KUALA LUMPUR: Malaysia's Islamic finance industry is evolving beyond traditional banking to play a wider role in people's lives and the economy, from helping microentrepreneurs build sustainable businesses to enabling small and medium enterprises (SMEs) to enter global markets.
Over more than four decades, the industry has grown from a niche segment into a comprehensive financial ecosystem supporting businesses, households and the country's economic development.
Bank Negara Malaysia governor Datuk Seri Abdul Rasheed Ghaffour said Islamic finance accounted for 48 per cent of Malaysia's total financial assets, with its share expected to surpass 50 per cent within the next few years.
"The industry contributed RM160 billion in issuance of sukuk to fund the real economic sector in 2025. Islamic banks' business financing grew by 9.7 per cent, supporting businesses across various economic sectors, while MSME microfinancing growth stood at 13.3 per cent," he told Bernama.
The governor also noted that Malaysia's position as the world's most developed Islamic finance market for the 14th consecutive year, as recognised in the Islamic Finance Development Report (IFDI) 2026, reflects four decades of sustained efforts in developing a comprehensive and progressive Islamic financial ecosystem.
Going forward, Bank Negara will continue working with the industry and its partners to advance innovation with purpose, digitalisation and sustainable finance.
The History of Malaysia's Islamic Finance Industry
Malaysia's Islamic finance industry has undergone several phases of development since the establishment of its first Islamic bank, Bank Islam Malaysia Bhd (BIMB), incorporated in March 1983 and officially commencing operations on July 1, 1983.
Recounting the industry's evolution with enthusiasm, Abdul Rasheed outlined four key phases in Islamic finance development, which are foundation-building from 1983 to 2000, mainstreaming from 2001 to 2010, diversification and innovation from 2011 to 2021 and advancing value-based finance from 2022 until today.
He explained that the introduction of Islamic banking windows enabled conventional banks to offer Shariah-compliant financial services, while the development of the Islamic interbank money market also provided the infrastructure needed to support the industry's growth.
"These developments laid the foundation for Islamic banking to grow from a niche offering into a mainstream component of Malaysia's financial system," he said.
The country also remains a key player in Asean's Islamic finance market, with Malaysian institutions accounting for about 82 per cent of the region's Islamic banking assets and 91 per cent of its takaful business.
Islamic Finance Offers Broader Financing Solutions through Risk-Sharing
Abdul Rasheed said Islamic finance offers a broader range of financing solutions through diverse contracts, including profit-sharing and partnership arrangements, which allow for greater risk-sharing.
He said both conventional and Islamic finance serve a similar economic objective of mobilising savings and financing businesses, but Islamic finance is distinguished by Shariah principles that require financing to support real economic activities and create value for borrowers, shareholders and the wider economy.
"Islamic finance also emphasises fairness, transparency, trust and good governance, while its diverse contractual structures enable financial institutions to offer solutions beyond conventional lending, including investment accounts with different risk-return profiles," he said.
The governor said takaful also has a distinct structure, with a clear separation between the operator and participants, who collectively own the risk fund.
Wonders of Social Finance
Abdul Rasheed said zakat and waqf could be combined with commercial financing to help recipients build sustainable livelihoods rather than remain dependent on financial assistance.
This approach aligns with value-based intermediation (VBI), which seeks to ensure that Islamic financial institutions generate positive outcomes for people and society alongside financial returns.
"Malaysia introduced the iTEKAD initiative during the Covid-19 pandemic to further advance social financing to support low-income microentrepreneurs and underserved communities. The programme has expanded from 57 participants in 2020 to about 16,000 participants today.
"The participating entrepreneurs recorded a 92 per cent increase in monthly sales and created more than 2,400 jobs. Some participants had also progressed from being zakat recipients to zakat contributors as their incomes improved, while digital-enabled transactions, including QR payment connectivity, facilitated them to reach wider markets, including overseas buyers," he said.
The initiative has since expanded to include employment support and access to the halal ecosystem through the new "Dapur iTEKAD KITA", a shared central kitchen that provides entrepreneurs with access to halal-certified, commercial-grade facilities to support business growth and market expansion.
This initiative builds on the experience of a programme launched in Penang at the Penang Times Square complex, involving 40 selected microentrepreneurs, most of whom originally started their businesses from home.
Abdul Rasheed said the second central kitchen is expected to be established in Seberang Perai, Penang, by mid-2027, as part of efforts to replicate the initiative nationwide.
Greening Halal Business to Help MSMEs Access Global Markets
For halal businesses, Abdul Rasheed said adopting sustainable practices is increasingly important as the global marketplace places greater emphasis on environmental standards and supply-chain requirements.
He said the Greening Halal Business (GHB) programme provides hands-on and practical support to halal businesses, particularly SMEs and medium-sized companies involved in the halal supply chain or halal-related services, to adopt sustainable practices and reduce carbon emissions.
He said adopting such practices would improve MSMEs' (micro, small and medium enterprises) ability to meet increasingly stringent environmental requirements in export markets, including Europe, while enhancing their capacity to supply multinational companies (MNCs).
"Islamic financial institutions could play a greater role in supporting this transition by providing appropriate financing alongside technical assistance and capacity-building support," he said.
Innovation with Purpose, Finance for Impact
The governor said the industry's future direction would be guided by the principle of "innovation with purpose, finance for impact", with the aim of generating better jobs, higher incomes, and a more sustainable, resilient economy.
"We want to build a nation where people live longer, healthier and financially secure," he said.
In addition, he said Islamic finance should embrace innovation that delivers tangible economic and social benefits, while ensuring financing reaches businesses and individuals who need it.
At the same time, he said innovation must deliver practical benefits, including improving access to financing for underserved communities, enhancing credit assessments and reducing transaction costs.
"Technology could help financial institutions assess borrowers who may lack conventional credit records by analysing their financial behaviour and repayment patterns," he said.
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