The absence of any particular component could reduce the effectiveness and efficiency and thus affect the viability and sustainability of the system. While the Islamic banking system has an important role in mobilizing deposits and providing financing, the Islamic capital market has an equally important role in providing a stable source of long-term funds for financing large investments and development projects as well as for capital and business expansion. The development of the Islamic capital market not only allows for a more balanced allocation of financial and economic resources within an economy but more importantly, ensures greater diversification of risks within the Islamic financial system. This enhances the resilience and robustness of the Islamic financial system to withstand financial shocks and contributes to the overall stability of the Islamic financial system. BIS Review 47/2004  1  In terms of the development of our Islamic financial system, as at June 2004, the assets mobilized by the Islamic banking sector have increased to RM89.1 billion, accounting for a market share of about 10% of the banking system. At the same time, deposits have also increased to RM64 billion, constituting a market share of 10.4% while financing mobilized amounted to RM54 billion to garner 11% of the market share. Product offerings have also increased in sophistication from the deposit products to hybrid products that are able to enhance returns to depositors. A further advancement was made with the introduction of the Islamic variable rate financing mechanism that provides an alternative to the fixed-rate financing.

The rapid progress of the domestic Islamic financial system, reinforced by significant developments in the Islamic financial infrastructure, including the legal and Shariah infrastructure and the regulatory and supervisory framework, has strengthened the position of the Islamic financial system as an increasingly important component in meeting the changing requirements of the new economy. The Financial Sector Masterplan launched three years ago provides the strategic direction envisioned for the development of the Islamic financial sector looking beyond the near term and taking a longer-term perspective into the needs and requirements of the future. The strategies outlined in the Plan have emphasized the development of the respective building blocks of the various parts of the financial sector that need to be put in place to form the solid foundation on which sustainable future progress can be achieved. The expansion of the Islamic financial system in Malaysia has therefore taken place with attention given for the development of a comprehensive system. Towards a more diversified Islamic financial system At the onset of our journey in the development of a comprehensive Islamic financial system that is progressive, efficient, dynamic and sustainable, due attention was thus given to the development of the key structural components of the Islamic financial system, comprising the Islamic banking industry, the takaful industry and the Islamic money and capital markets. The intra-dependency of these key components creates the enabling environment for the Islamic financial system to effectively perform its role as an efficient conduit for mobilizing resources and channeling the funds to finance productive economic activity.