National Authorities and Organizations

The Islamic Banking in Malaysia emerged in the 1960s when the Pilgrims Fund Board was established. It main purpose was to assist Muslim in saving for their pilgrimage. The Central Bank of Malaysia - Bank Negara Malaysia (BNM) - played an active role in promoting a separate Islamic legislation and banking regulation along with those for the conventional banking system. The legal basis for the establishment of Islamic banks was the Islamic Banking Act (IBA) which came into effect on 7 April 1983. It provided BNM with powers to supervise and regulate Islamic Banks as in the case of conventional banks. The BNM objective is to promote an efficient, progressive and comprehensive Islamic financial system. The first Islamic bank established in the country was Bank Islam Malaysia Berhad (BIMB) in 1983. It was listed on the Kuala Lumpur stock Exchange in 1992. To disseminate Islamic banking on a national wide basis BNM introduced a scheme known as “Skim Perbankan Islam” (Islamic Banking Scheme) in 1993. Under the SPI existing banking institutions were allowed to offer Islamic banking services using their branches (Islamic windows). In 1994 BNM promoted the Islamic Interbank Money Market to provide for the short term funds surplus and deficit among Islamic banks. In 1996 BNM issued a model financial statement for the banking institutions participating in the SPI, requiring the banks to disclose the Islamic banking operations as an additional item under the Notes to the Accounts. In 1997, to harmonise the Shariah interpretations among Islamic banks, the BNM established the Shariah Advisory Council for Islamic Banking and Takaful (SAC) as the highest Shariah authority on Islamic banking. The BNM supervises and regulates Takaful operations since 1988. The BNM’s web site offers general information on Islamic banking and takaful products and data on Malaysian Islamic Financial Industry are also available.

Bursa Malaysia was the first ever listed exchange in an Islamic country, in 2005. It comprises equities, derivatives and offshore markets. At the end of 2006 there were 886 Shariah compliant securities as determined by the Shariah Advisory Council (SAC) of the Securities Commission (SC). This represented 86% of the total listed securities or 64% of the market capitalization on Bursa Malaysia. Companies seeking to list can request for a pre-IPO screening by the SAC to determine whether their securities are Shariah compliant. Bursa Malaysia, in joint venture with FTSE, launched Shariah indices (FTSE Bursa Malaysia EMAS Shariah Index, FTSE Bursa Malaysia Hijrah Index) to track Malaysian Shariah compliant investments. On Bursa Malaysia Derivatives Bhd, two of nine products were approved as Shariah complaint instruments by SAC. These are Crude Palm Oil Futures (FCPO) and Single Stock Futures (SSF) of Shariah complaint underlying stocks. Malaysia offers a set of Islamic capital market infrastructure, including products, stockbrokers, trust funds and debt securities (Sukuk). There are also asset management companies that manage funds in accordance to Shariah principles. In 2006 the world’s first Islamic real estate investment trust (REIT) was listed. In 2000 the Labuan International Financial Exchange was established to promote the development of offshore Islamic capital market.

The Central Bank of Bahrain (CBB) is a public corporate entity established by the Central Bank of Bahrain and Financial Institutions Law 2006. It was created on 7th September 2006. The CBB is responsible for maintaining monetary and financial stability in the Kingdom of Bahrain. It succeeded the Bahrain Monetary Agency, which had previously carried out central banking and regulatory functions since its establishment in 1973 (shortly after Bahrain secured full independence from Great Britain). The CBB implements the Kingdom's monetary and foreign exchange rate policies, manages the government's reserves and debt issuance, issues the national currency and oversees the country's payments and settlement systems. It is also the sole regulator of Bahrain's financial sector, covering the full range of banking, insurance, investment business and capital markets activities. The CBB has played a leading role to develop Bahrain as the most important Islamic Finance Hub, introducing innovative products, sukuk market and promoting Islamic Financial Organizations like AAOIFI, LMC, IIFM. The Central Bank of Bahrain has also recently established a special fund to finance research, education and training in Islamic finance (the Waqf Fund); and is active in working with the industry and stakeholders in developing industry standards and the standardization of market practices.

The DIFC is the world's newest international financial centre opened in September 2004. It aims to develop the same stature as New York, London and Hong Kong. A world-class stock exchange, the Dubai International Financial Exchange (DIFX), opened in the DIFC in September 2005. The DIFC is a 110-acre free zone. It is part of the larger vision of His Highness Sheikh Mohammed Bin Rashid Al Maktoum, Vice-President and Prime Minister of the UAE and Ruler of Dubai, together with the Government of Dubai, to create an environment for progress and economic development in the UAE and the wider region. The DIFC focuses on several sectors of financial activity: Banking Services (Investment Banking, Corporate Banking & Private Banking); Capital Markets (Equity, Debt Instruments, Derivatives and Commodity Trading); Asset Management and Fund Registration; Insurance and Re-insurance; Islamic Finance & Professional Service Providers. Firms operating in the DIFC are eligible for benefits such as a zero tax rate on profits, 100 per cent foreign ownership, no restrictions on foreign exchange or repatriation of capital, operational support and business continuity facilities. Financial services in the DIFC are regulated to international standards by the Dubai Financial Services Authority (DFSA). The DIFC aims to become the global hub for Islamic finance. Its sophisticated framework of laws, regulations and controls make it the international financial center of choice for financial institutions offering Islamic products. The Dubai International Financial Exchange (DIFX), operating to global standards of transparency and efficiency, offers a deep pool of liquidity for the primary listing and secondary trading of sophisticated Islamic financial instruments. The DIFC also plans to offer a new domicile for the registration of Islamic collective investment schemes, reflecting an increasing investor preference for Shariah compliant investment products originated and managed in the region.

The UK’s Financial Services Authority (FSA) is a statutory body set up by Government under the Financial Services and Markets Act 2000. The FSA is responsible for regulating financial services in the UK and its aim is to promote efficient, orderly and fair financial markets and help retail financial service consumers get a fair deal. The FSA regulates most financial services markets, exchanges and firms. It sets the standards that they must meet and can take action against firms if they fail to meet the required standards. The FSA played an important role in developing the regulatory framework for Islamic finance in UK for retail and wholesale banking. The FSA approach to Islamic finance could be summarize “no favors no obstacles”, providing a non-discriminatory regime when it authorizes financial institutions. It licensed the first UK retail Islamic bank (Islamic Bank of Britain) in 2004 and two wholesale banks (European Islamic Investment Bank in 2006 and Bank of London and the Middle East in 2007). Many FSA members speeches on Islamic Finance are available in the web site. The FSA published “Islamic Finance in the UK: Regulation and Challenges” in November 2007.

The Islamic Interbank Money Market (IIMM) was introduced in Malaysia in 1994 to provide a ready source of short-term investment outlets based on Shariah principles. Through the IIMM, the Islamic banks and banks participating in the SPI would be able to match their funding requirements effectively and efficiently and promote stability in the system. It serves as a channel for the transmission of monetary policy as well. The Bank Negara Malaysia (BNM) issued the Guidelines on the IIMM on December 18, 1993 to facilitate the proper implementation. The IIMM covers the Interbank trading of Islamic financial instruments and Mudaraba Interbank Invetsments (MII).

Labuan, Malaysia, was designated as an offshore international financial centre in 1990. As part of its development, an offshore financial exchange, Labuan International Financial Exchange (LFX), was launched on 23 November 2000, owned by the Kuala Lumpur Stock Exchange (KLSE). The LFX scope is to facilitate the influx of funds through the listing and trading of financial instruments in developing the Malaysian Capital Market. LFX is a one-stop financial exchange offering full services from the submission of application to approval, listing, trading and settlement of the instruments listed. Transactions on LFX are not subject to any selective capital control measure and are tax-free. The Labuan Offshore Financial Services Authority (LOFSA) supervises the LFX activity. Many international sukuk issues have been listed in LFX.

The Liquidity Management Centre (LMC) was established in Bahrain in 2002 for the purpose of facilitating the investment of surplus funds of Islamic banks and financial institutions in quality short and medium term financial instruments structured in accordance with the Shariah principles. LMC is committed to playing a key role in the creation of an active and geographically expansive Islamic interbank market which will assist Islamic Financial Institutions in managing their short-term liquidity. LMC activity includes: the Short Term Sukuk Program; primary market sukuk issuance assistance to its clients (sovereign entities, financial institutions and other corporate entities) including structuring, issuance and administration; secondary sukuk market activity; Islamic Investment Fund issuance

The Malaysia International Islamic Financial Centre (MIFC) was launched in August 2006. Its main scope is to promote Malaysia as an Islamic Finance International Hub attracting Islamic funds from Asia and the Middle East. The Malaysian Government has played an important role in promoting MIFC. The objective of the MIFC is to promote Malaysia as the centre for origination, distribution as well as trading of Islamic treasury and capital market instruments; Islamic fund and wealth management services; International currency Islamic financial services (including deposits and financing); takaful and Re-takaful; Islamic Finance education, training, consultancy and research.

The State Bank of Pakistan (SBP) is one of the main Central Banks involved in promoting Islamic Finance. It established an Islamic Banking Department in 2003. It was entrusted with the huge task of promoting and developing the Shariah compliant Islamic Banking as a parallel and compatible banking system in the country. Islamic Banking is a high priority area for the State Bank of Pakistan. Steps are being taken to make Islamic banking industry in Pakistan robust enough to offer a viable alternative to conventional banking. State Bank of Pakistan wants to develop a progressive and sound Islamic banking system that is in line and is compatible with the global financial sector, providing innovative Shariah compliant products and services so as to achieve equitable economic growth. One of the biggest challenges being faced by this growing industry is the dearth of professional Islamic Bankers and capacity building in this area. In order to play the regulatory and supervisory role more efficiently the SBP is working on areas like Risk Management, Corporate Governance, Prudential Regulations, Accounting & Shariah Standards etc. The SBP provides a quarterly Islamic Banking Bulletin monitoring the status of the industry in Pakistan.