Towards Developing A Successful Islamic Financial System:
A Lesson from Malaysia
The Islamic financial system in Malaysia has achieved phenomenal growth since its humble beginning in 1963 with the establishment of Pilgrimage Fund or ‘Tabung Haji’. Central Bank of Malaysia reported an average annual growth rate of 18% in the last two decades. Malaysia has been regarded as the role model amongst Organization of Islamic Countries (OIC), in implementing Islamic financial system and has a strong potential to become the Islamic Financial Hub. The purpose of this paper is to elaborate the history, development, foundation, future and the supporting mechanisms of Malaysia’s Islamic financial system. The methodology used in this paper is library research by gathering the relevant information related to the subject from various sources. KEYWORDS: Islamic Institution History, ‘Shariah’ Compliant, Central Bank of Malaysia Contributions, Supporting Mechanisms to Stay Competitive.
INTRODUCTION: HISTORY & DEVELOPMENT
Malaysia is one of the pioneer countries amongst Organization of Islamic Country (OIC) who has implemented Islamic Financial System. It started from the humble beginning in 1963 with the formation of Pilgrimage Fund which is better known as ‘Tabung Haji’, as the first Islamic savings financial institution. The first fully ‘Shariah’ compliant Islamic Bank was established in 1983 with the name of Bank Islam Malaysia. It was followed by the first Takaful or Islamic Insurance Company under the Takaful Act in 1984. Malaysia has become the role model in implementing Islamic Financing and made progress way ahead of some of the countries in Middle East.
The fast growing Islamic Financing demand has triggered the conventional banks in Malaysia to expand their financing offerings and introduced products and services which begin in 1993. The Islamic Banking virtues were spread across the nation and reach all Malaysian irrespective of race and religion. On 4th March 1993, Malaysia Central Bank introduced a scheme known as ‘Interest Free Banking Scheme’ in conventional banks. The progress was not stop there, on October 1999, the second full fledge Islamic Bank was incorporated namely ‘Bank Muamalat Malaysia Berhad (BMMB)’. The Islamic Financing institutions and volume have been strengthened to the next level recently. Conventional banking institutions that have achieved certain volume in their Islamic finance operations have the option to transform their operations into dedicated Islamic subsidiary. As a results, the qualified conventional banks can operate a separate full fledge Islamic banks under the same banner. Over the years, Islamic finance in Malaysia has proven to be resilient and able to function effectively and efficiently alongside the conventional financial system. The ability of the Islamic banking institutions to promote attractive and innovative products and services at competitive prices has appealed to not only Muslim but also non-Muslim customers in Malaysia which reflects the competitiveness of Islamic finance as an alternative financial system (Mohamad Akram 2008).
(Source : Central Bank of Malaysia)
As illustrated in the chart above, the Islamic banking and Takaful assets growth since 1993 has been phenomenal. The domestic Islamic banking industry has been growing impressively at an average of 18% per annum in term of assets (Razif Kadir 2009).
ISLAMIC FINANCIAL PRINCIPLES
The growth of Islamic financial industry has been achieved because of attractive products and services offered which attract many players in the market. Furthermore, the customers also observed that the principles of Islamic Financial system is based on ‘Shariah’ compliant that represent a system of ethical investing that has been popular in Malaysia and worldwide. In this period of global financial crisis and uncertainty, in which the traditional banking system in Western countries such as USA &...
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