Islamic Finance

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Working Paper Series 003

TOWARDS DEVELOPING A SUCCESSFUL ISLAMIC FINANCIAL SYSTEM:
A LESSON FROM MALAYSIA
By Professor Sudin Haron 2004

Creating Dynamic Leaders

Towards Developing A Successful Islamic Financial System: A Lesson From Malaysia TABLE OF CONTENTS
Abstract Introduction History and Development Government Intervention Service Providers Intervention 2 2 3 6 8

Abstract
Malaysia is among those Muslim countries that are fully committed to developing not only an Islamic banking, but also a complete Islamic financial system. It is the objective of the Malaysian government to develop Islamic banking parallel to the conventional system. Over the years the Malaysian system has managed to portray itself as a feasible 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 efficient and effective system. To date, Malaysian system is studied and followed by other Muslim countries. There are, however, few issues still need to be addressed by responsible parties. The elimination of issues such as legality and usage of selected Shariah principles; public acceptance and financing direction will certainly make this system more viable in replacing the conventional system.

Educational Institutions Intervention 12 Issues and Challenges Concluding Remarks 13 19

Introduction
The Islamic banking system in Malaysia is considered to be a more progressive and robust as opposed to similar banking 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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Creating Dynamic Leaders

stan was among the only two countries which had fully Islamized her economy, it was the Malaysian assistance that was sought after by the Pakistani government when it proposed its intention of introducing the Islamic window concept. The Malaysian Islamic banking system history began with the establishment of the first Islamic bank in Malaysia, i.e. Bank Islam Malaysia Berhad (BIMB), in 1983. Since then, the Islamic banking system has transformed to become a vibrant and dynamic system. Understanding the need to develop a more comprehensive Islamic banking system, due attentions have been given in promoting and developing an Islamic financial market, Islamic windows, and an Islamic stock market to complement the role of the system. Given its roles in the intermediation process and payments system, the Islamic banking system will continue to be at the core of the Islamic financial system. The task of developing a successful Islamic financial system is indeed not an easy one. It requires the formulation of a sound plan and well coordinated efforts from various parties. The successful development of an efficient and progressive Islamic banking system should be credited to the Malaysian government and its agencies especially the Ministry 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 introduced. Currently BNM has its own Islamic Banking Department, which is responsible for the regulatory 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,...
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