While it is rightly considered ethnically diverse, over 50% of Malaysia's 20m people are classified as Muslim. For the past 10 years, Bank Negara Malaysia has encouraged the development of Islamic banking services and the establishment of local operations by Middle Eastern banks. While this sector is still fairly small in the overall scheme of things, Islamic finance has taken off and the country has established itself as the regional hub for Islamic investment funds.

In an Islamic capital market (ICM) transactions are carried out in ways that do not conflict with the conscience of Muslims and the religion of Islam. Religious law is specifically recognised so that the market is free from activities prohibited by Islam such as usury (riba) and gambling (maisir).

To position Malaysia as a global ICM hub, essential regulatory, tax and Shariah frameworks have been put in place. The Shariah Advisory Council (SAC) was established in May 1996 to advise the Securities Commission on Shariah matters pertaining to the ICM. Members of the SAC are qualified individuals who can present Shariah opinions and have experience in the application of Shariah, the basic framework for an Islamic financial system.

In response to the need for investment guidelines, Bank Islam Malaysia took the initiative to review and identify companies that were deemed permissible for Muslims to invest in. Bank Islam provided investors with a list of Shariah-compliant shares by excluding shares of companies that were involved in activities with non-permissible elements.

In August 2006, the Malaysia International Islamic Financial Centre was opened, to foster the developement of foreign investment in Islamic products through the Malaysian ICM.

Various capital market products are available for Muslims who only seek to invest and transact in the ICM. Products include the list of Shariah-compliant securities, sukuk, Islamic unit trusts, Shariah indices, warrants, call warrants and crude palm oil futures.


he sukuk, or Islamic bond, is a structure based on the specific contract of exchange of Shariah-compliant assets. Such contracts can be made through the sale and purchase of an asset based on deferred payment, leasing of specific assets or participation in joint-venture businesses. Hence, the issuance of sukuk is not an exchange of paper for money with the imposition of an interest, but rather an exchange of Shariah-compliant assets for some financial consideration applying various Shariah principles such as bai' bithaman ajil (BBA), murabahah, ijarah, mudharabah and musyarakah that allow the investors to earn profits from the transactions.

The issuance of globally accepted sukuk has progressed; 27 out of 64 sukuk approved by the SAC
were based on the profit and loss sharing (musyarakah), leasing (ijarah), progressive sale (istisna`) and profit sharing (mudharabah) principles. In terms of value, sukuk structured using musyarakah contributed RM29.4bn (€6.4bn), or 70% of the total sukuk approved.

The first global corporate sukuk was issued in 2001, worth $150m and a year later, the first global sovereign sukuk, worth $600m, was launched.

The general criteria in evaluating the status of Shariah-compliant securities are that the companies are not involved in the following core

n financial services based on riba (interest);

n gambling;

manufacture or sale of non-halal products or related products;

n conventional insurance;

entertainment activities that are non-permissible according to Shariah;

manufacture or sale of tobacco-based products or related products;

stockbroking or share trading in Shariah non-compliant securities.

The SAC also takes into account the level of contribution of interest income received by the company from conventional fixed deposits or other interest-bearing financial instruments. In addition, dividends received from investments in Shariah non-compliant securities are also considered in the analysis carried out by the SAC.

For companies with activities comprising both permissible and non-permissible elements, the SAC considers two additional criteria:

the public perception or image of the company must be good; and

the core activities of the company are important and considered maslahah (in the public interest) to the Muslim ummah (nation) and the country, and the non-permissible element is very small and involves matters such as `umum balwa (common plight and difficult to avoid), `uruf (custom) and the rights of the non-Muslim community which are accepted by Islam.

Around 86% of listed equities in Malaysia are deemed Shariah-compliant. In January 2007, a new index was introduced by Bursa Malaysia, known as the FBM EMAS Shariah Index, in collaboration with the FTSE Group. The FBM Emas Shariah Index will replace the existing KLSI from November this year.


In line with the Securities Commission's objective to widen the range of Islamic collective investment schemes, the number of new Shariah-based unit trusts funds has grown substantially while the types of funds offered are now more diversified in terms of structure. In November 2006, OCBC Bank introduced a subordinated sukuk mudharabah in the Malaysian capital market, making it the first bank in the country to offer an Islamic instrument based on the Islamic principle of profit sharing. The sukuk was based on a 15-year non-call 10-year structure, which is the longest-dated bank capital instrument in Malaysia. In this structure, under the mudharabah principle, OCBC acts as a mudharib - administrator of the investment capital and the assets of the mudharabah venture - while investors participate as rabb al-mal (investment capital providers). These comprise a pool of specifically identified Islamic financing portfolios and/or any other Shariah-compliant financing contracts concluded between OCBC and its customers.

The Shariah unit trust market has also been a major success. At the end of 2006, there were 100 funds registered, with total net assets of RM9.17bn. International groups active in the Shariah market include ING and Prudential. The funds are a mix of equity, bond or balanced portfolios. ING has recently been introducing capital protected and structured products, in association with SGAM.

The first Islamic real estate investment trust, the Al-'Aqar KPJ REIT was listed on the main board of Bursa Malaysia in August 2006. The second, Al-Hadharah Boustead REIT, launched in February 2007, is backed by plantation assets, with a condition that 98% of its distributable earnings be paid to unit holders for the first three financial years.