ISLAMIC BANKING SYSTEM IN MALAYSIA: INTRODUCTION

Posted by Kathryn Schwartz on November 10, 2013
Banking

INTRODUCTION

Good economic standing and strategic geography has made Penang chosen as the first state where Islamic banking was introduced in the country. Since the colonial period, Penang has become the country’s leading port. Economic activities that are carried out at ports like loading and unloading of trade goods and merchandise certainly require a good financial system so that a smooth trade operation is guaranteed. For that reason, a foreign bank known as the Chartered Mercantile Bank of India, London and China (later known as Mercantile Bank) was established in 1859. Since then, the banking system in this country continues to grow.

Islamic banking system in the state of Penang was founded after conventional banking system was initially introduced 124 years ago. This fact signifies a fairly long historical gap between Islamic and conventional banking system. Islamic banking system breaks its ground in Penang with the establishment of the first branch of Bank Islam Malaysia Berhad (BIMB) at Butterworth in 1983. To date, there are five branches of BIMB operating around Penang that provides electronic services like Automated Teller Machine (ATM), Cheque Deposit Machine (CDM) and Cash Deposit Machine (CQM).

LITERATURE REVIEW

Riba (Interest or usury)

It has been a basic or common practice for conventional banking system to adopt riba (interest or usury) in every elements of their business. Elements of justice and indirect consequences are not taken into account but rather concentrate alone on the profit for certain individuals or groups such as the shareholders.

According to Hakimi Ibrahim (May 1997), a financial crisis has started in Asia this crisis should be associated with the international financial regime and it was seen as a declaration of war against riba.

Khurshid Ahmad (1991) denotes that any form of interest (usury) is forbidden in the Koran. According to the principles of social justice, the philosophy of Islamic loan is to fulfil the needs of individuals who are in trouble, foster mutual help and instil the love to one another regardless of rank or position. However, the conventional banking system has taken away these principles by fixing high additional charges which exploits those needy individuals.

In contrast, the establishment of interest-free banking is founded on profit sharing. This means that the capital provider and the borrower (the bank and the debtor bank) will equally bear the entire likely outcome. If the banks experience some losses, the risk will then be shared together and so does if the banks experience some gain of profits, the profits will be evenly divided among the stakeholders (M.M. Wetmallay, 1997)

Shariah Principle in Islamic banking

Islamic banking system is entirely founded on Islamic law with no involvement of the element of interest (usury) in all offered banking transactions including loans (M.M. Metwally, 1997).
Islamic banking and conventional banking may appear to be similar but they do have differences in term of business practices where Islamic banking practices distinguish concepts which act in accordance with Islamic law and Shariah principles known as figh muamalat (Islamic transaction rules).

Development and Acceptance of Islamic Banking

Islamic banking system was aggressively criticised at the early stage of its implementation. However, Islamic financial and banking system has shown a robust development at the present day. Currently, there are more than 2,500 branches of Islamic banks, commercial banks, merchant banks and financial companies since the SPTF (Interest-Free Banking Scheme) was introduced in 1993. These growths have allowed Islamic banks to have a drastic increase in assets during the first five and a half years, from RM 2.4 billion in 1993 to 34 billion for the same period.

The existence of the second takaful (Islamic insurance) company (Bank Muamalat Malaysia Berhad), Islamic pawn schemes and Islamic cooperatives throughout the country demonstrate a growth pattern of Islamic financial and banking system. In order to enhance the competitiveness of Islamic banking over conventional financial and banking system, research and development (R & D) will be carried out to introduce more products and services that comply with Islamic (Shariah) law.

Hence, government intervention is essential to ensure economic balance in the form of full employment, economic proliferation, stable currency value, globalization harmony and responsibility in maintaining a healthy environment of a market to enable markets’ function to be properly practiced (Ismail Awang, 1999).

Former Deputy Governor of Bank Negara, Datuk Mohd Razif Abdul Kadir said that economic recession can be avoided if Islamic banking system is fully practiced in daily transactions. He added by saying that Islamic banking and finance system should be extensively promoted at the world level while conventional banks should follow the Islamic banking system to create a sustainable and balance global economy (Bernama, January 12, 2009).

The strengths of Islamic banking and financial system that need to be applied are special characteristics such as individual interests and social equality, equal distribution of profit and loss, justice, free from any unhealthy and negative elements and rejection of usury. With these strengths, Islamic financial and banking system will certainly be well accepted by Muslims and non-Muslims (Amiruddin Sadali, 1999).

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