The Islamic financial system is also well supported by a significant number of diverse players in the banking, takaful and capital market. Finally, for a dual financial system, the tax reforms have been undertaken to accord neutrality in treatment between conventional and Islamic financial products. The establishment of a national central Shariah Council has been important to ensure harmonisation of Shariah decisions in the Islamic financial services industry. The Islamic financial industry in Malaysia has experienced rapid transformation in recent five years. The product range has now expanded into broad array of innovative instruments. Several new Islamic financial products were introduced which included residential mortgage backed securities, commodity based financing, as well as investment and equity linked product based on musyarakah, mudarabah and ijarah. The Islamic financial system in Malaysia has evolved as a competitive component of the overall financial system, complementing the conventional financial system as a driver of economic growth and development. Malaysia continues to foster the expansion of the dual banking system where both, the Islamic and conventional systems operate in parallel to deliver innovative and competitive financial products and services. More recently, the increased pace of liberalisation in the Islamic financial services industry has increased foreign presence and participation in our domestic Islamic financial system. This has increase the diversity of players in our system. The Malaysian bond market has also been liberalised to enable foreign entities to raise ringgit and foreign denominated funds in our domestic market.

The evolution of sophisticated Islamic financial products that have been structured based on multiple Islamic concepts have resulted in a new wave of innovation. These products have become competitive and efficient both in terms of product structure and pricing. The more recent innovations include the introduction of Islamic hedge funds and the creation of Islamic benchmark indices. There has also been increased listing of Islamic financial instruments in international exchanges. This has enhanced the depth of the Islamic financial markets has increased its attractiveness of an asset class for investment. This has contributed to increased sophistication of Islamic banking and takaful products evidenced by the recent surge of structured products and investment-linked products. The sukuk market is fast emerging as the most significant form of Islamic financing and continues to receive strong interest as an avenue for fund raising and investment. The sukuk market has been gaining growth momentum, increasing at an average annual rate of 40 percent. Significantly, 90 percent of the sukuk issuance are corporate issuances. In Malaysia, the issuance of sukuk has surpassed the issuance of conventional bonds for three consecutive years, with the annual turnover in sukuk trading in the secondary market at about RM135 billion. Strong demand for sukuks have also been spurred by the high levels of surplus savings and reserves in Asia and the Middle East. The sukuk is also an attractive instrument to assist Islamic financial institutions in managing their liquidity requirements.