Islamic Finance as a Form of Financial Intermediation and Financial Stability in Malaysia

Topics: Islamic banking, Bank, Economics Pages: 9 (1671 words) Published: August 6, 2010
Sukuk : Islamic Finance As A Form of Financial Intermediation and Financial Stability in Malaysia


Beginning in late 2006, the collapse of U.S sub prime mortgage market and the reversal of the housing boom have had a ripple effect around the world. The experience of Mexico around the Tequila crisis and Thailand around the Asian crisis are prototypical examples of the boom-bust cycle (Aaron Turnell and Frank Westermann, 2006, P.48). In fact, more than half of the major world economies, in particular the U.S, the Euro area and Japan, are in recession and experiencing the worst economic contraction since the Great Depression of the 1930s.

To cushion the impact of the economic crisis, the Malaysian government had tabled the First Stimulus Package with an allocation of RM7 billion to sustain growth, ensuring resilient financial sector credit flows, promoting investment and new sources of growth, reprioritizing 9th Plan projects and enhancing social safety net programme (Tan Sri Sulaiman Mahbob, EPU, 2009). While the project under First Stimulus Package is still on, government continued to tabled the larger, comprehensive, encompassing various economic sector and target group of stimulus package also known as Mini Budget.

The target group under second core in the second stimulus package is to increase income of ‘rakyat’ makes government to issue syariah-compliant Savings Bonds (Islamic Bond) understanding that the Islamic bond or Sukuk is one of the Islamic financial instrument that government use to cure the economic crisis.


2.1 Islamic Financial System

2.2 The International Bond Market

2.3 The Global Sukuk Market

2.4 Sukuk In Malaysia


3.1 General

Islamic Financial System

3.2 Specific

Sukuk : Islamic Finance As A Form of Financial Intermediation and Financial Stability in Malaysia


4.1 Islamic Financial System

The Islamic financial system in Malaysia runs parallel with its mainstream counterpart and claims syariah legitimacy by virtue of contracts (aqd’) employed in financial transactions. To some extent, the system is well received with untapped markets and potential product niche, Islamic financial markets in Malaysia can do better under strong government support (Saiful Azhar Rosly, 2005, p.19). Over more than 30 years, Malaysia has placed strong emphasis on the four core sectors in Islamic finance – Islamic banking, takaful, the Islamic capital market and the Islamic money market. The capital market in an Islamic capital market are syariah-compliant stocks, Islamic funds and sukuk/Islamic investment certificates/bonds. As at 2007, Malaysia’s Islamic banking assets reached USD65.6 billion with an average growth rate of 18-20% annually. While total assets of Malaysia’s takaful industry amounted to USD2.8 billion, with market penetration of 7.2% (Bank Negara Malaysia : Annual Banking and Takaful Statistics 2007). The stability and strength together with the rapid liberalization of Malaysia’s Islamic finance system has encouraged foreign financial institutions’ to make Malaysia their destination of choice.

4.2 The Different Between The International Bond and Islamic Bond (Sukuk)

4.3.1 The international Bond

The international bond market consist of the Eurobond market, the foreign-bond markets and those domestic-bond market (such as the U.S, Japanese and French markets) in which global bond investors participate actively. The most ‘international’ of these markets is the Eurobond market, which from small beginning in the control-riddles world of the mid-1960’s had grown to the point where (by the early 1990s) it raises over $200 billion per annum in new capital for corporations, financial institution and government (Ian H. Giddy (1994), p.322).

Bond issue facilities have been developed as a natural extension...

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