Islamic banking is going progressively popular and plays a outstanding function in the fiscal services sector in Malaysia. Harmonizing to latest statistics shown, the Muslim population of Malaysia is about 25 million. There is decidedly a strong demand and strong growing potency in this sector. In Malaysia, the banking sector is chiefly dominated by the conventional banking system whereby involvement is non being prohibited. It is because the Islamic banking system is comparatively new and there are deficient ordinances at present to regulate them. If these obstructions are being resolved, the Islamic Banking sector will bloom given the influence of Malaysia in the international Muslim community.
The primary purpose of this research is to analyze and understand in deepness the development of Islamic banking in the universe of finance. This piece of research can be divided into three subdivisions. The first subdivision looks at important differences between conventional banking and Islamic banking. Products and services offered by these fiscal establishments will be marked to comparison. The 2nd subdivision looks at how the pattern of Islamic banking started and how it has emerged to go a vial force in the economic system. The concluding portion of the research will concentrate on how the Islamic Bankss penetrated the Malayan market and the challenges faced.
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1.1 Structure of Dissertation
This thesis is divided into a few subjects and each subject covers different countries of research. This is to give readers a clearer position of the research and do it more user-friendly. It is good thought and designed to guarantee the smooth flow of the reading. The construction of the thesis can be summarized as follows:
Chapter 1: This chapter describes the purposes and aims of this research.
Chapter 2: This chapter discusses the rules and basicss of Islamic banking
Chapter 3: This chapter explains in detailed the province and range of Islamic banking industry in Malaysia. I have besides mentioned to aims and roles the Malaysia International Islamic Financial Centre Initiatives plays in the industry.
Chapter 4: Research methodological analysiss and schemes that were being adopted for this paper was discussed.
Chapter 5: I have marked two Muslim Bankss in Malaysia for side by side comparing. I have drawn up a tabular array to compare their fiscal public presentation and place over the past two old ages.
Chapter 6: I have interviewed two Muslim bankers from Malaysia. On top of that, I have besides provided my personal analysis of their replies.
Chapter 7: Competition and globalisation of the Islamic banking industry. Furthermore, I have besides discussed chances and challenges faced in the universe and in Malaysia.
Chapter 8: A sum-up of the paper was included with recommendations and restrictions to research.
So, what precisely is Muslim Banking? Islamic Banking is banking based on Islamic Torahs ( Shariah ) . The Shariah rules are derived from the Quran and the Sunnah ( expressions of Prophet Muhammad ) . Furthermore, secondary beginnings of Islamic Torahs such as sentiments jointly agreed among Shariah bookmans, analogy and personal logical thinking are besides adopted in the regulations and patterns of Muslim Bankss ( Al-Omar, 1996 ) .
The research so looks at the differences between conventional banking and Islamic banking. There regulating rules of Muslim Bankss are:
Absence of interest-based minutess. Charging of involvement is prohibited under Shariah rules. Money itself does non hold built-in value and should non be used to make more money. Wealth can merely be generated through legitimate trade and investing.
Acts of guess are non accepted under Islamic rules. For case, purchasing goods now at lower monetary value in the hope of selling them at higher monetary value in future. The ground being speculators make private additions at the disbursal of society at big.
Introduction of Islamic revenue enhancement for the intent of wealth distribution so that every Muslim is guaranteed a just criterion of life.
It is out for Muslim Bankss to finance activities forbidden in Islam such as prok meat and alcoholic drink. In order to guarantee that the trading activities do non belie with Shariah rules, all Islamic Bankss are required to put up Shariah Committee, who acts every bit adviser to the Bankss.
On the other manus, conventional Bankss charge involvement on minutess. These involvements are widely seen as monetary value of recognition. Furthermore, conventional Bankss focal points on ‘elimination ‘ of hazards and therefore make non portion any liabilities with the borrower.
( Figure 1 )
Islamic Bank Vs Conventional Bank
Based on Shariahprinciples.
Based on best economic rules.
Bank should non take advantage of borrower. No involvement charged.
Charges involvement to reflect monetary value of recognition.
Does non let engagement in haramactivities such as porc meat and alcoholic drink.
Purposes at maximising net income without limitations other than conformity with relevant regulative models.
Intoduction of zakat.
Non-existence of zakat.
Promotes risk sharing between suppliers of recognition and borrower.
Interest is assured to suppliers of recognition. No liabilities borne by the bank.
Emphasis placed on viability and feasibleness of undertakings.
Emphasis placed on credit-worthiness of clients.
Merely supply warrant for sedimentation history ( al-wadiah ) . If financess placed under mudarabah histories, clients portions profit or loss incurred by bank.
Provides warrant to all its depositors.
2.1 Fundamentalss of Islamic Banking & A ; Finance
Islamic commercial jurisprudence is based on a few major rules. They will be discussed in elaborate as follows:
Musharakah ( Partnership Finance )
Musharakah is a contract in which the bank and the client contribute jointly to the capital of a specific undertaking or trade to do a net income. Therefore, hazards of net incomes and losingss are being shared between these two parties harmonizing to footings and conditions stipulated in the contract. This rule exposes bank to the hazards of the undertaking, in other words protecting the involvements of the community. This will forestall Bankss from giving their unjust influence and sells disadvantage merchandises to clients.
Mudarabah ( Trust Financing )
Mudarabah is a contract in which the Bankss provides all the capital required whilst the spouse contributes in footings of accomplishments, experiences and attempts. The bank receives a pre-determined portion of net incomes as agreed by both parties upon beginning of the undertaking. The major difference between mudarabah and musharakah is that in this instance, the bank bears all fiscal loss whilst the client goes empty-handed. Therefore, it is besides the bank ‘s duties to measure the feasibleness and viability of the undertaking. As such, it is critical for the bank to hold a good and believable recognition system to measure all its exposures on these undertakings. In short, this rule encourages persons to take part in fiscal activities It besides gives persons without sufficient resources an chance and platform to turn out themselves in the society.
Murabaha ( Cost-plus Financing )
Murabaha is a contract in which the Bankss informs their client about the acquisition monetary value of certain goods and merchandises and sells them with a border. It requires the bank to declare an honorable monetary value of acquisition. It is one of the most common rules adopted in Islamic banking system to advance interest-free minutess. It is widely practiced in plus funding and both trade good import and export.
Bai-Mua ” jjal ( Deferred Payment Sale )
It is a contract in which the marketer sells a certain goods or merchandises to the purchaser at an in agreement fixed monetary value to be paid subsequently at a specific day of the month by the purchaser. In short, it is a sale on recognition. The bank simply acts as the moneyman by postponing the reception of the sale monetary value of goods it sells.
Ijara ( Renting )
In this instance, the bank buys capital equipment or belongings and leases it out under episode to clients. Similar to conventional leasing, the client has the option to buy the goods at the terminal of the lease period. The fact that there is existent good to be financed means that it is Shariah compliant. A really common merchandise following this rule is Islamic mortgage whereby the purchaser buys the belongings on an instalment footing.
Muslim instructions promote brotherhood amongst Muslims. Qard Hassan is seen as a gratuitous loan that helps fellow Muslims who need fiscal aid. It can be defined as a loan to be repaid at a ulterior day of the month without incurring any involvements. Harmonizing to Rob ( 1992 ) , Muslim Bankss may raise financess through sale of portions to public and chief sedimentation histories. Therefore, the bank has a duty to impart a assisting manus to those in despairing state of affairs without taking of their advantaged place.
2.2 Compatibility of Islamic Banking with Conventional Banking
Islamic banking system has really similar characteristics to conventional banking except that Islamic Bankss operate in compliant to Shariah Torahs and rules. Both banking systems have common characteristics and common merchandises. The chief differences being prohibition of involvements being incurred and sharing of net incomes and losingss between Bankss and their clients ( Abdur Rahim, 2009 ) . They have the same aims except reading of involvement. Muslim Bankss fall into kingdoms of the economic universe every bit good. They try to guarantee all their operations comply with Shariah Torahs yet at the same clip conform to regulations set by international organic structures such as International Accounting Standards Board and Audit Practices Board. This is to guarantee they remain relevant to the society and at the same clip conform to their spiritual rules. Muslim Bankss sell merchandises such as mortgages, nest eggs histories, insurance which is besides sold by all conventional Bankss across the universe. Harmonizing to Nienhaus ( 1995 ) , Muslim Bankss offer installations more or less the same as conventional Bankss, in conformity with the public assistance rules of Islam.
3 LITERATURE REVIEW
A literature reappraisal is a procedure in which published articles or information are studied as portion of the research for the readying of a thesis. For the intent of this undertaking, I have gathered information from books and articles from assorted beginnings. I have studied the construct of Islamic banking, holding limited understanding about this subject antecedently. Further, I have besides included treatment about the development of Islamic banking in the universe, and in peculiar, Malaysia. This paper allows readers to hold a good appreciation of Islamic banking in general. It gives readers the chance to analyze about Islamic banking in greater item when the involvement of this industry assemblage strong impulse. This is of peculiar importance because Islamic banking has a immense impact of the universe economic system because of the strong influence of the oil-rich Gulf States.
Since a few decennaries ago, Islamic banking has emerged as a new world in the universe economic system. Its doctrines and rules are nevertheless, non new, holding been outlined in the Holy Qur’an and the Sunnah of Prophet Muhammad ( p.b.u.h. ) more than 1,400 old ages ago. The outgrowth of Islamic banking is frequently related to the resurgence of Islam and the desire of Muslims to populate all facets of their live in conformity with the instructions of Islam ( Siddiqi, 1983 ) .
This chapter provides a brief overview of how Muslim Banking was introduced in the World and how it penetrated the Malayan market. Islamic banking today has proven to be a popular and dependable fiscal system in the universe. It is widely seen as a feasible option to the conventional banking system over last 3 decennaries. Islamic banking was described by bookmans as ‘wishful believing ‘ when the thought was foremost mooted about 30 old ages ago ( Iqbal and Philip, 2006 ) . Many conferences and treatments were carried out at that clip to work on the finer inside informations of this system. Several designs were drafted by Islamic bookmans from all over the universe to guarantee a elaborate system is created.
The first international conference on Islamic Economics was organized by Kings Abdul Aziz University in Makkah marked an of import milepost in the history of Islamic banking ( Iqbal, 2005 ) . Financial gurus, economic experts and Islamic leaders were invited to show their position and sentiments.
Following this, the first Islamic bank, Dubai Islamic Bank ( DIB ) was established in the United Arab Emirates in 1975. Since its formation, it has established itself as the leader in the industry and has won several awards internationally. In 2009, it recorded net net income of ?200 million with assets deserving over ?14 billion. Islamic banking has gained enormous impulse and has been turning quickly over the old ages. Muslim Bankss now offer merchandises in assorted countries such as banking, insurance, mortgage and plus direction with one-year growing of 10 % for many old ages.
3.2 History of Islamic Banking in Malaysia
Muslim banking industry in Malaysia is turning at a moderate gait. It is a alone market because Islamic Bankss in Malaysia are allowed to run in analogue to conventional Bankss ( interest-based ) . The multiethnic population of Malaysia makes the full alteration of fiscal system to follow the Shariah system non feasible. Government of Malaysia opted for gradual manner of presenting Islamic banking by leting conventional Bankss to sell Islamic banking merchandises and services such as sukuk ( Arif, 1989 ) . The double banking system has been recognised by both West and East leaders and it is seen to be the theoretical account of the hereafter. In fact, many cardinal bankers have visited Malaysia to see the effectivity of this double system first manus. Furthermore, this double system besides eliminates the incorrect construct of general populace that Islamic banking merchandises are sold entirely to Muslims.
The history of Islamic banking industry goes back to every bit far as 1963, when the farseeing authorities set up the Lembaga Tabung Haji besides known as the Pilgrims Management and Fund Board. It was set-up chiefly to promote Muslims in the state to salvage up on their income in order to execute pilgrim’s journey in Mecca ( Kamarulzaman & A ; Bhupalan, 1983 ) . Besides, the fund was besides created to supply a platform for engagement in the economic and investing activities. Based on the success of the Lembaga Tabung Haji, coupled with the audience of Shariah experts and economic gurus, authorities so proceeded to put up the first of all time Islamic Bank in 1983. Puting up of Bank Islam Berhad Malaysia ( BIMB ) marked a milepost in the banking industry. It proved to be enormously popular because over half the Malayan population are Islam followings. What followed through was the listing of the bank in the stock exchange of Malaysia in the early 1990s. As of today, the bank has 100 braches located all over Malaysia.
With the fairy tale of BIMB, cardinal bank decided to let commercial Bankss and merchant Bankss to offer Islamic banking merchandises under the Islamic Banking Scheme. It was non long after that the cardinal bank set up the National Shariah Advisory Council to supervise all issues refering to Islamic Banking.
Due to the economic liberalization, cardinal bank eventually grants licences to foreign Muslim Bankss to run in Malaysia in 2004. Al-Rahji Bank and Kuwait Finance House took full advantage of this opinion and step foot into the Malayan banking industry. The last count of Islamic Bankss runing in Malaysia stood at 21.
3.3 Scope of Islamic Banking in Malaysia
Islamic Banking started out as mere sedimentation pickings and loaning installation has since transformed into all facets of banking, money and capital market operations. In Malaysia, the cardinal bank is in favor of a double banking system, whereby Muslim Bankss are allowed to co-exist with conventional Bankss. It is at the consumers ‘ pick to choose which services they prefer that cater to their demands. This is in blunt contrast with the scenario in Iran and Pakistan, where conventional banking system is abolished wholly to do manner for Islamic banking. They claim to be devoid of conventional involvement based fiscal minutess.
Today, the Malayan Islamic banking sector is blooming every bit reflected in the extended distribution webs consisting 152 fully fledged Islamic banking subdivisions. The ability of these Islamic Bankss to offer competitory merchandises with attractive and advanced characteristics has attracted both Muslim and non-Muslim population in the state. This has besides spurred not banking establishments such as nest eggs establishments to present Shariah conformity merchandise to appeal to a broad consumer base.
Harmonizing to Association of Islamic Banking Institutions Malaysia, there are 21 Muslim Bankss who have subscribed to their rank. The list of Islamic Bankss is provided as follows:
Affin Islamic Bank Berhad
Alliance Islamic Bank Berhad
Al-Rajhi Banking & A ; Investment Corporation Berhad
AmIslamic Bank Berhad
Asiatic Finance Bank Berhad
Bank Islam Malaysia Bank Berhad
Bank Kerjasama Rakyat Malaysia Bank Berhad
Bank Muamalat Malaysia Bank Berhad
Bank Simpanan Malaysia Berhad
CIMB Islamic Bank Berhad
EONCAP Islamic Bank Berhad
Hong Leong Islamic Bank Berhad
HSBC Amanah Malaysia Berhad
Kuwait Finance House ( Malaysia ) Berhad
Maybank Islamic Bank Berhad
OCBC Al-Amin Bank Berhad
PT Bank Muamalat Indonesia
Public Islamic Bank Berhad
RHB Islamic Bank Berhad
Standard Chartered Saadiq Berhad
Unicorn International Islamic Bank Berhad
As evident from the list above, there are 21 Bankss offering Muslim merchandises in the Malayan market. Assurance is clearly shown on the Malayan market with international banking human dynamo presence such as Standard Chartered group and Kuwait Finance House.
The Governor of Central Bank Malaysia late declared the cardinal bank ‘s purpose to entice larger abroad Bankss to supply services that comply with Muslim dogmas. As a sweetening to any possible trade, the cardinal bank has raised foreign ownership bounds at local Islamic Bankss and insurance companies to 70 % . Rising oil wealth has turned the Islamic banking into an industry with assets with $ 1 trillion in assets globally. The cardinal bank is making its uttermost, implementing enterprises to research this comparatively untapped market. In add-on to the alterations in foreign ownership bounds, the cardinal bank is besides offering revenue enhancement interruptions for Islamic merchandises and has relaxed regulations for Muslim Bankss to merchandise in foreign currencies ( Aziz, 2006 ) . This is seen as a major discovery because the foreign currencies covering is tightly regulated due to the impact Malayan market suffered in the 1997 Asiatic Financial Crisis.
In July 2010, Khazanah, Malaysia sovereign wealth fund made its introduction in Singapore debt market publishing sukuk or Islamic bonds deserving $ 1.5 billion, three times the size of Singapore sukuk market until now. This farther strengthened the Malayan authorities attempts to advance Islamic banking merchandises both domestically and internationally.