Introduction To History Of Islamic Banking In Malaysia Finance Essay

Current patterns of Muslim Bankss around the universe diverge in several ways from the ideal conventional system. These differences can be summarized in four chief points. First, all sedimentations, including investings are ever explicitly or implicitly assured, in some instances the sum of capital warrants is officially written in Torahs and ordinances ; in other instances, it ‘s based on the inexplicit apprehension among the governments. Second, The PLS rule is ne’er purely applied because there are assorted grades of disobedience with regard to the PLS rule in current patterns of Bankss. Third, Financing is largely done by non-PLS manners. On norm, Muslim Bankss operate through the less hazardous. Fourth, there is discretion in make up one’s minding if indirect Islamic Bankss are allowed to utilize a grade of discretion in make up one’s minding if collateral is needed before deriving their installations, including the PLS manner of funding ( Zahir ; Hassn ; 2001 ) .

Definition of Islamic Banking

Islamic banking is defined as a banking system that is based on the rules of Islamic jurisprudence ( besides known Shariah ) and guided by Islamic economic sciences. Two basic rules behind Islamic banking are the sharing of net income and loss and, significantly, the prohibition of the aggregation and payment of involvement. Roll uping involvement is non permitted under Islamic jurisprudence.

Islamic banking refers a system of banking or banking activities that is consistent with Islamic jurisprudence and rules and guided by Islamic economic sciences ( Sipra, 2002 ) .

Muslim banking around the World

The Number of Islamic Bankss around the universe is 396 in 53 states Pull offing a entire fund of 442 Billions United States Dollars. In add-on, not chief watercourse Bankss around the universe which offers Islamic banking Windowss are 320 Bankss pull offing a fund of 200 billion United States Dollars Harmonizing to the organizational of Islamic states OIC ‘s association of the Islamic banking 2008 study with a growing norm of 15 % per annum. Although, most Muslim Banks are located in or around in-between east country but the acknowledgment for Islamic banking merchandises and services are increasing from twenty-four hours to another ( Scribd ; , 2010 ) .

Figure 1.1 Entire Volume of Shria’a Complaint Asset in Billion USD

Beginning: ( Pete And Philip 2008 )

Figure 1.1 over the past two to three old ages about more than 50 Muslim fiscal market establishments opened Islamic fiscal services, particularly in the in-between east part where Islamic banking has been taging a singular footmark, for illustration, NOOR Islamic bank and AL-HILAL Islamic Bank are been established in United Arab Emirates, BOUBYAN Islamic bank is been formed in Kuwait while AL-BILAD AND AL-INMA Islamic Bankss have been formed in the Kingdom of Saudi Arabia.

The growing of Islamic banking came chiefly from the willingness of retail banking industry ‘s clients to put harmonizing to their personal belief this was a fact, although the Islamic banking during the starting clip was non competitory as the conventional bank ( Pete And Philip 2008 )

Some states were promoting the Islamic banking growing like Malaysia where the authorities was the chief driver behind the development of an Islamic banking sector by funding Islamic fiscal service Bankss and come oning to make legal frame work, peculiarly.

At peculiar clip consciousness of Islamic banking merchandise have been grown particularly in the Muslim universe where many establishments have been lunched. Islamic banking assets have been risen from 15 % to 20 % . Per Annum over the past five old ages ( Pete And Philip 2008 ) .

Figure 1.2 Number of Islamic Mutual Fund

Beginning: ( Pete And Philip 2008 )

Figure 1.2 Islamic banking is non limited to the retail banking merchandises capital markets have been turning expeditiously one of the fastest turning capital market merchandises is SUKUK In the clip between 2000 to 2007 USD85 Billions has been risen from SUKUK ( Pete And Philip 2008 ) It is expected to increase in the hereafter as United Kingdom is presenting Islamic banking hub in UK.

Current patterns of Muslim Bankss around the universe diverge in several ways from the ideal conventional system. These differences can be summarized in four chief points. First, all sedimentations, including investings are ever explicitly or implicitly assured, in some instances the sum of capital warrants is officially written in Torahs and ordinances ; in other instances, it ‘s based on the inexplicit apprehension among the governments. Second, The PLS rule is ne’er purely applied because there are assorted grades of disobedience with regard to the PLS rule in current patterns of Bankss. Third, Financing is largely done by non-PLS manners. On norm, Muslim Bankss operate through the less hazardous. Fourth, there is discretion in make up one’s minding if indirect Islamic Bankss are allowed to utilize a grade of discretion in make up one’s minding if collateral is needed before deriving their installations, including the PLS manner of funding ( Zahir ; & A ; Hassn ; , 2001 )

Talking about Islamic banking in Malaysia started in the twelvemonth 1963, when the Malayan Muslims were concerned about a mechanism which allowed them to salvage Money in order to execute Haj ( advised by Islam Essentials one time in life to see Makah The sanctum Masjeed in Saudi Arabia ) hence, the constitution of the Haj fund Management organisation is implemented, the organisation invests the fund to bring forth net income, net income is invested harmonizing to Islamic jurisprudence where no Riba is involved or any concern activity, which does n’t follow with Sharia jurisprudence and rules.

The being of Tabung Haji was extremely attributed to a paper presented by Royal Professor Ungoko Aziz titled “ Plan to better Economy of prospective pilgrims ” in 1959. This thought was the base for the creative activity of a mechanism to salvage the fund of Malayan Muslims, who intend to execute the Haj as the Malayan Muslims in the yesteryear had to sell their prosperities or impact their life criterion when traveling for to execute Haj apart from that there was a demand to make a economy for Muslim in Malaysia, which has no Riba ( Interest ) influence ( Fadzlan Sufian Muhd-Zulkhibri, Abdul Majid 2008 ) .

The outstanding public presentation of Tabung Haji has attracted many organisations to propose the authorities in Malaysia to set up a full fledge Islamic bank, in fact, there were many calls by meeting and conferences, which made the authorities accept to set up a National Council which comprises of 20 experts in the field in 1981 to analyze the thought of set uping Islamic fiscal establishments in Malaysia. However, Malaysia as a state with high Muslim population had been affected by the starting of Islamic Bankss in the Middle East. Calls by Muslims in Malaysia to get down an Islamic banking activity increased, in 1980 a call by Bumipura Congress to get down the Islamic banking is followed by the National Steering Committee in 1981 executing a survey on the worth of doing anew Islamic bank in Malaysia taking into history different facets. The consequence of the survey was positive plenty to tag in July 1983 the constitution of the first Islamic bank in Malaysia named Bank Islam Malaysia Berhad in July 1983, the get downing Capital of Bank Islam Malaysia Berhad was 80 Million Rinagate Malaysia, the starting of Bank Islam Malaysia was the first measure in building the Islamic fiscal system in Malaysia.

Bank Islam Malaysia has been transporting on operation like any other bank offering merchandises, which comply with Islamic jurisprudence.For illustration, Net income sharing ( Mudarabah ) , Cost plus ( Murabaha ) Home Financing ( Bai bel thaman alajael ) Easy Loan ( Qarad alhasan ) and many other merchandises which comply with Sharia ‘s jurisprudence. In line with its aims, the banking activities of the bank are based on Syariah rules. After more than a decennary in operations, Bank Islam Malaysia Berthed has proven to be a feasible banking establishment with its activity spread outing quickly throughout the state with a web of 80 subdivisions and 1,200 employees. The bank was listed on the Main Board of the Kuala Lumpur Stock Exchange on 17 January 1992.

Islamic Windows

The authorities of Malaysia has gained more assurance in the Islamic banking procedure, that is been translated in pulling a strong vision to better the Islamic fiscal system in the state in a short period of clip so Malaysia could be one of the chief universe participants in Islamic banking and finance industry. Therefore, a individual Islamic bank is non plenty to run in the state, in order to make an Islamic fiscal system, there must be more Bankss in the state so the authorities has allowed the commercial Bankss in 1993 to open Islamic Windowss and get down utilizing their existing substructure, staff and subdivisions, on 4th March 1993the Central Bank introduced a strategy known as “ Skim Perbankan Tanpa Faedah “ ( Interest-free Banking Scheme ) which was subsequently known as Islamic Windowss, which province that Bank Negara Malaysia has allowed other fiscal establishments to offer Islamic banking merchandises to ensue in entire 15 commercial Bankss, which offer Islamic Windowss alternatively of three Bankss before 3 of the 15 commercial Bankss are foreign commercial Bankss.

Islamic Foreign Banks in Malaysia

The outstanding advancement of Islamic banking establishments did non halt at the establishing of Islamic Windowss on 1 October 1999 a 2nd full fledged Islamic bank viz. Bank Muamalt Berhad ( BMMB ) started its operation non merely that conventional Bankss can set up their ain full fledge Islamic Bankss under one streamer in add-on the authorities has allowed licences to international Bankss to run in the state Figure 1.3. The Muslim Bankss in Malaysia offer a broad scope of merchandises and aid to mobilise the fund inside the state Islamic Bankss in Malaysia offer service like sedimentation history current history loan and funding. Malaysia has been one of the first states to offer double banking systems where a bank can offer Muslim merchandises and non Islamic merchandises at the same clip ( Siddiqi 2001 ) .

Figure 1.3: Muslim Deposits and Loans in Malayan Banks, 2000, 2002, 2004, and June 2006

Beginning: Bank Negara Malaysia, 2007

As portion of the attempt to streamline and harmonies the Shariah readings among Bankss and takaful companies, Bank Negara Malaysia established the National Shariah Advisory Council on Islamic Banking and Takaful ( NSAC ) on 1 May 1997 as the highest Shariah authorization on Islamic banking and takaful in Malaysia. ( Filaria Abdullah Traffic, Hassan Shams, her Mohamad 2007 )

The authorities in Malaysia has besides provided permissions foreign Bankss to run a full fledge Islamic Bankss in Malaysia.

Kuwait Finance House

Alrajihi Banking and investing corporations

Qater Islamic Bank

Islamic Insurance in Malaysia

The growing of Islamic finance and banking in Malaysia is non limited to banking and finance establishments and money market. It includes another of import merchandise that is Muslim insurance or as known by Takaful it was, foremost, introduced in Malaysia in 1985 when the first takaful operator was established to carry through the demand of the general populace to be protected based on the Islamic rules ( Laldin 2008 ) .

Muslim Bond in Malaysia

The development of Islamic banking industry in Malaysia is achieved by holding a feasible attractive merchandise to pull the participants in the market. Islamic fiscal establishments in Malaysia offer more than 40 Islamic fiscal merchandises and services that may be offered utilizing different constructs such as Mudharabah, Musyrakah and Ijarah.

One of the outstanding land Markss in the history of Islamic finance in Malaysia ballads in the constitution of money market and capital A broad scope of instrument development in the country of Islamic finance in Malaysia has been used to ease the smooth flow of financess in the Islamic fiscal system followed by the development of the bond market in Malaysia, which accounts for 81 % of GDP. The authorities of Malaysia is been really supportive in the development of Islamic capital market. The rapid development of Islamic capital market started in 1990 when SHELL MDS SDN Bhd issued the state ‘s first Islamic bond. In 1994, Malaysia ‘s first full-fledge Islamic stock broking company is established, as the increasing attending for Islamic securities is observed by the Malayan authorities the security committee of Malaysia established the ICM Unit which comprises research workers trained in both Islamic jurisprudence and Islamic finance, in 1997 the SAC introduced the first Shariah -approved securities, which were listed on the Kualalampour Stock Exchange.

The Bursa Malaysia Shariah Market trades merely Shariah -approved stocks and as at 31 May 2005, there are 816 stocks, which are Shariah compliant. The index is named as the Shariah Index towards an Islamic capital market and Islamic financess managed in conformity with Shariah rules and invested merely in Shariah approved assets. Islamic unit trust financess have been another of import country that was developed in this regard where Islamic financess managed in conformity with Shariah rules and invested merely by approved Shariah assets, in Malaysia the keeping of Shariah boards for Islamic financess is required by jurisprudence.

Islamic Banking Education

Malaysia has been sing the demand to heighten the Islamic finance instruction which is translated in leting universities to get down classs in Islamic banking and presenting pupils with different graduate student grades related to Islamic economic sciences and Islamic finance surveies.

Bank Negara Malaysia has established and financed a full university INCIF comprising of a separate research centre ISRA and separate certified charted grade in Islamic finance and banking many pupils from different parts in the universe are acquiring full scholarship support to build a research grade in Islamic finance.

Islamic Banking Principles and Concepts

Prohibition of Interest ( Riba )

Non chief watercourse banking is been pulling attendings since about a decennary. The thought of sharing the hazard between the giver of the money and the taker looks more justified to fiscal establishments every bit good as clients. Islamic banking has been introduced now even in states with minority Muslim populations like Singapore and Australia. It ‘s non any longer restricted to the Muslim ‘s communities.

Clearly Islamic banking provinces certain criterions in a signifier of a jurisprudence taken from the holy book of Muslims named Quran where this signifier of Torahs consists of monitorial ordinances explicating how to cover with Money, which is named Shria jurisprudence.

Muslim banking does non let covering in involvement ( riba ) rate because the jurisprudence of Islam States the prohibition of involvement, which is based on fixed rate return on a taken loan. In add-on, not chief watercourse banking is concerned about the consequence of the dealing. If the consequence does do anything, which is non acceptable by Islamic law jurisprudence than the loan and dealing would non take topographic point ( Ghiraar ) . ( Mohammed Akacem, Lynde Gilliam 2002 )

Riba is lawfully defined as a contractual addition originating from a loan ( qard ) , whether in money or swap. Islamic jurisprudence is concerned about the justness ( adal ) for both the parties loaner and taker every bit good as the benefit ( Manfaa ) .So, not chief watercourse banking merchandises and services should take into consideration the economic and ethical values.

The basic rules of Islamic banking are the sharing of net income and loss and the prohibition of Riba ( vigorish ) . Among the common constructs in Islamic banking used is the net income sharing ( Mudaraba ) , safekeeping ( Wadiah ) joint venture ( Musharaka ) , cost plus ( Murabah ) and renting ( ijarah ) .

For illustration, cognizing that a individual does necessitate money as a loan to pay for his Mother operation a loaner comes puting the destitute state of affairs of that individual when accepting to give a loan on a high rate of involvement ( Riba ) . In such instances, Islamic banking has had introduced free involvement loan ( qarad alhasan ) bear downing a nominal service fee for that with no punishment on late payments practising the ethical and economic values in minutess.

Importantly, Some concern which sounds profitable but hurtful to the society. Such as baccy companies, dubious nines, Prostitution ‘s magazines or anything whose effects are hidden is of no involvement to Islamic banking investings because it ‘s non allowable by Islamic Islamic law jurisprudence ( Ghiraar ) .Likewise, Muslim Bankss does non put in Non Islamic Bankss.

Muslim Bankss and banking establishments that offer Islamic banking merchandises and services ( IBS Bankss ) are required to set up Sharia ‘s consultative commission to rede them, advisers to rede them and guarantee that all the operations and activities do comply with sharia jurisprudence and rules.

The chief Concept behind Islamic banking dealing and creative activity is the sharing of hazard between the different parties were in progress given about the return of investing is non allowed harmonizing to Sharia ‘s regulations. Conventional banking does presume a certain rate of return on an investing, whether a bank is doing net income or non, which is non acceptable by Islamic banking Torahs.

Bai Al inah ( Sale and Buy Back Agreement )

If a client wants to purchase a merchandise, but he does non hold adequate money to cover the entire sum of the merchandise therefore alternatively of traveling to take a loan from the bank on a fixed involvement rate, the bank buys the merchandise and sells it back to the client as concern dealing. The merchandise belongs to the bank until the client covers the entire sum of the merchandise sold. If the client is detaining the payment he will non be fined normally.

Bai Al Salam ( Advance Payment )

The client wants to purchase goods the bank pays an beforehand payment so the goods can be sent to client the bank pays the remain sum of good to the marketer on the installment footing here the bank is the purchaser of the goods and granter. The goods eventually is considered resold to the client by the bank on a net income footing.

Al Hibah ( Gift )

This is a nominal given voluntarily by a creditor to a debitor in return for a loan. It normally arises in pattern when Islamic Bankss involuntarily pay their client involvement on nest eggs history balances.

Al Ijarah ( Lease )

If a client wanted to get down a mill of or an equipment but does non hold the adequate fund to buy, the bank if possible can rent the mill or the equipment on the installment footing where the terminal of the period he can have wholly the assets.

Al Murabahah ( Cost Plus )

This construct refers to the sale of goods at a monetary value, which includes a net income border agreed to by both parties. The purchase and merchandising monetary value, other costs, and the net income border must be clearly stated at the clip of the sale understanding. The bank is compensated for the clip value of its money in the signifier of the net income border. This is a fixed-income loan for the purchase of a existent plus ( such as existent estate or a vehicle ) , with a fixed rate of net income determined by the net income border. The bank is non compensated for the clip value of money outside of the contracted term ( i.e.. The bank can non bear down extra net income on late payments ) ; nevertheless, the plus remains as a mortgage with the bank until the Murabaha is paid in full.

AL Musawamah

It is a general and regular sort of sale in which monetary value of the trade good to be traded is bargained between a marketer and the purchaser without any mention to the monetary value paid or cost incurred by the former. Therefore, it is different from Murabaha in regard of pricing expression. Unlike Murabaha, nevertheless, the marketer in Musawamah is non obliged to uncover his cost. Both the parties negotiate on the monetary value. All other conditions relevant to Murabaha are valid for Musawamah every bit good. Musawamah can be used where the marketer is non in a place to determine exactly the costs of trade goods that he is offering to sell. musawah.


It is a relationship between two parties or more, of whom contribute capital to a concern, and split the net net income and loss pro rata. This is frequently used in investing undertakings, letters of recognition, and the purchase or existent estate or belongings. In the instance of existent estate or belongings, the bank assesses an imputed rent and will portion it as agreed in progress. All suppliers of capital are entitled to take part in direction, but non needfully required to make so. The net income is distributed among the spouses in pre-agreed ratios, while the loss is borne by each spouse purely in proportion to respective capital parts. This construct is distinguishable from fixed-income investment.

Qard Hassan ( Good Loan )

This is a loan extended on a goodwill footing, and the debitor is merely required to refund the sum borrowed. However, the debitor may, at his or her discretion, pay an excess sum beyond the chief sum of the loan ( without assuring it ) as a item of grasp to the creditor. In the instance whom the debitor does non pay an excess sum to the creditor, this dealing is a true interest-free loan. Some Muslims see this to be the lone type of loan that does non go against the prohibition on Riba, since it is the one type of loan that genuinely does non counterbalance the creditor for the clip value of money.

Sukuk ( Islamic Bonds )

It is the Arabic name for a fiscal certification but can be seen as an Islamic equivalent of bond. However, fixed-income, interest-bearing bonds are non allowable in Islam. Hence, Sukuk is securities that comply with the Islamic jurisprudence and its investing rules, which prohibit the charging or paying of involvement. Financial assets that comply with the Islamic jurisprudence can be classified in conformity with their tradability and non-tradability in the secondary markets. Conservative estimations suggest that over US $ 500 illion of assets are managed harmonizing to Islamic investing rules. Such rules form portion of Shariah, which is frequently understood to be Islamic jurisprudence, but it is really broader than this in that it besides encompasses the general organic structure of religious and moral duties and responsibilities in Islam.

Takaful ( Islamic Insurance )

It is an alternate signifier of screen that a Muslim can avail himself against the hazard of loss due to bad lucks. Takaful is based on the thought that what is unsure with regard to an person may discontinue to be unsure with regard to a really big figure of similar persons. Insurance by uniting the hazards of many people enables everyone to bask the advantage provided by the jurisprudence of big Numberss.

In modern concern, one of the ways to cut down the hazard of loss due to bad lucks is through insurance, which spreads the hazard among many people. The construct of insurance where resources are pooled to assist the needy does non belie Shariah. However, conventional insurance involves the elements of uncertainness ( Al-gharar ) in the contract of insurance, chancing ( Al-maisir ) as the effects of the presence of uncertainness and involvement ( Al-riba ) in the investing activities of the conventional insurance companies that contravene the regulations of Shariah. It is by and large accepted by Muslim legal experts whom the operation of conventional insurance does non conform to the regulations and demands of Shariah.

Challenges of Islamic Banking Growth in Malaysia

Most of the literature about the challenges confronting the Islamic banking negotiations about the engineering, accounting criterions, relation with cardinal bank, globalisation, equity establishments, constitution of an organized secondary fiscal market and supervisory framework.As an Islamic banking sector in Malaysia is considered at infant phase literature have asked for more creativeness and more fluctuations in merchandises. ( Munwar iqbal 1998 ) .

Teaching and preparation besides is considered one of the factors that is still a challenge for Islamic banking sectors. some of the workers in Muslim Bankss does n’t non graduate with Islamic banking background, some states like Saudi Arabia, Pakistan and Malaysia have created class in Islamic banking.

Kuwait Finance House, the Persian Gulf ‘s largest Islamic investing bank, and Saudi Arabia’sA Al-Rajhi Bank. Malaysia has 17 Islamic Bankss, which include the Islamic units of HSBC Holdings Plc, Oversea-Chinese Banking Corp. and Standard Chartered Plc, harmonizing to the cardinal bank ‘s Web site.

( Pete And Philip 2008 ) summarized the challenges of Islamic banking in the hereafter will probably go around around three countries.

Product Development And invention.


Operational Excellence.

Establishing and liquidness Management techniques

Achieving changeless Sharia Supervision

Pull offing the endowment pool.

Addressing the legal and revenue enhancement limitations.


Reviewing the literature Figure 1.3 would clearly bespeak that Malaysia represented in Bank Negara Malaysia was of the first states to take a systematic planning attack to develop the Islamic finance system in the part. Islamic banking systems in Malaysia is turning quickly and increasingly in malice of some other states procedure to be a caput of Malaysia like Singapore and UK.

Figure 1.3 The betterment degree in Islamic banking in Malaya