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Non-bank Islamic Financial Intermediaries: Malaysia

The non-bank Islamic financial intermediaries may be broadly divided into four groups of institutions as follows:

  1. Takaful companies
  2. Savings institutions
  3. The development financial institutions, and
  4. Other financial intermediaries that offer Islamic banking service such as Islamic leasing companies and National Mortgage Corporation.

Takaful Companies (Islamic Insurance): Takaful operations are regulated and supervised by BNM since 1988 with the appointment of the BNM governor as the director-general of insurance and Takaful. There are presently two Takaful operators, namely Syarikat Takaful Malaysia Berhad (STMB) and Takaful Nasional Sendirian Berhad (TNSB) operating a total of 113 Takaful offices throughout the country. As at end-March 1999, total assets of the Family Takaful Funds and the General Takaful Funds amounted to RM572 million (US$150.5 million) and RM205 million (US$53.9 million), respectively.


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Saving Institutions: The most prominent Islamic saving institutions is Tabung Haji. As mentioned above, Tabung Haji is considered the first Islamic financial institution in Malaysia, established by statute in August 1969.

Bank Rakyat is another leading co-operative credit institution and has committed to establishing itself as a full-fledged Islamic co-operative bank. The bank introduced Islamic banking in 1993 and since then, the banking operations of Bank Rakyat have been geared towards Islamic banking through its 74 branches nationwide. All new branches of Bank Rakyat now offer solely Islamic banking products while the existing branches are gradually being converted to Islamic banking branches. Bank Rakyat is the fore-front institutions in the provision of Islamic pawn-broking services or popularly known as ar-Rahnu, as a joint-venture exercise with Yayasan Pembangunan Ekonomi Islam Malaysia.

Development Finance Institutions: The Development Finance Institutions (DFIs) are basically enterprises owned by the public sector. The DFIs which offer Islamic banking services are the Industrial Bank of Malaysia, the Development and Infrastructure Bank of Malaysia and the Agriculture Bank of Malaysia; all of which provide the facilities on windows basis. The Development and Infrastructure Bank of Malaysia (DIBM) provides Islamic banking facilities in the provision of medium and long-term funds to promote industrial investment and growth while the agriculture bank has developed a similar scheme to that of DIBM. In addition, the Industrial Bank of Malaysia and DIBM are also the national agencies for the Islamic Development Bank’s (IDB) financing facilities in Malaysia, in which IDB extends credit lines to both banks for direct financing and trade financing facilities. As at end-June 1999, the combined Islamic financing extended by the three institutions amounted to RM164 million (US$43.2 million).

Islamic Financial Markets: The Islamic financial markets in Malaysia comprise the Islamic Money Market and the Islamic Capital Market. The Islamic Money Market, introduced in 1994 may be regarded among the most structured Islamic money market in the world. It comprises the trading of Islamic papers, the mudharaba inter-bank investment, and the Islamic clearing and settlement system for SPI commercial banks, SPI merchants banks, approved SPI finance companies and SPI discount houses. Among the instruments available in the Islamic Money Market are the government investment issues, Islamic accepted bills, green bankers acceptances, Islamic debt securities (bonds and commercial papers) and Islamic negotiable instruments.

The Islamic Capital Market in Malaysia comprises a primary securities market, which issues new Islamic government papers and offers Islamic corporate securities to the public as well as institutions. Then there is a secondary market, in which existing Islamic government papers and Islamic corporate securities and the equity market and unit trusts are transacted. Islamic government papers refer to Government Investment Issues (GII), introduced in 1983 under the Government Investment Act 1983. Under the Act, the government is allowed to issue non-interest bearing government papers to the public based on Islamic principles. Since the GII is defined as liquid assets, the Islamic bank and SPI banks purchase the GII to meet the liquidity requirements as well as to park their temporary idle funds. As at end-May 1999, total outstanding issues of GII were RM2 billion (US$0.5 billion).

Islamic Debt Securities (IDS) made its debut in 1990 when a multinational company issued a RM125 million (US$32.9 million) bai’ bithaman ajil facility for a distillation plant. Since then, IDS has become increasingly popular with various Islamic concepts such as musharakahijarah and qardhul hassan being applied. Islamic Debt Securities comprise the medium term Islamic bonds and the short-term Islamic commercial papers.

The Islamic Equity Market is reflected by the stock-broking activities, Islamic Unit Trusts, Islamic Index and the list of the Shari‘ah-approved counters. In terms of the stock-broking activities, the country now has one exclusively Islamic and three conventional stock-broking firms which are offering Islamic stock-broking services. In April 1999, the Kuala Lumpur Stock Exchange (KLSE) introduced an Islamic equity benchmark index for those who wish to invest according to Shari‘ah. The KLSE Islamic index tracks Shari‘ah-compliant stocks in the KLSE, constructed from the list of Shari‘ah-approved counters issued by the Securities Commission (SC).

Unit Trusts: The Unit Trusts are a group of specialized financial intermediaries in the capital market which offer small investors the opportunity to pool their resources in a diversified portfolio of securities which are managed and selected by professional portfolio managers. The Islamic Unit Trust began in 1993 when Tabung Ittikal was introduced by Arab-Malaysian Unit Trust. The success of the fund paved way for introduction of more Islamic Unit Trusts and as at May 1999, there were 13 Islamic Unit Trusts in the country with total fund size of RM3.55 billion (US$0.9 billion).

 

Source: Towards Islamic Banking: Experience and Challenges, Institute of Policy Studies. Republished with permission.