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Transcript of 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-
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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)
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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-
Creating Dynamic LeadersPage 10
Towards Developing A Successful Islamic FinancialSystem: A Lesson From Malaysia
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
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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
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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
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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
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Towards Developing A Successful Islamic FinancialSystem: A Lesson From Malaysia
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
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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
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Towards Developing A Successful Islamic FinancialSystem: A Lesson From Malaysia
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.
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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-
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Towards Developing A Successful Islamic FinancialSystem: A Lesson From Malaysia
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)
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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-
Creating Dynamic LeadersPage 19
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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.
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