Development of Islamic Finance in Malaysia: a Conceptual Paper

Topics: Bank, Islamic banking, Financial services Pages: 17 (4755 words) Published: August 29, 2010
Development of Islamic Finance in Malaysia: A Conceptual Paper

Darwis Abd Razak
School of Management, Universiti Sains Malaysia
11800, Penang, Malaysia
Tel: 04 6533888
Fax: 04 6577448
Email: drwis2002@gmail.com

Mohd Azhar Abdul Karim, PhD
Faculty Business and Economics
Universiti Putra Malaysia
43400, Serdang, Selangor

Abstract
Islamic finance has made significant inroads in the international financial markets that have achieved growing global awareness. Islamic finance now has a presence in over 60 countries, especially in Muslim countries. In the context of financial infrastructure, the Malaysian Islamic financial system is both robust and fast growing. The market has highly diversified players, with Islamic banks, investment banks, takaful companies, development financial institutions, savings institutions, fund management companies, stock brokers and unit trusts. The aim of this paper is provide a conceptual understanding on the growth in Islamic Finance in Malaysia by exploring its current and future development. It is observed that the participation in the Islamic finance process would require the development of a comprehensive and well established Islamic financial system such as: - a wide range of products and services; a good legal system, adequate financial infrastructure with competitive tax structures, low cost of doing business, high standards of business ethics, and conducive living conditions and cultural offerings. It would also need to be supported by adequate human talents that would drive the business and spur innovation. In addition, a strong regulatory regime in the Islamic financial system would be another pull factor. The implication of this paper is to provide a platform for industry players and regulators to highlights the recent developments in Islamic finance in Malaysia. Key words: Development, Islamic Finance, Malaysia

1.0Introduction
The Islamic finance industry is now in its fourth decade and, during that period, has developed extremely rapidly. In the past few years, overall market growth has been estimated at between 15-20 percent annually although individual Islamic banks have reported even faster growth (Howard, 2008). According to Bank Negara Malaysia (the Malaysian central bank), the number of Islamic bank branches in Malaysia increased from 126 in 2004 to 766 in 2005. Elsewhere, new Islamic financial institutions (IFIs) are being established rapidly in the industry’s traditional markets in the Gulf Co-operation Council (GCC) countries. Islamic finance is also on the rise in new markets such as Syria, Lebanon, the U.K., Turkey and Canada. In the U.K., for instance, two new Islamic banking license applications are currently being considered by the Financial Services Authority (FSA), following the authorization in the past three years of the Islamic Bank of Britain and the European Islamic Investment Bank (Yong, 2007).

With the rapidly changing international Islamic financial landscape, Islamic finance in Malaysia is now becoming increasingly integrated to the international financial system (Zeti, 2008). The world has witnessed the emergence of Islamic finance, and this phenomenon, as observed has continued to grow strongly. Global asset size for Islamic finance is estimated to be between US$200 and US$400 billion, and growing at 15% per annum. Apart from financial institutions in the Middle East, global banks are also responding to tap the opportunities of this huge pool of capital. Today, the number of Islamic financial institutions worldwide now exceeds over three hundred in seventy-five countries and offering a wide range of Syariah compliant products (El-Qorchi, 2005). This development has taken place in all segments of the Islamic financial system in Malaysia including the Islamic banking and takaful industry, and in the Islamic money and capital markets. These include Sukuk, takaful insurance, murabaha financing, as well as deposits and property funds...

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