1.1History of Islamic Banking in Malaysia
Islamic banks today exist in all parts of the world and are looked upon as a viable alternative system which has many things to offer. While it was initially developed to fulfill the needs of Muslims, Islamic banking has now gained universal acceptance. In Malaysia, the first Islamic bank is Bank Islam Malaysia Berhad (BIMB). Operated as the only Islamic bank for 10 years since July 1983 before the government allowed other conventional banks to offer Islamic banking services using their existing infrastructure and branches in 1993 (Bank Negara Malaysia (BNM), 1194 and 1999).
The government decided to allow the conventional banking institutions to offer Islamic banking services or “Islamic windows” this was thought to be the most effective and efficient mode of increasing the number of institutions offering Islamic banking services at the lowest cost and within the shortest time frame. By doing so, it would also force the Malaysian banking industry to be more competitive, which would lead to an improved performance and enhance efficiency of the Islamic banking industry.
The history of Islamic banking in Malaysia can be traced back to 1963 when Tabung Haji (the Pilgrims Management and Fund Board) was established by the government. It is a specialized financial institution that provides a systematic mobilization of funds from Muslim to assist them perform pilgrimage in Makkah as well as encourages them to participate in investment opportunities and economic activities. In fact, due to its uniqueness Tabung Haji is considered to be the first of its kind in the world (Mohammed Seidu, 2002).
The long-term objective of BNM is to create an Islamic banking system operating on a parallel basis with the conventional banking system. However, similar to any banking system, an Islamic banking system requires three vital elements to qualify as a viable system, i.e.:...