102 FINANCIAL SECTOR BLUEPRINT 2022-2026

Strategic Thrust 5
Advance value-based finance through Islamic
finance leadership
Islamic finance in Malaysia has undergone three broad phases of development over the last four decades –
foundation-building, mainstreaming, as well as driving diversification and innovation (Diagram 1).

Diagram 1:
Phases of development over the last four decades

Driving
Building
Mainstreaming diversification and
foundation
innovation

Development
phases

Financial Sector Financial Sector

Masterplan 2001-2010 Blueprint 2011-2020

Strategic intents w Promote financial w Broaden range of w Addressing

inclusion for solutions beyond ecosystem gaps and
Muslims Muslim community global expansion
w Providing alternative w Achieve scale, w Drive innovative
solutions enhance capacity, solutions and
and widen solutions diversification

Malaysia’s global leadership in Islamic finance is the result of concerted efforts by the Government, financial
regulators, and industry players. Over the years, a wide range of initiatives have been advanced – including
providing the overall enabling legal and regulatory environment, rolling out structural reforms to align strategies,
addressing market frictions and incentives, as well as building long-term capacity. The country has also
contributed to the development of global infrastructures to promote Islamic finance development, such as the
setting up of the Islamic Financial Services Board (IFSB) and the International Islamic Liquidity Management
Corporation (IILM), which are both headquartered in Malaysia.

Today, Malaysia enjoys a mature Islamic finance ecosystem with dynamic and resilient players, diverse products,
and comprehensive enabling infrastructures (see Diagram 2 for an overview).

As Malaysia’s Islamic finance ecosystem continuously adapts to the fast evolving economic and social needs,
efforts remain anchored on Shariah principles – aimed at realising a vision of economic growth that is balanced,
progressive, sustainable and inclusive (Diagram 3).

Building on these achievements, the strategies for the next five years will seek to leverage Malaysia’s well-
developed Islamic finance ecosystem, particularly to:

i. Sharpen Malaysia’s proposition as an international gateway for Islamic finance;

ii. Strengthen policy enablers of value-based finance for greater impact; and
iii. Mainstream social finance.
Strategic Thrust 5: Advance value-based finance through Islamic finance leadership

Diagram 2:
Highlights of Malaysia's Islamic finance ecosystem

Solid growth Key driver

in banking and takaful in global sukuk and Islamic funds
Islamic banking
41.0% Malaysia Malaysia
(RM0.9 tr) 45.1% 33.4%

18.4%
22.7% Global Global
sukuk sukuk
2010 2020 outstanding issuances
Market share of Islamic banking (2020) (2020)
Others Others
system by total financing
54.9% 66.6%
Market share of Takaful
total global 18.2% Malaysia
Islamic financial 12.6% (RM6.0 bn) Global 26.9%
assets (2020) Islamic
2010 2020 funds
Market share of takaful industry Others (2020)
by total net premiums/ 73.1%
contributions

Conducive environment and Diverse players

comprehensive ecosystem offering Islamic financial services

Enabling regulatory and Host to key global Islamic Retakaful Investment Training and
legal frameworks Islamic finance banks operators banks education entities
(e.g. CBA, IFSA, Shariah infrastructures
standards, and Shariah (e.g. IFSB, IILM) 16 3 6 >68
governance framework)
15 6 56 >60

Takaful Development Islamic fund Professional

operators financial managers ancillary services
institutions (e.g. legal, Shariah
Vibrant talent Shariah-compliant firms)
ecosystem serving market infrastructures
global Islamic finance (e.g. BSAS1, BM-i2)
needs

Innovative financial solutions Facilitative

and developments in meeting market infrastructure
sustainability objectives
World’s first SDG sukuk
VBI initiative  40 264
World’s first SRI and Currencies traded
Trading
participants
green sukuk
SRI Sukuk and SRI Shariah-compliant SRI 24/7 RM32.9 bil
Average daily
fund frameworks equity fund Trading hours trading value

1
Bursa Suq Al-Sila` (BSAS) is a commodity trading platform specifically dedicated to facilitate Islamic liquidity management and financing by Islamic
financial institutions.
2
Bursa Malaysia-i (BM-i) is a fully integrated Islamic securities exchange platform with a comprehensive range of exchange related facilities, that
incorporate Shariah-compliant features.

Source: Bank Negara Malaysia, MIFC data estimates, Bursa Malaysia, Malaysian Qualifications Agency, the Securities Commission, Refinitiv

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Diagram 3:
Shariah principles underpinning Islamic finance development efforts

Economic growth that is balanced, progressive, sustainable and inclusive

Prevention of
harm and attainment of benefits

Fairness and attainment of excellence (ihsan)

Money is only Wealth creation

Profit comes Assurance of
a store of value must be balanced
through accepting transparency and
and medium of with wealth transfer
and bearing risk traceability
exchange and circulation

Shariah compliance

Diagram 4:
Advance value-based finance through Islamic finance leadership

A Sharpen Malaysia’s proposition as an international gateway for Islamic

finance
w Strengthen gateway-critical capabilities in Malaysia’s Islamic financial
industry
w Promote greater industry leadership
w Facilitate further deepening of Malaysia’s Islamic financial and capital
markets

B Strengthen policy enablers of value-based finance for greater impact

w Develop a more conducive regulatory environment to facilitate the
application of diverse Shariah contracts
w Support the industry’s innovation efforts in developing new value-based
business models, solutions, and practices
w Facilitate greater stakeholder activism through higher quality disclosures

C Mainstream social finance

w Elevate social finance as an integral part of the Islamic finance ecosystem
Strategic Thrust 5: Advance value-based finance through Islamic finance leadership

Strategy 5A
Sharpen Malaysia's proposition as an international gateway for
Islamic finance
The global Islamic finance landscape has evolved significantly. Compared to a decade ago, Islamic finance has
gained greater prominence in the global financial landscape. Global Islamic financial assets have grown from
USD1.6 trillion in 2012 to USD2.7 trillion in 20201. Prospects for further growth remain significant, particularly
within Asia and Organisation of Islamic Cooperation (OIC) countries. These may arise from untapped market
segments, the growing halal business, and demand for more sustainable investments. Alongside the broader
digitalisation of financial services, Islamic fintech opportunities are also growing, particularly in developing
countries with Muslim-majority populations.

The Islamic finance space is thus expected to become more vibrant globally. Increasingly, more countries
are looking to develop domestic markets and expand their footprint overseas. This environment creates new
opportunities to Islamic finance – such as new cross-border partnerships to realise synergies, including through
‘collaborative competition’ (co-opetition) among established and emerging Islamic financial centres.

Against this backdrop, the Malaysia International Islamic Financial Centre (MIFC) vision and strategy continues to
evolve in response to global trends and shifts in real economic needs (Diagram 5).

Diagram 5:
MIFC vision moving forward

Global gateway for Islamic finance markets in Asia and OIC

Connect businesses, investors and other stakeholders to Islamic finance

w
opportunities in Asia and OIC
Specialise in sustainable finance and halal economy
w
Industry-led initiatives, supported by Malaysia’s talent services ecosystem
w

Leveraging existing strengths … and guided by strategic outcomes

Enabling regulatory and legal frameworks Business dimension Leadership dimension

Vibrant marketplace Innovation in Islamic

Diverse products, players and market segments
Inward for diverse Islamic finance solutions for
finance business focus areas
Host to key global Islamic finance infrastructures
(e.g. IFSB, IILM, Centre of Excellence of Islamic
Development Bank (IsDB))
Active tapping of Global influence in
Outward
Vibrant talent ecosystem serving global Islamic global opportunities areas of strength
finance needs (e.g. INCEIF, IBFIM, ASAS1)

Shariah-compliant market infrastructures (e.g.

BSAS, BM-i)

1
Association of Shariah Advisors in Islamic Finance (ASAS).

1
Source: IFSB (2013, 2021), “Islamic Finance Services Industry (IFSI) Stability Report”.

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Our strategies aim to sharpen Malaysia’s proposition complete solution for the halal value chain. Notably,
– specifically, to be a global gateway for Islamic the global halal trade has enormous prospects
finance markets in Asia and OIC. This envisions (estimated to be worth USD2.4 trillion in 20242). In
Malaysia connecting Islamic finance opportunities realising this potential, the MIFC community can
in Asia and OIC markets with businesses, investors, play a role to support halal trade and supply chain
and other stakeholders across the globe – including activities (e.g. halal certification and logistics).
partnerships with other jurisdictions to advance Further, financial institutions may also help nurture
areas of mutual interest. We will intensify efforts local halal businesses into global or regional
to facilitate industry-led initiatives that leverage players.
Malaysia’s Islamic finance ecosystem, including its
infrastructure, instruments, expertise, and players. In supporting these developments, we will continue to
This includes efforts to preserve Malaysia’s strengths provide an enabling policy environment. Realising this
as a destination of choice for Islamic fundraising and vision will require Malaysia’s Islamic financial institutions
investment activities, as well as a retakaful hub. to be agile and in a state of readiness to capitalise on
evolving opportunities. Greater industry leadership, as
In positioning Malaysia’s Islamic finance gateway, we well as targeted public-private partnerships, will thus
will pursue two areas of specialisation: be crucial. This includes initiatives in the Islamic finance
talent ecosystem – which will remain vital to drive
n First, a greater focus on opportunities in expertise development for the gateway’s key focus
sustainable finance. This builds on Malaysia’s areas, as well as to export Malaysia’s education and
pioneering work in VBI, which sets out the training services abroad.
frameworks and implementation guidance for a
holistic approach to financial intermediation. There In advancing the sharpened vision for MIFC, our
are also synergies with our efforts on climate and strategies aim to:
environmental risks – a key piece of the sustainable
finance agenda (refer to the chapter “Position the i. Strengthen gateway-critical capabilities in
financial system to facilitate an orderly transition to a Malaysia’s Islamic financial industry;
greener economy”). ii. Promote greater industry leadership; and
iii. Facilitate further deepening of Malaysia’s Islamic
n Second, greater integration of Islamic finance financial and capital markets.
with the halal industry, particularly in financing
halal trade and investment. This supports a more

i Strengthen gateway-critical capabilities in Malaysia’s Islamic financial industry

We are committed to the MIFC o Facilitate Malaysian financial institutions in

agenda and will continue to lead expanding their footprint in Islamic finance
business in other markets – among others by
on regulatory and Shariah fronts, as
engaging with other financial regulators and
well as facilitate market access for authorities, either bilaterally or multilaterally, to
financial institutions enable the wider provision of Islamic financial
offerings;
n We will support efforts to improve the Islamic
financial industry’s global distribution o Promote greater alignment of Islamic
capabilities to better tap opportunities outside of finance-related standards and practices,
Malaysia. These include facilitating Islamic finance including through global standard-setting bodies
activities in other markets by businesses that such as the IFSB and bilateral engagements. We
prefer to use Islamic finance, as well as enabling will also continue to promote mutual recognition
business matching of halal exports with potential of Shariah and regulatory requirements
clients abroad (see Diagram 6). To this end, we globally. This includes enhancing the role and
will enhance Malaysia’s connectivity with potential structure of the Centralised Shariah Advisory
Islamic finance markets to strengthen or realise the Authorities (CSAA) as the platform to pursue
distribution potential of financial institutions. These mutual recognition of Shariah application across
include collaborative efforts to: jurisdictions; and
2
Amount projected based on Muslim spending on halal products and services (Source: Dinar Standard Report (2020), “State of the Global Islamic
Economy Report 2020/21: Thriving in Uncertainty”).
Strategic Thrust 5: Advance value-based finance through Islamic finance leadership

o Facilitate greater visibility of Malaysia’s n Complementing this, we will continue to strengthen

professional services (e.g. Shariah advisory) global partnerships to advance Islamic financial
and talent development institutions (e.g. innovations beyond Malaysia’s borders. These
INCEIF, International Shari’ah Research include joint initiatives with other international
Academy for Islamic Finance (ISRA), IBFIM). This financial centres and multilateral organisations
aims to further export Malaysia’s Islamic finance (e.g. the World Bank, United Nations Development
expertise through cooperative efforts with Programme (UNDP) and IsDB. Such initiatives can
industry players and the relevant government provide critical insights for innovations in Malaysia’s
agencies, such as the Malaysia External Trade Islamic finance ecosystem. Where possible, we will
Development Corporation (MATRADE) and Halal build on these arrangements to identify areas where
Development Corporation (HDC). Malaysia can act as a testbed for innovation to
better meet global Islamic finance needs.
n We will facilitate nascent Islamic financial
innovations, including to accelerate the scaling n We remain committed to refine measures towards
up of new products and services. Our efforts will strengthening Malaysia’s global competitiveness
focus on trade-related solutions, alternative finance as an Islamic finance gateway. A key outcome
models (e.g. blended finance), and sustainable will be to support Malaysia as the preferred
finance. These include repurposing existing seed Islamic finance partner for halal industry growth.
funding provided by the Bank to Islamic fund To this end, we will explore collaboration with the
management companies (IFMCs) to focus on relevant agencies (e.g. MOF, Malaysian Investment
sustainability and innovative-driven mandates. Development Authority (MIDA) and HDC) to
Meanwhile, the growing market for Islamic fintech create stronger links between Islamic financial
will be supported by broader initiatives to foster services and Malaysia’s economic propositions
a vibrant digital financial services landscape – as a leading halal hub, particularly in supporting
including a conducive environment to test and high value-added sectors and initiatives under
scale digital innovations (refer to Strategy 3B(i) of the NIA. We will also continue to work alongside
“Advance digitalisation of the financial sector”). other financial regulators such as the SC Malaysia,
Bursa Malaysia, and the Labuan Financial Services
Authority on complementary strategies that
advance the MIFC agenda.

Greater industry leadership

to take MIFC forward

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ii Promote greater industry leadership

n We will enhance mechanisms for greater In the near term, we will work with the industry
industry leadership. This includes the review of to reform existing mechanisms and platforms
the MIFC Executive Committee (EXCO) and MIFC to be more agile, and to better position industry
communication strategies. In the earlier years champions to drive critical agendas for MIFC.
of the MIFC agenda, a strong regulatory role – These include efforts to further:
together with the contribution of the MIFC EXCO
and industry players – formed the key building o Enhance Malaysia’s position as an Islamic
blocks for a conducive and vibrant Islamic finance fundraising and investment destination;
ecosystem.
o Strengthen distributional capabilities and
With the more mature Islamic financial industry expand market access for players to provide
and the rapidly evolving landscape of global Islamic finance solutions;
opportunities, greater industry stewardship is
needed going forward. In sharpening Malaysia’s o Enhance the role of Islamic finance to support
proposition as an Islamic finance gateway, we see Malaysia’s national halal agenda
our role as focusing more on being a facilitator or (see Diagram 6); and
partner in broader industry-wide efforts.
o Encourage cohesive efforts by education and
training providers in sustaining Malaysia’s
position as a leading a knowledge centre for
Islamic finance globally.

Diagram 6:
Examples of possible Islamic finance offerings as a gateway to the halal economy

Complete range of Facilitate market access/ Capacity building,

financial solutions for expansion in and outside technical assistance, and
Malaysian halal investments/ Malaysia via business/ ancillary services (e.g.
companies operations in and outside partner matching certification and export
Malaysia readiness training)

Financial Extensive Ecosystem

solutions network of partners

Complete range of Facilitate market access/ FDI advisory services to

financial solutions expansion into Malaysia companies venturing/
(including fundraising or other markets with relocating to Malaysia
Foreign
activities) for halal Malaysian Islamic
companies
investment/operations: financial institutions’
w in Malaysia (e.g. presence via business/
distributor finance to partner matching
Malaysian contract
manufacturers)
w outside Malaysia (e.g.
sukuk advisory)
Strategic Thrust 5: Advance value-based finance through Islamic finance leadership

iii Facilitate further deepening of Malaysia’s Islamic financial and capital markets3

Efforts to improve Malaysia’s Islamic n We will continue to enhance best practices and
financial and capital markets will be standards in the Islamic money and capital
continuously pursued markets, in line with international standards.
To this end, we will continue to promote
collateralised Islamic transactions and support
n We will continue to promote Malaysia as the the implementation of collateral management
centre for origination, issuance, and trading for practices. As part of these efforts, we will work
sukuk. This will leverage our comparative advantage towards the recognition of additional Islamic
in sukuk advisory, particularly in structuring and instruments for close-out netting (e.g. collateralised
innovation, to tap into the growing sukuk trends, commodity murabahah) and greater adoption of
including sustainable sukuk in line with MIFC’s Islamic derivatives agreements (tahawwut) among
focus areas. This will also be achieved through interbank players4.
the continued deepening of the domestic hedging
market and strengthening of domestic players’ n We will continue to review and improve the
global distribution capabilities to further enhance structure of Islamic instruments to promote
Malaysia’s ability to attract a larger and broader greater Shariah acceptance and to leverage
foreign investor base. Such efforts will further the diversity of Shariah contracts. This includes
improve Malaysia’s propositions as the preferred efforts to promote a wider range of Islamic risk
destination for Shariah-compliant fundraising management tools, including derivatives, to
and investment, complemented by a facilitative investors. We envision that this measure will lead to
framework for the issuance and subscription of increased vibrancy in the Islamic derivatives market,
ringgit and foreign currency-denominated sukuk in and subsequently contribute to the expansion of
Malaysia. Islamic finance and share of Islamic financing in the
onshore financial market.

Strategy 5B
Strengthen policy enablers of value-based finance for greater
impact
As we advance SDGs in financial development, the Islamic financial sector can play a key role. Islamic finance
is uniquely aligned to the growing calls for a responsible and ethical model for financial services, given the
fundamental values of Shariah to prevent harm and promote the attainment of benefits – including to improve
well-being through wealth preservation, wealth circulation, and justice.

Building on this, we introduced key frameworks in recent years – namely, VBI in 2017 and VBIT in 2021.
Complemented by implementation guidance, these frameworks outline how Islamic finance solutions and
practices can support a more positive impact on the economy, community, and environment.

Islamic financial institutions have made steady progress since then, delivering value-based finance solutions
to a growing number of individuals and businesses in recent years (see Diagram 7). The impact of VBI is also
evident in the halal industry. Halal businesses have benefited from the comprehensive suite of financial solutions
in expanding their operations beyond the domestic market, complemented by the provision of business advisory
and ancillary services.

In the coming years, we envision Islamic financial institutions leading efforts to widen the adoption of value-
based finance across the financial sector. These efforts include developing innovative solutions and refining
business practices towards greater social, economic, and environmental resilience – underpinned by more refined
measures of value and impact.

3
These efforts will be pursued in collaboration with the Securities Commission, consistent with the Capital Market Masterplan 3 (CMP3).
4
Initiatives will be geared towards greater adoption of tahawwut agreements by interbank participants and consequentially expanding the adoption to
other markets and players.

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Diagram 7:
Overview of VBI-aligned financing (2017 - 2020)

2017 2020

Launch of VBI
A significant portion of the VBI-aligned financing went to:

Over RM94.2 billion

disbursed by Islamic banks towards
VBI-aligned financing
Micro SMEs Public infrastructure Affordable housing
(43%) (26%) (21%)

Accounts for nearly 26% >4500 renewable energy and green

of total financing approved from
2017-2020 projects worth >RM8.8 billion

Source : Association of Islamic Banking and Financial Institutions Malaysia (AIBIM)

To advance these goals, we will prioritise these strategies:

i. Develop a more conducive regulatory environment to facilitate the application of diverse Shariah contracts;
ii. Support the industry’s innovation efforts in developing new value-based business models, solutions, and
practices; and
iii. Facilitate greater stakeholder activism through higher quality disclosures.

We will continue to provide

the appropriate regulatory
facilitation for value-based
finance implementation
Strategic Thrust 5: Advance value-based finance through Islamic finance leadership

i Develop a more conducive regulatory environment to facilitate the application of

diverse Shariah contracts
n We will strengthen the Shariah regulatory n We will explore the potential recalibration of
framework by aligning the application of Shariah existing regulatory requirements to cater to
contracts with their underlying wisdom (hikmah). the broader application of ta`awun6 in takaful,
This includes setting out clear considerations guided by clear Shariah parameters. Current
for financial institutions in adopting certain regulations restrict the transferability of distributable
arrangements in exceptional circumstances (e.g. surplus across takaful funds in meeting the capital
ceding takaful risk to conventional insurers or requirements, due to separate fund ownership for
reinsurers due to capacity constraints), in line with takaful. An expanded application of ta`awun may
the hajah principle5. allow distributable surplus in a takaful fund that
is sufficiently capitalised to support shortfalls in
Another desired outcome is for financial institutions another takaful fund.
to use more diverse Shariah contracts, thereby
enabling value-based finance to serve a wider Similarly, a broader application of ta`awun can
range of economic and social needs. This may call facilitate greater wealth circulation within the
for a reconsideration of the use of tawarruq, which wider society. For example, the utilisation of
is presently a dominant Shariah contract for Islamic distributable surplus in takaful funds may potentially
finance products in Malaysia’s Islamic finance be channelled to provide takaful coverage to
landscape. lower-income households, thereby improving their
financial resilience. In exploring the expansion of
ta`awun application, key considerations would
be to promote benefits to the wider society while
preserving the interest of takaful participants.

ii Support the industry’s innovation efforts in developing new value-based business

models, solutions, and practices

Innovation, particularly through n We will support further diversification of

Investment Account (IA) offerings by Islamic
the application of diverse Shariah banks to mobilise new sources of funds for value-
contracts, is an important enabler of based financing, particularly initiatives to develop
value-based finance impact-driven investment instruments. This
will align with broader efforts to facilitate banks’
participation in non-debt finance solutions (refer
n We will leverage enhancements to our existing to Strategy 1B(ii) of Chapter 1 – “Fund Malaysia’s
Regulatory Sandbox to better support innovations economic transformation”). IA offerings will need
in value-based finance, such as novel applications to evolve in tandem with heightened competition
of Shariah contracts. These may arise from in the retail investment space, such as from equity
enhancements to the scope of hajah application, as crowdfunding and P2P financing. To widen the
well as from the exploration of new takaful business appeal of IA offerings among eligible investors, there
and operating models that support value-based is a need to expand the underlying assets beyond
protection (refer to Strategy 3B(i) of Chapter 3 – traditional financing. This may include mezzanine
“Advance digitalisation in the financial sector”). financing and venture capital that can also support
VBI-aligned outcomes. We will continue to support
industry efforts on that front where appropriate,
including addressing regulatory frictions and
facilitating the development of enabling infrastructure
as necessary.

5
Hajah is defined as a situation of exigent circumstances that will cause or is likely to cause a detrimental impact to the safety and soundness of the
Islamic financial institution, thus necessitating a temporary exception of a Shariah ruling. Further details are accessible in Bank Negara Malaysia’s
“Discussion Paper on Hajah” (2021) at https://www.bnm.gov.my/documents/20124/938039/Discussion_Paper_on_Hajah.pdf.
6
Ta`awun refers to the cooperation among a group of individuals in a takaful fund to mutually aid each other to meet certain needs, as collectively agreed
in a takaful contract. Further details are accessible in Bank Negara Malaysia's “Shariah Resolution in Islamic Finance” (2010) at
https://www.bnm.gov.my/documents/20124/761709/shariah_resolutions_2nd_edition.pdf/3844f55b-8c0f-23ea-5a2a-9874dc416a04?t=1593546461329.

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iii Facilitate greater stakeholder activism through higher quality disclosures

key stakeholders (e.g. investors and financial

With meaningful disclosures on consumers) to evaluate, compare, and differentiate
impact, stakeholders can engage with practices in VBI, thereby nudging the industry to
financial institutions to address gaps continuously improve – while supporting greater
and accelerate impact creation visibility of VBI initiatives beyond national borders.

In collaboration with the VBI Community of

n We will facilitate improvements in the quality Practitioners and VBIT Steering Committee, we
and usefulness of impact-based disclosures. will provide guidance on reporting metrics
Our priority here is to foster a more conducive that improve comparability and quality of
environment for effective stakeholder activism. disclosures. A major focus will be to mitigate the
risks of ‘impact washing’7 in these disclosures,
As it stands, Islamic financial institutions do provide which may include reducing the subjectivity or
impact-based disclosures under VBI. However, there discretion accorded to certain parameters. The
is room to further enhance the information published guidance will also be aligned to the phases of
– including to ensure the continued integrity of such individual financial institutions’ VBI implementation
disclosures, and better align them with international which vary across the industry8, and complement
practices. This can foster greater confidence among the existing principles of sustainability reporting and
initiatives on climate risk disclosures.

Strategy 5C
Mainstream social finance
Social finance refers to financial structures or business commercially-driven financial solutions, and corporate
models that aim to deliver tangible social outcomes by social responsibility (CSR) activities of the financial
mobilising philanthropic capital. Such capital includes institutions to promote greater social resilience. To
Islamic social finance instruments such as sadaqah unlock the potential of social finance, our strategies will
(donation), waqf (endowment) and zakat (alms). In aim to elevate social finance as an integral part of the
recent years, we have worked closely with the industry Islamic finance ecosystem.
and other stakeholders to encourage greater integration
of social finance in the Islamic finance ecosystem. The box article on “Social finance as an enabler of
social development in Malaysia” provides further
Moving forward, social finance is envisioned to details on the social finance landscape as well as
play a greater role, with Islamic finance leading recommendations for other social finance actors on
the way – complementing public sector finance, unlocking the potential and amplifying the impact of
social finance.

We will adopt a nurturing approach

to support financial institutions’
explorations to better integrate social
finance within their businesses

7
Impact washing refers to a process in which impact-focused initiatives claim to be aligned with and contribute to development objectives without
providing meaningful supporting evidence (Source: OECD (2021), “OECD-UNDP Impact Standards for Financing Sustainable Development”).
8
There are four phases towards the full implementation of VBI, namely Initiating, Emerging, Engaged, and Established (Source: Bank Negara Malaysia
(2018), “VBI Implementation Guide”).
Strategic Thrust 5: Advance value-based finance through Islamic finance leadership

i Elevate social finance as an integral part of the Islamic finance ecosystem

n We will support a range of finance models n We will enable a conducive regulatory
that promote impactful social outcomes. This environment for diverse business models,
reflects how the optimal models can vary based recognising that social finance solutions could
on individual player’s risk appetite, capacity, be delivered by a range of players. This builds on
operational readiness, business strategy, and the emerging interest among industry players to enter
this space – be it as part of their existing mandates
evolving needs of financial consumers. Generally,
(e.g. DFIs), CSR initiatives by incumbents, or as
we will facilitate both blended finance and
a primary business strategy (e.g. digital players
funding escalator models (refer to Diagram 1 with a social finance focus). As part of these
under the box article, “Social finance as an enabler efforts, we will facilitate the roll-out of more
of social development in Malaysia”) to address impactful pilot programmes for social finance.
financing, investment, and protection gaps in These programmes will guide efforts to enhance
the market. This may include providing funding regulations to remain fit-for-purpose, particularly
for specific financing facilities and facilitating to scale tried-and-tested social finance solutions.
collaboration between actors from the private For example, these may include tailoring capital
and public sectors. Blended finance models refer and liquidity rules to better reflect the risk profile
of such activities (e.g. proportionate credit risk
to the combination of commercial funding (e.g.
requirements for group-based lending using
microfinancing) and philanthropic capital (e.g.
concessional funds and simplified liquidity
zakat or sadaqah) to fund beneficiaries based on
requirements for ring-fenced donations).
adjusted risk acceptance criteria. Funding escalator
models, on the other hand, refer to the incubation
n We will collaborate with the industry to develop
of beneficiaries using social finance funds as they
better measures of value and impact in
develop their creditworthiness and business track
promoting more transparent disclosures of social
record, upon which they graduate to source for
finance. This strategy will be pursued together with
commercially-driven funding. Social finance funds
impact-based disclosures for value-based finance,
are also mobilised to extend financial protection to
as outlined under strategy 5B(iii).
low-income households as a form of safety net in
the event of calamity.

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