Malaysia and Indonesia as the Global Center for Islamic Financial Market

by | Mar 25, 2021 | Market Research | 0 comments

Analysis on Malaysia Sharia Finance Market Landscape and How Indonesia and Malaysia could Become the Center of Islamic Financial Market.

Over 30 years, the Islamic finance market has grown tremendously since its inception. There are 614 Islamic financial institutions worldwide across 47 countries, according to the Banker, a global financial intelligence group. The Top 500 Islamic Financial Institutions (TIFI) reported the global total of Shariah-compliant assets grew by 27.6% to reach USD639.1billion. Currently, the Muslim population in the world is 1.907 billion make adherents of Islam constitute the world’s second-largest religious group.

Nowadays, Islamic finance has evolved into a complete and competitive form of financial intermediation that serves both Muslim and non-Muslim consumers and businesses. Malaysia has the largest Islamic banking and financial market penetration rate and has grown steadily over the years to account for 40% of total financing in 2020, from 29% in 2010 (Bank Negara Malaysia, 2020).

Recently, we have discussed the market landscape of Indonesia’s sharia finance. In this article, we will discuss the landscape of Malaysia’s sharia finance market and how both countries could become the center of the Islamic financial market as the largest Muslim population and the biggest sharia market share.  

Islamic Finance in Malaysia 

The introduction of the Islamic financial system in Malaysia began in 1963. Since then it has witnessed tremendous growth in demand, acceptance, and development. The Islamic financial system in Malaysia is a dual banking environment, the Islamic financial system operates in parallel with the conventional financial system. Malaysia’s Islamic finance Information and Communications Technology (ICT) advancement gives a significant impact on its operations. 

For instance, the Central Bank of Malaysia has developed a website on the market, the Islamic Interbank Money Market (IIMM) as an initiative to disseminate information more efficiently and enhance public confidence in their investments. The Securities Commission Malaysia (SC) announced the launch of a five-year Islamic fund and wealth management blueprint In January 2017 to drive further development and growth of Malaysia’s Islamic capital market. 

Banking System

The central bank, Bank Negara Malaysia (BNM) has been entrusted to regulate and supervise Islamic banking operations in Malaysia. Currently, there are 16 local Islamic banks and 5 International Islamic banks operating in Malaysia (The Edge Market, 2020).

Islamic finance in Malaysia is among the fastest growing and competitive areas in the current international financial. The development triggered the need for financial institutions to be more dynamic in the development of Islamic products, rather than diversify their products and strengthen their skills.

Islamic Organization. 

In 2002, Malaysia passed a special law of the Islamic Financial Service Board Act 2002 to establish Islamic Financial Service Board (IFSB). The IFSB seeks to outline the standards of financial prudence of Islam. To ensure the resilience of Islamic finance is more sustainable, IFSB has also joined the Accounting and Auditing Organization for Islamic Financial Institution (AAOIFI). 

Moreover, the International Centre for Education in Islamic Finance (INCEIF) was established in 2005 to develop the human capital of the industry. The Central Bank of Malaysia has established an endowment fund for RM500 million for starters. Up until today, there are 1,561 INCEIF alumni from over 80 countries around the world contributing to the advancement of Islamic finance at all levels be it product development, policy framework and implementation; regulation and enforcement; and innovation (INCEIF, 2020).


Islamic finance startups in Malaysia are now offering digital mortgage platforms, wealth management, and mobile applications such as Wahed Invest, Qard Hassan, HelloGold, and BEST Invest. Malaysian Islamic finance has much to offer given its resilient financial system and innovative ecosystem including Bursa Malaysia-i, which offers faith-based investors a unique proposition and platform for Shariah-compliant investing. 

A total of 79% of listed companies on Bursa Malaysia are Shariah-compliant, with a market capitalization of RM1.2 trillion as of January 2021. Moreover, Bursa Malaysia has pledged to contribute 1% of its profit after tax or RM3.8 million towards community projects that would positively change and benefit society.

COVID-19 Impact

Since the enforcement of the national lockdown, the Malaysian government estimated that the economic losses amount to RM63 billion. Bank Negara Malaysia (BNM) announced a six-month moratorium period for loans and mortgages to help ease the burden. Subsequently, a huge stimulus package worth RM30 billion was injected into the banking system after BNM released a robust set of measures. 

Banks were also allowed to draw down a 2.5% capital conservation buffer, utilize accumulated regulatory reserves, and run the liquidity coverage ratio below 100% (Salaam Gateway, 2020). However, the implementation of the moratorium raised a polemic within the Islamic banking industry locally by the justification from customers questioning the additional charges used by Islamic banks after the expiry of the moratorium period.

Malaysia and Indonesia to become the Global Center for Islamic Financial Market

Both Indonesia and Malaysia contain a Muslim majority population, as a matter of fact, Indonesia has the world’s largest Muslim population amounting to 225 million Muslims home to 12.7% of the global Muslim population (Statista, 2021). On the other hand, Malaysia has the world’s largest sharia market share stood at 35.6% (Raj, 2020). Thus, this puts both countries in a position to become a global center for future sharia financial instruments. 

World Sharia Stock Market Center

In 2016, the stock exchanges of Indonesia and Malaysia agreed to join hands to develop a World Sharia Stock Market Center. This partnership aims to establish a global benchmark for Islamic capital markets as part of an effort to broaden the usage and availability of Islamic products and liquidity globally (Indonesia Investment, 2016). 

After the signing of a memorandum of understanding (MoU) at the 12th World Islamic Economic Forum (WIEF) in Jakarta, both countries have conducted studies and develop the necessary infrastructure to launch financial securities products, sharia bonds, and other sharia-compliant products while also supporting the development of a micro-market structure for the global sharia stock market.

Center of Sharia Banking System 

Bank Indonesia (BI) and Bank Negara Malaysia (BNM) in 2019, agreed on financial cooperation and payment systems to strengthen bilateral relations between the two central banks. The agreement covers two areas, Local Currency Bilateral Swap Agreement (LCBSA) and Memorandum of Understanding in the field of Payment Systems and digital financial innovation, including anti-money laundering supervision and prevention of terrorism financing (AML/PPT). 

The LCBSA allows for the exchange of local currency between the two central banks with a maximum value of RM 8 billion or IDR 28 trillion (roughly the equivalent of USD 2 billion). This move will complement efforts to support the wider use of local currency to facilitate cross-border economic activity between Malaysia and Indonesia. The agreement is an affirmation of the commitment of the two central banks to support payment system development and encourage digital financial innovation. The meeting discussed the latest economic and financial developments, including in the fields of Islamic finance, social financing, and financial market development (Sitorus, 2019).

Center of Islamic Finance Education 

The National Sharia Economy and Finance Committee (KNEKS) is running major programs starting this year for the development of Islamic social finance including simplification of Islamic universities’ majors from 16 to five (Shariah economics, Shariah banking and finance, Shariah business management, Shariah economy law, and Shariah accounting). 

Out of the 2021 Top 10 Islamic Universities, five of the universities are from Indonesia and one is from Malaysia. This shows that both countries have educational growth potential in Islamic Finance and Business Education (UniRank, 2021). Until now, Indonesian Universities have been partnering with Malaysian education institutions in the sharia economy knowledge exchange. For instance, Universitas Pendidikan Indonesia (UPI) one of Indonesia’s top universities collaborated with Sultan Azlan Shah Polytechnic (PSAS). The cooperation program that is carried out includes the reciprocal student mobility program between 2 universities, especially students of the Islamic Economics and Finance Study Program (UPI, 2019).

Moreover, to strengthen the capacities of Indonesia’s researchers to publish Sharia Economy-related research in global journals, research in the Islamic economy will also be a focus area. KNEKS is currently working with the economist Prof. Mansor H. Ibrahim from Malaysia’s International Centre for Education in Islamic Finance (INCEIF) (Winosa, 2020).

Be A Part of The World’s Sharia Finance Through BRIGHT Indonesia

The potential role of sharia financial institutions in the world’s economy has been proven to be growing tremendously. The prominence of the market has created significant demand for sharia-compliant products over the last five years. Countries like the United Arab Emirates and Saudi Arabia are competing to become centers of Islamic finance. In such a competitive environment, Malaysia and Indonesia also have a great opportunity to advance themselves as the center of Islamic finance. As the world’s largest sharia market share and most populous Muslim country, Malaysia and Indonesia are undoubtedly promising markets. 

If your business is interested in entering Malaysia and Indonesia’s sharia finance market it is important to have the right partner that is an expert in Southeast Asian markets. BRIGHT Indonesia offers services such as Business Partnership Engagement, Management and Strategy Consulting, and Foreign Direct Investment that will help your institution to secure an agreement with your future Malaysian and Indonesian business partners, create and implement sharia business strategy programs, and prepare high-level visits and investment delegations.

For more information, email

This article is co-written with Gianina Amira Zahra


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