Embracing Risk-sharing Business Will Be Game Changer For Malaysia’s Robust Islamic Banking Sector – Economists

By Karina Imran

KUALA LUMPUR, March 23 (Bernama) -- Intense demand coupled with the wider acceptance of shariah-compliant financial products will continue expanding Islamic banking in Malaysia despite stiff competition from the conventional sector, an economist said today.

While Islamic banks will grow in numbers, Bank Muamalat Malaysia Bhd’s chief economist Dr Mohd Afzanizam Abdul Rashid contends that for it to be a real game changer, Islamic banks will need to embrace the risk-sharing concept.

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This entails Islamic banks sharing business risks with entrepreneurs rather than relying solely on debt-based structures, he told Bernama in an interview.

Although the growth of Islamic banking was largely driven by the country’s sizeable Muslim population, he said it was notable its expansion was chalked up alongside increasing acceptance of Islamic banking products among non-Muslims.

Of the 34.2-34.3 million populace in Malaysia as of last year, 63.5 per cent are Muslim and 36.5 per cent are non-Muslim.

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He said the share of Islamic banking assets which grew steadily over the years reflects the sector’s increasing role in the country’s financial system.

Total Islamic banking assets reached RM1.3 trillion, commanding a share of 34.3 per cent as of January 2026 compared with a mere RM152.9 billion or 13.7 per cent of banking assets in 2007.

To expand into the risk-sharing business, Mohd Afzanizam said policymakers would need to address existing gaps to enable the risk-sharing model to be implemented more holistically within the Islamic banking system.

Risk-Sharing Concept Key To Islamic Finance

Despite their encouraging growth, he said Islamic banks would need to focus on their strategic niche by strengthening the risk-sharing concept, which is regarded as a hallmark of Islamic finance.

An advantage of risk-sharing financing is that it can promote entrepreneurship as banks share business risks with entrepreneurs rather than relying solely on debt-based structures.

However, he said debt-based financing structures remain dominant in the Islamic banking sector.

“So far, tawarruq-based financing continues to dominate the Islamic banking realm, constituting 65.2 per cent of total financing assets in Islamic banking as of January 2026,” he said.

Tawarruq is an Islamic financing contract where a customer buys a commodity from a bank on a deferred, cost-plus basis and immediately sells it to a third party to obtain liquidity.

Mohd Afzanizam said that while risk-sharing financing contracts such as musyarakah are aligned with the principles of Islamic finance, several structural challenges remain.

Among which is the funding structure of Islamic banks which relies heavily on deposits.

“Depositors require certainty in investment returns and risk-sharing financing instruments cannot provide that level of certainty, creating a mismatch,” he said, adding that risk-sharing financing tends to attract more capital per ringgit deployed.

“This makes it a harder sell for Islamic banks because it is deemed an expensive business as it requires larger capital in order to extend risk-sharing financing concept such as musyarakah,” he said.

Mohd Afzanizam also highlighted information asymmetry among micro, small and medium enterprises (MSMEs), particularly in terms of record-keeping and governance, which complicates banks’ risk assessments.

He said the industry also faces a talent gap, as banking officers are generally more familiar with conventional credit assessment tools such as credit scoring, collateral evaluation and cashflow servicing ratios rather than equity-style due diligence and business partnership models.

“So, the skills gap will impede the growth in risk sharing concept,” he said. 

Islamic Banks, Digital Banks Not Direct Competitors

CIMB Islamic chief executive officer Ahmad Shahriman Mohd Shariff said the presence of conventional banks offering Islamic windows and digital banks should not be viewed purely as competition for full-fledged Islamic banks.

“I don’t see it as competition per se. Each type of bank has a role to play and serves different segments, and that is also the intention of Bank Negara Malaysia (BNM),” he said.

He said banks can also learn from one another, particularly as digital banks introduce new approaches and innovations.

“At the end of the day, the main beneficiary is the customer and the community. If we have healthy competition, we learn and improve by learning from each other,” he said.

Looking ahead, Ahmad Shahriman said Islamic banking in Malaysia is expected to maintain stronger growth compared with conventional banking, a trend that has persisted over the past 15 years.

However, he noted that the industry must continue demonstrating the broader value of Islamic finance to society.

“The challenge for the Islamic banking industry is how we ensure the value of Islamic banking remains relevant to the whole society,” he said.

Malaysia’s Islamic Capital Market Strength 

Mohd Afzanizam said Malaysia’s Islamic capital market has also strengthened the country’s position in global Islamic finance, with the nation maintaining the largest share of the global sukuk market.

“Malaysia has the largest sukuk market, accounting for 36 per cent market share at the end of 2024. Hence, the statistics really stand out for Islamic finance,” he said.

Meanwhile, Ahmad Shahriman said the global Islamic capital market continues to attract growing investment flows, presenting opportunities for Malaysian companies to tap into international shariah-compliant funds.

“Additionally, for Islamic capital markets internationally, there's actually a growing amount of funds following Islamic markets. 

“So, we are also trying to work on how to allow our nation’s companies to access all those global funds which want to invest in top tier Islamic companies,” he said.

-- BERNAMA