What next for Islamic Finance in Malaysia?

Islamic banking industry remains promising, with the advent of digital banking and fintech. But stiff competition is just around the corner 


ISLAMIC finance in Malaysia has seen an explosive growth since it first emerged in the 1970’s. What is the scene today? Has it hit a plateau? 

Talking to industry executives and those dabbling in the sector, they feel Islamic finance is still going strong, though there is a perception of a slowdown when compared to past initiatives. 

This is especially the case when comparing to the active expansion of services during the period when Tan Sri Zeti Akhtar Aziz was the governor of the Bank Negara Malaysia (BNM), one of the key regulators for the sector. Zeti served as the top person at the Malaysian central bank from 2000 to 2016. 

“During that period, there were numerous initiatives that spurred growth. It included the establishment of an Islamic finance university and the opening of Islamic windows in commercial banks,” said Silverlake Group CEO for Islamic finance and Innovative Services Othman Abdullah. 

“While businesses like Bank Islam (M) Bhd continue to report profits, suggesting some level of growth, it may not be as significant as in the past. This sentiment aligns with our observation that the industry may hit the plateau in driving the sector forward,” said another industry executive. 

The central bank was instrumental in the establishment in 2005 of the International Centre for Education in Islamic Finance (Inceif ) University. The aim was to nurture human capital for the Islamic finance industry. Three years later, BNM again came to prop up the sector when it established the International Shari’ah Research Academy for Islamic Finance (Isra) as an Islamic finance and Shariah-related research institution. 

Malaysia still has substantial room for growth, as it offers more robust regulation and governance guidelines, says Ziyaad

Promising Outlook 

Malaysia’s Islamic banking industry remains promising, suggested a report. “The Economic Outlook 2024” report from the Ministry of Finance (MoF) noted that Malaysia’s Islamic banking assets increased by 8.1% to RM1,293.2 billion in July 2023, accounting for 36.4% of the market share. Outstanding Islamic financing grew by 9.1% to RM844.1 billion in July, outpacing the growth trend in the conventional banking sector. 

“The demand for household financing remained strong, accounting for the largest share of 63.1% of the total financing, mainly for residential properties and passenger cars. 

“The outlook for Islamic banking remains promising, supported by a mature ecosystem that promotes social and financial inclusion,” it said. 

Malaysia’s Ekonomi Madani framework aims to assert its position as a leader in driving innovations for the global Islamic economy. 

The country’s mature Islamic finance ecosystem, innovative Shariah-compliant products, and comprehensive environment will support the halal industry through value-based finance, reinforcing its global leadership in Islamic finance and halal industries. 

On the global front, Malaysia is seen as the world’s most developed Islamic finance market, and has been since the Islamic Finance Development Indicator (IFDI) measurements began. 

The indicator, developed by the Islamic Corp for the Development of the Private Sector (ICD) and global provider of financial market data Refinitiv, has placed Malaysia as the world’s third largest Islamic banking market in 2022. This makes the nation the third largest Islamic banking market by assets, led only by Iran which applies 100% Islamic finance and Saudi Arabia which is more than 80% Islamic in its banking. 

“This trend has continued, although Malaysia still has substantial room for growth in the next few years, as it offers more robust regulation and governance guidelines and a developing Islamic digital banking market,” said Assoc Prof Dr Ziyaad Mohamed from the Centre of Excellence Islamic Social Finance (CoEISF), a unit under INCEIF. 

Established in 1983, Bank Islam as the 1st Islamic bank in the country was one of the key starting points in developing an Islamic banking system (pic: TMR)

Developments Over the Years

The first Islamic Banking Act was established in 1983 which paved the way for establishment of Islamic banks in Malaysia and granted BNM similar powers to supervise and regulate these banks. 

In the same year, the Government Investment Act 1983 and Government Investment Issues (GII) were introduced which allowed the government to issue Shariah-compliant bills and securities whereas GII made Malaysia the first nation to introduce government securities on an Islamic basis. 

Also established in 1983, Bank Islam emerged as the first Islamic bank in the country and was one of the key starting points in developing an Islamic banking system. In July 2009, six Islamic banks were appointed as Islamic Principal Dealers to enhance efficiency in the primary and secondary markets of the Islamic financial market. 

Recent Excitements 

In recent years, we have the Malaysia International Islamic Financial Centre (MIFC) on the scene. Tan Sri Azman Mokhtar, who served as the MD of the sovereign wealth fund Khazanah Nasional Bhd from 2004 to 2018, is serving as the chairman of the MIFC Leadership Council. 

One thing is sure. With supportive institutions now in place, the slew of activities may have appeared to slow down compared to previous years marked by ambitious initiatives. 

One major recent excitement would be the emergence of the digital banks. In 2022, BNM granted five digital banking licences, including two for digital Islamic banks. 

Aeon Bank (M) Bhd has emerged as the country’s inaugural Islamic digital bank. On Jan 8, its parent Aeon Credit Service (M) Bhd told the local stock exchange that it had obtained approval from BNM and the MoF to launch digital banking operations in Malaysia. The approval, granted following BNM’s thorough validation of the bank’s operational readiness, positions Aeon Bank at the forefront of the nation’s digital banking landscape. Aeon Bank is also a subsidiary of Aeon Financial Service Co Ltd. 

“We anticipate Aeon Bank to serve as a catalyst for further Islamic banking sector growth, given the strong interest and awareness of Islamic digital banking in Malaysia,” said a spokesperson from Visa Inc. According to Visa’s findings, 80% of surveyed consumers express a keen interest in opening Islamic digital banking accounts. 

In a report released by the Financial Institutions Directors’ Education (FIDE), it was noted that Islamic banking in Malaysia is dominated by large institutions, and subsidiaries of major banks leverage group technology for superior digital experiences. 

According to Othman, Islamic digital banks provide Shariah-compliant services, including automated zakat donations

Entitled “ESG: A Global Perspective, Local Opportunity and Challenge”, the report said that full-fledged Islamic banks have also entered the digital space. Challenges in digital infrastructure persist, but the sector anticipates increased digitalisation, with a focus on compliance and security. 

Also, in the report, it said BNM is actively implementing measures to drive growth in digital banking, including the issuance of a licensing framework for new digital-only banks. This regulatory support aims to foster innovation and ensure Malaysia’s continued prominence in the evolving landscape of Islamic finance. 

Digital banking is poised to offer customers unparalleled convenience, enabling banking anytime, anywhere. Islamic digital banks provide Shariah-compliant services, including automated zakat donations, simplifying charitable contributions for disaster relief efforts, according to the report authored by Silverlak’s Othman. 

The surge in digital banking brings heightened cyber security risks. A recent ransomware attack on Bank Shariah Indonesia highlighted vulnerabilities in digital systems. It goes without saying that organisations must prioritise robust security measures, leveraging artificial intelligence (AI)-driven solutions to detect and prevent cyber threats effectively. 

A recent ransomware attack on Bank Shariah Indonesia highlights vulnerabilities in digital systems (pic: Bloomberg)

Digital Banking Expansion

Moody’s Investors Service anticipates that the expansion of Malaysia’s Islamic banking sector will bolster the country’s strong position in the global Islamic finance industry. This development, deemed credit positive by the ratings agency, is attributed to the provision of accessible, inclusive and Shariah-compliant digital banking services. 

Moody’s observes that Muslim small and medium enterprises (SMEs) primarily banking with Islamic institutions show greater interest in digital banking compared to those banking with non-Islamic banks. The agency highlights robust growth in Malaysia’s Islamic banking sector in recent years, credited to the government’s “Islam First” strategies. 

As of November 2023, Islamic financing accounted for 41% of total financings, reflecting a significant 33% increase from five years prior. 

“While opportunities for sectoral growth abound, a substantial proportion of individuals still lack access to services offered by incumbent banks, representing 55% of the population as of 2019,” noted Moody’s. 

The ratings agency underscores potential Islamic digital banking customers among self-employed individuals engaged in online product and service offerings. Historically, traditional banks have been hesitant to lend to these segments due to challenges in verifying salary income. 

On the recent advent of Aeon Bank, the international rating agency noted that it was poised to tap into the above customer pool, leveraging the underwriting expertise of AEON Credit, which already provided financing to individuals traditionally underserved by banks. 

n Younes’ view, Indonesia, which has many Islamic fintech start-ups, is doing better than Malaysia in Islamic fintech (Source: kliff.com.my)


In some areas, Malaysia is being given a run for its money. Shariah scholar and consultant Prof Dr Younes Soualhi noted some cutting-edge developments in neighbouring Indonesia. 

“They are taking the lead in Islamic financial technology (fintech). There are so many Islamic fintech start-ups there. And in my humble view, they are doing better than Malaysia when it comes to Islamic fintech,” he told The Malaysian Reserve (TMR). 

Younes, who is a senior researcher at ISRA, said Malaysia has an edge on a number of other areas in Islamic finance. 

“Malaysia is still ahead of Indonesia when it comes to the number of depositors. On the deposit side, it’s still higher, but the growth rate in Indonesia is very competitive. In the next few years, they may overtake Malaysia when it comes to deposits for their current account or saving account,” he said. 

On the local front, he noted that the Islamic financial market has come up with a new product in the form of the Carbon Exchange. 

Bursa Carbon Exchange (BCX) and Gold Standard have recently signed a memorandum of understanding (MoU) to enhance the voluntary carbon market in Malaysia. 

The collaboration between the two companies will enable BCX (the world’s first Shariah-compliant carbon exchange) to improve its offerings and increase ecosystem player knowledge, supporting its expansion of carbon credits from local and international projects. 

“The BCX is a new platform to trade carbon credits. This exchange alone is actually set to grow because everyone is trying to grow sustainably. So, we are expecting a growth in this new market called the Exchange Carbon, and it is fully Shariah-compliant. This alone will add to the assets of Islamic finance,” he said. 

  • This article first appeared in The Malaysian Reserve weekly print edition