Islamic Banking in Malaysia Explained

Islamic banking in Malaysia is based on the principles of Shariah law, which prohibits the collection and payment of interest.

The first Islamic bank in Malaysia was introduced in 1983, marking a significant shift towards Islamic banking practices.

Islamic banking in Malaysia is regulated by the Central Bank of Malaysia, which ensures that all Islamic banking products and services comply with Shariah principles.

Malaysia has a well-established Islamic banking system, with many banks offering Islamic banking services.

Malaysia is one of the fastest-growing Asian economies, making it an attractive case study for understanding the impact of Islamic finance.

The country's unique blend of economic growth and Islamic financial system has sparked interest in how Islamic banking contributes to the real economy.

Malaysia's economy has been growing rapidly, and Islamic finance has been a key factor in this growth.

This makes it essential to assess the dynamic contribution of Islamic finance to the country's economic development.

By examining the role of Islamic banking in Malaysia, we can gain valuable insights into its potential to drive economic growth.

The country's Islamic financial system has been designed and developed to support economic growth, making it a crucial aspect of the Malaysian economy.

Islamic banking in Malaysia has a rich history dating back to 1983, when Bank Islam Malaysia Berhad was established as the first Islamic bank in the country.

The government played a crucial role in promoting Islamic banking, with the Islamic Banking Act 1983 being enacted to regulate and supervise the industry.

In 2007, the government set a target to increase the share of Islamic banking assets in the country's banking system to 15% by 2010, which was achieved ahead of schedule.

Banking is a system that allows people to store and manage their money. It's a way to keep your money safe and earn some extra through interest.

There are different types of banking, such as Islamic banking, which complies with Islamic law, also known as Shariah law. Shariah law is Islamic religious law that governs the day-to-day lives of Muslims.

Banking has been around for a long time, and it's a crucial part of modern life. People use banking to buy things they need and want, and to save for the future.

In Malaysia, Islamic banking is regulated by three main bodies that work together to ensure stability and efficiency.

The Islamic Financial Services Act 2013 (IFSA 2013) is one of the key regulatory bodies.

Bank Negara Malaysia (BNM) oversees the operations of Islamic Financial Institutions (IFIs) in Malaysia.

The Securities Commission Malaysia (SC) plays a crucial role in ensuring that Islamic products and services comply with Shariah law.

These three bodies collaborate to maintain a stable and efficient Islamic financial system.

Here are the regulatory bodies that guide Islamic Financial Institutions in Malaysia:

Islamic banking in Malaysia has its fair share of misconceptions. One common myth is that Islamic banking is just a replica of conventional banking.

This couldn't be further from the truth. Islamic banking operates on Shariah-compliant contracts, such as Commodity Murabahah, Ijarah, and Mudarabah, which are fundamentally different from conventional banking practices.

Some people worry that Islamic banking will yield lower returns, but this is a wrong perception. Banks that offer both Islamic and conventional products apply the same risk-return tradeoff to calculate dividends or profits, making them similar in terms of returns.

In fact, Islamic financing products come with extra benefits, such as rebates (Ibra’), no compounding charges in monthly instalments, and a capping of Ceiling Profit Rate (CPR).

You might think that having an Islamic account limits your purchasing power, but this isn't the case. Money is just a medium of exchange for all types of payment transactions, and there's no restriction on what you can buy with an Islamic deposit account.

Malaysia's banking industry is dominated by five major banks, with Maybank being the largest. These banks have a significant presence in the country's economy.

The Islamic banking segment in Malaysia is a growing sector, with the country's Islamic banking assets reaching RM 243 billion in 2020. This represents a significant increase from the RM 13.4 billion in 2005.

In Malaysia, Islamic banking has a long history dating back to 1963 when Perbadanan Wang Simpanan Bakal-Bakal Haji was established to help Muslims save for their Hajj expenses.

The first Islamic bank in Malaysia was set up in 1983, and by 1993, commercial banks and finance companies were allowed to offer Islamic banking products and services.

Islamic banking in Malaysia is regulated by the National Shariah Advisory Council at Bank Negara Malaysia, which advises on Shariah aspects of operations and products.

Bank Negara Malaysia also established the International Centre for Education in Islamic Finance (INCEIF) in 2006 to provide skilled and certified personnel for Islamic finance.

Today, there are 16 banks in Malaysia offering Islamic products, in addition to non-bank intermediaries like Malaysia Building Society Berhad and cooperatives registered under the Cooperative Commission of Malaysia.

These institutions have grown significantly since 2015, and the list of banks offering Islamic products continues to expand.

Malaysia's Islamic banking industry has become a major player in the global market, with the country's government actively promoting its development.

Here are some key facts about Islamic banking in Malaysia:

Islamic banking in Malaysia offers a range of benefits to customers, including rebates, no compounding charges, and capping of Ceiling Profit Rate.

Malaysia will continue to be the largest Islamic banking market in Asia-Pacific with 62.7 per cent of the region's total Islamic banking assets. This dominance is expected to be maintained over the next two years.

The country's strong position is due to the healthy capitalisation and stable retail deposit bases of its Islamic banks. This stability is a key factor in the growth of Islamic financing in Southeast Asia.

According to S&P Global Ratings, Islamic financing in Southeast Asia is expected to grow by eight per cent over the next two years. This growth will be driven by the proposed merger of Malaysia Building Society Bhd and Malaysian Industrial Development Finance Bhd, which will create a full-service Islamic bank in Malaysia.

Malaysia's Islamic banks are also expected to increase their share of Islamic financing in Southeast Asia to 45 per cent by 2026. This is a significant increase from the current share.

Some of the key drivers of growth in Malaysia's Islamic banking sector include the increasing digitalisation of banking services and the adoption of environmental, social and governance (ESG) practices. These practices are expected to be further incentivized by regulatory measures, such as tax deductions and grants to cover external review costs.

Malaysia's Islamic banks are already leading the way in ESG practice, with 18 per cent of total financing going to priority sectors. The largest recipient of responsible financing is small and medium enterprises, which account for 61.8 per cent of total financing in this category.

In Malaysia's banking industry, personal banking services are a crucial aspect of a bank's offerings.

Deposit and Investments are key components of personal banking, allowing individuals to manage their finances effectively.

Bank Islam Cards provide customers with a convenient way to make transactions and earn rewards.

Financing options are also available, helping customers achieve their financial goals.

Agent Banking services extend banking services to remote areas, making financial services more accessible.

Wealth Management services help individuals plan for their financial future, investing in their well-being.

Ar-Rahnu is a unique service that allows customers to use gold as collateral for loans.

Services like these demonstrate the importance of personal banking in Malaysia's banking industry.

To understand the research methodology behind the study on Islamic banking in Malaysia, it's essential to know that a qualitative approach was employed, focusing on in-depth interviews with industry experts and a review of existing literature.

This approach allowed for a comprehensive understanding of the subject matter, with a total of 15 interviews conducted with key stakeholders in the industry. The interviews were semi-structured, ensuring that participants were free to share their insights and opinions without being constrained by a rigid format.

The study also involved a review of relevant laws and regulations, including the Islamic Banking Act 1983 and the Financial Services Act 2013, which provide the framework for Islamic banking operations in Malaysia.

The research for this study was limited to the effects of Islamic banking on Malaysian economic growth. Malaysia has a dual financial system, with both conventional and Islamic banking systems affecting the real economy.

The study only looked at data from 1998 to 2017, a period of 20 years, due to limitations in data availability for all variables used in the study. This timeframe was chosen to ensure comprehensive coverage of the variables.

Variables are the building blocks of research, and understanding them is crucial for a successful study.

A variable is a characteristic or attribute of the population being studied, such as age, gender, or income level.

In research, variables can be categorized as either independent or dependent. An independent variable is the factor being manipulated or changed, while a dependent variable is the outcome or result of the independent variable.

Variables can be further classified as quantitative or qualitative. Quantitative variables are numerical in nature, such as height or weight, while qualitative variables are descriptive, like eye color or occupation.

Data descriptions provide a summary of the variables used in a study, including their types, ranges, and frequencies. This information helps researchers understand the characteristics of their data and make informed decisions about analysis and interpretation.

In a study, variables can be measured using different scales, such as nominal, ordinal, or ratio scales. Nominal scales are used for variables with no inherent order, while ordinal scales have a clear order but no numerical values.

Data descriptions are essential for research as they provide a clear understanding of the data, which is crucial for drawing accurate conclusions.

Islamic banking indices show a non-significant relationship with the real economy in the short-run.

The results in the long-run, however, are more promising, with financing and deposits of Islamic banks contributing significantly to the growth of the Malaysian economy.

There was a notable accumulation of investment over the study period, with a positive impact on the productivity of capital.

The direction of causality between Islamic banking deposits and Malaysian GDP is found to be bidirectional, meaning that they influence each other in a two-way street.

A weak causal effect is observed from Islamic banking financing to GDP, indicating a more limited impact in this area.