ISLAMIC BANKING INSPIRES A BETTER FINANCIAL FUTURE FOR A COUNTRY

Islamic banking is defined by Bank Negara Malaysia as a financial system that compiles
with Islamic law whereby the underlying principles applied in this system is based on mutual
risk and profit sharing among parties that involves in the transactions. In Islam, interest is
strictly forbidden and that element is become the major pillars for theories in Islamic Banking.
Islamic teachings have provide the required guidance on which to base the working of banks.
The basic principle that has guided all theoretical work on Islamic banking is that although
interest is forbidden in Islam, trade and profit is encouraged.
The Islamic banking system in Malaysia is labelled as more progressive as compared
to similar banking system in other Muslim countries. Malaysia is now recognised as the pioneer
and act as leader in Islamic banking and finance. Malaysia surpasses other Muslim countries
currently in terms of market infrastructure owing to the unwavering support by the government
in providing the impetus for growth of the local Islamic financial services industry.
The system has transformed from a slow beginning in 1983 to a successful and dynamic system
that is able to fulfil the banking needs of both Muslims and non-Muslims. The most important
ingredient in the success story of today Islamic banking and finance in Malaysia is the wellplanned and coordinated effort between the Malaysian government and the industry players.
As of today, Islamic banking and conventional Banking have played a major role as
Islamic banking have gained acceptance from both Muslim and Non-Muslim whereby it have
become the alternative banking philosophy for the depositors. According to the Asian Banker
Research Group, there are over 300 Islamic financial institutions in 75 countries that
implement the Islamic banking as part of their banking system. The World's 100 largest Islamic
banks have set an annual asset growth rate of 26.7% and the global Islamic Finance industry is
experiencing average growth of 15-20% annually(Asian Banker Research Group, 2013, page
27).
Malaysia's Islamic finance industry has been in existence for over 30 years. The
enactment of the Islamic Banking Act 1983 enabled the country's first Islamic Bank to be
established which is Bank Islam and thereafter, with the liberalisation of the Islamic financial
system, more Islamic financial institutions have been established. As per today there are 16
banks that have been listed by Bank Negara of Malaysia as the licenced Islamic banking in this
country
Malaysia's long track record of building a successful domestic Islamic financial industry

of over 30 years gives the country a solid foundation. Presently, based on Bank Negara data,
Malaysia's Islamic banking assets reached USD65.6 billion with an average growth rate of 1820% annually.
Due to the increase and well-being of Islamic banking industry, it is believed that
Islamic banking inspires to improve financial sector of Malaysia in terms of economics
development, ethical dimension and fairness.
Economics development of a country can be improvise by the implementation of
Islamic banking as one of the country banking systems. In this part, we will see further on how
Islamic banking can improvised the financial sector. One of the reasons why Islamic banking
is needed is because the conflicts that occurs in current conventional banking. One of the issues
of current conventional banking is the rising of the interest rate. The conventional banking
system is based on interest, they make profit based on profits they put in into the depositors
and under the supervision from the Central bank. The higher the interest, the higher the banks
profits.
Higher interest rates would produce higher yield curves, making deposits liabilities
more valuable. Banks flush with deposits and not enough loans may be especially effective.
This situation will make the depositors have to pay more than what they get in every loan that
they made. Due to that, people will have issues and problem in paying back their loans.
Now we will move to the successful development of Islamic banking. As mention
earlier in the introduction part, the Islamic banking system in Malaysia had been developed in
early 1980 whereby the pilgrim board was introduced. Followed by the Islam bank of Malaysia
in 1983.
For the next 10 years, the government had restricted the establishment of Islamic
banking to give time and opportunity for Bank Islam Malaysia to become stable and can stand
still among other banks in Malaysia. In year, 1993 the government introduced the Islamic
banking scheme or what we call as the Islamic windows for all operating bank in Malaysia.
Later on by year 1999 the second fully Islamic bank had been introduced and given a name of
Bank Muamalat Bank Malaysia Berhad. All these Islamic banks is been observed and governed
by the Shariah Advisory Council (SAC) which had been launched by central bank in the year
1996.
According to Bank Negara Malaysia, as in 2015, there are altogether 16 Islamic
banking in Malaysia with 2 of them are fully Islamic banking which are Bank Islam and also
Bank Muamalat. In 2014, there Sukuk that is maturing in Malaysia is amounting more than
25,000 million USD (Bank Negara Malaysia, 2015). This make Malaysia the most successful

country as the Sukuk provider and shown that there are positive development of Islamic
Banking in Malaysia. These to element which are the issues in conventional banking and the
successful development in Islamic banking is important in the development of Islamic banking
sector. Therefore, it is clearly seen that economics development of a country can be improvised
by the implementation of Islamic banking.
The implementation of Islamic Banking can also improve financial ethical dimension
of a country. There are many reasons on how ethical dimension can be improved such as the
moral hazard can be reduced. Everyone knows that, the current conventional use interest as
their main sources of profits. In Islam, interest is known as riba and it is prohibited in Islam
regardless what their objectives are even for profit based. Interest is the main problem in
banking whereby people have to pay more than what they get especially when they are making
a loan from the bank therefore there will be probabilities that the customers cannot be able to
pay back the loan and this will lead to the insolvency of the customers. This is one of the
example of moral hazard whereas the bank taking advantage to the needy people as the
customers did not have other option and have to deal with it.
If Islamic banking is implemented and used widely by the people especially in Malaysia
the problem of moral hazard will not become the major concern in this banking institutional as
for Islamic banking the main objective is to help people and interest is restricted and will not
be implemented to the customers.
Islamic banking has established itself as an emerging alternative to interest
based banking and has grown rapidly over the last two decades both in Muslim
and non-Muslim countries. Islamic banks have recorded high growth rates in
both size and number and operate in over 60 countries worldwide and bankers
predict that Islamic banking could have control over 50% of savings in the
Islamic countries within the next decade.
(Ahmad, 2004, page 22)
Therefore it can be clearly be seen that moral hazard which is one of the financial ethical
problems in the current conventional banking sector can be improved by the implementation
of the Islamic Banking.
Issue that is experienced by the conventional banking is that they implement the
security-oriented system as they prefer to help people who can guaranteed to pay back the
banks money and reduce the probability to lost the loan given to the customers instead of

helping the needy people. As mentioned by Venardos in 2005, The interest-based system is
security-oriented rather than growth-oriented. This attitude deprives many potential
entrepreneurs of the opportunity to get the required funding, because they lack sufficient
security to satisfy the banks criteria of creditworthiness. (Venardos, 2005, page 78)
For the Islamic Banking, the main objective is helping people and therefore they tend
to give loan to people who are eligible regardless their projects size especially in giving loan
as mentioned by Agrawal and Youssef, The socio-economic aspect of Islamic banking can
help to create more job opportunities, because the feasibility and productivity of a project are
the only criteria on which an Islamic bank will base its financing decision. Consequently, many
small productive projects can take place in the market, creating many new job opportunities.
(Agrawal & Youssef, 2000 page 126)
This example gives a clear situation about ethical problem experienced by the
conventional banking sector whereby they prefer to gain more and more profits without taking
into account the ethical problem created by them. Therefore, it can be concluded that Islamic
banking can improve the financial ethical dimension that had been created by the conventional
banking.
Other than economics development and ethical problems, the implementation of
Islamic banking also will inspire justice and fairness in the financial institutions. Fairness is
one of the important elements in Islamic banking therefore all the products are based on fairness
and justice for instance the musharakah product. Musharakah is the partnership agreement
whereby the bank helps the customers in providing the capital and becoming a partner to the
business. Then, both of them will share the profits and losses together with the pre agreed ratio.
This will lead to equality among the partners.
Musharakah also provides the opportunity to the customers to have own businesses
without depending on other people and indirectly gives job opportunity to other people
especially for those who are in need of the jobs. This is example of growth-oriented implement
by Islamic banking as they help one another without taking into account their background,
Musharakah encourages partnerships, also created jobs for many people in
society, promotes enterprise and partnership ventures, creating jobs in the
country, promote business enterprise culture in society and growth of skilled
people. Musharakah has a potent effect on controlling inflation and spread of

baseless credit, promoting joint ventures without potent investigations and

research ensures business successes, not speculations.
(Nedal al Ghattis, 2008 as cited by Kuala Lumpur Business School 2008, page 87)
Other than that, the concept of justice and fairness also can be seen in Islamic banking
through unrestricted eligibility to consume Islamic banking products to Muslim only. This
means that, the non-Muslim also can benefit from Islamic Banking products. Some people
might think that Islamic banking products are only for Muslims. These thought of mind had
make Non-Muslim do not used the Islamic banking products. Kuala Lumpur Business School
(2008) in their annual report about Islamic banking has stated that the customers of Islamic
banking products is come from different religion not only by Muslims customers.
During the initial stage of development, Islamic banking industry was
considered as a niche industry created to meet the banking needs of Muslims in
accordance with Shariah principles. At present, Islamic banking products and
services has gained widespread acceptance among Muslims as well as nonMuslims as a viable alternative to the conventional products and services in the
global financial system.
(Kuala Lumpur Business School, 2008)
Therefore, it can be concluded that, Islamic banking promotes justice and fairness in
their implementation through their products.
It can be clearly seen that through these examples, Islamic banking inspire a better
financial future for Malaysia and should be assisted for their development. There are many
ways assistance from third party can come in. One of them is through the education
intervention. Realizing that developing the required pool of qualified and skilled human
resources is vital to drive the industry to greater heights, Bank Negara Malaysia (BNM),
through the Financial Sector Master plan, outlined two important measures which need to be
undertaken by both Islamic financial institutions and institutions of higher learning. Firstly,
Islamic financial institutions need to form strategic alliance with institutions of higher learning
with the purpose of enhancing knowledge on Islamic banking and Takaful. Secondly, it is
suggested in the Plan that Islamic banking subjects be incorporated into the school curriculum
as well as in institutions of higher learning. (Kuala Lumpur Business School, 2008)

Education intervention is important as it will give a brighter explanation for the

importance of banking sector especially the importance of Islamic banking institution. Through
Islamic banking education, people will have alternative to choose either conventional banking
or Islamic banking as they have the ideas about the pros and cons of both banking sectors.
Other than that, government roles in enhancing the Islamic banking sector is also
important. As of today, the government gives full support towards the establishment of Islamic
banking. There are several legislations that had been introduced just to ensure the Islamic
banking institution survival in their sector. For example, in the early stage of the establishment
of Islamic Banks in 1983, the Government Investment Act 1983 was simultaneously enacted
with the Islamic Banking Act 1983. Sulaiman in his journal had mentioned that, While
Islamic Banking Act 1983 provides Bank Negara Malaysia (BNM) with powers to supervise
and regulate Islamic banks, the Government Investment Act 1983 empowers the government
to issue certificates on Islamic basis. (Sulaiman, 2013)
As the certificates are regarded as liquid assets, the Islamic banks could invest in the
certificates to comply with the prescribed liquidity requirements as well as to park their
temporary idle funds. This significant step has made Malaysia the first country in the world to
issue government bonds on an Islamic basis.
Other than that, realizing the fact that a new system will certainly face various
challenges and uncertainties, the government granted a ten-year monopolistic status to Bank
Islam Malaysia Berhad (BIMB). The rationale to confine Islamic banking within the structure
of a single Islamic bank was to allow the Islamic bank to operate in a smooth manner without
undue competition, which may hinder the progress of Islamic banking. It was the hope of the
government that within this grace period BIMB would be able to position itself as a strong and
viable financial institution. Bank Negara mentioned, Furthermore, with only one Islamic bank
operating, it would be that much easier for the authority to develop and test out new instruments
on a careful and prudent basis.(Bank Negara Malaysia, 1994).
To conclude, based on the explanation given above it is clear that Islamic banking
inspires a better financial future for Malaysia in terms of economics development, ethical
dimension and also fairness. Therefore, Islamic banking is the best alternative for conventional
banking and should be utilised by the community and the existence of this banking sector
should by supported all the time by all.

REFERENCES

Kuala Lumpur Business School, (2008) , An Overview of Islamic Banking System in Malaysia,
Kuala Lumpur, Malaysia, Kuala Lumpur Business School.

Dakhlallah, K. & Miniaoui, H. 2011, Islamic Banks Vs. Non Islamic Ethical Dimensions, 2nd
International Conference on Business and Economic Research (2nd ICBER 2011) Proceedings,
Conference Master Resources, Malaysia, pp. 2141-2148.

Sulaiman Abdullah Saif Al Nasser, Joriah Muhammed, (2013), Introduction to history of

Islamic banking in Malaysia, Humanomics, Vol. 29 Iss 2 pp. 80 87

Andrew M., (2010), Islamic finance: four articles introducing Islamic banking and finance
system, London, United Kingdom, Risk Reward limited

Bashir, (2008) , Successful Development of Islamic Finance, J. Res. Islamic Econ., Vol. 1, No.
2, pp. 59-66 (1404/1984)

Hamim S., Mokhtar Naziruddin Abdullah, Syed M. Alhabshi, (2008), Efficiency and
competition of Islamic banking in Malaysia, Humanomics, Vol. 24 Iss 1 pp. 28 48

Asyraf Wajdi Dusuki, Nurdianawati Irwani Abdullah, (2007), Why do Malaysian customers
patronise Islamic banks?, International Journal of Bank Marketing, Vol. 25 Iss 3 pp. 142-160

INTERNATIONAL ISLAMIC UNIVERSITY MALAYSIA

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ISLAMIC BANKING INSPIRES A BETER FINANCIAL
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SECTION 5
NAME: RIZMAN HAFIZ SUAIMAN (1220407)