Shuai peng (pdf) future of islamic financial institutions

LABUAN INTERNATIONAL CAMPUS

SCHOOL OF INTERNATIONAL BUSINESS & FINANCE

GT 30403
CURRENT ISSUES IN INTERNATIONAL & OFFSHORE BANKING

GROUP ASSIGNMENT:
Future Prospects of Islamic Financial Institutions in Malaysia

PREPARED FOR:
MR SAMSULBAHRI MOHD NASIR & HE20 STUDENTS
PREPARED BY:
GROUP SHUAI PENG

NAME MATRIX NUMBER
ARAVINDRAN A/L KARUPANAN BG09110074
MUHAMAD AIZUDDIN BIN FAKRI BG09110025
MOHD FAIZAL BIN MUSTARI BG09110150
CHE MUHAMAD AFZAN BIN CHE ABDULLAH BG09110355
AMANDA JOANNE JEFFERY GILIMON BG09110367
ZURAINAH AHMAD BG09160506

Future Prospects Islamic Financial Institution in Malaysia

TABLE OF CONTENTS

NUM TOPIC PAGE NUM

1.0 Abstract 2-3

2.0 Introduction 3-6

3.0 Scope of Study 6

4.0 Objectives of Study 7

5.0 Literature Review 7-9

6.0 Body of Research Project 9-13

7.0 Findings & Discussion 13-21

8.0 Future Prospects of Islamic Financial Institution 22-24

9.0 Challenges toward Islamic Financial Institution 25-26

10.0 Problem & Recommendation 27-28

11.0 Conclusion 29

12.0 References 30

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1.0 ABSTRACT

Malaysia is one of a multiethnic, and one of developing country in Asia that has relied heavily on
income from its natural resources to engineer successful diversification into manufacturing and sharply
increased incomes for all ethnic groups. The Islamic financial system in Malaysia showed significant
progress in an increasingly liberalized and competitive in line with increased international integration of the
Malaysian Islamic financial system. Islamic finance now has a presence in over 60 countries, especially in
Muslim countries. In the context of the financial infrastructure, the Malaysian Islamic financial system is
strong and growing rapidly. Markets have a variety of players, with Islamic banks, investment banks, fund
management companies, stock brokers, takaful companies, development financial institutions, savings
institutions and units trust. In this study, we are going to find the future prospect of Islamic financial
institution in Malaysia. Nowadays the Islamic financial system in Malaysia has evolved as a practical and
competitive component on the financial system that reacts as a driver of economic growth and
development. Development of financial markets is necessary to promote Malaysian economy development.
In the long term, Islamic institutions will provide a positive outlook to the economic growth and also the
society. Islamic banking has effectively played its role as financial intermediaries that functions to
transmission of savings from surplus households to deficit households. The achievements in the Islamic
banking sector are not easily reached but it will require careful planning and full of wise. This improvement
is so well realized through whether a holistic approach in terms of banking policy and the implementation of
effective laws. In view of that, Islamic banking in Malaysia has a great potential for growth as Malaysia is an
Islamic country and has a large Muslim population. On 27 April 2009, Prime Minister Datuk Seri Mohd.
Najib Tun Razak has announced liberalisation measures for the financial services sector which include the
issuance of up to two new licenses for Islamic banking with a minimum paid-up capital of USD 1 billion (
BNM, 2009). In the press statement issued by Prime Minister’s Office mentioned that these new licensees
must be locally incorporated in Malaysia and will be regulated by Bank Negara Malaysia. The new Islamic
bank may have a foreign equity interest. This is a proof of commitment by the government to further
strengthen Malaysia’s competitive position in Islamic finance to become an international financial hub. The
former Prime Minister, Tun Dr Mahathir Mohamad also stated that Islamic banks have great potential as
compared to their conventional counterparts. He also envisioned that Islamic banking to replace the
existing conventional system which is less effective and easily manipulated by irresponsible parties. Dr
Mahathir gave Petronas as an example as the most successful corporation in Malaysia who has greatly
participated in Islamic banking. Prospects for the development of Islamic finance should contain a balanced

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development of the shariah and included market by the prospect of a unique Islamic finance. Plus, the
products and services must also not be limited to Muslim’s market only but also globally. Islamic finance
has a role in shaping the future of the global financial system and reinforcing ethical and moral values that
are inherent in Islamic finance principles. Ongoing efforts to further strengthen the resilience of Islamic
financial industry would enhance the prospects for global growth and the potential of Islamic finance to
contribute toward global financial stability (Mushtak, 2010).

2.0 INTRODUCTION

Malaysia’s Islamic finance sector has enjoyed exponential growth in recent years and is often considered
one of the world’s leading Islamic finance centres. Malaysia is making considerable efforts to enhance its
financial industry. A distinctive feature of Malaysia’s economy is the fact that Islamic banking and financial
services have been fully integrated into the country’s existing financial system. On top of that, Malaysia
provides a good example of the financial and banking industry’s inventiveness and capacity for innovation.
Following the liberalisation of the financial sector, the view for future growth looks positive. Liberalisation
measures now allow for an increase in foreign equity ownership of up to 70% in Islamic banks, investments
banks and insurance companies. Malaysia has been promoting itself as a regional Islamic financial centre.
Labuan is being developed as an International Offshore Financial Centre (IOFC) including of Islamic
banking and capital markets. Efforts are being organized to equip Labuan IOFC with the appropriate
infrastructure, institutional capacity as well as legal aspects to enable Labuan to position itself as an
efficient and highly rated Islamic financial center for the region.

In the process of promoting Islamic financing, Malaysia has gained huge experience that must be
shared if Malaysia are to benefit from the collective experience and wisdom. We need to exchange
information and eventually develop a system of best practices that is universally acceptable. The financial
system mobilises and drives financial resources in global capital markets. It is estimated that there is more
than USD1 trillion worth of Islamic wealth available within the global financial system. These represent
opportunities for both conventional as well as Islamic banking and finance system to explore Islamic wealth
globally. The trend is expected to contribute to more changes in the local financial landscape as well.

While the opportunities for Islamic financing will continue to grow, products, services and standards that
are in line with the times need to develop. Islamic finance is an alternative source of financing which
complement conventional finance to meet the needs and requirements of Muslims and non-muslims

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throughout the world. Any of the products and services produced in the conventional financial system could
be made possible for the application of Muslims provided adjustments are made to comply with shariah
principles. According to Maybank Islamic Bhd Executive VicePresident and acting Executive Officer Ibrahim
Hassan, Islamic financing assets grew at a compounded annual growth rate of 15% between 2004 and
2008. This statistics prove than Islamic Financing is at least 5% higher than the conventional banking loans
and advances.

In Malaysia, Islamic banking assets amount to US$30.9 billion, while takaful assets amount to US$1.7
billion. Malaysia now has the largest Islamic private debt securities market and a critical mass of diversified
players, including Islamic banks, investment banks, takaful companies, savings institutions, fund
management companies and stock brokers. According to experts from the Issuers and Investors forum in
Kuala Lumpur, it is strongly suggested that Malaysia as an Islamic nation should focus on developing
innovative products in order to continuously stimulate future growth of the Islamic financial industry.

Malaysia now has a reasonably comprehensive Islamic Capital Market with a wide range of products
comprising Global Sukuks, Islamic Reits, Islamic Residential Mortgage-backed Securities and a variety of
other Islamic bonds and financial products, including Islamic bonds issued. Many of these product
segments have been popular with both investors and issuers and continue to grow at a rapid pace. The
Islamic collective investment industry in particular has shown much evidence and is likely to be the main
nest growth area. As Malaysia’s Islamic financial sector achieves this level of maturity and sophistication,
two points become evident. First, the role of the private sector becomes more important in leading the
growth of the market. Increasingly, the role of regulator shifts from being a developer to that of a facilitator.
The private sector must drive the increasing commercialisation of Islamic finance through higher level of
investments into product origination and distribution capabilities and into building intellectual capacity to
accelerate growth momentum and to maximise capture of opportuinities. in fact, the common availability of
high quality intermediation services is essential to the next phase of growth for Islamic finance.

Malaysia’s Islamic finance sector provides great opportunities for tie ups with other successful Islamic
centres elsewhere in the world, particularly in the Middle East. Increasing co-operation and linkages
between the various Islamic centres is important to building a successful global Islamic financial market
given the highly integrated nature of Islamic financial services. According to Executive Director and CEO of
HSBC Amanah Malaysia Bhd Musa Abdul Malek, Malaysia Islamic Financing growth will continue to
increase as Bank Negara focuses on providing conducive regulatory framework in line with growth and

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development. At the international level, Malaysia is also seeing significant progress being made in the
development of Islamic finance. There are more and more institutions offering Shariah based financial
services being established today to explore on the opportunities in this fast growing industry. This includes
the participation from global conventional banking giants. This participation of established financial centers
such as London and Hong Kong has further reinforced the trend of internationalization in Islamic finance.

As Malaysia’s Islamic finance industry continues to grow and develop beyond domestic boundaries, our
Islamic financial institutions are well positioned to initiate and lead efforts in converging different
organizations financial practices to establish uniform standards or instruments that may be applied across
borders. These areas cover from accounting, legal and operational practices. Cross border alliances by
Islamic financial institutions in setting up new business ventures would also facilitate knowledge sharing
and the globalization of Islamic business products and services. In this aspect, financial market instruments
that enable better allocation of resources in the international Islamic financial system need to be further
enhanced and developed. This certainly needs to be supported by more international collaborative efforts in
the area of research and development to provide the motivation for more innovation to take place and
address global and contemporary issues of market and risk management practices. These initiatives are
important for the industry to develop as it becomes more internationally integrated.

The development of the Islamic financial system in Malaysia started with the establishment of
pilgrimage fund (Tabung Haji) in 1963 as the first Islamic savings institution. After a few years of break, the
first full-fledged Islamic bank was established in 1983 with the name Bank Islam Malaysia Berhad. It was
introduced through the Islamic Banking Act 1983. Bank Islam Malaysia Berhad operates through eighty-five
branches in the country whilst the more recently-established Bank Muammalat Malaysia Berhad has fifty-
six branches. In addition to the Islamic banks, there are also thirteen commercial banks that offer product
and services under Islamic banking scheme.

Today, Malaysia is believed to have one of the most developed interest-free financial systems in the
world. Besides the interest-free financial systems Banking Scheme, there is an Islamic debt securities
market developed in 1990 and Islamic Equity Market operate in 1995 and Islamic Interbank Money Market
was establish in 1994. In 30 june 2003, Islamic banking assets accounted for 9.4 per cent or RM75.5 billion
of the banking system in Malaysia.

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In order to internationalize the Islamic banking industry and making Malaysia as Islamic financial
hub, the Malaysian government has started opening it market to international players in this field. It started
by allowing international banks which operates Islamic product to open their branches in Malaysia. At
present there are three international players which are Al-Rajhi Banking and Investment Corporation,
Kuwait Finance House and RUSD Bank-led consortium which includes Qatar Islamic Bank and Global
Investment House. This approach which is taken by Malaysia Government is to help the country emerge as
regional hub for Islamic finance.

3.0 SCOPE OF STUDY

The main focus of this report is to study the future prospects of Islamic financial institutions in Malaysia.
More specifically, this study focused on several important scopes which is our objective of the research that
is, examine the structure and, studying the strength of Islamic financial institutions on Malaysian and the
challenges of Islamic financial institutions in Malaysia.

The research in the analysis of the structure of Malaysia's Islamic finance system will be divided
into several fractions which are the background of the Islamic financial institutions, principle in the Islamic
financial institutions and the products offered in Islamic institutions. We will also discuss the strength of
Islamic financial institutions on Malaysia’s economic development. Moreover this paper will explain about
philosophy Islamic banking system, the advantages of Islamic financial institutions, and the future prospect
for achievement of Islamic financial institutions in Malaysia. Last but not least this study will also highlight
some of the problems or challenges encountered in the achievement of the Islamic financial institutions in
Malaysia. In addition a few of solutions and recommendation also is made in this research.

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4.0 OBJECTIVES OF THE STUDY

In this report, our primary objective is to discover and analyse the future prospect of Islamic financial
institutions in Malaysia.

The other objectives are explained further below:

1. To examine the structure of Islamic financial institutions in Malaysia
2. To examine the strength and weakness of Islamic financial institutions in Malaysia
3. To seek the contribution of Islamic Financial Institution towards the steady growth of
Malaysia economy
4. To seek the challenges facing all Islamic financial institutions in Malaysia

5.0 LITERATURE REVIEW

Since the 1970s, Islamic banking has emerged as a new reality in the international financial scene. Its
philosophies and principles are however, not new, having been outlined in the Holy Qur'an and the Sunnah
of Prophet Muhammad (p.b.u.h.) more than 1,400 years ago. The emergence of Islamic banking is often
related to the revival of Islam and the desire of Muslims to live all aspects of their live in accordance with
the teachings of Islam.

Iqbal (1997) define Islamic financial system as a set of rules and laws, collectively referred to as
shariah, governing economic, social, political, and cultural aspects of Islamic societies. Shariah originates
from the rules dictated by the Quran and its practices, and explanations rendered (more commonly known
as Sunnah) by the Prophet Muhammad. Further elaboration of the rules is provided by scholars in Islamic
jurisprudence within the framework of the Quran and Sunnah.

Malaysia has emerged as a country that has the most comprehensive Islamic finance sector in the
world, supported by all components required of a financial system of Islamic banking, Takaful, and Islamic
money market and equity based on its own legal system and comprehensive. Laldin (2008) states that the
development of the Islamic financial system in Malaysia started with the establishment of pilgrimage fund
corporations in 1963 as the first Islamic saving institutions. The fund was known as Tabung Haji. In 1983,
Bank Islam Malaysia Berhad (BIMB) was established in Malaysia as the first full-fledged Islamic bank.
According to Markom and Islmail (2009), the emergence of Islamic banking in Malaysia stemmed from the

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establishment of the first full-fledged Islamic bank offering Islamic products and services in 1983 know as
Bank Islam Malaysia Berhad (BIMB) under the Islamic Bank Act 1983. Furthermore, in year 1993 a buildup
of the Islamic money market followed suit, turning out to be the quickest growing segment in the Islamic
financial instrument. The development of the Islamic banking and finance industry in Malaysia because of
Islamic banking has staged a very impressive growth as well as reflected by high growth of the asset of the
Islamic banking industry in Malaysia grew by approximately 30 per cent per annum since its inception in
1983 ( Sukmana & Kassim, 2010). Qorchi (n.d) said that Islamic financial institutions in Malaysia, and have
been gearing up for further expansion by continuing to develop, refine, and market innovative Islamic
financial instruments, on both the asset and liability sides.

The Malaysian government commenced to open its market to the international players in order to
internationalize the Islamic banking industry and cultivate Malaysia as an Islamic financial hub which
automatically contributes to the Malaysia economic development. In the beginning, international banks that
offers Islamic product was given permission to open their branches in Malaysia. It is significant to have
sufficient advance planning in order for Islamic financial sector to be competitive and to assure the vision of
making Malaysia as international financial hub (Laldin, 2008). The Islamic financial system constitutes a
small fraction of the entire financial system and comprises of only two institutions in formal arrangement; in
the banking sector is Islamic Bank Malaysia (IBM) while in the non-banking sector Pilgrimage Management
and Fund Board (PMFB). While the makeup of Islamic financial system is characteristically small, it has
potential to contribute a significant share towards eudemonia economic of nation by stimulating both
distribution and growth (Salleh & Hamat, 1997).

Besides that, Islamic financial institutions play their role in the economic development of Malaysia
toward the economy growth such as transformation from a banking entity to a universal financial
institutions, developing the nation holistically, and also springboard for Malaysia into a global Islamic
centre. In addition Islamic financial institutions in Malaysia also play as a driver of economic growth and
development is it evolved as a viable and competitive component on the overall financial system (Furqani &
Mulyany, 2009). The other role of Islamic financial system in Malaysia economic development is the rapid
evolution of Islamic financial system in Malaysia has set the juncture for global integration (Furqani &
Mulyany, 2009).

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Islamic financial institutions also have their own products and services offered to their clients.
Islamic products consist of mutual fund, takaful insurance, murabahah financing, Islamic bond, sukuk,
syariah complaint stocks and Islamic stock broking (Razak & Karim, 2008). These products are offered by
Islamic institutions like commercial Islamic banks, takaful, Islamic investment companies, Islamic
investment banks and so on. One of the Islamic financial system policies is that all business or transaction
must be based on Islamic principle where riba or interest for all types of loans is prohibited (interest free
banking). Other than that, the Islamic core value that is justice with fairness has enormously led to the
country’s miraculous accomplishment via the introduction of a pragmatic policy. This is supported by the
establishment of New Economic Policy (NEP) (Pramanik, 2002).

As a conclusion, Malaysia’s financial sector has experienced rapid growth particularly in the Islamic
banking and financial industry. Although brief, it is worth noting that Islamic banking has shown very
encouraging development, where annual asset growth accounts for approximately 30 percent since its
establishment in 1983. Therefore, it is reasonable to examine the relevance of Islamic financial system
based on its contribution to the Malaysian economy (Sukmana & Kassim, 2010).

6.0 BODY OF RESEARCH PROJECT

6.1 Structure of Islamic Financial System in Malaysia

In Malaysia, the roots of Islamic financial system go back to 1963 when the government established
Tabung Haji or Pilgrims Management and Fund Board. The institution was established to invest the savings
of the local Muslims in interest free places, who intend to perform pilgrim (Hajj). Tabung Haji utilizes
Mudarabah (profit and loss sharing), Musharikah (joint venture) and Ijara (leasing) modes of financing for
investment under the guidance of National Fatawah Committee of Malaysia. Below, there have some
important points which is consist of the structure of Islamic Financial System that we will discuss on this
project.

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6.1.1 Background of Islamic Financial System
The establishment of Bank Islam Malaysia Berhad (BIMB) in July 1983 marked a milestone for the
development of the Islamic financial system in Malaysia. BIMB carries out banking business similar to other
commercial banks, but along the principles of Islamic laws (Shariah). The bank offers deposit-taking
products such as current and savings deposit under the concept of Wadiah (guaranteed custody) and
investment deposits under the concept of Mudarabah (profit-sharing). The bank grants finance facilities
such as working capital financing under Murabaha (cost-plus financing), house financing under Bai'
Bithaman Ajil (deferred payment sale), leasing under Ijara (leasing) and project financing under Musharikah
(joint venture). BIMB has grown tremendously since its inception. It was listed on the Main Board of the
Kuala Lumpur Stock Exchange on 17 January 1992. At the end of 2003, the bank has a network of 82
branches throughout the country and staff of 1,200 employees.

The long-term objective of the Central Bank of Malaysia was to create an Islamic banking system
operate parallel to the conventional banking system. A single Islamic bank (BIMB) did not represent the
whole financial system. It required large number of pro-active players, wide range of products and
innovative instruments, and a vibrant Islamic money market. Realizing the situation, the Central Bank
introduced Interest Free Banking Scheme (now replaced with Islamic banking scheme (IBS) in March 1993.
The scheme allowed conventional banking institutions to offer Islamic banking products and services using
their existing infrastructure, including staff and branches. Since then, the numbers of IBS banking
institutions have increased to 36 till the end of 2003, comprising 14 commercial banks (of which 4 are
foreign banks), 10 finance companies, 5 merchant banks and 7 discount houses.

6.1.2 Basic Principle of Islamic Financial System

The basic framework for an Islamic financial system is a set of rules and laws, collectively referred to as
shariah, governing economic, social, political, and cultural aspects of Islamic societies. Shariah originates
from the rules dictated by the Quran and its practices, and explanations rendered (more commonly known
as Sunnah) by the Prophet Muhammad. Further elaboration of the rules is provided by scholars in Islamic
jurisprudence within the framework of the Quran and Sunnah. There are several basic principle of Islamic
financial systems which is will be discuss on this project papers:

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a) Prohibition of interest.

Prohibition of riba, a term literally meaning “an excess” and interpreted as “any unjustifiable increase of
capital whether in loans or sales” is the central tenet of the system. More precisely, any positive, fixed,
predetermined rate tied to the maturity and the amount of principal (i.e., guaranteed regardless of the
performance of the investment) is considered riba and is prohibited. The general consensus among Islamic
scholars is that riba covers not only usury but also the charging of “interest” as widely practiced. Islam
encourages the earning of profits but forbids the charging of interest because profits.

b) Risk sharing.

Because interest is prohibited, suppliers of funds become investors instead of creditors. The provider of
financial capital and the entrepreneur share business risks in return for shares of the profits.

c) Prohibition of speculative behaviour.

An Islamic financial system discourages hoarding and prohibits transactions featuring extreme
uncertainties, gambling, and risks.

d) Shariah-approved activities.

Only those business activities that do not violate the rules of shariah qualify for investment. For example,
any investment in businesses dealing with alcohol, gambling, and casinos would be prohibited

e) Gharar.

Under this prohibition any transaction entered into should be free from uncertainty, risk and speculation.
Contracting parties should have perfect knowledge of the counter values intended to be exchanged as a
result of their transactions. Also, parties cannot predetermine a guaranteed profit. This is based on the
principle of 'uncertain gains' which, on a strict interpretation, does not even allow an undertaking from the
customer to repay the borrowed principal plus an amount to take into account inflation. The rationale
behind the prohibition is the wish to protect the weak from exploitation. Therefore, options and futures are
considered as un-Islamic and so are forward foreign exchange transactions because rates are determined
by interest differentials.

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6.1.3 Products of Islamic Finance

a) Takaful

Takaful in Arabic, means joint guarantee. This Islamic alternative to insurance is based on the concept of
social solidarity, cooperation and mutual indemnification of losses of members. The Tabarru' system is the
main core of the takaful system making it free from uncertainty and gambling. Tabarru' means "donation;
gift; contribution." It is an accord among a group of persons who agree to jointly indemnify the loss or
damage that may be caused, out of the fund they donate collectively. Such a contract usually involves the
concepts of Mudaraba, Tabarru (to donate for benefit of others). It is based on the concept of mutual
sharing of losses with the aim of eliminating the element of uncertainty. Takaful is a way to reduce the
financial risk of loss due to accident and misfortunes.. The objective of takaful is to pay a defined loss from
a defined fund. Muslim jurists conclude that insurance in Islam should be based on principles of mutuality
and cooperation.

b) Murabaha

The others of the more popular instruments in Islamic financial markets are Trade with markup or cost-plus
sale (murabaha). One of the most widely used instruments for short-term financing is based on the
traditional notion of purchase finance. The investor undertakes to supply specific goods or commodities,
incorporating a mutually agreed contract for resale to the client and a mutually negotiated margin. Around
75 percent of Islamic financial transactions are cost-plus sales.

c) Leasing (ijara).

Another popular instrument, accounting for about 10 percent of Islamic financial transactions, is leasing.
Leasing is designed for financing vehicles, machinery, equipment, and aircraft. Different forms of leasing
are permissible, including leases where a portion of the instalment payment goes toward the final purchase
(with the transfer of ownership to the lessee).

d) Profit-sharing agreement (mudaraba).

This is identical to an investment fund in which managers handle a pool of funds. The agent-manager has
relatively limited liability while having sufficient incentives to perform. The capital is invested in broadly

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defined activities, and the terms of profit and risk sharing are customized for each investment. The maturity
structure ranges from short to medium term and is more suitable for trade activities.

e) Equity participation (musharaka).

This is analogous to a classical joint venture. Both entrepreneur and investor contribute to the capital
(assets, technical and managerial expertise, working capital, etc.) of the operation in varying degrees and
agree to share the returns (as well as the risks) in proportions agreed to in advance. Traditionally, this form
of transaction has been used for financing fixed assets and working capital of medium- and long-term
duration.

f) Sales contracts.

Deferred-payment sale (bay’ mu’ajjal) and deferred-delivery sale (bay’salam) contracts, in addition to spot
sales, are used for conducting credit sales. In a deferred-payment sale, delivery of the product is taken on
the spot but delivery of the payment is delayed for an agreed period. Payment can be made in a lump sum
or in installments, provided there is no extra charge for the delay. A deferred-delivery sale is similar to a
forward contract where delivery of the product is in the future in exchange for payment on the spot market.

7.0 FINDINGS & DISCUSSION

7.1 Strength of Islamic Financial System on Malaysia Economic Development

The strength of Islamic Financial System (IFS) compared to Conventional System is that there are many
differences to conventional system and in this project paper. The discussion about the strength of IFS will
focus on the philosophy, the advantages and the future prospect of IFS.

7.1.1 Philosophy of Islamic Financial System

The philosophical basis of the Islamic financial system is to place equal emphasis on the ethical, moral,
social and religious dimensions, to improve equality and justice for the good of society as a whole. The
Islamic financial system is developed on the following bases abstain from activities involved in usury in all
matters, and this implies that all investment activities shall be based on profit sharing.

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The Islamic financial system also based on participation in the production process rather than
business debts. This means that Islamic banks participate in either the production activities either as
executor of the project or be a partner in the project. Islamic financial system must have two key elements
partner
that it must be based on Islam fully, not just the name and label, but must reflect the philosophy, values,
ethics and goals of the Islamic shariah. In addition, it also must have the characteristics of a system of
sophisticated and viable in order to compete with conventional systems in all aspects. For realizing this
purpose the three pre-conditions must be found in the financial systems it must has a variety of
conditions
instruments, number of large institutions and adequate and establish a mechanism to link between the
f
earlier of the instrument. Islam considers money only as a medium of exchange, not unlike the intrinsic
value of any commodity.

Sancity of
Contract

Prohibition
Money as
on
Potential
speculative
Capital
transaction

Islamic
Financial
System
Shariah
Prohibition
compliant
of Interest
activities

Risk Sharing

Figure 2: Philosophy Islamic Financial System

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7.1.2 Role of Islamic Financial Institution in Malaysia

An Islamic financial institution is an organization that performs a lot of the typical functions of financial
intermediation while still maintaining its Islamic character. It undertakes both mobilization of funds from
savings-surplus economic units usually household sector, through a collection of financial assets and
development of funds into profitable projects floated and operated by savings-deficit economic units which
usually are the corporate and government sector. While conventional banking uses the interest rate
mechanism to perform its task of financial intermediation, Islamic banking relies on profit or loss sharing for
purposes of financial intermediation.

Islamic commercial banks play the role of intermediaries in the financial system. They buy funds by
offering a variety of deposit products such as wadiah and qard is based current account deposits,
mudarabah is based savings account and investment account deposits. They sell funds through a variety of
financing products such as equity-based and debt-based. Islamic equity-based financing products comprise
trustee partnership (mudarabah) facility, joint venture (musharakah) facility, and declining partnership
(musharakah) facility. Islamic debt-based financing products comprise cost-plus sale (murabahah) with
deferred payment (bai-bithaman-ajil) facility, leasing (ijara) facility, deferred delivery sale (salam) facility,
manufacture-sale (istisna) facility, recurring sale (istijrar) facility, benevolent loan (qard) facility.

In addition to that, certain Islamic commercial banks also provide a range of fee-based services,
such as, opening of letter of credit (wakala) and letter of guarantee (kafala). Islamic financial institutions
provide a range of products and services that is in line with the Shariah Law. There are exchange-based
contracts, such as, murabahah, bai-bithaman-ajil, ijara, salam, istisna, istijrar that create debt and hence,
underlie debt-based financing products and securities. There are also a few participatory contracts, such as
mudarabah and musharakah that underlies equity-based financing contracts and securities. Contracts such
as, wadiah and qard are underlying deposit products.

The Islamic bank also plays an important role in re-channeling the funds, especially for the interests of
the society and for enhancing the productive capacity of the economy. In the Islamic context, this would involve
helping the needy and financing activities that is not considered illegal (haram).

The asset structure of an Islamic financial institution is usually more diverse. For short-term
maturity and risk-limited investments, Islamic financial institutions have a choice of assets originating from
trade related activities that include murabahah, bai muajjal, and bai salam. Furthermore, Islamic financial

16


institutions also provide short-term funds to its clients to meet their working capital needs. For the medium-
term maturity investments, Islamic financial institutions invest in ijara and istisna based assets. For longer-
term maturity investments, Islamic financial institutions engage into venture capital or private equity
activities in the form of musharakah.

Next, Islamic financial institution in Malaysia that provide mobilizing savings and preventing the
fragmentation of wealth by assisting Muslims to perform the pilgrimage without impoverishing them or further
imposing financial hardships after their pilgrimage is called Tabung Haji. Role of Tabung Haji is to collects
savings throughout Peninsula Malaysia, Sabah and Sarawak in 345 locations. Besides that, to offer better
and convenient services, Tabung Haji allows the deduction of salary of employees from both public and
private sectors. Recently, Tabung Haji has further enhance its services by collaborating with Bank Islam
Malaysia Berhad and Bank Rakyat Malaysia Berhad for deposit, transfer and withdrawal services and also
the use of ATM cards issued by them.

The Islamic financial institution has contribution in the economic development. They have implant
habits of saving and investment among the Muslims, and have provided opportunities for employment have
helped small businesses and the agricultural sector and also have enabled the Muslims for the systematic
collection of zakat funds and their distribution to the poor and needy.

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7.1.3 Advantages of Islamic Financial System

a) The principle of fairness and justice.

The first advantages of Islamic Financial System are the principle of fairness and justice. The
underlying principle of Islamic banks is the principle of justice which is an essential requirement for all kinds
of Islamic financing. The principle of fairness and justice requires that the actual output of such a project
should be fairly distributed among the two parties. If a financier is expecting a claim on profits of a project,
he should also carry a proportional share of the loss of that project. In contrast with conventional finance
methods, Islamic financing is not centered only on credit worthiness and ability to repay the loans and
interest; instead the worthiness and profitability of a project are the most important criteria of Islamic
financing while the ability to repay the loan is sub-segmented under profitability.

b) Integration of ethical and moral values with its banking operation.

The second advantages of Islamic Financial System are the integration of ethical and moral values
with its banking operation. It is one of the unique and salient characteristics of Islamic banks. The ethical
and moral consideration of Islamic banks cannot be detached and their behavior should be consistent with
the moral and ethical standards laid down by the Islamic Shari’ah. Unlike the conventional banks, the
financing of Islamic banks are restricted to useful goods and services and refrain from anything that’s
prohibited in Islam. Differences with conventional banks, Islamic banks do not consider only the credit
worthiness and interest rate as standards; instead they must apply Islamic moral and ethical criteria in their
provision of financing. This adds another merit for Islamic banks since there is a beneficial impact on the
productivity in the economy as it reduces the social and economic cost of such harmful products and
activities.

c) The relationship with depositors

The third advantages of Islamic Financial System are the relationship with depositors. They deal with
their customers on investment grounds rather than a pre-determined fixed interest rate. They invest the
money of their depositors on high profitable projects after going through a strategic analysis in order to give
a substantial return to their depositors. Thus in Islamic banking industry, each bank will attempt to out-
perform other banks if it wants to attract funds from investors. And the ultimate result is that a high return
on investments for the investors, which is unlikely in a conventional bank where it deals with their

18


depositors on a pre-determined fixed interest rate. Furthermore, Islamic banks eliminate the barrier
between those who save and those who invest, and bring them closer to the real market. The nature of the
financial intermediation of Islamic banks significantly defers from conventional banks and it is in harmony
with real market and developmental changes in it.

7.1.4 Perception & Acceptance of Islamic Financial Institutions in Malaysia

In this study, we also incorporate the perceptions of the citizens of Malaysia on Islamic Financial Institution
that is operating in Malaysia. All aspects are taken into account ranging from product and services,
customer service, efficiency and mobility. The Islamic Financial Institutions divided the differences of
perceptions and also acceptance into a few types including the demographics differences, services
attribute by and also religious influences.

In Malaysia, there have 3 major races that active on the banking transaction including Malay,
Indian, and Chinese. Based on that, we are going to analyze the differences of all three races on
perception and acceptations to the Islamic Financial Institutions. Most of the Malay respondents agreed
that Islamic banking availed modern looking equipment. According to these respondents, Islamic banks
offered secured transactions, fulfilled personal needs, provided easy–to-access account information, used
integrated value-added services, their staff treated their customers as “friendly”, and they had provision of
profit sharing.

Religious reason also played an important role behind their attitude towards Islamic Financial
Institutions for the Malay people. On the other hand, most of the Chinese respondents agreed that Islamic
banks had been using integrated value added services. Besides that, these respondents also agreed that it
was easy for them to access to their account information, staffs treated their customers as “friendly”, and
also they had the provision of profit sharing.

The Islamic Financial Institutions possesses a sound capability to attract customers by offering
integrated value added services, they seem to be very useful for obtaining account information, and they
also use latest technology alike the conventional banking. This quality of Islamic Financial Institution to
create value based services that can best suit with the needs of the entire population regardless of their
racial diversity.

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Furthermore, Malaysian people also choose each of the Islamic Financial Institutions depends on
the reliability. It is including by the empathy, responsiveness and compliance, respectively on how the
banking institutions use the customer behavior to complete the mission on giving their satisfaction.

Other than that, the factor of “free interest loan” also influences the customers on using these
Islamic Financial Institutions and it also attract non-Muslim to perform banking services with the Islamic
financial institutions.

Therefore, understanding differences in cultural values among the three races are important in
order to attract all three races to utilize Islamic Financial Institutions. Chinese mostly have positive attitude
towards Islamic banking. Perhaps the Chinese are very conscious of the different type of schemes and
services offered by the both conventional and Islamic banks. On the other hand, the Malays are concerned
about the religious and profitability reasons. Despite these differences between the Malays and Chinese,
the consistency in citizens’ responses indicates that all those three races accepted the schemes and
services offered by the Islamic Financial Institutions.

7.1.4 Impact & Contribution of Islamic Financial Institutions towards Malaysia

The establishment and progress of Islamic financial institutions in Malaysia has resulted in positive impact
for the country as a whole. This involves the banking industry, other financial institutions as well as for the
society and so on. Nowadays, many countries are already practicing this system especially among Islamic
countries. When we mention Islamic financial system, most people will say it only consists of banks,
however it not only restricted to Islamic banks but also financial institutions agencies such as Zakat, Waqf,
Baitulmal and others.

There is no doubt that Islamic financial system is also a medium that creates wealth for financial
institutions, society and at time same time contributes to economy growth. General perception indicates
that money is the actual wealth. Financial institutions play the important role in this situation. We can use
goods and services which this things we enable to use by doing our owned. In Islam, banks have financing
instrument like murabaha, ijarah, musyarakah and bank’s activities also focus on fund management. For
example, for home financing, there is an agreement between the leaser and lessee. If the lessee is able to
pay the full amount therefore the lessee will own the house. This is different compared to conventional as

20


an end of agreement the lessee has to pay an extra amount to own house which is depending on their
agreement. This method uses the concept of rent versus interest (conventional system) and it gives
benefits to the lessee. So, lessee even with low level of income can own the home eventually.

Besides the modern institutions, the Zakat institution also as one of the agency which gives
benefits to the society especially for Muslims. In Zakat institution, it totally involves of Islamic rule and
principle in managing this institutions. Since Zakat was applied about hundred years ago, this institution
already gives positive impact to social-economic development. According to the Islamic system, these
Zakat funds will distributed to 8 of the recipients such as fakir (fukaha), poor (masaqin), Amil (collector),
Muallaf (converters), Fisabilillah, Gharimin, Ibnu Sabil, Riqab. All the recipients will benefit from the fund.
This is done in order to increase the standard of living. Therefore, no parties will be left out in the process.
Zakat also played an important role in improving the infrastructure. Zakat fund are used in order to provide
sponsorship of education for poor people in vocational school.

Waqf institutions are another type Islamic financial institutions that spreads benefits to peoples.
Waqf have played a major role in financing, infrastructure development and also economic growth in certain
country. Many public facilities have been support by Waqf. Waqf was created in order to support school
system such as universities, hospital and others. The Waqf fund also can be used to finance education of
the poor people, fund research and others. In short, this institution provides huge impact to the well being of
the society as a whole and increases their education of the citizens.

Next is the pilgrimage fund (Tabung Haji) that was started on 1963 as the first Islamic saving
institutions. Many individuals realized that Tabung Haji have good future which suitable for Muslim
community. This saving institution was established for those who were interested to travel to the holy land.
This institution will manage the savings from clients through the Islamic principles. It begins with
establishment of the first Takaful or Islamic insurance. Before Takaful was implemented, most people were
interested on the conventional insurance, but after that, most Muslim people realized that these insurances
are not following the Syariah principle. Therefore, most Muslims changed to Takaful insurance and this
eventually served the people objective and welfare. Hence, with the pilgrimage fund and Takaful, these
institutions was growing as well as increasing in economic growth.

21


ECONOMY

In view of the impact towards the Malaysian economy, it is for definite that the establishment and the
appearance of Islamic Financial institution in Malaysia has boost and improved the economy growth in
Malaysia. Malaysia is facing with rapid growth since government introduces Islamic financial institutions
early 1960’s. Islamic system has been implemented in the country stage by stage and this development is
done by professional from all around the world after analyzing the Malaysian economy and market structure
in terms of population.

Islamic capital market (ICM) in Malaysia has emerged in significant growth. At the first
implementation which stand with 2 equity fund in 1993 and at the end 2007 there are 77 unit trust funds. It
consists of both equity and bond fund with net assets value (NAV) of about RM6.8 Billion. Within 1993-
2007, Islamic unit trust funds have been growing 47% of annual rate while unit trust industry grown at 9.6%.
This is was major breakthrough in the unit trust industry.

Next, Malaysia’s was the first to introduce Sukuk and the demand for this product worldwide was
very encouraging. More of the demand was concentrated on Sukuk (Islamic bond). In 2002 received
international subscription of investors, 51% from Middle East, 30% from Asia, 15% from Euro and 4% from
U.S. So there is no doubt that by implementation of Islamic financial system in Malaysia it effectively gives
unlimited positive impact to the people, financial institutions as well as for the Malaysia’s economic
development.

22


8.0 Future Prospect of Islamic Financial System

PROSPECTS

The Islamic financial institution in Malaysia has developed into a feasible and competitive component of the
overall Malaysian financial system and act as a catalyst of economic growth and nationwide development.
Malaysia has build up comprehensive Islamic financial infrastructures such as Islamic banking (1983),
Islamic insurance (1984), Islamic capital market ( 1993), Islamic inter-bank money market (1994), Kuala
Lumpur Stock Exchange (KLSE) Shariah Index (1990) and in March 2001, Central Bank of Malaysia (
BNM) launched the financial sector master plan which incorporated the 10-years master plan for Islamic
banking and Takaful that is aimed at creating an efficient, progressive and comprehensive Islamic financial
system and at the same time, to promote Malaysia as regional financial centre for Islamic banking and
finance. In the Financial Sector Master Plan, Central Bank of Malaysia has envisioned Islamic baking to
constitute 20% of the banking market share in 2010 ( BNM Annual Report, 2003).

Other than that, Malaysia expected to become an international Islamic financial hub. To fulfil the
changing requirements of domestic and international businesses, Malaysia offers the range of highly
innovative Shariah compliant products and structures. Malaysia, an international Islamic financial centre, is
at the forefront of Islamic finance by taking a leadership role in advancing Islamic finance globally. People
can access the progressive and integrated sectors of an international Islamic financial centre such as
Islamic banking, takaful and re-takaful, Islamic capital market and money market, Islamic fund
management, human capital development and ancillary services. Malaysia’s Islamic financial industry is
market-driven with strong and continues government commitment. According to Dr. Mahathir Mohamad, a
former Malaysian prime minister, Islamic banking without interest and subjected to high moral codes, on the
other hand would or should not yield the aforesaid results. It would however slow growth and wealth
creation, but the wealth created would be real, would be more fairly distributed, and would be spin-off into
real economic activities, creating jobs, increasing trade domestically and internationally. Mahathir predicted
that Islamic banking and the wealth of the Muslims will cause the rest of the world to connect with Muslim
countries.

23


In term of economic growth, Malaysia has a remarkable record of consistently high growth in the
past three decades. The growth of GDP increases to 5.3 percent in 2005. As a country slightly shifted
towards industrial country, industrial sectors and services contributed 80 percents to total of GDP of
Malaysia. With total population 26.7 million, Malaysia maintains its Per capita GDP above US$ 3,000 since
1995. Malaysia was the first to introduce a global corporate Sukuk (the world’s largest corporate Sukuk of
US$4.7 billion), sovereign Sukuk and redeemable Sukuk. As for the 31st March 2008, Malaysia has issued
US$46.3 billion onshore outstanding corporate Sukuk, representing 24% average annual growth or 149%
increase from US$18.52 billion in 2002.

In maintaining its lead position, Malaysia is focused on nurturing talents in the Islamic finance
sector that would significantly contribute towards developing more innovative products to further accelerate
the industry growth momentum. In view of this, there is a few higher learning institution are offering
profesional qualification papers and degree in Islamic finance. An example is Institute of Islamic Banking
and Finance.

OPPORTUNITIES

With Islamic capital market and derivatives as the next potential area of high growth, Bursa Malaysia is in a
prime position to further innovate new Islamic products to meet market demand. Malaysian financial
institutions have been invited to explore expansion opportunities in Pakistan, particularly in Islamic banking.
Pakistan’s High Commissioner to Malaysia, Masood Khalid expects Bank Negara Malaysia Governor, Tan
Sri Dr Zeti Akhtar Aziz to have a discussion on how Malaysian financial insitutions can expand their
operations to Pakistan. According to Masood, he would like to see more investments from Malaysia as well
as joint ventures. He said that major areas which provided opportunities included construction, surgical
goods, energy, oil and gas, halal products, gemstones, pharmaceutical, textiles, leather products and rice.

Besides that, Bank Negara Malaysia recently held a seminar on Islamic Finance in Istanbul,
Turkey, in support of the Malaysia International Islamic Financial Centre (MIFC) initiative. With the theme
‘Malaysia and Turkey: The New Silk Route in Islamic Finance’, it is a strategies for collaboration,
cooperation and smart partnership aimed to strengthen the relationship between Malaysia and Turkey and
signifies the growing internationalisation of Islamic finance. The seminar provide a platform for the
Malaysian and Turkish financial and business community to share and exchange knowledge and industry
views on the current development of the Islamic financial market. Malaysia is a gateway for Turkish

24


investors and financial institutions to expand their trade and investment opportunities in the ASEAN region.
Conversely, the Malaysian financial community can use Turkey as a platform to the Central Asian and
Europe regions. Among the key potential areas of collaboration between Malaysia and Turkey include
Turkish financial and business community to use Malaysia as a platform to raise funds such as Sukuk and
Islamic syndication, and Malaysia and Turkey’s financial community can collaborate to formulate or offer
innovative solutions in Islamic finance, Islamic finance education and professional services.

Futhermore, MIFC delegation headed by Raja Nazrin Shah visited Saudi Arabia recently to
promote Islamic finance relations. The 33 member delegation including reprentatives from 17 Islamic banks
and 12 Islamic fund management companies and also some asset management firms. Malaysian Consul
General, Hidayat Abdul Hamid said the delegation was to introduce the MIFC to this part of the world and
study the opportunities available specifically in the financial and investment sectors. He added that, they
would like to invite the Saudi to counterparts to Malaysia for further interaction. The discussions centered
on promoting business and investment opportunities in Islamic finance in Malaysia, which is globally known
for its highly developed and diversified Islamic banking and financial market. Delegation leader, Yusry
Yusoff, manager MIFC Promotion Unit at Central Bank of Malaysia, explained that the delegation was
seeking to establish relationship with the key institutional investors in Saudi Arabia for potential investment
opportunities including Sukuk mandate, asset management as well as interest to set up Islamic banking
and Takaful business in Malaysia. Currently, Malaysia is considered to have a comprehensive Islamic
financial landscape. These show a positive sign of Malaysian to grab all the opportunities thus expanding
its role of Islamic financial leading and thus introduce Malaysia towards the worlds.

25


9.0 Challenges Facing Islamic Financial Institutions

1. Banking regulations

Although the market has recognized the existence and importance of Islamic financial institutions to the

global financial system, a uniform regulatory and legal framework supportive of an Islamic financial system

has not yet been developed. Existing banking regulations in Islamic countries like Malaysia are based on the

western banking model.

2. Insufficient legal protection

Laws relating to companies, commerce, investment, the courts and legal procedures need to be reviewed

and reformulated to suit the requirement of the Islamic financial institutions. It is not acceptable that

company law continues to talk about bonds and interests while ignoring participation deeds and profits. The

laws should accommodate rules and regulations which permit Islamic financial institutions to apply their loss

profit sharing modes so that they can participate in partnership businesses either in form of Mudharabah or

Musharakah.

3. Prohibition of interest

The prohibition of interest or riba, literally translated as increase, excess or usury. Riba restrictions are best

understood as a type of price setting regime designed to reinforce a public guarantee of a minimum

distribution of basic goods. Nowadays, every transaction is currently using interest rate as their base to

calculate either profit gain or losses.

4. Prohibition of speculative risk

It encompasses some forms of incomplete information and or deception, as well as risk and uncertainty

intrinsic to the objects of contract’. However, since contracts are never complete and therefore always

26


contain some measure of risk and uncertainty, it is only excessive gharar, affecting the principal component

of a contract, which is prohibited.

5. Competition with conventional banking

Since the conventional banking system is widely spread inside as well as outside the Islamic countries for

decades, it gains the clients’ trust especially if it is well regulated and actively contributed to the economy.

On the other side, Islamic financial institutions are new player in the financial market therefore, they have to

compete with the existing system inside the Islamic countries. Islamic Financial Institutions are still building

up their regulatory system and trying to contribute to the country’s economy in line with Islamic Shariah.

6. Shareholders and investors

Risk premium in Islamic financial institutions is relatively high while risk mitigation, risk allocation and risk

transfer techniques are not that well developed unless risk adjusted returns are equalized across the two

market segments, the Islamic financial institutions growth will remain stunted. Absence of hedging products

places the Islamic products at a relative disadvantage as far as risk mitigation is concerned.

27


9.0 PROBLEM & RECOMMENDATIONS

a) Lack of serious human capital in the Islamic financial system

In the development of an Islamic economy especially in Malaysia, an increase in human capital is very
important. As the current lack of qualified Islamic young banker looks set to hamper the development of the
sector should it not be addressed. The lack of human capital in the sector affects to the growth of current
and new markets such as the U.K. Training of Islamic bankers has not kept pace with the rapid growth of
the sector and, as a result, there are shortages throughout the industry.

To overcome these problems, the more higher education institutions should offer courses that are
appropriate to request the Islamic finance industry. One of the positive steps taken by Bank Negara
Malaysia (BNM), which has created a Center for International Education in Islamic Finance (INCEIF). In
2006, for example, Bank Negara set up an RM500m endowment fund to support The International Centre
for Education in Islamic Finance (INCEIF), with the main objectives of making Malaysia the leading center
for Islamic finance education and developing human capital for the global Islamic finance industry. To
overcome the shortage of human capital, more education centers such as INCEIF be established in the
future because of the potential of Islamic financial system developed at the international level. With the
cooperation of all parties who can ensure that the Islamic financial system not only acceptable but also the
global community can become their first choice.

b) Restructuring of the financial institution

The functions of institution actually as the intermediary financial are also important players in financial
markets. Thus, to create a financial market-based right to full-fledged Islamic financial system, there have a
needs to provide a sophisticated and viable, an Islamic financial system and the need for more adequate. If
not, how do we create a financial market in the absence of Islamic financial institutions and large enough?

The order form of our institutions see the need to present a complete order form institutions to create
a sophisticated Islamic financial system and viable. It is another proof of the importance of the number of
institutions is extensive and sufficient prerequisite to a sophisticated system and viable. For example
institutes such as central bank is important in determining a country's monetary policy, as well as to achieve
a sophisticated Islamic financial system and viable.

28


Authorities should have specific strategies for the proposal to increase the number of institutions that
offer Islamic banking is establishment of dual banking system thus allowing conventional banks to offer
Islamic banking service in order to ensure the successfulness of restructuring financial institution.

So, after inspection, the authorities must agree to the third as the third choice was right for the most
efficient and effective way to increase the number of institutions offering Islamic banking at lower costs and
in a short time. This is because the first and second choice is costly due to hold a branch going to cost a
total of RM500, 000, time consuming and requires a large workforce.

c) Product and Market Development

Product and market development is important in enhancing and expanding the economy. Although it is
difficult and complex that includes creative thinking, knowledge, patience, perseverance and business
environment that encourages. in conjunction with the strong management team will be required to do so.
Islamic banks and the industry should have an employee who is experienced and qualified staff of those
expatriates to facilitate transfer of knowledge and expertise.

To further promote Malaysia as an Islamic hub, in-depth market structure is important, therefore
research and development should be intensified in this area. These Initiatives of running R & D could be
undertaken individually by the Islamic banking industry. There are different kinds of contractual relationship
between Islamic Banks and Their Customers, and this attributes to distinct risk. A Comprehensive risk
management and appropriate mechanisms be developed to mitigate should risk. Besides, it is important
that Islamic banking industry to pay attention to build a financially sound portfolio. This is to sustain the
competitiveness of Islamic naming in a dual financial system in Malaysia.

In conjunction with that, in ensuring the development of Islamic financial sector in the future, we need
plans and strategies more explicit, planned, systematic and consistent in producing more ulama’,
intellectuals and intellectual quality and competitiveness.

29


10.0 CONCLUSION

Malaysian culture is the one of the unique cosmopolitans as it is composed of Malays, Chinese and
Indians culture. Moreover, racial unity and interactions formed a diverse and vibrant society based on
sharing mutual respects. This is perhaps an example of a unique society. This has been the main catalyst
for Malaysia's political stability and growth. All the races in Malaysia have made massive contributions to
the resilient and prosperous socio-political and economic structure in Malaysia. All Malaysian enjoys a
active lifestyle and they have high ambitions, which make them dynamic force in Malaysia's economy. All
citizens’ of Malaysia represents an integral and vital component of Malaysian society and areproud of their
actions and their contributions to Malaysia's success.

Islamic financial institutions have made significant impact on the development of Malaysian economy. The
growth of this financial system is hugely depending on the efforts of government, banking sectors and also
the trust of consumers. Furthermore, the contributions of Islamic banking and finance to the main sectors
of Malaysia has increased economic growth and Foreign Direct investment (FDI) which indicates
improvement of the Islamic financial infrastructure in Malaysia may benefit to society and the economic
development and it is important in the long run for economic welfare. Therefore, Islamic financial system
significantly and effectively played its main role as financial intermediaries to ensure Malaysia as a
international Islamic financial hub and the one of the most developed interest-free financial system in the
world.

The future prospects of the Islamic financial services industry will be the result of the combined efforts of all
the relevant entities in the financial sector - the industry, the regulators, the market participants and the
international community. These collective efforts need to be galvanized as a coordinated and concerted
effort to maximize the potential for the industry. Evolving the shared vision and common goal to be
achieved will be an important first step. Of greater importance will be the actions that need to be taken to
make this happen. It will be our actions and initiatives taken today that will contribute towards determining
the future that we aspire.

30


11.0 REFERENCES

Ataul Huq Pramanik. (2002). Islam and Development Revisited with Evidences from Malaysia. Islamic
Economic Studies, Vol. 10 No. 1.

Dusuki, A. W., & Abdullah, N. I. (2007). Why do Malaysia Customers patronize Islamic Banks?

International Journal of Bank Marketing, 142-160.

Darwis Abd Razak & Mohd Azhar Abdul Karim. (2008). Development of Islamic Finance in Malaysia: A
Conceptual Paper. Paper presented at the 8th Global Conference on Business & Economics.

El Qorchi, M. (2005). Islamic Finance Gears Up. First published in Finance & Development Vol. 42, No. 4. ,
1-7.

Hafas Furqany and Ratna Mulyany. (2009). Islamic Banking ang Economic Growth: Empirical Evidence
from Malaysia. Journal of Economic Cooperation and Development, 30, 59-74.

Iqbal, Z. (1997). Islamic Financial Systems. Finance & Development , 1-4.

Laldin, M. A. (2008). Islamic financial system: the Malaysian experience and the way forward. Humanomics
Vol. 24 No. 3 , 217-238.

Markom, R., & Ismail, N. (2009). The Development Of Islamic Banking Laws In Malaysia: An Overview.
Jurnal Undang-undang, 13.

Muhammad Syukri Salleh & Abdul Fatah Che Hamat. (1997). Equity versus Growth: the Malaysian
Experience of the Islamic Financial System under the Dual Systems. USM Journal of Humanomics, Vol. 13
No. ¾.

Sukmana, R., & H. Kassim, S. (2010). Roles of the Islamic banks in the monetary transmission in the
monetary transmission. International Journal of Islamic and Middle Eastern Finance and Management Vol.
3 No. 1 , 7-19.

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