage a broader range of product offerings to
made during the year to allow for the deductions of meet the diverse needs of customers.
expenses incurred in managing family takaful funds.
The amendment recognises the unique features of To encourage greater innovation in takaful product
the takaful business model and accords regulatory offerings, the Bank conducted a review of the
parity in the tax treatment between the takaful and Takaful Operational Framework. The review seeks
insurance industries. to provide further clarity on the operationalisation of
Shariah contracts − namely wakalah (agency), mudarabah
REGULATORY AND SUPERVISORY (profit-sharing), qard (interest-free loan), hibah (gift) and
tabarru` (donation) − in the context of takaful business. This
FRAMEWORK
includes providing additional guidance on differentiated
The Bank’s regulatory priorities in the area of Islamic product features according to the attributes of the
finance in 2017 continued to be centred on measures contracts. For example, proposed revisions will include
to promote end-to-end Shariah compliance and spur a clear demarcation between takaful funds established
greater product innovation in meeting the needs of the for the purpose of savings and investment to reflect the
economy and society. relevant contracts applicable for each fund. The review
will also clarify expectations on specific responsibilities
Ensuring end-to-end Shariah compliance of takaful operators under these contracts and how they
through Shariah standards should be remunerated. Greater clarity that is envisaged
Since 2013, the Bank has worked closely with the to follow from the revisions is expected to catalyse the
Shariah Advisory Council of Bank Negara Malaysia development of products that better meet the protection
Islamic Finance Development

(SAC) to progressively roll out a compendium of Shariah needs of a wider range of customers. Internal controls over
Standards and Operational Requirements. These Shariah the establishment of sub-funds will also be strengthened
standards aim to reinforce the principles of Shariah, while to ensure their sustainability and safeguard the interests of
ensuring consistent and effective governance in the takaful participants. The proposed revisions will be issued
application of various Shariah contracts. During the year, for industry consultation in early 2018.

Table 4.1
Shariah Standards Issued in 2017
Kafalah Wa`d Rahn Bai` al-Sarf
Shariah Contract
(Guarantee) (Promise) (Pledge) (Exchange of money)

Application Guarantees, standby All types of financing and Pawnbroking and Foreign currency
letters of credit and other derivatives secured financing deposits, financing or
forms of guarantees investment, remittance
and bureau de change

Key elements Ensures clear distinction Specifies elements of Defines accepted Clarifies the approach
between the rights and a binding wa`d and uses of collateral and to spot settlement and
obligations of guarantors sets out the rights allowable charges rate of exchange for
and beneficiaries and responsibilities of currency exchange
promisors and promisees

Source: Bank Negara Malaysia

98 Financial Stability and Payment Systems Report 2017

Strengthening impact of Shariah governance ecosystem in Malaysia – anchored mainly by the
The Shariah Governance Framework, first issued in International Centre for Education in Islamic Finance
2010, sets out requirements to ensure that Islamic (INCEIF), International Shariah Research Academy (ISRA),
financial institutions are governed in a way that adheres IBFIM2, Chartered Institute of Islamic Finance Professionals
to Shariah principles at all times. To further strengthen (CIIF) and Association of Shariah Advisors in Islamic
its effectiveness given the growing size, nature and Finance Malaysia (ASAS). Over the years, these institutions
sophistication of the business of Islamic finance, a number have contributed towards enlarging the pool of Islamic
of enhancements to the framework were proposed in an finance professionals and deepening expertise through
exposure draft issued in November 2017. The exposure various programmes and initiatives (Diagram 4.5).
draft promotes Shariah governance practices that are
more effectively integrated within the business and risk Following the work of the Steering Committee for
processes of Islamic financial institutions. It calls for, Transformation of the Islamic Finance Education
among others, the strengthening of responsibilities of the Landscape (an industry-led task force established in
board of directors to include matters concerning Shariah November 2016 with members drawn from senior
governance, while reinforcing the independence of the management and board members from financial
Shariah committee in its advisory and decision-making institutions and academia), the Bank introduced a
role. The exposure draft further proposes to mandate number of reforms which were anchored on two key
that each Shariah committee include at least one thrusts to meet the talent needs of the industry.
industry practitioner to allow for practical and commercial
dimensions of Shariah issues to be more thoroughly The first thrust was to enhance the quality of talent
deliberated. Taken together, these proposals aim to development offerings, not just to increase their
elevate the role of Shariah committees in providing sound technical rigour, but to also ensure industry relevance
and innovation-centred Shariah advice to the board and and a high level of professionalism. This aimed to
senior management. The finalised policy document is support the creation of a high-calibre talent pool to
expected to be issued in 2018. drive and sustain the industry’s future growth and
development. Moving in this direction, INCEIF piloted
The revised Shariah Governance an action-based learning (ABL) approach in its modules
Framework aims to ensure effective during the year as a precursor to its full adoption in the
integration of Shariah governance within Master of Science in Islamic Finance programme in
January 2018. Under the ABL approach, case studies
the business and risk processes of

Islamic Finance Development

and simulations will feature more prominently in
Islamic financial institutions the classroom. Students will also be assigned
field projects and assignments with partnering
TALENT DEVELOPMENT organisations, where they will work on real-world
issues and challenges, thus equipping students with
Islamic banks and takaful operators employed 21,398 greater applied knowledge and practical skills such
individuals (2016: 21,601) or 13.0% of total banking, as critical thinking, problem solving and effective
insurance and takaful employees in 2017 (2016: 13.1%). communication skills. To date, INCEIF has secured the
During the year, the sector hired 4,562 new employees commitment of 22 commercial, non-profit and public
(2016: 3,605) and created 787 new jobs (2016: 878). sector institutions as ABL-partner organisations.
Recognising the importance of talent, the Bank and
the industry continued to drive various human capital In addition to industry-relevant content, equally important
development initiatives to raise the quality of talent in the were efforts to elevate the level of professionalism within
Islamic finance industry. the industry. To meet the professional development
needs of the Shariah fraternity, ASAS launched the
The Islamic finance talent development landscape in Certified Shariah Advisor (CSA) and the Certified Shariah
Malaysia offers a wide and comprehensive range of Practitioner (CSP) qualifications in November 2017. These
solutions, spanning higher education, research, training were the first comprehensive professional qualifications
and consultancy services, which are globally-recognised. developed for Shariah professionals working in the Islamic
In meeting the global demand for Islamic finance talent,
not just of today but into the future, efforts continue to be IBFIM was previously known as ‘Islamic Banking and Finance
2

scaled up to further strengthen the talent development Institute Malaysia’.

Financial Stability and Payment Systems Report 2017 99

 Diagram 4.5

Contributions of Islamic Finance Talent Institutions

INDUSTRY IMPACT THOUGHT LEADERSHIP REPUTATION

Established in
2006 Sustainable supply of Islamic Extensive participation by Local and global recognition
finance talent faculty in industry of academic excellence
• 1,585 graduates from 72 countries • 75% of faculty sit in various • 46th in Asia in RePEc2 ranking
International boards and advisory roles • Rated 5 (Excellent) in the
Centre for Emerging University category
Education in Top contributor for Islamic Reference point for other by SETARA3
Islamic finance research universities
Finance • 400 research papers and • 49 textbooks produced, of

publications (more than 50% which seven adopted by 23

listed in Scopus/SCI1) universities

Industry-relevant content
• Adoption of action-based learning
methodology to expose students to
leading industry practitioners

INDUSTRY IMPACT THOUGHT LEADERSHIP REPUTATION

Established in
2008 Top contributor for Islamic Extensive dissemination of Global recognition for
finance research research output intellectual contributions
• Over 200 research projects with • Over 300 conference • Winner of Islamic Economic

International more than 90 papers published presentations worldwide Award in the Islamic Economic
Shariah Knowledge Infrastructure category
Research Global repository for Reference point by other
Academy Shariah knowledge universities
• Over 2,000 fatwas and 500 • ISRA textbooks used by over
articles in i-Fikr portal 70 universities

Close linkage between Promotion of global

industry and academia harmonisation of Shariah
• Content developer for standards
Educator’s Manual on Shariah • Joint research with Accounting and
Standards issued by the Bank Auditing Organization for Islamic
Financial Institutions (AAOIFI) to
encourage harmonisation of
Shariah standards globally

INDUSTRY IMPACT
Established in
2001 Upskilling of the Islamic finance workforce Active publication
• More than 100,000 certification holders • 96 IBFIM publications
Islamic Finance Development

• Over 1,700 training programmes, events and seminars

Industry-led
training Close linkage between industry and academia
institute in • Academic collaboration with 27 universities and colleges

Islamic finance

INDUSTRY IMPACT
Established in
2011 Elevating the professionalism of Shariah advisors Continuous professional development
• Over 300 members •Over 20 training programmes, events and conferences

Professional qualifications for Shariah personnels

Association of
• Cerfified Shariah Advisor (CSA) and Certified
Shariah Advisors
in Islamic Finance Shariah Practitioner (CSP)
Malaysia

Established in
INDUSTRY IMPACT
2015
Elevating the professionalism of Islamic Professional qualifications for Islamic finance
finance practitioners • Chartered Professional in Islamic Finance (CPIF)
• Over 800 members (to be introduced in 2018)
Chartered
Institute of
Islamic Finance
Professionals
1
Scopus is the largest abstract and citation database of peer-reviewed literature while SCI (Science Citation Index) is a citation index produced by the Institute for Scientific Information.
Indexed journals are considered to be of higher scientific quality as compared to non-indexed journals
2
RePEc is a central index of economics research, including working papers and journal articles
3
Malaysia Rating for University and University College Excellence by Ministry of Higher Education
Source: International Centre for Education in Islamic Finance (INCEIF), International Shariah Research Academy (ISRA), IBFIM, Association of Shariah Advisors in Islamic Finance
Malaysia (ASAS), Chartered Institute of Islamic Finance Professionals (CIIF)

100 Financial Stability and Payment Systems Report 2017

financial industry. The CSA is intended for practitioners with to meet the industry’s current and future talent needs.
Shariah degrees while the CSP is designed for Shariah A Strategic Coordination Committee, comprising
practitioners without formal Shariah qualifications. Going representatives from the Bank and heads of the five
forward, these qualifications will be made a prerequisite for entities, was established to develop strategies to raise
Shariah committee members and key Shariah personnel in the quality and range of talent offerings available to meet
Islamic financial institutions, including Islamic windows. the needs of the Islamic financial sector. The Committee
will address gaps and overlaps in offerings and maximise
For non-Shariah practitioners, the Chartered operating and financial synergies across the entities. Niche
Professional in Islamic Finance (CPIF) qualification by areas for individual institutions will be identified to leverage
CIIF, was announced in December 2017 to raise the and further amplify the unique strengths of each institution.
bar for professionalism and ethics in the Islamic finance
industry. The CPIF offers two specialist tracks, namely In addition to specific enhancements to individual talent
Islamic banking and takaful, building on common institutions, a number of other initiatives were also
foundational modules. Enrollment is targeted to pursued during the year to enhance the suite of talent
commence in the first half of 2018 (Diagram 4.6). offerings. At the board level, a specialised Islamic finance
training programme for directors of financial institutions
The CSA, CSP and CPIF will elevate the will be launched in the first half of 2018. Building on the
core foundations on corporate governance set out in the
level of professionalism in the Islamic Financial Institutions Directors’ Education programme,
finance industry this new programme aims to equip directors with an
appreciation and knowledge of Islamic finance value
The second thrust of talent reforms pursued by the propositions by incorporating practical perspectives of
Bank was to improve coordination and cooperation Shariah governance, business opportunities in Islamic
among the five talent institutions. This was to ensure a finance and the risks pertinent to Islamic financial
coherent and optimal approach to talent development transactions in the programme.

Diagram 4.6

Islamic Finance Professional Qualifications

Background
CSP CSA CPIF

Islamic Finance Development

Shariah personnel Shariah personnel Other Islamic finance
without Shariah degrees with Shariah degrees practitioners

To produce Shariah advisors and officers with comprehensive and To produce versatile Islamic banking and takaful professionals
applied knowledge in Shariah, legal and finance practice with ability to assume wide-ranging responsibilities

Learning outcomes of each programme level

CSP CSA CPIF

Level 3 Level 3 Level 4

Application of skills and knowledge Application of skills and knowledge in Management level competencies in Islamic
in practical scenarios practical scenarios finance practices and operations

Level 2 Level 2 Level 3

Knowledge in Islamic finance Knowledge in Islamic finance business Core competencies in specific areas of practice
business practices with exposure practices with extensive exposure to i.e. banking or takaful
to research methodologies in classical texts in Shariah
Shariah Level 2
Level 1 Knowledge in accounting and ethics, as well as
Level 1 Foundations in law and finance an introduction to either banking or takaful
Foundations in Shariah and/or law operations
and finance
Level 1
Basic understanding of the operating
environment, Shariah, economics, legal and
products
Source: Association of Shariah Advisors in Islamic Finance Malaysia (ASAS), Chartered Institute of Islamic Finance Professionals (CIIF)

Financial Stability and Payment Systems Report 2017 101

 The Bank also continued to focus efforts on innovation, a significant milestone for the Malaysian sukuk
embedding Shariah standards within the Islamic market was achieved during the year with the world’s first
finance education curriculum. In this regard, the Bank two green sukuk issuances amounting to RM1.25 billion
continued the development of the Educator’s Manual for funding solar energy projects. The green sukuk were
for two more Shariah contracts, namely musharakah issued under the Sustainable Responsible Investment
(profit and loss sharing) and tawarruq (asset purchase on Sukuk Framework developed collaboratively by the Bank,
a deferred basis with subsequent sale to third party for the Securities Commission Malaysia and the World Bank
cash), adding to the first manual on murabahah (cost plus to provide a facilitative fundraising ecosystem to meet the
profit) released in 2016. These manuals are expected to needs for green and other sustainability projects. Malaysia
be issued in the first half of 2018. The series of manuals was ranked first in the Islamic Finance Development
aim to expose students of higher learning institutions to Indicator by Thomson Reuters and the Islamic Corporation
the practical workings of Shariah contracts by expounding for the Development of the Private Sector (a member
the theoretical foundations currently set out in the core of the Islamic Development Bank Group) in their
curriculum. Two universities have already embedded Islamic Finance Development Report 2017. This
the Educator’s Manual within their academic syllabus. was in recognition of Malaysia’s achievements in the
As a next step, a Train-the-Trainers programme will development of effective market infrastructure, diverse
be conducted by IBFIM to equip faculty with the players, a deep Islamic finance talent pool and robust
requisite foundations for delivering the content to legal, regulatory and Shariah frameworks conducive for
students. The Bank is also pursuing efforts to expand the sector’s growth and development.
the adoption of these manuals to a larger number of
universities in and outside Malaysia. At the global level, the Bank continues to be an active
advocate for the development of Islamic finance,
REGIONAL AND INTERNATIONAL particularly in the area of Shariah. Through its SAC,
INTERLINKAGES the Bank supports efforts to promote harmonisation
and mutual respect of Shariah opinions expressed
Malaysia remained a leading global hub for Islamic across Islamic financial systems. The SAC, which
finance in 2017. It is home to the world’s third largest celebrated its 20th anniversary in 2017, has played an
Islamic finance market by assets and the largest sukuk important part in the development of Islamic finance
market with a 51.0% share of global sukuk outstanding, in Malaysia (Diagram 4.7). The SAC has produced
amounting to USD202.2 billion. In terms of product several path-breaking Shariah rulings which have
Islamic Finance Development

Diagram 4.7

Key Contributions and Decisions by the SAC towards Developing the Islamic Finance Industry
Public confidence
• Permissibility of sale and buy-back arrangement with specified
Endorsement by renowned fiqh scholars that Islamic financial conditions and parameters
products are fully Shariah-compliant • Permissibility of takaful model based on wakalah (agency)
contract

Legal certainty
• Reference made to the SAC for seven court cases and one
Important source of reference for courts and arbitrators, while arbitration case in ascertaining Shariah rulings
reducing risk of commercial disputes • Shariah standards as key reference for courts and arbitrators

Product innovation • Approved the use of hybrid contracts (e.g. musharakah

mutanaqisah - diminishing partnership) which enabled the
Publication of more than 500 binding rulings and 12 Shariah introduction of innovative products
standards, which serve as building blocks for product innovation • Clarity on definition and differentiation between Islamic deposits
and investment accounts
• Permissibility of al-ijarah thumma al-bai` (leasing followed by sale)

Level the playing field • Establishment of an appropriate mechanism for late payment
charges by Islamic banks using gharamah (penalty) and ta`widh
Mitigates inconsistencies that lead to competitive distortions (compensation) concept
between Islamic and conventional financial institutions • Treatment for ibra` (rebate) in Islamic financing based on
sale-based contracts
Source: Bank Negara Malaysia

102 Financial Stability and Payment Systems Report 2017

not only instilled customer and market confidence, In the area of takaful, the Bank organised a roundtable
but have also catalysed a number of industry discussion at the sidelines of the 24th Annual Conference
innovations. The SAC’s endorsement of the application of the International Association of Insurance Supervisors
of al-ijarah thumma al-bai` (leasing followed by in Kuala Lumpur. The Bank shared its experiences
sale), for example, has allowed the offering of more in building a progressive takaful sector, including the
competitive vehicle financing solutions by more than development of a comprehensive and robust Shariah
15 Islamic banking institutions. Another area is the governance framework. Participants expressed keen
ruling on the imposition of late payment charges by interest to understand the similarities and differences of
Islamic banks using gharamah (penalty) and ta`widh takaful and insurance (in particular, mutual insurance),
(compensation) which has allowed Islamic financial and the advantages of having full-fledged takaful
institutions to operate on a level playing field with operators as opposed to takaful windows.
their conventional counterparts. During the year,
two publications were launched in conjunction with Apart from regulators, the private sector also plays
the SAC’s anniversary, namely a compilation of SAC an important role in expanding the frontiers of Islamic
resolutions from 2011 until 2017 and a compilation of finance at the global level. Over 100 professional
12 Shariah standards issued by the Bank. In addition, ancillary services firms currently offer a wide spectrum
in January 2018, the Bank rolled out a new SAC of services including in the areas of Shariah, legal,
website (www.sacbnm.org) which provides convenient accounting, tax and training in Malaysia. Given their
access to all SAC rulings and the Shariah governance depth and breadth of experience in developing the
framework in Islamic finance. This website serves as a Islamic financial sector in Malaysia, these firms are
key repository for detailed fiqh (Islamic jurisprudence) well-positioned to help meet the growing need and
decisions and underlying reasoning of the SAC interest of other jurisdictions wishing to make inroads
rulings, including the rulings made in developing into Islamic finance. Among key contributions by such
the 12 Shariah standards published by the Bank firms include pioneering the development of the world’s
to date. Efforts are underway to make these digital first Shariah standard on gold, in collaboration with
and physical publications available in key languages, the Accounting and Auditing Organization for Islamic
including English and Arabic. Financial Institutions (AAOIFI).

Islamic Finance Development

Financial Stability and Payment Systems Report 2017 103