Islamic Finance in Asia: Rapid Growth of The Industry in the Region

Islamic Finance in Asia: Rapid Growth of The Industry in the Region

Islamic Finance in Asia has put its early seeds in Malaysia. Asia is a central hub for Islamic banking and finance, especially Malaysia, Indonesia, and Brunei. It is because these countries have a sizeable Muslim population. Many Asian countries, like Pakistan (96.4%), Bangladesh (86.3%), Indonesia (87.2%), and Malaysia (63.5%), have a Muslim majority population. Although Islamic finance is gaining popularity around other countries in the region, such as Brunei, Indonesia, Singapore, and Thailand, Malaysia remains the leading country in Islamic Banking. Moreover, Malaysia has become one of the most competitive countries in the Islamic Finance industry worldwide. The share of worldwide Islamic banking assets by country, including Asian countries, is depicted below.

Shares of Global Islamic Banking Assets
Source: IFSB, 2020

Islamic Finance in Malaysia

Malaysia, along with Iran and Saudi Arabia, is a major player in Islamic finance. According to MIFC, Malaysia has been seeing an average annual growth rate of 18-20% since 2007.

Another well-known Islamic financial institution in Malaysia is Tabung Haji. It was the earliest Islamic Finance institution in Malaysia since 1963. The main objective of the organization was to help more Malaysians save for and afford the Hajj. Then, Malaysia was a low-income country. It would take 10 to 15 years person with an average income level to save enough for the pilgrimage.

The first Islamic bank in Asia was Bank Islam Malaysia Berhad. The bank came into existence in 1983 when the Malaysian government signed into law the Islamic Banking Act that year. The act gives the country’s central bank, Bank Negara Malaysia, the authority to supervise and regulate Islamic banks in the same way it manages and controls conventional banks. In 1993, Bank Negara introduced the Islamic Banking Scheme. For the first time, existing conventional banks offered Islamic banking services using their existing infrastructure and branches.

The Islamic Financial Services Act 2013 (IFSA)

When we talk about Islamic Finance in Malaysia, it is essential to mention The Islamic Financial Services Act 2013 (IFSA). It is a Malaysian law that went into force on June 30, 2014. The IFSA regulates and supervises Islamic financial institutions, payment systems, other relevant entities, and the Islamic money market and Islamic foreign exchange market to promote financial stability and Shariah compliance and other related, consequential, or incidental matters.

The country’s central bank, Bank Negara Malaysia, is currently creating many standards for essential Islamic contracts that outline the Shariah and operational criteria of a specific arrangement to meet the Act’s goals. According to the World Bank, in 2018, Malaysia’s $521 billion in Islamic finance assets ranked third in the world, trailing only two countries with much larger Muslim populations than Malaysia’s 20 million: Iran ($575 billion in assets, 80 million Muslims) and Saudi Arabia ($541 billion, 30 million Muslims).

Islamic Finance in Other Countries of the Region

Other Asian financial centers, such as Singapore and Hong Kong, have admired Malaysia’s success. To date, Singapore has tapped into this market before Hong Kong. In 2007, the Islamic Bank of Asia, the country’s first Islamic bank, came into existence. However, it was an investment bank rather than a retail bank.

The Hong Kong government entered the Islamic financing market in September 2014 by issuing a $1 billion Sukuk. Investor demand was strong, and other non-Muslim countries have also expressed interest in the Sukuk market. Furthermore, 14 Islamic banks came into existence in Brunei, Indonesia, the Philippines, and Thailand, all of which have considerable Muslim populations. After watching Malaysia’s success, the government and regulators in Brunei and Indonesia are re-energized to get the business rolling.

The Indonesian Council of Ulama took (MUI) the lead in establishing the Islamic Finance industry in the country in 1990. The first Islamic bank in Indonesia, Bank Muamalat Indonesia, was founded in November 1991 and began operations in May 1992.

In comparison to other Muslim-majority nations such as the Philippines (1973) and Malaysia (1998), Indonesia is a latecomer in establishing Islamic banks (1983). Indonesia was the first in the Islamic Finance Country Index (IFCI) for 2019. In 2020, however, Indonesia had slipped to second place behind Malaysia.


The growth of Islamic finance in Asia goes far from this. In Bangladesh, Pakistan, and Sri Lanka, Islamic financing is firmly developed. Non-Muslim Asian countries have been exploring methods to enter into this market as well. Japan and South Korea, both Muslim-minority nations, have expressed interest in participating in Islamic capital markets for Sukuk and other financial products. Therefore, there is a huge potential growth in Islamic finance in the following years, as many countries showed their interest in this industry.

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