Malaysia has built one of the world's most credible and sophisticated Islamic finance ecosystems. Today, the country's Islamic financial system is growing materially faster than the conventional banking system. Islamic banking assets exceeded US$312 billion in 2025, with Shariah-compliant financing representing approximately 44% of total system loans. This places Malaysia on a trajectory toward achieving parity in size between the Islamic and conventional banking markets.
Malaysia's next strategic opportunity lies in converting this growth advantage into a lasting structural advantage by strengthening market infrastructure, deepening liquidity, and building greater institutional scale.
How to turn Malaysia’s Islamic finance growth into structural leadership
Malaysia has already established leadership in Islamic banking, issuance of Shariah-compliant bonds called sukuk, Shariah governance, and regulatory credibility. Yet this leadership has not been fully translated into a lasting competitive advantage.
The next phase of value creation will be driven by deepening liquidity in the secondary sukuk market and developing digital asset infrastructure, positioning Malaysia as a global trading venue instead of primarily an issuance venue, and building greater institutional scale to match the rapid growth of Islamic finance.
Growing secondary sukuk market liquidity in Malaysia
Malaysia's opportunity extends beyond simply issuing more sukuk and involves making existing sukuk genuinely tradable. Today, much of the outstanding sukuk market remains concentrated among buy-and-hold investors, limiting secondary trading activity and embedding a persistent liquidity premium. Solving this challenge can create a self-reinforcing cycle in which deeper liquidity attracts additional investors, lowers funding costs, encourages greater issuance, and further strengthens Malaysia's position in global Islamic capital markets.
Achieving this requires coordinated investment across market infrastructure, including:
- Larger and more standardized benchmark sukuk
- Market-making frameworks
- Shariah-compliant repo markets
- Greater post-trade transparency
- Broader retail and institutional participation
- Expanded sukuk ETFs and listed investment products
Together, these initiatives would help cement Malaysia's leadership in liquidity, trading, and market infrastructure, as well as reinforce its strength in sukuk issuance.
Tokenization and digital innovation across Malaysia's sukuk market
Malaysia's evolving digital asset framework creates a rare opportunity to build digital market infrastructure around the country's strongest financial export — sukuk. Rather than viewing digital assets as a separate market, Malaysia can make sukuk digitally native across issuance, settlement, distribution, and secondary trading.
Capabilities such as fractional ownership, automated profit distribution, real-time settlement, and greater transparency can broaden investor participation while addressing many of the frictions that currently limit secondary-market liquidity.
Growing Bursa Malaysia into a global sukuk trading hub
Malaysia has already established itself as one of the world's leading sukuk issuance markets. The next phase of value creation lies in becoming the preferred venue for global secondary sukuk trading.
A stronger trading ecosystem would allow Malaysia to capture recurring value through clearing, custody, market data, listing services, and market-making activity. Bursa Malaysia, the country’s stock exchange, is well-positioned to become the gateway connecting ASEAN sukuk supply with Gulf Cooperation Council (GCC) and international investor demand through transparent and digitally enabled market infrastructure.
Building scale for Islamic finance's next phase of growth
As Islamic finance continues to outpace conventional banking, institutional structures should evolve alongside it.
Two complementary pathways can help build greater scale: First, consolidate standalone Islamic financial institutions. Second, unlock an "Islamic dividend" through consolidation among conventional banks, where Islamic subsidiaries can either remain within merged banking groups or contribute toward larger standalone Islamic banking platforms.
Any combination should ultimately be assessed against shareholder value, customer outcomes, competition, financial inclusion, and systemic resilience. Scale creates value only when it delivers better outcomes.
Advancing Islamic finance with GLICs, Cagamas, and covered sukuk
Malaysia's government-linked investment companies (GLICs) occupy a distinctive position as long-term investors across both financial institutions and the wider economy. Their ownership positions create an opportunity to solve coordination challenges that markets alone may struggle to address, particularly where institutional restructuring could strengthen Malaysia's Islamic finance ecosystem.
The National Mortgage Corporation of Malaysia’s (Cagamas) 2.0 model, supported by a covered bond and covered sukuk framework, also offers an opportunity to diversify funding sources beyond deposits while enabling:
- Direct covered bond and covered sukuk issuance by larger banks
- Access to comparable funding costs for smaller institutions through Cagamas aggregation and credit enhancement
- Development of a new benchmark asset class supporting housing, infrastructure, and green finance
Covered sukuk could become an important foundation for both funding diversification and future tokenized capital markets.
Making Islamic finance more inclusive and accessible
Structural reform should ultimately be judged by its impact on customers. Stronger market infrastructure, deeper liquidity, and greater institutional scale should translate into improved mortgage availability, expanded small and medium-size enterprises (SME) and broader halal economy financing (for goods and services that comply with Islamic law), broader retail access to sukuk, stronger Islamic wealth and retirement products, enhanced digital banking experiences, increased takaful (Islamic insurance) penetration, and wider financial inclusion.
Taking Malaysia's Islamic finance leadership to the next level
Malaysia's Islamic finance leadership is already well-established — and continues to strengthen.
The next decade presents an opportunity to convert sustained growth into enduring competitive advantage by matching issuance leadership with deeper secondary-market liquidity, positioning Bursa Malaysia as a global trading venue, making sukuk digitally native, and building institutional scale where it creates value.
Realizing this opportunity will require coordinated action across regulators, market participants, GLICs, and financial institutions. If done well, Malaysia can reinforce its position not only as the world's leading sukuk issuance market but also as the global reference market for Islamic finance across trading, infrastructure, and capital markets.
