developing islamic financial system

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TOWARDS DEVELOPING ASUCCESSFUL ISLAMICFINANCIAL SYSTEM:A LESSON FROM MALAYSIA

Creating Dynamic Leaders

Working Paper Series 003

By

Professor Sudin Haron

2004


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TABLE OF CONTENTS

Towards Developing A Successful Islamic FinancialSystem: A Lesson From Malaysia

Abstract 2

Introduction 2

History and Development 3

Government Intervention 6

Service Providers Intervention 8

Educational Institutions Intervention 12

Issues and Challenges 13

Concluding Remarks 19

Abstract

Malaysia is among those Muslim countries

that are fully committed to developing not

only an Islamic banking, but also a complete

Islamic nancial system. It is the objective

of the Malaysian government to develop Is-

lamic banking parallel to the conventional

system. Over the years the Malaysian sys-tem has managed to portray itself as a fea-

sible alternative to conventional banking.

The journey towards this has not been an

easy one. Nevertheless, the contributions of

many parties especially by the Central Bank,

industry players, educators, and customers

managed to steer this system towards more

efcient and effective system. To date, Ma-laysian system is studied and followed by

other Muslim countries. There are, however,

few issues still need to be addressed by re-

sponsible parties. The elimination of issues

such as legality and usage of selected Shari-

ah principles; public acceptance and nanc-

ing direction will certainly make this system

more viable in replacing the conventionalsystem.

Introduction

The Islamic banking system in Malaysia is considered to be

a more progressive and robust as opposed to similar bank-

ing system in other Muslim countries. This is evident when

Indonesia and Brunei adopted the Malaysian model during

the initial stage of developing an Islamic banking system

in their respective countries. Interestingly, although Paki-

Creating Dynamic LeadersPage 2


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stan was among the only two countries which hadfully Islamized her economy, it was the Malaysian

assistance that was sought after by the Pakistani

government when it proposed its intention of intro-

ducing the Islamic window concept. The Malaysian

Islamic banking system history began with the es-

tablishment of the rst Islamic bank in Malaysia,

i.e. Bank Islam Malaysia Berhad (BIMB), in 1983.

Since then, the Islamic banking system has trans-

formed to become a vibrant and dynamic system.

Understanding the need to develop a more com-

prehensive Islamic banking system, due attentions

have been given in promoting and developing an

Islamic nancial market, Islamic windows, and an

Islamic stock market to complement the role of the

system. Given its roles in the intermediation pro-

cess and payments system, the Islamic banking

system will continue to be at the core of the Islamic

nancial system.

The task of developing a successful Islamic nan-

cial system is indeed not an easy one. It requires

the formulation of a sound plan and well coordi-

nated efforts from various parties. The successful

development of an efcient and progressive Islamic

banking system should be credited to the Malaysian

government and its agencies especially the Minis-

try of Finance and Bank Negara Malaysia (BNM).

Through the dedicated commitment from these

two agencies; several policies and guidelines for

the industry player have been successfully intro-

duced. Currently BNM has its own Islamic Bank-

ing Department, which is responsible for the reg-ulatory aspects and has continuously introduced

measures for the development of Islamic banking

system in Malaysia. The rapid progress of Islamic

banking over the last two decades would not have

been possible without the continuous efforts from

the industry players in building up a successful and

vibrant industry As for the industry players, the last

20 years have witness continuous effort form them

to promote Islamic banking products and services

as an alternative to the conventional system to both

retail and corporate customers. From a humble be-

ginning, Islamic banking system currently holds10.5 percent of Malaysian banking asset and by the

year 2010 this gure is expected to grow to the 20

percent level.

Although the Malaysian Islamic banking system has

achieved enormous success in building itself as a vi-

brant complement to the conventional system, cer-

tain issues have arisen and remained unresolved.

Issues related to public awareness and acceptance,

development of human capital through training and

education, and the lawfulness of the Islamic princi-

ples in use as well as their applicability are amongst

those that have received great attention.

The objective of this paper is to discuss the history

and development of Islamic banking system in Ma-

laysia and interventions taken by various parties in

order to make this system a success. This paper is

organized into seven sections: the history and de-

velopment of Islamic banking system in Malaysia is

highlighted in section two; section three, four and

ve elaborate the interventions and contributions

by various parties in developing this system; sec-

tion six discuss the issues and challenges; and sec-

tion seven presents the concluding remarks.

History and Development

As with other Muslim countries, the move towards

establishing an Islamic bank in Malaysia was initiat-

ed by private parties. The rst formal request wasmade during the Burmiputera (indigenous people)

Economic Congress in 1980. This Congress passed

a resolution, which required the government to al-

low the Pilgrimage Board to establish an Islamic

bank. In another seminar which was held in 1981 at

the National University of Malaysia, the participants

requested the government to promulgate special

law which would allow the setting up of a new bank

based on Islamic principles. In line with these re-

quests, the government, on July 30, 1981 appointed

a National Steering Committee on Islamic Banking.



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This committee studied both the operations of the

Faisal Islamic Bank of Egypt and the Faisal Islamic

Bank of Sudan (Connors, 1988). Below are among

the recommendations made by the committee in its

report which was presented to the Prime Minister of

Malaysia on July 5, 1982 (BIMB, 1984):

1. The government should establish an Islamic

bank whose operations are in accordance to the

principles of Shariah.

2. The proposed bank is to be incorporated as acompany under the auspices of the Companies

Act, 1965.

3. Since the Banking Act of 1973 is not applicable

for the operations of an Islamic bank, a new Is-

lamic banking act must be introduced to license

and supervise the Islamic bank. The supervision

and administration of the proposed act are to be

the responsibility of the Central Bank of Malay-

sia.

4. The Islamic bank is to establish its own Shariah

Board whose function is to ensure that the opera-

tions of Islamic bank are in accordance to Sha-

riah.

The Islamic Banking Act, 1983, which was gazetted

on March 10, 1983 and came into effect on April

7, 1983, paved the way for the establishment of

Islamic banking in Malaysia. This Act provides the

Central Bank of Malaysia with powers to superviseand regulate Islamic banks in Malaysia. Simultane-

ously, the government introduced the Government

Investment Act in 1983 to enable the government

to issue Government Investment Certicates,

which are government bonds issued in accordance

to Islamic principles.

The rst Islamic bank, Bank Islam Malaysia Ber-

had (BIMB) was incorporated on March 1, 1983 and

commenced operations on July 1, of the same year.

The bank now has a network of 89 branches. BIMB

is not only promoting Islamic banking productsthrough its own operations but is actively involved

in introducing Islamic nancial products and ser-

vices through its own subsidiaries. At present, BIMB

has subsidiaries dealing with leasing businesses,

nominee services, family and general takaful (in-

surance) business, trust funds, and stockbroking.

The establishment of BIMB marked the beginning

of a commitment by the Malaysian government to

introduce Islamic banking in Malaysia. The present

government however, does not have any intention

of Islamizing the countrys nancial system. On

the contrary, it is the long-term objective of Bank

Negara Malaysia (BNM), i.e. the Central Bank of

Malaysia, to create an Islamic banking system par-

allel to the conventional system. The Central bank

believes that this objective can be accomplished

through: (i) large number of players, (ii) broad va-

riety of instruments, and (iii) an Islamic inter bank

market (Bank Negara Malaysia, 1994).

In the process of increasing the number of players in

the system, rather than allowing a new Islamic bank

to operate, the BNM introduced a scheme known as

Skim Perbankan Tanpa Faedah (SPI) or the In-

terest Free Banking Scheme. Under this scheme

often known as Islamic windows, all commercial

banks, merchant banks and nance companies are

given the opportunity to introduce Islamic banking

products and services alongside their conventional

banking services. The pilot phase of this scheme

was launched on March 4, 1993, which involved thethree largest commercial banks in Malaysia. The

second phase commenced on August 21, 1993 with

10 more nancial institutions joining the scheme.

At the end of December 1993, a total number of 21

nancial institutions had obtained BNMs approval

to participate in the scheme.

BNM is also actively involved in formulating and

establishing banking products whose operations do

not violate Shariah principles. By the beginning of

1993, a total of 21 Islamic banking products were




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successfully developed by the Central Bank. Theseproducts represent the common products and ser-

vices available at conventional banks except that

they are Shariah compliant. In January 1994 the

Islamic inter bank market was introduced in the

Malaysian nancial system. This market con-

sists of three elements namely, (i) interbank trad-

ing in nancial instruments, (ii) Islamic inter bank

investments, and (iii) Islamic inter bank cheque

clearing system.

In 1996, several new measures were introduced

by BNM. First, nancial disclosure must be car-

ried out via the New Financial Disclosure or GP8,

which requires banking institutions participating in

the system to disclose their Islamic banking opera-

tions as part of their principal nancial statements.

The disclosure, as part of the Notes to the Accounts

entails the balance sheet and the Prot and Loss of

the Islamic banking operations during the nancial

year. Second, instead of providing products through

the Islamic counter concept, conventional banks

are now allowed to set up fully-edged branches

(known as green branches) that deal exclusively

with Islamic products.

In the area of Shariah, BNM recognizes the need to

harmonize the interpretation of Shariah in Islamic

nance among the Shariah scholars. Hence, the

National Shariah Advisory Council was established

in 1997 with the objectives of advising BNM on mat-

ters relating specically to Islamic banking, coor-

dinating Shariah issues and analyzing the Shariahcompliance of new products or schemes submitted

by banking institutions. The Council is empowered

with the sole authority and reference on all Shariah

matters pertaining to Islamic banking and takaful.

Since its inception, this Council has agreed on sev-

eral resolutions, i.e. banks are allowed to impose

penalty charges on unpaid debts, no restriction on

female and non-Muslim solicitors to act as signato-

ries in all nancial documents, and second and third

party charge is accepted as security.

Although Islamic banks and the SPI banks appointtheir own Shariah advisers to advise them on their

day-to-day operations, these banks are still required

to refer to BNM on policy-related Shariah issues. In

April 2005, BNM introduced the Shariah governance

framework as one of the initiatives to strengthen

the role and involvement of the Shariah scholars in

the development of Islamic banking and nance.

As the number of Muslims who want to realign

more to Islamic practices in their economic activi-

ties increase and the successful setting-up of therst Islamic Bank, these paved the way for the es-

tablishment of a second Islamic bank. In October

1999, the government granted a license for a sec-

ond Islamic bank, Bank Muamalat Malaysia Berhad.

An important milestone taken by BNM in positioning

Malaysia as an international Islamic nancial hub

was to bring forward the liberalisation of its Islamic

banking sector to 2004, three years ahead of the

World Trade Organisations deadline, by granting

three new Islamic bank licenses to foreign insti-

tutions. These three Islamic nancial institutions

are from the Middle East, namely Kuwait Finance

House, Al-Rajhi Banking & Investment Corporation

and a consortium of Islamic nancial institutions

represented by Qatar Islamic Bank, RUSD Invest-

ment Bank Inc., and Global Investment House.

As the Islamic banking industry progresses into a

more advanced stage of development, BNM also is-

sued ve new licenses for domestic banks to cre-

ate Islamic subsidiaries. The underlying philosophyfor this establishment is to further strengthen the

institutional structure of the Islamic banking opera-

tions. The RHB Bank is the rst local bank to have

a full edge Islamic bank subsidiary, known as RHB

Islamic Bank, which commenced operation on 16th

March 2005 and followed by Commerce Tijari Bank

Berhad, which started operation on 15th April 2005

and Hong Leong Islamic Bank Berhad on 19th July

2005.



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Government Intervention

Positive intervention on a continuous basis from the

government is the key element for the successful

story of the Malaysian Islamic banking system. For

example, the appointment of the late Raja Mohar

Raja Badiozaman, the then economic adviser to

the Prime Minister to chair the steering committee

to study the viability of introducing Islamic bank-

ing in Malaysia in 1981 was the clear indicator that

government is really serious in establishing Islamic

banking system in the country. Secondly, it took

less than a year for the government to introduce a

new legislation, which allowed Islamic bank to start

its operation.

Thirdly, acknowledging the fact that the Islamic

bank would face liquidity problem at its early stage

of business, the Government Investment Act 1983

was simultaneously enacted with the Islamic Bank-

ing Act 1983. While Islamic Banking Act 1983 pro-

vides BNM with powers to supervise and regulate Is-lamic banks, the Government Investment Act 1983

empowers the government to issue certicates on

Islamic basis. As the certicates are regarded as

liquid assets, the Islamic banks could invest in the

certicates to comply with the prescribed liquidity

requirements as well as to park their temporary

idle funds. This signicant step has made Malaysia

the rst country in the world to issue government

bonds on an Islamic basis.

Fourthly, realizing the fact that a new system will

certainly face various challenges and uncertainties,

the government granted a ten-year monopolistic

status to BIMB. The rationale to conne 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 nancial institution. Furthermore,

with only one Islamic bank operating, it would be

that much easier for the authority to develop andtest out new instruments on a careful and prudent

basis (Bank Negara Malaysia, 1994).

BNM has also established a special unit in the Bank

to carry out strategic planning as well as regulating

and developing the Islamic banking system. This

role was given to its Islamic Banking Department,

which was rst established within the cluster of the

Banking and Regulation Department. As of October

2001, this Department was upgraded as one of the

key departments in BNM. Below are some of the

recent and major measures undertaken following

the recommendations by this department to further

enhance the development of Islamic banking sys-

tem in Malaysia. These measures, normally, are in

the form of policies and procedures to be followed

by the players and some are structural changes

pertaining to legal and accounting systems. They

are:

1. A requirement to observe the minimum risk

weighted capital adequacy ratio framework for

the Islamic banking portfolios of conventional

banking institutions participating in the Islamic

Banking Scheme (2001).

2. A standard framework for the computation of

the rate of return for Islamic banking institutions

(2001).

3. The establishment of Consultative Committee

on Product and Market Development. This is acollaborative approach with the industry players

with the purpose of developing risk-sharing mode

of nancing and Islamic oating rate mechanisms

for managing uctuating market risks (2002).

4. The Guidanc e Note on Sell and Buy Back

Agreement to facilitate a structured trading of

sell and buy back agreement with best practices

(2002).

5. Introduced a standard list of generic names of




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Islamic banking products and services. Of sig-nicance is the indicator i afxed at the end of

generic name (2002).

6. The new framewo rk o f ca lcu la t ing t he

distributable prots and the derivation of rates of

return to depositors in Islamic banks (2003).

7. The Guidelines on the Specimen Reports and

Financial Statements for Licensed Islamic Banks

or GP8-I (2003).

8. The amendment to the Central Bank of Malaysia

Act 1958 which position the Shariah Advisory

Council of BNM as the sole authority on Shariah

matters pertaining to Islamic banking and nance

that falls under the purview of BNM (2003).

9. The establishment of a dedicated High Court to

adjudicate all muamalat cases in the Commer-

cial Division of High Court Kuala Lumpur. In this

regard, a directive (Practice Direction No. 1 of

2003) was issued by the Chief Judge Malaya to

all legal practitioners in the country to register

Islamic banking and nance cases at both the

High Courts and the lower courts using a special

code number (2003).

10. The formation of the Law Review Committee

comprising representatives from the Attorney

Generals Chambers, Ministry of Finance, Ma-

laysian Bar Council, industry players and legal

practitioners. The main task of this Committeeis to review the existing laws pertaining to tax-

es, stamp duties, lands and other administra-

tive matters (2003).

11. The issuance of new Islamic banking licenses

under the Islamic Banking Act 1983 to three

leading foreign Islamic nancial institutions

from the Middle East (2004).

12. The transformation of the current Islamic

window structure into Islamic subsidiary and

approval has been given to ve domestic bank-ing groups to establish their own subsidiary

(2004).

13. The Islamic banks are allowed to determine a

reasonable ceiling prot rate and to include in

their nancing agreements, and their letter of

offer, the mechanism and benchmark used in

deriving the effective prot rate.

14. The Guidelines on Directorship in the Islamic

Banks or GP1-i which spell out the duties and

responsibilities of the board, appointment and

reappointment of directors and chief executives,

directorship in other corporations and compo-

sition of the board of directors as well as the

requirement for the Islamic banks to establish

an Audit Committee and other board commit-

tees consisting of Nominating Committee, Re-

muneration Committee and Risk Management

Committee (2004).

15. The Guidelines on Financia l Reporting for

Licensed Institutions or BNM/GP8 (2004).

16. The Guidelines on the Governance of Shariah

Committee for the Islamic Financial Institutions

in which the functions and duties of this com-

mittee are rationalized and streamlined.

As the banking industry entered the turn of the

millennium, the government reafrmed its long-

term commitment in developing Islamic bankingin Malaysia. This is reected in the formulation of

the Financial Sector Masterplan in 2001. The ob-

jective of this Plan is to develop a more resilient,

competitive and dynamic nancial system with best

practices, that supports and contributes positively

to the growth of the economy through the economic

cycle, and has a core of strong and forward looking

domestic nancial institutions that are more tech-

nology driven and ready to face the challenges of

liberalization and globalization.



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Importantly, the Plan outlined a detailed long-termstrategy to promote Islamic banking industry as

a niche area where Malaysia will be competitively

placed as an international leader in this industry.

By 2010, the Plan proposed the following criteria

to be achieved by the Islamic banking system in

Malaysia:

1. Constitute 20% of the banking and insurance

market share with an effective contribution to the

nancial sector of the Malaysian economy;

2. Represented by a number of strong and highly

capitalized Islamic banking institutions and taka-

ful operators offering a comprehensive and com-

plete range of Islamic nancial products and ser-

vices;

3. Underpinned by a comprehensive and conducive

Shariah and regulatory framework;

4. Supported by a dedicated institution (Shariah

commercial court) in the judiciary system that

addresses legal issues related to Islamic banking

and takaful;

5. Supported by a suff icient number of well

trained, high caliber individuals and management

teams; and

6. Epitomise Mal aysia as a regional Isl amic

nancial center.

Service Providers Intervention

Islamic banks in present time were created in junc-

tion with the Islamic resurgence, which took place

within many Islamic communities especially at the

end of 1960s and in the early 1970s. One of the

most important issues that were widely discussed

during that period was the transformation of the

economy from a capitalist basis to an Islamic foun-

dation. Since Muslims are prohibited from giving

or taking interest (or riba in Islamic banking litera-ture), the removal of interest has generally been

the rst step for the Islamisation of the economy.

It is perhaps only natural that the formation and

operation of Islamic banks were given the most at-

tention (Khan and Mirakhor, 1987). Due the riba

factor, most pioneering Islamic banks have incorpo-

rated the elimination of riba within their corporate

objectives. Some of the examples are as follows:

Dubai Islamic Bank (DIB), The United Arab

Emirates:

The main objective of an Islamic bank is to prohib-

it the Muslims from dealing with interest or usury

which has been strictly prohibited by Allah and to

protect them from one of the biggest sins.

(undated DIB information leaet)

Kuwait Finance House (KFH), Kuwait:

To conduct all banking operations and services for

its own account, or for the account of third parties,

without practising usury, whether in the form of in-

terest or in any other form.

To carry out direct investments or purchase or -

nance projects or activities owned by others, on a

non-usurious basis.

(KFH, Memo and Articles of Association, 1977)

Faysal Islamic Bank of Bahrain (FIBB), Bah-

rain:

To promote, foster and develop the application of

Islamic principles, laws and traditions to the trans-

action of nancial, banking and related business

affairs including the investment of funds for the

purpose of compensation for the nancial conse-

quences of dened risks or losses, and to promote

investment in companies, enterprises and concerns

which shall themselves be engaged in business ac-

tivities as are acceptable and consistent with Is-

lamic principles, laws and traditions and in no event

engaged in the alcoholic beverage trade, the busi-




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ness of borrowing and lending money at interest,the gambling industry or the pork meat industry.

(FIBB, undated Memo and Articles of Association)

Jordan Islamic Bank, Jordan:

The Bank aims at meeting the economic and social

needs in the eld of banking services, nancing and

investment operations on a non-usurious basis. In

particular these objects shall include:

a) Expanding the extent of dealings with the

banking sector by offering non-usurious banking

services with special emphasis on introducing

services designed to revive various forms of col-

lective social responsibility on a basis of mutual

benet.

b)Developing means to attract funds and savings,

and channeling them into participation in non-

usurious banking investment.

c) Providing the necessary financing to meet the

requirements of the various sectors, particularly

those which are not likely to benet from usuri-

ous banking facilities.

(Jordan Islamic Bank for Finance and Investment

Law, 1978)

As evident form the various objectives listed above,

it is clear that the main purpose of establishing Is-

lamic banks is to fulll the banking needs of Mus-

lims. Since interest is viewed as illegal for Muslimsin accordance with Shariah principles, survival

should not be an issue for Islamic banks especially

if they are established within the Muslim countries.

Banking on the needs of Muslims for Shariah com-

pliant products and services offered by nancial

institutions, many proponents agree that Islamic

banks are thus, ensured of their continuous exis-

tence. Unfortunately, in reality, this conviction does

not always hold.

Most Muslims do not behave in conformity to the be-

lief of many Muslim jurists and scholars. Empiricalstudies have shown that Muslims tend to behave as

rational economic man. Therefore, the norm rules

of selecting bank apply to Muslims. For example,

the top ve factors Malaysian Muslims consider as

important when selecting their banks are, (1) fast

and efcient services, (2) speed of transactions, (3)

friendliness of bank personnel, (4) condentiality of

bank, and (5) knowledgeable about the needs of

customers.

Several possible reasons can be put forward as to

why Muslims do not conform to the governing prin-

ciples of Muslim economic behavior i.e. belief in the

Day of Judgement, Islamic concept of riches, and

Islamic concept of success. It is worth to note that

modern conventional banks have been in existence

for more than 850 years and Muslims have been

long imbued with the capitalist and conventional

system. The problem of survival will not occur if the

whole economic system is converted into an Islamic

economic system (countries that already has a full

economic system are Pakistan, Iran and Sudan). In

most cases, however, Islamic banks have to co-ex-

ist with the conventional banks. Therefore, without

effective marketing strategy Islamic bank will not

be able to convince customers to switch from con-

ventional to Islamic system. The belief that the

Muslims are rational customers could be one of the

reasons of why BIMB chose the following objective

during its early years of establishment:

To provide banking facilities and services in accor-dance with Islamic principles, rules and practices to

all Muslims as well as the population of this coun-

try. The Islamic principles, rules and practices are

essentially those belonging to the body of Islamic

principles on commercial transactions (ahkam al-

muamalah al-Islamiah) that relate to banking and

nance. The banks efforts to provide these bank-

ing facilities and services are undertaken within the

framework of its viability and capability to continu-

ously grow and expand.

(BIMB, 1985)



10/21

Recognizing and leveraging on the increasing ap-peal of the Islamic banking products and services

from both Muslims and non-Muslims customers, the

above objective are now being replaced with more

dynamic and concise as follows:

1. To provide its customers with Islamic banking

facilities and services of the highest possible

quality;

2. To at tain viabil ity and sufficient l evel of

protability to sustain growth;

3. To develop and fost er a competent and

innovative management imbibed with high stan-

dard of integrity and Islamic banking profession-

alism;

4. To develop a motivated workforce inculcated

with appropriate work ethics fully committed to

the Bank and efcient and courteous services to

the customers;

5. To constantly strive to protect its shareholders

interest;

6. To be always conscious of its responsibilities and

duties as an Islamic corporate citizen.

In view of the above objective, we can safely con-

clude that the operation of BIMB is similar to any

ordinary commercial bank, except that it is guided

by the Shariah principles. The following BIMBs mis-

sion supports this statement:

To seek to operate as a commercial bank func-

tioning on the basis of Islamic principles, provid-

ing banking facilities and services to Muslims andthe whole population of this country, with viability

and capability to sustain itself and grow in the pro-

cess.

Contrary to the objectives of Islamic banks at other

Muslim countries, the focus of BIMB is providing Is-

lamic banking facilities to all Malaysian populations,

both Muslim and non-Muslim customers, based on

viability. As the pioneer Islamic bank in Malaysia,

BIMB has been able to portray itself as the leader

in the countrys Islamic banking system. For ex-



ample, started with its rst branch in Kuala Lum-pur in 1983, the Bank now has a network of more

that 50 branches. BIMB recorded strong growth a

year after its inception. Total assets doubled from

RM170.7 million at the end of 1983 to RM369.8 mil-

lion at the end of 1984, with sharp increases of de-

posits from RM91.0 million to RM274.9 million, and

of loans from RM40.7 million to RM249.8 million. As

at the end of June 2004, total assets of BIMB was

RM12,958 million, whereas total deposits and total

loans were RM11,269 million and RM7,640 million,

respectively.

BIMB accomplishment is attributed to the banks

top management who has transformed BIMB into

a dynamic bank that it is today. By having a for-

ward-looking management, BIMB not only has con-

tributed to the successful story of Islamic banking

within the Malaysian context but has also build its

reputation at the international arena. Some of the

successful stories are as follows:

1. Besides becoming the first Islamic bank in

Malaysia, BIMB was the rst institution that

provides takaful business (Islamic insurance)

through its subsidiary, Syarikat Takaful Malaysia

Berhad.

2. The rst Islamic credit card was also introduced

by BIMB.

3. The firs t Islamic bond was designed and

managed by BIMB i.e. bai bithaman ajil bonds forRM125 million issued by Shell MDS Sdn Bhd in

1990. Similarly, using the similar principle, BIMB

also involved in issuing RM 2.2 billion bonds for

the Malaysian Government for nancing the con-

struction of Kuala Lumpur International Airport.

Others are currently adopting the structure of

this bond in structuring other new issues.

4. BIMB was the first bank that has it s own

institution, BIRT Training and Research Institute,

providing training and consultancy works to public


11/21Creating Dynamic Leaders

Page 11

in Malaysia and other countries. This institutionwas later being upgraded to institution of higher

learning and providing certicate and diploma in

Islamic banking and nance to students. Due to

the liberalization process, the ownership of this

institute was transfer to a few banks in the coun-

try and renamed as Islamic Banking and Finance

Institute Malaysia or IBFIM.

5. BIMB has produced many quality staff and

many of these staffs now work as key personnel

with other Islamic nancial institutions in Malay-

sia.

Although there are other Islamic nancial institu-

tions operating in Malaysia, these institutions fall

within the categories of a challenger, follower, or

nicher. In most cases, they contribute in their

own ways in promoting their Islamic products and

services. In the case of Bank Muamalat Malaysia

Berhad (BMMB), for example, it is evident from its

2003 annual report that the bank aspires to become

a challenger to BIMB. As depicted in this report,

BMMBs strategy in competing for a share of the

Islamic customer base is to increase its consum-

er and retail nancing to a 60 percent level in the

year 2005 as well as to increase fee-based income

through investment banking division. In the case of

other Islamic banking providers such as Maybank,

Public Bank Berhad and Southern Bank, these con-

ventional banks are seen to be as either a follower

or nicher.

Seeing the importance of having the spirit of to-

getherness, Islamic banking providers decided to

come together and form an association, known as

the Association of Islamic Banking Institutions Ma-

laysia (AIBIM). Among the objectives of this Asso-

ciation are as follows:

1. To promote the establishment of sound Islamic

banking system and practice in Malaysia in co-

operation and consultation with BNM and other

regulatory bodies in Malaysia;

2. To p r o m o t e a n d r e present the interests ofmembers by all means and methods consistent

with the laws of Malaysia in or connected with

Malaysia;

3. To render where possible such advice or

assistance as may be deemed necessary and ex-

pedient to members;

4. To take note of events, s tateme nts and

expression of opinions affecting members, to ad-

vise them thereon and to represent their interests

by expression of views thereon on their behalf as

may deemed necessary and expedient;

5. To work in co-operation with other similar

association elsewhere in the world;

6. To circulate information likely to be of interest

to members;

7. To promote education and training in Islamic

banking so as to upgrade Islamic banking exper-

tise in Malaysia;

8. To work in conjunction with any legal body or

any association or committee or commission ap-

pointed or to be appointed for the consideration,

framing, amendment or alteration of any law re-

lating to Islamic banking;

9. To make provision subject to the approval of the

authorities for the conduct of foreign exchangeand other Islamic banking business; and

10. To organize and manage arrangements and

maters of common interest, concern or benet

to members or any group of members and to

collect and manage funds for the same.

Prior to forming this Association, every Islamic bank

conducted their own public awareness program

on Islamic banking system. The Association now

shoulders this task. One of the common activities


12/21



undertaken by this Association in educating publicis by organizing two important events, (1) Islamic

Banking and Takaful Week, and, (2) Islamic Bank-

ing and Takaful Expo. While Islamic Banking and

Takaful Week is an annual event and usually held

in Kuala Lumpur, Islamic Banking and Takaful Expo

is a program conducted at various capital states in

Malaysia. For example, the rst expo was held from

26th to 28th September 2003. This expo attracted

more than 38,000 visitors and was participated by

two Islamic banks, 10 local commercial banks, four

foreign banks, four takaful companies, four auto-

mobiles companies, ten housing developers, and

ve other companies.

In view of the overwhelming response, the second

expo was held from 8-10 October 2004 at Putra

World Trade Center, Kuala Lumpur. Besides exhibi-

tion on the various Islamic banking products and

services currently on offered in the market; activi-

ties such as seminar, forum and talks were also or-

ganized and broadcast in through electronic media.

Seeing the importance of educating public on a con-

tinuous basis, AIBIM has planned more exhibitions

for the year 2005. Four such exhibitions have been

successfully organized at Shah Alam, Alor Setar, Jo-

hor Bahru and Ipoh during the rst half of 2005.

Educational Institutions Intervention

Despite the achievements that have been achieved

so far, there remains the need for Islamic bank tostrive to enhance their capacity and capability. This

requires the readiness to invest in talent and skills

to spearhead the development of the Islamic bank-

ing industry. It is also important for this industry

to continually promote human capital development

and expertise to create a larger pool of experts and

high caliber professionals. Realizing that develop-

ing the required pool of qualied and skilled human

resources is vital to drive the industry to greater

heights, BNM, through the Financial Sector Mas-

terplan, outlined two important measures need to

be undertaken by both Islamic nancial institutionsand institutions of higher learning. Firstly, Islamic

nancial 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.

In an environment of rapid change, a key factor

that will inuence the future prospects of Islamic

banking industry will be investment in its human

resources. Investing in the development of human

capital will be the differentiating factor that will

contribute to the effectiveness, resilience and com-

petitiveness of the industry. This undertaking needs

to be the joint responsibility of industry practitio-

ners and academia to mutually elevate the perfor-

mance of the industry. As a matter of fact, strategic

alliance between Islamic nancial institutions and

institutions of higher learning has long been estab-

lished.

This relationship, however, is mostly in the form of

a one-time affair and is generally on an informal ba-

sis. For example, BIMB has always been accommo-

dative to the request of institutions of higher learn-

ing for their student internship program. Similarly,

it is often the case for a representative from the Is-

lamic nancial institutions to be invited to become a

member of an academic committee established by

these higher institutions before any Islamic bankingand nance program is offered in the institutions.

For instance, representatives from BIMB and BMMB

were invited to sit in the academic board for the

program of the Bachelor of Islamic Banking and Fi-

nance of the Faculty of Finance and Banking at the

Universiti Utara Malaysia.

Although efforts have been made to bridge the gap

between the requirement of the industry and the

development of human capital by the higher insti-

tutions, the activities taken are sometimes, based



Page 13

solely on the initiatives of higher institutions only.As a result, there exist an apparent mismatch be-

tween the supply and demand of human capital for

the Islamic banking industry. There is a possibility

that the industry players have no or limited knowl-

edge about the academic programs related to Is-

lamic banking and nance that are currently being

offered at the local higher institutions. The following

Table 1 highlights some of the programs related to

Islamic banking and nance presently being offered

by institutions of higher learning in Malaysia.

Table 1List of Programs Related to Islamic Banking and Finance at Higher Institutions in Malaysia

Inst Phd Master Bachelor

Besides the above programs, Islamic banking and

nance programs are also available at private insti-

tutes of higher learning. These programs, however,

are mostly at the diploma level. For example, the

Diploma of Islamic Banking and Finance is offered

at the Darulridzuan Islamic College of Perak, Sultan

Zainal Abidin Islamic College of Terengganu and In-

ternational University College of Selangor.

Issues and Challenges

Islamic banks will not face any treats and chal-

lenges if Muslims are fully aware that interest is

not permissible in Islam. Similarly, if all Muslims are

bound by the Muslims economic-behavior doctrine,

Islamic banks will have a continued existence. Un-

fortunately, Islamic banks operate in an environ-

ment where customers make rational economic

decisions. In light is this, Islamic bank should not

use religion as its major strength in attracting cus-

tomers, instead the bank must be managed effec-

tively and efciently. The last decade have also

seen the Islamic nancial landscape being signi-

cantly redened and shaped by powerful forces of

change. In light of further globalization and liber-

alization of the nancial system, BNM has outlined

three important factors that will change the future

landscape of banking industry in Malaysia, namelyincreased competition as a result of globalization


14/21



and liberalization, rapid technological advancementwhich lead to greater efciency and effectiveness,

and a new generation of customers which are more

discerning and have become more involved in their

nancial decisions.

As the nancial landscape is undergoing transfor-

mation, competition spurred by nancial liberaliza-

tion will intensied banking institutions are facing

competition not only from each other but also from

non-traditional competitors as well as from alterna-

tive sources of nancing such as the capital market.

On the Islamic banking front, new foreign players

and the transformation of Islamic windows into Is-

lamic subsidiaries present new challenges to the

Islamic banking scene in Malaysia. Furthermore,

technological advancements have allowed the de-

velopments of new and more efcient delivery and

processing channels as well as more innovative

products and services.

The challenge of banking institutions is to effective-

ly leverage on the opportunities offered by tech-

nology to innovate products and services aimed at

attaining greater efciency, reliability and competi-

tiveness. Another challenge facing Islamic bank is

the growing changing needs and expectations of

consumers in tandem with increased in education

level and growing wealth. Customers are now more

sophisticated in their needs and expectations. Cor-

porate customers have become more performance

oriented and are demanding competitive nancial

product. Customers too are becoming increasinglydiscerning and have becomes more involved in their

nancial decisions. Customers are now demanding

a boarder range of products and services at more

competitive prices through more efcient and con-

venient channels.

Therefore, these challenges require Islamic banking

providers to be more susceptible to the needs of

customers, provide more efcient and high quality

services, and make full use of the latest technology

available in the industry to gain competitive advan-

tage. Although, the Malaysian Islamic banking sys-tem is been regarded as the front-runner among

its counterparts in other countries, certain issues

remain unresolved. Amongst the most important is-

sues are public awareness and acceptance, and the

lawfulness of the Islamic principles in use as well as

their applicability.

Public Acceptance

Since its introduction, Islamic banking products

have now gained wide acceptance in Malaysia.

This is reected by the increasing amounts of to-

tal deposits and total loans that are based on Is-

lamic principles placed by Muslim and non-Muslim

customers. In the case of BIMB for example, at

the end of June 1984 (its rst year of operation),

the total deposits and total loans were RM241 mil-

lion and RM162 million respectively. At the end of

1994 (the 10th year of its operations), total depos-

its increased to RM2,548 million whilst total loans

increased to RM977 million. The corresponding g-

ures for the nancial year 2004 were RM11,269

million and RM7,640 respectively.

Public support and acceptance towards the Islam-

ic banking system is also high as reected by the

usage of Islamic banking products offered by the

conventional nancial institutions. In 1994, i.e. the

rst year of which selected commercial banks were

allowed to introduce Islamic deposit facilities, a to-

tal of RM1,463 million deposits was collected fromthe customers. This gure comprises of deposits in

current account (RM166 million), savings deposit

(RM1,146 million) and investment deposit facilities

(RM151 million).

Since then, these three types of deposits continue

to receive full support from the public. At the end

of 2004, total Islamic deposits placed by customers

at commercial banks increased to RM53,273.5 mil-

lion. The gure for current account was RM12,886.9

million, whereas RM8,072.9 million and RM32,313



Page 15

million for savings and investment accounts, re-spectively. Thus, the ability of the Islamic banking

institutions to arrange and offer attractive and in-

novative products at competitive prices vis--vis

conventional banking products has appealed to

both Muslim and non-Muslim customers, reecting

the effectiveness and competitiveness of Islamic -

nance as a form of nancial intermediation.

Although gures for total deposits of BIMB and Is-

lamic deposit facilities of commercial banks had

increased signicantly over the last ve years, we

cannot generally imply that that the Malaysian public

are all receptive towards Islamic banking products.

The comparative growth gures between Islamic

and conventional deposits are good indicators for

making few comments for further considerations.

The growth for various types of deposit facilities

in conventional and Islamic system of commercial

banks is shown in Table 2.

Table 2: Annual growth of various deposits facilities at commercial banks (%).

2000 2001 2002 2003 2004

Source: Bank Negara Malaysia Annual Report (various issues)

As indicated in Table 2, the yearly growth guresfor Islamic deposits were greater, in most cases,

than the gures for conventional deposits. Looking

at individual gures, we can also see that in many

instances, the growth for various types of Islamic

deposit facilities were greater than the growth of

deposits of the conventional system. This statistics

implies that Islamic banking products have now be-

come more popular among Malaysians.

The above growth gures alone cannot answer sev-

eral pertinent questions related to the development

of Islamic banking in Malaysia. Such issues include

whether all economic units in Malaysia are really

keen with the idea of the superiority of Islamic

banking against the conventional banking; whether

commercial banks in Malaysia are really committed

to adhere to the directives of BNM in promoting Is-

lamic banking products; and whether Islamic bank-

ing system has a bright future in Malaysia. Answers


16/21



to some of these issues can be found by lookingat the percentage of the deposits placed by Malay-

sians in Islamic system against the deposits with

the conventional system. The percentage of funds

placed in various types of deposit facilities available

at commercial banks in Malaysia is shown in Table

3 below.

Table 3: Funds deposited at various deposits facilities of commercial banks (%).

2000 2001 2002 2003 2004

Source: Bank Negara Malaysia Annual Report (various issues)

Looking at Table 3, notwithstanding with the fact

that there is a sign towards positive development

of Islamic banking system in Malaysia, it is inevi-

table to conclude that much work is still needed

to make this system more attractive to the public.

Furthermore, Malaysia is a country whereby Mus-

lims represent half of the countrys population andis governed by a coalition government that is led

by UMNO (a Muslim-based party). Therefore, when

total funds deposited in an Islamic system remains

not more than 15 percent of total deposits in com-

mercial banks, remedial actions are necessary in

order to ensure this system share a greater deposit

gure in the future.

In such instances, BNM being the governing body

of the Malaysian banking system not only must in-

troduce directives which can lead to the progres-

sive development of Islamic banking system butmust impose penalty to those who are not serious

in promoting this alternative system. In a study

conducted by Haron et al. (1994), the authors re-

ported that almost 100 percent of Muslims and 75

percent of non-Muslims in their study were aware

of the existence of Islamic banks. Most of them

expressed their desire to have a relationship with

Islamic banks only if they have a complete under-

standing of this system. In addition, the authors

also presented evidence, which suggests that the

public believed that Islamic bank is not meant for

Muslim customers only. Therefore, issues regard-

ing public acceptance does not arise. On the con-trary, the major issue here seems to rest on those

providing these services.

Although Islamic nancial institutions claimed that

their marketing programs are extensive in promot-

ing Islamic banking products and services, the re-

sults are far from satisfactory. In another study on

the perceptions of corporate customers toward Is-

lamic banks in Malaysia, Ahmad and Haron (2002)

revealed that Islamic banks had not done enough in

marketing their products to corporate sector.



Page 17

The Usage of Shariah Principles

There are many Shariah principles available to be

applied and implemented by Islamic banks in deliv-

ering their products and services. These principles

can be broadly classied into ve categories, (1)

prot and loss sharing principles; (2) trade prin-

ciples, (3) fees or charges based principles; (4) free

services principles; and (5) ancillary principles. Al-

though a number of principles have been adopted

according to how Islamic banks wish to conduct

their operations, it is the consensus among Muslim

scholars that these principles falls to two main clus-

ters, i.e. strongly Islamic and weakly Islamic.

A principle is considered strongly Islamic if it con-

forms to the Islamic objectives in both form and

substance. Weakly Islamic refers to conformity with

Islamic norms in form but not in substance. The

basis for judgement as to the strength or weakness

of a given principle is the extent to which this mode

contributes towards the achievement of the objec-

tives of the Islamic economy. Thus, only those prin-

ciples, in which risks are shared between providers

and users of funds, can be considered strongly Is-

lamic. Muslim scholars consider only two principles,

i.e. mudarabah and musharakah, as strongly Islam-

ic and the remaining principles are recommended

only in cases where risk-return sharing cannot be

implemented (Mirakhor, 1987).

Since the early days of modern Islamic banking

system, scholars had put their recommendation toIslamic banks to use prot and loss sharing princi-

ples for both deposits taking and nancing activities

(see Ahmed et, al. 1983; Siddiqi, 1983; Qureshi,

1985; and CII Reports, 1983). While these princi-

ples are widely used in the deposit taking activities,

the usage in the nancing activities has been rela-

tively non-existence. Islamic banks prefer to use

principles within the fee-based category because of

its simplicity, less risk involvement, and pre-deter-

mined xed rate of return. Similarly, the principles

within this category preserve the status quo associ-

ated with traditional banking, with its emphasis oncreditworthiness of the client and maintenance of

credit-debtor relationship. It is believed that the

usage of these facilities opens the back door for

interest (Ahmed, et. Al, 1983).

The renunciation of the prot and loss sharing prin-

ciples by Islamic banks management in their nanc-

ing is clearly seen from the gure of the total funds

channeled to these activities. In the case of Dubai

Islamic Bank, for example, at the end of 2004 the

total funds allocated for prot and loss sharing prin-

ciples was 10% of its total nancing. Similarly, the

corresponding gures for Jordan Islamic Bank and

Qatar Islamic Bank were 3% and 4%, respectively.

Just as in the case of other Islamic banks, Bank

Islam Malaysia Berhad also prefers to use the fee-

based principles in its nancing activities. Histori-

cally, at the end of 1988, only 1% of its total nanc-

ing was in the form of mudaraba and musharaka.

In 1993, the gure increased to 2 percent and at

the end of nancial year 1999 the gure decreased

back to 1percent. After more than 15 years of its

establishment, it is timely for both Islamic banks in

Malaysia and in other countries not to overly depen-

dent on fee-based nancing activities.

New strategies must be implemented in order to

increase the usage of prot and loss sharing ac-

tivities. However, it is worth to note that there are

some proponents of Islamic banking who do believe

that there is nothing wrong in using mark-up prin-ciples (also refereed to as the deferred contracts

of exchange) in banking businesses because any

transaction that based on trades are unlawful from

Shariahs point of view and also in line with the

verse 275, Al Baqarah, which says, God hath per-

mitted trade and forbidden usury. (Ismail, 2002)

The use of terminology in describing these princi-

ples could also lead to confusion. Malaysia for ex-

ample, is the only country where the Arabic words

are used in describing all the Shariah principles gov-


18/21



erning its Islamic banking operations. Other coun-tries, however, retain the Arabic words for certain

principles only, using vernacular words for others.

Some of the principles which are widely published

in the Islamic banking literature in Malaysia are al-

wadiah, al-wadiah yad dhamanah, al-mudharabah,

al-musyarakah, al-murabahah, bai bithaman ajil,

bai al-dayn, al-wakalah, al-kafalah, al-hiwalah, al-

ijarah, al-ijarah thumma al-bai, al-ujr, ar-rahn, bai

al-inah, al-istisna and al-qardhul hassan.

The Legality of the Principles

Although Malaysia is considered as one of the Muslim

countries that have successfully promoted Islamic

banking at par with conventional system, there are

objections from scholars in other countries regard-

ing the lawfulness of the Shariah principles used

in its system (Al-Qaradawi, 1997; Homoud, 1999).

One of the areas that have received heavy criti-

cism is the issuance and trading of Islamic bills and

bonds. The Interest-free Accepted Bill or Islamic

Accepted Bill was rst introduced in 1991 with Is-

lamic bond gaining its footing in 1992.

The operations of Islamic Accepted Bill are similar

to the bankers acceptance of conventional banks

and are used to facilitate international and domestic

trades. However, the introduction of Islamic bonds

is to assist corporate bodies in tapping funds from

the capital market (the detail operations of these

transactions is beyond scope of this paper). Theprinciples of murabahah, bai bithaman ajil, bai al-

dayn and dhawa taajjal are normally used in the

issuance and trading of these documents. The us-

age of bai al-dayn and discounting has drawn strong

criticisms from scholars especially from the Middle

East countries.

Prior to the process of creation and transactions of

these nancial securities, there are a few steps to

be followed, namely, (1) the existence of owner-

ship, (2) securitization, (3) issuance of securities,

and (4) trading of securities. In the case of Islamicbills for example, this facility is provided only to

those customers who can produce evidence that

they are involved in either import (purchase) or ex-

port (sale) transactions. Upon presentation of evi-

dence such as trade documents, bills of exchange

etc, Islamic bill (single or multiple) will be issued,

drawn on bank/purchaser which payment will be af-

fected to them on maturity. The accepting/drawing

bank would receive commission for these services.

In the case of bai al-dayn or debt trading, this prin-ciple is widely used not only in the trading of Islam-

ic bills but also in Islamic bonds. The issuance of

these bonds usually is based on trade transactions,

which uses principles such as bai-bithaman ajil,

murabaha, and ijarah between the issuers and the

investors. The principle of bai-al-inah is used simul-

taneously when a deal is negotiated and completed.

Just like in conventional system, a certicate will be

issued indicating the maturity date. The issuer will

pay the amount to the holder of the certicate

. The certicate known as shahdah al-dayn is con-

sidered as al-mal or property to qualify as an ob-

ject of sale. Therefore, the holder will have the

right to resell at the secondary market using the

bai-al-dayn principle. Malaysian scholars strongly

believe that this principle is allowable in Islam and

Islamic bonds can be sold to a third party in cash

and at a lower price (see Ishak, 1997, and Rosly

and Sanusi 1999 for further elaboration).

In the case of dhawa taajjal or discounting, the

legality of this principle is said to be based on the

following traditions (hadith) (see Ishak, 1997, for

further elaboration):

Narrated by Ibn Abbas when Rasulullah s.a.w. di-

rected Bani Nadir to evacuate from Madinah, they

said: there are still debts due to us. Rasulullah

s.a.w. then replied: give discount and asked for

early payment.

(Narrated by al-Baihaqi)


19/21

While Kaab was discussing with Abi Hadrad on howhe would pay his debt to Kaab in a mosque, they

did not realise that they had raised their voice that

caused Rasulullah s.a.w, who was in his house, to

hear their discussion. Rasulullah then said: give

discount on the debt. Kaab then replied: I have

already given, then Rasulullah asked Abu Hadrad

to pay the discounted debt.

(Narrated by al-Bukhari)

Dhawa taajjal is different from riba because it has

an element of rafah or compassion and assistance

or support. The consent to reduce the loan or debt

comes from the lender or seller and it brings the

element of rafah and takhf or lifting the burden

or debt from the borrower or buyer. Similarly, the

usage of this concept creates mutual goodwill for

both parties and this is one of the pillars of Islamic

muamalat.

Usmani (1999), however, strongly believed that the

principle of bai al-dayn is not permissible in Islam.

He argued that debt corresponds to money and any

exchange involved must be at the same value. He

also reiterated that the Islamic Fiqh Academy of

Jeddah has unanimously approved the prohibition

of bai al-dayn. In Malaysia, the used of bai al-dayn

was approved by the Syariah Advisory Council of

Securities Commission on 21 August 1996.

Another unsettled issue is the legality of the bai

al-inah principle used by Islamic banks in Malaysia

particularly in personal nancing. The bai al-inah orbetter known as sale and buy-back principle applies

when the nancier sells an asset to the customer on

a deferred payment and then the nancier immedi-

ately repurchases the asset for cash at a discount.

The Syariah Advisory Council of Securities Commis-

sion on 29 January 1997 approved the usage of this

principle. Similar to bai al-dayn, the principle of bai

al-inah is deemed unlawful by scholars in the Middle

East.

In Bahrain, however, instead of bai al-inah, an al-

ternative principle called tawarruq is used in whichinstead of reselling the asset to the seller for cash,

the buyer will sale the good to the third party. The

used of this principle have also been heavily critised

and opposed by several scholars.

Concluding Remarks

This paper highlights the development of Islamic

banking system in Malaysia. This system has trans-

formed from a humble beginning in 1983, to a

vibrant and dynamic system that is able to fulll

the banking needs of both Muslim and non-Mus-

lim customers. Interestingly, the Malaysian banking

system has become a model for countries such as

Indonesia, Brunei, Bangladesh and Pakistan. The

well planned and a coordinated effort between the

government and industry players is the most im-

portant ingredient to the successful story of the Is-

lamic banking system in Malaysia.

The Malaysian government has always been com-

mitted in developing the Islamic banking system as

an alternative to the conventional system. The gov-

ernments commitment is reected in enactment of

the Islamic Banking Act and Government Invest-

ment Act in 1983 when the rst full-edged Islamic

bank was established. Since then, various more

programs, incentives and guidelines have been im-

plemented by the Central Bank in ensuring that the

Islamic banking industry emerges as a viable and

competitive component of the nancial system thatcontributes towards enhancing wealth creation and

the countrys economic development.

As pointed out by the Second Finance Minister of

Malaysia, Tan Sri Nor Mohamed Yakcop, seeing that

the Islamic banking system has entered its third

wave, we can expect to see the development of

more innovative products and services from non-

banking Islamic nancial institutions such as waqaf,

qard hassan instruments, inherit properties, micro

credit and zakat. It is envisioned that such devel-



20/21

opments will further enhance Malaysias positionas the world leader in promoting Islamic banking

system. Industry players alongside the government

have also worked relentlessly in creating public

awareness of and acceptance for the Islamic bank-

ing products and services to public.

Hence, with strong concerted effort from BNM and

industry players, we can look forward with con-

dence to a more efcient, progressive and compre-

hensive Islamic banking industry in Malaysia. The

formation of the Association of Islamic Banking In-stitutions Malaysia is also reective of the strong

commitment by the Islamic nancial institutions.

Recognizing that public awareness about Islamic

banking is critical to the success and future devel-

opment of this industry, the Associations foremost

responsibility is to increase the level of consumer

awareness on the unique characteristics of Islamic

nancial products and the product choices offered

by Islamic nancial service providers. It is hoped

that increased awareness would drive the demand

for a broader range of Islamic products and ser-

vices. Over the last three years, the Association has

successfully conducted various consumer educa-

tion programmes such as seminars, exhibitions and

public lectures in major cities throughout Malaysia.

Other parties that have been actively involved in

promoting public awareness are higher institutions.

These institutions also play a vital role in develop-

ing qualied and skilled human resources in the

area of Islamic banking and nance. The availabil-ity of a trained and skilled workforce is essential

for the rapid development of the Islamic banking

industry. Currently, a few government universities

have already started to offer Islamic banking and

nance programmes at both the undergraduate and

post-graduate levels.

For example, Universiti Utara Malaysia and Uni-

versiti Malaysia Sabah have already offered a spe-

cialized degree in Islamic banking and nance.

Nonetheless, most universities prefer to offer this

subject as an area of concentration or just a singlecourse to their students. Since Islamic banking and

nance is a new subject to the higher institutions,

collaboration between industry and the universities

is essential to ensure that the required pool of com-

petent and skilled human capital in this industry is

produced. Experts from the industry should also be

invited to conduct seminars and gives lectures to

students and students should be exposed to the in-

dustry via attachment program during holidays.

Finally, today, more and more Malaysians are seento perceive Islamic bank as just an ordinary nan-

cial institution except that its operations are based

on religious principles. This perception shift is owed

much to the thinness in demarcation between the

nature of product and the price of the product as

well as the documentations of the products offered

by Islamic and conventional banks. Therefore, Is-

lamic bank will face greater challenges in order to

remain a viable nancial institution in Malaysia.

Beside the issues that are highlighted earlier, other

new challenges faced by Islamic bank are merger

and acquisition, legal framework, regulatory and

supervision, risk management, product develop-

ment, accounting framework, comparable statisti-

cal information among Islamic banks. To overcome

these challenges is not a walk in the park. How-

ever, I believe that strong cooperation between po-

litical and corporate leaders in Muslim countries will

be able to remove all hurdles and barriers that may

impede the further development of Islamic bankingacross the globe.

REFERENCES

Ali, Muazzam (1988), A Framework of Islamic

Banking. in Directory of Islamic Financial Institu-

tions, John R. Presley (ed), London (UK), Croom

Helm, pp. 3-13.



21/21

Bank Islam Malaysia Berhad, Annual Report, vari-ous issues, Kuala Lumpur (Malaysia).

Bank Negara Malaysia (1994), Money and Banking

in Malaysia, 35th Anniversary Edition, 1959-1994,

Kuala Lumpur, The Economic Department.

Bank Negara Malaysia (1999), The Central Bank

and the Financial System in Malaysia, Kuala Lum-

pur (Malaysia).

Bank Negara Malaysia, Monthly Bulletin, various is-sues, Kuala Lumpur (Malaysia).

Haron, S., Ahmad N, and Planisek, S. (1994), Bank

Patronage Factors of Muslim and Non-Muslim Cus-

tomers, International Journal of Bank Marketing,

Vol 12, N0 1, pp.32-40.

Ishak, O (1997), Promotion of Dhawa Taajjal in

the structuring of Islamic Instruments, Paper pre-

sented at International Islamic Capital Market Con-

ference 1997. Kuala Lumpur (Malaysia).

Ismail, Abdul Halim (2002) The Deferred Contracts

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