Malaysia presently finds itself just over a year into the tenure of a new government, at the helm after former opposition Pakatan Harapan's historic victory in the 14th general election in May 2018, and the country's first change of government following 61 years of rule by the previous Barisan Nasional government. Pakatan Harapan had campaigned on the basis of its plan for fiscal reforms entitled, the 'First 100 Days Fiscal Reforms', which outlined its full commitment to undertake responsible and progressive fiscal reforms to both enhance fiscal equity, transparency and accountability and to accelerate productive investment and economic growth in Malaysia. In the Annual Budget 2019 (announced in November 2018), the new government identified key priorities to support the transition of the Malaysian economy towards 'more balanced, sustainable and inclusive growth' and expressed its ambition to promote Malaysia as a global leader in the bond and sukuk markets by establishing a special committee on Islamic finance together with the extension of tax incentives for sukuk, ijarah and wakalah.2

Malaysia has developed a sophisticated Islamic finance sector over the past 30 years, which in turn has generated a vibrant business environment for financial institutions, intermediaries, investors, issuers and service providers alike. In the course of this development, Malaysia successfully established a mature and robust Islamic finance regulatory framework and pioneered the dual banking system, wherein both Islamic and conventional financial systems operate and co-exist within a single regulatory framework.

The financial services industry of Malaysia has always been championed as a key driver of Malaysia's economic development. It is one of the 12 national key economic areas (NKEAs) under Malaysia's Economic Transformation Programme (ETP), the national strategic initiative formulated by the previous government to elevate the country to developed-nation status by 2020,3 and is the foundation of the Financial Sector Blueprint (FSB), the 10-year master plan implemented by the country's central bank (Bank Negara Malaysia (BNM)), for the management of Malaysia's transition towards becoming a high-value-added, high-income economy.4 A key recommendation under the FSB is for Malaysia to consolidate its success and position itself as a leading international centre and global hub for Islamic finance. Further, the Malaysian government has also committed under its financial services NKEA for Islamic finance in Malaysia to constitute 40 per cent of total financing in Malaysia by 2020.

In January 2017, the Securities Commission Malaysia (SC) announced the launch of a five-year Islamic Fund and Wealth Management Blueprint (the Blueprint)5 to drive further development and growth of Malaysia's Islamic capital market. The Blueprint envisages leveraging Malaysia's Islamic capital market ecosystem to establish the country as a leading international centre for Islamic fund and wealth management6 (see also Section VI.iii). The SC has achieved early success in implementing the Blueprint, as 2017 witnessed the maiden public offering of waqf shares by Larkin Sentral, green sukuk issuances, as well as new players in the fund administration and fund management business in Malaysia.7

In July 2017, BNM, in collaboration with certain Islamic banking and finance institutions, embarked on the development of several strategies aimed at strengthening the roles and impact of Islamic banking institutions. These strategies, called value-based intermediation, were to focus on delivering the intended outcomes of shariah through the adoption of practices, conduct and offerings that generate a positive and sustainable impact on the economy, community and environment.8 The new government lost no time in effecting leadership change at BNM and, in July 2018, the Ministry of Finance announced the appointment of Datuk Nor Shamsiah Mohd Yunus as the central bank's new Governor.9

Nevertheless, BNM continued to build on the 2017 Strategy Paper on Value-based Intermediation (VBI) and issued three guidance documents in October 2018, namely the Implementation Guide for VBI, the VBI Financing and Investment Impact Assessment Framework and the VBI Scorecard to facilitate the practical adoption of VBI, as VBI aims to re-orient Islamic finance business models towards realising the objectives of shariah.10 VBI is also consistent with global finance initiatives in support of achieving the Sustainable Development Goals (SDGs) set by the United Nations (UN). Islamic banks continued to make progress in driving the VBI agenda through enhanced offerings and strong institutional commitments11 and in September 2018, HSBC Amanah Malaysia Bhd launched the world's first UN SDG sukuk.12

While it may still be too soon to comment on measures introduced by the new government, it was reported that in the first quarter of 2019 (Q1 2019), Malaysia's Islamic bond market remained the biggest in emerging East Asia, where sukuk comprised 61 per cent of total local currency bonds outstanding. Malaysia was also among emerging East Asian economies that saw the local currency bond market continue to expand over Q1 2019, despite trade conflicts and moderating global growth.13

i Legislative and regulatory regime

Islamic banking

In line with the FSB, the regulatory and supervisory framework in Malaysia in respect of the Islamic banking and finance sector was recently consolidated and updated under the Islamic Financial Services Act 2013 (IFSA),14 the governing law of Malaysia's Islamic finance sector.

As the primary source of legislation governing the licensing and operation of Islamic and international Islamic banking businesses conducted by financial institutions, the IFSA, together with guidelines and circulars issued by BNM,15 contains extensive provisions on end-to-end shariah compliance, governance and enforcement, which include the following basic premises:

  1. establishing BNM as the shariah regulator over the financial sector;
  2. providing the legal basis for the rulings of BNM's Shariah Advisory Council (the BNM SAC);
  3. prohibiting financial institutions that conduct Islamic and international Islamic banking businesses from carrying out non-shariah-compliant activities; and
  4. empowering BNM to direct and penalise financial institutions for breaches of the IFSA and offences committed thereunder.16

Under the IFSA, BNM was conferred regulatory and supervisory powers and was also empowered to issue guidelines and circulars on shariah requirements to promote financial stability and ensure shariah compliance. Following therefrom, the IFSA provides that the operations, structure and the terms and conditions of Islamic financial products and services provided by financial institutions must be shariah-compliant. Any entity that conducts Islamic banking business17 or international Islamic banking business18 must possess the licences granted by the Minister of Finance (the Minister) on the recommendation of BNM. There are various measures taken by the authorities to strengthen consumer protection, including (1) the issuance of the revised BNM's Rules on Prohibited Business Conduct in 201619 to supplement the prohibitions on financial institutions from engaging in conduct deemed to be inherently unfair to consumers under Schedule 7 of the IFSA; (2) the establishment of the Financial Ombudsman Scheme under the Islamic Financial Services (Financial Ombudsman Scheme) Regulations 2015; and (3) the setting up of the Malaysia Deposit Insurance Corporation (MDIC) pursuant to the Malaysia Deposit Insurance Corporation Act 2011 (MDICA), under which the MDIC insures consumers against the loss of their deposits (including Islamic deposits) in financial institutions in Malaysia20 for up to 250,000 ringgit per depositor per financial institution in the event of loss caused by failure of a financial institution holding such deposits.

Islamic capital markets

The Capital Markets and Services Act 2007 (CMSA)21 constitutes a single framework regulating the licensing of both conventional and Islamic capital market services, market conduct and offering and issuances of securities, including unlisted Islamic securities or sukuk, with the exception of specific laws, regulations and guidelines that apply exclusively to the operation of the Islamic capital market. This marked a major milestone in the SC's continuous efforts to strengthen the capital market regulatory framework.

In this regard, the CMSA provides, inter alia, as follows:

  1. that Islamic securities are securities for the purposes of securities laws;22
  2. that any proposal, scheme, transaction, arrangement, activity, product or matter relating to Islamic securities shall comply with the relevant requirements under securities laws and guidelines issued by the SC;23 and
  3. that the Minister may, for the purposes of securities laws and, on the recommendation of the SC, inter alia, prescribe any instrument or product or class of instruments or products to be:
    • Islamic securities;
    • Islamic derivatives; or
    • Islamic capital market products.24

The following features of the CMSA accord greater protection to investors of securities (including Islamic securities) in Malaysia: (1) the SC's power to take civil and administrative actions; (2) the SC is allowed to recover three times the amount of losses through civil action for a wider range of market misconduct; (3) the standards of trustees for debenture holders are enhanced; and (4) investor protection is extended to clients of financial institutions.

With the CMSA, there are various guidelines and practice notes issued by the SC to regulate the Malaysian capital markets, including Islamic capital markets. In 2015, the SC introduced the Guidelines on Unlisted Capital Market Products Under the Lodge and Launch Framework as part of its initiative to promote process efficiency, shorten time-to-market and provide certainty of product offering.

Takaful (Islamic insurance)

Under the IFSA, any companies that are in the takaful business or international takaful business must hold a valid licence granted by the Minister on the recommendation of BNM. Takaful operators must also comply with the relevant BNM guidelines on takaful25 and have in place an effective retakaful management strategy that is appropriate to the overall risk profile of the takaful business, and ensure that risks are ceded to takaful or retakaful operators.26 In addition, takaful operators shall not accept inwards reinsurance from insurance or reinsurance companies except where the risk is shariah-compliant and the arrangement is based on shariah-compliant retakaful contracts.27 In June 2019, BNM issued the guidelines on Takaful Operational Framework, which will come into force on 1 July 2020, thereafter superseding the current guidelines, which were issued on 26 June 2013. The document provides additional guidance related to the specificities of takaful business and also seeks to strengthen takaful fund management practices to ensure their sustainability, and prudent management. Collectively, these guidelines seek to spur greater innovation in the takaful industry while further safeguarding the position of takaful participants.28

Collective investment schemes (funds)

The BNM Guidelines on Investment in Shares, Interest-in-Shares and Collective Investment Schemes for Islamic Banks (the BNM Guidelines) constitute the main guidelines governing for collective investment schemes (CISs) offered by Islamic banks. The BNM Guidelines adopt a more principle-based regulatory approach to enable financial institutions to define the scope of their equity-related investments according to capacity and capability. Other than guidelines issued by BNM, the SC has also issued various guidelines governing CISs.29

Generally, under the BNM Guidelines, there are two categories of investments that may be made by financial institutions: (1) investment in shares or interest-in-shares of any corporation;30 or (2) investment in CISs, which includes unit trusts.31 In addition, the SC has issued various guidelines on the establishment of a variety of CISs that can be invested in by financial institutions.32

Midshore financial centre

Labuan International Business and Financial Centre (Labuan IBFC) is the midshore financial centre in Malaysia and provides a platform for local as well as international financial institutions to offer Islamic financial products or services and Islamic capital market instruments in foreign currencies.

The Labuan Islamic Financial Services and Securities Act 2010 (LIFSSA) is the governing law of the Islamic financial industry in Labuan IBFC. The LIFSSA provides for the registration of business vehicles used by financial institutions and the licensing of financial institutions to conduct regulated business activities. The LIFSSA must be read together with any guidelines or circulars issued by the Labuan Financial Services Authority (Labuan FSA).

The LIFSSA provides for the establishment of the Shariah Supervisory Council (SSC),33 and for the SSC to (1) ascertain Islamic law for the purposes of any business regulated or supervised by the Labuan FSA and issue rulings; and (2) advise on any shariah issue relating to any business regulated or supervised by the Labuan FSA.34 The SSC, however, may only make rulings upon reference being made to it by licensed or regulated entities under the LIFSSA or as determined by the Labuan FSA.35 While the rulings of the SSC shall, upon issuance, be binding upon the Labuan FSA and the entity making the referral, the rulings shall not be binding on any other licensed entity, entity regulated under LIFSSA or shariah-compliant entity unless specified as such by the Labuan FSA.36

ii Regulatory and supervisory authorities


BNM was established under the Central Bank of Malaysia Act 1958 and continues to operate under the Central Bank of Malaysia Act 2009 (CBA). BNM reports to the Minister and keeps the Minister informed of policies governing the monetary and financial sector.

BNM is empowered to act as the regulator of financial institutions under the IFSA, the Financial Services Act 2013 and the CBA. The CBA confers the necessary powers and instruments on BNM to achieve its mandates effectively and legitimises the duality of both the conventional and Islamic financial systems in Malaysia and in doing so, establishes the legal foundation for development of an Islamic financial system within the overall Malaysian financial system. BNM is also the financial adviser to the Malaysian government and its primary objectives include the prudent conduct of monetary policy, financial system stability and the development of a sound and progressive financial sector.37 Other functions of BNM include the monitoring and supervision of payment systems, money markets and foreign exchange markets by adopting a risk-based supervisory approach that monitors and reviews the manner in which all financial institutions identify, control and deal with their respective business risks.

Notwithstanding the above, it is the Minister who is the authority for the issuance and revocation or imposition of conditions of licences to carry on the businesses provided for under the IFSA on the recommendations of BNM.38


The SC is a regulatory body established under the Securities Commission Malaysia Act 1993 (SCMA), which is mandated to regulate the Malaysian capital market (including the Islamic capital market) and which is directly responsible for the regulation, supervision and monitoring of all persons licensed under the CMSA with the main objective of protecting investors. It is also primarily responsible under the CMSA for encouraging and promoting the development of the securities and derivatives markets in Malaysia and for the monitoring and supervision of public listed companies to ensure compliance with securities laws.

Bursa Malaysia Berhad

Bursa Malaysia Berhad (Bursa) operates a fully integrated exchange under Section 15 of the CMSA. It not only provides a complete range of exchange-related services such as trading, clearing, settlement and depository services but also offers various Islamic market products, namely equities, derivatives, commodities and debt securities across all sectors and industries. To perform the tasks and duties assigned under the CMSA, Bursa has set up subsidiaries to handle some of its principal activities. As at 31 May 2019, 77 per cent of securities listed on Bursa are shariah-compliant.39 Aside from conducting commercial activities, Bursa is also empowered to regulate and administer:

  1. the FTSE Bursa Malaysia Hijrah Shariah Index;
  2. the FTSE Bursa Malaysia EMAS Shariah Index;
  3. the FTSE Bursa Malaysia Small Cap Shariah Index;
  4. the Sukuk Index;
  5. Bursa Suq Al Sila' (an electronic Islamic commodity trading platform); and
  6. listed shariah-compliant instruments, such as Islamic exchange-traded funds, Islamic real estate trusts and Islamic unit trusts.

However, SC, and not Bursa, is responsible for the screening of companies to determine whether they are shariah-compliant for the purpose of being listed on the stock exchange.

Labuan FSA

The Labuan FSA was established under the Labuan Financial Services Authority Act 1996 and is solely responsible for the regulation, supervision and development of the Labuan IBFC under the LIFSSA. Aside from issuing licences for financial institutions operating within Labuan IBFC,40 it is also empowered to make recommendations, investigate, collect and divulge information and conduct entry search and seizure, as well as to establish or participate in any body corporate for the purpose of promoting research and training.

Shariah advisory councils and shariah committees

Other than the establishment of shariah advisory councils (SACs) within BNM and the SC, individual financial institutions are also required to establish their own internal shariah committees to ensure the shariah compliance of their respective business operations.


As mentioned earlier, the BNM SAC was established under the CBA as the authority for the ascertainment of Islamic law for the purposes of Islamic financial business.41 In any Islamic financial business proceedings, the court or arbitrator must refer to the published rulings of the BNM SAC or refer any question concerning shariah matters to the BNM SAC for its ruling, which shall be binding on the court or arbitrator.42


The SC Shariah Advisory Council (SC SAC) was established in 1996 to advise the SC on shariah matters relating to Islamic capital market and is the authority for the ascertainment of the application of shariah principles in respect of Islamic capital markets businesses or transactions.43

The SC SAC has the following functions:

  1. to ascertain the application of shariah principles on any matter relating to Islamic capital market business or transactions;
  2. to issue rulings on any matters relating to Islamic capital market business or transactions;
  3. to advise the SC on any shariah issue relating to Islamic capital market business or transactions;
  4. to provide advice to any person on any shariah issue relating to Islamic capital market business or transactions; and
  5. such functions as may be prescribed by the Minister.44

In carrying out the above functions, the SC SAC adopts two significant approaches. First, by conducting research or studying the validity of conventional instruments from the shariah point of view, where focus is on the mechanism and use of the instruments to ensure their compliance with shariah principles. Second, by formulating and developing new financial instruments based on shariah principles. These approaches have formed the basis in developing several key shariah rulings on sukuk issuance.

Shariah committees of financial institutions

Every licensed holder under the IFSA must establish an internal shariah committee to ensure that its business, affairs and activities are shariah-compliant.45 It is an independent body that reports directly to the board of directors. The appointment of the shariah committee members must be done with BNM's prior written approval.46

All Islamic financial products or services offered by a licensed holder must be evaluated and approved by its shariah committee. The shariah committee may consult the BNM SAC for their ruling on any shariah matter and the latter's ruling prevails over the former's.47

Malaysia International Islamic Financial Centre Initiative

In 2006, the Malaysia International Islamic Financial Centre Initiative (the MIFC Initiative) was launched to position Malaysia as an international Islamic financial hub to, inter alia, facilitate Islamic finance business within the Asian region. Pursuant thereto, the MIFC was established as a network of the country's financial sector regulators, including BNM, the SC, the Labuan FSA, Bursa and government ministries and agencies, together with industry participation from the banking, takaful, capital markets, research and talent development institutions and service providers within Islamic finance. The MIFC network has greatly contributed to the development of Islamic finance in Malaysia by building strong ties among key stakeholders locally and abroad.


The following discussion on common structures used by the financial institutions in offering Islamic financial products or financing facilities is based on the BNM SAC's rulings, which were published in the second edition of Shariah Resolutions in Islamic Finance in October 2010. The rulings must be followed by all local or foreign financial institutions offering such products or services in Malaysia.48

i Consumer finance

Deposits typically involve contracts or arrangements under the shariah principle of wadiah, where property is deposited with a financial institution for safekeeping or protection, or mudarabah, which envisages the depositor as investor and the financial institution as entrepreneur, whereby the depositor contributes capital and the entrepreneur contributes expertise and operations. Profit earned is distributed according to agreement, but any losses suffered are borne by the investor.

As such it is permitted for (1) Islamic savings accounts to be established under the shariah principle of mudarabah;49 and (2) Islamic current accounts to be established under the shariah principles of mudarabah, wadiah and wadiah yad dhamanah.50

Under the IFSA, there are two major classifications of products for the acceptance of money from customers, namely (a) Islamic deposits using shariah contracts with principal guaranteed features, applying the shariah principles of wadiah yad dhamanah, qard or murabahah; and (b) Islamic investment accounts using shariah contracts with non-principal guaranteed features, applying the shariah principles of mudarabah, musharakah or wakalah.

Given the above, investment accounts would not constitute debt obligations owed by the financial institution to its depositors, whereas in the case of Islamic deposits, whether the same constitute debt obligations owed by the financial institution to its depositors would depend on whether the financial institution's obligation to fully repay is based on a debt obligation, such as in the case of accounts opened under the shariah principles described at (a) above. This duality also enables customers with higher risk appetites to place their funds in investment accounts that will in turn receive higher returns depending on the performance of the underlying portfolio. This is also a new source of funding that may be utilised by financial institutions to fund more entrepreneurial business opportunities.

Islamic credit cards are offered using two shariah concepts, namely bai al inah and wadiah.51 Two separate contracts must be entered into under the concept of bai al inah for sale and buy-back transactions of an asset. Financial institutions will sell an asset at a nominal value plus profit to the customer with an agreed deferred payment term and the customer will subsequently sell the same asset to the financial institution at a nominal value and payable on cash basis. The sale proceeds will be credited into the wadiah account to facilitate the purchases of goods or services by the customer.

The concept of ijarah thumma al-bai is applied in vehicle financing and involves two independent contracts: the ijarah contract and the al-bai contract.52 Under the ijarah contract, the financial institution will appoint the customer as an agent to purchase the vehicle identified by the customer and the former will then lease the vehicle to the latter for a specified period. The customer has the option to purchase the vehicle from the financial institution upon the expiry of the lease period. An al-bai contract will be entered into should the customer opt to purchase the vehicle.

ii Home finance

The principle of bai bithaman ajil (BBA) is commonly used in Islamic home financing facilities. BBA contracts are contracts of sale and deferred payment where a home is sold on a deferred payment basis at an agreed selling price that consists of the actual cost of the home and the profit margin agreed between the financial institution lender and the customer borrower.53

Under BBA home financing, the agreed payment instalments remain fixed throughout the financing period as the selling price is fixed at the outset and the financing is not tagged to base lending rates. The latest Islamic home financing products allow customers to receive ibra (a rebate) on the monthly instalment amount if the home financing is linked to a mudarabah deposit account as long as the cost associated with the ibra is borne solely by the financial institution.54

In addition, the concepts of ijarah mawsufah al-zimmah and musharakah mutanaqisah are used to finance homes that are still under construction.55 Based on the contract of musharakah mutanaqisah, both customer and financial institution share the rights over the home under construction. The financial institution will then lease its portion to the customer under the contract of ijarah mawsufah al-zimmah. The customer is required to pay advanced rent during the construction period of the home and will continue to pay full rent upon completion of the home.

iii Takaful

In Malaysia, takaful involves contribution of money based on the tabarru concept (voluntary contribution) by all takaful participants who agree to relinquish all or part of their contribution as donation to aid other takaful participants who suffer losses or difficulties. This is originated from the concept of ta'awun (mutual assistance). A takaful company will then be appointed as their agent to manage the takaful fund and will in return receive commission of fixed service fee under the wakalah contract. A retakaful business model based on tabarru and wakalah or based on the wakalah model with the element of wakaf is permissible.56

iv Islamic private equity investments

The common structures used for shariah-compliant private equity or venture capital are musharakah, mudarabah and wakalah. The first Islamic venture capital fund established in Malaysia was based on the concept of musharakah, a risk-sharing partnership.57 In this partnership, the ratio of distribution of profits need not coincide with the ratio of participation in the financing of the business activity but all parties bear the loss in proportion to their share in financing in the event of loss.

The requirements for the registration of corporations undertaking Islamic venture capital and Islamic private equity activities are provided for in the Guidelines on the Registration of Venture Capital and Private Equity Corporations and Management Corporations dated 9 March 2015.58 Under these Guidelines, an applicant who wishes to undertake Islamic venture capital or private equity activities must appoint a shariah adviser to provide shariah expertise and guidance on all matters pertaining to the Islamic venture capital or private equities activities and ensure that all aspects of the activities are in accordance with shariah requirements, including resolutions issued by the SC SAC.59 In the case of investment in securities of any venture corporation by the registered corporations undertaking Islamic venture capital or private equity activities, the activities of the venture corporations must be shariah-compliant.60

v Islamic real estate investment trusts

Malaysian Islamic real estate investment trusts (REITs) are governed by the SC but will also fall under the purview of Bursa if they are listed on the stock exchange. The SC revised the Guidelines on Real Estate Investment Trusts on 15 March 2018 (the Guidelines on REITs).61 and issued the Guidelines on Listed Real Estate Investment Trusts on 15 March 2018 (the Guidelines on Listed REITs) in relation to listed REITs.62

Currently the number of listed Malaysian Islamic REITs remains at four as at 30 May 2019.63 These Islamic REITs specialise in different classes of assets and are as follows:

  1. Al-'Aqar' Healthcare REIT (healthcare);
  2. Al-Salam Real Estate Investment Trust (shariah-compliant properties that include retail, office, food and beverage, which consists of restaurant and non-restaurant outlets);
  3. AXIS-REIT (office buildings and industrial properties); and
  4. Kuala Lumpur City Centre (KLCC) REIT (first shariah-compliant stapled REIT where the existing shares of KLCC Property Holdings Berhad are stapled together with the units of KLCC's three prime properties, namely Petronas Twin Towers, Petronas Tower 3 and ExxonMobil Tower).

In addition, the current Guidelines on REITs allow for the establishment of unlisted REITs. Malaysia also has its first shariah-compliant unlisted REIT, the ALPHA REIT of 2017, dealing with purely education-related properties.64

For Islamic REITs, tangible assets will be acquired and rented out or leased to generate profits for the investors based on an ijarah contract. The owners of real estate sell assets to the Islamic REITs and a back-to-back asset lease arrangement will be entered into simultaneously. This helps to mitigate risks as an income stream is secured and the issue of securing a long-term tenant or buyer is solved.

Under these Guidelines, a shariah advisory committee must be established to oversee the shariah compliance of the REIT's operations. The rental of real estate by I-REITs is permissible provided that the property is not used for non-permissible activities.65 Takaful schemes must be purchased to insure real estate and conventional insurance schemes can only be allowed if the former is unable to provide insurance coverage.

vi Investment funds

The shariah principle of musharakah, a joint venture profit and loss sharing arrangement, is commonly applied in investment and financing activities in Malaysia to provide working capital financing, trade financing and asset financing. There are two commonly used forms of musharakah-based financing:66 (1) a joint venture partnership where the facility sums will be credited (in a lump sum or in stages) into a joint account that is registered under the customer's name but is managed by the financial institution in accordance with the musharakah principle; and (2) equity participation through establishment of a private limited joint venture company where the company's management will be appointed by both parties to represent their interests and will be responsible towards the development of a project. For the second form of musharakah-based financing, the financial institution will disburse the facility sums in one lump sum through additional paid up capital of the private limited company. These financing approaches are allowed provided that there is no element of capital or profit guarantee by any of the partners on the other partners.

Further to the above, the shariah principle of istisna (a type of sale contract where a subject matter is transacted before it comes into existence) is commonly used to finance construction and manufacturing activities in Malaysia. According to istisna, the financial institution enters into an agreement to purchase the project or asset to be developed from the customer (istisna – purchase by order) and will immediately sell it back to the customer at a marked-up price under the principle of al-istisna (sale by order). The purchase price will only be released by the financial institution upon presentation of the requisite documents (such as a valid architect's certificate) whereas the customer is required to settle the selling price by way of instalments within the agreed period or by redemption exercise. The BNM SAC has previously ruled that a conventional bond can be used as a security for financing of this type as it is not made for the purpose of ownership, but merely as a security.67

vii Other areas – Islamic financial derivative instruments

Forward foreign currency exchange transactions

The concept of wa'd is widely used by the financial institutions to conduct forward foreign exchange transactions, whereby one of the parties to the contract promises to buy from or sell to the other counterparty a specific currency at an agreed exchange rate and settlement date. Aside from wa'd, BBA is also allowed to be used as the underlying concept for forward foreign currency exchange transactions as all the deferred payment sale transactions are conducted independently and not related to each other. The unilateral wa'd mulzim (binding promise) is permissible to be applied in a forward foreign exchange transaction as it is treated as a promise.68

Islamic profit rate swap based on bai al inah

The shariah contract of bai al inah is used for Islamic profit rate swap (IPRS),69 and depending on the duration of the swap contract, there are several stages involved in this contract.

First, the financial institutions representing the swap counterparties jointly invest70 in a mudarabah interbank investment (MII) whereupon this investment will be used as the underlying asset in the swap transaction. The financial institutions will enter into an IPRS agreement with a third party to conduct a series of trade transactions on agreed dates71 (e.g., semi-annually during the swap contract period, which in this instance shall be assumed to be two years).

Second, the financial institutions will sell the MII to the third party at a deferred sale price payable every six months (i.e., semi-annually) and the third party will thereafter sell it back to the financial institutions at a sale price based on the fixed profit rate agreed in the swap contract. The settlement of the purchase price due from the third party will be offset against the payable amount due from the financial institutions, which results in the financial institutions being obliged to pay the fixed profit rate to the third party every six months during the two-year period. Third, the financial institutions will sell the MII to the third party at the price agreed in the swap contract, which is based on the prevailing floating profit rate and the third party will thereafter sell it back to the financial institutions at this agreed price.

The settlement of the purchase price due from the third party will again be offset against the payable amount due from the financial institutions and thus the financial institutions will only be required to pay the floating profit rate for every six months for the two-year contract period.

The difference between payment obligations of both contracting parties resulting from the final step at the second stage and the final step at the third stage will be paid to the receiving party. Finally, the third stage will be repeated at the agreed reset date, which will be determined every six months until the swap contract matures. This arrangement is allowed and the issue of sale of debt with debt (which is prohibited by shariah) does not arise as the transfer of beneficial ownership takes place automatically given that the underlying asset used in the transaction is the MII. The transfer will be reflected in the contract documentation and is shariah-compliant.


Both conventional and Islamic financial products are governed under the same taxation regime. However, tax incentives are offered from time to time by the Malaysian government to encourage growth in the Islamic finance sector and facilitate Malaysia's aim towards becoming the regional Islamic finance hub. Some of the most significant and recent tax incentives are as follows:

i Malaysian Budget

The existing tax incentives announced under the Malaysian Budgets in 2016, 2017, 2018 and 2019 respectively comprise the following:

  1. companies enjoy single deduction on additional expenses72 incurred for the issuance of sukuk under the principles of ijarah and wakalah73 and enjoy double deduction on additional expenses incurred for the issuance of sukuk under the principles of mudarabah, musharakah, istisna, murabahah and BBA based on tawarruq until 2020;74
  2. companies that issue sustainable and responsible sukuk will benefit from a tax deduction on their issuance costs until 2020;75
  3. companies that provide shariah-compliant fund management services and are certified by the SC will also enjoy a tax exemption on statutory income from the provision of such services until 2020;76
  4. recipients of green sustainable and responsible investment (SRI) sukuk grants enjoy income tax exemption for the purpose of financing the external review expenditure until 2020;77
  5. investors enjoy stamp duty exemptions on contract notes for trading of exchange-traded funds and structured warrants until 2020;78
  6. the fund manager managing an SRI fund approved by the SC will be given tax exemptions on management fee income from managing conventional and shariah-compliant SRI funds until 2020 to further promote fund management activities globally;79 and
  7. the following tax incentives that were provided pursuant to the MIFC Initiative from 2007 to 2016 have been further extended until 2020:
    • full tax exemption on income earned from Islamic banking business or takaful business conducted through the International Currency Business Unit in foreign currencies by licensed financial institutions or licensed takaful companies and takaful units; and
    • full stamp duty exemption on instruments executed pertaining to the above-mentioned activities.

Tax allowances and exemptions made under previous years' budgets are discussed in Section VI.

ii Malaysian Income Tax Act 196781

While Section 2(7) of the Malaysian Income Tax Act 1967 (ITA) provides that any reference in the ITA to interest shall apply to gains or profits received and expenses incurred, in lieu of interest, in transactions conducted in accordance with shariah principles, Section 2(8) of the ITA provides that any reference in the ITA to the disposal of an asset or a lease shall exclude enabling transactions under a scheme of financing approved by BNM, the SC, the Labuan FSA or the Malaysia Co-operative Societies Commission.

iii Malaysian Stamp Act 1949

Sukuk issuances currently enjoy stamp duty exemptions in Malaysia by way of orders issued under the Malaysian Stamp Act 1949, which include the following: (1) Stamp Duty (Exemption) (No. 23) Order 2000, which provides that all instruments relating to the issue of, offer for subscription or purchase of, or invitation to subscribe for or purchase, debentures approved by the SC under Section 32 of the Securities Commission Act 1993 and the transfer of such debentures are exempted from stamp duty; and (2) Stamp Duty (Exemption) (No. 4) Order 2013, which provides that an instrument relating to the sale and purchase of retail sukuk as approved by the SC under the CMSA are exempted from stamp duty.


In Malaysia, corporate insolvency is currently governed by the Companies Act 2016 (CA), which repealed and replaced the Companies Act 1965.82 The modes of winding-up proceedings provided thereunder still include compulsory and voluntary winding up and the appointment of receivers and managers over a corporation. However, the CA introduced two new corporate rescue mechanisms, namely corporate voluntary arrangement and judicial management in Division 8 of Part III of the CA, which came into force on 1 March 2018.83 A voluntary winding up under the CA can either be a member's voluntary winding up or a creditor's winding up. A company may be wound up voluntarily if so provided under its constitution and the company has passed a resolution in a general meeting requiring itself to be wound up voluntarily or a special resolution for its winding up is passed.84 In addition, the CA provides 12 situations85 whereby a court may wind up a company, which include a company being unable to pay its debts, the most commonly occurring scenario.

Over and above the CA, however, a specialised framework addressing the failure of financial institutions licensed to undertake Islamic or international Islamic banking business under the IFSA to pay their debts as they fall due can be found in the IFSA and the MDICA.


The MDICA empowers the MDIC to assume control of a non-viable financial institution and to acquire and take control of non-performing loans that are outstanding between the financial institutions, borrowers and security providers through the appointment of a conservator. The MDICA further provides that upon the appointment of the conservator, a moratorium shall take effect during which, inter alia, (1) no action, suit or proceeding may be commenced or continued against the MDIC, the conservator or the financial institution; (2) any petition for the winding up of the financial institution shall be dismissed; (3) no receiver, receiver manager or liquidator may be appointed over the financial institution; and (4) no steps may be taken to enforce any security over the assets of the financial institution.86

Under the MDICA, BNM may provide written notice to the MDIC where BNM is of the opinion that a financial institution has ceased to be viable or is likely to cease to be viable, whereupon the MDIC can exercise, inter alia, the following powers:

  1. the financial institution to take any step or action or refrain from any act or thing, in relation to itself, its businesses or its officers, to cease soliciting, taking or repaying deposits or carry on its business or such part of its business as the MDIC may direct or to restructure the whole or part of its business as may be specified by the MDIC;
  2. acquire or subscribe to the shares of the financial institution;
  3. assume control over the financial institution, carry on the whole or part of its businesses and manage the whole or part of its assets, liabilities and affairs, including disposal of its assets or businesses or any part thereof, or appoint any person to do so on behalf of the MDIC;
  4. apply for the appointment of a receiver or manager, or both, to manage the whole or part of the assets, liabilities, businesses and affairs of the financial institution;
  5. subject to the approval of the Minister, present a petition for the winding up of the financial institution;
  6. with the approval of the Minister, designate one of its subsidiaries as a 'bridge institution'; or
  7. transfer such assets and liabilities of the non-viable financial institution to the bridge institution on terms as determined by the MDIC.87


The provisions of the IFSA include measures for addressing the insolvency of Islamic financial institutions. Under the IFSA, BNM acts as a resolution authority that is, with the prior approval of the Minister, empowered to assume control of the whole or part of the business, affairs or property of an Islamic financial institution, manage it or appoint any person to do so on behalf of BNM in the event that BNM is of the opinion that certain circumstances exist in relation to the Islamic financial institution concerned, including the following:

  1. the assets of the institution are not sufficient to give adequate protection to its depositors, policy owners, participants, users or creditors, as the case may be;
  2. the capital of the institution has reached a level or is eroding in a manner that may detrimentally affect its depositors, policy owners, participants, users, creditors or the public generally; and
  3. the financial institution has become or is likely to become insolvent or is likely to become unable to meet all or any of its obligations.88

Additionally, the IFSA provides BNM with further powers if it is found that an Islamic financial institution is insolvent or is on the verge of insolvency, whereupon BNM may:

  1. make an application to appoint a receiver or manager, or both, over the whole or part of the business, affairs or property of the financial institution;89
  2. with the prior approval of the Minister, vest in a bridge institution or any other person, the whole or part of the business, assets or liabilities of the financial institution;90
  3. with the prior approval of the Minister, provide financial assistance to another institution or any other person to purchase any shares, or the whole or any part of the business, assets or liabilities, of the financial institution;91 or
  4. recommend to the Minister and the Minister may, on that recommendation, authorise BNM to file an application for the winding up of the financial institution.92

Lastly, the IFSA further provides that:

  1. the provisions of the CA shall apply to the winding up of an institution, unless specifically provided otherwise. However, no application for the winding up of a financial institution may be presented by any person without the prior written approval of BNM;93 and
  2. in the winding up of the licensed Islamic bank or the licensed takaful operator, the assets of that financial institution shall be available to meet all its liabilities to depositors or takaful participants in priority over all other unsecured liabilities, other than preferential debts set out in the CA and debts due and claims owing to the government under the Government Proceedings Act 1956.94


i Courts

Although Malaysia has a dual judicial system consisting of secular laws (criminal and civil) and religious laws (shariah), each with its own court system, cases involving Islamic finance business disputes fall within the jurisdiction of the civil courts and not the shariah courts.

Article 121 of the Federal Constitution of Malaysia 1957 (FC) sets out the jurisdictions of the Malaysian civil courts whereas Article 74(1) of the FC prescribes that Parliament may make laws with regard to the matters contained in the Federal List, inclusive of List I under the Ninth Schedule of the FC (List I), which, inter alia, includes civil and criminal procedure, the administration of justice and contracts95 but specifically excludes the constitution and organisation of the shariah courts. As such, Articles 121 and 74(1) read together indicate that the jurisdiction of the civil court is specifically set out in List I.

Article 121(1 A) of the FC states that the civil court has no jurisdiction over matters within the jurisdiction of the shariah court, whereas Article 74(2) of the FC provides that a state legislature may make laws contained in the State List, inclusive of List II of the Ninth Schedule of the FC (List II), which, inter alia, includes Islamic law and personal and family law of persons professing the religion of Islam and the constitution and organisation of the shariah courts.96

Based on the above provisions, jurisdiction over Islamic banking and finance laws lies with the civil court for the following reasons:

  1. while the term 'Islamic law' in List II is wide,97 its application is only limited to persons professing the religion of Islam and would not be applicable to banks and financial institutions, which cannot be said to profess the religion of Islam;
  2. laws relating to Islamic banking and finance fall within the category of contract and mercantile law under List I, which is under the purview of the Malaysian federal legislative body. As such, these are subject to the jurisdiction of the civil courts as civil court judges are bound by laws and regulations that are exclusively federal;98 and
  3. the judgment of the Malaysian Supreme Court in the case of Mohamed Habibullah bin Mahmood v. Faridah Dato' Talib99 held that the shariah court may only decide matters falling under its jurisdiction and as such Article 121(1 A) does detract from the jurisdiction of the High Court in respect of the matters in List I.

ii Cases

As stated above, disputes relating to Islamic finance in Malaysia are decided by the civil courts rather than the shariah courts, notwithstanding the application of shariah principles. Bearing this in mind, together with the popular usage of the BNM SAC approved BBA principle in Malaysian home financing transactions, the following cases are noteworthy in illustrating how the Malaysian courts have progressively dealt with disputes involving Islamic finance transactions.

Initially, the civil courts dealt with disputes through the application of common law principles applicable to conventional banking without discussing or reference to applicable underlying shariah principles.100 In Bank Islam Malaysia Bhd v. Adnan Omar,101 the court applied common law doctrine that parties were bound by the four corners of their agreement. The defendant was therefore obliged to pay the entire selling price as he had knowingly entered into the contract and was fully aware of its terms. The decision did not examine whether the BBA facility involved non-shariah-compliant elements, expressly referred to the facility as a loan and held that defendants had no right to a rebate, which was at the discretion of the lender. Understandably, this operated to the disadvantage of the defendants, who in defending claims against them, were deprived of an analysis of shariah principles by the court.

Subsequently, the courts took a more interventionist approach in Affin Bank v. Zulkifli Abdullah,102 which concerned a BBA facility wherein the customer had defaulted in instalment payments for the asset sale price and the lender had claimed the outstanding balance of the asset sale price (i.e., minus the payments previously made). In coming to a decision, the courts decided that a critical examination of the underlying shariah principles in the financing was required to ensure justice and equality between the parties.

This approach was subsequently followed in Malayan Banking Berhad v. Marilyn Ho Siok Lin,103 in which the court specifically analysed whether the transaction was contrary to Islam and ruled that the Islamic banks could not claim unearned profits on BBA contracts because the contract was similar to a conventional loan and unearned profits were equal to interest calculation. The resulting judgment disallowed the lenders claims for unearned profits notwithstanding that the predecessor to the CBA, the Central Bank of Malaysia Act 1958 was amended in 2003104 to allow for a referral by the court to the BNM SAC for shariah-related issues. However, the court was not bound to make such a referral and the judge in Affin Bank declined to do so and decided the matter based on a review of the transaction documents.

The Affin Bank judgment was not well received in the Islamic finance industry as lenders became uncertain as to what they could claim in default situations. In addition, shariah scholars were dissatisfied with the decision and viewed it to be defective from a shariah law perspective. Some three years later, the presiding judge in Affin Bank further developed this approach in Arab-Malaysian Finance Bhd v. Taman Ihsan Jaya Sdn Bhd & 11 Ors,105 where Affin Bank was affirmed and the court ruled that a bona fide sale was required in BBA financing for the profit or selling price to be shariah-compliant. In the absence of a bona fide sale, deferred payment of the sale price would be nothing more than a credit or loan extended and any profit therefrom would be prohibited as riba. The judge rejected the approach in Adnan Omar and held that the parties' agreement alone did not prevent the court from examining and determining the exact nature of a transaction.

The other judges presiding over disputed BBA financing transactions began to adopt differing views by seeking the advice of shariah scholars and the BNM SAC, in contrast to Affin Bank. In Malayan Banking Bhd v. Ya'kup Oje & Anor106 the court opined that there would be great uncertainty if customers entering into financing contracts approved by both the Islamic financial institution lenders shariah committee and by the BNM SAC were allowed to challenge the shariah compliance of the contract in court and that this was morally unacceptable from a shariah perspective.

The Malaysian Court of Appeal considered Taman Ihsan Jaya on appeal in Bank Islam Malaysia Berhad v. Lim Kok Hoe & Anor and other appeals107 and held that the High Court judgment in Taman Ihsan Jaya was manifestly wrong and must be set aside for the following reasons:

  1. the judge in Taman Ihsan Jaya was plainly wrong to equate profit earned as being similar to riba or interest. The two cannot be similar as a BBA contract is in fact a trade transaction between the customer and the bank and the element of profit is therefore completely distinct from interest in conventional loans;
  2. judges in civil court should not take it upon themselves to declare whether banking business is in accordance with the religion of Islam; this requires consideration by eminent jurists properly qualified in the field of Islamic jurisprudence; and
  3. the judge in Taman Ihsan Jaya failed to follow the judicial precedent of superior courts, which clearly favoured the common law approach in Adnan Omar.

In the appellate case of Maybank Islamic Berhad v. M-IO Builders Sdn Bhd & Anor,108 the appellate court opined that the validity of the disputed Murabahah Overdraft Facility agreements should be governed by the law that generally governs the contract between parties in Malaysia, namely the Contracts Act 1950. Therefore, the said agreements were held to be valid notwithstanding their failure to comply with shariah principles. It is interesting to note that most of the claims were filed as an attempt by customers to escape liability as a whole or to reduce the quantum of their liability. If courts were to declare these facilities, which are monitored and approved by BNM, as invalid, the development of the local Islamic banking industry would be adversely affected as Islamic financial institutions would face uncertainty and increased risk in their ability to recover the principal and profit in relation to the granting of these facilities.

Subsequently, BNM and Parliament conclusively laid much uncertainty to rest with the coming into force of the CBA, which provides, inter alia, that:

  1. the BNM SAC would be the authority for determining Islamic law for the purposes of Islamic finance business;109
  2. the BNM SAC would be a consultative body to the Malaysian judiciary and that consequently judges and arbitrators were required to take into consideration published rulings of the BNM SAC or refer to the BNM SAC for its ruling on any shariah issues arising from disputes being adjudicated;110 and
  3. once a ruling is issued by the BNM SAC in response to a reference, that ruling was binding on the referring financial institution, court or arbitrator.111

In addition to this, the issuance of BNM's Guidelines on Ibra' (Rebate) for Sale-Based Financing obliged Islamic banks to grant ibra to customers of sale-based financing facilities, thus resolving earlier questions of unfairness or injustice. With these developments, the above-mentioned cases remain purely of academic interest.

Section 56 and Section 57 of the CBA were enacted to mandate the courts to refer to the BNM SAC to answer questions on shariah issues in cases involving Islamic financial institutions. In the case of JRI Resources Sdn Bhd v. Kuwait Finance House (M) Bhd (President of Association of Islamic Banking Institutions Malaysia & Anor, and Central Bank of Malaysia as interveners),112 the Federal Court affirmed that the SAC's ruling is limited to ascertaining the position of Islamic law on financial matters or business applicable to the dispute but does not conclude or settle the dispute between the parties. The final decision on the dispute remains with the court. Moreover, in the case of Tan Sri Abdul Khalid Ibrahim v. Bank Islam Berhad,113 there was an argument that these provisions are unconstitutional and ultra vires as the courts have to refer to the BNM SAC for answers on shariah questions in Islamic finance, thereby compelling the court to adopt the decision of the council as its judgement. In response, the Court of Appeal interpreted the judicial role of the BNM SAC provided in Sections 56 and 57 as a new procedural requirement, and one that does not give judicial power to the BNM SAC.


The following recent developments illustrate Malaysia's continuing commitment to its financial services objectives under the ETP, the FSB and the Blueprint. Collectively, they underscore a promising outlook for Malaysia's dynamic and innovative Islamic finance sector and its continuing efforts to lead in the growth and development of Islamic finance globally.

i Islamic indices

To ensure that shariah-based investments continue to grow, the SC and Bursa acknowledged that Islamic indices serve an essential role in Islamic finance as they identify securities available for investment within Islamic financial markets and facilitate the valuation of shariah-compliant products. These indices also broaden the base of investors and increase shariah-compliant product diversity.

In line with the above, Bursa launched Bursa Malaysia-i, the world's first end-to-end integrated Islamic securities exchange platform in September 2016.114 The platform's basic function is to enable investors to invest in and trade shariah-compliant products via a shariah-compliant trading platform incorporating the full range of shariah-compliant exchange-related services, including listing, trading, clearing, settlement and depository facilities. Bursa Malaysia-i forms an important part of Bursa Malaysia's plan to position Malaysia as the pre-eminent marketplace for Islamic-based financial offerings and shariah investing.

In July 2019, the Bond Pricing Agency Malaysia (BPAM) launched the country's first environmental, social and governance (ESG) bond index series, which will monitor bonds with a market capitalisation of 4.05 billion ringgit and covers long-term Islamic bonds. The index series highlights bond issuers issuing under ESG principles and tracks their performance. It covers bonds that were issued under or aligned with the SC's SRI sukuk framework, the ASEAN Green Bond Standards, ASEAN Social Bond Standards, ASEAN Sustainability Bond Standards and the United Nations Sustainable Development Goals.115

ii Islamic pension fund

In August 2016, Malaysia's state pension fund, the Employees Provident Fund (EPF) made available to its members the option of converting their current conventional savings into an Islamic pension scheme option, simply called 'EPF Simpanan Shariah', which took effect on 1 January 2017, whereby dividend rates would not be guaranteed, but based on the performance of shariah-compliant investments. EPF Simpanan Shariah is open to all members regardless of race, religion and nationality. However, members who have chosen Simpanan Shariah would not be allowed to revert to the conventional scheme after the effective date. According to EPF sources, a total of 59.03 billion ringgit of the initial 100 billion ringgit fund allocated for Simpanan Shariah 2017 have been taken up and 635,037 members had switched to Simpanan Shariah as at 23 December 2016. As at 31 December 2017, EPF had about 700,000 contributors with a total of 67.76 billion ringgit for Simpanan Shariah, from 100 billion ringgit allocated for the savings as at 31 December 2017.116 EPF allocated 50 billion ringgit as further injection for Simpanan Shariah 2018.117

The EPF also announced that it had allocated an initial fund size of 100 billion ringgit, equivalent to about 15 per cent of the EPF's total investment assets of 681.71 billion ringgit (as at end March 2016) and that its investment in shariah assets was expected to grow by at least 25 billion ringgit per annum on average, or in tandem with its total asset growth, to maintain a minimum of 45 per cent shariah assets.118 As at 31 December 2017, the shariah assets stood at 47.5 per cent of the fund's total asset exposure and contributed 42.9 per cent of total income in 2017.

iii Islamic fund and wealth management

The SC unveiled the Blueprint on 12 January 2017 with the aim of, among other things, establishing Malaysia as a leading international centre for Islamic fund and wealth management.

According to the Blueprint, one of the strategic thrusts to achieve the aim is to develop Malaysia as an international provider of Islamic wealth management services. In this regard, focus will be concentrated on efforts to deepen and broaden the suite of shariah-compliant wealth management solutions while enhancing the supporting market infrastructure and creating a more conducive and enabling environment. Efforts will also be directed towards promoting and differentiating aspects of Islamic wealth management across the value chain of wealth generation, accumulation, preservation and distribution by aligning products and services to the tenets of the maqasid al-shariah and by utilising waqf assets and structures. This will enable the Islamic fund and wealth management service provider to tap into a target market of affluent investors, especially Muslim investors.

iv Sustainable and responsible investments

With a clear shift in global trends towards business strategies that incorporate sustainable practices, stronger governance and ethics, together with environmental and social concerns, this enabled Islamic finance, based on the principles of fairness, social and environmental responsibility, to feature prominently in the rise of sustainable development projects. With this in mind, the SC introduced the SRI sukuk framework in 2014 to facilitate the creation of an ecosystem conducive for SRI investors and issuers.

The framework further enhances Malaysia's position and reputation as a hub for Islamic finance and sustainable investments. In June 2015, Malaysia's sovereign wealth fund, Khazanah Nasional Bhd issued the first tranche of the 1 billion ringgit SRI ihsan sukuk, the proceeds of which were to be utilised for the Yayasan Amir trust schools programme, a not-for-profit foundation that is party to a public private partnership with the Malaysian Ministry of Education.119

According to the Global Sustainable Investment Review 2016, Malaysia is the largest SRI market in the region, with a 3 per cent share in Asia (excluding Japan), as Malaysia recognises shariah-compliant funds as part of the SRI universe.120 The SC has developed a framework for SRI funds by issuing the Guidelines on Sustainable and Responsible Investment (SRI) Funds in December 2017 to facilitate and encourage growth of SRI funds in Malaysia. This will build on Malaysia's position as a regional shariah-compliant SRI centre; a strategic thrust that was identified under the Blueprint. These Guidelines are applicable for both conventional and shariah-compliant funds.121 Malaysia achieved further success in the SRI space in July 2017 with the establishment of the world's first green SRI sukuk by Tadau Energy (a joint venture between Kagayaki Energy, a Malaysian renewable energy and sustainable technology investment firm, and Edra Solar, owned by the China General Nuclear Power Corporation). This was a significant development in the green financing and global sukuk arena and the result of a collaboration between the SC, BNM and the World Bank Group, aimed at developing an ecosystem to facilitate the growth of green sukuk and to introduce innovative financial instruments to accommodate global infrastructure needs and green financing.122

In November 2017, the Association of Southeast Asian Nations (ASEAN) Green Bond Standards (GBS) were launched at the inaugural ASEAN Capital Market Conference. The ASEAN GBS aim to provide more specific guidance on how the Green Bond Principles are to be applied across the ASEAN, to promote transparency and consistency in the ASEAN green bond market framework. Quantum Solar Park (Semenanjung) Sdn Bhd issued the largest green sukuk in the world of 1 billion ringgit, which coincides with the ASEAN GBS. The proceeds are to fund the construction of three large solar power plants with total capacity of 150 megawatts (MW), which are the largest solar power projects in South East Asia. This transaction would assist Malaysia in achieving its renewable energy generation target of 7,200MW by 2020 and propel the nation's objective to be a key driver in the green Islamic financial space. The green SRI sukuk paves the way for more sustainable and responsible financing in Malaysia and ASEAN and coincides with ASEAN GBS, which further supports and assists the establishment of climate-friendly investments.

In December 2017, Permodalan Nasional Bhd issued the first tranche of 690 million ringgit under its 2 billion ringgit and 15-year Merdeka ASEAN green SRI sukuk programme. This was the first green sukuk recognised under both the SC's SRI sukuk framework and the ASEAN GBS.123 In addition, tax incentives were announced in July 2017 to attract green issuers, which included tax deduction until year of assessment of 2020 on issuance costs of SRI sukuk approved, authorised by or lodged with SC,124 over and above the measures previously introduced in the 2014 Budget.125 In the 2018 Malaysian Budget, the former Prime Minister unveiled a series of tax incentives, including an income tax exemption on green SRI sukuk grants, aimed at encouraging the issuance of green SRI sukuk in Malaysia. The SC, through the Capital Market Development Fund, will provide a green SRI sukuk grant of 6 million ringgit to finance the external review expenditure incurred by a green SRI sukuk issuer.126 Malaysia has issued five green SRI sukuk, with an amount of 2.4 billion ringgit raised in 2017 and 2018,127 including the issuance of ASEAN Green SRI Sukuk by Pasukhas Green Assets Sdn Bhd to fund the hydropower plant in Sungai Rek, Kelantan, and to explore other renewable energy assets in Malaysia.128

In line with the growing importance of sustainable finance in ASEAN, the ASEAN Capital Markets Forum introduced the ASEAN Social Bond Standards and ASEAN Sustainability Bond Standards at the ASEAN Capital Market Conference in October 2018, to support ASEAN's sustainable development needs in financing projects that are socially beneficial and to finance a combination of both green and social projects that offer environmental and social benefits.

v Financial technology

The role of fintech in Islamic finance as a key enabler for future business and facilitator for an automated end-to-end Islamic banking system for shariah-compliant banking operations. To this end, six Islamic banking institutions in Malaysia collaborated in February 2016 to launch the Investment Account Platform,129 the first bank-intermediated fintech platform combining Islamic banking services and technology to channel funds from investors to shariah-compliant economic ventures.130 In this regard, BNM and the SC have taken initiatives to boost the development of fintech in Malaysia as elaborated below.

BNM has approved seven firms to operate within its 'regulatory sandbox' in accordance with the Guidelines on Financial Technology Regulatory Sandbox Framework dated 18 October 2016.131 This will enable innovation of fintech to be deployed and tested in a live environment within specified parameters and time frames. The Islamic financial institutions are encouraged to embrace the movement by coming up with their own fintech innovations or by working with fintech start-ups, especially those in the digital payments space. In 2018, BNM introduced the Specialised Sandbox, which uses more focused and standardised testing parameters to allow for a more targeted and efficient testing approach for high-impact innovations.132

In addition, the SC and the Australian Securities and Investments Commission entered into an innovation cooperation agreement on 27 June 2017 to further promote innovation in financial services in their respective markets. This enables both regulators to explore potential joint innovation projects relating to the application of new technologies and to facilitate referrals of innovative businesses seeking to operate in each other's jurisdictions. This marks an important milestone for Malaysia's digital finance sector.133 In September 2017, the SC signed a series of innovation cooperation agreements with several other regulators in major financial centres: the Hong Kong Securities and Futures Commission, the Dubai Financial Services Authority and the Monetary Authority of Singapore.134 In February 2018, the Global University of Islamic Finance inked a memorandum of understanding with MIMOS Bhd, Malaysia's national information and communications technology research and development centre, to collaborate in the development of a blueprint for an Islamic finance-based investment technology platform.135 In September 2018, to promote an inclusive financial system that further supports Malaysia's middle and low-income groups, the United Nations Capital Development Fund, BNM and Malaysia Digital Economy Corporation launched the Digital Finance Innovation Hub and Inclusive Fintech Accelerator Program to support greater use of technology by service providers, such as financial institutions and fintech start-ups, in offering inclusive financial solutions.136

The government, through the Malaysia Digital Economy Corporation, has introduced the Islamic Digital Economy Guide (Mi'yar), a reference guide for start-ups, venture capital firms and the supporting ecosystem of participants in these areas who wish to explore and understand the various components of the Islamic digital economy, such as Islamic venture capital, business operations, and products and services that are shariah-compliant or conform to a halal perspective.137

vi Securities Industry Dispute Resolution Centre

Securities Industry Dispute Resolution Centre (SIDREC) is an independent body established by the SC in 2011 for the settlement of disputes between investors and capital market intermediaries. SIDREC offers a free service and aims to ensure that investors have access to an independent and impartial and expert dispute resolution avenue. Commercial and Islamic banks offering capital market services and products have become members of SIDREC in September 2017 following the SC's amendment to the Capital Markets and Services (Dispute Resolution) Regulations 2010. With these developments, investors can initiate dispute resolution claims for amounts of up to 250,000 ringgit. SIDREC may also provide mediation for claims exceeding 250,000 ringgit with the consent of both parties.138 In 2018, SIDREC expanded its purview, allowing it to offer its services to investors and capital markets services providers with disputes relating to claims exceeding 250,000 ringgit. The new service, being a voluntary scheme, requires both parties to a dispute to agree to use SIDREC's alternative dispute resolution services.139

vii Conclusion

Malaysia is recognised by the Islamic Finance Services Board and International Monetary Fund as a systemically important jurisdiction in which 15 per cent or more of its financial sector assets are Islamic,140 and it has maintained its leading position as the most developed Islamic finance market globally, as recognised by the Thomson Reuters's Islamic Finance Development Indicator 2018.141 It is recognised that Malaysia's achievements are attributable to the development of effective market structure, diverse players, a deep Islamic finance talent pool and robust legal, regulatory and shariah frameworks conducive to the sector's growth and development.142 The BNM SAC has also played an important role in developing Islamic finance in Malaysia through its shariah rulings, which have not only instilled customer and market confidence, but also catalysed a number of industry innovations (e.g., the BNM SAC's approval to use hybrid contracts, such as musharakah mutanaqisah (diminishing partnership), which enabled the introduction of innovative products).143 Moody's has recognised Malaysia as the largest Islamic issuer in terms of volume, both in the long and short-term market, at 34 per cent of total global issuances. Following the decline of global sovereign sukuk issuance in 2018, Moody's expects issuance in Malaysia to recover in the context of moderate oil prices and higher sukuk refinancing needs.144As at 31 March 2019, Malaysia remained the top sukuk issuer with 35.1 per cent, or US$13.9 billion, of the global sukuk issuance of US$39.5 billion.145 With the new government's determination to focus on the country's finances and economic management,146 there is optimism that Malaysia will consolidate and continue its leadership and innovation in Islamic finance, to do its part in forging a more sustainable, equitable, socially responsible and environmentally beneficial world.


1 Rodney Gerard D'Cruz and Murni Zuyati Zulkifli Aziz are partners at Adnan Sundra & Low. The authors would like to express their gratitude to Ms Wong Zhi Xin for her contribution in relation to the contents of this chapter.

4 See http://ntp.epu.gov.my/nkea and the BNM website at www.bnm.gov.my/index.php?ch=en_press&pg=

11 See: BNM Financial Stability and Payment Systems Report 2018 (page 48).

14 The IFSA repealed and consolidated the Islamic Banking Act 1983 and the Takaful Act 1984.

15 BNM is empowered under Section 59 of the Central Bank of Malaysia Act 2009 to issue circulars, guidelines or notices on any shariah matter relating to the Islamic financial business carried on by any Islamic financial institutions in accordance with the advice or ruling of the BNM's Shariah Advisory Council (the BNM SAC).

16 Section 28(3) of the IFSA provides that any financial institution becoming aware that its activities are not in compliance with shariah or the advice of its shariah committee or the advice or ruling of the BNM SAC shall notify BNM and cease the non-shariah-compliant activity whereas Section 37(1) of the IFSA empowers BNM to compel any financial institution to appoint any person as BNM may approve, to carry out an audit on shariah compliance on the said financial institution.

17 Section 2 of the IFSA defines 'Islamic banking business' as the business of (1) accepting Islamic deposits on current accounts, deposit accounts, savings accounts or other similar accounts, with or without the business of paying or collecting cheques drawn by or paid in by customers; or (2) accepting money under an investment account; and (3) provision of finance; and (4) such other business as the Minister may prescribe, on the recommendation of BNM. For the avoidance of doubt, the provision of finance by itself would not fall under the definition of Islamic banking business unless the provision of finance were specifically prescribed by the Minister under Section 3 of the IFSA.

18 Section 2 of the IFSA defines 'international Islamic banking business' as Islamic banking business in currencies other than ringgit or such other business as the Minister may prescribe, on the recommendation of BNM. For international Islamic banking business, see BNM Guidelines on International Islamic Banks.

19 This was issued pursuant to Section 135(3) as well as Section 136(2) of the IFSA and supersedes the previous BNM's Rules on Prohibited Business Conduct, which were issued in 2014.

20 Pursuant to Section 42 of the MDICA.

21 The CMSA repealed and consolidated the Securities Industry Act 1983, the Futures Industry Act 1993 and parts of the Securities Commission Malaysia Act 1993 (SCMA).

22 See Section 316B(1) of the CMSA.

23 See Section 316B(2) of the CMSA.

24 See Section 5 of the CMSA.

25 See Section 10 of the IFSA.

26 See Paragraph 10.09, Guidelines on Takaful Operational Framework issued by BNM on 26 June 2013.

27 ibid., Paragraph 10.11.

28 See guidelines on Takaful Operational Framework 2019: http://www.bnm.gov.my/index.php?ch=57&pg=

29 CISs are broadly defined under the BNM Guidelines as follows: any arrangement made for the purpose, or having the effect, of providing facilities for persons to participate in or receive profits or income arising from the acquisition, holding, management or disposal of securities, futures contracts or any other property, or sums paid out of such profits or income. In such schemes, participants do not have day-to-day control over the management of the schemes' assets.

30 See Paragraph 5.1, BNM Guidelines on Investment in Shares, Interest-in-Shares and Collective Investment Schemes for Islamic Banks (www.bnm.gov.my/guidelines/01_banking/04_prudential_stds/14_Investment_in_Shares_IIS_and_CIS_2806.pdf).

31 ibid. Unit trusts include institutional funds, real estate investment trusts, property trust funds and exchange-traded funds.

32 These include (1) Guidelines on Islamic Fund Management 2007; (2) Guidelines for Real Estate Investment Trusts 2018; (3) Guidelines on Unit Trust Funds 2017; (4) Exchange-Traded Funds Guidelines 2018; (5) Guidelines for Public Offerings of Securities of Closed-end Funds; (6) Guidelines for the Offering, Marketing and Distribution of Foreign Funds; (7) Handbook for CIS Operators of ASEAN CISs; and (8) Prospectus Guidelines for Collective Investment Schemes 2019. Note that this also falls under the purview of BNM vide Guidelines on Investment In Shares, Interest-in-Shares and Collective Investment Schemes for Islamic Banks.

33 See Section 7 of the Labuan Islamic Financial Services and Securities Act 2010 (LIFSSA).

34 See Section 8 of the LIFSSA.

35 See Section 9(1) of the LIFSSA. In addition, consumer complaints may be made to the Labuan FSA by completing the web forms available on the Labuan IBFC website at www.labuanibfc.com/contact-us.

36 See Section 9(3) and 9(4) of the LIFSSA.

37 This is an excerpt from page 333, chapter 22 on Malaysia by Rodney Gerard D'Cruz, The Banking Regulation Review, 10th Edition, Law Business Research Ltd, 2019.

38 See Section 10 of the IFSA.

40 See Section 67 of the LIFSSA.

41 See Section 51 (1) of the CBA, and footnote 6.

42 See Sections 56 and 57 of the CBA.

43 See Section 31ZI(1) of the SCMA.

44 See Section 31ZJ of the SCMA.

45 See Section 30(1) of the IFSA.

46 See Section 31 of the IFSA.

47 See Section 58 of the CBA.

48 See Section 59 of the CBA.

49 See BNM, Shariah Resolutions in Islamic Finance (2nd edition, Kuala Lumpur: 2010), at p. 24 (ruling No. 15).

50 ibid., at pp. 26 and 155 (rulings Nos. 17 and 94).

51 ibid., at p. 148 (ruling No. 89).

52 ibid., at p. 3 (ruling No. 1).

53 In this case, legal title to the home is with the customer or borrower.

54 See footnote 44, at p. 128 (ruling No. 80).

55 ibid., at p. 16 (ruling No. 12).

56 ibid., at p. 62 (ruling No. 41).

57 See Islamic Finance: An Ideal Model for Private Equity and Venture Capital dated 30 September 2015, published by BNM.

58 For more details about the registration requirements, see Part B of the Guidelines.

59 See Chapter 5 of Part B of the Guidelines on the Registration of Venture Capital and Private Equity Corporations and Management Corporations.

60 See Part D of the Guidelines on the Registration of Venture Capital and Private Equity Corporations and Management Corporations.

62 See: Guidelines on Listed Real Estate Investment Trusts (www.sc.com.my/api/documentms/download.ashx?id=afacc30c-060e-4cc0-b40f-d4546db74724)

65 Non-permissible activities include financial services based on riba (interest), gambling, conventional insurance, entertainment activities that are not permissible according to shariah principles, manufacturing or sale of tobacco-based products or related products, stockbroking or share trading in non-shariah-compliant securities, hotels and resorts and other activities to which the shariah committee may apply ijtihad (the process of making a legal decision by independent interpretation of the sources of the law, the Quran and the Sunnah) for other non-permissible activities to be included as a criteria in assessing whether the rental income for the I-RElTs is shariah-compliant or not.

66 See footnote 44, at p. 40 (ruling No. 29).

67 ibid., at p. 21 (ruling No. 15).

68 ibid., at p. 137 (ruling No. 84).

69 ibid., at p. 139 (ruling No. 85).

70 As mudarib or managers for the swap counterparties (1) the FIs invest in the MII, but do not acquire it, to avoid the costs and implications of legal title; and (2) the amount invested by FIs is a notional swap amount contributed by the swap counterparties as prescribed in the swap contract.

71 The dates (described as 'reset dates' in the ruling) constitute determination points of the applicable floating profit rates to be swapped. These dates are set by swap counterparties and may fall quarterly, semi-annually, annually or otherwise.

72 These are: (1) professional fees relating to due diligence, drafting and preparation of prospectus; (2) printing cost of prospectus; (3) advertisement cost of prospectus; (4) SC prospectus registration fee; (5) Bursa processing fee and initial listing fee; (6) Bursa new issue crediting fee; and (7) primary distribution fee. See Appendix 9 of the 2016 Malaysian Budget: www.bnm.gov.my/files/Budget_Speech_2016.pdf.

73 The Income Tax (Deduction for Expenditure on Issuance of Sukuk) Rules 2015 provide that a company shall be given a revenue deduction on an amount equal to the expenditure incurred on the issuance of sukuk under the shariah principles of ijarah or wakalah approved or authorised by, or lodged with, the SC or approved by the Labuan FSA. This is applicable until 2020. See Appendix 10 of the 2019 Malaysian Budget.

74 See Appendix 11 of the 2019 Malaysian Budget.

75 See Paragraph 72 and Appendix 8 of the 2016 Malaysian Budget.

76 ibid., Appendix 10.

77 See Appendix 4 of the 2018 Malaysian Budget.

78 See Appendix 8 of the 2018 Malaysian Budget.

79 See Appendix 5 of the 2018 Malaysian Budget.

81 For more tax incentives that are or were previously offered under the Income Tax Act for various Islamic capital market products or services, see www.sc.com.my/home/special-incentives-2/islamic-capital-market/.

82 See Part IV of the CA, which provides for voluntary and compulsory winding up of a company.

84 Section 439 of the CA.

85 Section 465 of the CA.

86 Sections 161 and 179 of the MDICA.

87 Sections 98 and 99 of the MDICA.

88 Sections 177 and 179 of the IFSA.

89 Section 184 of the IFSA.

90 Section 188 of the IFSA.

91 Section 200(b) of the IFSA.

92 Section 205 of the IFSA.

93 Sections 204, 206 and 207 of the IFSA.

94 Sections 217 and 218 of the IFSA.

95 See Paragraphs 4(a) and 4(b) of List I of the Ninth Schedule of the FC.

96 ibid., Paragraph 1 of List II.

97 ibid.

98 This refers to the Malaysian Civil Law Act 1956, the Malaysian Courts of Judicature Act 1964 and the Rules of the High Court 1980.

99 [1993] 1 CLJ 264. See also the Malaysian High Court judgment in Bank Islam Malaysia Berhad v. Adnan Omar [1994] 3 CLJ 735, in which the High Court held that, inter alia, shariah courts can only decide cases that fall under the State List of the Malaysian Federal Constitution, which excludes commercial law matters such as Islamic banking and finance.

100 See Bank Kerjasama Rakyat Malaysia Bhd v. Emcee Corporation [2003] 1 CLJ 625, CA, which held that the law applicable to Islamic banking disputes was the same as that applicable to conventional banking disputes. This was followed in Tahan Steel Corporation v. Bank Islam Malaysia Bhd [2004] 6 CLJ 25.

101 [1994] 3 CLJ 735.

102 [2006] 3 MLJ 67.

103 [2006] 3 CLJ 796.

104 See Section 16B of the CBA 1958.

105 [2008] 5 MLJ 631.

106 [2007] 5 CLJ 311.

107 [2009] 6 MLJ 839.

108 [2016] MLJU 1415.

109 See Section 51 of the CBA.

110 See Section 52(1) (a) of the CBA.

111 See Sections 56 and 57 of the CBA.

112 [2019] 3 MLJ 561.

113 [2013] 3 MLJ 269.

118 See www.thestar.com.my/business/business-news/2016/06/20/epf-shariah-savings-scheme-open-for-registration-on-aug-8/ and www.freemalaysiatoday.com/category/nation/2018/02/10/epf-declares-6-9-dividend-6-4-for-simpanan-shariah/.

119 Part 1 of the SC Annual Report 2015 and www.yayasanamir.org.my.

123 See footnote 6.

126 See Appendix 4 of the 2018 Malaysian Budget, page 63.

127 See: Securities Commission Annual Report 2018.

132 See: BNM Financial Stability and Payment Systems Report 2018.

142 See BNM Financial Stability and Payment Systems Report 2017 (www.bnm.gov.my/files/publication/fsps/en/2017/fs2017_book.pdf).

143 ibid.