Islamic Finance and the Development of Malaysia’s Halal Economy

Abstract

The halal economy (HE) plays an important role in Malaysia’s economic growth, contributing 7.5 percent to the Gross Domestic Product (GDP) as of 2020. Under the Twelfth Malaysia Plan, 2021-2025 (12MP), one of the key strategies to boost Malaysia’s economic growth is enhancing the competitiveness of the halal industry to capture a more significant share of the global halal market. The term halal refers to anything that is permissible or lawful under Islamic Law that dictates the way of life of a Muslim (a follower of the Islamic faith). Hence, the scope of the HE is broad and can be defined as an industry that is involved in the provision of halal products and services, including food, clothing and fashion, cosmetics and personal care, travel, and financial services. Consequently, Islamic finance is both parts of the broader HE (Hassan et al., 2021) and can facilitate the development of the HE. This report requested by Bank Negara Malaysia (BNM) explores the role of Islamic finance in supporting the development of Malaysia’s HE with the objective of informing policy discourse on enhancing existing strategies to increase access to Islamic finance solutions to underserved HE enterprises. The report comprises the following chapters, (1) the current state of the HE; (2) the financing ecosystem of Malaysia’s HE, (3) enhancing role of Islamic finance for the HE in Malaysia; and concludes in Chapter 4 with a set of recommendations for stakeholders in Malaysia. While the recommendations focus on Malaysia, they may also be relevant for other developing economies where the HE and Islamic finance are prominen