Public Disclosure Authorized

FINANCE, COMPETITIVENESS
AND INNOVATION

OCTOBER 2022 THE MALAYSIA DEVELOPMENT EXPERIENCE SERIES

Public Disclosure Authorized

Islamic Finance
and the Development of
Public Disclosure Authorized

Malaysia’s Halal Economy

Public Disclosure Authorized
OCTOBER 2022 THE MALAYSIA DEVELOPMENT EXPERIENCE SERIES

Islamic Finance
and the Development of
Malaysia’s Halal Economy

FINANCE, COMPETITIVENESS
AND INNOVATION
Disclaimer
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 Acknowledgements
This report on “Islamic Finance and the Development of Malaysia’s Halal Economy”
was prepared by a World Bank team consisting of Abayomi A. Alawode (task team
leader), Aamir A. Rehman, Ahmad Hafiz Bin Abdul Aziz, Roselee Shah Shaharudin,
and Shahira Zaireen Binti Johan Arief Jothi. Comments were provided by Rekha
Reddy, Smita Kuriakose, Kristina Siew Leng Fong, and Kok Onn Ting. Other
colleagues, including Mohamed Rozani bin Mohamed Osman and Tatiana Didier,
provided valuable inputs. The team worked under the overall guidance of Hassan
Zaman, Cecile Thioro Niang, and Yasuhiko Matsuda. The peer reviewers were
Volkan Celen, Yavar Moini, Abdullah Haroon and Simon Thorburn Gray. Joshua
Foong and Daniel Subramaniam provided excellent editorial assistance.

The report benefitted from a close partnership and extensive discussion with
Bank Negara Malaysia (BNM) staff, Malaysia International Islamic Financial
Centre, Securities Commission Malaysia, Halal Development Corporation,
Jabatan Kemajuan Islam Malaysia, and Malaysia Digital Economy Corporation. In
particular, the team would like to thank the technical staff of BNM, particularly
Hamim Syahrum Ahmad Mokhtar, Lim Qian Pink, Anas Afifi Zulkefli, and Faqrul
Fithri Mohd Nasrudin of the Islamic Finance Department, for providing useful
guidance, data, and input, coordinating meetings with several departments in
BNM and with selected financial institutions. The team would also like to express
its gratitude to the Ministry of International Trade and Industry, the Malaysian
Investment Development Authority, and halal industry players whose participation
in a constructive dialogue also informed the analysis.

In support of

Islamic Finance and the Development of Malaysia’s Halal Economy 5

Table of Contents
Acknowledgements.................................................................................................................................5
List of Figures..........................................................................................................................................8
List of Tables............................................................................................................................................9
Acronyms...............................................................................................................................................10
Glossary.................................................................................................................................................12
Executive Summary................................................................................................................................14

CHAPTER 1:
Current State of the Halal Economy ........................................................................................................... 22
1.1 What is the Halal Economy? ............................................................................................................ 23
1.2 Key Drivers of Growth in Global Halal Markets............................................................................... 24
1.3 Malaysia’s Position in the Global Halal Economy............................................................................. 26
1.4 Malaysian Halal Regulatory Framework........................................................................................... 29
1.5 Conclusion........................................................................................................................................ 31

CHAPTER 2:
Financing Malaysia’s Halal Economy ........................................................................................................... 32
2.1 Modes of Islamic Financing for Halal Enterprises............................................................................ 33
2.1.1 Introduction............................................................................................................................. 33
2.1.2 Financing Through Islamic Banks............................................................................................ 34
2.1.3 Financing Through Islamic Non-Bank Financial Institutions (NBFIs) and Capital Markets............ 39
2.1.4 Financing from Malaysian Institutional Investors.................................................................... 42
2.1.5 Other Institutional Support..................................................................................................... 43
2.1.6 Cross-Border Investments in the Halal Economy.................................................................... 44

Special Topic: Financing the Halal Food Industry in Malaysia .................................................................. 46

2.2 Introduction...................................................................................................................................... 46
2.3 Islamic Banking ................................................................................................................................ 46
2.4 Islamic Capital Markets (ICM)........................................................................................................... 47
2.5 Alternative Finance .......................................................................................................................... 48
2.6 Islamic Social Finance....................................................................................................................... 50

6 Islamic Finance and the Development of Malaysia’s Halal Economy

CHAPTER 3:
Enhancing Role of Islamic Finance for the Halal Economy in Malaysia .................................................... 52
3.1 Introduction...................................................................................................................................... 53
3.2 Demand-side Factors........................................................................................................................ 53
3.2.1 Halal Industrial Parks............................................................................................................... 53
3.2.2 Innovation and Research and Development (R&D)................................................................. 57
3.2.3 Talent Development................................................................................................................ 59
3.2.4 Digitalization............................................................................................................................ 60
3.2.5 E-commerce............................................................................................................................. 63
3.2.6 Global Value Chain and Sustainability..................................................................................... 64
3.3 Supply-side Factors.......................................................................................................................... 66
3.3.1 Digital Payments...................................................................................................................... 66
3.3.2 Islamic Fintech......................................................................................................................... 68
3.3.3 Blended Finance and Alternative Finance............................................................................... 68
3.3.4 Integrated Halal Advisory and Marketplace........................................................................... 70
3.3.5 Enhancing Current Islamic Finance Offerings......................................................................... 71

CHAPTER 4:
Conclusions and Recommendations for Stakeholders................................................................................ 72

Appendix: Case Studies ........................................................................................................................77

References ............................................................................................................................................79

Islamic Finance and the Development of Malaysia’s Halal Economy 7

List of Figures
Figure 1.1 Global Halal Sectors 23
Figure 1.2 Regional Distribution of Muslims 24
Figure 1.3 Global Islamic Economy Indicator 26
Figure 1.4 Malaysian Halal Food Services Industry 27
Figure 1.5 Malaysian Halal Pharmaceutical Industry 28
Figure 1.6 Malaysia’s Certified Halal Exports (RM Million) 28
Figure 1.7 Malaysia’s Top 5 Certified Halal Export Destinations (RM Million) 28
Figure 1.8 Malaysia: Trade in Halal Food-related Products (US$ Million) 29
Figure 2.1 Increased adoption of Islamic financing in the banking sector by halal certified companies 37
Figure 2.2 Islamic vs. conventional bank finance in the banking sector 38
(by outstanding funding volume) by halal certified companies by size, 2021
Figure 2.3 Islamic vs. conventional bank finance (by outstanding amount) 38
by halal economy sector, 2021
Figure 2.4 Simplified Halal Supply Chain 46
Figure 2.5 Market Capitalization for Food-related Sector By Size: Shari’ah vs. Non-Shari’ah. 47
As of December 31, 2021
Figure 2.6 Total Market Capitalization for Food-related Sector: Shari’ah vs. Non-Shari’ah (RM Billion). 47
As of December 31, 2021
Figure 2.7 Equity Crowdfunding Activities in Malaysia (end-September 2021) 48
Figure 2.8 Peer to Peer Lending Activities in Malaysia (end-September 2021) 49
Figure 2.9 Simplified Waqf for Agriculture and Food Security 50
Figure 2.10 Raising Capital through sukuk issuance for the development of waqf assets 51
Figure 3.1 Location of 14 HALMAS industrial parks 54
Figure 3.2 Sustainable Development Goals (SDGs) applicable to EIPs 56
Figure 3.3 Circular economy principles in industrial parks 57
Figure 3.4 R&D indicators (2018) 58
Figure 3.5 Research orientation - R&D Expenditure RM Millions (2016) 58
Figure 3.6 Winners of the Brand Laurette Halal Most Valuable Brand Award 2021 59
Figure 3.7 Reasons for not investing in digital solutions, percentage (Oct 2020 and Jan-Feb 2021) 61
Figure 3.8 Most useful business function for digitalization and government support 61
(Oct 2020 and Jan-FEB 2021)
Figure 3.9 Selected Sectors: Growth in Global Digital Commerce 62
Figure 3.10 ASEAN: Services Most Used by New Digital Customer, 2020 62
Figure 3.11 Breakdown of digital consumers in ASEAN countries 63
Figure 3.12 Merchant sentiment on benefits of operating online 63
Figure 3.13 Range of services provided under the Halal Integrated Platform 70

8 Islamic Finance and the Development of Malaysia’s Halal Economy

List of Tables
Table 2.1 Products and Services Offered by Malaysian IFIs to Business Customers 35
Table 2.2 Role of NBFIs in Financing and Supporting Business 39
Table 2.3 Islamic Capital Markets Products in Malaysia 41
Table 3.1 Tax incentives and grants for halal development in Malaysia 54
Table 3.2 List of research centers at Malaysian universities and services provided 58

Islamic Finance and the Development of Malaysia’s Halal Economy 9

Acronyms
ADB Asian Development Bank
ASEAN Association of Southeast Asian Nations
BPS Business Pulse Survey
BNM Bank Negara Malaysia
BRTT Business Reducing Term Takaful
BPJPH Badan Penyelenggara Jaminan Produk Halal
BPMB Bank Pembangunan Malaysia Berhad
CAPEX Capital Expense
CAGR Cumulative average growth rate
CCM Cooperative Commission of Malaysia (SKM)
DDI Domestic Direct Investment
DLT Distributed Ledger Technology
DOSM Department of Statistics Malaysia
DRMSB Damansara REIT Managers Sdn Berhad
ECF Equity crowdfunding
EIP Eco-industrial park
EPF Employees Provident Fund
EPU Economic Planning Unit
ESG Environmental, Social, Governance
FDI Foreign Direct Investment
FHCB Foreign Halal Certification Body
Fintech Financial Technology
F&B Food and beverage
FSBP Financial Sector Blueprint 2022-2026
GDP Gross Domestic Products
GHG Greenhouse Gas
GII Global Innovation Index
GIEI Global Islamic Economy Index
GMV Gross Merchandise Value
GVC Global Value Chain
HACCP Hazard Analysis Critical Control Point
HALMAS Halal Malaysia
HDC Halal Development Corporation Berhad
HE Halal Economy
HTPP Halal Technology Transformation Program
HIMP 2030 Halal Industry Master Plan 2030
HIP Halal Integrated Platform
HLO Halal Logistics Operator
HOPE Halal Outreach Program for Entrepreneurs
ICD Islamic Corporation for the Development of the Private Sector
ICM Islamic Capital Market
IFDI Islamic Finance Development Indicator
IFI Islamic Financial Institution

10 Islamic Finance and the Development of Malaysia’s Halal Economy

 IFSB Islamic Financial Services Board
INCEIF International Centre for Education in Islamic Finance
ISRA International Shariah Research Academy for Islamic Finance
JAKIM Jabatan Kemajuan Islam Malaysia
KWAP Kumpulan Wang Persaraan (Retirement Fund)
LDC Least-developed Countries
MAFI Ministry of Food and Industries
MASSIVE Market Access Incentive
MATRADE Malaysia External Trade Development Corporation
MDEC Malaysia Digital Economy Corporation
MEDAC Ministry of Entrepreneur Development and Cooperative
MENA Middle East and North Africa
MHC Malaysia Halal Certification
MIDA Malaysian Investment Development Authority
MIHAS Malaysia International Halal Showcase
MNC Multinational Corporation
MQA Malaysian Qualification Agency
NBFI Non-bank Financial Institution
NGO Non-government organizations
NIA National Investment Aspiration
OIC Organization of Islamic Cooperation
PE Private equity
PENJANA Pelan Jana Semula Ekonomi Negara
PNB Permodalan Nasional Berhad
PRInce International Product Registration Incentive
PuTRA Product Transformation Program
P2P Peer-to-peer lending
REIT Real Estate Investment Trust
R&D Research and development
SC Securities Commission Malaysia
SDGs Sustainable Development Goals
SESRIC Statistical, Economic and Social Research and Training Center for Islamic Countries
SIRCs State Islamic Religious Councils
SME Small Medium Enterprise
SMIIC Standards and Metrology Institute for Islamic Countries
SSFS Shariah Compliance SME Financing Scheme
TDA Trade Descriptions Act 2011
12MP Twelfth Malaysia Plan 2021-2025
UNIDO United Nations Industrial Development Organization
VC Venture Capital
VBI Value-based Intermediation
WEF World Economic Forum
WIEF World Islamic Economic Forum
WTO World Trade Organization

Islamic Finance and the Development of Malaysia’s Halal Economy 11

Glossary

GLOSSARY OF ISLAMIC FINANCE TERMS

Principles of Islamic Finance
Prohibition of interest (Riba): The premium (interest) that the borrower must pay to the lender
along with the principal amount as a condition for the loan or an extension.
(i) Riba al-Fadl: Riba in hand-to-hand or barter exchange.
(ii) Riba al-NasiNas: Riba in money-to-money exchange provided exchange is delayed or
deferred, and an additional charge is associated with such deferment.
Prohibition of speculative behavior (Gharar): Uncertainty in contractual terms and conditions is
forbidden. However, risk-taking is allowed when all the terms and conditions are clear and
known to all parties.

Ban on financing certain economic sectors: Financing industries deemed unlawful by Sharia—
such as liquor, pork, and gambling—is forbidden.

The profit- and loss-sharing principle: Parties to a financial transaction must share in the risks and
rewards attached to it.

The asset-backing principle: Each financial transaction must refer to a shari’ah-compliant tangible
assets (like real estate) and/or intangible assets like usufruct (e.g., leasehold rights) or services
(e.g., toll road concessions);

Takaful (Islamic Social Solidarity Scheme): A mutual guarantee in return for the commitment
to donate an amount in the form of a specified contribution to the participants’ risk fund,
whereby a group of participants agrees among themselves to support one another jointly for
the losses arising from specified risks.

Retakaful: A form of Islamic reinsurance that operates on the Takaful model.

Kafalah: A contract of guarantee used to provide assurance as to performance or liabilities.

Wakala (Agency): An agency contract where the customer (principal) appoints an institution as
agent to carry out the business on his behalf. The contract can be for a fee or without a fee.

Murabah.ah: A sale contract whereby the institution sells to a customer a specified asset,
whereby the selling price is the sum of the cost price and an agreed profit margin. The murabah. ah
contract can be preceded by a promise to purchase from the customer.

Commodity Murabah.ah or Tawarruq: A murabah. ah transaction based on the purchase of a

commodity from a seller or a broker and its resale to the customer on the basis of deferred
murabah.ah, followed by the sale of the commodity by the customer for a spot price to a third
party for the purpose of obtaining liquidity, provided that there are no links between the two
contracts.

Ijarah: A contract made to lease the usufruct of a specified asset for an agreed period against
a specified rental. It could be preceded by a unilateral binding promise from one of the
contracting parties. An ijarah contract is binding on both contracting parties.

12 Islamic Finance and the Development of Malaysia’s Halal Economy

 Glossary

Musharakah: Equity participation contract. Different parties contribute capital, and profits are
shared according to a pre-determined ratio, not necessarily in relation to contributions, but
losses are shared in proportion to capital contributions. The equity partners share and control
how the investment is managed, and each partner is liable for the actions of the others.

Mudarabah: A partnership contract between the capital provider (rabb al-mal) and entrepreneur
(mudarib) whereby the capital provider would contribute capital to an enterprise or activity
that is to be managed by the entrepreneur. Profits generated by that enterprise or activity
are shared in accordance with the percentage specified in the contract, while losses are to be
borne solely by the capital provider unless the losses are due to misconduct, negligence or
breach of contracted terms.

Salam: The sale of a specified commodity that is of a known type, quantity and attributes for
a known price paid at the time of signing the contract for its delivery in the future in one or
several batches.

Istisna’: The sale of a specified asset, with an obligation on the part of the seller to manufacture/
construct it using his own materials and to deliver it on a specific date in return for a specific
price to be paid in on lump sum or instalments.

Vocabulary of Islamic Finance

Halal: Allowed and permitted by Islamic law.

Tayyib: Wholesome, pure, healthy and safe.

Sukuk (certificates of ownership): Certificates that represent a proportional undivided ownership

right in tangible assets, or a pool of tangible assets and other types of assets. These assets
could be in a specific project or specific investment activity that is shari’ah-compliant.

Waqf: A waqf is a trust established when the contributor endows the stream of income accruing
to a property for a charitable purpose in perpetuity.

Sadaqah: Recommended contributions.

Qard hassan: Benevolent loan free of any charge.

Zakat: An obligatory financial contribution disbursed to specified recipients that is prescribed

by the shari’ah on those who possesses wealth reaching a minimum amount that is maintained
in their possession for one lunar year.

Islamic Finance and the Development of Malaysia’s Halal Economy 13

Executive Summary

Executive
Summary

14 Islamic Finance and the Development of Malaysia’s Halal Economy

 Executive Summary

Overview
The halal economy (HE) plays an important role in Malaysia’s economic growth, contributing 7.5
percent to the Gross Domestic Product (GDP) as of 2020. Under the Twelfth Malaysia Plan, 2021-2025
(12MP), one of the key strategies to boost Malaysia’s economic growth is enhancing the competitiveness
of the halal industry to capture a more significant share of the global halal market. The term halal refers to
anything that is permissible or lawful under Islamic Law that dictates the way of life of a Muslim (a follower
of the Islamic faith). Hence, the scope of the HE is broad and can be defined as an industry that is involved
in the provision of halal products and services, including food, clothing and fashion, cosmetics and personal
care, travel, and financial services. Consequently, Islamic finance is both parts of the broader HE (Hassan et
al., 2021) and can facilitate the development of the HE.

This report requested by Bank Negara Malaysia (BNM) explores the role of Islamic finance in supporting
the development of Malaysia’s HE with the objective of informing policy discourse on enhancing existing
strategies to increase access to Islamic finance solutions to underserved HE enterprises. The report
comprises the following chapters, (1) the current state of the HE; (2) the financing ecosystem of Malaysia’s
HE, (3) enhancing role of Islamic finance for the HE in Malaysia; and concludes in Chapter 4 with a set of
recommendations for stakeholders in Malaysia. While the recommendations focus on Malaysia, they may
also be relevant for other developing economies where the HE and Islamic finance are prominent.

State of the Global HE

The HE has expanded in recent years and forms a unique segment of the global supply chain driven
by faith-based demand. Most Muslims prefer certified halal foods and products as a religious obligation,
while non-Muslim consumers cite hygiene, sanitation, quality, and safety as the main reasons for purchasing
halal products (Rusydiana and As-Salafiyah, 2020). The State of Global Islamic Economy Report (GIER) 2022
estimates that the world’s 1.9 billion Muslims spent the equivalent of US$2 trillion in 2021 across the halal
food, pharmaceutical, cosmetics, fashion, travel, and media/ recreation sectors. Despite the continued
uncertainty related to the pandemic, this spending reflects an 8.9 percent year-on-year growth from 2020.
It is forecast to grow by a further 9.1 percent in 2022 (excluding the Islamic finance sector) (DinarStandard,
2022). The growing Muslim population worldwide therefore presents an opportunity for significant growth
in the demand for halal products and services.
The consumption patterns of young people and increased digital connectivity are key drivers of
future domestic and cross-border trade in the HE. According to 2020 United Nations (UN) estimates,
Organization of Islamic Cooperation (OIC) member states are home to 338.3 million youth, or 28 percent
of the world’s total youth population, which is projected to grow to 30.7 percent by 2030 (SESRIC, 2020).
Many Muslim-majority countries from the Middle East and North Africa (MENA) and South-East Asia regions
had a higher internet penetration in 2020 than the global average of 59 percent. Indonesia, Malaysia, and
Saudi Arabia are OIC countries with the highest global e-commerce and m-commerce adoption, above the
worldwide average of 76.8 percent and 55.4 percent, respectively (DinarStandard, 2021b). This millennial
youth is the most globally connected generation and tends to have higher purchasing power and can afford
a diverse range of halal goods and services (Charoenchang, 2019).
Several OIC economies have strengthened certification frameworks for scrutinizing the halal integrity
of products imported into their countries. In many OIC countries, designated national bodies, such as the
United Arab Emirate’s Emirates Authority for Standardization and Metrology, Saudi Arabia’s Saudi Food and
Drug Authority, Indonesia’s Badan Penyelenggara Jaminan Produk Halal, and Malaysia’s Jabatan Kemajuan
Islam Malaysia (JAKIM), monitor and provide halal certification and accreditation to foreign halal certification
bodies. In addition, several Muslim-majority countries are working on legal frameworks that will define halal
and regulate the halal integrity of imported products. These efforts are useful in promoting greater general
awareness of halal and strengthening the regulations for cross-border trade.

Islamic Finance and the Development of Malaysia’s Halal Economy 15

Executive Summary

State of the HE in Malaysia

Malaysia currently leads the overall Global Islamic Economic Indicator (GIEI) rankings with respect
to the size of the HE (GIER 2022), particularly for Islamic finance, halal food, Muslim-friendly
travel, and media and recreation sectors. The largest component of the HE in Malaysia is the food
services sector, with business revenue in the sector estimated at US$31 billion (RM128.8 billion) in 2021
and is forecast to reach US$47.6 billion (RM201.02 billion) by 2025. Halal pharmaceuticals are also growing,
with business revenues of US$4.0 billion in 2021 and are expected to grow to US$4.8 billion by 2025.
Malaysia is regarded globally as a leader in halal pharmaceuticals due to establishing the world’s first halal
pharmaceutical standard.

Malaysia's halal certification is globally recognized and is considered a valuable and credible resource
providing a significant competitive advantage for Malaysian firms in the international arena (Dubé
et al., 2016). The stamp of authenticity on halal products helps to reduce information asymmetries, avoids
“halal washing,” and builds trust, especially in international trade.

The HE contributes significantly to Malaysia’s GDP but lacks the capacity to produce high-value-
added products and services that can increase its competitiveness in the global HE market (Economic
Planning Unit, 2021). Malaysia's halal industry is largely concentrated in the halal food-related sector, with
28.9 percent of Malaysia’s halal export value in 2020 attributed to halal ingredients. It lacks diversification
in other high-productivity sectors such as pharmaceuticals and medical devices. According to the Halal
Development Corporation (HDC), there is a lack of product creation and innovation by Malaysia’s HE
players.1 Most certified halal businesses in Malaysia are micro, small, and medium enterprises (MSMEs).2
These businesses generally focus on a small local market and lack the capacity to develop their products
for the export market.

Islamic Finance and the HE

Malaysia’s highly developed Islamic finance industry providers offer a diverse range of financial
products and services and have been recognized as one of the five key enablers for implementing the
strategies outlined in Malaysia’s Halal Industry Master Plan (HIMP) 2030. The estimated percentage of halal-
certified companies using Islamic bank financing nearly doubled between 2018 and 2021, growing from
21.9 percent to 41.3 percent. As of September 2021, outstanding Islamic financing in the banking sector to
HE enterprises exceeded US$ 5 billion comprised of food and beverage (F&B) enterprises (US$ 4 billion),
followed by manufacturing (US$ 718 million), food premises (US$ 239 million) and pharmaceuticals (US$
109 million).3 From the capital market side, an estimated 20 percent of Malaysia’s Islamic capital market
(ICM) securities are issued by HE enterprises as at end 2021. The growth in Islamic finance usage by the HE
enterprises could be attributed to the targeted awareness and capacity building initiatives driven by Bank
Negara Malaysia (BNM) in collaboration with key agencies such as HDC and JAKIM through the years.

1 Halal Knowledge Centre, (n.d.). Impact Study and Profiling 2016 – 2020, Halal in Malaysia, from global perspective. Retrieved Feb.
11, 2022 from https://hkc.hdcglobal.com/infographic-report/list
2 According to news reports, 7,204 companies received halal certification from JAKIM in 2019 (Selangor Journal, 2019) and in 2021
the number of halal-certified SMEs were reported to be 7,000 (Jalil, 2021). However, these numbers represent the lower bound
since not all halal-related companies would have obtained halal certification.
3 Lim Qian Pink, Anas Afifi Zulkefli and Faqrul Fithri Mohd Nasrudin, Bank Negara Malaysia (BNM). Data and analysis provided for
this report. The statistics is an outcome of data matching of companies registered with the Companies Commission of Malaysia
and certified halal by JAKIM with credit data from the Central Credit Reference Information System (CCRIS). The statistics
represent a lower bound of the estimate of the population of financing to the HE.

16 Islamic Finance and the Development of Malaysia’s Halal Economy

 Executive Summary

Islamic versus conventional bank finance (by outstanding amount) by halal economy sector, 2021 4

Islamic Conventional

Pharmaceutical 70% 30%

Slaughterhouse 28% 72%
Logistics 19% 81%
Halal Sector

Cosmetics 8% 92%
Used Goods 8% 92%
Food Premises 13% 87%
Manufacturing/OEM 24% 76%
Food Products/Beverages/Supplements 34% 66%
Total Financing/Loan Amount

Usage of Islamic financing offered by the banking sector for the HE varies greatly by sector and is
more utilized by smaller halal certified businesses. According to data provided by BNM, more than two-
thirds of outstanding bank financing to the HE sectors (except pharmaceutical) is conventional. On the other
hand, non-SME businesses that are halal-certified predominantly used conventional finance, with only 25
percent of outstanding bank finance to them was Islamic.5 In contrast, nearly two-thirds (65 percent) of the
outstanding bank funding to halal-certified micro enterprises was Islamic as of September 2021, highlighting
the role of Islamic finance in serving underserved segments.

Malaysia has captured a large share of global HE cross-border investments. Of 156 cross-border
transactions in 2019-20, estimated at US$11.8 billion recorded in the GIER 2021 (DinarStandard, 2021b),
31 were in Malaysia. This corresponds to 20 percent of the total number of transactions. Only Indonesia
(with 38 inbound transactions) had more reported cross-border HE investments. The largest number of
transactions was in the halal food sector (16), followed by media and entertainment (10), Muslim-friendly
travel (3), halal pharmaceuticals (1), and unspecified (1).

HE enterprises face requirements and challenges beyond those confronting their conventional peers,
such as the need to obtain halal certification of their products, inspection requirements, and serving
more fragmented and dispersed customer markets. These factors can impact the start-up, production,
distribution, and marketing costs borne by HE firms. They can also introduce unique barriers to entry that
may be daunting to smaller enterprises.

4 Lim Qian Pink, Anas Afifi Zulkefli and Faqrul Fithri Mohd Nasrudin, Bank Negara Malaysia. Data and analysis provided for this
report.
5 Large companies, particularly foreign multinational companies (MNCs) that are involved in Malaysia’s HE could have a higher
proportion of their banking transactions conducted through the conventional parent bank.

Islamic Finance and the Development of Malaysia’s Halal Economy 17

Executive Summary

Enhancing Role of Islamic Finance for HE

Development
Recommendations provided on enhancing the use of Islamic finance to develop the HE will entail
public and private sector interventions on both the demand and supply-sides. Based on engagement
with HDC, businesses involved in the HE, particularly MSMEs, face a combination of access to finance
and business-related challenges, which directly impact their financial viability. Therefore, it is important to
consider the supply-side elements of the financing gap, such as provision of relevant financing instruments,
and to address demand-side elements by supporting the development of halal businesses, who are in effect
all potential Islamic finance users, become more financially viable and resilient.

While the contribution of Islamic finance, especially the Islamic banking sector, has increased,
further actions can be taken to facilitate funding and the overall growth of HE. Malaysia’s Islamic
finance industry currently offers a diverse set of products and services to meet the financing needs of
businesses. However, linking Islamic finance more closely with Malaysia’s existing HE development
programs can be a major opportunity for expanding the utilization of Islamic finance. Growing the HE in
Malaysia requires financing and investment in digitalization, innovation, research and development (R&D),
and sustainable practices to enhance productivity and global competitiveness. The role of Islamic finance in
the development of the HE in Malaysia could be enhanced further by increasing support for the adoption of
digital payments, integrating halal advisory and marketplace, and enhancing current Islamic finance offerings
through innovative Islamic finance solutions such as fintech, blended finance, alternative finance, and Islamic
social finance. The following table presents a set of recommendations to serve as inputs to key stakeholders
in enhancing existing strategies involving the role of Islamic finance in Malaysia’s HE development.

Summary of Recommendations for Stakeholders

Recommendation Description Stakeholders
1. Enhance policy and Various public and private sector initiatives could be Government
strategy coordination streamlined to optimize the impact of such programs. agencies, financial
across different regulators, Islamic
policy makers and • HDC’s Halal Integrated Platform (HIP), an online one-stop finance providers, and
Islamic finance center for halal business support, could be leveraged as a SMEs.
providers to increase central virtual platform that connects relevant government
the impact of agencies and Islamic finance providers. In addition,
programs. financial regulators may advocate for Islamic finance
providers to participate in HIP and connect their existing
halal systems with the HIP.

• Linking programs related to financing, such as SME

financing and export financing, more closely with halal
agencies – HDC, MEDAC, JAKIM, and industry events
– WIEF and MIHAS, can provide more comprehensive
support to HE enterprises.

• HDC may implement strategies to encourage halal

labeling of merchants using services provided by
e-commerce and related technology companies.

18 Islamic Finance and the Development of Malaysia’s Halal Economy

 Executive Summary

2. Establish closer Closer engagement with the private sector in public Government
linkages between programs for innovation and technology adoption could agencies, Islamic
programs that develop an effective pathway to graduate HE enterprises finance providers,
support innovation from public funding to private funding. SMEs, and research
and productivity centers.
improvements with • HDC, in collaboration with other relevant government
Islamic finance. agencies such as MDEC, could provide technical expertise
and technology validation, similar to the approach under
the Green Technology Financing Scheme (GTFS). The
technology validation can help encourage Islamic finance
providers to offer funding for productivity-improving
technologies to SMEs, such as AgriTech.

• Relevant government agencies, research centers, and

Islamic finance providers could collaborate in initiatives
that bring public and private actors in creating R&D and
capacity-building funds, particularly mobilizing Islamic
social finance such as waqf.

• Islamic finance providers could provide advisory services

and transition finance to transform HE enterprises and
halal parks to become more sustainable and less carbon-
intensive.

3. Encourage Islamic IFIs should explore the multitude of shari’ah contracts that Government
finance providers, offer the potential for innovative financing structures beyond agencies, financial
particularly Islamic conventional debt-based financing. regulators and,
banks to participate Islamic finance
in public-private • Equity-based financing, especially for SMEs and funding providers, SMEs.
sector collaborations growth stages, could address funding gaps not currently
to pilot innovative met by Islamic finance providers. In addition, a public-
Islamic finance private sector collaboration could help manage risks
solutions and scaling and incentivize Islamic finance providers and institutional
up. investors to innovate and participate in more blended
finance programs.

• Government funding programs could be amplified by

collaborating with Islamic banks, Islamic fintech and
related technology companies to facilitate development of
innovative solutions and pilot new funding programs.

4. Strengthening Malaysia should take a leadership role in galvanizing global Government agencies
collaboration with efforts in advancing Islamic finance for HE for the mutual and financial
policy makers in benefit of the OIC countries. regulators.
other countries to
advance utilization • HDC could play an advocacy role in collaboration with
of Islamic finance for financial regulators to further promote the utilization of
HE. Islamic finance solutions in funding HE and promoting
participation in HDC’s HIP. Partnerships with other key
countries to develop an integrated approach to promote
global HE could increase the potential market size of the
global HE in strategic sectors such as food and beverages,
halal ingredients and agriculture.

• HDC and MATRADE could further support the utilization

of Islamic trade finance and explore investment flows
between Malaysia and other countries. Collaboration with
relevant multilateral development banks (MDBs) that are
active in the OIC countries should also be pursued to
implement strategies that can advance Islamic finance and
the HE.

Islamic Finance and the Development of Malaysia’s Halal Economy 19

Executive Summary

5. Enhancing the role of There is untapped opportunity to increase Islamic finance Government
relevant institutional utilization amongst corporates and SMEs via capital market agencies, financial
investors and instruments. regulators, Islamic
expanding capital finance providers, and
market funding for • Financial regulators and Islamic capital market participants institutional investors.
the HE. could collaborate to pilot the issuance of retail bonds
for the HE and explore blockchain technology for such
issuances.

• Islamic capital market participants and relevant

government agencies could collaborate to develop
specific private equity (PE) and venture capital (VC) funds
for R&D.

• Relevant government agencies could advocate

encouraging the utilization of Islamic finance by
institutional investors to invest in mature businesses and
drive consolidation and mergers and acquisitions (M&A).

• Institutional investors and corporates could explore

investing overseas in key HE sectors, such as F&B
or agriculture, by developing investment strategies
specifically for HE sectors.

6. Enhancing data Data is an important enabler to advance finance in Government agencies

sharing on Islamic any segment, to determine the gaps and measure the and financial
finance and HE. effectiveness of strategies and initiatives. Therefore, HDC, regulators.
JAKIM, and financial regulators could enhance data sharing
between agencies to develop and report key business and
financial indicators in HE to better monitor the impact of
relevant initiatives, identify further gaps, and improve future
strategies.

20 Islamic Finance and the Development of Malaysia’s Halal Economy

 Executive Summary

Islamic Finance and the Development of Malaysia’s Halal Economy 21

Chapter 1: Current State of the Halal Economy

CHAPTER 1

Current State
of the Halal
Economy

22 Islamic Finance and the Development of Malaysia’s Halal Economy

 Chapter 1: Current State of the Halal Economy

1.1 What is the HE?

The term halal refers to anything that is permitted under Islamic Law 6 . The halal economy (HE) can
therefore be defined as an industry involved in providing halal products and services, including food,
clothing and fashion, cosmetics and personal care, travel, financial services, and so forth. Hence, Islamic
finance and halal industries are parts of the broader HE (Hassan et al., 2021).

An important aspect of the HE is the certification of products and services. The permission to put the
halal certification logo on a product conveys that a reliable authority or independent party has confirmed
that halal requirements have been met at a sufficient level (Kawata and Salman, 2020). Halal certification is
particularly essential when production processes are long and complex, such as in food chains where the
development of food technology creates new products and ingredients, and many products are traded
internationally. Moreover, composite products may be mixed or contaminated with non-shari’ah ingredients.
For example, food can be contaminated with pork which is sometimes added in the form of an emulsifier 7.
Other non-halal substances such as gelatine, enzymes, glycerine, and lecithin may also be found in processed
food. As required, laboratory analysis of specific ingredients and audits of halal production can be used to
verify certificates as part of halal assurance systems (van der Spiegel et al., 2012).

Halal also covers other important aspects of handling animals and food items during production.
Issues such as animal welfare, the ritual slaughter method, treatment and separation of halal animals,
cleaning and disinfection, separation of halal and haram food at all stages of the halal food supply chain are
key to ensuring that processed items remain compliant with shari’ah requirements.

The HE has expanded in recent years, and food is its largest sector. Most Muslims prefer certified
halal foods and products as a religious obligation, while non-Muslim consumers cite hygiene, sanitation,
quality, and safety as the main reasons for purchasing halal products (Rusydiana and As-Salafiyah, 2020).
The State of Global Islamic Economy Report (GIER) 2022 estimates that the world’s 1.9 billion Muslims
spent the equivalent of US$2 trillion in 2021 across the halal food, pharmaceutical, cosmetics, fashion,
travel, and media/ recreation sectors. This spending reflects an 8.9 percent year-on-year growth from 2020
despite the continued uncertainty related to the pandemic, and global Muslim spending on the HE sectors
is forecast to grow by a further 9.1 percent in 2022 (excluding the Islamic finance sector) as we see a return
to pre-pandemic spending levels in all sectors except travel (DinarStandard, 2022). The food sector is the
largest component of the HE, with spending on halal food by Muslims valued at US$1.27 trillion in 2021 and
projected to reach US$1.67 trillion in 2025 (DinarStandard, 2022 and SESRIC, 2021a) (Figure 1.1).

Figure 1.1: Global Halal Sectors

1800
1600
1400
1200
US$ Billion

1000
800
600
400
200
0
Food Pharmaceutical Cosmetics Fashion Travel Media/recreation

2021 est. 2022 est. 2025

Source: Global Islamic Economy Report 2022

6 The opposite of halal is haram, which means anything which is not permitted or not allowed by Islamic Law.
7 For example, pork fat can be used in bread as part of animal-based emulsifiers.

Islamic Finance and the Development of Malaysia’s Halal Economy 23

Chapter 1: Current State of the Halal Economy

1.2 Key Drivers of Growth in Global Halal Markets

The growing Muslim population presents an opportunity for expanding the demand for halal products.
The 57 member states of the Organization of Islamic Cooperation (OIC) contain approximately 1.8 billion
people with a GDP of US$7.2 trillion as of 2019, presenting a massive potential for halal markets (World Bank
Group, 2021b). Given the ongoing gradual recovery from the pandemic, it is estimated that the OIC’s GDP
will rebound to US$7.7 trillion in 2021, exceeding the 2019 level (US$ 7.2 trillion). With this economic size,
OIC member countries accounted for 8.1 percent of global GDP in 2020 (SESRIC, 2021b). Pew Research8
estimates that by 2050 the number of Muslims worldwide will grow to 2.6 billion, or 29.7 percent of the
world’s population.

There are significant numbers of Muslims across all regions of the world. 587 million live in the South
Asia region (31.3 percent of the total), 413.1 million in the Middle East and North Africa region (22 percent),
379.3 million in sub-Saharan Africa (20.2 percent), 292 million in East Asia Pacific (15.6 percent), 197.2 million
in Europe and Central Asia (10.5 percent). There are also sizeable Muslim populations in North America (4.5
million) and Latin America and the Caribbean (1.49 million).

Figure 1.2: Regional Distribution of Muslims

Source: https://worldpopulationreview.com/country-rankings/muslim-population-by-country

8 See https://www.pewresearch.org/fact-tank/2017/01/31/worlds-muslim-population-more-widespread-than-you-might-think/

24 Islamic Finance and the Development of Malaysia’s Halal Economy

 Chapter 1: Current State of the Halal Economy

The consumption patterns of young people will be the main driver for the HE in the coming years.
According to 2020 United Nations (UN) estimates, OIC member states are home to 338.3 million youth,
representing 17.9 percent of the total OIC population (compared to a global average of 15.5 percent) and 28
percent of the world’s total youth population. It is projected that by 2030 the number of young Muslims will
further increase to 396.9 million (30.7 percent of the global youth population) (SESRIC, 2020). This millennial
youth is the most globally connected generation, tend to have higher purchasing power and can afford a
diverse range of halal goods and services (Charoenchang, 2019).

The concepts of halal and tayyib are aligned with the environment, social, and governance (ESG) values
adopted by global brands in their end-to-end business operations, including distribution, marketing,
and financing. Tayyib means wholesome, pure, healthy, and safe. The growing attention to ESG affects
agriculture, food production, and the eating habits of consumers. Pioneering companies such as Saffron
Road and Crescent Foods in the United States have incorporated green credentials into the design and
packaging of their products and highlight these in their marketing campaigns (DinarStandard, 2021b;
Laluddin et al., 2019). Nestle, for example, established the Paddy Club back in 2012 as an initiative to ensure
rice used for the company’s cereal products is sourced sustainably and responsibly. Another example is the
Sustainability Agriculture Code as a pre-requisite for suppliers to enter Unilever’s supply chain as part of the
group’s ambition for sustainable sourcing. This is likely to become a common trend, especially in Muslim
minority markets. These qualities and values are generally recognized as an inherent part of halal market
values (Ghaffour, 2021). The linkage between halal and ESG has the potential to expand the consumer base
of halal products to include non-Muslim consumers. Furthermore, the HE may also run the risk of being
excluded from the global supply chain by not aligning to ESG and sustainable values more broadly.

Many Muslim countries are making conscious efforts to develop their HEs and capture the potential
halal market. Malaysia, UAE, and Turkey are among the most active nations and have clear visions of
becoming hubs for the global halal trade. Even non-majority Muslim countries like Thailand, Japan, and
South Korea aim to position themselves as key players in the halal market. Notably, Australia and Brazil are
among the top halal meat and poultry suppliers to countries in the Middle East (Charoenchang, 2019).

Several OIC economies have strengthened certification frameworks for scrutinizing the halal
integrity of products imported into their countries. In many OIC countries, designated national bodies,
such as the UAE’s Emirates Authority for Standardization and Metrology, Saudi Arabia’s Saudi Food and
Drug Authority, Indonesia’s Badan Penyelenggara Jaminan Produk Halal, and Malaysia’s Jabatan Kemajuan
Islam Malaysia (JAKIM), monitor and provide halal certification and accreditation to foreign halal certification
bodies.

In addition, several OIC countries are working on legal frameworks that will define halal and
regulate the halal integrity of imported products. These efforts are useful in promoting greater general
awareness of halal and strengthening the regulations for cross-border trade. Indonesia, with a total halal
export value of US$33.8 billion in 2020, is the largest exporter of halal food-related products among the
OIC and ASEAN countries, followed by Malaysia (US$20.6 billion) and Turkey (US$19 billion). However, the
United States (US$120 billion) and other non-OIC countries such as the Netherlands (US$75.3 billion), Brazil
(US$70.8 billion), China (US$64.7 billion), Thailand (US$31 billion), and Vietnam (US$24.4 billion) are dominant
in global halal trade9.

9 Based on the halal classification for food-related products by the WTO and data available in the UN International Trade Statistics
Database.

Islamic Finance and the Development of Malaysia’s Halal Economy 25

Chapter 1: Current State of the Halal Economy

1.3 Malaysia’s Position in the Global Halal Economy

The GIER 2022 indicated that Malaysia currently leads the overall Global Islamic Economy Indicator
(GIEI) rankings for the ninth consecutive year. Malaysia is followed by Saudi Arabia, the UAE, and Indonesia.
New entrants to the top 15 include the UK and Kazakhstan. Turkey and Singapore moved up 7 and 8 places to
reach the 5th and 7th positions, respectively. Nigeria and Sri Lanka have dropped out of the top 15. In addition,
Malaysia obtained the highest score for Islamic finance, halal food, Muslim-friendly travel, and media and
recreation sectors. At the same time, the UAE ranked first for modest fashion while Singapore performed
better than other countries in pharmaceuticals and cosmetics (DinarStandard, 2022) (Figure 1.3).

Figure 1.3: Global Islamic Economy Indicator

Source: The State of Global Islamic Economy Report (2022)

According to the 12MP, the halal industry in Malaysia in 2019 was valued at US$27.9 billion (RM115.5
billion), representing 7.6 percent of GDP. Of this, 69.3 percent was from the manufacturing sector and 30.7
percent from the services sector. This halal industry contribution was more significant than the agriculture
sector, which contributed 7.1 percent (US$24.5 billion) to the GDP in the same year10. The industry grew by
an average of 5.5 percent per annum during the 2016 to 2019 period. In addition, over the 2016-2019 period,
the value of halal exports increased marginally by 0.8 percent per annum, from US$9.5 billion (RM39.4 billion)
to US$9.8 billion (RM40.6 billion). However, in 2020, the GDP contribution decreased to US$22.4 billion
(RM92.7 billion), and exports declined sharply to US$7.4 billion (RM30.6 billion). Cumulative investments in
the 22 existing halal parks amounted to US$0.7 billion (RM2.8 billion) in 2020, and 55 percent were foreign
direct investments. A total of 2,225 new companies received halal certification as of 2020, creating an
additional 160,337 job opportunities (Economic Planning Unit, 2021).

10 DOSM, 2020: Selected Agricultural Indicators of Malaysia https://www.dosm.gov.my/v1/index.php?r=column/

cthemeByCat&cat=72&bul_id=RXVKUVJ5TitHM0cwYWxlOHcxU3dKdz09&menu_id=Z0VTZGU1UHBUT1VJMFlpaXRRR0xpdz09

26 Islamic Finance and the Development of Malaysia’s Halal Economy

 Chapter 1: Current State of the Halal Economy

The majority of certified HE businesses in Malaysia are MSMEs. According to news reports, 7,204
companies received halal certification from JAKIM in 2019 (Selangor Journal, 2019), and in 2021 the number
of halal-certified SMEs was reported to be 7,000 (Jalil, 2021).11 However, these numbers represent the lower
bound since not all halal-related companies would have obtained halal certification. In addition, according
to HDC, SMEs lack knowledge of the halal certification process and face financial constraints in complying
with halal certification requirements.12

The largest component of the HE in Malaysia is the food services sector. In 2021, business revenue in
the sector was estimated at US$31 billion (RM128.8 billion). It is forecast to reach US$47.6 billion (RM201.02
billion) by 2025, based on a cumulative average growth rate (CAGR) of 11.7 percent growth (Figure 1.4). This
industry comprises food services, event catering services, and beverage services. Due to new norms during
the Covid-19 pandemic, the online food delivery segment is likely to be the key driver for the food services
industry in the coming years.

Figure 1.4: Revenue of Malaysian Halal Food Services Industry

50.0 48.6
43.4

40.0 38.9
34.8
31.1
30.0 27.9
US$ Billion

24.9
22.3
20.0

10.0

0.0
2018 2019 2020 2021 2022 2023 2024 2025

Source: Halal Development Corporation

The pharmaceutical industry in Malaysia has grown steadily over the last decade and has been
identified as a key growth area. The industry plays a significant part in the healthcare sector and
contributed 15 percent (US$800 million) to the country’s health expenditure in 2019, which was a 10-fold
increase from 1997 (US$78.9 million). Pharmaceutical products manufactured in Malaysia include new
drug products, biologics, generics (prescription and over-the-counter (OTC) products), health and food
supplements, traditional and complementary medicines (TCM), and veterinary products. (Ministry of Health
Malaysia, 2021)

Halal pharmaceuticals in Malaysia are also growing with business revenues of US$4.0 billion in 2021.
This industry is expected to grow to US$4.8 billion by 2025 (Figure 1.5), mainly driven by increasing affluence
among the middle class and an aging population. In addition, Malaysia is regarded globally as a leader in
halal pharmaceuticals due to establishing the world’s first Halal Pharmaceutical Standard, MS2424:2019. In
2019, the total export of halal pharmaceuticals was US$96.6 million (RM401 million).

11 Latest available statistics on the number of halal-certified businesses were published by DOSM in 2017, which reported the
number to be 6,138 as of 2015, up 13 percent from 2010.
12 The Star (2021, November 22). Improving SME capacity in halal industry. https://www.thestar.com.my/news/nation/2021/11/22/
improving-sme-capacity-in-halal-industry

Islamic Finance and the Development of Malaysia’s Halal Economy 27

Chapter 1: Current State of the Halal Economy

Figure 1.5: Revenue of Malaysian Halal Pharmaceutical Industry

5.0 4.8
4.6
4.4
4.2
4.0
4.0 3.8
3.6
3.4

3.0
US$ Billion

2.0

1.0

0.0
2018 2019 2020 2021 2022 2023 2024 2025

Source: Halal Development Corporation

In 2020, Malaysia’s export of certified halal products totaled US$7.3 billion, a 25 percent decrease
from 2019 because of the pandemic. The most significant drop was in the chemical industry and halal
ingredients by 44 percent and 31 percent, respectively (Figure 1.6). Top Malaysia’s halal export destinations
were Singapore (RM4.1 billion), China (RM3.4 billion), the United States (RM1.7 billion), Thailand (RM1.5 billion),
and Indonesia (RM1.3 billion). (Figure 1.6). Exports of certified halal food and beverages accounted for 56
percent of halal exports, with most of this going to non-OIC countries (Figure 1.7). However, the total export
value of halal food-related products based on WTO assumption13 in 2020 was US$20.6 billion, indicating
a massive gap between certified and non-certified halal food markets. This shows the importance of halal
certification in avoiding halal washing, reducing asymmetric information, and building trust, especially for
international trade.

Figure 1.6: Malaysia’s Certified Halal Exports Figure 1.7: Malaysia’s Top 5 Certified Halal
(RM Million) Export Destinations (RM Million)

Pharmaceutical 5000
4500
Chemical Industry
4000

Palm Oil Derivatives 3500

3000
Cosmetic &
2500
Personal Care Products
2000
Halal Ingredients 1500
1000
Food & Beverages
500

Total Halal Exports 0

na

sia
e

es

nd
or

at

ne
Ch

la
ap

St

ai

do

0 10,000 20,000 30,000 40,000

ng

Th
d

In
ite
Si

Un

2018 2019 2020 2018 2019 2020

Source: Halal Development Corporation

13 The WTO assumption of HS code specification for the value of halal product trade also includes unlabeled halal products such as
vegetables, fish, fruits, etc.

28 Islamic Finance and the Development of Malaysia’s Halal Economy

 Chapter 1: Current State of the Halal Economy

Based on data from WTO, Malaysia has experienced a trade surplus of halal food-related products since 2016,
which has strengthened Malaysia’s position as among the key players in the halal markets (Figure 1.8). However,
several products, such as cereals and meat, have a significant trade deficit with a heavy reliance on imports.

Figure 1.8: Malaysia: Trade in Halal Food-related Products (US$ Million)

20,000
7,000

15,000
6,000
10,000

5,000
5,000

- 4,000
2016 2017 2018 2019 2020
Export Import Balance of Trade

Source: World Bank staff’s calculations based on the UN Comtrade database on international trade.

The top 10 Malaysia export destinations of halal food-related products are China (US$2.9 billion), Singapore
(US$1.8 billion), India (US$1.8 billion), Netherlands (US$1.1 billion), the Philippines (US$822 million), USA (US$786
million), Pakistan ($646 million), Turkey (US$632 million), Japan (US$623 million), and Vietnam (US$578 million). 

1.4 Malaysian Halal Regulatory Framework

Malaysia has enacted several regulations to ensure the safety and quality of halal products marketed
in Malaysia, particularly halal food. These regulations, in addition, aim to protect the integrity of Malaysia’s
halal logo as a global brand that aligns with the shari’ah and international best practices. These include the
Trade Descriptions Act 2011 (TDA 2011), Animal Act 1953 (revised 2006), Food Act 1983, Food Regulations
1985, Consumer Protection Act 1999, and the Local Government Act 1976. TDA 2011 aims to promote good
trade practices by prohibiting false trade descriptions and false or misleading statements, conducts, and
practices in relation to the supply of goods and services, thereby protecting the interest of consumers. A
fundamental purpose of TDA 2011 is to standardize the issuance of halal certificates. Effective January 1,
2011, only the Jabatan Kemajuan Islam Malaysia (JAKIM) and the respective State Islamic Religious Councils
(SIRCs) can issue halal certificates for any food, goods, or related services. Since 2013, JAKIM and SIRCs have
coordinated and standardized halal management, including certifications, logos, standards and procedures,
and processing fees via online applications. It also includes extending the use of the MYeHALAL system, a
comprehensive online halal certification management system throughout Malaysia (Suhaimee et al., 2019).
Under sections 28 and 29 of TDA 2011, the Minister issued the Trade Descriptions (Definition of Halal) Order
2011 and Trade Descriptions (Certification and Marking of Halal) Order 2011. The laws offer protection to
consumers from unethical trade practices relating to halal products and services (A Rahman et al., 2018).

In addition, a comprehensive halal food guideline is known as Malaysian Standard: Halal Food - General
Requirements was launched in 2004 and revised in 2009 and 2019 (Malaysian Standard MS 1500:2019).
This was issued by Standards Malaysia, the national standard and accreditation body. The standard prescribes
guidelines for preparing and handling halal food, starting from selecting raw materials to distributing and
promoting food industry activities. MS1500:2019 provides a more precise understanding among food
manufacturers on the application of the halalan t. ayyiban concept14 in the halal certification procedures. It also

14 The concept of halãlan tayyiban relates to four key elements: i) strict adherence and obligation to halal principles; ii) avoidance
of syubhah (status unsure or doubtful) from manufacturing and handling process; iii) demonstration of compliance towards
cleanliness; and iv) establishment of good systematic halal management.

Islamic Finance and the Development of Malaysia’s Halal Economy 29

Chapter 1: Current State of the Halal Economy

considers appropriate sources of halal food, including animals (both land and aquatic), plants, microorganisms,
minerals, chemicals, beverages, and genetically modified organisms. It also states that other factors that
should be considered in the processing and manufacturing of halal food products are hygiene, safety, and
good sanitation15.

In general, there are seven conditions of halal food based on MS 1500: 2019 as follows: (a) does not
consist of or contain any part of the matter of an animal that is prohibited by shari’ah law and fatwa for a
Muslim to consume or that has not been slaughtered in accordance with shari’ah law and fatwa; (b) does not
contain anything which is najs (impure) according to shari’ah law and fatwa; (c) does not contain any part of
a human being or its yield which are not allowed by shari’ah law and fatwa; (d) does not intoxicate according
to shari’ah Law and fatwa; (e) is not poisonous or hazardous to health; (f) has not been prepared, processed
or manufactured using any instrument that is contaminated with najs (impurity) according to shari’ah law and
fatwa; and (g) has not in the course of preparation, processing or storage been in contact with, mixed with, or
in close proximity to any food that fails to satisfy items (a) and (b). There is no stated requirement in MS 1500
that companies producing halal food use Islamic finance.

In addition, there are some basic requirements for the preparation of halal food based on MS 1500:
2019: including (a) sources of halal food and drinks should be animal and plant-based; (b) halal and non-halal
animals must never be slaughtered together; (c) product processing, handling, and distribution should comply
with halal regulation; (d) product storage, display and serving for instance equipment, machineries, and other
materials used must not be made of non-halal materials; (e) hygiene, sanitation, and food safety should comply
with the concept of halalan thoyyiban; (f) packaging and labeling must be carefully evaluated by JAKIM; and (g)
legal requirement which in line with MS 1500:2004 revised in 2009 and 2019. (A Rahman et al., 2018)

The recognition of the halal standard is also significant in international trade. Some countries such
as Malaysia and Indonesia have implemented the halal accreditation system on food and beverage imports,
allowing only products with a list of certified halal logos to be imported into their countries. Countries whose
products have a well-recognized halal certification should therefore have some competitive advantage in halal
exports. According to Blind et al.(2018), the certification of the standard has a significant positive impact on
trading. For example, in the case of ISO 9000 standard to trade products from developing countries willing to
access markets in developed countries, the certification reduces information asymmetries and transaction costs
between trading partners. Hence, the halal certificate can have an essential role in promoting international
trade in halal products, especially for the exports coming from non-Muslim countries (Charoenchang, 2019).
As a result, the Malaysian halal certification system provides a significant competitive advantage for Malaysian
firms in the international arena due to its centralized nature, reliable integrity, and strong support infrastructure
for Malaysian halal certificates (Dubé et al., 2016).

JAKIM has recognized 84 foreign halal certification bodies (FHCB) in 46 countries16 to ensure the
quality and integrity of halal products manufactured in other countries for the Malaysian market.
Interestingly, 70 of the FHCBs are in 34 countries that are not members of the OIC, including 7 each in Australia
and Japan and 6 in China. The role of an FHCB is to monitor and verify the halal status of the raw materials
and products with responsibility and integrity. The recognition is based on compliance and implementation
of Halal Standards that meet the requirements set by Malaysia. This recognition aims at meeting procedures
set by Malaysia Halal Certification that require imported ingredients to be halal certified by recognized bodies
(Suhaimee et al., 2019). The validity of the recognition by JAKIMs is for two (2) years, and FHCBs are required
to submit annual reports to JAKIM. In addition, JAKIM’s halal logo is among the most recognized symbols of
halal compliance in the world. (Charoenchang, 2019).

15 Other standards such as MS1514: 2009 Good Manufacturing Practice (GMP) and MS1480: 2019 Hazard Analysis and Critical
Control Point (HACCP) are compulsory requirements in preparing products certified as halal.
16 See JAKIM Foreign Halal Certification Bodies: https://www.halal.gov.my/v4/ckfinder/userfiles/files/cb2/LATEST%20CB%20
LIST%20-%20AS%20OF%20FEBRUARY%2013TH%202019.pdf

30 Islamic Finance and the Development of Malaysia’s Halal Economy

 Chapter 1: Current State of the Halal Economy

1.5 Conclusion
The growth of the market for halal products and services is likely to continue. As the Muslim population
grows across the globe and Muslims get improved access to certified halal products that enable them to
meet their religious obligations, the demand for these products is expected to strengthen in the coming
years. Halal food is the most significant contributor to the HE and has gained the attention of non-Muslim
consumers who are showing stronger preferences for natural and organic food items and their concerns for
hygiene, quality, and safety of consumed food. In addition, the young will have a central role in the growing
halal market given their digital connectivity, affinity with e-commerce, sensitivities to social issues, and
higher purchasing power.

The halal certification framework will continue to be critical. The stamp of authenticity on halal
products helps to reduce information asymmetries, avoids “halal washing,”  and builds trust, especially
in international trade. The implementation of halal accreditation systems in countries like Malaysia and
Indonesia is welcome and could provide them with a competitive advantage in the international trade
of halal products and services. Although Indonesia is the largest exporter of halal food-related products
among the OIC and ASEAN countries (with Malaysia in the second place), non-OIC countries are the biggest
exporters of halal food products, with Australia, China, Brazil, and the US as key players. In addition, HE’s
key stakeholders should be more proactive in addressing the issues and challenges in halal certification, in
order to ensure the integrity of halal-certified products. For instance, in 2020, Malaysian media reported a
large network has been importing frozen meat bearing fake halal logos for distribution for decades.17 This
issue sparked a debate on tightening enforcement to ensure the genuineness of certified halal products
marketed in Malaysia. For imported halal meat, enforcement will involve the Department of Veterinary
Services (DVS), JAKIM, Malaysian Quarantine and Inspection Services Department (MAQIS), Customs and
the Ministry of Domestic Trade and Consumer Affairs (KPDNHEP). Standardization of the halal logo is also
crucial for international trade as it helps create more transparency and avoid halal washing. Member states
of the Standards and Metrology Institute for Islamic Countries (SMIIC)18 have come together to produce
five new halal standards and the SMIIC is also developing Halal Quality Infrastructure standards, which will
provide guidelines for strengthening the halal regulatory ecosystem.

17 See https://salaamgateway.com/story/malaysias-scandal-of-imported-frozen-meats-with-fake-halal-logos-whos-in-the-wrong
18 SMIIC, an affiliate body of the Organization of Islamic Cooperation (OIC), was established to prepare OIC/SMIIC halal standards
to achieve uniformity in metrology, laboratory, testing, and standardization. A total of 31 member states out of the 56 OIC
countries are currently members.

Islamic Finance and the Development of Malaysia’s Halal Economy 31

Chapter 2: Financing Malaysia’s Halal Economy

CHAPTER 2

Financing
Malaysia’s Halal
Economy

32 Islamic Finance and the Development of Malaysia’s Halal Economy

 Chapter 2: Financing Malaysia’s Halal Economy

2.1 Modes of Islamic Financing for HE Enterprises

2.1.1 Introduction
The term Islamic finance refers to financial activities conforming to Islamic law (shari’ah). In addition
to the prohibition of riba (usury or interest), several other essential provisions may affect financial transactions.
These include the ban on gharar (uncertainty or asymmetrical information), maysir (gambling, speculation),
hoarding, as well as trading in prohibited commodities (for example, pork and alcohol). Companies that
offer halal products are likely to use Islamic finance to ensure that all business transactions in the entire
products and services supply chain align with Islamic principles. Shareholders and business owners who
are committed to compliance with religious law may require that HE companies use only Islamic finance.
This may also be important to building some customers’ trust and faith in halal products and services. In
Malaysia, the agency responsible for the certification of halal products (Jabatan Kemajuan Islam Malaysia,
JAKIM), in its 2020 halal certification guidelines, strongly encourages all certified halal companies to use
Islamic finance in all their business transactions.

Some key features of HE enterprises affect their financing. In general, HE companies have financing
requirements that are similar to the requirements of conventional companies in the same sector (e.g.,
start-up funding, debt and equity financing, and access to capital markets), whether that be food, travel,
pharmaceuticals, fashion, or another industry. A key difference in financing policies, however, is that HE
companies are likely to strongly prefer, if not require, Islamic finance solutions rather than conventional ones.
At the same time, they may find Islamic financial products and services relatively unfamiliar, complicated,
unavailable, or expensive (World Bank Group, 2021b, pp. 67, 78). This is reflected in the fact that, as of 2019,
of the 54 percent of HE businesses in Malaysia that received bank financing, a small fraction (22 percent)
used Islamic finance. In other words, barely 12 percent of Malaysian HE enterprises were utilizing Islamic
bank financing in one of the world’s most developed Islamic finance markets.19

Financing the HE may be especially supportive of MSMEs. Across the OIC, there are an average of
over 50 micro, small, and medium-sized enterprises (MSMEs)20 for every thousand people, double the
world average (Malaysia Islamic Financial Centre, 2014). MSMEs often face challenges accessing financing
from banks and capital markets, with over half of such businesses in developing countries lacking access
to adequate commercial financial services (World Bank Group & Islamic Development Bank, 2015).
Despite these challenges, MSMEs account for over one-third of Malaysian GDP and almost two-thirds of
employment (World Bank Group, 2020c). In addition, Malay and rural communities, which have historically
been underrepresented in the business sector, are active in the HE due to their religious preferences and
their rural orientation. These aspects of the financing landscape faced by small businesses in general will
affect such HE enterprises. Another indication of the potential for increasing Islamic finance participation
in the segment of the HE conducted by small businesses is given by the statistic that in 2019, Islamic banks
provided only 28.5 percent of MSME financing in Malaysia (World Bank Group, 2020c). This indicates a gap
between MSMEs’ share of GDP and employment. Finally, one Islamic bank noted that as of 2018, 90 percent
of small and medium-sized enterprises in Malaysia are not halal-certified. At the same time, over 80 percent

19 Remarks by Mr. Abdul Rasheed Ghaffour, Deputy Governor of the Bank Negara Malaysia, at the Islamic Finance Rendezvous
Series, “Islamic finance and halal industry - opportunity, impact, synergy,” Kuala Lumpur, October 1, 2019, citing Bank Negara
Malaysia survey. Available at https://www.bis.org/review/r191001j.pdf.
20 The definition of MSME used by the Malaysian government is specified by SME Corporation Malaysia, the central body that
coordinates official programs for MSMEs throughout the Malaysian federal government. There are varying thresholds for
manufacturing and non-manufacturing enterprises, and either revenue or number of employees marks the boundaries between
the micro, small, medium, and non-MSME categories. A manufacturer with up to 200 employees or a services business with up to
75 employees, in each case if privately owned and not a subsidiary of a certain larger organizations, will qualify as an MSME. See
https://www.smecorp.gov.my/index.php/en/policies/2020-02-11-08-01-24/sme-definition.

Islamic Finance and the Development of Malaysia’s Halal Economy 33

Chapter 2: Financing Malaysia’s Halal Economy

of the bank’s financing growth from small and medium-sized enterprises involved HE businesses.21 Together,
these data points indicate a significant untapped potential for creating synergies between Islamic finance
and the HE.

Finally, HE enterprises face several requirements and challenges beyond those confronting their
conventional peers, such as the need to obtain halal certification of their products, inspection requirements,
and serving more fragmented and dispersed customer markets. These factors can impact the start-up,
production, distribution, and marketing costs borne by HE firms. They can also introduce unique barriers
to entry that may be daunting to smaller enterprises, particularly since halal certification has to be renewed
periodically and the related costs may be significant in certain industries However, there is limited empirical
(or anecdotal) evidence that would suggest that the cost of halal certification has a negative impact on
financial performance.22

2.1.2 Financing Through Islamic Banks

Malaysia has a relatively well-developed Islamic banking industry. According to the 2021 edition of the
Islamic Finance Development Report (IFDR), Malaysia has the most highly developed Islamic finance market
in the world (Refinitiv, 2021).23 The metric that the IFDR provides to summarize the state of the Islamic finance
industry in each of the 135 countries covered is the Islamic Finance Development Indicator (IFDI). The IFDI
is based on five sub-indicators, covering quantitative development (such as the size and performance of
Islamic finance institutions), knowledge (education and academic publishing in the field of Islamic finance),
governance (regulatory, shari’ah, and corporate), corporate social responsibility, and awareness (events and
news items). For several years in a row, Malaysia has taken the top spot among all countries, often by a
significant margin, with a 2021 IFDI score of 114 (out of a maximum of 200). Malaysia also ranked first in five
of the six sub-indicators that make up the IFDI. The 2021 performance by Malaysia in this regard is typical
of Malaysia’s strong IFDI rankings over the past few years.

Malaysia’s Islamic banks offer a diverse set of products and services to meet the financing needs of
businesses. The following table shows products and services offered to business customers by Malaysia’s
largest IFIs. The offerings are grouped into stages corresponding to a business’s lifecycle and evolving
financing needs.24 The products and services listed span an entire range from working capital and expansion
financing, fixed asset financing, trade finance, capital markets, and treasury functions. Some offerings are
specifically targeted to MSMEs, and many others are available to businesses of varying sizes. Of the products
and services aimed at MSMEs and new entrepreneurs, the financing terms typically involve smaller amounts
and require little or no collateral, are sometimes supported by government programs or guarantees, and are
available for working capital, capital expenditures, or general business growth.

21 Wong Swee May, “CIMB Islamic offers up to RM100m financing for SMEs to become halal-ready,” The Edge Markets, November
28, 2019. Available at https://www.theedgemarkets.com/article/cimb-islamic-offers-rm100m-financing-smes-become-halalready.
See also Richard Whitehead, “Malaysian bank launches halal advisory to help customers get JAKIM certification,” Salaam
Gateway, Jan. 10, 2020, https://www.salaamgateway.com/story/malaysian-bank-launches-halal-advisory-to-help-customers-get-
jakim-certification.
22 Puspitasari & Urumsah (2021) examined the financial statements of 17 food and beverage corporates listed on the Indonesian
Stock Exchange of 2015-2018 period and found that halal certification significantly and positively affects financial performance.
Zailani et. al (2020) surveyed 154 halal food firms in Malaysia and found halal materials and halal storage and transportation
positively affect financial performance, whereas the halal production process negatively affects financial performance.
23 The IFDR is published by Refinitiv, a subsidiary of the London Stock Exchange Group.
24 The Malaysian IFIs examined for this purpose were AmBank Islamic, Bank Islam Malaysia, Bank Muamalat Malaysia, Bank Rakyat,
CIMB Islamic Bank, Hong Leong Islamic Bank, Maybank Islamic Bank, MBSB Bank, Public Islamic Bank, and RHB Islamic Bank.

34 Islamic Finance and the Development of Malaysia’s Halal Economy

 Chapter 2: Financing Malaysia’s Halal Economy

Table 2.1: Products and Services Offered by Malaysian IFIs to Business Customers 25

Stage Products and Services Offered

Business term financing for start-ups

Working capital financing
MSME stage:
Capital expenditure financing
Start-up and early-stage capital
Targeted COVID-19 working capital relief financing for MSMEs26
Separate COVID-19 relief financing for MSMEs in the tourism sector27

Letters of credit
Shipping guarantees
Bills for collection (inward and outward)
Invoice financing
MSME and later stages: Accepted bills
Trade finance Bills of exchange
Trust receipts
Export credit refinancing
Foreign currency trade financing
Factoring

Overdraft financing
Project & contract financing
Working capital guarantees
Factoring
Distributor supplier financing
Property acquisition financing
Growth stage:
Hire/purchase financing
General business financing
Project financing
Commodity murabaha financing
Agricultural enterprise financing
Professional services business loans
Short-term revolving credit
Credit guarantees

Capital markets services:

• Corporate advisory services
• M&A advisory
• M&A and bridge financing
• Initial public equity offerings (IPOs)
• Secondary equity offerings
Maturity stage: • Sukuk / fixed-income issuances
Capital markets and treasury • Syndicated loans
services Treasury services:
• Deposit accounts
• Money market (including Wakalah, Mudarabah, Bai Inah, and
Tawarruq structures)
• Foreign currency services
• Derivatives and structured products
• Risk management

Source: World Bank staff’s analysis of publicly available information

25 World Bank analysis of publicly available information.

26 This is part of BNM’s Fund for SMEs. See https://www.bnm.gov.my/documents/20124/2294076/Brochure_TRRF_EN.pdf.
27 This is known as the PENJANA Tourism Financing (PTF) Facility and was instituted under the auspices of BNM. See https://www.
bnm.gov.my/documents/20124/2294076/PTF_FAQ_en.pdf?s=2.

Islamic Finance and the Development of Malaysia’s Halal Economy 35

Chapter 2: Financing Malaysia’s Halal Economy

Many Malaysian Islamic banks have initiatives specifically targeting HE companies. Their support for
HE enterprises ranges across a full spectrum of business functions: halal certification and training; business
development and marketing; distribution, logistics, and warehousing; exports and expansion outside
Malaysia; and providing financial services to MSME HE enterprises, including financing and insurance. Some
examples of bank initiatives are as follows:

i. Maybank has a “Halal Route to Market Program” that aims to assist MSMEs in expanding their halal
businesses outside Malaysia. The bank aids MSMEs in distribution, service advisory, and marketing.28

ii. CIMB has a “HalalBizReady” program to support halal businesses in multiple areas: logistics and
warehousing, halal certification and training, business development, international trade, and financing
needs.

iii. Bank Islam Malaysia’s “Go Halal SME Financing Program” similarly provides financing at favorable
terms to help Malaysian small and medium-sized enterprises in the halal sector achieve halal
certification, afford insurance in the form of takaful, fund working capital needs, and purchase
plant and equipment.29 Another Bank Islam facility, the Shariah Compliance SME Financing Scheme
(SSFS) 3.0, is designed to finance MSME business activity, especially exporting halal products, and is
subsidized by the government.30

iv. Alliance Islamic Bank’s “Halal in One” likewise helps HE enterprises obtain halal certification, seek out
new customers, and secure financing.31

v. AmBank Islamic’s “Halal Quest” is a partnership with the Malaysian government’s halal certification
body, JAKIM, that offers halal certification assistance to Malaysian MSMEs.

vi. Standard Chartered Saadiq’s “Halal360” initiative hopes to leverage the bank’s global footprint to
serve halal businesses.32

Outstanding Islamic financing in the banking sector to HE companies exceeded US$ 5 billion and
skews heavily towards the food and beverage industry. As of September 2021, outstanding Islamic
financing to halal-certified food and beverage enterprises was US$ 4.0 billion, followed by manufacturing
(US$ 718 million), food premises (US$ 239 million), and pharmaceuticals (US$ 109 million). F&B thus represents
nearly four times the volume of the next three largest categories combined. 33

The percentage of halal-certified companies using Islamic financing nearly doubled between 2018
and 2021. In 2018, 21.9 percent of halal-certified companies in Malaysia used Islamic finance (based on
approved applications for financing). The figure increased to 41.3 percent by 2021 – an increase of 89% in
the adoption rate over a three-year period. The chart below, produced by Bank Negara Malaysia, identifies
a series of strategic initiatives over the years that have contributed to the growth in Islamic finance adoption.
These include: (1) the inclusion of an Islamic finance pavilion at the Malaysia International Halal Showcase
(MIHAS); (2) business engagement programs between HE enterprises and IFIs; (3) partnerships between
industry and regulators; and (4) increasingly customized financial solutions for HE enterprises.34

28 See https://www.maybank.com/islamic/en/newsroom/2021/halal-route-to-market.page?.
29 See https://www.bankislam.com/business-banking/sme-banking/go-halal-sme-financing-program.
30 See https://www.bankislam.com/business-banking/sme-banking/shariah-compliance-sme-financing-scheme-ssfs-3-0/.
31 See https://www.alliancebank.com.my/halal-in-one.aspx.
32 See https://www.sc.com/my/saadiq/halal360/.
33 Lim Qian Pink, Anas Afifi Zulkefli and Faqrul Fithri Mohd Nasrudin, Bank Negara Malaysia. Data and analysis provided for this
report. The statistics is an outcome of data matching of companies registered with the Companies Commission of Malaysia and
certified halal by JAKIM with credit data from the Central Credit Reference Information System (CCRIS). The statistics represent
a lower bound of the estimate of the financing to the HE.
34 Lim Qian Pink, Anas Afifi Zulkefli and Faqrul Fithri Mohd Nasrudin, Bank Negara Malaysia. Data and analysis provided for this
report.

36 Islamic Finance and the Development of Malaysia’s Halal Economy

 Chapter 2: Financing Malaysia’s Halal Economy

Figure 2.1: Increased adoption of Islamic financing in the banking sector by halal certified companies 35

21.9% 41.3%
Halal Halal
certified certified
companies Inaugural Industry- Tailored companies
using Islamic Business regulator end-to-end using
Islamic finance engagement strategic solutions to Islamic
2018

2019

2020

2021
finance pavilion programmes partnership that support the finance
hosted by with halal enhances diverse needs
industry businesses Islamic finance of halal
players contribution to businesses
halal industry
Promote awareness to key stakeholders Promote greater financial solutions take up
Features

Value-Based Intermediation (VBI) as Underpinning Objective

Bank financing, however, has significant limitations and constraints. First, capital offered to start-up
enterprises can be limited since large corporate customers are likely to be more profitable for banks to
service. The credit review process for small companies may require significant staff time but only generate
small revenue for the bank: spending the same amount of time on a larger account would be a more
efficient use of human resources. Nonetheless, as noted above, several banks appear to market financial
services specifically to MSMEs, and the Malaysian government has several subsidy and guarantee programs
to encourage banks to engage with smaller business customers. Second, banks focus on debt rather than
equity financing. This focus is a result of their mandate to preserve depositors’ funds and take only a limited
risk on their balance sheets. Most of the products and services offered by Malaysian IFIs involve a lending or
guarantee component (if the institution puts its capital at risk at all) or involve the provision of services, which
often has no downside capital risk for the institution. Third, creditworthiness and collateral are ordinarily
essential factors in a bank’s decision to extend financing.

For a start-up enterprise lacking a credit history or limited collateral, obtaining financing can be difficult.
Again, some banks have programs catering to MSMEs that recognize these potential hurdles and offer
financing with modified terms. Finally, banks’ mandates generally do not necessarily include actively
supporting business growth through interventions beyond providing financing. However, some banks do
have programs to assist MSME startup and growth, and the Malaysian government also undertakes several
schemes to support MSMEs.36 These programs make bank-enabled support more broadly relevant to the
HE and MSMEs. Bank programs designed to support MSMEs can play an important role in enhancing access
to finance – especially debt financing – are encouraging. However, they are likely to remain only part of the
solution since banks do not have the mandate to be equity investors in small businesses.

35 Lim Qian Pink, Anas Afifi Zulkefli and Faqrul Fithri Mohd Nasrudin, Bank Negara Malaysia. Data and analysis provided for this
report.
36 See, for example, the large number of BNM SME fund financing products listed at https://www.publicislamicbank.com.my/
Business-Banking/Financing/Other-Financing/BNM-SME-Fund-Financing-Products.

Islamic Finance and the Development of Malaysia’s Halal Economy 37

Chapter 2: Financing Malaysia’s Halal Economy

Although micro-sized halal-certified companies have adopted Islamic finance, larger halal-certified
businesses primarily use conventional finance (Figure 2.2). Nearly two-thirds (65 percent) of the
outstanding bank funding to halal-certified micro-enterprises was Islamic as of September 2021. Non-SME
businesses that are halal-certified predominantly used conventional finance; only 25 percent of outstanding
bank finance to them was Islamic. Large companies, particularly foreign multinational companies (MNCs)
that are involved in Malaysia’s HE, tend to have a higher proportion of their banking transactions conducted
through conventional banks associated with their parents. Medium-sized enterprises used 32 percent of
Islamic finance; small-sized enterprises used 42 percent. Discussions with halal industry players indicate
several reasons for this contrast between heavy use of Islamic finance by halal-certified micro-enterprises
when compared to the larger firms. In the first place, larger companies often have less awareness of the
benefits of using Islamic finance facilities given long-standing relationships with conventional banks. Also,
there is a general misconception that Islamic finance is complex and costly due to the nature of transactions.

Figure 2.2: Islamic vs. conventional bank finance in the banking sector
(by outstanding funding volume) by halal certified companies by size, 2021 37
Conventional Islamic

25% 32%
42%
65% 72%

75%
68%
58%
35% 28%

NON-SME MEDIUM SMALL SMALL OTHERS

Adoption rates of Islamic finance vary greatly by sector (Figure 2.3). Halal-certified companies in the
pharmaceutical industry overwhelmingly use Islamic financing (70 percent). In all other sectors of the HE,
however, more than two-thirds of outstanding bank financing is conventional. The use of Islamic financing
stands at 34 percent for food products, beverages and supplements, 28 percent for slaughterhouses, and
24 percent for the manufacturing and OEM sector. The logistics (19 percent), food premises (13 percent),
cosmetics (8 percent), and used goods (8 percent) sectors all have adoption rates of Islamic finance below
20 percent. Figure 2.3 below presents the use of Islamic vs. conventional finance by the HE sector. 38

Figure 2.3: Islamic vs. conventional bank finance

(by outstanding amount) by halal economy sector, 2021 39
Islamic Conventional

Pharmaceutical 70% 30%

Slaughterhouse 28% 72%
Logistics 19% 81%
Halal Sector

Cosmetics 8% 92%
Used Goods 8% 92%
Food Premises 13% 87%
Manufacturing/OEM 24% 76%
Food Products/Beverages/Supplements 34% 66%
Total Financing/Loan Amount

37 Data and analysis provided for this report by Lim Qian Pink, Anas Afifi Zulkefli and Faqrul Fithri Mohd Nasrudin, all at the Bank
Negara Malaysia. Please note that the “others” category covers entities such as cooperatives and NGOs.
38 Lim Qian Pink, Anas Afifi Zulkefli and Faqrul Fithri Mohd Nasrudin, Bank Negara Malaysia. Data and analysis provided for this report.
39 Lim Qian Pink, Anas Afifi Zulkefli and Faqrul Fithri Mohd Nasrudin, Bank Negara Malaysia. Data and analysis provided for this report.

38 Islamic Finance and the Development of Malaysia’s Halal Economy

 Chapter 2: Financing Malaysia’s Halal Economy

2.1.3 Financing Through Islamic Non-Bank Financial Institutions

(NBFIs) and Capital Markets
Malaysia’s Islamic NBFI sector is similarly highly developed to its Islamic banking sector. The 2021
IFDR breaks down each country’s quantitative development in Islamic finance (where Malaysia ranks first
among all nations) into five further sub-indicators. Other than Islamic banking, the other sub-indicators are
sukuk (where Malaysia is in the first place), Islamic funds (first), takaful (fourth), and other IFIs (third). More
quantitatively, Malaysia is by far the world leader in sukuk, with Malaysian issuers responsible for over 40
percent of the US$631 billion of sukuk outstanding worldwide in 2020. Malaysia also has approximately
20 percent of the world’s US$62 billion of takaful assets and had one of the three fastest growing takaful
markets in 2020. Finally, Malaysia leads all countries in assets held in other IFIs, with over one-third of the
world’s US$154 billion markets. This category consists of institutions other than banks and takaful providers
such as finance, leasing, mortgage, factoring, and fintech companies (Refinitiv, 2021).40

Islamic NBFIs in Malaysia play an essential role in financing and supporting businesses. The table
below shows the roles played by various types of NBFIs in this endeavor.
Table 2.2: Role of NBFIs in Financing and Supporting Business
Type of NBFI Illustrative Activities in Financing and Supporting Business

• Takaful, a form of shari’ah-compliant insurance, is an essential service consumed by

Takaful companies modern businesses to protect against life, property, casualty, financial, and general
business risks. Malaysia has over a dozen takaful operators (Md Husin, 2019).

• As of 2017 (the latest data available), non-deposit taking microfinance institutions

Microfinance institutions in Malaysia had around US$1 billion in loans outstanding to about a million micro
enterprises.41

• BNM data indicates that as of November 2021, development finance institutions

Development finance
had almost US$4 billion of loans outstanding to SMEs, including over one-quarter of
institutions
all financing received by SMEs in the primary agriculture sector.42

• Malaysia has hundreds of leasing companies, which are particularly useful to

Leasing companies businesses that must finance the use of expensive fixed assets.43 Representative
industries include energy, aviation, shipping, and construction.

• Tabung Haji has almost US$20 billion of assets invested across a range of equity
and fixed income (sukuk), including major industrial, agricultural, and transportation
projects in Malaysia. (World Bank Group, 2020c p.69)
Government-affiliated
entities • PNB (Permodalan Nasional Berhad) is an asset manager with around US$75 billion
in AUM at the end of 2020 that includes significant minority or controlling stakes in
businesses key to Malaysia’s economic development. (World Bank Group, 2020c
p.71)44
Source: World Bank staff’s analysis based on publicly available information

40 IFDR 2021. This category would also include the TH, whose total assets are now close to $20 billion. https://www.malaymail.com/
news/malaysia/2021/03/03/tabung-haji-in-the-pink-with-total-assets-outstripping-liabilities-by-rm3.7/1954471.
41 International Monetary Fund, Use of Financial Services, Assets: Outstanding Loans at Non-deposit Taking Microfinance Institutions
(MFIs) for Malaysia [MYSFCSMMFXDC], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/
MYSFCSMMFXDC, January 22, 2022. According to BNM, more than one million micro enterprises have received microfinance,
with the sector’s total outstanding financing standing at US$1.2 billion in 2016. “Microfinance in Malaysia benefits over 1 million
enterprises,” The Star (Malaysia), May 22, 2017, https://www.thestar.com.my/business/business-news/2017/05/22/microfinance-in-
malaysia-benefits-over-1-million-enterprises/.
42 Data series 1.15, available at https://www.bnm.gov.my/financial-inclusion-data-for-malaysia. By comparison, commercial banks
had over US$50 billion of loans to SMEs outstanding and Islamic banks about US$20 billion.
43 The count of leasing companies is from https://bizdirectasia.com/list/malaysia/keyword/service+leasing.html.
44 See also the description of the PNB’s investment strategy at https://www.pnb.com.my/index_EN.php.

Islamic Finance and the Development of Malaysia’s Halal Economy 39

Chapter 2: Financing Malaysia’s Halal Economy

Non-bank financial institutions (NBFI) in Malaysia have several programs that support the HE and
MSMEs active in the HE. The programs described below serve MSMEs broadly, including companies in
the halal economy. In some cases, such as BPMB, there are specific high-profile examples of these NBFIs
specifically supporting HE enterprises.

i. The Malaysian Development Bank (known by the acronym BPMB (Bank Pembangunan Malaysia
Berhad) is an arm of the Malaysian government that provides financing to industries deemed to be
of national importance. Its National Development Scheme initiative is designed to support the 12th
Malaysia Plan (2021-2025), which specifically includes the HE under the primary focus category of
“high impact industries.” Term financing for capital expenditures and operating expenses is available
at subsidized rates to qualifying borrowers.45

ii. BPMB runs several other programs that can support such companies, although not specifically
targeted at HE enterprises. For example, one Malaysian halal food producer was the first recipient
of financing from BPMB’s “Industry Digitalization Transformation Scheme,” which subsidizes industry
adoption of new technologies. BPMB was also the first financial institution to provide financing to this
halal food producer 35 years ago.46

iii. Agrobank, another development financial institution in Malaysia owned by the government, focuses
on the agricultural sector and related industries. Since 2015, it has been a fully Islamic bank capable
of providing Islamic financing solutions to the halal food industry, furthering shari’ah-compliance
across the entire value chain.47 Agrobank’s focus on the agricultural sector makes it a natural partner
for the halal food sector, which comprises the largest component of Malaysia’s HE.

iv. Tekun Nasional is a government agency whose mission is to make micro-credit financing more
accessible to entrepreneurs and, more broadly, provide guidance and advice to entrepreneurs and
encourage networks of entrepreneurs to develop.48

v. Malaysia’s general takaful providers offer MSME takaful packages that mostly cover P&C claims.
However, there are no specific initiatives for HE enterprises at present.

Malaysia is consistently ranked as having the world’s most sophisticated Islamic capital market
(ICM). As noted earlier, the 2021 edition of the IFDR notes Malaysia’s continued leadership in multiple
capital markets metrics, ranking it the world leader in sukuk. Malaysia’s sukuk outstanding stood at US$ 262
billion in December 2020, 42 percent of the global total of US$ 631 billion. Malaysia’s sukuk market volume
was equal to nearly the totals of the next three countries combined (Saudi Arabia (US$ 158 billion), Indonesia
(US$ 73 billion, and the UAE (US$ 50 billion). Furthermore, the 2021 edition of the Islamic Financial Services
Industry Stability Report (IFSISR), which is published by the Islamic Financial Services Board (an international
standard-setting organization based in Malaysia), observes that Malaysia has an active domestic sukuk
market, citing its depth and liquidity. (Islamic Financial Services Board, 2021 p.21).

Malaysia ranked third amongst all countries in 2020 in terms of Islamic fund assets under management
(AUM). Malaysia’s US$ 38 billion in AUM represented 21 percent of the global market of US$ 178 billion.
Countries ahead of Malaysia in the rankings are Saudi Arabia (US$ 53 billion) and Iran (US$ 46 billion).

At least 20 percent of Malaysia’s ICM securities are estimated to be issued by HE enterprises.

The Securities Commission Malaysia (SC)’s 2021 Annual Report states that 750 securities traded on Bursa

45 See https://www.bpmb.com.my/national-development-scheme and https://www.bpmb.com.my/annexure-1.

46 Harizah Kamel, “Ramly Food allocates up to RM1 billion to boost production capacity within 3 years,” The Malaysian Reserve, Jan.
22, 2020, https://themalaysianreserve.com/2020/01/22/ramly-food-allocates-up-to-rm1b-to-boost-production-capacity-within-3-
years/.
47 See https://www.agrobank.com.my/home/corporate-info/about-agrobank/.
48 See https://www.tekun.gov.my/en/corporate-info/info/introduction/.

40 Islamic Finance and the Development of Malaysia’s Halal Economy

 Chapter 2: Financing Malaysia’s Halal Economy

Malaysia were shari’ah-compliant. This corresponds to 79 percent of all securities available (949) and 67
percent of total market capitalization. Of the 750 Islamic securities, 146 were in the consumer products and
services category. Additionally, there were 30 securities in the transportation and logistics sector and 23
in the healthcare sector. (Securities Commission Malaysia, 2021).49 The consumer companies issuing Islamic
securities (19 percent of total ICM issuers) may be assumed to be predominantly halal, as their issuances
would not pass the shari’ah filters if their nature of business were impermissible. Some transportation
and logistics companies may be halal logistics companies and some healthcare companies may be halal
pharmaceuticals. It may thus be safely estimated that at least 20 percent of ICM securities in Malaysia have
been raised to fund HE companies.

The ICM in Malaysia provides a diverse set of financing options for large-scale businesses. The SC,
which regulates Malaysia’s capital markets, has been important to the development of Malaysia’s ICM. The
table below shows the range of Islamic capital market products available to large-scale businesses.50
Table 2.3: Islamic Capital Markets Products in Malaysia
ICM Product Comments
Both common stock and non-cumulative non-voting preferred stock are considered shari’ah-
Shares
compliant.
A form of Islamically permissible debt, a sukuk certificate indicates the holder’s ownership or
Sukuk investment interest in certain underlying assets (generally tangible assets) of the sukuk issuer.
Malaysia’s sukuk market is the world’s largest.
Commodity futures contracts represent an agreement to buy or sell a commodity at a specified
Commodity futures
price on a specified future date. Futures contracts involving crude palm oil, among other
contracts
commodities, have been ruled permissible in Malaysia.
Malaysia’s ICM includes futures contracts on shares of companies engaged in shari’ah-compliant
Single stock futures activities. The shares must be listed on the Malaysian stock market, the futures contract must
contracts follow certain standardized terms regarding size and expiration, and the contract must be cash
settled.
The creation of trusts that own business assets and are operated or managed by a trustee
are permitted, provided certain shari’ah governance guidelines are followed. A key investor
Business trusts
feature of business trusts is that they can pay distributions out of operating cash flow rather
than merely accounting profits.
Islamic exchange-traded funds whose underlying assets are gold or silver are permitted in
ETFs based on gold and
Malaysia if certain requirements relating to structure, trading, and settlement procedures are
silver
met.
Stapled securities are “a situation where investors own two or more securities which are
generally related to each other and contractually bound together through a single vehicle that
Stapled securities
cannot be traded separately.” Provided the individual securities that are stapled together are
shari’ah-compliant, the overall stapled security will also be permissible.
A company may issue such an instrument to obtain financing at a fixed-income rate, with
Redeemable convertible holders of the security being non-voting creditors of the issuer. The instrument may be
unsecured Islamic debt cheaper to service than a bank loan, and the conversion feature may attract investors looking
for additional upside and appeal to current shareholders who prefer equity to debt investing.
“Islamic Securities Selling and Buying-Negotiated Transaction Model” is permitted as a
counterpart to conventional securities lending structures. Such structures permit institutional
Securities lending holders of securities to lend their securities (at a price) to borrowers such as broker-dealers,
investment banks, and hedge funds, enabling them to conduct capital markets operations that
require possession of the security.
A real estate investment trust, or REIT, is a vehicle that permits large numbers of investors
to participate passively in equity ownership of real estate while enjoying professional
Islamic REITs management of the underlying properties. The SC has published extensive operational
guidelines for Islamically permissible REITs and guidelines for the conversion of conventional
REITs to Islamic REITs.
Source: Securities Commission Malaysia

49 SC Malaysia Annual Report 2021: https://www.sc.com.my/api/documentms/download.ashx?id=9d3e461f-7fff-47bf-84cf-

7fefb4c42881
50 “Resolutions of the Shariah Advisory Council of the Securities Commission Malaysia,” December 31, 2021, available at https://
www.sc.com.my/api/documentms/download.ashx?id=58748842-65bb-4060-92af-46b588d886e5.

Islamic Finance and the Development of Malaysia’s Halal Economy 41

Chapter 2: Financing Malaysia’s Halal Economy

In addition, Malaysia has an incipient market for Islamic derivatives and structured products,
particularly certain kinds of forwards and swaps (offered by over a dozen Islamic banks in Malaysia), although
Islamic derivatives remain quite limited in scope and scale.51 Access to these products would strengthen the
ability of halal companies to hedge various risks, especially in an uncertain post-pandemic world. Derivatives
relevant to HE companies may include (1) forward and futures contracts, by which they can secure prices
for the inputs required for producing goods and (2) foreign exchange futures, which help mitigate foreign
exchange risk related to either input costs in foreign currency or revenues from customers in foreign
currency. Islamic derivative standards produced by the International Islamic Financial Market (IIFM) and the
International Swaps and Derivatives Association (ISDA) include templates for both foreign exchange futures
and currency swaps (IIFM 2017).52 HE companies can thus avail of Islamic derivative solutions for key aspects
of risk management.

Malaysia’s capital markets have increasingly embraced fintech and other innovative solutions
which could help finance halal SMEs. As early as 2016, BNM realized the potential of Islamic fintech
solutions, launching a “Financial Technology Regulatory Sandbox Framework” as early as 2016 to enable
fintech innovation and experimentation within a supportive regulatory background. BNM specifically noted
that innovations eligible for the fintech regulatory sandbox “should have clear potential to improve the
accessibility … of financial services … or address gaps in or open up new opportunities for financing.”53
Likewise, the Malaysian securities regulator has the “aFINity@SC” initiative to support the growth of fintech in
the Malaysian capital market and, in 2021, launched the “Fikra Islamic Fintech Accelerator Program” to help
fintech startups access capital.54 Approximately 40 fintech enterprises are currently licensed to do business
in various segments of the Malaysian capital market, including digital investment management, equity
crowdfunding, peer-to-peer financing, and digital asset exchange.55 Malaysian Islamic fintech ventures that
assist SMEs include those furnishing cross-border payment services to enable payment to non-Malaysian
suppliers and a number of Islamic supply chain finance platforms (World Bank Group, 2021b p.70, 72, 87).
Several of the most prominent Islamic banks in Malaysia also have online marketplace platforms to support
trade and facilitate the provision of financing needs. (World Bank Group, 2021b p.102)

2.1.4 Financing from Malaysian Institutional Investors

Malaysia’s large institutional investors do not appear to have explicit strategies targeting the
HE. Although these institutions invest broadly in the Malaysian economy, analysis suggests they have not
published strategic plans or investment allocations for the HE.

However, they have mandates that include national development and Islamic investment. Several
examples can be given:

i. PNB, with approximately US$75 billion under management, making it one of the largest fund
management companies in Malaysia, has as its mission “to enhance the economic wealth of the
Bumiputera community and all Malaysians.” Such a goal can incorporate the support of the HE, as

51 For a list of Malaysian Islamic banks offering Islamic derivatives, see the (World Bank Group, 2021b p.98). For commentary
on the Islamic derivatives market in Malaysia, see “Malaysian Islamic derivatives market gets boost with Tahawwut schedule
development,” IFN Reports, Islamic Finance News, Feb. 11, 2021, available at https://www.islamicfinancenews.com/daily-
cover-story-malaysian-islamic-derivatives-market-gets-boost-with-tahawwut-schedule-development.html; Fitch Ratings, “Islamic
Derivatives Increasingly Necessary, but Constraints Remain,” June 17, 2020, available at https://www.fitchratings.com/research/
islamic-finance/islamic-derivatives-increasingly-necessary-constraints-remain-17-06-2020.
52 IIFM, “The Tahawwut Master Agreement and Islamic Hedging Product Standards – Purpose and Overview” - https://
islamicmarkets.com/publications/the-tahawwut-master-agreement-and-islamic-hedging-product-standards
53 See https://www.bnm.gov.my/-/financial-technology-regulatory-sandbox-framework.
54 See https://www.sc.com.my/fikra.
55 See https://www.sc.com.my/development/digital.

42 Islamic Finance and the Development of Malaysia’s Halal Economy

 Chapter 2: Financing Malaysia’s Halal Economy

this ethnic group generally consists of Muslims. PNB’s portfolio investments include businesses and
funds active in HE sectors.56 If the HE is viewed as a strategic priority for national development, PNB
could designate an allocation for HE investments as an application of its overall mandate.

ii. Employees Provident Fund (EPF), Malaysia’s national retirement saving scheme for private-sector
workers, manages assets of approximately US$238 billion (as of the end of 2020), of which 40 percent
is invested in shari’ah-compliant assets. This includes investments in Islamic private debt securities
and shari’ah-compliant financing. (Employees Provident Fund, 2020 p.46, 49, 198). EPF’s commitment
to Islamic investment creates a large pool of capital that must be channeled to permissible businesses.
As a result, HE enterprises and other businesses that meet EPF’s Islamic screening criteria stand to
benefit from the additional capital.

iii. KWAP is the public employee counterpart of the EPF. With total assets of around US$35 billion as
of mid-2021, KWAP has avoided investments in certain Islamically impermissible activities, such as
alcohol and gaming, since its inception in 2007. (KWAP, 2018)57

iv. Malaysia’s national investment fund Khazanah Nasional has set aside US$1.4 billion to be deployed
over the next few years into an investment fund aimed at improving national development in addition
to providing purely financial returns.58 This is a significant portion of its total assets (as of the end of
2020) of approximately US$20 billion. More generally, Khazanah’s purpose is “to deliver sustainable
value for Malaysians” and it is managed internally through two separate funds, one of which, the
“Strategic Fund,” aims “to deliver impactful measurable economic and societal returns for the nation
and its people.” (Khazanah Nasional, 2021 p.6). To the extent that developing the HE is a priority for
Malaysia, Khazanah could potentially allocate from its Strategic Fund in order to catalyze the HE.

2.1.5 Other Institutional Support

Beyond banks and NBFIs, several institutions in Malaysia provide financial and non-financial
support for the HE. One of the most prominent is the Halal Development Corporation (HDC), a Malaysian
federal government agency that acts as a central promotion body to develop Malaysia’s HE. The HDC offers
HE enterprises and the halal industry a broad slate of advisory services, touching upon market research,
recruiting, halal certification, logistics, networking, funding, and trade facilitation, governance and auditing
practices, and training programs and seminars. The HDC has also designated fourteen locations through
Malaysia to serve as “halal parks” hosting industrial facilities populated by HE enterprises, ranging from
domestic MSMEs all the way to large multinational corporations such as Kellogg and Coca-Cola’s local
bottler.59

The SC, the Malaysian capital markets regulator, has published guidance regarding the shari’ah
screening of MSMEs that are seeking to raise funds through crowdfunding and peer-to-peer financing
platforms. This is designed to benefit investors seeking to invest in the HE and HE enterprises to achieve
a shari’ah-compliant capital structure.60 HE companies stand to benefit from these tools, as their ability to

56 See, e.g., the PNB-INSPiRE Ethical Fund 1, a shari’ah-compliant in fund, https://www.inspirecorp.co.jp/en/business/pief; and the
first halal-certified hotel in Malaysia, “A halal hotel seeks to profit from Muslim travel boom,” CNNMoney, April 28, 2017, https://
money.cnn.com/2017/04/28/news/halal-tourism-hotel-malaysia/;
57 See also Goh Thean Eu, “Malaysia’s KWAP 2020 investment income tops 8 billion ringgit, report says,” Asia Asset Management,
Aug. 3, 2021, https://www.asiaasset.com/post/24933-kwapedge-gte-0802; “KWAP’s Corporate Level Environmental Social &
Governance (ESG) Guidelines,” available at https://www.kwap.gov.my/documents/publications/others/ESG_Framework_Final.pdf.
58 Reuters, “Malaysia’s Khazanah to increase high impact investments via US$1.4 billion fund,” Aug. 12, 2021, https://www.reuters.
com/article/malaysia-khazanah-idUSL4N2PJ1VG.
59 https://www.hdcglobal.com. See also Ng Wai Heng, “Optimising Malaysia’s halal parks,” New Straits Times, Nov. 21, 2021,
https://www.nst.com.my/opinion/columnists/2021/11/747394/optimising-malaysias-halal-parks.
60 Farah Adilla, “SC introduces toolkit for shari’ah status of unlisted MSMEs applying for ECF, P2P funding,” New Straits Times, Aug.
5, 2021, https://www.nst.com.my/business/2021/08/715172/sc-introduces-toolkit-shariah-status-unlisted-msmes-applying-ecf-
p2p-funding.

Islamic Finance and the Development of Malaysia’s Halal Economy 43

Chapter 2: Financing Malaysia’s Halal Economy

pass shari’ah screens can make them eligible for investment from investors who require compliance with
Islamic guidelines.

Malaysia’s Entrepreneur and Cooperative Development Ministry (MEDAC) has encouraged awareness
of halal certification among MSMEs and supported human and physical capital growth and improved
marketing in the HE under the aegis of programs such as the Halal Outreach Program for Entrepreneurs
(HOPE), the Product Transformation Program (PuTRA), the Halal Technology Transformation Program (HTTP),
the International Product Registration Incentive (PRInce), and the Market Access Incentive (MASSIVE). These
programs are implemented by other Malaysian agencies: the Cooperative Commission of Malaysia (SKM),
SME Corp. Malaysia, and Tekun Nasional.61 The SME Corp. Malaysia is notable for being a government
agency specifically dedicated to implementing development programs designed to assist MSMEs. It
cooperates with other agencies, financial institutions, and entrepreneurs themselves in carrying out this
objective.62

JAKIM (the Department of Islamic Development Malaysia), a federal government agency, was
established in 1974 and maintains the halal certification guidelines that apply in Malaysia. As noted
in Chapter 1, the halal certification guidelines JAKIM published in 2020 encouraged certified halal companies
to use Islamic finance. Also, under the auspices of JAKIM, Malaysia hosts the International Halal Authority
Board, an umbrella organization of halal certification bodies from 45 countries. Therefore, recognizing the
validity of halal certification conferred by foreign agencies can remove a roadblock to international trade of
HE products.

Additionally, the Ministry of Science, Technology, and Innovation (MOSTI), through the Malaysian
Technology Development Corporation (MTDC), provide the Halal Technology Development Fund
(HTDF) 63 . The HTDF is specifically designed to finance and nurture small and medium enterprises (SMEs)
for long-term growth and export through halal-compliant activities. The fund’s primary focus is to provide
companies with access to the best advisory services and networks. In addition, activities include the halal
product development process and regulatory compliance services to overcome barriers and hurdles to
bringing halal products and services to market.

Finally, Malaysia originated the World Islamic Economic Forum (WIEF), an event attended by business,
government, and investor representatives that has fostered intra-OIC business and trade opportunities
and encouraged HE activities. The annual event alternates between Malaysia (hosting once every two
years) and other countries. The organizers of the Forum have also held events geared toward startups and
entrepreneurs.64 Malaysia also hosts a trade fair called the Malaysia International Halal Showcase (MIHAS),
which since 2004 has allowed HE enterprises to showcase their wares and network with other industry
participants. The MIHAS is hosted by Malaysia’s Ministry of International Trade and Industry and receives
assistance from the HDC and JAKIM.65

2.1.6 Cross-Border Investments in the HE

As mentioned in Chapter 1, Malaysia has captured a large share of global HE cross-border
investments. Of 156 cross-border transactions in 2019-20, estimated at US$11.8 billion recorded in
the GIER 2021 (DinarStandard, 2021b), 31 were in Malaysia. This corresponds to 20 percent of the total

61 “SMEs, cooperatives to drive halal sector,” New Straits Times, Nov. 21, 2021, https://www.nst.com.my/news/
nation/2021/11/747463/smes-cooperatives-drive-halal-sector.
62 See https://www.smecorp.gov.my/index.php/en/about/2015-12-21-08-49-11/about-sme-corp-malaysia.
63 See https://www.mtdc.com.my/business-funding/htdf/
64 See https://wief.org/.
65 See https://mihas.com.my/about_mihas_overview.php.

44 Islamic Finance and the Development of Malaysia’s Halal Economy

 Chapter 2: Financing Malaysia’s Halal Economy

number of transactions. Only Indonesia (with 38 inbound transactions) had more reported cross-border HE
investments. The largest number of transactions was in the halal food sector (16), followed by media and
entertainment (10), Muslim-friendly travel (3), halal pharmaceuticals (1), and unspecified (1). Although the
precise deal value of these transactions is not publicly available, Malaysia’s share could be roughly estimated
at US$2.3 billion based on the number of Malaysian transactions (31) and the global average transaction size
of US$75.5 million per transaction.

Cross-border investments in the HE may face unique challenges. Total trade by OIC member countries
represents 9.2 percent of global trade, although the population of OIC member countries exceeds 20
percent of the global total. Intra-OIC trade is 18.3 percent of OIC member countries’ trade, suggesting that
intra-OIC trade is 1.7 percent of total global trade (World Bank Group, 2021b). The limited trade volume
suggests that investment ties and comfort with cross-border investment may also be limited. In addition,
regulatory barriers and foreign exchange risk can contribute to reluctance to invest across borders. In the
case of the HE, there may be additional challenges due to halal certification and accreditation requirements
varying between countries.

Multilateral development banks (MDBs) can play a supportive role in increasing cross-border
investment. Numerous MDBs are active in countries with large halal economy sectors. These include
the World Bank Group (WBG), the Islamic Development Bank (IsDB) Group, the Asian Development Bank
(ADB), the African Development Bank (AfDB), and the European Bank for Reconstruction and Development
(EBRD), and Asian Infrastructure Investment Bank (AIIB). These institutions can support halal economy sector
development through direct financing and non-financing support. The IFC (a member of the WBG) plans to
invest up to US$1.2 billion in investments in the Sahel region in sectors including agribusiness between 2022
and 2026.66 Political risk insurance and credit enhancement, such as facilities offered by MIGA (a member
of the WBG) and credit guarantees like those offered by ICIEC (a member of the IsDB), can mitigate risks
associated with cross-border HE investments and enable more such transactions in the future. Additionally,
trade finance facilities such as those offered by the ITFC (also a member of the IsDB) can foster greater
trade volumes, enhancing the revenues and profits of HE companies and making them more attractive for
investment.

Global industry-building efforts by Malaysian institutions may help attract cross-border HE

investment. The World Islamic Economic Forum (WIEF), a Malaysia-led initiative, has been held in Malaysia
and Pakistan, Kuwait, Kazakhstan, the United Kingdom, the United Arab Emirates, and Indonesia. (WIEF
2022).67 Malaysia’s Halal Development Corporation announced a partnership with the Islamic Development
Bank to undertake a “Global Halal Ecosystem Assessment” studying best practices and gaps in the halal
sectors of 22 countries (IsDB, 2022).68 HDC’s Halal Training Institute teaches best practices not only for halal
food but also for halal-friendly hospitality, halal pharmaceuticals, and more (HDC, 2022).69 Although the
direct impact of these initiatives on inbound investment is not known, their role in positioning Malaysia as a
HE leader likely helps attract FDI to the country.

66 See https://www.ifc.org/wps/wcm/connect/news_ext_content/ifc_external_corporate_site/news+and+events/news/insights/
lowering-barriers-for-agribusiness-in-the-sahel
67 See https://wief.org/milestone/
68 See https://www.isdb.org/coekl/news/isdb-center-of-excellence-kuala-lumpur-collaborates-with-the-halal-development-
corporation-to-undertake-halal-ecosystem-assessment-in-22-countries
69 See https://hdcglobal.com/halal-training-institute/

Islamic Finance and the Development of Malaysia’s Halal Economy 45

Chapter 2: Financing Malaysia’s Halal Economy

Special Topic: Financing the Halal Food Industry in

Malaysia

2.2 Introduction
The food industry is a complex supply chain network, covering all aspects of food and beverages from
production to sale (Figure 2.4). It includes raising crops and livestock, food processing, packaging and
labeling, storage, distribution, marketing, retailing, catering, research and development, and education70.
There are also supportive activities such as the manufacturing of farm equipment and agrochemicals and the
financing of businesses in the food industry. The preparation, handling, and processing of food according to
shari’ah is the singular distinguishing feature of the halal food industry.
Figure 2.4: Simplified Halal Supply Chain

Halal Trading Houses

Producers Manufacturers Storage Wholeseller Retailer Customer

Business Logistic

Source: World Bank staff illustration

The certified halal food sector contributes to US$7.3 billion to Malaysia’s total export, but Malaysia
is the second-largest importer of halal-certified food amongst the OIC countries after Saudi Arabia.
Indeed, the largest producers and exporters of halal food are countries like Brazil, Australia, the United
States, and Argentina.71 Therefore, the development of the halal food sector is an important strategy for
Malaysia, to increase export potential and reduce reliance on imports. Access to financing at all stages of
the supply chain is essential to supporting this strategy.

2.3 Islamic Banking

Malaysia’s Islamic banking sector is well developed and has numerous traditional and fintech product
offerings for the agriculture and food sectors. Several Islamic banks, such as AgroBank, Bank Islam,
Maybank, CIMB, and Alliance, offer dedicated financing and other forms of support that help expand the
halal business, including halal agriculture products. AgroBank, being the leading DFI focused on facilitating
financing for the agriculture sector, offers full-chain financing programs in support of Malaysia’s National Agro
Food Policy and works closely with the Ministry of Agriculture and Food Industry (MAFI) to advance responsible
financial inclusion. Under its Value-Based Intermediation (VBI)72 initiative, AgroBank promotes funding to adopt
good agricultural practices by agropreneurs to increase productivity, improve quality and better preserve the
environment. CIMB’s Agrofood Facility Scheme and Maybank’s Primary Agriculture Sector-i provide financing
for working capital and/or capital expenditure for the development of agriculture projects, such as purchasing
machinery and equipment, or for the renovation cost for owner-occupied business premises.

70 Food Industries, Food Standards Agency (UK). Retrieved August 3, 2008.

71 Based on the halal classification for food-related products by the WTO and data available in the UN International Trade Statistics Database
72 The VBI initiative aims to improve the products and services offered by IFIs towards better facilitation of entrepreneurship,
community well-being, sustainable environment, and economic growth.

46 Islamic Finance and the Development of Malaysia’s Halal Economy

 Chapter 2: Financing Malaysia’s Halal Economy

2.4 Islamic Capital Markets (ICM)

The capital market plays a complementary role to the banking industry by supporting capital and
fund-raising activity. Traditionally, medium to large firms in Malaysia can raise capital through the capital
market via equities, bonds, and sukuk. Nearly 80 percent of listed companies in Malaysia are shari’ah-
compliant. As of November 2021, the market capitalization of these shari’ah-compliant companies stood
around US$0.28 trillion (RM1.19 trillion), or around 68 percent of the total Bursa Malaysia market capitalization.
Currently, there are approximately 45 agriculture and food-related products firms in the consumer staples
group listed in Bursa Malaysia (Figure 2.5 and 2.6). This sector covers food activities from farming, food
manufacturing, animal feeds production and fisheries to medication. Listed and planned to be listed firms in
the halal food industry can have easy access to raise funds and tap liquidity via sukuk and shari’ah-compliant
equities. In addition, Halal MSMEs can raise funds via alternative markets such as ECF and P2P lending.

Figure 2.5: Market Capitalization for Food- Figure 2.6: Total Market Capitalization for
related Sector By Size: Shari’ah vs. Non-Shari’ah Food-related Sector: Shari’ah vs. Non-Shari’ah
(as at December 31, 2021) (RM Billion)(as at December 31, 2021)

Market Captialisation for Food Related Sector:

Shari'ah vs Non-Shari'ah
5.36
16
14
12 14
10
8
6
8
7
4
4 4 80.7
2 1 2 2 3 0
0
Less than RM100 mn RM500 mn RM1 bn to More than
RM100 mn to RM500 mn to RM1 bn RM10 bn RM10 bn

Shari'ah Compliant Non-Shari'ah Compliant Shari'ah Compliant Non-Shari'ah Compliant

Source: Bloomberg

Sukuk, one of the key ICM instruments, dominated the issuance in 2021, representing around 83
percent of capital raised from corporate bonds and sukuk. QSR Brands, which operates KFC and Pizza
Hut, issued sukuk murabahah of up to US$0.31 billion (RM1.3 billion) in 2017 is a good example of how halal
companies could tap the sukuk market. Similarly, FGV Holdings, a plantation-related company producing
various halal food-related products, also issued RM 500 million of sukuk murabahah in 2021. QSR Brands
also listed its assets under the Al-Salam Real Estate Investment Trust (Al-Salam REIT). The proceeds from
the sukuk murabahah program shall be utilized by FGV to refinance its existing financing or borrowings. Al-
Salam REIT was listed on the Main Market of Bursa Malaysia Securities Berhad on 29 September 2015 with
an initial asset value of US$215 million (RM903.1 million). Starting with 31 properties in 2015, Al-Salam REIT
has expanded its portfolio to 54 properties across Malaysia, comprising three retail malls, an office building,
43 F&B restaurants, and seven F&B non-restaurant assets. The asset value of Al-Salam REIT has since risen
to US$0.28 billion (RM1.19 billion) as of 31 December 2020 from its initial investment. As of 31 December
2020, Al-Salam REIT market capitalization stood at US$75.6 million (RM319 million) (Al-Salam REIT, 2020).

Islamic Finance and the Development of Malaysia’s Halal Economy 47

Chapter 2: Financing Malaysia’s Halal Economy

2.5 Alternative Finance

ECF and P2P provide additional fund-raising avenues for early-stage businesses and MSMEs. ECF is
an innovative form of alternative fundraising that allows small businesses, including those in the halal industry,
to raise capital from the public using online platforms registered with the securities market regulator. In the
context of the halal industry, ECF allows small halal businesses to offer equity in their companies to investors,
who in turn invest in the concept in which they see the potential. Through ECF, investors can diversify their
investments beyond traditional asset classes. P2P financing is another innovative form of financing that
allows entrepreneurs and small businesses to unlock capital in small amounts from a pool of individual
lenders. P2P lets businesses borrow, and investors lend capital through online platforms registered with
the SC, including shari’ah-compliant platforms. In addition, the alternative financing market can also help
embed financing solutions based on data such as from the agritech platforms or digital marketplaces and
support innovative firms in developing credit scoring models that are useful for future lending.

Since their introduction, these alternative market-based fund-raising platforms have benefited close
to 3,000 MSMEs. In 2020 and despite economic uncertainties, total amounts raised from these platforms
were more than 5.5 times for ECF (Figure 2.7) and 1.2 times for P2P platforms (Figure 2.8) compared to the
previous year. The offering of shari’ah-compliant solutions by these platforms has also increased. Currently,
there is only one Islamic ECF platform, i.e., Ethis, in contrast to five P2P platform operators that are providing
shari’ah-compliant offerings. More than US$0.38 million (RM1.6 million) has also been successfully raised
using Islamic investment notes.73

Figure 2.7: Equity Crowdfunding Activities in Malaysia (end-September 2021)

Distribution by Fundraising Amount

8%
RM500,000 and
28% below

>RM500,000 and up
to RM1.5 million
30%
>RM1.5 million and
up to RM3 million

>RM30 million

34%

Note: 236 Successful Campaign, RM352.11 A mount Raised, 222 Successful Issuers
Source: Securities Commission Malaysia, as of end September 2021

Example of ECF registered with Securities Commission Malaysia

73 See https://www.sc.com.my/resources/speeches/keynote-address-at-sc-hdc-forum-2021-enabling-growth-through-the-islamic-
capital-market

48 Islamic Finance and the Development of Malaysia’s Halal Economy

 Chapter 2: Financing Malaysia’s Halal Economy

However, some private lenders may find it difficult to expose their portfolios to the halal food supply
chain base, which is the agricultural sector. The potential reasons are the high entry barrier regarding
farming skills and experience, land requirements, and high initial capital investment. On a positive note,
growing interest among AgroTech providers such as Kapitani Sdn Bhd provides digital solutions and extends
advancements in bookkeeping and agricultural analytics to farmers, which will allow lenders to access real-
time farm data and farmers’ credit scores. These digital solution providers can also construct optimal profit-
sharing and repayment terms based on individual farmers’ financial health and farm operation, connecting
farmers with players along the agriculture supply chain.

Figure 2.8: Peer to Peer Lending Activities in Malaysia (end-September 2021)

Distribution by Fundraising Amount

7%, 7%

RM500,000 and below

22%, 22%
>RM50,000 and up to
RM200,000

>RM200,000

71%, 71%

Note: 25,259 Successful Campaign, RM1.94 billion Amount Raised, 3,824 Successful Issuers
Source: Capital Market Malaysia, as of end September 2021

Example of P2P registered with Securities Commission Malaysia

Several ongoing initiatives by ECF and P2P providers could benefit HE companies. For example,
several ECF operators, such as AtaPlus, have included agriculture-related firms in their investment portfolio,
including Fefico. Fefico is a technology-first co-farming company that provides traditional smallholder
farmers and young agriculture graduates with ready-to-farm spaces and technologies to kickstart farming
businesses. As of 2021, MicroLEAP has collaborated with BPMB to fund farming digitalization plans aiming
to accelerate the use of smart farming systems via the adoption of technology known as a ‘smart fertigation
system’ in their farming operations.

In general, opportunities are aplenty for innovative companies along the halal supply chain to receive
funding through ECF and P2P platforms. With the introduction of the HIP by HDC, a data pool of halal
products and services that provides industry players with access to global halal players, businesses along the
halal supply chain will have greater potential to reach out to global partnership and expand their customer
base thus reducing cost and failure risk. This will incentivize potential investors and lenders to engage with
halal business operators via the well-regulated ECF and P2P platform.

Islamic Finance and the Development of Malaysia’s Halal Economy 49

Chapter 2: Financing Malaysia’s Halal Economy

2.6 Islamic Social Finance

Islamic social finance such as waqf and zakat can play an essential role in supporting the halal food
industry. Generally, waqf can be defined as a special kind of philanthropic deed in perpetuity. It involves
donating a fixed asset that can produce a financial return or provide a benefit. The revenue or benefit
generated then serves specific categories of beneficiaries. Therefore, a waqf focused on the agricultural
sector could provide financial support to different market players along the halal food supply chain, including
small farmers, small and medium enterprises, and other stakeholders for working capital purposes, land
acquisition, technology, etc. In addition, the waqf structure is an effective and administratively convenient
mode of investment and finance, particularly for large-scale projects, as waqf has been used successfully
to promote the public interest and facilitate investment throughout culturally and geographically diverse
countries (Abdelhady, 2012). An example of how waqf can support halal food production is illustrated in
Figure 2.9 below.

Figure 2.9: Simplified Waqf for Agriculture and Food Security

Community
Waqf Giver
Waqf Farmers Food
(Waqif)
Security

Source: Muhammad Dandy Alif Wildana, An’im Kafabih74

The waqf concept is explained as follows (Wildana & Kafabih, 2021):

i. The asset owner (waqif) surrenders his asset (i.e., land) to waqf to be managed. The land will be
observed by waqf whether the land is arable or not. If the land is considered arable, then it can be
utilized to plant food crops.

ii. Waqf, as the trustees of the land, enter into partnership with farmers.

iii. Waqf and farmer choose the most suitable option based on the profile of the farmer. If the said
farmer owns no capital, then mudarabah (venture capital) contract is chosen. In another case, if the
farmer has some capital to cultivate the land, musharakah (partnership) contract is chosen.

iv. Waqf and the farmer shared profit and loss based on the chosen contract and upon the pre-agreed
ratio upfront.

v. Waqf share of crops is either deposited in its original form as a reserve or can be sold and converted
into cash for either economic, social, or religious purposes.

vi. The reserve held by waqf in the form of original staple food crops such as rice, maize, whey, barley,
etc., is considered stock to ensure the community’s food security in the smallest form.

The SC has launched a waqf framework to broaden the range of innovative Islamic finance products
and provide the public access to Islamic funds that allocate whole or part of the fund’s returns towards
socially impactful activities via waqf. On a bigger scale, waqf institutions can opt to explore raising capital to
develop their waqf projects, such as those related to the halal food industry, through the issuance of sukuk.

74 The concept of waqf-syirkah for community food security. Muhammad Dandy Alif Wildana & An’im Kafabih

50 Islamic Finance and the Development of Malaysia’s Halal Economy

 Chapter 2: Financing Malaysia’s Halal Economy

In addition, the sukuk issuance may be used for various purposes to satisfy the issuer’s commercial needs,
such as for financing working capital and capital expenditure requirements, vis-à-vis the investors’ (sukuk
holders) investment and risk appetite. Figure 2.10 provides an overall picture of how capital raising from
sukuk issuance could be used to develop waqf assets.

Figure 2.10: Raising Capital through sukuk issuance for the development of waqf assets

Investors
Investors Issuer distributes
1 provide 5 periodic profit
capital via
subscriptions
of sukuk

Sukuk
Issuers
e.g. waqf institution

Sukuk proceeds
2 are used for
development Project generates
4 income
of waqf assets

Waqf
Projects
e.g. universities, hospitals, etc

Appoint
Intermediary Institutions
To manage the projects
3 e.g. by asset manager or
real-estate manager licensed
by supervisory authorities

Source: Securities Commission Malaysia

Zakat (almsgiving) is another Islamic social finance instrument that could be used to provide financing,
especially for eligible zakat recipients (asnaf) to participate in the agriculture industry. For example, the Kedah
Zakat Agency (LZNK) runs the Paddy Estate Scheme, under which each participant manages a 0.29-hectare
paddy field owned by the LZNK. The LZNK has provided them with all the paddy planting inputs, all the
way to the harvesting process. In addition, participants would get US$1,190 (RM5,000) worth of interest-free
BangKIT micro-financing – twice a year, through a collaboration between LZNK and BIMB. This soft loan will
help the participants to support their families throughout the four months prior to harvesting the paddy.
LZNK will then deduct proceeds from the paddy sales to repay their loan. LZNK also offers Paddy Estate
Cultivation Scheme to existing small farmers. Under this project, LZNK will fund all the costs from cultivation
to harvesting, and the loan payment will be deducted from the sales later. Both schemes aim to transform
low-income earners into successful paddy farmers. 75

75 See https://www.nst.com.my/news/nation/2021/12/756938/kedah-zakat-agency-transforming-low-income-earners-successful-
paddy

Islamic Finance and the Development of Malaysia’s Halal Economy 51

Chapter 3: Enhancing Islamic Finance for the Halal Economy in Malaysia

CHAPTER 3

Enhancing
Role of Islamic
Finance for the
Halal Economy
in Malaysia

52 Islamic Finance and the Development of Malaysia’s Halal Economy

 Chapter 3: Enhancing Islamic Finance for the Halal Economy in Malaysia

3.1 Introduction
Enhancing the use of Islamic finance for the development of the HE will entail interventions on both
the demand and supply-side. According to HDC, businesses involved in the HE, particularly MSMEs in
general, face a combination of access to finance and business-related challenges that directly impact their
business and financial viability. Therefore, it is not only important to consider the supply-side elements of
the financing gap, such as ensuring the availability of relevant financing instruments but also to address
the demand-side elements to ensure that halal businesses, who are in effect all potential Islamic finance
users, become more financially viable and resilient. This chapter provides an overview of the key elements
of the demand and supply-side factors of the financing ecosystem in the HE. Whilst some of these elements
appear not just unique to the HE, the chapter endeavours to highlight specificities that may be relevant in
the context of the HE.

Facilitating the financing of the HE is a strategic goal of BNM. BNM’s Financial Sector Blueprint 2022-
2026 (FSBP), released in January 2022, includes as a goal “greater integration of Islamic finance with the HE,
particularly in financing halal trade and investment.” In addition to noting the global opportunity associated
with halal trade and supply chain activities, the Blueprint calls on financial institutions to “help nurture local
halal businesses into global or regional players” (Bank Negara Malaysia, 2022 p.106)76.

3.2 Demand-side Factors

Under the Twelfth Malaysia Plan 2021-2025 (12MP), the Malaysian government has outlined a
strategy towards fostering the competitiveness of an inclusive HE as part of the government’s
priority to accelerate the development of strategic and high-impact industries (Economic Planning
Unit, 2021). The key strategies are intended to develop Malaysia’s HE, improve its competitiveness and
ultimately position Malaysia as a leading global halal hub. They include halal industrial parks, research,
development, innovation, and talent development.

3.2.1 Halal Industrial Parks

Since their introduction in 2011, Halal Malaysia (HALMAS) industrial parks have attracted
RM16.1 billion worth of investment, of which RM9.5 billion, or 59 percent, came from foreign direct
investment (FDI) and RM6.6 billion from domestic direct investment (DDI). 77 There are fourteen (14)
strategic HALMAS industrial parks located across Malaysia designated by HDC (Figure 3.1), hosting more
than 40 multinational corporations (MNCs) and 200 local SMEs including such brand names as Kellogg, F&N
Dairies, Coca-Cola, Ramly Food Industries and Kawan Food Manufacturing. In addition, there are eleven
(11) halal parks recognized by state governments or other government agencies. The companies located in
the HALMAS industrial parks are involved in various sectors such as food and beverage, cosmetics, logistics,
and pharmaceuticals.

76 See also Daily Cover Story: Malaysia’s latest financial sector blueprint features strategic thrust focusing on Islamic finance
leadership,” Islamic Finance News, Jan. 25, 2022, https://www.islamicfinancenews.com/daily-cover-story-malaysias-latest-financial-
sector-blueprint-features-strategic-thrust-focusing-on-islamic-finance-leadership.html.
77 “Malaysian halal parks record RM200 mln increase in direct investment”, Bernama, Mar.23, 2021, https://www.mida.gov.my/mida-
news/malaysian-halal-parks-record-rm200-mln-increase-in-direct-investment/#:~:text=Malaysia%20has%20recorded%20an%20
increase,cumulative%20total%20investments%20of%20RM16.

Islamic Finance and the Development of Malaysia’s Halal Economy 53

Chapter 3: Enhancing Islamic Finance for the Halal Economy in Malaysia

Figure 3.1: Location of 14 HALMAS industrial parks

110
KOTA KINABALU
INDUSTRIAL PARK

Major Highways 100

165
POIC

170
Sea Ports
LAHAD DATU
Thailand

PERDA International Airports

PASIR MAS With Cargo Facilities
HALAL PARK HALAL PARK
Rail Freight

200
PENANG
INTERNATIONAL
HALAL HUB

190,271
Brunei

1,000 170 TG MANIS

SELANGOR GAMBANG HALAL HUB
HALAL HUB HALAL PARK

67
PKFZ
NATIONAL
342
HALAL PARK POIC TG
LANGSAT

1,134
TECHPARK
@ENSTEK
Singapore

100 Indonesia

PEDAS HALAL
PARK

135
MELAKA
HALAL HUB

72 ISKANDAR
BUSINESS PARK

Source: https://hpglobal.com.my/

Halal park operators, manufacturers, and halal logistic operators operating in these locations can also
benefit from tax incentives (Table 3.1). For example, manufacturers are eligible to receive a 100 percent
income tax exemption on qualifying capital expenditure for as long as ten years or an income tax exemption
on export sales for a period of five years. In addition, MNCs located in these parks listed on Malaysia’s stock
exchange are mainly shari’ah-compliant, indicating that at least two-thirds of their financing is based on
Islamic finance.
Table 3.1: Tax incentives and grants for halal development in Malaysia

Agency HDC HDC MIDA Malaysian Technology

Development Corporation
Type of Tax incentive Tax incentive Tax incentive Grants
incentives
Sector Services Services Manufacturing Manufacturing and
Services
Incentive • Full income tax • Full income tax • Incentives Tax • Halal Technology
description exemption for a period exemption for a period Allowance (ITA) of 100% Development Fund
of 5 years or 100% of 10 years or 100% on qualifying capital (HTF) is specifically
income tax exemption income tax exemption expenditure incurred designed to finance
on capital expenditure on capital expenditure within a period of 5 and nurture SMEs for
for a period of 5 years. for a period of 5 years. years. The allowance long-term growth and
can be offset against export through halal
• Exemption on import • Exemption from 100% of statutory compliant activities.
duty and sales tax on import duty and sales income in each year of
equipment, components tax on equipment, assessment. Unutilized • The primary focus of
and machinery used components and allowance can be the fund is to provide
directly in Cold machinery used carried forward until companies with access
Room Operations directly in the Cold fully absorbed. to the best advisory
in accordance to Room Operations services and networks.
prevailing policies. in accordance to Activities include halal
prevailing policies. product development
• Must be located within process and regulatory
one of the the HDC • Must be located within compliance services,
designated HALMAS one of the the HDC as part of the effort to
designated HALMAS overcome barriers and
hurdles to bring halal
products and services
to market.

54 Islamic Finance and the Development of Malaysia’s Halal Economy

 Chapter 3: Enhancing Islamic Finance for the Halal Economy in Malaysia

• HTF 1 provides flexible

funding which includes
grant and convertible
promissory note up to
a maximum of RM2
million.
• HTF 2 provides flexible
funding which includes
grant and convertible
promissory note up to
a maximum of RM4
million.
Eligibility • Services provided • Granted with HALMAS Eligibility activity/ HTF 1
by Halal Logistics status product • The company is
Operators (HLO) must • Involve the halal incorporated under the
be integrated which industry cluster (i) New or additional halal Companies Act 1965.
comprises of the 3 component in terms food products utilizing • The company must be
principal activities: of food, non-food modern and state-of- at least 60% owned by
(i) Forwarding; (ii) products and services the-art machinery or Malaysian(s).
Warehousing; and (iii) technology. (ii) Expansion
Transportation • Employing substantial with upgrading of existing • The company qualifies
number of knowledge plant by investing in as an SME according to
• And at least one of the workers in the halal the guidelines on new
following activities: (i) additional machinery
industry. and utilizing modern SME definition 2013 by
Distribution; (ii) Other SME Corp. Malaysia.
related and value- • Having certified technology. (iii) Products
added services/activities halal slaughter from not listed in the promoted • The company has
(e.g. palletising, respective authority for list with modern and state- already obtained
product assembly/ companies involved of-the-art machinery and halal certification from
installation, bulk in the slaughtering of technology would also be JAKIM.
breaking, consolidation, animals. eligible for consideration • The company must not
packaging/ • Provide technology/ be a subsidiary of a
re-packaging, transfer and or Eligible applicant: GLC/MNC.
procurement, quality contribute towards the (i) New companies
control, labelling/ development of halal undertaking production
re-labelling, testing industry of halal foods. (ii) Existing HTF 2
etc.); (iii) Supply chain companies undertaking • All the criteria listed
• Establish a separate diversification project
management. legal entity for the above (HTF 1); and the
in the production of products or services
HALMAS status halal food. (iii) existing have already been
A HLO must own the • Comply with the halal food companies exported.
minimum infrastructure environmental undertaking upgrading/
as follows: (i) Commercial guidelines. expansion of existing plan.
vehicles – 20 units; (ii) • Activities NOT
Warehousing facilities – ELIGIBLE for HALMAS: Eligibility criteria and
5000 sq. meters (i) Business Trading conditions:
– business trading (i) Fulfill the level of
activities only is not value-added percentage
allowed to apply for the and level of technology
halal industry incentives. as measured by the
(ii) Producers – Those Managerial, Technical
are not operating in the and Supervisory (MTS)
HDC designated halal index; (ii) The company
parks. (iii) Consultancy – shall obtain JAKIM halal
consultation activity that certification in compliance
is primarily providing with MS1500:2019
professional advice
and to any halal status
application develop in-
house by the applicant.
Note: Having met the eligibility
criteria, all the applications
must comply with HDC
standards and guidelines for
halal parks. Any new halal
parks proposed by the state
government will have to seek
the consent of HDC in order
to ensure that compliance to a
set of checklist on requirement
of infrastructure, standards and
guidelines.

Islamic Finance and the Development of Malaysia’s Halal Economy 55

Chapter 3: Enhancing Islamic Finance for the Halal Economy in Malaysia

HALMAS industrial parks provide access to an integrated HE ecosystem to improve the efficiency
of HE business operations. The establishment of industrial parks and economic zones has primarily been
associated with providing functional infrastructures in a more effective manner and creating spillover effects
both inside and outside of the parks (Saleman & Jordan, 2013). According to research, key criteria of the
HALMAS industrial parks that tenants highly value include their accessibility to the nearest port and highways,
customs and cargo inspection services, traceability services, and packaging facilities (Islam & El Madkouri,
2018). In addition, HALMAS industrial parks are equipped to facilitate logistics to comply with international
and Malaysia Halal Certification (MHC) standards. More than 50 international bodies mutually recognize
MHC standards, and the global reputation of the MHC has created a demand for these certifications from
firms outside Malaysia. As a result, an overseas manufacturing manual has been introduced.

Under the 12MP, underperforming HALMAS industrial parks will be revived through coordination involving
state authorities, investment promotion agencies, and regional economic corridors authorities. Based
on engagement with HDC, there is no periodic performance evaluation conducted for monitoring HALMAS
industrial parks. However, a research conducted to evaluate the performance of the HALMAS industrial parks
indicated a higher score for more established locations such as the PKFZ National Halal park and Selangor Halal
hub. In contrast, the less urban locations such as the Pedas Halal Park and POIC Lahad Datu fared poorer on the
scale (Islam & El Madkouri, 2018). The key areas of improvement include accessibility to infrastructure, facilities,
logistics, local support authorities, and the role of the HDC. With coordinated support from the relevant
government agencies, state authorities, and the private sector, challenges faced by these underperforming
locations may be overcome, which can help to attract fresh financing and investment prospects.

HALMAS industrial parks could be transformed into halal eco-industrial parks (EIPs) that implement
circular economy practices to enhance the value of the HE and increase competitiveness (see section
3.2.6 on sustainability). EIP is defined as a dedicated area for industrial use at a suitable site that supports
sustainability through the integration of social, economic, and environmental quality aspects into its siting,
planning, management, and operations (United Nations Industrial Development Organization et al., 2021, p.13)
(Figure 3.2). Benefits such as access to finance, technical support, and policy, economic, and community gains
were frequently cited in EIP case studies by UNIDO in 2016 (ibid, p. 21). Circular economy interventions are not
just environmentally beneficial but also economically viable and hence, can improve the competitiveness of
industrial parks and tenant firms (World Bank Group, 2021a). The World Bank report suggests mainstreaming
circular economy principles in industrial park operations by improving the circularity of energy, water,
materials, and by-products during production processes, such as adopting renewable energy sources and
water efficiency technologies (ibid) (Figure 3.3). According to HDC, currently none of the HALMAS industrial
parks are recognized EIPs but efforts are underway by some of the EIPs to incorporate renewable energy
options in their energy supply mix.
Figure 3.2: Sustainable Development Goals (SDGs) applicable to EIPs

Eco-
Industrial
Parks

Source: UNIDO; World Bank Group & GIZ (2021)

56 Islamic Finance and the Development of Malaysia’s Halal Economy

 Chapter 3: Enhancing Islamic Finance for the Halal Economy in Malaysia

Figure 3.3: Circular economy principles in industrial parks

Source: (World Bank Group, 2021a)

3.2.2 Innovation and Research and Development (R&D)

Malaysia’s HE is concentrated in the F&B sector and lacks diversification in high productivity
sectors.78 According to HDC, one of the challenges faced by HE manufacturers in Malaysia is the lack
of diversification beyond the F&B sector. Based on data from HDC, US$2.1 billion (RM8.8 billion) or 28.9
percent of Malaysia’s halal export value for 2020 was attributed to halal ingredients, where 95.5 percent
of these exports were produced by MNCs79. The 12MP intends to promote initiatives that will encourage
Malaysia’s halal entrepreneurs to venture into the production of high value-added products, such as halal
ingredients, pharmaceuticals, cosmetics, and medical devices.

Supporting relevant R&D activities is essential to developing high-value-added innovation in Malaysia’s

HE. A World Bank report has shown that Malaysia’s quality of research has remained low compared to high-
income countries. Thus strengthening support for Malaysia’s public research organizations and universities
is crucial to accelerating the transition to an innovation-driven growth toward becoming a high-income
nation (World Bank Group, 2020a). Total R&D spending as percentage of GDP lags behind high income
countries (Figure 3.4) and most of the R&D funding is sourced by businesses themselves (56.5 percent) and
they typically focus more on applied research (Figure 3.5).

78 Halal Knowledge Centre, (n.d.). Impact Study and Pro­filing 2016 – 2020, Halal in Malaysia, from global perspective. Retrieved Feb.
11, 2022 from https://hkc.hdcglobal.com/infographic-report/list
79 Halal Knowledge,(n.d.). Malaysia Halal Export 2020 – Halal Ingredients. Retrieved Feb. 11, 2022 from https://hkc.hdcglobal.com/
infographic-report/list

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Figure 3.4: R&D indicators (2018) Figure 3.5: Research orientation - R&D
Expenditure RM Millions (2016)
R&D indicators 8000
5000
7000
Researchers per million population

High income
4500 countries
4000 6000

3500 5000
3000 4000
2500 3000
Malaysia East Asia and
2000 the Pacific 2000
1500
1000
1000
Middle income 0
500 countries Business Government Higher Education
0 Enterprises Research Institutes
0.5 1 1.5 2 2.5 Institutes
R&D spending as percentage of GDP Basic Research Applied Research
Experimental Research

Source: UNESCO Institute for Statistics Source: National Survey of R&D in Malaysia 2017

The 12MP has identified the need to support HE-focused incubators and R&D commercialization.
After the Ninth Malaysia Plan 2006-2010, where the development of the HE was identified as a key
strategy, several institutions of higher learning in Malaysia have established dedicated research centers
for halal encompassing various fields, including shari’ah and law, detection systems for non-halal products,
pharmaceutical and vaccine, logistic, consumerism and products and others. In addition to research, these
centers also provide services such as providing analytical testing services and training and consultancy for
halal certification (Table 3.2)
Table 3.2: List of research centers at Malaysian universities and services provided
Research center/ Center of Excellence Laboratory Training and Product
testing consultancy commercialization

Halal Research Centre (UMHRC), University of Malaya No Yes Yes

International Institute for Halal Research and Training (INHART), Yes Yes Yes
International Islamic University Malaysia

Institute of Fatwa and Halal (IFFAH), Universiti Sains Islam Yes Yes Yes
Malaysia (USIM)

Halal Products Research Institute, Universiti Putra Malaysia Yes Yes Unknown

Unipeq, University Kebangsaan Malaysia Yes Yes No

Asian Halal Institute, University Utara Malaysia Unknown Yes Unknown

Source: World Bank staff’s illustration

However, there is limited data on commercialized research and registered patents that may suggest
the potential impact of relevant R&D has not been optimized by the HE. Whilst this challenge is
common in all economic sectors in Malaysia, it is imperative for the HE to invest in R&D in order to promote
innovation and higher productivity. In one of its studies, HDC found that there is a lack of product creation
and innovation by Malaysia’s HE players.80 Hence, HDC has initiated further efforts to promote research
and knowledge generation by introducing the Halal Knowledge Center at the end of 2021 as a knowledge
resource platform to promote the global sharing of information on HE. In addition, HDC is also collaborating

80 Halal Knowledge Centre, (n.d.). Impact Study and Pro­filing 2016 – 2020, Halal in Malaysia, from global perspective. Retrieved Feb.
11, 2022 from https://hkc.hdcglobal.com/infographic-report/list

58 Islamic Finance and the Development of Malaysia’s Halal Economy

 Chapter 3: Enhancing Islamic Finance for the Halal Economy in Malaysia

with a government agency, the Academy of Sciences Malaysia, under its ‘i-Connect’ initiative, which intends
to facilitate the R&D of innovative solutions through collaborative networks. The halal supply chain is one of
the four strategic industry sectors that have been included as an area of focus under the i-Connect initiative.
Since supply chains are specific and unique by industry, greater focus should be given to priority halal
sectors such as food sector or pharmaceuticals.

Enhancing the business development and brand value of halal businesses can positively impact
business performance. According to HDC, most certified halal businesses in Malaysia are MSMEs. These
businesses generally focus on a small local market and lack the capacity to develop their products for the
export market.81 However, HDC noted that 61 percent of the businesses surveyed indicated an interest in
diversifying into the future export market 82. Branding and promotion by SMEs are mainly poor, and brand
investment is a key challenge for SMEs.83 Halal branding is becoming a key priority for halal businesses,
and brand recognition can help to elevate the presence of these brands domestically and globally (Figure
3.6). HDC and SME Corp have initiated several programs to assist SMEs with branding development, such
as the Product Transformation Program (PuTRA) and the Market Access Incentive (MASSIVE). PuTRA is
specifically designed to assist SMEs in improving the commercial value of their halal products through
improved branding, packaging, and labeling. MASSIVE will help SMEs to market their halal products to
potential international markets.
Figure 3.6: Winners of the Brand Laurette Halal Most Valuable Brand Award 2021

Source:https://www.thebrandlaureate.com/world-halal-bestbrands/the-world-halal-bestbrands-2021

3.2.3 Talent Development

Developing a comprehensive halal talent framework is important to ensure an adequate supply of
quality professionals to provide high-quality service. One of the strategies under the Halal Industry
Master Plan 2030 (HIMP 2030) is to produce more ‘Halal Champions’ among local industry players. To
this end, the Ministry of Entrepreneur Development and Cooperative (MEDAC) has appointed government
agencies such as the Cooperative Commission of Malaysia (SKM), SME Corp, and Tekun Nasional to
implement Halal Professional training. In addition, the Malaysian Qualification Agency (MQA) and HDC have
developed a program standard for halal studies from certificate level to doctoral degree. However, funding
for professional development training and tertiary education outside of existing government schemes would
require private sources. Currently, Islamic finance providers have a minimal offering of education financing
beyond crowdfunding solutions. Islamic social finance and Islamic fintech solutions are ideal for providing
funding options to complement available public funding. For example, Google-incubated fintech player
Financepeer, based in India, offers interest-free tuition fees to parents of the school and college-going
students. Similarly, Pintek, an Indonesian fintech for education, has successfully provided access to funds for
students or parents for study fees.

81 Halal Knowledge Centre, (n.d.). Impact Study and Pro­filing 2016 – 2020, Halal in Malaysia, from companies’ perspective. Retrieved
Feb. 11, 2022 from https://hkc.hdcglobal.com/infographic-report/list
82 Ibid.
83 Bizsphere. “Malaysia SME: Brand Investment Is Greatest SME Challenge”, Feb 3 – Feb 16, 2018, https://bizsphere.com.my/
smebrandsurvey2017-malaysia-sme/

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3.2.4 Digitalization
The potential of digitalization as a catalyst to unlock new economic opportunities has been embedded
in the 12MP. The 12MP has identified technology adoption and innovation as a key policy enabler and
targets to grow the contribution of e-commerce to GDP to 10.5 percent by 2025 (Q3 2021: 8.4 percent).84
Similarly, the HIMP 2030 intends to leverage technology and digitalization to improve the competitiveness
of Malaysia’s halal businesses. According to a World Bank report (World Bank Group, 2020d), digitalization
is a key enabler in (i) developing financial products that provide access to finance, (ii) driving transformation
that enhances efficiency, reduces the cost of production, and increases profitability, ultimately attracting
more financing, and (iii) creating market enablers such as e-commerce and open banking.

While the pandemic has accelerated the adoption of digital solutions by firms, the percentage of SMEs
investing in digital solutions lags those of large firms, indicating a potential for significant funding
opportunities (World Bank Group, 2021c). According to the World Bank’s Business Pulse Survey (BPS), 54
percent of the small firms surveyed made investments in digital solutions compared to 81 percent and 83
percent of the medium and large firms surveyed. (Kuriakose & Tran, 2020). In another study conducted by the
SME Association of Malaysia, only 26 percent of SMEs were revealed to have chosen digital technologies as
their main post-pandemic growth strategy. The majority of SMEs (57 percent) have not even started efforts
toward digitalization.85 The digitalization of the ASEAN economy during the pandemic has largely favored
individual consumers, with SMEs facing significant barriers related to access and use of digital technologies
that prevent them from optimizing their business potential.86 In terms of digital presence, fewer Malaysian
businesses have websites than per capita income would predict compared to other countries (World Bank
Group, 2018). National statistics suggest that as of 2019, 53.9 percent of business establishments in Malaysia
have a web presence, up from 37.8 percent in 2017.87 Limited access to finance remains the most significant
constraint for firms’ investing in digital solutions, followed by a lack of information and lack of certainty
regarding the benefits to be derived (World Bank Group, 2021c) (Figure 3.7).

Firms (including halal companies) have identified the need for funding support to expand digital
business capabilities, which can be offered through innovative financial products and services. The
cost of digitalization is a major challenge for businesses, especially SMEs. Relevant government agencies
such as Malaysia Digital Economy Corporation (MDEC) offer funding programs to support digitalization by
firms, such as SME Business Digitalization Grant, SMART Automation Grant, 100 Go Digital, and SME Digital
Accelerator.88 BNM has also established funds to support SME digitalization namely the SME Automation
and Digitalisation Facility (ADF) and a RM1 billion High Tech Facility – National Investment Aspirations.
Cognizant of the gap in digital access in rural East Malaysia, the 12MP has identified several initiatives
such as the eRezeki and eUsahawan programs to increase the skills and opportunities of the rakyat in
Sabah and Sarawak. Digital financial education is also critical to ensure that MSMEs can fully optimize the
benefits of fintech products and services. However, these programs, such as the SME Business Digitalization
Grant, are limited to 100,000 SMEs, which leaves a significant funding gap for the remaining Malaysian
SMEs. According to the BPS survey, firms indicated sales and marketing support as the most popular choice
for government support (Figure 3.8). Funding for improvements in payment methods and supply chain
management capabilities can also be supported by relevant financial products and services offered by IFIs.

84 Malaysia e-commerce income soared 17.1 percent to RM279 billion in the third quarter 2021. (2021, November 10). DOSM
85 Azahar, S. (2021, October 20). Post-pandemic growth – Address barriers to business digital transformation. ISIS Malaysia. https://
www.isis.org.my/2021/10/20/post-pandemic-growth-address-barriers-to-business-digital-transformation/
86 Carandang, B. and Canaveral, T. (2022, January 18). South-East Asian SMEs are missing out on the digital revolution. Here’s how
to get them on board. World Economic Forum. https://www.weforum.org/agenda/2022/01/south-east-asia-sme-digitization-
financial-services/
87 Income of e-Commerce transactions surged 30 percent in the first quarter 2021, DOSM, Jul. 6, 2021.
88 See https://mdec.my/digital-economy-initiatives/for-the-industry/SME

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Figure 3.7: Reasons for not investing Figure 3.8: Most useful business function
in digital solutions, percentage for digitalization and government support
(Oct 2020 and Jan-Feb 2021) (Oct 2020 and Jan-FEB 2021)
Reasons for Not Investing in Digital Solutions, Percentage Most useful business function for digital support
Share among interested firms (%)
50 60 57
54
50
47
40 44
41 42
40 38 38 39
35 36
34
30 32
29
27

20 20

10
0

Business
administration

Production

Production
planning

Marketing

Sales

Payment
methods
Supply chain
management

Service
delivery
0
No No Lack Employees Uncertain Unreliable Other
need financial information missing benefits internet
resources on relevant skills
solution &
implementation

Oct 1-15 Jan 15-Feb 10 Oct 1-15 Jan 15-Feb 10

Source: (Kuriakose et al., 2021)

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Chapter 3: Enhancing Islamic Finance for the Halal Economy in Malaysia

Box 1:

Leveraging Digital Connectivity

to Expand the HE
Digital technologies are an important enabler for global supply chains and can potentially
lower trade costs, improve transparency and price discovery, and information flow between
exporters, shippers, and country authorities. For example, robotics can help accelerate port
procedures and artificial intelligence can help lower logistics costs by optimizing route planning,
storage, and inventory and improving tracking and monitoring. Blockchain technology can
help reduce time spent in customs, especially for time-sensitive goods, facilitate cross-border
payments by increasing transparency and credibility, and enhance information sharing within
supply chains (Fan et al., 2019; WTO, 2018). Such technologies may disproportionately benefit
SMEs facing larger trade costs than large corporations. Rapid digitalization resulting from
the pandemic has fundamentally transformed economies by permanently changing the way
companies do business, individuals work, and consumers consume. (AMRO, 2021)

The COVID-19 pandemic inadvertently accelerated the “flight to digital,” and this
behavior change is unlikely to be reversed. Increased technology adoption is evident in
the unprecedented growth of e-commerce and other online businesses during the pandemic
period. Global digital sales of various items jumped by 71 and 55 percent year over year in the
second and third quarters of 2020 (Shim, 2020). Online sales worldwide of food and beverage
increased the fastest with an impressive growth of 153 percent, an upsurge never seen before.
(Figure 3.9). In the ASEAN regions, along with the boom in e-commerce, the number of Internet
users doubled compared to the average annual growth in users between 2015 and 2019
(Google et al., 2020). New users appear to be coming from smaller, non-metropolitan cities in
the region’s economies. The pandemic undoubtedly prompts the increase in internet usage—
as some businesses shifted to online meetings, conferences, and seminars; students to virtual
education; shoppers to online shopping, and the increased use of digital banking and other
services (Figure 3.10).

Figure 3.9: Selected Sectors: Growth in Figure 3.10: ASEAN: Services Most Used
Global Digital Commerce by New Digital Customer, 2020

(Percent of total service consumers)

Education
Loans
Media
Video
Food delivery
Groceries
Beauty
Apparel
Electronics
0 10 20 30 40 50 60
Sources: Google, Temasek, and Bain & Company (2020); and AMRO staff calculations.

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3.2.5 E-commerce
HE businesses, particularly SMEs, could benefit from expanding their businesses on e-commerce and
sharing/gig economy platforms. These business models have been a key factor in the growth of digital
financial products and the digitalization of SMEs, helping to expand SMEs’ reach into domestic and global
markets (World Bank Group, 2020d). According to a recent report, the pandemic has resulted in continued
shifts in consumer and merchant behaviors, leading to the rise of digital consumers and merchants, with the
gross merchandise value (GMV) in the ASEAN region expected to grow to US$1 trillion by 2030 (Google et
al., 2021) (Figure 3.11). The report noted that Malaysian businesses, especially, expressed the importance
of digital platforms to ensure business continuity during the pandemic period (Figure 3.12). ASEAN’s
e‑commerce market is quite fragmented, with the presence of several regional players such as Lazada and
Shopee and many local business-to-consumer (B2C) platforms.89 National statistics recorded an increase in
Malaysia’s e-commerce income by 23.1 percent annually to US$190.8 billion (RM801.2 billion) in the first nine
months of 2021 compared to US$155 billion (RM651 billion) in 2020. 90 Cross-border e-commerce is already
important and established part of the Malaysian online shopping experience accounting for 44 percent of
overall e-commerce sales, with more than half (52 percent) of Malaysian online shoppers spending cross-
border.91 Leading cross-border shopping origin markets are China, Singapore, and Japan.92 These non-
Muslim markets create the necessity for halal certification and present an opportunity for Islamic finance
to facilitate businesses in these countries to obtain the certificate. In contrast, an HDC study suggests that
Malaysia’s halal businesses face challenges penetrating Muslim consumer markets in the Middle East.93

Figure 3.11: Breakdown of digital consumers Figure 3.12: Merchant sentiment on benefits
in ASEAN countries of operating online
% split of all digital consumers
% of merchants who believe that they would not
Pre-pandemic consumers New digital consumers 2020 New digital consumers 2021 (H1) have survived COVID-19 without selling on digital platforms

5% 4% 6% 3% 7% 4% 5% 43%
7%
8% 11%
14% 11% 10% 11% 39% 38%
87% 85% 90% 35%
82% 86% 84% 34%
80%
30%
28%

Indonesia Malaysia Philippines Singapore Thailand Vietnam SEA Malaysia Philippines Singapore Thailand Vietnam Indonesia SEA

Source: Google,Temasek & Bain, e-Conomy SEA 2021

Malaysia’s HE benefits from better integration between halal-focused and generic e-commerce/
e-marketplaces, which has the potential to generate more meaningful data and further enable embedded
finance solutions to be developed for halal SMEs. More than 80 percent of Malaysian consumers are
engaged in various forms of e-commerce activities, such as using shopping applications and making
purchases online.94 Malaysia’s top-three e-commerce sites by traffic are Shopee, Lazada, and PG Mall.95 In

89 Ho, M. (2021, June 9). ASEAN E-commerce: Beyond the Pandemic. HKTDC Research. https://research.hktdc.com/en/article/
NzY4MzkzMzg1
90 Malaysia e-commerce income soared 17.1 percent to RM279 billion in the third quarter 2021. (2021, November 10). DOSM
91 2020 E-commerce Payments Trends Report: Malaysia. (n.d.) JP Morgan. https://www.jpmorgan.com/merchant-services/insights/
reports/malaysia-2020
92 See https://www.ppro.com/countries/malaysia/
93 Halal Knowledge Centre, (n.d.). Impact Study and Pro­filing 2016 – 2020, Halal in Malaysia, from global perspective. Retrieved Feb.
11, 2022 from https://hkc.hdcglobal.com/infographic-report/list
94 Kemp, S. (2021, February 11). Digital 2021: Malaysia. Data Reportal. https://datareportal.com/reports/digital-2021-malaysia
95 Müller, J. (2021, September 29). Top 10 e-commerce sites in Malaysia as of second quarter 2021, by monthly traffic. Statista

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addition, halal-focused marketplaces that engage in business-to-business (B2B) and B2C transactions, such
as Daganghalal.com, Muslimbrands.com.my, halalmall.online, and myhalmart.com are also present, but their
market reach is limited compared to major sites like Shopee that are also used by halal businesses. In 2021,
HDC launched HIP – an online networking platform that connects local HE players to global HE players and
acts as a one-stop center for business support tools such as consultancy, training, and funding facilitation,
e-marketplace, and online marketing. While the development of HIP is more targeted, exploring potential
collaboration with other major e-marketplaces may help to expand the reach of targeted businesses.
Currently, major e-commerce sites do not distinguish halal businesses, which is a missed opportunity to
better showcase halal businesses to customers who prefer halal products and services. Halal labelling of
products within these e-commerce sites would provide greater accessibility and offer product differentiation
to customers who are looking for halal products and services.

Box 2:

Supporting the growth of halal SMEs

through e-commerce platforms
Major e-commerce sites used by Malaysian businesses, such as Shopee and Lazada have been
instrumental in supporting digital business growth by MSMEs throughout Malaysia, including
those from less urban areas. 80 local sellers, who joined Shopee in 2021, achieved more than
RM1 million in sales in just their first year on the platform.

Shopee has introduced various campaigns regionally and locally, such as the #ShopeeSapotLokal
initiative in Malaysia to give more exposure to local sellers. Under its #ShopeeGivesBack
program, it has partnered with 12 non-government organizations (NGOs) and social enterprises,
including Budimas Charitable Foundation, Hopes Malaysia Welfare Association, Islamic Aid
Malaysia, and the MyKasih Foundation, on a donation drive. Shopee has also collaborated with
Mydin, Nestlé, RB Home, Thong Guan Trading and Unilever to offer users the option to donate
essential bundle packs between US$7.14 (RM30) and US$23.8 (RM100) towards providing
necessities such as clean water, food, and other basic amenities to rural and underprivileged
communities in Malaysia.

Source: https://www.malaysiakini.com/announcement/602352

3.2.6 Global Value Chain and Sustainability

Malaysia has experienced limited gains from global value chain (GVC) participation, necessitating
a shift towards higher value-added activities to be more competitive (Economic Planning Unit, 2021).
Mainstreaming an economic growth strategy that incorporates green and environmental sustainability may
positively improve competitiveness (World Bank Group, 2021c p.71). Malaysia’s industries need to make
more significant investments to improve resilience post-pandemic, which can also support higher levels of
connectivity with GVCs, requiring all chain participants to engage in green and sustainable practices (World
Bank Group, 2020e). In the Asia Pacific region, efforts to mainstream sustainability measures in global trade
facilitation for SMEs, agriculture, and women’s engagement are currently underway (Asian Development
Bank, 2019).

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The HE contributes significantly to Malaysia’s GDP but lacks the capacity to produce high-value-
added products and services that can increase its competitiveness in the global HE market (Economic
Planning Unit, 2021). HDC has stated its intention to further strengthen Malaysia’s HE by broadening the
industry’s end-to-end presence in the global halal supply chain, such as developing local supply chains
to source raw materials.96 SME Corp has also introduced several initiatives to increase the productivity of
halal SMEs, such as PuTRA, MASSIVE, and the Halal Technology Transformation Program (HTTP). The HTTP
program is designed to assist SMEs in managing and improving their manufacturing processes through the
adoption of system automation.

The halal market’s concentration on the F&B sector creates an opportunity to develop a halal green
and sustainable supply chain. The food industry is one of the major contributors to greenhouse gas
(GHG) emissions from crops and livestock farming and waste generated from the F&B sector. Promoting
sustainability in the halal supply chain can reduce the environmental footprint and benefit Malaysia. Other
countries can recognize Malaysian halal standards for hygiene and safety as a symbol of sustainable
practices (Abdullah et al., 2018). A research paper found that while evidence suggests halal food production
can achieve sustainable production, not all halal standards adopted by Malaysian SMEs demonstrated a
connection with sustainable production principles (Ali & Suleiman, 2016).

The modest fashion industry, which also forms part of the broader HE, is also exposed to
sustainability issues related to fast fashion waste, non-sustainable raw materials usage, and poor
labor practices. Adopting sustainable standards can broaden the modest fashion market beyond existing
Muslim clientele, including customers who specifically target sustainable products (DinarStandard, 2021b).
In 2021, Malaysia’s online fashion retailer, Zalora introduced a sustainable modest wear range made using
100 percent sustainable fabrics such as Tencel, Ecovero, and Organic Cotton.97

Malaysia’s IFIs are well-placed to facilitate investments in Malaysia’s HE to expand their presence
in GVCs and transform their businesses towards more sustainable practices in line with the VBI
initiative. The VBI is an initiative introduced by BNM in collaboration with the IFIs and aims to deliver
the intended outcomes of shari’ah through practices, conduct, and offerings that generate a positive and
sustainable impact on the economy, community, and environment and is consistent with the shareholders’
sustainable returns and long-term interests (Bank Negara Malaysia, 2017 p.6).

The recently published Financial Sector Blueprint 2022- 2026 notes that BNM intends to leverage
VBI to further support sustainable finance and funding halal trade and supply chain activities (Bank
Negara Malaysia, 2022). In addition, BNM intends to collaborate with the relevant agencies to create
stronger links between Islamic financial services and Malaysia’s economic propositions as a leading halal hub,
particularly in supporting high value-added sectors and initiatives under the National Investment Aspiration
(NIA) (ibid, p.107). To this end, IFIs may play a leading role in providing advisory services, financing, and
market access solutions to support local halal businesses to become global and regional players and more
sustainable. For example, CIMB Islamic has combined MATRADE’s Sustainable Exporter Program with its
own Halal Biz Ready solution to help develop a “sustainable halal” ecosystem of companies and trading
partners.

96 Yusof, A. (2021, September 8). Malaysia to extend reach in global halal supply chain: HDC. The New Straits Time. https://www.nst.
com.my/business/2021/09/725507/malaysia-extend-reach-global-halal-supply-chain-hdc
97 Azri, D. (2021, May 2). Éarth by Zalia Basics Takes Raya Sustainability to a New Level. Zalora. https://thread.zalora.com.my/
home/2021/5/earth-by-zalia-basics-takes-raya-sustainability-to-a-new-level

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3.3 Supply-side Factors

As articulated in Chapter 2, Malaysia’s Islamic finance providers have been actively facilitating the
financing needs of the HE. This section examines ways that Islamic finance can further support the HE
through digital services and innovative activities beyond traditional financing.

3.3.1 Digital Payments

Cashless and digital payments are expected to continue to grow significantly in the next decade,
and facilitating cross-border transactions is an important development in the market. According
to a report by PricewaterhouseCoopers, global cashless payment volumes are set to increase by more
than 80 percent from 2020 to 2025, from about US$1 trillion transactions to almost US$1.9 trillion, and to
almost triple by 2030, with the fastest growth expected to be seen in the Asia Pacific region, with cashless
transaction volume growing by 109 percent until 2025 and then by 76 percent from 2025 to 2030, followed
by Africa (78 percent, 64 percent) and Europe (64 percent, 39 percent).98 In ASEAN, member countries
have taken steps to advance cross-border interoperability of standardized quick response (QR) code for
payments and introduce innovative real-time remittances to achieve cross-border real-time retail payments
in the region by 2025.99 Beginning April 2021, Singapore and Thailand have linked their respective real-
time retail payments platform (RRP), PayNow and PromptPay, allowing customers of participating banks in
Singapore and Thailand to transfer up to S$1,000 or more THB25,000 daily across the two countries, using
just a mobile number.100

Cashless and digital payments can potentially improve HE enterprises’ financial performance and
the opportunity to access various financial solutions. Digital payments can increase an entrepreneur’s
profitability by making financial transactions with customers, suppliers, and the government more convenient,
safer, and cheaper (Klapper, 2017). Digital payments automatically provide users with data points to develop
a credit history that can help improve a firm’s access to credit (ibid). The use of alternative data such as mobile
phone call records, utility and bill payments, digital payment transactions, social media, psychometric tests,
industry/sector data, and many others have become essential in the development of credit risk models to
assess the willingness and ability of SME borrowers to pay (World Bank Group, 2020d).

The introduction of cross-border payment linkages can help expand HE enterprises’ reach to the wider
domestic and global markets. Based on the MasterCard Impact Study 2020, Malaysia leads Southeast Asia
in e-wallet use, at 40 percent take-up, compared with the Philippines (36 percent), Thailand (27 percent), and
Singapore (26 percent).101 Malaysia’s e-wallet coverage is dominated by Touch’n Go, Boost, and GrabPay. In
the period of one year to June 2021, e-wallet volume has increased 89 percent to 468 million transactions,
merchant participation for QR payments jumped 57 percent to one million registrations; and online banking
volume improved 36 percent to 12.1 billion transactions.102 In June 2021, BNM and Bank of Thailand
announced the completion of the first phase in linking Malaysia’s DuitNow QR and Thailand’s PromptPay,

98 Payments 2025 & beyond. (n.d.). PWC. https://www.pwc.com/gx/en/industries/financial-services/publications/financial-services-

in-2025/payments-in-2025.html
99 Foo, B.P. (2021, March 15). What will ASEAN payment integration achieve? The Asian Banker. https://www.theasianbanker.com/
updates-and-articles/what-will-asean-payment-integration-achieve
100 Singapore and Thailand Launch World’s First Linkage of Real-time Payment Systems. (2021, April 29). Monetary Authority of
Singapore. https://www.mas.gov.sg/news/media-releases/2021/singapore-and-thailand-launch-worlds-first-linkage-of-real-time-
payment-systems
101 Malaysia leads mobile wallet usage in South-East Asia. (Jun 24, 2020). The Star. https://www.thestar.com.my/business/business-
news/2020/06/24/malaysia-leads-mobile-wallet-usage-in-south-east-asia
102 Ikram, I. (2021, September 21). e-wallet, QR payments and online banking surged exponentially in one year up to June 2021, says
Tengku Zafrul. The Edge Markets

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which allows users in Thailand to use their mobile payment applications to scan DuitNow QR codes to make
payment to merchants in Malaysia including for online cross-border e-commerce transactions.103 In January
2022, a foreign bank launched Malaysia’s first multi-currency digital wallet that will allow SMEs to make
and receive international payments from a single global account. The recent published FSBP has outlined
BNM’s advocacy role to advance digitalization of the financial sector such as simplified tracks for Regulatory
Sandbox and licensing of digital insurers/takaful operators, which can further promote digital innovation in
support of the HE.

Box 3:

Supporting the growth of halal SMEs

through digital payment solutions
SME Corporation Malaysia (SME Corp) has been promoting cashless initiatives among SMEs, targeting
100,000 SMEs utilizing cashless or digital payment methods by 2018. The push toward cashless payments
is expected to improve operational efficiency, reduce administrative costs, and improve payment
collections. Currently, e-wallet providers only distinguish HE enterprises that are involved in the food
delivery business.

A new player in the digital payment market is jomSETTLE™ which was introduced in 2021. jomSETTLE™
is a fintech solution that provides businesses, especially micro-businesses, the ability to pay and
receive credit card payments virtually from customers without needing a website, payment gateway, or
credit card terminal. jomSETTLE™ facilitates better management of accounts payables and accounts
receivables, thus improving MSMEs’ cash flow management and capital turnover. jomSETTLE™ provides
two payment solutions which are jomSETTLE™ Make Payment and jomSETTLE™ Request Payment.

With the jomSETTLE™ Make Payment solution, underserved halal MSMEs can leverage on credit
available to them via their Credit Card as working capital to pay for business expenses to a payee who
does not have a credit card receiving facilities. This includes rent, staff salary, suppliers’ invoices, legal
fees, machinery purchases, business loans, and more. Halal MSMEs will now have immediate access to
new working capital through their credit card without the hassle of going through the conventional route
of applying for business loans or high-interest cash advances. On the other hand, many businesses can
still not accept credit card payments due to low credit card payment volumes, high costs, and lack of
technical skills.

With this in mind, jomSETTLE™ has introduced the jomSETTLE™ Request Payment solution: Malaysia’s
1st Virtual Credit Card Platform. Through the jomSETTLE™ Request Payment solution, Users can
request credit card payments by sending a secure payment link via SMS or email to their customers. In
addition, customers can pay businesses from anywhere at any time via the payment link issued. This has
broadened the payment receiving methods for many halal businesses. Eventually, businesses can secure
their payments faster and gain a competitive advantage over their competitors solely dependent on cash
terms.

Over the last quarter of 2021, jomSETTLE™ has facilitated close to 1 million Ringgit in transactions, where
46 percent of the transactions are accorded to halal businesses. The company partners with Bank Islam
and collaborates with HDC in their outreach programs across Malaysia to raise awareness on the various
financial facilities available to the halal businesses in Malaysia. jomSETTLE™ is the first Fintech startup
approved under the Malaysia National Technology and Innovation Sandbox (NTIS).

Source: jomSETTLE™

103 Launch of the Cross-Border QR Payment Linkage between Malaysia and Thailand. (2021, June 18). BNM. https://www.bnm.gov.
my/-/cross-border-qr-payment-linkage-between-malaysia-and-thailand

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3.3.2 Islamic Fintech

Innovative fintech solutions can benefit from rapid digitalization to expand access to finance
to the underbanked and underserved. As stated above, digital payments can provide alternative data
sets to enhance SMEs’ credit analysis with a limited credit history. For instance, Kopo Kopo, a Kenyan
fintech, applies big data analytics to merchant payment transaction data to offer SMEs a range of value-
added services, such as unsecured, short-term loans (World Bank Group, 2020d). In addition, China’s Ant
Financial has developed a private credit scoring system, Zhima Credit, based on various factors, including
transactions performed through its Alipay mobile wallet. Islamic fintech companies could collaborate with
mobile network operators (MNOs) to utilize mobile payments solution to develop financing products for
halal businesses. Distributed ledger technology (DLT) or blockchain can be utilized to modernize trade
finance and collateral management. At the same time, potential open banking applications such as account
aggregation can further facilitate access to finance for SMEs. (Nemoto & Yoshino, 2019).

The HE can benefit from Islamic fintech innovations that can expand the reach of Islamic finance,
particularly Islamic social finance. Islamic fintech has significant potential by optimizing opportunities
presented by the growing digital demographic, advancements in big data analytics, and increasing interest
in alternative finance markets (World Bank Group, 2020b). According to the Global Islamic Fintech Report
2021, payments are a relatively crowded segment with a high number of Islamic fintech players, but Islamic
social finance remains relatively untapped, suggesting potential for growth (DinarStandard, 2021a). Another
report also identified the growing demand for Islamic social finance and its application in providing access
to finance for SMEs (DinarStandard, 2021b). In addition, DLT or blockchain adoption can modernize and
improve the pricing competitiveness of Islamic trade finance and supply chain finance solutions (World
Bank Group, 2021b). This would be a critical development to facilitate cross-border trade amongst halal
businesses along the global halal value chain.

To accelerate fintech innovations, partnerships between traditional Islamic banks and Islamic fintech
should be encouraged where they can lower costs, strengthen financial inclusion and/or improve
the quality of financial products and services for SMEs (World Bank Group, 2020d). Islamic banks
can partner with Islamic fintech to create credit scoring models that combine data from digital payments
and e-commerce platforms to facilitate lending to SMEs. For example, in 2021, a local Islamic bank has
partnered with a technology company to expand the capability of its existing halal digital finance platform
by utilizing big data analytics and artificial intelligence (AI) to help their halal business customers to better
predict market trends, meet their customer demand, automate operational processes, and scale-up their
business.104 Whilst the use of big data analytics by Islamic fintech is still at the nascent stages, examples
from their conventional counterparts can be adapted to develop shari’ah-compliant alternatives. In addition,
as described in Chapter 2, Islamic financial providers can also collaborate with AgroTech providers to offer
financial solutions based on improved bookkeeping and agricultural analytics.

3.3.3 Blended Finance and Alternative Finance

Blended finance incorporating debt-based and non-debt-based instruments (such as Islamic social
finance and equity-based instruments) can offer innovative funding alternatives for halal businesses.
The role of blended finance is becoming increasingly important in improving access to finance. During the
pandemic, iTEKAD was a blended social finance program that offered seed capital and microfinancing
to micro-entrepreneurs and partly funded by zakat (tithe) funds. More recently, in January 2022, BNM
announced the establishment of a new financing facility that utilizes blended finance (debt and equity
financing) as an innovative solution to fund SMEs.

104 Fusionex Signs MoU with Alliance Islamic Bank to Accelerate SMEs’ Halal Business Growth. (2021, September 20). Fintech News.
https://www.fintechnews.org/fusionex-signs-mou-with-alliance-islamic-bank-to-accelerate-smes-halal-business-growth/

68 Islamic Finance and the Development of Malaysia’s Halal Economy

 Chapter 3: Enhancing Islamic Finance for the Halal Economy in Malaysia

Alternative financing such as equity crowdfunding (ECF) and waqf (endowment) have been identified
as a source of funding to support halal business start-ups under the 12MP. In the Capital Market
Masterplan 2021-2025, the Securities Commission Malaysia (SC) intends to further collaborate with relevant
stakeholders to establish and develop an ecosystem conducive to facilitating shari’ah-compliant funding
models and mechanisms such as PE, VC, ECF, and P2P to support halal MSMEs. In 2020, the SC launched
a new framework to facilitate the offering of Islamic funds with waqf features to enable the growth of the
Islamic social finance segment. In 2021, SC launched a shari’ah Screening Assessment Toolkit for unlisted
MSMEs as an industry reference to identify potential halal asset class. In the 2022 budget, the government
has committed to channel a start-up fund of RM10 million using the waqf concept to start the SME Halal
Endowment, Agriculture Endowment, and Disaster Endowment to produce more farmers, entrepreneurs,
and halal industry traders and to aid them in the event of a disaster.

Currently, there is limited research on the application of waqf for the development of the HE. Several
studies have outlined different conceptual frameworks for mobilizing cash waqf to fund human capital
development programs for MSMEs (Mohd Thas Thaker et al., 2021) (see also Chapter 3). Ismail et al., (2021)
explored the potential use of waqf building to resolve issues related to the availability of proper premises
faced by SMEs when applying for halal certification. In 2017, in collaboration with BNM and the State Islamic
Religious Council, six Islamic banks developed the ‘myWakaf’ platform to mobilize waqf collection from the
public towards projects that provide impact to the underserved communities. The Islamic banks provide
financial and investment expertise, effective governance mechanisms, and access to their wide banking
channels for cash waqf collection that can optimize the development of waqf. A similar collaboration between
IFIs and relevant government agencies could be explored to create opportunities for halal businesses to
connect with potential waqf fund providers.

Box 4:

Supporting the growth of halal SMEs

through alternative funding solutions
One of Malaysia’s registered P2P providers is microLEAP, which provides Islamic and conventional
invoice financing to MSMEs in all sectors, including those involved in the HE. To date, more
than RM16 million in financing has been disbursed, and 98 percent of the transactions executed
are based on shari’ah-compliant financing due to the high supply of retail investors seeking
competitive shari’ah investment opportunities. Aside from funding, microLEAP also offers value-
added services such as access to personal insurance products for borrowers and basic debt
management and accounting training. The additional services help to improve the borrower’s
financial acumen and thus, to a certain extent, mitigate the financial risk to investors.

Several e-wallet providers have started offering financial products such as deferred payment
schemes (buy now pay later solutions) and investment products. However, currently only
Touch’n Go has a full shari’ah-compliant set up including its investment solution GO+, making
it Malaysia’s first shari’ah-compliant e-wallet product.

Islamic Finance and the Development of Malaysia’s Halal Economy 69

Chapter 3: Enhancing Islamic Finance for the Halal Economy in Malaysia

3.3.4 Integrated Halal Advisory and Marketplace

Several Islamic finance providers have expanded their services offering to include halal advisory
and marketplace. As this report has articulated, the HE enterprises face requirements, such as the need
to obtain halal certification of their products, inspection requirements, and serving more fragmented and
dispersed customer markets that can introduce unique access to finance challenges. As such, the need to
offer effective halal advisory services is more urgent in the HE. HIP, which is launched by HDC in 2021, is
intended to become a one-stop center for business support tools such as consultancy, training, funding
facilitation, e-marketplace, and online marketing for local and global HE enterprises (Figure 3.13). Islamic
finance providers can leverage the comprehensive technical support provided to HE enterprises by HDC
and other government agencies to expand their financial product offering to the HE enterprises registered
with the HIP. As of 2021, five Islamic banks, whom have existing halal industry financing programs, have also
enrolled as strategic partners in the platform.

Figure 3.13: Range of services provided under the Halal Integrated Platform

70 Islamic Finance and the Development of Malaysia’s Halal Economy

 Chapter 3: Enhancing Islamic Finance for the Halal Economy in Malaysia

3.3.5 Enhancing Current Islamic Finance Offerings

Islamic finance providers may explore the usage of unique shari’ah contracts such as bai’ salam to
finance the agriculture sector. As described in Chapter 2, conventional bank financing has significant
limitations and constraints. Currently, Islamic finance providers in Malaysia offer debt financing based on
murabahah and tawarruq contracts and a very limited number of equity financing. Several studies have
posited potential Islamic finance instruments using the bai’ salam contract (Atah et al., 2019; Muneeza et
al., 2011). Bai’ salam is a contract where two parties enter into a contract of sale of goods that would be
delivered in the future for which the price for the goods would be paid in cash on the spot at the time of
the signing of the contract. Because the risk of non-delivery is borne by the financier alone, bai’ salam has
not been successfully adopted in Malaysia. However, the risk of bai’ salam could be mitigated by combining
takaful (insurance) and collaborating with relevant government agencies to monitor the performance of the
agriculture producers effectively, as proposed by Atah, et al. (2019). Under this proposal, the agriculture
producers will contribute towards the takaful, which could provide mutual protection against potential loss.
The Ministry of Agriculture and Food (MAFI) announced that an Agrofood Takaful for the paddy and rice
sector would be launched in 2022 to assist industry players, especially during natural disasters such as
floods105. This provides an opportunity for Islamic finance providers to explore the hybrid bai’ salam and
takaful model. Islamic social finance, such as waqf and zakat, could also be incorporated into the model (see
Chapter 2, Special Topic).

Additionally, financial regulators and Islamic finance providers should explore initiatives to encourage
the participation of retail investors in funding the HE. As described, many HE enterprises are MSMEs,
which require a relatively smaller funding size compared to corporations, which limits the opportunity for
them to tap potential funding from the capital markets except for in alternative funding platforms such as
ECF and P2P. According to SC, retail investors have been increasing their investment significantly in ECF and
P2P platforms from approximately US$6.9 billion in 2017 to US$93.1 billion in 2021. To increase the options
of capital market instruments and encourage retail investors’ participation in the bond market, Malaysia
could explore strategies to allow smaller bond issuances by medium-sized enterprises106. For example, in
2021, SHUAA Capital led a first of its kind US$ 50 million structured sukuk for Pure Harvest Smart Farms,
the world-leading, sustainable technology-enabled agribusiness based in the UAE107. Financial regulators,
relevant government agencies and HE industry players could collaborate to further explore the potential of
issuing such instruments for the sophisticated retail investors.

pter 4:
105 Aliff, S. (2022, February 11). Mafi to implement Agrofood Takaful in stages this year. The Malaysian Reserve. https://
themalaysianreserve.com/2022/02/11/mafi-to-implement-agrofood-takaful-in-stages-this-year/
106 Sze, K. (2021, July 7). Cover Story: Retail bonds time for a reset. The Edge Malaysia. https://www.theedgemarkets.com/article/
cover-story-retail-bonds-time-reset
107 Shuaa leads $50m sukuk for Pure Harvest. (n.d.). The Arabian Post. https://thearabianpost.com/shuaa-leads-50m-sukuk-for-pure-
harvest/

Islamic Finance and the Development of Malaysia’s Halal Economy 71

Chapter 4: Conclusions and Recommendations for Stakeholders

CHAPTER 4

Conclusions and
Recommendations
for Stakeholders

72 Islamic Finance and the Development of Malaysia’s Halal Economy

 Chapter 4: Conclusions and Recommendations for Stakeholders

The HE plays an important role in Malaysia’s economic growth, contributing 7.5 percent to the GDP
as of 2020. Malaysia continues to be a leading player in the global HE and is recognized as a leader in
halal accreditation systems. The penetration of HE in the global markets and the growing Muslim population
present an opportunity for growth in the demand for halal products and services. Malaysia’s HE is largely
concentrated in the halal food-related sector, with 28.9 percent of Malaysia’s halal export value in 2020
attributed to halal ingredients.

Malaysia has a well-developed Islamic finance market, which has provided additional funding support
for HE. Malaysia’s Islamic finance providers (banks, NBFIs, and capital market players, including fintech) offer
a diverse range of financial products and services and have been recognized as one of the five key enablers
for implementing the strategies outlined in the HIMP 2030. The percentage of halal-certified companies
using Islamic finance nearly doubled between 2018 and 2021, growing from 21.9 percent to 41.3 percent.
The growth in Islamic finance usage by the HE enterprises could be attributed to the targeted awareness
and capacity-building initiatives driven by BNM in collaboration with key agencies such as HDC and JAKIM
through the years.

While the contribution of Islamic finance, especially the Islamic banking sector, has increased,
further actions can be taken to facilitate funding and the overall growth of HE. This report has
explored the current Islamic finance ecosystem supporting HE enterprises in Malaysia and globally and
considered both the demand and supply-side factors to explore further avenues to enhance Islamic finance
for HE development. As a result, this report has identified the following gaps where the contribution of
Islamic finance can be further advanced:

i. enhancing capacity and funding for innovation and productivity improvements;

ii. increasing access to finance for SMEs through innovative solutions, including fintech and social
finance; and

iii. supporting cross-border trade and investment at the growth stage.

A major opportunity is linking Islamic finance more closely with Malaysia’s existing HE development programs.
The HE requires critical financing and investment in technology adoption, digitalization, innovation and R&D,
and sustainable practices to enhance productivity and global competitiveness. Islamic fintech innovations
also have the potential to expand the reach of Islamic finance, particularly Islamic social finance for HE.
This chapter offers a set of recommendations to serve as inputs to key stakeholders in enhancing existing
strategies involving the role of Islamic finance in Malaysia’s HE development.

Islamic Finance and the Development of Malaysia’s Halal Economy 73

Chapter 4: Conclusions and Recommendations for Stakeholders

Recommendation 1: Enhance policy and strategy coordination across different

policymakers and Islamic finance providers to increase the impact of programs.

Various public and private sector stakeholders are actively developing and implementing strategies to
support the HE. However, the report observes that these strategies could be streamlined to avoid duplication
of resources and thus optimize such programs’ impact.

• HDC’s Halal Integrated Platform (HIP), an online one-stop center for halal business support, could be
leveraged as a central virtual platform connecting relevant government agencies and Islamic finance
providers. Financial regulators may advocate for Islamic finance providers to participate in HIP and
connect their existing halal systems with the HIP. In addition, Islamic finance providers may expand
their financial advisory service to facilitate business development and leverage HDC’s expertise in
the halal certification process.

• Linking programs related to financings, such as SME financing and export financing, more closely
with halal agencies – HDC, MEDAC, JAKIM, and industry events – WIEF and MIHAS, can provide
more comprehensive support to HE enterprises.

• HDC may implement strategies to encourage halal labeling of merchants using services provided by
e-commerce and related technology companies.

Recommendation 2: Establish closer linkages between programs that support

innovation and productivity improvements with Islamic finance108 .

Currently, government agencies are leading efforts to implement innovation and technology adoption
programs. While the support from the public sector is critical, involving the private sector could develop an
effective pathway to graduate HE enterprises from public funding to private funding. A closer engagement at
the early stages will also help inform Islamic finance providers of innovation and technological advancements
that can help them to mitigate financial risks.

• HDC, in collaboration with other relevant government agencies such as MDEC, could provide
technical expertise and technology validation, similar to the approach under the Green Technology
Financing Scheme (GTFS). The technology validation can help encourage Islamic finance providers to
offer funding for productivity-improving technologies to SMEs, such as AgriTech.

• Relevant government agencies, research centers, and Islamic finance providers could collaborate
in initiatives that bring both public and private actors to creating R&D and capacity-building funds,
particularly mobilizing Islamic social finance such as waqf.

• Islamic finance providers could provide advisory services and transition finance to transform HE
enterprises and halal parks to become more sustainable and less carbon-intensive.

108 See also policy recommendations in Kuriakose, S & Tiew, H. (2022). Malaysian SME Program Efficiency Review. World Bank,
Washington, DC.

74 Islamic Finance and the Development of Malaysia’s Halal Economy

 Chapter 4: Conclusions and Recommendations for Stakeholders

Recommendation 3: Encourage Islamic finance providers, particularly Islamic banks

to participate in public-private sector collaborations to pilot innovative Islamic
finance solutions and scaling up109.

IFIs should explore Islamic finance solutions beyond conventional debt-based financing. Islamic finance has
a multitude of shari’ah contracts that offer the potential for innovative financing structures.

• Equity-based financing, especially for SME and funding growth stages, could address funding gaps
that Islamic finance providers do not meet. In addition, a public-private sector collaboration could
help manage risks and incentivize Islamic finance providers and institutional investors to innovate and
participate in more blended finance programs.

• Government funding programs in support of the HE could be further amplified by collaborating

with Islamic banks, Islamic fintech and related technology companies to pilot new funding programs.
Relevant government agencies and financial regulators could facilitate data sharing and product
ideation to develop innovative solutions.

Recommendation 4: Strengthening collaboration with policymakers in other countries

to advance the utilization of Islamic finance for HE.

Malaysia should leverage its leadership role in Islamic finance and HE to galvanize global efforts in developing
the global HE for the mutual benefit of the OIC countries.

• HDC could play an advocacy role in collaboration with financial regulators to further promote the
utilization of Islamic finance solutions in funding HE and promoting participation in HDC’s HIP. In
addition, partnerships with HE initiatives in other key countries – especially in ASEAN, MENA, and
Turkey – would provide market access opportunities for Malaysia’s IFIs to provide Islamic finance
support to other economies pursuing the HE opportunity. An integrated approach to optimize the
comparative advantages of individual countries could increase the potential market size of the global
HE in strategic sectors such food and beverages, halal ingredients and agriculture.

• HDC and MATRADE could further support the utilization of Islamic trade finance and explore
investment flows between Malaysia and other countries. Islamic trade finance has been identified as
a meaningful opportunity for Malaysia (World Bank, 2021). Both agencies could also collaborate with
relevant multilateral development banks (MDBs) that are active in the OIC countries to implement
strategies that can advance Islamic finance and the HE.

109 See also policy recommendations in World Bank. (2022). Malaysia: Assessment of the Start-Up Financing Ecosystem. World Bank,
Washington, DC.

Islamic Finance and the Development of Malaysia’s Halal Economy 75

Chapter 4: Conclusions and Recommendations for Stakeholders

Recommendation 5: Enhancing the role of relevant institutional investors and

expanding capital market funding for the HE.
An untapped opportunity exists to increase Islamic finance utilization amongst corporates and SMEs via
capital market instruments.

• Financial regulators and Islamic capital market participants could collaborate to pilot the issuance of
retail bonds for the HE and explore DLT for blockchain bonds. The issuers could be IFIs or government-
linked companies (GLCs). The proceeds would be used solely for financing HE companies. Over time,
financial regulators could develop mechanisms to facilitate access capital markets by medium-sized
enterprises through micro-issuances.

• Islamic capital market participants and relevant government agencies could collaborate to develop
specific PE and VC funds for R&D.

• Relevant government agencies could advocate for the utilization of Islamic finance by institutional
investors to invest in mature businesses, and drive consolidation and M&A.

• Institutional investors and corporate could explore investing overseas in key HE sectors, such as F&B
or agriculture. In addition, institutional investors could develop investment strategies specifically for
HE sectors, such as consolidating halal meat producers or packaged food companies to raise capital
from HE-oriented investors from other countries.

Recommendation 6: Enhancing data sharing on Islamic finance and HE.

In preparation for this report, a key challenge evident is the lack of data on HE and Islamic funding of HE. Data
is a critical enabler to advance finance in any segment, to determine the gaps and measure the effectiveness
of strategies and initiatives. Whilst there has been collaboration between HDC and the Department of
Statistics Malaysia (DOSM) to compile halal data, analysis and intelligence reports covering various halal
activities, these outputs are not published regularly. Therefore, HDC, JAKIM, DOSM, and financial regulators
could enhance data sharing between agencies to develop and report key business and financial indicators in
HE to better monitor the impact of relevant initiatives, identify further gaps, and improve future strategies.

Recommendation-stakeholder matrix:

Recommendation Stakeholders

Enhance policy and strategy coordination across different Government agencies, financial regulators,
policymakers and Islamic finance providers to increase the Islamic finance providers, and SMEs.
impact of programs.

Establish closer linkages between programs that support Government agencies, Islamic finance providers,
innovation and productivity improvements with Islamic finance. SMEs, and research centers.

Encourage Islamic finance providers, particularly Islamic banks, Government agencies, financial regulators and,
to participate in public-private sector collaborations to pilot Islamic finance providers, SMEs.
innovative Islamic finance solutions and scale-up.

Strengthening collaboration with policymakers in other Government agencies and financial regulators.
countries to advance the utilization of Islamic finance for HE.

Enhancing the role of relevant institutional investors and Government agencies, financial regulators,
expanding capital market funding for the HE. Islamic finance providers, and institutional
investors.

Enhancing data sharing on Islamic finance and HE. Government agencies and financial regulators.

76 Islamic Finance and the Development of Malaysia’s Halal Economy

 Appendix

Appendix: Case Studies

Synxsoft
Type of company: Software development company, digital solution
provider for the halal industry, SME

Stage of business: Early-stage startup

Halal economy business proposition: Synxsoft is a technology company

which developed CoreHalal in 2021. CoreHalal is an end-to-end digital platform that helps businesses
obtain and maintain their halal certification by streamlining the halal audit process, halal management, and
halal compliance across business operations. CoreHalal’s Digital Halal Assurance System utilizes blockchain
technology, which helps to improve control over halal supply chain and increase traceability of products,
whilst artificial intelligence (AI) is used to digitalize and automate the halal reporting process. It currently
serves clients from Australia, Japan and Malaysia. Synxsoft has a strategic partnership with HDC and will be
collaborating with foreign halal certification bodies to explore business opportunities globally.

Funding experience: As a technology-based start-up, Synxsoft has mainly relied on self-financing and
government grants to support its business development. It does not have any Islamic financing and plans
to seek public equity (PE) or venture capital (VC) to fund its growth. Synxsoft indicated that its decision to
utilize Islamic finance will be driven by cost of finance, availability of digital channels and shari’ah compliance.
However, the main challenge it faces in utilizing Islamic finance is the lack of understanding and lack of
suitable Islamic financial products. As such, Synxsoft strongly agrees that it requires awareness and capacity
building programs on Islamic finance.

Insights on the role of Islamic finance: Synxsoft is planning to incorporate a business marketplace module
as part of the service offering in CoreHalal that will allow halal businesses to conduct business transactions. It
plans to collaborate with Islamic financial institutions to integrate Islamic financial products that can support
the halal businesses on the marketplace.

Serunai Commerce
Type of company: Software development
company, digital solution provider for the halal
industry, SME

Stage of business: Growth stage

Halal economy business proposition: Formed in 2009, Serunai Commerce offers a range of digital solutions
designed to enhance global Halal marketplace connectivity and transparency. The digital solutions offered
include Global Halal Data Pool™ – a digital platform that connects halal buyers and suppliers around the
world; Verify Halal™ app – a global halal search engine, Halal Digital Chain (HADIC)™ – an integrated and
secure digital Halal ecosystem that connects the numerous databases along the supply chain via multiple
ledgers secured by blockchain, Certification Bodies Master System CBMS™ – a digital system to assist
Halal certification bodies in receiving Halal applications, managing, tracking and keeping their data safe in
a high-end cloud system and VH SMART™ – a digitalized Halal Assurance System (HAS) that safeguards a
company’s Halal integrity, especially for Halal certification purposes. Serunai Commerce has also established
Halal Centre of Excellence (Halal CoE™) in Malaysia, South Africa, and India to provide various professional
Halal training programs and Halal consultancy assist for new applicants of Malaysia Halal Certification.
Serunai Commerce has close engagement with key government agencies such as the Department of Islamic

Islamic Finance and the Development of Malaysia’s Halal Economy 77

Appendix

Development Malaysia (JAKIM), the Halal Development Corporation (HDC) and the Malaysia External Trade
Development Corporation (MATRADE) to promote digital halal ecosystem. In 2021, more than half of its
business revenue were generated from its global clients from Africa, Asia Pacific, and North America.

Funding experience: As a technology-based company, Serunai Commerce initially relied on shareholders’

equity, PE or VC and credit from supplier to finance its operations. It utilizes services of both conventional
and Islamic financial institutions and has utilized an Islamic term financing to fund the growth of its operation.
From its experience, the main challenges of obtaining financing from formal financial institutions have been
proving the adequacy of credit history and viability of business plan. Serunai Commerce also indicate that
its decision to utilize Islamic finance will be driven by cost of finance, duration of approval and suitability of
products. It strongly agrees that it requires awareness and capacity building programs on Islamic finance.
Currently it is relying on self-funding and has also sought out alternative finance from non-bank financial
institutions but had opted not to use despite obtaining an alternative fund provider.

Insights on the role of Islamic finance: Serunai Commerce’s Halal CoE provides various types of training
and consultancy, which includes program to educate on Islamic finance and has partnered with Islamic
finance institutions to help the industry especially the micro and small enterprises to develop their business
through Islamic financing assistance and developing digital system for countries around the world.

Kapitani
Type of company: Agri-fintech, SME

Stage of business: Early-stage startup

Halal economy business proposition: Kapitani is an agri-fintech startup that offers

a digital solution to improving financial literacy of smallholder farmers through its
proprietary agriculture operating system, “taniOS”. taniOS helps farmers automate their farm management
and record keeping system. The data collected could then be utilized to generate alternative credit score
for farmers to enable them to access formal financing facilities. Kapitani is working closely with government
agencies to improve its Malaysian Good Agricultural Practices (myGAP) certification process embedded in
its digital solution. The myGAP certification is a critical component of the alternative credit scoring tool that
can help farmers improve their farming practices in line with food safety and sustainability principles and
complement traditional credit assessment using financial data. Kapitani currently serves domestic clients
and is looking towards expanding its digital solution to become a P2P funding platform for the agriculture
sector.

Funding experience: As a technology-based startup, Kapitani relied on PE or VC and government grants at

the early stages of its operations. Currently it relies on self-funding and has also utilized alternative finance
from non-bank financial institutions. Moving forward, Kapitani plans to further explore utilizing alternative
funding from P2P or ECF and PE or VC to fund its expansion. Whilst it currently banks with an Islamic bank
it does not utilize any Islamic financing facilities. From its experience, the main challenges of utilizing Islamic
financing facilities are cost of finance, duration of approval and suitability of products. It strongly agrees that
it requires awareness and capacity building programs on Islamic finance.

Insights on the role of Islamic finance: Kapitani views the affinity between the value proposition of Islamic
finance and sustainability to be an important catalyst for promoting capital assistance to farmers in the long
term. There are various Islamic finance instruments such as Islamic social finance and takaful that could be
explored as alternative source of funding for smallholder farmers.

78 Islamic Finance and the Development of Malaysia’s Halal Economy

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Chapter 4: Conclusions and Recommendations for Stakeholders




 Chapter 4: Conclusions and Recommendations for Stakeholders

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