Written in conjunction with TMF Group
Islamic finance continues to gain popularity at a remarkable pace, as it's now the fastest growing sector in the financial services market, showing growth of nearly eight-percent in the last five years. This impressive expansion, which came despite the looming presence of a global economic slowdown, shows no signs of abating. Growth in Islamic finance is projected to increase to 20-percent by 2019, taking its total share of the global financial services industry to nearly four-percent — or $3.5 trillion in assets.
Malaysia is at the epicenter of this growing phenomenon. Thanks to its strategic location, religious heritage and business-friendly regulatory climate, the large Southeast Asian country has become perhaps the leading hub of Islamic finance. Though other world financial centers such as London and Dubai are also contenders for the designation, Malaysia is well-positioned to become the "world capital of Islamic finance".
Elevated demand for Sharia-compliant financial products and services is one of the primary factors driving the increased demand for Islamic finance. Malaysia is a Muslim-majority country situated in one of the world's most populous Muslim regions. This strategic location makes Malaysia a natural market for Islamic financial services.
Why is Malaysia a world leader in Islamic finance?
Malaysia has a history of pioneering efforts in the realm of Islamic finance. The country was one of the first to establish a Sharia-compliant deposit insurance system. Malaysia also established the first Sharia-compliant commodity trading platform on its domestic stock exchange.
Malaysia is home to 16 foreign and domestic Islamic banks, with total assets approaching $170 billion. Malaysian Islamic finance comprises about one-quarter of the country's total banking sector and about ten-percent of the assets held under Islamic finance systems worldwide.
Malaysian officials have also taken steps to assure the country's position as a leader in this area. These officials have urged a variety of international banking companies to establish their Islamic finance headquarters in Malaysia, and many have done so.
Additionally, Malaysia sits on the cutting edge of Islamic finance innovation. The world's first Islamic residential mortgage-backed securities, exchangeable bonds, REITs and other financial products were all incubated and introduced in Malaysia. The country also issued the world's first sovereign sukuk (Islamic bond) and corporate sukuk in 2002. Since then, Malaysia has grown to become the worldwide leader in this category. Malaysia boasts 60 percent of the market share in global sukuk issuance.
Finally, Malaysia is the host country of the Islamic Financial Services Board, an international body that sets global standards for Islamic finance. Members include the World Bank, the International Monetary Fund and the Asian Development Bank.
Given its vibrant, world-leading Islamic financial services sector and pioneering history, Malaysia has a strong claim to the "Islamic finance capital" designation. Should international financial firms continue to choose Malaysia as their Islamic finance operations hub, that designation may be an enduring one.
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