Promoting a Progressive and Inclusive Islamic Financial System

Resilient growth in Islamic banking and takaful

Throughout the year, Islamic finance deepened its role in serving Malaysians. Islamic financing rose to 48% of total financing and takaful participation reached 24.5% (Diagram 1). This growth reflects how Islamic finance continues to meet the changing financing and protection needs of households and small and medium enterprises (SMEs) (Diagram 2).

Thrust 1: Advancing value-based intermediation for social and economic impact

Islamic finance is built on the objectives (maqasid)^[1] of Shariah. These objectives build on values such as fairness, equitable wealth distribution and shared responsibility. Value‑Based Intermediation (VBI) puts these values into practice. For Islamic financial institutions (IFIs), this means to operate and create positive and lasting impacts instead of just focusing on profit. In 2024, IFIs intermediated RM148.6 billion^[2] into VBI-aligned activities including for SMEs and green financing, as well as social finance activities. This shows how VBI places people and the real economy at the centre of financial intermediation. In building stronger impact, BNM introduced initiatives to nurture meaningful innovations to support national priorities (Diagram 3). We also directed efforts to improve understanding of Islamic finance and build industry capabilities in exploring innovations.

Fostering sustainable practices for halal businesses

Increasingly, Malaysian halal businesses must consider environmental aspects in their operations to stay competitive globally. For SMEs, this means meeting international green standards and certifications, which is typically costly and challenging. The Greening Halal Businesses (GHB) initiative supports SMEs by providing carbon tracking tools and guidance. With the support of eight IFIs, over 200 halal SMEs have begun adopting greener practices. The programme remains open for others to join.^[3] Early adopters are better placed to access new markets and obtain preferential procurement from buyers.

Catalysing the growth of risk-sharing instrument offerings

Islamic finance goes beyond provision of credit. There are instruments based on risk-sharing contracts that allow investors and entrepreneurs to share risks and returns. Such instruments provide more diverse risk and reward contractual obligations. For instance, economic activities with longer horizons and unpredictable cashflows such as climate-transition projects cannot rely on traditional debt alone which usually is used to finance projects with more predictable cashflows or lower risk profiles. For such activities, equity-based contracts may be a better fit. With this in mind, BNM launched the i-CITA programme in September 2025. It promotes wider use of risk-sharing contracts, such as mudarabah and musyarakah. Through RM100 million of matching funds,^[4] i-CITA has the potential to improve funding access for new viable ventures. The programme encourages IFIs to develop innovative risk-sharing solutions that channel investments into key economic areas such as food security and climate resilience.

Strengthening financial wellbeing

In 2025, we expanded iTEKAD to include iTEKAD Protection,^[5] a social takaful solution. The aim is to make protection more affordable and provide easier access for microentrepreneurs (Diagram 4). Rooted in the takaful principle of ‘mutual assistance’, four takaful operators committed to pilot iTEKAD Protection at its launch during the Global Islamic Finance Forum (GIFF). In December 2025, two takaful operators began rolling out their offerings. These efforts show the continued commitment of BNM and IFIs to strengthen social safety nets and support wider economic participation.

Thrust 2: Sustaining a conducive ecosystem for market development

We adopt a whole‑of‑ecosystem approach to support progressive and inclusive growth. This includes providing a conducive regulatory environment, deepening the Islamic financial market, and ensuring Shariah certainty in Islamic financial practices. BNM also continued efforts to futureproof the Shariah ecosystem. This is done through research, talent development and public understanding of Islamic finance.

Conducive regulatory environment

In November 2025, BNM issued a Policy Document on Broader Application of Ta`awun in Takaful to strengthen the use of mutual assistance in the takaful industry. The goal is for takaful operators to explore solutions that support access to protection by certain segments in the economy. In line with the value-based framework, such mutual support can help build financial resilience for all segments of society. Our intent is for Islamic finance to not only promote financial protection, but also a culture of shared support, so that the benefits of Islamic finance can reach those who need them.

We are also currently reviewing industry feedback on the Shariah Contract Framework and Investment Account discussion papers. These reviews aim to provide clear and practical guidance. This ensures that Shariah principles are effectively applied in financial contracts and investment accounts. By working closely with the industry, this will continue to keep the regulatory frameworks robust, transparent and adaptable to market developments.

Deepening Islamic financial market

A sound regulatory foundation must be supported by clear policy roadmaps and strong market readiness. We made further progress in implementing key policies for the Malaysia Islamic Overnight Rate (MYOR-i)^[6] and Islamic collateralised funding. Through these policies, we intend to:

Introduce more transparent Islamic product pricing and benchmark transition. We will be mandating the use of MYOR-i for Islamic products beginning the second half of 2027. This supports the broader transition away from the Kuala Lumpur Interbank Overnight Rate (KLIBOR) to MYOR/MYOR-i.^[7] As MYOR-i reflects actual overnight Islamic interbank placements, it provides a benchmark that is reflective of Shariah-compliant market activity. This shift is expected to make pricing more transparent and support an end-to-end Shariah-compliant solution for IFIs.

Enhance operational readiness and risk management. Several Islamic banks signed two Memoranda of Understanding (MOUs)^[8] to improve the use of secured Islamic money market and hedging instruments. These MOUs standardise market practices, which support better liquidity management, more reliable hedging, and smoother day‑to‑day operations, in line with global standards.

Providing Shariah certainty in Islamic financial practices

Clear Shariah guidance builds confidence and trust in Islamic finance. The Shariah Advisory Council (SAC) continues to provide clear guidance on what is permissible in Islamic finance. Its decisions anchor our regulatory framework and ensure that new market practices and policy developments are aligned with Shariah expectations. During the year, SAC decisions enabled new solutions such as istisna`-based inventory purchase and salam-based agriculture financing (Diagram 5).

Building a futureproof Shariah ecosystem

As financial innovation accelerates, deeper understanding of emerging issues is needed to maintain Shariah certainty. This means clear, authoritative and consistent guidance are necessary on what is allowed in Islamic finance. New tools, such as digital assets and other emerging financial tools are expanding how markets work and raise questions that require careful Shariah assessment. To stay ahead, BNM is focusing on Shariah research and talent development as key elements of a futureproof ecosystem.

In July 2025, BNM released a Working Paper on ‘Fundamentals of Money and its Application to Central Bank Digital Currency (CBDC): An Exploratory Shariah Analysis’. The paper sets out the foundational understanding of what money is and how it works in modern economic systems. It offers a framework to guide Shariah deliberation on new financial innovations, including digital assets, stablecoins and CBDCs.^[9] This analytical groundwork also paved the way for broader regional engagement on emerging monetary issues (refer to Thrust 3).

A futureproof ecosystem also means to have strong pool of Shariah talent. In October 2025, BNM convened a roundtable that brought together internationally prominent Shariah scholars and experts^[10] to exchange views on key Shariah issues. This includes using Shariah contracts beyond tawarruq and the role of Shariah advisors in shaping the industry. The session helped build stronger relationships and encouraged mentorship, supporting the development of Shariah talent ecosystem.

Broadening Islamic financial literacy outreach

Financial literacy helps customers understand the features and values of Islamic finance. It also helps boost public confidence by understanding how Shariah principles and governance protect integrity of the system. For the first time this year, we included Islamic Financial Literacy (IFL) programme in the Karnival Celik Kewangan^[11] in Pulau Pinang. Through the IFL forum and the Shariah Clinic,^[12] consumers received practical guidance on Islamic finance and basic wealth management. This support helps them take part in the system more confidently and responsibly.

Thrust 3: Positioning Malaysia as global thought leader

We continue efforts to position Malaysia as a global thought leader in Islamic finance. This builds on a solid ecosystem and steady market progress. Our priorities for 2025 include strengthening business linkages, promoting mutual Shariah recognition, accelerating innovation and building global capabilities (Diagram 6). Through these efforts, Malaysia aims to build a more connected and progressive global Islamic finance ecosystem.

Strengthening industry stewardship

The regulators including BNM have played a key role in the early development phase of Islamic finance in Malaysia. As the industry now being more mature, it is time for them to drive key agendas for the Malaysia International Islamic Financial Centre (MIFC). To support this, industry players formed the MIFC Business Network (MBN) in October 2025. It serves as a sector-wide coordination platform for players in the banking, takaful, capital market and ancillary services. The MBN can better coordinate efforts to draw interest on Malaysia’s Islamic finance business opportunities, positioning Malaysia as an international gateway. It also supports efforts to develop and nurture the industry into regional or global players. MBN builds on the foundation laid by the MIFC Leadership Council (MLC) where 18 identified Impact Projects^[13] have already catalysed early progress toward these outcomes (Diagram 7).

Driving value-based innovation

Malaysia partners with global counterparts to drive innovation that addresses social and sustainability needs. With the theme of ‘Accelerating Innovation Empowering Change,’ BNM and the MLC worked with global^[14] and domestic^[15] partners for the MIFC Global Impact Challenge (MIFC GIC). Through this challenge, participants developed Shariah-compliant solutions targeting social and sustainability issues. The four winning ideas covered social welfare, estate planning, agritech and digital platforms. These solutions enhance transparency, improve efficiency and empower communities. The MLC and MIFC GIC partners provided support and guidance to winners, over a 12-month period, on how to scale up their solutions for wider adoption. This collaboration showcases Malaysia’s role in encouraging practical, value-based innovation that can benefit the wider Islamic finance community globally.

Promoting greater cross-jurisdictional Shariah advocacy

We value diversity in Shariah views as robust discourse allows for clearer guidance and stronger industry practice. In this context, the Centralised Shariah Authorities Forum (CSAF) continues to serve as a key platform to strengthen global collaboration in Shariah matters. By hosting and steering CSAF, Malaysia brings together leading Shariah authorities to share insights, address emerging issues and enhance collective understanding. The 6th CSAF, held in October 2025, marked another important milestone where the CSAF Terms of Reference (ToR) was finalised. This further strengthened the governance framework and coordination among member countries. It also fostered deeper mutual respect among Shariah authorities.^[16] Discussion areas include thematic and jurisdictional Shariah developments such as takaful practices and modern money.

Building on this momentum, further discussion continued at the Muzakarah Cendekiawan Syariah Nusantara 2025 in Bangkok. These sessions broadened understanding of digital asset development and supported deeper cross-jurisdictional Shariah discussions. They also strengthened our role in shaping global Shariah perspectives on emerging financial innovations.

Strengthening capacity building

Learning from one another is crucial to know what works well and what to avoid. In 2025, we supported 17 jurisdictions^[17] by sharing Malaysia’s experience through technical consultations and strategic dialogues. We also hosted the inaugural Islamic Finance Capacity Building Programme (IFCBP).^[18] The programme offered practical guidance on building dual financial systems in Central Asia countries^[19] and Azerbaijan. It covered key areas on regulatory and supervisory frameworks, and liquidity management. The positive feedback we received reaffirms Malaysia’s role as a reference point for jurisdictions when developing their Islamic finance ecosystems. It also allows us to expand and tailor the programme for other regions.

Going Forward

Looking ahead to 2026, our priorities are to strengthen value-based intermediation capabilities including in sustainability and climate agenda, foster an enabling environment for impactful innovation, and catalyse economic potential through the halal economy and global opportunities. Guided by strategic stewardship and collaboration, BNM remains committed to advancing Malaysia’s Islamic financial ecosystem. This ensures its progressive evolution delivers lasting benefits for all.

Notes

^[1] The five main objectives of Shariah (maqasid Shariah) consist of the preservation of religion, life, intellect, lineage and wealth (property).

^[2] VBI-aligned initiatives refer to deposits and investment accounts, financing, investment and social finance activities. For financing portion, this refers to the approved amount of financing by banks that are VBI-aligned.

^[3] Further information at (https://www.bnm.gov.my/sme-financing/ghb).

^[4] Further information in Budget 2025 Speech (paragraph 154) at (https://belanjawan.mof.gov.my/pdf/belanjawan2025/ucapan/ub25-en.pdf).

^[5] Further details on iTEKAD can be found in the chapter ‘Promoting a Progressive and Inclusive Financial System’ in BNM’s Annual Report 2025.

^[6] MYOR-i is the world’s first transaction-based Islamic benchmark rate, introduced in 2022 as alternative reference rate, alongside its conventional equivalent, the Malaysia Overnight Rate (MYOR).

^[7] BNM announced the transition roadmap in October 2025 to accelerate the financial industry’s adoption of MYOR/MYOR-i, following the cessation of KLIBOR by 1 January 2029. Further information is in the chapter ‘Promoting a Progressive and Inclusive Financial System’ in BNM’s Annual Report 2025, (https://financialmarkets.bnm.gov.my/transition-roadmap) and BNM’s Financial Stability Review for First Half 2024 box article titled ‘Transition from KLIBOR to MYOR/MYOR-i’.

^[8] The enhanced Sell Buy Back Agreement (SBBA) and the Tahawwut Master Agreement (TMA) signed during the Islamic Financial Market Sub-Committee (IFMC) roundtable. Further information is available at (https://www.bnm.gov.my/documents/20124/11285645/ifmc-2025-milestones-trends.pdf).

^[9] Further information at (https://www.bnm.gov.my/documents/20124/826852/ahmad-et-al-2025-wp325.pdf).

^[10] Shariah experts are developing and established Shariah professionals who are progressively building expertise, exposure, and practical experience in Islamic finance. They display potential as the next generation of Shariah scholars in Islamic finance.

^[11] Karnival Celik Kewangan is an initiative by the Financial Education Network (FEN), aimed to enhance financial literacy among Malaysians through engaging and interactive approaches. Further details can be found in the chapter ‘Engaging Malaysians’ in BNM’s Annual Report 2025.

^[12] The forum refers to a panel discussion entitled ‘Berkat Rezeki, Tenang Jiwa – Memahami Kebimbangan Pengurusan Kewangan dari Perspektif Islam’ which explores how Islamic principles guide financial decisions-making. Shariah Clinic provides a consultation booth offering on-the-spot guidance on Shariah and Islamic finance matters.

^[13] The Impact Projects as outlined in MLC Position Paper 2024 aim to drive collective actions and shifts by the industry to foster positive societal change through Islamic finance. Further information at (https://mifclc.com/main/wp-content/uploads/2024/05/MIFC_Positioning_-Paper.pdf).

^[14] Islamic Finance Council UK, Hong Kong Trade Development Council, Islamic Development Bank, and the World Bank Group Inclusive Growth and Sustainable Finance Hub in Malaysia.

^[15] ASBhive by the Asia School of Business acted as the knowledge partner and accelerator programme provider. Other partners are Fintech Association of Malaysia, Association of Shariah Advisors in Islamic Finance and Islamic Finance News.

^[16] Include delegates from ten jurisdictions including Malaysia (Libya, Maldives, Morocco, Nigeria, Oman, Pakistan, the Philippines, United Arab Emirates and Uzbekistan (as observer)).

^[17] Including Azerbaijan, Benin, Cambodia, Djibouti, Hong Kong, Indonesia, Kazakhstan, Kenya, Kyrgyz Republic, the Philippines, Somalia, Tajikistan, Türkiye, Turkmenistan, the United Kingdom, Uzbekistan and Zambia.

^[18] The IFCBP was organised in collaboration with Islamic Development Bank, INCEIF University, and International Shariah Research Academy for Islamic Finance (ISRA).

^[19] Such as Kazakhstan, Kyrgyz Republic, Tajikistan, Turkmenistan and Uzbekistan.