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Islamic Deposit Insurance: The
Malaysian Experience
Presentation for Seminar on Islamic Deposit Insurance
18 August 2008, Kuala Lumpur
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Main components of financial safety net
Robust & sound
banking system
Financial
stability
Depositors’
protection
Financial safety net
Prudential
regulation &
supervision
Lender of
last resort
Intervention
& resolution
mechanism
Deposit
insurance
system
Need to maintain financial stability for sustainable economic growth
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Malaysian banking system
In Malaysia, Islamic banking operates in parallel with
conventional banking …
Depositors
Target same customer pool
Islamic
banking
Implicit
guarantee
Government
Conventional
banking
Implicit guarantee already in place before introduction of deposit
insurance system …
3
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The need for Islamic deposit insurance
4
To ensure the competitiveness of the Islamic
banking system vis-a-vis conventional banking
To comply with Shariah principles
To instil public confidence
To promote financial stability
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What is Islamic deposit insurance?
A system that provides protection to depositors
against loss of insured Islamic deposits placed
with Islamic member institutions* in the unlikely
event that an Islamic member institution is unable
to meet its financial obligations. It operates in
accordance with Shariah principles.
Guiding
principle
Equal treatment between Islamic and
conventional deposits
* Islamic banks and Islamic banking windows
5
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The operation
Operates in parallel with conventional system and both are
adminstered by MDIC ...
ISLAMIC DEPOSIT
INSURANCE
CONVENTIONAL
DEPOSIT INSURANCE
Sources
Annual
premiums
Annual
premiums
Fund
IDIF
CDIF
Investment
Investment
Expenditures
Expenditures
Islamic MI’s failure
resolution
Conventional MI’s
failure resolution
Utilisation
6
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Salient features of IDI (1)
Mechanism
1
Conventional
deposits
Depositors
Islamic
deposits
Islamic member
institutions
Conventional
member
institutions
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Provide protection
in event of member
institution’s failure
3
Payment of annual
premiums
2
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Salient features of IDI (2)
Coverage
Islamic deposits covered separately from
conventional deposits
RM60,000 per depositor per member institution
Separate coverage for Islamic banking window
8
Separate coverage for trust accounts, joint accounts,
sole proprietorship and partnership
Various contracts – mudharabah, wadiah, qard and
murabahah
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Mudharabah deposits
Money placed by depositor (investor) in bank (entrepreneur) for
bank to invest and profit from such investment is shared
1
Bank receives depositor’s money to
invest on profit sharing basis
Depositor
(investor)
Bank
(entrepreneur)
3
Bank will repay to depositor the
principal plus profit upon maturity
2
Investment
Relationship : Investor - entrepreneur
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Principal
: Not guaranteed (may be reduced by loss)
Return
: Profit from investment is shared based on preagreed ratio but loss is borne by depositor. In
case of negligence, loss is borne by bank
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Coverage for mudharabah deposits
As prudential measure with overall objective of
promoting integrity & stability of banking system
Bulk of deposits are mudharabah
Avoid systemic risk
Coverage only in the event of bank failure
Under normal course of banking business, depositors are
exposed to the risk of losing their capital – consistent
with concept of mudharabah
Coverage by 3rd party guarantee not by bank itself
MDIC provides 3rd party coverage (consistent with
Shariah principles)
10
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Salient features of IDI (3)
Premium assessment
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Separate calculation of total insured deposits
Separate Differential Premium System
Separate supervisory assessment for Islamic and
conventional banking institutions (including Islamic
banking window)
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Salient features of IDI (4)
Management of funds
Separate Islamic and Conventional Deposit Insurance
Fund (IDIF & CDIF)
IDIF contributed by premiums collected from Islamic
banking institutions i.e. Islamic banks and Islamic
banking windows
Investment
Shariah compliant papers issued or guranteed by
Government or BNM only
Expenditures
Apportionment of cost
Non-Shariah compliant expenditures charged solely
to CDIF
12
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Salient features of IDI (5)
Payout
13
Use IDIF only for Islamic member institutions’ failures
– no transfer of funds between IDIF and CDIF
Deficit IDIF – can raise funds from market or Government
based on Shariah principles
Under claim & recovery, priority of payments is given
to wadiah and qard before payments to mudharabah
depositors
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Issues and Challenges (1)
Absence of guiding principles for Islamic deposit
insurance
14
Operation and establishment of the system
Differential Premium System
Different risk indicators for Islamic member
institutions
Lack of data - no separate submission of some
information for Islamic banking window
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Issues and Challenges (2)
15
Liquidation of assets in event of failure
Cross border liquidation - globalisation
Priority of payments of new contracts applied to
deposits (e.g. commodity murabahah)
Actual liquidation process (e.g. liquidation of assets
funded by specific investment accounts)
Limited avenue for investment on Islamic financial
instruments
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Thank you ...
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