Malaysia has established itself as a global leader in Islamic finance. This success is not merely the result of a well-developed financial ecosystem, but also due to progressive regulations and innovative strategies that support the industry’s growth. Malaysia is not only advancing its Islamic financial sector but also using it as a tool for sustainable and inclusive economic growth. This article explores the main factors contributing to Malaysia’s success as a hub for Islamic finance, supported with data and relevant examples.
1. Government Commitment to Islamic Finance Development
The Malaysian government’s commitment to Islamic finance development has been a foundational factor in the industry’s growth. Various strategic policies, such as the Financial Sector Blueprint and the Islamic Finance Sector Blueprint, have provided clear direction for the growth of the industry over recent decades.
Bank Negara Malaysia (BNM), the central bank, has played a critical role in supporting innovation through regulations that facilitate the creation of various Islamic financial instruments, such as sukuk and Islamic mutual funds. A notable example is the Sukuk Prihatin, a national sukuk launched in 2020 to support the government’s fight against the economic impact of COVID-19. This sukuk attracted significant interest from both domestic and international investors who viewed Islamic finance as a stable and secure investment option.
As a result of these policies, Malaysia now controls around 62% of the global sukuk market, making it one of the world’s largest sukuk issuers. Additionally, Malaysia actively promotes international standards for Islamic finance, supporting the standards issued by the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) and the Islamic Financial Services Board (IFSB).
2. Robust and Integrated Islamic Finance Infrastructure
Malaysia boasts a strong and integrated Islamic finance infrastructure covering sectors such as banking, capital markets, takaful (Islamic insurance), and microfinance. Institutions like Bank Islam Malaysia Berhad (BIMB), Maybank Islamic, and CIMB Islamic have contributed to the growth of Malaysia’s Islamic finance market both domestically and internationally.
Malaysia is also recognized as a center for education and training in Islamic finance through institutions such as the International Centre for Education in Islamic Finance (INCEIF) and the Islamic Banking and Finance Institute Malaysia (IBFIM). These institutions not only produce skilled Islamic finance professionals but also drive research and innovation in financial products and services. For example, IBFIM offers specialized training and certifications for Islamic finance practitioners, while INCEIF offers programs from diploma to doctoral levels in Islamic finance.
Additionally, digitalization and technological support further strengthen Malaysia’s Islamic finance infrastructure. Tech-based Islamic finance products, such as digital Islamic banking services and blockchain-backed financing applications, have expanded the accessibility of Islamic financial services to wider segments, including rural communities that previously struggled to access conventional banking services.
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3. Product Innovation That Attracts Global Investors
Malaysia’s reputation in Islamic finance is bolstered by its innovation in product development tailored to meet modern market demands. A prominent innovation is the green sukuk, launched in 2017 as a financial instrument to fund eco-friendly projects such as sustainable infrastructure and renewable energy.
For instance, Tadau Energy issued a green sukuk valued at RM250 million to finance a solar energy project, making it the world’s first green sukuk. This initiative not only supports sustainable development but also appeals to global investors focused on environmental and social impact investments. Since the introduction of the green sukuk, Malaysia has issued additional sustainable sukuk, totaling over USD 1 billion, positioning the country as a key player in sustainable Islamic finance.
In addition to green sukuk, Malaysia has introduced ethical and ESG-compliant Islamic mutual funds, providing investors with opportunities to invest in companies that are Sharia-compliant and contribute positively to society.
4. The Role of Islamic Finance in Inclusive Economic Growth and Empowerment of SMEs
Islamic finance has been instrumental in expanding financial inclusion in Malaysia. The Sharia-compliant principle of avoiding interest (riba) and emphasizing risk-sharing makes it more accessible to low-income populations and SMEs that may face difficulties accessing conventional financial services. Through Sharia-compliant microfinance institutions, many SMEs in Malaysia can access funding that aligns with Islamic principles and is more affordable.
For example, the microfinance program by Amanah Ikhtiar Malaysia (AIM) has provided interest-free loans to over 300,000 low-income households, focusing on economic empowerment through small business loans for the underprivileged. This program has significantly helped reduce poverty rates in Malaysia and improved the living standards of underserved communities.
Moreover, Malaysia’s Islamic banks also offer financing products tailored for SMEs with more flexible requirements compared to conventional financing options. This support enables SMEs to thrive and contributes to economic growth, making Islamic finance a vital part of Malaysia’s inclusive economic development strategy.
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5. Integration with the Halal Economy and Contributions to the National Economy
Malaysia has not only developed Islamic finance as a financial instrument but has also integrated it with the halal economy. The Malaysian halal economy spans sectors such as food, pharmaceuticals, cosmetics, fashion, and tourism. This integration strengthens Malaysia’s position as a hub for both the halal economy and Islamic finance, which are mutually supportive.
For example, Malaysia’s halal tourism sector has experienced significant growth thanks to Islamic banking and takaful services that cater to the needs of tourism businesses. This integration enables halal industry players in Malaysia to access Sharia-compliant financing, which enhances their competitiveness in the global market. Islamic finance supports not only the local halal industry but also contributes to Malaysia’s export of halal products to countries with substantial halal markets.
Conclusion
Malaysia’s success as a global leader in Islamic finance is the result of comprehensive strategies, government commitment, product innovation, and integration with the halal economy. By building a supportive ecosystem for Islamic finance, Malaysia serves as a model for other nations seeking to develop the industry. With progressive policies and a strong commitment to innovation, Malaysia has secured its place as one of the best countries in the world for Islamic finance, contributing to a more inclusive and sustainable economy.
Also read:Important Principles on How Islam Views Investment
References
World Bank. (2019a). How Malaysia Created a Conducive Ecosystem for Islamic Sustainable Finance. World Bank. Retrieved from https://blogs.worldbank.org/en/eastasiapacific/how-malaysia-created-conducive-ecosystem-islamic-sustainable-finance
World Bank. (2019b). Islamic Finance in Malaysia: Filling the Gaps in Financial Inclusion. World Bank. Retrieved from https://blogs.worldbank.org/en/eastasiapacific/islamic-finance-malaysia-filling-gaps-financial-inclusion
Republika. (2013). Rahasia Malaysia Sukses dalam Pengembangan Ekonomi dan Keuangan Syariah. Retrieved from https://sharia.republika.co.id/berita/sj8mmj502/rahasia-malaysia-sukses-dalam-pengembangan-ekonomi-dan-keuangan-syariah
World Bank. (2019). Islamic Finance and the Development of Malaysia’s Halal Economy. World Bank. Retrieved from https://www.worldbank.org/en/country/malaysia/publication/islamic-finance-and-the-development-of-malaysia-s-halal-economy