After establishing the initial structure of its Islamic Financial System, Malaysia instituted several more developments, which has allowed it to emerge as one of the most well-known countries in the world with an established and reputable Islamic Banking Establishment.
In 1984, the Malaysian Parliament passed the Takaful Act to allow the setting up of Takaful companies in Malaysia.
Furthermore, an Islamic Capital Market was developed, which comprises an equity market, government securities, and a corporate bond market (private debt securities). ‘The Islamic capital market, similar to the conventional capital market, refers to the market in longer term financial assets, comprising all public and private debt instruments with various maturities, corporate stocks, and shares for which there are no fixed maturity periods, and commodity futures, issued, managed and traded based on Islamic principles.’
Malaysia also developed an Islamic equity market. ‘The Islamic equity market is characterized by the absence of interest based transactions, doubtful transactions, and stocks of companies dealing in unlawful activities and items. The principles governing the Islamic equity market includes the principle of moderation on the part of the investors not to expose themselves to the risk of fluctuations in the price of shares, either in quoted or unquoted shares. The investors are prohibited to deal with all unethical and immoral practices, ensuring that the funds are clean and pure according to Sharia’h…(In addition) There must be complete ownership as this ensures that the buyer will get the item contracted for in the Bai’ (trading) contract.’
Furthermore, a government securities market was developed to allow the purchase or trade in Malaysian government securities, Malaysian treasury bills, and other such instruments. In 1983, Malaysia passed the Government Investment Act to enable the government to issue non-interest bearing investment certificates called government investment certificates (GIC). The certificates were issued on the basis of Qard al-Hasan (benevolent loan) ‘whereby the purchase of the investment certificates by the public will be considered as a benevolent loan by the public to the government to enable the government to undertake projects or provide services to the benefit of the nation.’ Under the terms of the GIC, the purchaser of the GIC would be entitled to the principal amount paid for the GIC to be returned at maturity. Even though the GIC holder would not expect a return, the government always provides some type of return to the investors, the amount being at the discretion of the Malaysian government.
In a bid to further strengthen its Islamic Financial System, Malaysia also developed its Islamic private debt securities market. In 2002, the average size per issue was RM 118.5 million. Islamic PDS and long-term straight bonds were the preferred methods of funding during 2002 and accounted for more than 50% of total issuance in 2002. In fact, since then Islamic PDS has exceeded the issuance of conventional bonds in Malaysia. ‘Islamic PDS attracted a wider range of investors, including both Islamic and conventional institutional funds.’ In order to further develop the Islamic private debt securities market, the Malaysian government announced in 2003 that it would give a tax deduction for expenses incurred in using any Islamic PDS that adopts Mudharabah, Musharakah, or Ijarah principles for five years starting from 2003.
In addition, the Malaysian government strengthened Labuan as an International Islamic Offshore Financial Center.
*Information taken from the Law and Practice of Islamic Banking and Finance by Dr. Nik Norzrul Thani; Mohamed Ridza Mohamed Abdullah; and Megat Hizaini Hassan. (2003)