As of July in Malaysia, there were 11 Islamic banks comprising six Islamic subsidiaries (previously Islamic banking windows), two domestic Islamic banks and three new foreign banks.
The foreign Islamic banks have rapidly expanded their branch network to a total of 15 branches, since the commencement of operations of the first foreign Islamic bank in August 2005.
Policy initiatives for the Islamic banking sector continue to emphasise further strengthening of corporate governance and risk management.
Additional requirements have been introduced, such as the disclosure on Syariah matters in the annual report, expanding the role of internal auditors to include Syariah audit and additional roles of the board of directors in the protection of depositors, particularly investment account holders.
The Capital Adequacy Framework for Islamic Banks, developed by the Islamic Financial Services Board (IFSB), will take effect from Jan 1.
In March, Bank Negara issued the Guidelines on the Role of the Appointed Actuary. The guidelines set out the qualifying criteria for the appointment of actuaries as well as their general and specific duties and responsibilities.
It is envisaged that enhancing the role of actuaries would help improve the quality of actuarial investigations into the financial conditions of family takaful funds.
In April, Bank Negara issued the Circular on Valuation of Liabilities for Mortgage Reducing Term Takaful (MRTT) setting out the minimum valuation basis to be conducted by takaful operators in evaluating their liabilities on MRTT products.
Efforts were also intensified to enlarge the pool of talent in the field of Syariah by providing scholarships and research grants funded by Bank Negara's Endowment Fund for Syariah Scholars in Islamic Finance.
The International Centre for Education in Islamic Finance set up in March 2006 to develop human capital and R&D in Islamic finance, has forged strategic alliances with renowned local and international institutions of higher learning, and currently has more than 700 students.
Significant progress had been achieved in the Malaysia International Financial Centre (MIFC) initiative launched in August 2006 and supported by attractive tax incentives under Budget 2007.
Efforts have been directed at enhancing institutional capacity, forging strategic alliances and embarking on promotional initiatives.
There have been positive responses from local and foreign financial institutions to participate in the MIFC initiative, particularly in the establishment of international Islamic banks (IIBs), international takaful operators (ITOs) and international currency business units (ICBUs).
As of July, eight financial institutions comprising three takaful operators and five Islamic banks have been granted approvals to set up ICBUs. In addition, one application was received to set up an llB.
The Islamic banking (IB) sector remained well capitalised, with the capital base increasing to RM14.7bil and risk weighted capital ratio (RWCR) of 17.1% as at end-June (end-2006: 16.6%).
Pre-tax profit grew by 32.9% to RM1bil in the first six months, driven largely by growth in income from financing, trading and investment, and higher recoveries on non-performing assets.
The annualised return on assets and return on equity stood at 1.6% and 16.1% respectively, almost matching those of conventional banking. The quality of financing continued to improve with net non-performing financing (or net NPLs ratio under conventional banking) based on three-months classification declining by 8.3% to RM3.2bil to account for 4.1% of total financing.
During the first six months, total assets of the IB sector expanded by 8% to RM143.7bil (end-2006: RM133bil) and accounted for 12.1% of total banking system assets.
IB deposits increased by 8.4% to RM107.5bil (end-2006: RM99.2bil) to capture a 12.8% market share.
Financing grew by 3.8% to RM81.5bil and accounted for 13.3% of total banking system loans. IB lending remained highly concentrated on the household sector with RM51.7bil or 63.5% of total outstanding loans as at end-June, mainly for the purchase of passenger cars and residential properties.