CONTENTS Tittle: FUTURE PROSPECTS OF ISLAMIC FINANCIAL INSTITUTIONS IN MALAYSIA

Pages a. Abstract 2 b. Introduction 2-4 c. Scope of study 4 d. Objectives 4 e. Literature Review 5-8 f. Discussion & Findings 9-21

i- Principles and Products of Islamic Finance ii- Role and Functions of Islamic Financial Institution in Malaysia iii- Challenges and Opportunities in Islamic Financial Institution

g. Conclusion & Limitations 22

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Abstracts

Over the past three decades, the Islamic finance industry has emerged as one component of a competitive and comprehensive market, consistent with the conventional financial system in contributing to economic development. Although in early development the Islamic financial system is concentrated just in the country, but its growth internationally has seen a positive trend with the creation of growth in the number of Islamic financial institutions, with shareholders from various countries. Islamic financial system should be based on Islam fully, not just the name and label only. It must reflect the philosophy, values, ethics and objectives of Islamic Shariah. More recently, Malaysia, not often considered to be a leader within the Muslim world, has played a leading role in the Islamic finance industry.

The application and mechanics of Islamic Finance are examined in the light of Islamic Finance Guidelines issued by Central Bank of Malaysia. As will be evident in this paper, this system has its own advantages and value added which would make it the system of choice in meeting specific investment interests and needs. This paper provides insights into the future prospect of Islamic financial institutions in Malaysia.

INTRODUCTION

Malaysia aspires to transform the country into becoming Islamic banking and finance hub and one of the efforts is through strengthening the shariah governance in the Islamic financial sector.

Islamic finance refers to banking, finance, investment, and insurance services that are structured so as to comply with Islamic law. It is governed by the Shariah (Islamic Law), sourced from the Quran and the Sunnah, which are followed by the consensus of the jurists and interpreters of Islamic law. For the most part, compliance with Islamic law means avoiding transactions that involve the payment of interest, though other restrictions are also sometimes implicated. Furthermore, according to Shariah, the Islamic mode of finance should emphasize profit and loss sharing and prohibit fixed returns.

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In other words, any predetermined payment over and above the actual amount of the principal (i.e.

interest) is prohibited. The Shariah also prohibits activities related to uncertainty, risk and speculation. Investment in businesses dealing in alcohol, drugs and gambling, which are considered unlawful or undesirable also included in this prohibition (Grail, 2007). Islamic financial system should be based on Islam fully, not just the name and label only. It must reflect the philosophy, values, ethics and objectives of Islamic Shariah.

The idea of creating modern financial services institutions that operate in accordance with Islamic

law was first put forward in the first half of the twentieth century. The first Islamic bank was established in Egypt in 1963, but it was the infusion of petrodollars into Middle East economies in the 1970s that powered the development of Islamic banking. More recently, Malaysia, not often considered to be a leader within the Muslim world, has played a leading role in the Islamic finance industry.

The evolution of the Islamic finance in Malaysia has followed in the wake of innovations in the global financial services industry. A natural progression of the Islamic finance industry are competitive retail offerings, sophisticated corporate banking products, innovative project finance solutions and commercial banking. Malaysia’s Islamic finance sector has enjoyed exponential growth in recent years. Initially Islamic finance was limited to retail and commercial banking services. The industry has grown to include a range of investment vehicles as well as religiously approved insurance. Islamic banks now exist in more than sixty countries, and the industry is estimated to be worth over one-trillion dollars.

Following the liberalisation of the Malaysia’s financial sector, the outlook for future growth looks positive. Liberalisation measures now allow for an increase in foreign equity ownership of up to 70% in Islamic banks, investments banks and insurance companies.

When Islamic finance started at 1970’s, the initiative offered simple banking solutions that

encourage savings and financing. The products were structured in a manner that is in line with Shariah principles and easily understood by the public at large. In 1980’s, showed an increase of Islamic financial products, which is project finance and syndications.

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In the 1990’s, Ijarah and equity are included and in the 2000’s, sukuk, structured and alternative assets, liquidity and management tools also are implemented. Today, Islamic finance in Malaysia is a dynamic industry that is widely regarded as a competitive alternative to conventional financing solutions. There are now diverse local and foreign players in the market, showcasing their dynamism with a wide array of innovative financial products and services on offer. Islamic banking now comprises 20% of the total banking sector, complemented by a vibrant Islamic capital market, where 55% of outstanding domestic private debt papers are sukuk, representing the largest volume of sukuk issuances globally.

SCOPE OF STUDY This study explores and analyses the future prospect of Islamic financial institution in Malaysia by highlighting a few main areas of Islamic finance such as principles and Islamic finance products. Beside that, we also had see the role and function of Islamic financial institution in Malaysia from the past success and determines the opportunities and challenges that will effect the future prospect of Islamic financial institution.

OBJECTIVES The objectives of our study about the future prospect of Islamic financial institution in Malaysia is :

a) To examine the principles and products of Islamic finance with the growth of Islamic financial institution b) To study the role and functions of Islamic financial institution in Malaysia c) To investigate the opportunities and challenges that effect Islamic financial institution

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LITERATURE REVIEW Malaysia is the country in the world that well regarded by the international community as one of the leading Islamic financial centers. This was evidenced by the launching of an initiative by the Malaysian Government known as the Malaysian International Islamic Financial Centre (MIFC) on 14 August 2006. Based on that improvement, “Islamic finance has become a competitive form of financial intermediation that has been able to meet the differentiated requirements of our economies.

In an environment of rapid change, a key factor that will influence the future prospects of the Islamic financial services industry will be the investments to build the foundations on which further progress can be achieved. Investing in the future, in research and development and in the development of talent and expertise will be the differentiating factor that will contribute to the effectiveness, resilience and competitiveness of the industry. This undertaking needs to be the joint responsibility of both the private and public sectors to mutually elevate the performance of the industry and thus increase its potential to contribute to wealth creation and prosperity of our nations.” (Aziz, D.Z.A, 2005).

According to the speech of Governor of Central Bank of Malaysia, it shows that Islamic financial

institutions in Malaysia have good prospects to success in the future. Malaysia Islamic institutions also have many factors that can make the development and improvement in that particular institutions including in various sector, whether private or government sector. In addition, the future prospects of the Islamic financial institution in Malaysia will be the result of the combined efforts of all the relevant entities in the financial sector whether the industry, the regulators, the market participants and the international community. These efforts need to be encouraged as a coordinated and concerted effort to exploit the potential for the industry of Islamic financial institutions. In addition, developing the shared vision and common goal to be achieved will be an important first step to make a good future for Islamic financial institution. The greater importance will be the actions that need to be taken to make this happen to achieve the successful. It will be actions and initiatives that will contribute towards determining the future that aspire.

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According to the (Aziz, D.Z.A, 2004), the Governor was said that in the development of Malaysia Islamic financial system, a comprehensive approach has been adopted. Malaysia has given emphasis to the development of a comprehensive financial infrastructure that includes the Islamic financial markets, Islamic financial instruments, contract law and law enforcement procedures, Shariah governance framework, Islamic accounting practices and valuation standards, appropriate disclosure requirements as well as an efficient and secure payment and settlement system. Attention has also been directed to develop the prudential regulatory and supervisory framework that underpins the stability of the Islamic financial industry. Based on that statement, it shows that Malaysia governments give more attention and focusing to develop the Islamic financial institutions in Malaysia. Even though that Islamic institutions have been achieved the international standard, but Malaysia’s still in progress to make the improvement to make this Islamic institution develop from time to time in the futures.

Also, in a globalized world, Islamic financial institutions will have to compete with other financial

institutions. The customer is the final arbiter who will determine our share of the global market. To increase market share, Islamic Investment and Financial institutions must strive to introduce products and provide a quality of service that is competitive in relation to other products and services (Y.M Raja Dato’ Zaharaton Binti Raja Zainal Abidin, 2004). It means that from another perspective, Islamic finance is an alternative source of financing, which complements conventional finance to meet the needs and requirements of Muslims and non-Muslims throughout the world. Any of the products and services produced in the conventional financial system could be made possible for the usage of Muslims provided adjustments are made to fulfill with Shariah principles. For example, the form of financing for large infrastructure projects through bonds in conventional capital market has been made likely in the Islamic financial system as well as by introducing Islamic bonds called sukuk, which today is well known as a successful investment instrument globally.

In Malaysia, the principles of corporate governance have been well documented and applied

across all business entities, particularly public listed companies. Islamic financial institutions like banking institutions can thus adapt the code of ethics of the corporate governance that are consistent with the Shariah to their business. “In the Malaysian context, the same good corporate governance practices are applied for both conventional and Islamic banking institutions. To enhance the standard of corporate governance in the banking sector, Bank Negara Malaysia has introduced measures including among

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others, specific guidelines on the code of conduct for directors, officers and employees of the banking institutions and guidelines on the directorship and the prohibition of loans to directors, staff and their interested corporations.

The main objective of these guidelines is to engender public confidence in banking institutions and to ensure that the management and board of directors exhibit integrity and professionalism in the running of the banking institutions.” (Aziz, D.Z.A, 2000-2006). On top of that speech, the Malaysia Governor was said that, the Islamic financial institutions in Malaysia have a good perspective and efficiently in corporate governance. In addition, with the establishment of the Islamic Financial Services Board (IFSB), it is expected that the level of transparency and quality of corporate governance of Islamic banking institutions will be further strengthened. Through the transmission of international prudential standards that are consistent with the Shariah principles, the IFSB is expected to play an important role in promoting prudent, transparent and the robust development of the Islamic financial services industry and also to the whole Islamic financial institutions in Malaysia. Also, the Malaysia governments is honoured that Malaysia country has been chosen to be the IFSB secretariat and hope that the IFSB will accomplish its noble objectives as an effective prudential standard setting body for Islamic financial institutions.

At the same time as significant progress has been achieved in Islamic finance there remains much

to be undertaken both by the regulators as well as the industry if the factual potential of this form of financial intermediation is to be realized. Islamic financial institutions offer the Islamic financial system. Islamic financial system has a bright future in Malaysia. Malaysia is one of the hubs of Islamic financial institutions in the world.

According to Prof. Dr. Saiful Azhar Rosly and Dr Mohd Pisal Zainal in book ‘Islamic Financial

institutions and Market’, further growth and development of the Malaysian Islamic financial system will depend largely on the nature of innovations introduced in the market. Means the direct need is to boost operation of human and financial resources to develop instruments to improve liquidity; develop secondary, money and interbank markets; perform asset and liability also risk management. Islamic financial system can play an imperative role in the economic development of Malaysia, by mobilizing and facilitating the increased development of capital markets. At the same time, the development of such systems would allow savers and borrowers to decide which financial instruments compatible with their business needs, social

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values, and their beliefs. Islamic financial institutions have further duty to prevent money laundering activities as promoted by religion of Islam (Zulkifli Hasan).

Money laundering is the process by which criminals create the illusion that the money they are

spending is actually theirs to spend. Islam prohibits us to involve in any economic activities and services which are contradicted with the teaching of Islam such as money laundering activities. Islamic financial institution has responsibility to prevent money laundering activities which are clearly contradicted with the teachings of Islam. Islamic financial institution has a responsibility not only required by statutory law such as the Anti Money laundering Act 2001 (AMLA) but as well as the decree of religion of Islam. Shariah views that statutory duty under the AMLA upon reporting institutions as commendable and in line with the spirit of Islam (Zulkifli Hasan). Islamic bank is one of the Islamic financial institutions. Islamic banking now days has been on a progressive upward trend of which the assets of the banks have been doubled over the period 2004 until 2008 (Shahrizan Adzham, 2010).

On 27 April 2009, Prime Minister, Datuk Seri Najib Tun Razak has announced the new Islamic

bank may have a foreign equity interest of up to 100% at the same time as the minimum issued and paid-up share capital is USD 1 Billion. On 18 August 2009, the former prime minister Tun Dr. Mahathir highlighted that Islamic financial institution have greater potential as compared to their conventional counterparts as a former emphasizes on moral and ethics in conducting business. Islamic financial institutions playing a role in wealth accumulation, ownership, and protection by the ummah (Zuriah Abdul Rahman).

In Malaysia, countries where there is a large Muslim population, it is important that the financial

planner of properties belonging to a Muslim be provided with adequate information on laws and practices affecting the accumulation, protection and giving out of wealth or assets in accordance with Shariah laws. In Malaysia, the businessman and the investor does not have any doubts in their efforts to accumulate assets, the Central Bank of Malaysia introduced the Islamic Financial Master Plan (IFMP) in 2001 which indirectly, besides offering financial instruments and financial service which is halal, Malaysia exposed itself as offeror and manufacturer of halal financial services to convince the Muslim all over the world invest in Malaysia without any doubt (Zuriah Abdul Rahman).

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Discussion and finding

An Islamic financial institution is an increasingly globalized world. The banks are the first in the 1970's usually commercial banks that operate on the basis of interest. Since then, the main trend has been the increasing integration of investment and financing in the global economy. There is rapid development of "Islamic products" offered by conventional banks are customers of both Muslims and non-Muslims. For Islamic financial institutions currently operating in over 75 countries with assets of over USD 230 billion, we are sure in a strong position.

Malaysia is one of the leading Islamic financial center and it is recognized by researchers and researchers around the world. It’s also known as a Muslim country that is rapidly developing. This can be proved with the launch of the initiative by the Malaysian Government to be known as the Malaysian International Islamic Financial Centre (MIFC) on August 14, 2006. The various initiatives that have been committed, Islamic finance have become a competitive form of financial intermediation and meet the needs of the people in this country. Islamic finance meet the needs of the majority people in this country whether they are muslim or non-muslim because of the principle and products that Islamic finance that been produced.

Islamic finance in Malaysia is regulated by the country’s central bank, Bank Negara Malaysia (BNM), and the Malaysian Ministry of Finance, which are directly involved in the supervision of domestic Islamic financial activities. Islamic banking windows are permitted in conventional banks, as are subsidiaries that function solely to facilitate Islamic financial transactions. Under the Malaysian dual banking system, conventional and Islamic financial institutions operate adjacent to one another in the market.

According to the BNM annual report for 2008, Malaysia had a total of 17 Islamic Banks in operation

as of year-end 2008. As part of the government’s liberalization plans for the Malaysian financial sector, BNM announced in April 2009 that it would issue up to two new licenses for Islamic banking. The Malaysian Islamic Banking Act of 1983, established to govern Malaysia’s Islamic financial practices, is enforced by separate Shari’ah boards in both the BNM and the Securities Commission through centralized oversight. Locally adopted Basel II capital requirements and international accounting standards are being applied to domestic Islamic financial transactions, though adoption has been somewhat inconsistent.

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Principles and Products of Islamic Finance Basic elements of Islamic finance include profit and risk sharing, transparency and full disclosure, good governance, value-based innovation and principles of justice. These collectively provide implicit checks and balances in the system.

Currently, the guiding principles regarding Islamic finance include the following: 1. Any predetermined payment over and above the actual amount of principal is prohibited. 2. The lender must share in the profits or losses arising out of the enterprise for which money was

lent. 3. Making money from money is not acceptable by Islamic law. Money is only a medium of

exchange, and therefore should not be allowed to give rise to more money, via fixed interest payments, simply by being put in a bank or lent to someone else.

4. Gharar (uncertainty, risk or speculation) is also prohibited. 5. Investments should only support practices or products that are not forbidden (or discouraged) by

Islam.

The following is a brief description of Islamic financial products: ( Imady and Seibel ,2006) ( Grail, 2007 ) i) Profit sharing financial products • Musharakah- It is joint venture. Under Musharakah, all the partners contribute funds and have right to participate in the management of the business. Profits are shared in an agreed ratio but losses are shared in the ratio of capital invested. Contributions can be made either in cash or in kind.

• Mudarabah- It can be categorized into asset based, liability based and profit sharing. Under Mudarabah, one party provides 100% capital and the other party manages the investment project. Profits are shared in a pre-agreed ratio whereas losses accrued are borne by the provider of capital only. Mudarabah is often used for investment funds, where investor provides money to the Islamic bank, which the bank invests charging a management fee. • Qard Hasan- charitable loans free of interest and profitsharing margins, repayment by installments. Modest service charge is permissible.

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• Wakalah- a bank is authorized to conduct business on customers’ behalf. • Hawalah- an agreement by the bank to undertake some of the liabilities of the customer in return for a service fee. The customer pays back the bank when the abilities mat. ii) Advance purchase financial products • Murabahah- It can be categorized into asset based and cost plus financing. Bank purchases the commodity and resells it at a predetermined higher price to the capital user, disclosing the margin of profit included in the sales price. The client pays for the goods in deferred payments or over a stated installment period. In case of default the client is liable only for the contracted sale price • Istithna’- It can be categorized into asset based and commissioned manufacturing. Under Istithna’, a party (bank) undertakes to produce a specific thing that is possible to be made according to agreed specifications at a determined price and fixed date of delivery. As banks do not normally carry out manufacturing, a parallel contract for manufacture is instituted. The bank charges the buyer the price it pays to the manufacturer plus a reasonable profit (monetary installment) and takes the risk of manufacture of the asset. • Mu’ajjal- a sales contract that allows purchase with deferred delivery. • Ijarah- It can be categorized into asset based and leasing. The bank buys and leases out the asset for a rental fee, which includes the capital cost of the equipment plus a profit margin. The ownership of the equipment remains with the lessor bank and in case of a finance lease, is transferred on pre-determined terms. It was available under both operating lease and finance lease (Ijara-wa-iktana). Widely used in house and aircraft financing. • Tawarruq- It can be categorized into asset based and monetization of commodity. Tawarruq is the mode adopted by banks to lend cash and the customer buys a commodity from the bank under Murabahah which is then sold to a third person on cash at a price less than the purchase price. The customer hence obtains cash without taking an interest-based loan. If the customer resells that commodity to the bank, it is called Al-'inah.

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iii) Deposit products • Wadi’ah- deposits, including current accounts (giro wadi’ah).

• Mudarabah- deposit products based on revenue-sharing between depositor and bank, including savings products that can be withdrawn any time and time deposit products. • Qard al-Hasanah- unremunerated deposit products, usually for charitable purposes. iv) Insurance products • Takaful- It was an Islamic insurance. Takaful is insurance based on mutual co-operation, responsibility, protection and assistance between groups of participants. It is a kind to a cooperative insurance wherein members contribute a specific sum of money to a common pool. Every policyholder pays his subscription to help those that need assistance. Losses are divided and liabilities spread according to the community pooling system. v) Sukuk • Sukuk- Islamic bond. Sukuks are similar to conventional bonds with the difference that these are asset backed and represent proportionate beneficial ownership in the underlying asset. Sukuk holders are entitled to a share in the revenues generated and in the proceeds of the realization of the Sukuk assets. The overall Sukuk market size is estimated to be close to USD 50 billion globally as of the end of 2006. (Development Bank of Malaysia, 2006 ) All Shariah-based products, including private equity, project financing, organization and sukuk’s issue and fund management products, assets and property. This proved successful Islamic financial services emerged as one of the fastest growing services in the financial services industry.

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Role and Functions of Islamic Financial Institution in Malaysia Islamic world have many reasons to celebrate our success in promoting investment and Islamic financing over the last three decades. In this regard, Malaysia has been promoting itself as a regional Islamic financial center. Labuan in particular is being developed as an International Offshore Financial Centre (IOFC), including Islamic banking and capital markets. Various efforts are underway to complete the Labuan IOFC with appropriate infrastructure capacity, and institutional aspects of the law to allow Labuan to position itself as an Islamic financial center and is very effective in this region. Internal factors played an important role in promoting Islamic banking system is the mission, the strengthening and consolidation of religious knowledge among the Muslims through the institutions of formal and informal education. In addition, awareness among the Muslims is also influenced by the success of the Tabung Haji as a respected financial institution.

The Islamic financial system in Malaysia comprises of banking institutions and companies offering discount schemes takaful, leasing companies, leasing, institutional development costs, savings institutions, cooperatives, mortgage institutions, the Pilgrims Fund Board, the management of the institution of zakat, the national endowment institution, agency credit, rating agencies and fund management companies. The system also includes financial markets, accounting for offshore financial markets, money markets and foreign exchange, Islamic government securities , Islamic private debt securities, shares, unit trusts, insurance agencies and financial security.

Today Islamic finance has evolved into a complete and competitive form of financial intermediation

that serves both Muslim and non-Muslim consumers and businesses. The Islamic finance industry is currently worth more than $1 trillion and growing at a rate of 15-20 percent annually, with projected growth to reach $2 trillion in the next 3 to 5 years, as more countries around the world seek to further develop Islamic finance within their jurisdictions. The appeal of Islamic finance has led a number of established conventional players to enter the industry, thus widening the diversity of Islamic financial institutions and its product range. The impressive growth however is not confined to the Muslim world, but spans across the West and the Asia Pacific region where the growth is driven by commercial and business considerations. (Zeti Akhtar Aziz, 2008)

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Malaysia is the largest Islamic banking and financial market which valued RM113.5 billion (US$30.9 billion) in Islamic banking assets, RM6.2 billion (US$1.7 billion) in Takaful assets and the largest Islamic Private Debt Securities (IPDS) market attained RM125 billion or US$34 billion ( 45.5% ) of domestic corporate bonds. Active Islamic money market channelling about RM30 billion - RM40 billion monthly. ( Central Bank of Malaysia, 2008)

The following is the summary of growth and development of Islamic financial in Malaysia.

A. Government Regulations and Incentives. Based on the legal infrastructure of the existing Islamic finance, including Islamic Banking Act 1983, Act 1984 and Government Funding Act 1983, Malaysia has provided a legal framework for the further development of Islamic financial system in Malaysia. It aims to give due recognition to the Islamic financial system that operates in tandem with the conventional financial system and give the task to the bank and other government agencies to promote Malaysia as an international Islamic financial center.

10 Year Master Plan for the development of global Islamic financial industry been undertaken and it is a collaboration between the Islamic Development Bank (IDB) and the IFSB. Perhaps that the development of efficient measures will be taken. In addition, it is also the best guide for every cooperation to contribute to economic growth. This plan also emphasized the importance of the level of understanding and awareness of investors, who want to join Islamic financial system by providing information about the expected level of performance and shariah law is the cornerstone to any investment details. (Plan of The Financial System Malaysia, 2002).

On 9 February 2006, the Central Bank of Malaysia announced a new Islamic monetary instrument,

called the Sukuk Ijarah. It seeks to manage liquidity in the market and the first issue of these instruments amounted to RM 400 million. Advances in ICT also have a significant impact on Islamic financial operations. On this awareness, the Central Bank of Malaysia has developed a website on the market, namely Islamic Interbank Money Market (IIMM) as an initiative to disseminate information more efficiently, to facilitate investment decisions and enhance public confidence in their investments.

Malaysia had also earlier launched the first global Islamic derivatives master agreement (IDMA) in

2007 to develop hedging tools for the Islamic financial markets to manage investment risks. This was

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followed by the Interbank Murabahah Master Agreement (IMMA), which was signed in August 2009 by Malaysian Islamic banks, designed to facilitate effective risk and liquidity management through Shariah-compliant deposit placements using the commodity murabahah concept.

B. Islamic Organization Islamic Financial Services Board (IFSB) established on year 2002. It seeks to outline the standards of financial prudence of Islam. IFSB has also joined the Accounting and Auditing Organization for Islamic Financial Institution (AAOIFI) that was established in 1990. These two organizations have collaborated in producing an international best practice in development of global Islamic finance. Significantly, this effort is to ensure the resilience of Islamic finance is more sustainable.

On 24 June 2006 at the Islamic Finance Summit, Governor Tan Sri Dato 'Dr. Zeti Akhtar Aziz spoke, there were four main challenges that must be addressed to sustain the development of Islamic finance in the global financial system. First, the development of a robust financial system at the national, international Islamic financial market development, efficient and effective manner, implementing standards and IFSB standards of adequate human capital development.( Zeti Akhtar Aziz,2006)

C. Education On year 2005, the International Centre for Education in Islamic Finance (INCEIF) was established to develop human capital to meet the needs of the industry domestically and internationally. For starters, the Central Bank of Malaysia has established an endowment fund of RM500 million. D. Cooperation Between Countries. On 19-20 May 2010,cooperation between INCEIF and Islamic Finance Industry United Kingdom was held at Multiporpose Hall, INCEIF, proving that Islamic financial system in the world market value. (ISRA Report, 2010)

Malaysia, United Kingdom and Hong Kong has declared intention to become the Islamic Financial Base. The existence of this center to facilitate the transaction and would further strengthen relations between the countries. (ISRA Report, 2010)

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E. Banking. Islamic banking and financial system in Malaysia has shown a remarkable development and improvement. Before 1993, Malaysia has only one Islamic bank with 36 branches is limited. However, after the government introduced a scheme of Interest Free Banking in 1993, Islamic banking is now available in nearly 2,500 branches of Islamic banks, commercial banks, merchant banks and finance companies. According to the Economic Report 2001/2002, at the end of July 2001, the Islamic banking system consisting of Holdings, Bank Malaysia Bhd and 35 other financial institutions (14 commercial banks, nine companies, five merchant banks and seven discount houses) that offer services Islamic Banking Scheme (IBS).

In the current international financial, Islamic finance in Malaysia is among the fastest growing areas and competitive. This development triggered the need for financial institutions to be more dynamic in the development of Islamic products, other than to strengthen their skills and diversify their products.

Malaysia also need to develop a system that can evaluate and distribute the work practices adopted by others. Practices and procedures in line with Islamic values should be practiced and to describe to people that the Muslim community can be identified through good works to increase the confidence of non-Muslims on how all the management, especially in the field of Islamic finance. Monitoring mechanism will be established to ensure that all works smoothly. Individual and collective Islamic Investment and Financial institutions need to document their experiences and put them in the public domain for the benefit of the people and for others to emulate. Investment and financial managers who are guided by laws and regulations specified under the Shariah principles. It is guided by the Quran and Hadith.

According to Bank Negara Malaysia Governor's speech, it shows that the Islamic financial institutions in Malaysia have good prospects for success in the future. This means that Islamic financial institutions in Malaysia will expand more rapidly in the near future. However, to ascertain the truth of this statement, many things, and efforts should be made by Malaysia to achieve the objectives that have been determined. Many changes have been made by Malaysia in its effort to develop the national economy. There are many reasons that cause this country can thrive in today's economy. Among them are the developments in the field of investments. Investment in Malaysia is encouraging and this has led many foreign investors interested in investing in the country. A lot of investments undertaken in the country can

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be achieved. Developments in financial institutions in the country are also very encouraging. There are many factors that lead to the stability of financial institutions. It includes efficiency, endurance and competitiveness that the financial industry.

According to Dr Zeti Akhtar Aziz, the need to be the joint responsibility of both private and public sectors to mutually enhance the performance of the industry and thus increase the potential to contribute to the creation of wealth and prosperity of our country. From this verse, we recognize the importance of cooperation between the public and private sector in developing the industry in Malaysia. Cooperation between the two parties can continue to improve the financial potential in the future.

On August 18, 2009, former Prime Minister Tun Dr Mahathir pointed out that Islamic financial institutions have a greater potential than their conventional counterparts as the former emphasizes the moral and ethics in business. This case shows us the importance dominates and takes advantage of the Islamic finance because it has a good future for entrepreneurs in Malaysia. Therefore, knowledge of Islamic finance is beneficial to the institutions that carry out activities in accordance with shariah law.

On 27 April 2009, Prime Minister Datuk Seri Najib Tun Razak announced a new Islamic bank may have a foreign equity interest of up to 100% at the same time as the minimum issued and paid-up share capital is USD 1 Billion. This is good news for Islamic financial institutions in Malaysia. It can ensure economic stability in the near future.

According to Shahrizan Adzham(2010), Islamic banking now days has been on a progressive upward trend of which the assets of the banks have been doubled over the period 2004 until 2008. This can be proved with the increase in the establishment of banks across the country Malaysia, especially in areas with rapid development. This case shows the Islamic banking has gained its place among the community at present is not about Muslims or non Muslims.

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Challenges and Opportunities in Islamic Financial Institution

While the opportunities for investment and financing will continue to grow there is a need to develop products, services and standards in line with the times. We must strive to find and seize the opportunities in global markets and investment services. This is an opportunity for Islamic financial institutions in the near future. Islamic financial institutions have a stable economic position at this time, and it is expected to be better in the future.

Therefore, further examination should be made to the system of Islamic financial institutions today. For example, consumer, banking, portfolio of products including rescue plan, insurance and protection, home financing, consumer financing, equity broking and retirement planning products / retirement and wealth management options. This all needs to be analyzed carefully to develop and expand its Islamic financial institutions.

As we know, there are existing markets and new markets in the global Islamic financial. The existing countries are Malaysia, UAE, Bahrain, Qatar, Brunei, Indonesia, Pakistan and Sudan. Potential new markets are United Kingdom, Hong Kong, Singapore, Thailand, Japan and USA. Currently, there are over 300 Islamic financial institutions in more than 75 countries though they are mainly concentrated in the Middle East and Southeast Asia, but are also gaining popularity in Europe and the United States. It is estimated that the industry will grow at a rate of 15 to 20 percent annually, from current assets of US$300 billion (Al-Salem, 2008).

Furthermore, exploring new markets can be realized with more efficient when there is cooperation with various institutions that conduct research in Islamic finance such as: i) Islamic Research and Training Institute, IDB ii) Centre for Research in Islamic Economics, King Abdul Aziz University iii) Salih Kamil Centre for Islamic Economics iv) Durham University in U K v) OCIS (Oxford Centre for Islamic Studies) vi) IIFM (International Islamic Finance Market)

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The exploration on new markets area will expand not only knowledge about Islamic finance but also the Islamic cultural that have in doing business like the akad in transaction process and so on. Another area of concern is commercial, especially for small and medium enterprises (SMEs). SMEs have become one of the universally accepted businesses. SMEs can grow the economy and it will provide job opportunities for the participation of SMEs have a lot of diversified portfolios. Many of products for this market segment as well as a variety of trade finance, cash management, financial assets and bills discounting services. Attention given to SMEs can continue to help entrepreneurs who run based products increased.

In a globalized world, Islamic financial institutions have to compete with other financial institutions. Customer is the final arbitrator will determine our share of the global market. It is therefore important for us to meet customers by producing what is claimed by them. To increase market share, investments and Islamic financial institutions should strive to provide quality products and services competitive in relation to products and services and others. Among the things to do, we are conducting a survey method desired by the user. Survey method is very important to ensure that Islamic financial institutions can produce products that are in line with user demand. In addition, Islamic financial institutions should also renew existing products. When these institutions are always new products, consumers will not feel bored with the existing product. It also indirectly helps create the mood to try new products that are produced. When demand increases, it will increase the profitability of Islamic financial institutions in the future.

On the other hand, Islamic finance is an alternative source of financing, which complement conventional finance to meet the needs of Muslims and non-Muslims around the world. Very important to increase at the Islamic financial Institutions in Malaysia as it would make the Muslims feel confident using a product that the word halal in packaging. Any of the products and services Produced in the conventional financial system can be made to use the Muslims as long as it is consistent with Islamic shariah law.

For example, the mode of financing for infrastructure projects through the bonds of conventional capital markets has been done in the Islamic financial system and the introduction of Islamic bonds known as sukuk, which today is known as a successful investment instruments at the global level. Sukuk is a certificate in Islamic finance, similar to Western financial bonds, which comply with Shariah, Islamic law. Sukuk must be able to link the returns and cash flows of financial assets purchased, or the return generated from the assets purchased. This is because trading in debts is prohibited under sharia.

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In addition, investment funds and financial institutions also need to begin an aggressive publicity to attract more customers and promote a variety of Islamic products is increasing. Publicity can be directly introduced to the public about the products produced by these institutions. Therefore, to improve the efficiency and effectiveness of the publicity, advances in ICT must be fully utilized. Until now, advances in ICT have a great impact on the operations of Islamic financial institutions in terms of information management systems, product development, risk management, and distribution capabilities. Use of ICT will be an important medium to connect our customers with the institution. There are many advantages using ICT as a place to promote the product. Among them is that it saves time and is usually more extensive use of ICT will certainly reduce costs. It provides tremendous benefits to consumers and also the institution itself.

In addition, research and development is very important to be care. Research should be increased to encourage investment and Islamic finance a global scale. Islamic banking and finance should be developed as a discipline and field of research. Research and rapid development can assist Islamic financial institutions to raise new ideas that are consistent with the current. In addition, universities and institutions of higher learning offer courses must be chains to move forward closer. Courses offered to review in advance to ensure they have the opportunity and demand in the near future. This research will not only enable the sharing of information on the public, but at the same time it gives recognition to the Islamic financial system that it was entitled in this globalized world.

Shariah based financial need to pay attention in some particular thing. It includes user interest, acceptance, and cost competitiveness. Thus, this must be channelled into innovative processes to ensure they succeed in introducing a new and useful to the market. However there are some parts of the least performed of innovation today. The first is about risk management. In Malaysia, we already have some equipment that complies with sharia hedge that work on the basis of actual or structured transactions on real assets. However, many new tools have been created to meet market demands, including syariah-compliant short-selling controlled. It may not be very advanced compared to some of the more complex derivatives available, but they have the ability to hedge some of syariah-based transactions.

The second focus for future innovation should be on fundraising. In 2007, Saudi Arabia reportedly issued a fifth of the global sukuk. However, sharia-based investors are not limited only to Muslims. So clearly, the sukuk market remains a strong growth prospects and it is believed by the public.

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However, we must remember that while the sukuk bring Islamic finance into the area of capital market, Islamic capital market is not confined only to the sukuk. In fact, the equity market is an area where there are strong opportunities, to expand the potential pool their financing through the Islamic equity market.

Future prospects reflect that Islamic capital market has the potential to reach several trillion USD in the near future. It is directly put Islamic financial institutions in a stable and better in subsequent years. Acceptance and demand for products from both Muslims and Non-Muslims is expected to increase in the near future. It can be seen through its acceptance at the present time.

The fact that there are no policy restrictions or discriminatory practices adopted by Islamic banks and conventional banks which operate through the windows of local Muslims, they have made Islamic products and services are accessible to non-Muslims. This success is evidenced by the rapid development of Islamic financial institutions and the acceptance by both Muslims and non-Muslims and retail and corporate sectors. Malaysia unique experience bode well for the globalization of Islamic financial institutions as they strive to compete and make their mark in this world of multi-ethnic. With more attention given to consumer acceptance of benefits, and cost-competitiveness, the Islamic capital market will be in a position the firm to benefit from the global recovery and meet the demand for risk management, investment and fund raising.

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Conclusions Currently, Malaysia is considered to have a comprehensive Islamic financial landscape. However, to ensure the effectiveness and competitiveness of this system continues, the institutional infrastructure of Islamic finance should be further enhanced. Each of the dissemination of information should have access to it. This is important so that investor’s awareness of the unique features of Islamic financial system will be increased.

Prospects for the development of Islamic finance should contain a balanced development of the shariah and integrated market by the prospect of a unique Islamic finance. In addition, the products and services must also not limited to Muslim’s market only. But, also emphasizes acceptance and applications globally. The creation of many innovations and initiatives have also contributed to the advancement of Islamic financial system.

However, the challenges can be overcome by increased effort in every cooperation, increase

understanding of the shariah concern, mutual respect and collaboration practices. Islamic finance has a role in shaping the future of the global financial system and reinforcing ethical and moral values that are inherent in Islamic finance principles and fundamental towards promoting the stability of the global financial system. Ongoing efforts to further strengthen the resilience of Islamic financial industry would enhance the prospects for global growth and the potential of Islamic finance to contribute toward global financial stability.

Islamic financial industry should be prudent and it is time for it to keep its financial system from imitating the practices of conventional products. This is because identity is an important financial and compliance with Islamic Sharia as the basis for Islamic finance and sharia maqasid be considered. Thus, Islamic finance is emerging as a rapidly growing part of the financial sector in the Islamic world. Islamic finance is not restricted to Islamic countries, but is spreading wherever there is a sizable Muslim community. Islamic Financial System shall be based on the philosophy of Islam as it is part of the teachings of Islam itself.