IslamicFinancialSystemVol1

ISLAMIC FINANCIAL
SYSTEM

VOL.1

AZAHAR BIN MOHAMMED

JABATAN PERDAGANGAN
POLITEKNIK SEBERANG PERAI

©All rights reserved. No part of this publication may be translated or
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Email : [email protected] Website : www.psp.edu.my
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Acknowledgement

This Ebook focusses on the content of DPD20042 Islamic
Financial System course which is compulsory to be taken by
students of Diploma in Islamic Banking and Finance. The
topics were arranged according to chapter 1 of the course.
Based on several books and websites related to the topic, the
writer combined the materials into an easy to read Ebook.
Special thanks to all the people involved in the making of this
Ebook, family, wife, my sons, daughters and friends. You are
the reason making this Ebook much easier and fun.

Table of Page
Contents 1
2
No. Topic 3
1. What to expact from this Ebook 4
2. Overview of Malaysia’s Financial System 5
3. The Banking System 6
4. Bank Negara Malaysia (BNM) 7
5 the Roles & Functions of BNM 9
6 Banking Institutions
7 Commercial Banks Define 14
8. The Islamic Banks
18
9. Facts you need to know about Malaysia’s Islamic 21
Financial System 22
23
10. Investment Banks 26
11. Other Financial institutions 27
12. Representative Offices of Foreign Banks
13. International Business & Financial Centre (IBFC)
14. The Non-Bank Financial Intermediaries
15. Development Finance Institutions (DFIs)

Table of Page
Contents 29
30
No. Topic 32
16. Provident & Pension Fund 33
17. Takaful & Insurance Companies 34
18. Savings Institutions 35
19. Others 38
20. Recap
21. Activities
22. References

eBook PSP- Islamic Financial System Vol. 1 1

What to
expect from
this ebook

Banking System and Non-bank
Financial Intermediaries

The Financial System in Malaysia is a unique and comprehensive
system created in order to ensure our banking, non-bank
institutions and the financial market cooperate with each other to
ensure Malaysia achieving its economic goals. The vol 1 of this
Ebook will only be discussing on the roles and functions of
financial institutions involved in the financial system.
Meanwhile as for the Financial Market, the topic will be
discussed further in the Vol 2 of the Ebook concentrating on the
instruments offered, roles and functions and how the market
helps the overall financial system in Malaysia running smoothly.
To help recap on the topic discuss, the Ebook will also added
some simple activities at the end of the book. The idea is to help
readers to understand more on the topic and be able to use the
knowledge when needed.
To begin the journey of this Ebook, let us look at the diagram on
the overview of the financial system in Malaysia on the next
page.

eBook PSP- Islamic Financial System Vol. 1 2

1 BSayTnshtkeeinmg

Overview 2
of
TheFiNnaonnc-iBaal nk
Malaysia’s Intermediaries
Financial

System

3 FinTahnecial
Market
The Financial
System of Malaysia is

divided into three
categories which

has their own roles
and functions.

eBook PSP- Islamic Financial System Vol. 1 3

1 The Banking
System

i. Bank ii. Banking
Negara Institutions
Malaysia
a. Commercial Banks
b. Islamic Banks
c. Investment Banks

iii. Other
Financial
Institutions

a. Representative Offices of
Foreign Banks

b. Offshore banks in the
International Business
Financial Centre in Labuan
(Labuan IBFC)

eBook PSP- Islamic Financial System Vol. 1 4

i. Bank BNM, as the central bank, is at
Negara the apex of the banking system,
and is responsible for the
Malaysia regulation and supervision of the
banking system, with the
(BNM) exception of the offshore banks
operating in the Labuan IBFC.

eBook PSP- Islamic Financial System Vol. 1 5

Bank Negara
Malaysia (BNM)

Is a statutory body which started operations on 26
January 1959. Bank Negara Malaysia is governed
by the Central Bank Of Malaysia Act 2009.

Listed are the Roles 5 Bank Negara Malaysia is also
& Functions of BNM : the sole authority in issuing
the national currency and in
Promote monetary and managing the country's
international reserves.
1 financial stability. This is
aimed at providing a 6 Development of financial
conducive environment for system infrastructure with
the sustainable growth of the major emphasis placed on
Malaysian economy. building the nation's efficient
and secured payment systems
Responsible for financial as well as the necessary
2 system stability by institutions i.e Securities
developing a sound, resilient, Commission, Bursa Malaysia
progressive and diversified and Credit Guarantee
financial sector which serves Corporation (CGC).
to support the sectors of the
real economy. 7 Actively promotes financial
inclusion, which has led to
Implementing initiatives to improved access to financial
deepen and strengthen the services for all economic
sectors and segments of
3 financial markets, including society, thereby supporting
the foreign exchange market. balanced economic growth.

Banker and adviser to the

4 Government, Bank Negara
Malaysia provides advice on
macroeconomic policies and
the management of public
debt.

eBook PSP- Islamic Financial System Vol. 1 6

ii. Banking a. Commercial Banks
Institutions
The commercial banks are the main
players in the banking system. They
are the largest and most significant
providers of funds in the banking
system.
The range of transaction accounts
typically offered are savings account,
current account, fixed deposits and
negotiable instruments of deposits
(NIDs).
They provide facilities for making
payments or monetary transfers in
domestic or foreign currencies, both
locally and internationally; makes
commercial and industrial loans and
trade finance.

eBook PSP- Islamic Financial System Vol. 1 7

Banking Meanwhile under the same
Institutions act, the interpretation of
provision of finance include :
a. Commercial lending of money, leasing
Banks business, factoring business,
purchase of bills of
Commercial bank is defined exchange, promissory notes,
as a person which carries on certificates of deposits,
banking business. According debentures or other
to section 2(1) Financial negotiable instruments and
Services Act 2013 (FSA). the acceptance of guarantee
of any liability, obligation or
The definition of banking duty of any person (Bank
business can be deprived Negara Malaysia, 2013).
from the definition stated as
below : The main functions of
commercial banks are to
“…. banking business means provide banking services such
the business of: as the acceptance of deposit,
granting of loans and
(a) accepting deposits advances, and financial
on current account, guarantees; Trade financing
deposit account, facilities such as letters of
saving account or credit, discounting of trade
other similar bills, shipping guarantees,
accounts, trust receipts and Banker’s
Acceptances, Treasury
(b) paying or services, Cross border
collecting cheques payment services, and
drawn by or paid Custody services such as safe
in by customers; deposits and share custody.
and Commercial banks are also
authorized to deal in foreign
(c) provision of finance; and exchange and are the only
financial institutions allowed
(d) such other business as to provide current account
prescribed under sec.3 facilities.

eBook PSP- Islamic Financial System Vol. 1 8

26
Commercial
Banks in
Malaysia

1. Affin Bank Berhad
2. Alliance Bank Malaysia Berhad
3. AmBank (M) Berhad
4. Bangkok Bank Berhad
5. Bank of America Malaysia

Berhad
6. Bank of China (Malaysia)

Berhad
7. BNP Paribas Malaysia Berhad
8. China Construction Bank

(Malaysia) Berhad
9. CIMB Bank Berhad
10. Citibank Berhad
11. Deutsche Bank (Malaysia)

Berhad
12. Hong Leong Bank Berhad
13. HSBC Bank Malaysia Berhad
14. India International Bank

(Malaysia) Berhad
15. Industrial and Commercial

Bank of China (Malaysia)
Berhad
16. J.P. Morgan Chase Bank
Berhad
17. Malayan Banking Berhad
18. Mizuho Bank (Malaysia)
Berhad
19. MUFG Bank (Malaysia) Berhad
20. OCBC Bank (Malaysia) Berhad
21. Public Bank Berhad
22. RHB Bank Berhad
23. Standard Chartered Bank
Malaysia Berhad
24. Sumitomo Mitsui Banking
Corporation Malaysia Berhad
25. The Bank of Nova Scotia
Berhad
26. United Overseas Bank
(Malaysia) Bhd

eBook PSP- Islamic Financial System Vol. 1 9

ii. Banking b. The Islamic Banks
Institutions The Islamic Banking System in
Malaysia exists side by side with
the conventional banking system.
The legal basis for the introduction
of banking products along Islamic
principles is the Islamic Finance
Services Act (IFSA), which came
into effect on 30 June 2013.
IFSA provides the Central Bank
with the power to supervise and
regulate Islamic banks similar to
the case of other licensed banks.
The history of establishment of
Islamic financial system in Malaysia
began in July 1981.

eBook PSP- Islamic Financial System Vol. 1 10

Banking
Institutions

b. Islamic Banks

An Islamic bank is a financial The primary objective of
institution that operates with the establishing Islamic banks is to
objective to implement the spread economic prosperity
economic and financial principles of within the framework of Islam by
Islam in the banking arena. promoting and fostering Islamic
principles in the business sector.
According to the Islamic Financial
Services Act 2013 (IFSA), an
Islamic bank is

".. a company which carries on
Islamic banking business. Islamic
banking business means banking
business whose aims and
operations do not involve any
element which is not approved by
the religion of Islam..."

From the above definitions, we can
summarize that Islamic banks are
institutions that are based on Syariah
principles. This shall include but not
be limited to the following Islamic
principles:

• The avoidance of riba (in the
broad sense of unjustified
increase or interest);
• Prohibition of gharar
(uncertainty, risk, speculation);
• Focus on halal (religiously
permissible) activities; and
• More generally the quest for
justice, and other ethical and
religious goals.

oipIp.neprroi.een,dsrrcsaiuiseptckinlot-esscnsheasaf,noarIdsirrnleafsgimenbaraaivncnsidcecbeidaapslnorhtoknraihanvInisgbinslaiatgmicortiniicobonafs,
and profit and loss-sharing are major
ifneatthuereesc,oennosmuryin. g justice and equity

eBook PSP- Islamic Financial System Vol. 1 11

Banking
Institutions

Islamic Banks

According to section 2(1)
Islamic Financial Services Act
2013, the definition of Islamic
banking business can be
deprived from the definition
stated as below :

“….Islamic banking business Financing facilities Offered
means the business of: by Islamic banks
(a) accepting Islamic
1 Project financing under the
deposits on current principles of Mudharabah
account, saving and Musyarakah.
account or other
similar accounts, with 2 Lease financing under the
or without the principles of Al-Ijarah and Al-
business of paying or Takjiri.
collecting cheques
drawn by or paid in by 3 Hire purchase financing Bai
customers; or under the principles of Al
Bithaman Ajil.
(b) accepting money under an
investment account; and 4 Trade financing (including
bill financing and letter of
(a) provision of finance; and credit) under principles of
Murabahah and Wakalah.
(a) such other business as
prescribed under sec.3 5 Guarantee under the
principles of Al-Kafalah.

6 Benevolent loans under the
principles of Qard Hassan.

7 Insurance under the
principles of Takaful.

eBook PSP- Islamic Financial System Vol. 1 12

Banking
Institutions
Islamic Banks

Key Objectives of an Islamic bank :

1. Offer Financial Services: The 4. Optimum Resources
focus is on offering banking Allocation: Islamic banking
transactions adhering to optimises allocation of
Syariah principles and scarce resources through
avoiding conventional investment of financial
interest-based banking resources into projects that
transactions where riba and are considered to be the
gharar. are all identified as most profitable, religiously
unlslamic. The thrust is permissible and are
towards financing on risk- beneficial to the economy.
sharing and strict focus on
halal activities. 5. Equitable Distribution of
Resources: Islamic banking
2. Facilitate Stability in Money ensures equitable
Value: Islam recognizes distribution of income and
money as a means of resources among the
exchange and not as a participating parties - the
commodity, where there bank, the depositors and the
should be a price for its use. entrepreneurs - with its
Hence, riba-free system leads profit-sharing approach
to stability in the value of which is one of a kind
money to enable the medium
of exchange to be a reliable 6. Optimist Approach: Profit-
unit of account. sharing principle
encourages banks to go for
3. Economic Development: projects with long-term
Islamic banking fosters gains instead of short-term
economic development gains. This leads the banks
through utilities like to conduct proper studies
eMtcu.s,hwairtahkaahusnMiquudehparroafbitaahn, d before getting into projects,
loss-sharing principle. This which safeguards both the
establishes a direct and close banks and investors interests
relationship between the in total. High returns
bank's return on investment distributed to shareholders
and the successful operation maximise the social benefits
of the business by the and bring prosperity to the
entrepreneurs, which in turn economy.
leads to the economic
development of the country.

eBook PSP- Islamic Financial System Vol. 1 13

16 Islamic
Banks in
Malaysia

1. Affin Islamic Bank
Berhad

2. AInlvReasjthmi eBnatnCkionrgpo&ration
(Malaysia) Berhad

3. BAellirahnacde Islamic Bank
4. AmBank Islamic Berhad
5. Bank Islam Malaysia

Berhad
6. Bank Muamalat

Malaysia Berhad
7. BCeIMrhBadIslamic Bank
8. HBaonnkgBLeerohnagdIslamic
9. BHeSrBhCadAmanah Malaysia
10. Kuwait Finance House

(Malaysia) Berhad
11. Maybank Islamic

Berhad
12. MBSB Bank Berhad
13. BOeCrhBaCdAl-Amin Bank
14. Public Islamic Bank

Berhad
15. RHB Islamic Bank

Berhad
16. SStaaanddiqarBdeCrhhaadrtered

eBook PSP- Islamic Financial System Vol. 1 14

FSFIMtosyailankcsalattnmaesnyomiycswcoiiaaual’sbnoeuetd

The Islamic banking system in Malaysia
started just four decades ago, in early 1980’s

(even though the history of Islam existed for more than
1400 years ago).
As with other Muslim countries, Malaysia was effected
by the Islamic resurgence movement among the
intellectuals especially around the 1970s. Formal
request to set-up Islamic Bank however was made
during the Bumiputera Economic Congress in 1980.
In order to setup an Islamic banks in Malaysia, the
government appointed a National Steering Committee
in 1981 to study on the setting up Islamic Banking. In
order to do so, this committee studied both
operations of the Faisal Islamic Bank of Egypt and The
Faisal Islamic Bank of Sudan.
Based on their studies, the committee came out with a
few recommendations on setting up Islamic banks in
Malaysia.

eBook PSP- Islamic Financial System Vol. 1 15

Recommendations
by the National
Steering Committee
1Is9la8m1 iocnBsaenttkinsginup
Malaysia

1 The Government should establish an
Islamic bank whose operations are in
accordance to the principles of Syariah.

2 The proposed bank is to be
incorporated as a company under the
auspices of the Companies Act, 1965.

3 A new Islamic banking act must be
introduced to license and supervise
the Islamic bank.

The Islamic bank is to establish its own

4 Shariah Supervisory Board; to ensure
that the operations of Islamic bank are
in accordance to the Shariah.

eBook PSP- Islamic Financial System Vol. 1 16

The First Based on the
recommendations by the
Islamic National Steering
Bank Committee, the first
Islamic bank was
established. Bank Islam
Malaysia Bhd (BIMB) was
incorporated in July 1983.

eBook PSP- Islamic Financial System Vol. 1 17

The History Mac 1, 1983 BIMB was incorporated and commenced operations on July
1, 1983.

March 10, The Islamic Banking Act was gazetted.
1983

April 7, 1983 The Islamic Banking Act came into effect.

July 1, 1983 BIMB commenced operations.
1983
The Government introduced The Government Investment
Act in 1983 to enable the government to issue Government
Investment Certificates, which are government bonds issued
in accordance to Islamic principles.

March 4, 1993 Central Bank has introduced a scheme known as ‘Skim
Perbankan Tanpa Faedah’ or ‘Interest-free Banking Scheme’
(Often known as ‘Islamic windows). Under this scheme, all
commercial banks, merchant banks and finance companies
are given an opportunity to introduce Islamic banking
products and services. The pilot phase of the scheme
involved the three largest commercial banks in Malaysia.

August 21, The second phase started with 10 more finance institutions
1993 joining the scheme.

January, 1994 The Islamic inter-bank market was introduced in Malaysian
financial system, which consists of three elements namely,
i. Interbank trading in financial instruments,
ii. Islamic inter-bank investments
iii. Islamic inter-bank cheque clearing system

Oct 1999 Bank Muamalat Malaysia Berhad, as 2nd Islamic Bank in
Malaysia was formed due to merger between BBMB (Bank
Bumiputra Malaysia Berhad), BBMB Kewangan, and BOC
(Bank of Commerce) to form Bumiputra-Commerce Bank.

31 Dec 2001 BNM compliance date where SPI players to achieve at least
8% of the bank’s total assets.

March 2001 BNM launched Financial Sector Master Plan (FSMP) sets out
until Now the broad strategies for the development of the financial
sector over a ten year period. The end objective is to evolve
the financial system into one which is competitive, resilient
and dynamic.

eBook PSP- Islamic Financial System Vol. 1 18

ii. Banking c. Investment Banks
institutions
Another institution in the banking
system is the investment banks.
The establishment of investment
banks was a result of mergers
between merchant banks,
stockbroking companies and
discount houses (Bank Negara
Malaysia, 2005).
In view of the scope of activities,
investment banks continues to
conduct activities based on the types
of licences the investment bank
entity held prior to the rationalisation.
In addition, investment banks are
also allowed to undertake fund
management and unit trust
businesses in line with securities laws
and guidelines issued by the Security
Commission (SC).

eBook PSP- Islamic Financial System Vol. 1 19

Banking
Institutions

c. Investment Bank b. Lending: In principle,
lending activities only
In relation to the banking confined to those that are
activities of investment necessary for investment
banks, here are the banks to complement
activities of investment their fee-based activities
banks : and to offer
a. Deposit-taking: comprehensive
Investment banks are investment banking
allowed to mobilize packages to their clients.
deposits. However, the c. Fee based activities :
minimum deposit 1. Corporate finance &
threshold is RM500,000
(excluding repurchase Advisory
agreements where the 2. Investment & Portfolio
minimum transaction
amount is RM50,000). services
Besides being an 3. Corporate banking
interbank players, 4. Money market &
investment banks also
actively involved in the treasury
capital market to meet
their funding needs, (as
practiced by the
international investment
banks).

eBook PSP- Islamic Financial System Vol. 1 20

11
Investment
Banks in
Malaysia

Affin Hwang Investment
Bank Berhad
Alliance Investment Bank
Berhad
AmInvestment Bank
Berhad
CIMB Investment Bank
Berhad
Hong Leong Investment
Bank Berhad
KAF Investment Bank
Berhad
Kenanga Investment Bank
Berhad
Maybank Investment Bank
Berhad
MIDF Amanah Investment
Bank Berhad
Public Investment Bank
Berhad
RHB Investment Bank
Berhad

eBook PSP- Islamic Financial System Vol. 1 21

iii. Other Still categorized under the
Financial LBbobcinoaafausbnnnFstisiukoktniuiasrsnetetnigisooings(nsfLtnyFsRahs.ieBbnetTepauahImnnrnaeektnsciseeissaeIrBoinlnnatFCatnshCattedeiit)tnoriu.OvtnftrieifnaeoflOasninhnsfcofiircaeel s
institutions wFTohhreiecRihgenpdBroeansneokntsthaaatriveveefotOhreeffiigfcunellsbloiacfneknsse
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eBook PSP- Islamic Financial System Vol. 1 22

Other
Financial
Institutions

a. Representative Offices
of Foreign Banks

A representative office is an office
established by a foreign company or a
foreign legal entity to conduct
marketing and other non-
transactional operations in Malaysia
where a branch office or subsidiary is
not warranted.

Country Representative Offices in Malaysia
Australia
1. Australia and New Zealand Banking Group
France Limited
2. Societe Generale Corporate and Investment
Hong Kong Banking
India 3. The Bank of East Asia, Limited
Korea
Nepal 4. ICICI Bank Limited

Singapore 5. Woori Bank
Switzerland
Taiwan 6. Himalayan Bank Limited
7. NMB Bank Limited
United States of 8. DBS Bank Ltd
America
9. Credit Suisse AG

10. Bank of Taiwan Co. Ltd.
11. CTBC Bank Co. Limited
12. Land Bank of Taiwan Co. Ltd.

13. The Bank of New York Mellon
14. The Northern Trust Company

eBook PSP- Islamic Financial System Vol. 1 23

Other
Financial
Institutions

b. International Labuan IBFC is Malaysia's very
Business & own integrated financial centre,
Financial Centre providing a wide range of
(IBFC) corporate, trust and company
secretarial services.
It was made a Federal Territory
directly under the administration of
the Federal Government of Malaysia
in 1984. The development of Labuan
as an international financial centre
only began in October 1990.
The statutory body responsible for
the development of Labuan IBFC is
the Labuan Financial Services
Authority (commonly known as the
“Labuan FSA”.
Beginning January 2008, Labuan
IBFC has been repositioned as Asia's
most connected, convenient and
cost-efficient International Business
and Financial Centre, with a specific
focus on business incorporations.

eBook PSP- Islamic Financial System Vol. 1 24

Other
Financial
Institutions

b. International Business
& Financial Centre
(IBFC)

The Characteristics of an In summary, the objectives
IBFC of establishing Labuan IBFC
are as follows:
1 IBFC Is basically a small
territory or jurisdiction that to enhance the
imposes low or no taxes on
income, profit, dividend and 1 attractiveness of Malaysia
interest earned or derived as an investment centre.
from the offshore business to supplement the onshore
activities or transactions financial system centre in
carried out by offshore
multinational corporation in 2 Kuala Lumpur by tapping
or from those jurisdictions. the growing demand for
Does not have any exchange tailored financial and
related services.
2 control or limitation or to strengthen the
transboundary movement of
funds into and out of the 3 contribution of broad
jurisdiction by the offshore financial sector to the
company. progress of diversified
economic growth.
3 No stamp death, inheritance or To form part of the broad
estate duties.
4 national strategy to spread
4 No value added tax. out and diversify the growth
5 Maintains a high degree of opportunities of the nation,
focusing attention on the
secrecy through limitation on further development of East
public inspection of company Malaysia in terms of
files industrial and services
(including tourism)
6 prohibition from disclosure of development.
the shareholding or beneficial
ownership and management of
the business, financial or other
affairs of the company other
than in compliance with the law.

eBook PSP- Islamic Financial System Vol. 1 25

Other
Financial
Institutions

b. International Business
& Financial Centre
(IBFC)

Services Offered in Labuan IBFC includes :

i. Offshore banking operations.
ii. Offshore insurance and offshore insurance-

related businesses.
iii. Corporate funding.
iv. Investments and trust management.
v. Offshore investment holding companies.
vi. Professional services and other related

services.
vii. Other offshore financial related services.

.

eBook PSP- Islamic Financial System Vol. 1 26

2 The Non-Bank Financial
Intermediaries
The second type of financial institutions in
Malaysia’s financial system is categorized as the
non-bank financial intermediaries. These
institutions are mostly established by the
government to compliment the banking
institutions roles. The main objective is to support
and focus on special economic sectors such as
agricultural, infrastructure & high technology
industries, insurance & Takaful, SMEs and many
other industries with the intention to help Malaysia
achieving its economic goals. These institutions
are divided into 5 categories :
i. Development Finance Institutions (DFIs)
ii. Provident And Pension Funds
iii. Takaful & Insurance Companies
iv. Savings Institutions
v. Other institutions

eBook PSP- Islamic Financial System Vol. 1 27

iFI.niDnstaeivntueclteoiopnmse(nDt FIs)

DFIs in Malaysia are DFIs therefore complement
the banking institutions and
specialized financial act as a strategic conduit to
institutions established by bridge the gaps in the supply
the Government with of financial products and
specific mandate to develop services to the identified
and promote key sectors strategic areas for the
that are considered of purpose of long-term
strategic importance to the economic development.
overall socio-economic
development objectives of The DFIs have, to a large
the country. extent, contributed to the
development and growth of
These strategic sectors the targeted sectors. With the
include agriculture, small and enactment of the DFIA,
medium enterprises (SMEs), selected DFIs have been
infrastructure, maritime, placed under the purview of
export-oriented sector as well Bank Negara Malaysia (the
as capital-intensive and high- Bank).
technology industries.
As part of the regulatory and
As specialized institutions, supervisory framework, the
DFIs provide a range of Bank monitors the activities
specialized financial products and financial performance of
and services to suit the these institutions to ensure
specific needs of the targeted that they perform their
strategic sectors. Ancillary mandated roles in a prudent
services in the form of manner, supported by strong
consultation and advisory corporate governance and
services are also provided by best practices.
DFIs to nurture and develop
the identified sectors.

eBook PSP- Islamic Financial System Vol. 1 28

iIF.niDnstaeivntueclteoiopnmse(nDt FIs)

There are 1. Agrobank
17 DFIs 2. Bank Kerjasama Rakyat
currently
operating Malaysia Berhad
in Malaysia 3. Bank Pembangunan Malaysia

Berhad
4. Bank Simpanan Nasional
5. SME Bank
6. Malaysian Industrial

Development Finance (MIDF)
7. Sabah Development Bank

Berhad
8. Sabah Credit Corporation

Berhad
9. Development Bank of Sarawak

Berhad
10. Borneo Development

Corporation (Sabah) Sdn
Berhad
11. Malaysian Technology
Development Corporation
(MTDC)
12. Majlis Amanah Rakyat
13. Perbadanan Usahawan
Nasional (PUNB)
14. Perbadanan Nasional Berhad
(PNS)
15. Johor Corporation (JCORP)
16. Credit Guarantee Corporation
(CGC)
17. Borneo Development
Corporation (Sarawak) Sdn
Berhad

eBook PSP- Islamic Financial System Vol. 1 29

ii. Provident Provident and Pension Funds
& Pension (PPFs) are a group of financial
Fund schemes designed to provide
members and their
dependents with a measure
of social security in the form
of retirement, medical, death
or disability benefits.
The major PPFs in Malaysia
comprise the Employees
Provident Fund (EPF), the Social
Security Organization (SOCSO),
the Armed Forces Fund and the
Teachers Provident Funds.
The PPFs are the second largest
group of financial institutions in
the country in terms of
aggregate assets, next to
banking institutions.

eBook PSP- Islamic Financial System Vol. 1 30

fhIppniornrsoolaudptnreeeaccrrintsaticyolae,snriee/natrcgavgokiiavcmaieenfeunswltofhilrbnoeluasrifsesneibcon,iyfefaoslprsoailsicay iii. Takaful
premium. & Insurance
Companies
The basic types of insurance and
Takaful business in Malaysia are life,
general, reinsurance / retakaful and
export credit reinsurance/ retakaful.
Insurance / takaful companies have to
spread their risks over the insured
community and take calculated risks to
be able to cover for possible claims.
A licensed takaful operator carrying on
takaful business has the duty to
manage the takaful operations in
accordance with Shariah and in the
best interest of the takaful participants.
This includes operating the business in
a sound and prudent manner.
Life insurance / takaful companies are
primarily concerned with the insurance
/takaful of the life of individuals
including coverage against disability
or illness. General insurance/ takaful
companies cover the risk of non-life
business such as loss of property or
income arising from accident, burglary,
fire, floods or other unexpected
events. They operate on t
Insurance/takaful companies mobilize
substantial funds through the
acceptance of premium particularly
long-term funds for life
insurance/takaful.

eBook PSP- Islamic Financial System Vol. 1 31

Since they accumulate substantial iii. Takaful
reserves, they are active participants in & Insurance
the capital market. They invest Companies
proportion of the available funds in
corporate and government securities.
Takaful however only invested their
funds in shariah compliance securities
in the Islamic Capital Market.
In addition they place a sizeable
proportion of their deposits with the
banking system to meet their liquidity
needs, and also participate in the loans
market to a certain extent.

List of Takaful Operators List of Insurance Operators

1. AIA PUBLIC Takaful Bhd 1. AIA General Berhad
2. AmMetLife Takaful Berhad 2. AIG Malaysia Insurance Berhad
3. Etiqa Family Takaful Berhad 3. Allianz General Insurance
4. Etiqa General Takaful Berhad
5. FWD Takaful Berhad Company (Malaysia) Berhad
6. Great Eastern Takaful Berhad 4. AmGeneral Insurance Berhad
7. Hong Leong MSIG Takaful Berhad 5. AXA Affin General Insurance
8. Prudential BSN Takaful Berhad
9. Sun Life Malaysia Takaful Berhad Berhad
10. Syarikat Takaful Malaysia Am 6. Berjaya Sompo Insurance Berhad
7. Chubb Insurance Malaysia Berhad
Berhad 8. Danajamin Nasional Berhad
11. Syarikat Takaful Malaysia 9. Etiqa General Insurance Berhad
10. Great Eastern General Insurance
Keluarga Berhad
12. Takaful Ikhlas Family Berhad (Malaysia) Berhad
13. Takaful Ikhlas General Berhad 11. Liberty Insurance Berhad
14. Zurich General Takaful Malaysia 12. Lonpac Insurance Berhad
13. MPI Generali Insurans Berhad
Berhad 14. MSIG Insurance (Malaysia) Bhd
15. Zurich Takaful Malaysia Berhad 15. Pacific & Orient Insurance Co.

Berhad
16. Pacific Insurance Berhad
17. Progressive Insurance Berhad
18. QBE Insurance (Malaysia) Berhad
19. RHB Insurance Berhad
20. Tokio Marine Insurance

(Malaysia) Berhad
21. Tune Insurance Malaysia Berhad
22. Zurich General Insurance

Malaysia Berhad

eBook PSP- Islamic Financial System Vol. 1 32

iv. Savings Saving institutions exists to
Institutions complement the commercial banks
and finance companies as the
major deposit-taking institutions.
In this respect, saving institutions
promote and mobilize savings,
especially among the middle and
lower-income groups in the rural
areas not adequately served by
the commercial banks and finance
companies.

The main saving institutions in Malaysia is
the Bank Simpanan Malaysia (BSN),
established in 1974 through a
reorganization of the former Post Office
Savings Bank.
The BSN was then set up to promote and
mobilize private savings, especially the
small savers, in order to finance economic
development programmes in the country.

The other group of saving institutions are
the co-operative societies which pool
small individual savings in the form of
share subscriptions and deposits and
channel the funds for use by teir members
largely in the form of loans.

An example of Co-operative society
include Bank Kerjasama Rakyat Malaysia
Bhd (Bank Rakyat), Koperasi Angkatan
Tentera Malaysia Bhd and Koperasi Bank

Persatuan Malaysia Bhd.

eBook PSP- Islamic Financial System Vol. 1 33

v. Others

oOainrtstehhteinetruorcttfioiocnmnaatsnpeccagionaonilresizsisewtdohfich
siurnoynssldettiesetumrintti.hocTenohsmbepsapelnalikymisnegsnpteincgial
ettthhoceeoainbcr hofauimnenkvicicentiogoMbnsajsyelasfcotytescivmiuaes’sswe.sith
CiAnmrsetoidtunittgiGoountashreianrncstl,eutehdeese
LCcCYeoaaoPamprespipitinomaagrln,aCHaiteionoosmdn,uVsspFeia(anCncngtGtiuoeCCrrseri,)ne, gdit
aIIInnnnsssdtttiiitttmuuutttaiiiooonnnnyssso,,, tTWZhraeuakrsqastfhees

eBook PSP- Islamic Financial System Vol. 1 34

Recap

To summarised the topic, the Malaysia’s financial system is
consist of three main components; the banking system, the
non-bank financial intermediaries and the financial markets.
These entities need to cooperate with each other in order to
guarantee that the financial system running on the best
possible condition while ensuring healthy economic well
being. From the overall financial system components, this
Ebook will only focusing on the banking system and the non-
bank financial intermediaries.
The first part of the Ebook discusses the banking system of Malaysia.
The banking system is consist of BNM, commercial & Islamic banks
and also the investment banks. The function of BNM is to monitor
the whole system, making sure the economic goals are achieved
while maintaining good health. As for commercial and Islamic
banks, their focus are mainly to the retail and business customers
needs. Investment banks meanwhile focuses into the corporate
entities requirements such as their investment needs, corporate
advisory and actively involved in the capital market. In order to
ensure these entities achieving their goals and healthy business
operations, they are governed by BNM’s rules and regulations.
The second part of the Ebook discusses on the non-bank financial
intermediaries. These institutions are mostly established by the
government to compliment the banking institutions roles. The main
objective is to support and focus on special economic sectors such
as agricultural, infrastructure & high technology industries, insurance
& takaful, SMEs and many other industries with the intention to help
Malaysia achieving its economic goals. These institutions are
divided into 5 categories which are the Development Finance
Institutions (DFIs), Provident & Pension Funds, Savings Institutions,
Takaful & Insurance companies and others non-bank financial
intermediaries. As these businesses involved with financing, they are
also governed by BNM’s rules and regulations besides the
Malaysia’s law.

eBook PSP- Islamic Financial System Vol. 1 35

Activities

Questions

1. List three (3) components of Malaysia’s financial
system.

2. Elaborate the meaning of banking business
according to Financial Services Act 2013?

3. Which financial institutions focuses on the needs
of corporate entities?

4. List five (5) categories of non-bank financial
intermediaries?

5. How many investment banks operated in
Malaysia?

6. When was the first Islamic bank established in
Malaysia?

7. Determine four (4) requirements needed in order
to established an Islamic bank in Malaysia.

8. Establish five(5) strategic sectors the Development
Finance Institutions (DFIs) focuses.

9. Elaborate the different between banking system
and non-bank financial intermediaries.

10. Explain the objectives of International Business &
Financial Centre (IBFC).

eBook PSP- Islamic Financial System Vol. 1 36

Activities

Answers
1. Answers :

i. Banking System
ii. Non-bank Financial Intermediaries
iii. Financial market

2. Athnesdweefirnsit:ioTnhsetadteedfinaistiobneloowf b:anking business can be deprived from
“…. banking business means the business of:
(a) accepting deposits on current account, deposit account,
saving account or other similar accounts,
(b) paying or collecting cheques drawn by or paid in by
customers; and
(c) provision of finance; and
(d) such other business as prescribed under sec.3

3. Answers : Investment banks
4. Answers :

i. Development Finance Institutions (DFIs)
ii. Provident And Pension Funds
iii. Takaful & Insurance Companies
iv. Savings Institutions
v. Other institutions

5. Answers: 11 investment banks
6. Answers : July 1983
7. Answers:

i. The Government should establish an Islamic bank whose
operations are in accordance to the principles of Syariah.

ii. The proposed bank is to be incorporated as a company under
the auspices of the Companies Act, 1965.

iii. AsupneewrvisIselatmheicIsblaamnkicinbganakc.t must be introduced to license and
iv. BTachoceaordrIsd;laatnmociecetnbosautnhreke Sitshhaattoriatehhse.taobplieshratiitosnoswonf SIshlaamriaich bSaunpkeravriseoriny

eBook PSP- Islamic Financial System Vol. 1 37

Activities

Answers
8. Answers :

i. agriculture
ii. small and medium enterprises (SMEs)
iii. infrastructure, maritime
iv. export-oriented sector
v. capital-intensive and high-technology industries.

9. Answers : The banking system is consist of BNM, commercial &
Islamic banks and Investment banks. They are mostly private
entity companies providing financial assistant to either retail,
business or corporate companies. Commercial banks are the
main players of the banking system. Meanwhile non-bank
financial intermediaries compliment the functions of banking
system however focusing on special economic sectors such as
agricultural, infrastructure & high technology industries,
insurance & takaful, SMEs and many other industries with the
intention to help Malaysia achieving its economic goals. These
companies mainly consist of government link companies.

10. Answers :
i. to enhance the attractiveness of Malaysia as an investment
centre.
ii. to supplement the onshore financial system centre in Kuala
Lumpur by tapping the growing demand for tailored
financial and related services.
iii. to strengthen the contribution of broad financial sector to
the progress of diversified economic growth.
iv. To form part of the broad national strategy to spread out
and diversify the growth opportunities of the nation,
focusing attention on the further development of East
Malaysia in terms of industrial and services (including
tourism) development.

eBook PSP- Islamic Financial System Vol. 1 38

References

Asyraf Wajdi Dusuki. (2016). Islamic Financial System, Principles &
Operations 2nd Edition, Kuala Lumpur : International Shari’ah
Research Academy for Islamic Finance. (ISBN 9789673291278).
Bank Negara Malaysia. (2005). Guideline for Investment Bank .
Bank Negara Malaysia.
Bank negara Malaysia. (2005). Guidelines on Investment Banks.
Kuala Lumpur: Bank Negara Malaysia.
Bank Negara Malaysia. (2013). Financial Services Act 2013 (Act
758) & Orders. Selangor: International Law Book Services.
Bank Negara Malaysia. (2021). Retrieved from www.bnm.gov.my:
www.bnm.gov.my
Islamic Financial Service Board. (2015). Islamic Financial Services
Industry Stability Report.
Kamal Khir, L. G. (2011). Islamic Banking A Practical Perspective.
Petaling Jaya: Pearson Malaysia Sdn Bhd.
Sudin Haron, W. N. (2009). Islamic Finance and Banking System
Philosophies, Principles & Practices. Shah Alam: McGraw-Hill
Education (Malaysia).

POLITEKNIK SEBERANG PERAI e ISBN 978-967-2774-02-0
JALAN PERMATANG PAUH
13500 PERMATANG PAUH
PULAU PINANG
http://www.psp.edu.my