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ISLAMIC FINANCE INTELLECTUAL DISCOURSE 20TH OCTOBER 2016 NOVOTEL MELAKA
POLICY CONSIDERATIONS IN DEVELOPING A DUAL FINANCIAL SYSTEM IN MALAYSIA
Rustam Mohd Idris
Islamic Banking & Takaful
Department
2
Disclaimer
This document is solely for the use of the participants of the Islamic Finance
Intellectual Discourse (18 – 20 October 2016)
All information in this document shall not be circulated, copied or reproduced in
whole or in part, nor publicly referred to or discussed unless with the prior written
approval from Bank Negara Malaysia (BNM) or the information has been officially
released by BNM to the public.
The information was not prepared with the specific consideration of any particular
individual or entity.
Any views expressed in this document are those of the author and are not
necessarily those of BNM. While every care is taken in the preparation of the
information, no responsibility can be accepted by BNM for any errors and any
liability for any loss or damage arising from the use of, or reliance on, the
information contained in this document.
Islamic AuM:
RM132.4 billion Market share: 19.8%
Outstanding:
RM749 billion Global market share: 54.3%
Contribution:
RM6.8 billion Domestic market share: 12.9%
Asset:
RM685.4 billion Domestic market share: 26.8%
IF has entered its third decade of development…
All figures as at end 2015 .
Takaful
Islamic
banking
Sukuk
Islamic
fund
4
Source : BNM’s Financial Stability & Payment System
Report 2015
Source : BNM’s Financial Stability & Payment System
Report 2015
Sources : Zawya Islamic, Thompson Reuters
Source : Bi-Annual Bulletin of Malaysian Islamic
Capital Market
……..with a comprehensive IF ecosystem • Legal certainty to conduct IF
Central Bank of Malaysia Act 2009
Islamic Financial Services Act 2013
Harmonisation of IF matters in existing laws
Dispute resolution mechanism
• Established Shariah-compliance
framework
Two-tier Shariah Governance Structure
Shariah Governance Framework
Shariah & Operational Standards on key
Shariah contracts
• Comprehensive prudential regulations
Adopts BASEL & IFSB standards
• Diversified range of players, including
16 Islamic banks (8 leveraged model)
11 Islamic windows
6 development financial institutions
(2 are full-fledge DFIs)
11 takaful operators
3 retakaful operators
• Established supporting infrastructure
Malaysia Deposit Insurance Corporation
– safety net
Professional ancillary services providers
(law firms, accounting firms, rating
agencies, trust companies, consultancy
firms etc.)
• Wide-ranging products cater for discerning
market needs
• Efficient liquidity management
Lender of last resort facilities
Specific Islamic instruments to support liquidity
management operation
Active Islamic interbank money market
Bursa Suq Al-Sila’ facilitates efficiency in
commodity murabahah transactions
• Several learning institutions offer IF
courses
• Dedicated training institutions to
develop IF professionals
• Dedicated Shariah research institute
conducts focussed Shariah research
for the industry
• Continuous industry-led awareness
programme
Knowledge
& education
Product &
market
5
Institutional
development
Legal, Shariah &
Regulation
Sustained growth… Is
lam
ic b
anki
ng
, tak
afu
l &
Isla
mic
wea
lth
man
agem
ent
Sh
aria
h c
om
plia
nt
secu
riti
es
685.4 132.4 35.7
Sources : BNM’s Financial Stability & Payment System Report 2015,
Securities Commission Dec 2015
6
8
MIFC initiative - initiative that triggers several IFC initiatives in other parts of the world
Dedicated post graduate university in IF
Largest repository of Shariah research
Host to IFSB & IILM
Spearheaded several key IF initiatives…
Sources: Bloomberg, The Malaysian Reserve, Islamic Finance News, Reuters, The Banker
10
Supportive Government Facilitative central bank
Responsive markets Receptive public
Driven by four key enablers…
Government of Malaysia has been very supportive
National Agenda
Enabling legal environment
Provides enabling legal environment through:-
11
• GII, Islamic Treasury Bills, sovereign sukuks
• Dedicated legislation & IF provision in conventional legislation
• Non- discriminatory policy through tax neutrality framework
• Dedicated High Court & i-Arbitration for IF
Continuous sukuk issuance
12
Islamic Finance is one of BNM’s
key agenda
• Consistent facilitator of IF agenda since 80s Firm believer of financial inclusion & viability of IF’s
contribution to national growth
• Strong advocate of financial stability Regulator & supervisor of licensed IFIs Comprehensive regulatory / supervisory oversight for IFIs Comprehensive prudential policies to achieve stability &
compliance.
• Develop Islamic money markets & liquidity instruments
• Dedicated department (JPIT) to deliver IF mandates
13
• Strong buy in from markets due to its economics' viability & commercial considerations
• Consistent outreach programmes to create awareness
• Effective distribution of IF products & services
• Innovative in designing new products
Markets that are responsive
14
Malaysian population is a very important determinant that
ensures success of IF
• Strong acceptance from Malaysian population • Initial objective to cater for Muslim religious needs
evolved into commercial consideration. • Non-Muslim becomes important component of IF’s
growth.
14
16
Implications to financial
stability Phased in approach
Comprehensive and
structured framework
Shariah compliance as key
oversight
4 main principles in formulating policy considerations….
17
Dual role of BNM • The appropriateness for the Islamic bank to be placed under BNM • Issue of treatment between Islamic bank vs conventional bank
Possible disruption of the banking system • Possibility of a large migration of funds from conventional
banks into Islamic bank.
Effects on foreign investments • Possible concerns on Foreign Direct Investments
Pressure for more Islamic banks • Demand for more Islamic banks • Possible conversion of existing banks, especially
Government-owned bank
Containing the fear of non-Muslim • Racial harmony – non Muslims may view that the
establishment of an Islamic bank is an attempt to impose Islamic principles on the entire economic system.
1980s What were the concerns then?
These concerns were addressed – establishment of 1st Islamic bank becomes a reality.
18
1
2 4
Approach in disseminating IF nationwide
• Available options o Issue more Islamic banking licenses o Allow conventional banks to setup Islamic
branches o Allow conventional banks to setup Islamic
windows
1990s Anchored on Governor Jaafar’s speech. His dream for Malaysia to have a complete financial system i.e. conventional & Islamic financial system
Adequacy of instruments
to meet liquidity
requirements
• Larger number of players warranted the need to match deficit & surplus unit • Viability of Islamic money market
Shariah considerations
• Islamic window requires clear segregation of funds
• Adequacy of Shariah scholars well-versed in finance
• Possible formation of a central Shariah council
Readiness of Islamic banks
& TOs
• Readiness of Islamic bank to compete with Islamic window
• Adequacy of single TO to absorb expanded IF business
1
2
3
19
1990s Some key initiatives & outcomes
Formation of SAC.
Nation wide dissemination from 40 branches to 1000 branches
Establishment of Islamic money market
Separate system for fund segregation
Market share increase from virtually nil to 5%
Increase in number of takaful operators
20
Institutional capacity enhancement
2000s : Policy considerations guided by FSMP Realising a comprehensive Islamic financial system
• Benchmarking • Enhance knowledge & expertise • Strong management team
Financial Infrastructure development
• number of Islamic banks & TOs to stimulate competition • Deepen Islamic financial market • 20% market share by 2010
Regulatory framework development
• Strengthen regulatory framework for Islamic banks & TOs
• Establish an effective legal structure
• Codified dual financial system in CBoM Act 2009
21
2000s : Some key initiatives & outcomes
Development of new market & financial infrastructure
• Sukuk dominates IF growth
• Bursa Suq As-Sila
Creating strong & highly capitalized Islamic banks & TOs • Liberalising policy for
foreign players • Transformation of
windows to subsidiaries
Positioning Malaysia as an Islamic financial center (formation of MIFC)
Strengthened legal & Shariah framework • New CBoM Act • SAC as apex • SGF
Capacity building • Transformation of
IBFIM • Establishment of
INCEIF & ISRA
Establishment of multilateral institutions in Malaysia
22
2010s ¤t: Policy Considerations guided by FSBP
Islamic Financial Services Act 2013
Investment intermediation Enhance
professionalism of IF talent
Shariah contract based regulatory framework
Islamic Financial
Services Act 2013
Scope of Business
Definition of “Islamic banking business”
Definition of “Islamic deposit” & “Investment account”
BNM’s Role in Regulating Shariah Compliance
Regulatory objectives – promote financial stability & Shariah compliance
Duty of authorised person to ensure compliance with Shariah
Power of BNM to specify standards on Shariah matters
Non-compliance with Shariah as trigger for intervention & enforcement actions
Shariah Compliance & Governance Requirements
Establishment of Shariah committee
Duties & functions of Shariah committee
Requirements relating appointment & cessation of Shariah committee
Reflecting Shariah in Islamic Financial Services Act 2013
23
Financial Stability
Shariah Compliance
Efficient Payment System
Monetary Stability
Developmental Role
Formation of strategic initiatives aimed to institute a
comprehensive financial infrastructure supported by key
ancillary institutions through holistic developmental plans
Regulatory Role
Formulation of comprehensive regulatory framework,
institutional & infrastructure building with effective &
efficient consumer protection
Supervisory Role
Development and implementation of a sustainable,
progressive and robust Shariah supervision framework to
ensure the safety and soundness of financial institutions
in accordance with Shariah
Clarity of BNM’s role under IFSA that include Shariah
24
Protection of depositors, investment account holders & policyholders
• Preventing mismanagement of public funds
Preserve sound Islamic financial system
Preserve sanctity of Shariah conducts
Objective: Ensure financial stability
Defined regulatory framework for IF anchored on two regulatory objectives
1
To preserve public confidence • Setting minimum standards that all industry players
must adhere to
2
To correct market imperfections • Protecting consumer interests e.g. issues on
information asymmetry, monopolistic or non-competitive behavior
3
Need to moderate the problem of moral hazard
• Counter the negative effects of safety net arrangements such as tendency for excessive risk taking by industry players
4
Understand the fundamental • Shariah as backbone of Islamic finance • Specific approach taken to ensure compliance with
Shariah principles
1
Appreciate the uniqueness • Recognise unique structures of Islamic finance • Identify distinctive risks for Islamic finance
2
Recognise the environment • Understand local industry, customise regulatory &
supervisory approach to nature of Islamic finance • Resolve pressing & emerging system-wide issues
3
Acknowledge the challenge • Identify pre-requisites for sustainable system e.g.
human capital, infrastructure, capacity & capability • Balancing the need for prudential regulation & strategic
aspiration
4
25
FSMP & FSBP has facilitated in transforming IF into a modern, advanced & comprehensive IF ecosystem
Financial Sector Masterplan
(2001-2010)
Financial Sector Blueprint
(2011-2020)
26
• Ensures Malaysian Law is facilitative for IF
transactions for greater certainty
• Made recommendations for the amendment of
relevant laws – Rules of High Court, Land laws
Legal & Shariah Development
• Authority for the ascertainment of
Islamic law for IF industry
• Decision of SAC is binding on IFIs,
court, arbitration & BNM
Dato’ Dr. Mohd Daud Bakar
SAC Chairman
Tun Abdul Hamid
Former Chief Justice of Malaysia/
Chairman of LHC
LAWS OF MALAYSIA
Act 701
CENTRAL BANK OF MALAYSIA ACT 2009
LAWS OF MALAYSIA
Act 799
ISLAMIC FINANCIAL SERVICES ACT 2013
“The financial system in Malaysia shall consist of the
conventional financial system and the Islamic financial
system.” Section 27, Central Bank of Malaysia Act 2009
“The principal regulatory objectives of this Act are to
promote financial stability and compliance with Shariah…”
Section 6, Islamic Financial Services Act 2013
________________________ _______________________
Dedicated judge to adjudicate
Islamic finance cases
27
Shariah Resolutions in IFaims to
be an essential guide and
reference point for the Islamic
financial community.
Key Strategic & Regulatory Policies
TRANFORMATION of Islamic windows into licensed
Islamic banks
ISSUANCE OF ISLAMIC BANK LICENSES to qualified foreign
institutions
ISSUANCE OF TAKAFUL LICENSES to qualified parties, including foreign parties
ISSUANCE OF KEY PRUDENTIAL POLICIES
Capital Adequacy Framework Liquidity Framework
Shariah Governance Framework Investment Account Framework Takaful Operational Framework
Shariah & Operational Standards Late Payment Charges & Ibra’
GL on Islamic windows
Target of
market share
by 2020
market share
met in 2010
A palm oil bourse to facilitate tawarruq transactions
28
Capacity Building & Talent Development
• Promotes applied research in the area of Shariah &
IF. Recognised by Thomson Reuters as the top
global contributor in dedicated IF researches (2011-
2013)
• An industry-owned institute to enhance
technical skills & knowledge of IF
practitioners
• Trained more than 30% of total IF industry
workforce
• Robust KMC
• 63 titles published & more than 11,000 books
stored
Association for Shariah advisers & Shariah
officers to enhance professionalism
Professional body responsible to promote
highest standard of professional practice
amongst IF practitioners.
SHARIAH LEADERSHIP EDUCATION
Specialised programs to educate
Shariah advisers on banking & finance
29
International Initiatives
• Malaysia play host to IILM & supported via the IILM
Corporation Act 2011
• An international corporation that facilitates cross-
border Islamic liquidity management through
issuance of sukuk.
• Outstanding sukuk issued as at end Dec 2015 - USD
1.85 bil amount of
• Malaysia play host to IFSB supported via IFSB Act
2002
• An international standard-setting organisation that
formulate standards for IFIs globally
• Issued 24 standards & guiding principles
• Several regulators including BNM have adopted
IFSB standards
30
• Malaysia has earned its position as an
international marketplace for Islamic
finance.
“Malaysia's Islamic finance marketplace is open to global industry players and market participants to collaborate with and mutually benefit from a highly conducive business environment of innovation, expertise and deal flow.”
Malaysia’s MIFC initiative… greater international integration and inter-linkages on Islamic finance Established in 2006
31
CAPITAL MARKETS BANKING TAKAFUL TALENT DEVELOPMENT
PROFESSIONAL SERVICES
David Cameron Former Prime Minister of the United Kingdom October 2013
Mark Mobius, Ph.D Executive Chairman, Templeton Emerging Markets Group March 2015
Key drivers to advance IF to the next level
Value-based financial system
Contract-based regulatory framework
Investment intermediation
Education and awareness
34
New trajectory to capture 40% market share by 2020.
Value-based financial system
Contract-based regulatory framework
Investment intermediation
Education and awareness
Enhancing role of Islamic banks to further
strengthen its intermediary functions &
promote risk sharing
• To reduce reliance on banking activities as main
source of finance for IFIs, the latest regulation, IFSA
2013, introduced Investment Account (IA) as an
alternative source of funding
i. IFSA redefines Islamic deposit and IA for greater
clarity
IA demonstrated strong exponential growth
since its inception in July 2015 (110%
growth after a year from RM32.3 billion to
RM67.8 billion)
Industry-led digital innovation led to the
development of the IA Platform (IAP) -
bridge investors with prospective ventures
to facilitate efficient operationalisation of IA
35
1. Bank accept IA funds from customers 2. Bank channels IA fund to financing assets
Conduct suitability assessment on customers’ eligibility & risk appetite
Provide disclosures on the corresponding assets of each IA
fund & related risk-return profiles
Recommend appropriate products based on customers’ risk appetite
Conduct due diligence on prospective financing assets to ensure that risks undertaken are aligned with the investment mandate
Ensure proper governance to safeguard customers’ interests & bank’s reputation
Maintain clear separation of funds for: • Distribution of principal & returns • Resolution on winding-up
REGULATORY FRAMEWORK
36
3. Bank’s continuous roles
Conduct regular
monitoring
Report
performance
to customers
Distribute profit to
customers at pre-
agreed terms
Identify exit mechanism
& perform recovery,
if required
Match funds received with underlying assets according to the investment mandate
Propose Shariah contracts which will
define bank’s intermediary’s role &
basis for attributing returns generated
to bank & IA holders
Requirements under Investment Account (IA) Framework
Key features
• Centralised platform channelling funds from investors to viable entrepreneurial projects
• Incorporates robust disclosure regime
• Operates on secured internet-based architecture
Industry-led initiative on Investment Account Platform facilitates efficient operationalisation of
IA by bridging investors with prospective ventures
37
Initiatives to advance Islamic finance to the next level
Value-based financial system
Contract-based regulatory framework
Investment intermediation
Education and awareness
Contract-based regulatory framework
to reflect underlying Shariah tenets of
the respective contracts
• The framework supports the effective application of
Shariah contracts in the offering of Islamic financial
products and services
• The diverse spectrum of Shariah contracts provides
the opportunity for Islamic banks to expand their
product offerings beyond the traditional debt-based
products
• To increase dynamic offerings of Islamic banks that
can effectively match the diverse needs of customers
• 14 Shariah Standards have been developed to
facilitate the implementation of Shariah & operational
requirements 38
Shariah contract-based regulatory framework for Islamic finance
IFSA reflects Shariah contracts specificities and
enables issuances of -
Towards achieving value propositions of Islamic finance
Financial intermediation that serves real economy
Distinct risk and reward profiles based on Shariah contracts
Supports effective application of Shariah contracts
in Islamic banking business
39
Islamic banks conduct financial intermediation functions using various Shariah contracts
Islamic financial system
Compliance with fundamental requirements of respective Shariah contracts
Shariah Standards Practice Guides
Strengthen risk management, legal, accounting and other operational aspects of applying Shariah Standards
40
Shariah standards & operational requirements
Major Shariah contracts
Murabahah (cost plus mark-up sale)
Musharakah (profit & loss sharing)
Qard (loan)
Mudharabah (profit sharing & loss bearing)
Hibah (gift)
Istisna’ (sale of asset to be constructed)
Wakalah (agency)
Kafalah (guarantee)
Tawarruq (commodity murabahah)
Wadi’ah (safe custody)
Ijarah (lease)
Wa’d (promise)
Rahn (pledge)
Sarf (currency exchange)
due for completion by 2017..
Initiatives to advance Islamic finance to the next level
Value-based financial system
Contract-based regulatory framework
Investment intermediation
Education and awareness
Strengthening role of Islamic finance as
value-based finance that shapes a value-
based financial ecosystem
IF has inherent characteristics, in line with
values, to spearhead efforts of shaping a value-
based financial ecosystem
Currently developing proposal to measure
performance of IFIs beyond financial aspect
Corporate value intent (CVI) as a key
parameter to measure IFIs’ performances
based on 5 key elements:
i. Good self governance
ii. Entrepreneurial mindset
iii. Community empowerment
iv. Best conduct
v. Greater transparency
41
Efficient waqf &sadaqah
management
Opportunity for Islamic banks to
give back to society
Alternative funding sources for
waqf land development
Increase in size of waqf & sadaqah collected
Expand range of cash waqf & sadaqah products
Finance more social projects that are impactful to community
Community empowerment initiative Linking Islamic finance through waqf and sadaqah
Potentials for Islamic finance
Desired outcomes
42
4 innovative solutions currently being offered by Islamic banks
1) Wakaf Selangor-Mumalat is a cash waqf collaboration
channelled for education and health benefits
2) Bank Islam introduced e-donation terminals in mosques
3) Affin Barakah Charity account-i is a deposit product where
earned profit/dividend (hibah) can be donated
4) Maybank Islamic collaborating with Majlis Agama Islam Perak
(MAIP) to collect cash waqf from the public
Note – Community empowerment initiative is referring to social finance
Initiatives to advance Islamic finance to the next level
Value-based financial system
Contract-based regulatory framework
Investment intermediation
Education and awareness
Towards greater acceptance & avoiding
misconception on Islamic finance
Continuously promote greater understanding of
IF’s value propositions
43
45
Educator’s Manual for Murabahah Standard – Pilot project
A collaborative effort BNM,ISRA and IBFIM.
To assist the teaching faculty to infuse relevant practical elements of murabahah into the current academic syllabus.
The principles, pillars and components of murabahah including the recommended best practices are deliberated in an illustrative and attractive format
It exposes the students and academicians to the operational aspects and practical application of murabahah.
Universiti Sains Islam Malaysia (USIM) and Universiti Islam Antarabangsa Malaysia (UIAM) have agreed to adopt the Educator's Manual in their teaching syllabus
Educator’s Manual of other Shariah contracts will be issued in gradual
Disclaimer: While every care is taken in the preparation of this publication, no responsibility can be accepted for any errors.
Copyright: All or any other portion of this presentation may be reproduced provided acknowledgement of the source is made.
Notification of such use is required. All rights reserved. 46