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Lee Pei San; August 2007

Malaysian Islamic banking system is playing a prominent role in the Islamic financial sector in Malaysia. Proper management and well organization of the Malaysian Islamic banking system is the main reason for its success. Presently, PricewaterhouseCoopers (2007) acknowledged that Malaysia has the largest Islamic banking and financial market with assets worth RM 113.5 billions and the Takaful assets valued at RM 6.2 billions. On top of these, Malaysia is also the largest Islamic private debt securities market, which contributed 45.5% of the domestic corporate bonds that worth of RM 125 billions. Moreover, Malaysia also actively participating in the Islamic Money Market channeling, that is about RM 30 billions to RM 40 billions monthly. Critical mass of diversified players – Islamic banks, investment banks, takaful companies, development financial institutions, savings institution, fund management companies, stock brokers and unit trusts is also mentioned. Currently, there are about ten Islamic financial institutions in Malaysia, either incorporated locally as such Affin Islamic Bank Berhad, Bank Islam Malaysia Berhad and Bank Muamalat Malaysia Berhad or foreign-owned for example Al-Rajhi Bank and Kuwait Finance House. Besides, there are also eight other conventional banks that are offering the Islamic banking services through the Islamic windows, for examples Public Bank Berhad and OCBC Bank (Malaysia) Berhad.

Islamic banking system was first established in Malaysia 40 years ago. It was introduced in 1963 by Malaysian Pilgrims Fund Board (Lembaga Tabung Haji) and the first Islamic bank in Malaysia is the Bank Islam Malaysia Berhad, formed on the 1st July 1983. The ultimate objective of Malaysian Islamic banks is to operate in parallel with the conventional banks and present itself as an attractive alternative to these traditional banks. Islamic banking is based on the philosophies and principles that had already been outlined in the Holy Qu’ran and Sunnah of Prophet Muhammad more than 1800 years ago. This emergence of Islamic banking is mainly due to the revitalization of Islamic financial system which is totally usury (riba) free. Usury refers to the increase, addition or growth in value which are non-trade related. In other words, Islamic bank is prohibited from dealing with any transactions that involved interest, as according to the principles of the Qu’ran. Due to this reason, Islamic Banking Act had been implemented on the 7th April of 1983 to cater for a specific legal framework to regulate the activities of Islamic banks. Emphasis of Islamic banking in Malaysia is placed on the justice of socio-economy and an equitable distribution of income and wealth, as well as the stability in the value of money. Businesses and trade activities must be on the basis of fair and legitimate profit. Monopoly and hoarding are forbidden as well. Moreover, there is also an intention to incorporate the Islamic principles, laws and tradition into the financial sector of Malaysia. This also helps to prevent the Islamic communities and societies from activities that are forbidden under the Islamic laws and concepts.

As time goes by, with the development of human capital and innovation in the creation of financial products and services, many new rules have been put into practice. For instances, the Takaful Act 1984 to regulate the new components introduced in this sector. With this expansion of the Islamic banking system and the growth in demand for this service, Bank Negara Malaysia (BNM) had even allowed the existing conventional banks to offer the Islamic banking services. For example, at the 4th of March, 1993, Interest-free Banking Scheme was introduced by BNM. This was then called as the Islamic Banking Scheme at the latter time. On top of this, in the year 1996, a model financial statement had been introduced by BNM to urge those banks that are offering Islamic banking services to disclose their operations, with an intention to regulate and standardize the performance of these banks. As in 1997, a special regulatory agency, known as National Shariah Advisory Council, was formed to decide on the Shariah issues related to the Islamic financial system. Moreover, BNM had even streamlined the existing product names on the 8th of January, 2003.

Under Islamic banking system, there are actually many products and services made available in the Malaysian market. All these products and services are offered in accordance with the Shariah concept. For instances, savings account is introduced under the Wadiah concept, project financing is under the Bai ‘Bithaman Ajil concept and charge card is under the concept of Qardul Hasan. As the financial sector is becoming more globalize and liberalized and in face with more challenges ahead, BNM has formulated a 10-years strategy to create a more resilient financial system with the Islamic banking and Takaful sector be the major potential growth under this plan. Being attentive to the needs of the market is the key to the success of this financial system. Not only revitalizing the existing products and services is important but also with the development of human capital, more and more conveniences should be created to satisfy the increasing demand from the market.

In a nutshell, it is a remarkable success for Malaysia to achieve such a good result in the world of Islamic financial system even with just only 40 years of establishment. Nevertheless, Islamic banking development in Malaysia is not a perfect smooth sailing either, having to compete with well-established conventional banking for business and non-Muslim communities’ support. In this case, Bank Negara Malaysia (BNM) reported that in the inter-bank money market, the profit rates in the Islamic money market have been generally lower than that in the conventional money market, underlining its competitiveness and strength. Yet, there are more to be achieved in the years to come. There is still much room for improvements in our domestic Islamic banking as well as the need to expand out into the international market. Those are the immediate challenges.

Main | Malaysian Economy | Asian Crisis | Teaching Subjects  

Har Wai Mun @ 2007