Islamic banking within the financial development of Malaysia

Abstract

Islamic banking is based on the Muslim precept that interest, riba, is prohibited. In 1983 an Islamic Bank named Bank Islam was established in Malaysia. This was the first Islamic bank to be supported by a Government and be legislatively accommodated within a mixed financial system. It has succeeded in mobilizing funds from the general public and corporate sector and has introduced a wide range of relatively sophisticated financial services in a short period of time. As with other Islamic banks. Bank Islam's operations have relied upon the use of Islamic pre determined financial instruments. These instruments, however, are regarded with superstition by Islamic economists who contend that Islamic banks should base their operations solely on the profit-sharing principles of mudarabah and musharakah. Within the financial development of Malaysia, the introduction of an Islamic bank can be regarded as an extension of the, "Supply-following," and, "Malayani-sation," policies pursued since independence by the Central Bank (Bank Negara). The supply-leading policy is based on the theory that active government development of the financial system will induce economic growth. For example, the savings generated from Bank Islam depositors (who as Muslims were previously denied the opportunity to save in a riba-dominated system), will be used in investments within the economy. Bank Islam, however, has had a qualitative, rather than quantitive impact upon financial development, being a development consistent with the Government's policy of building an economy and financial system that meets the indigenous needs. In the case of Bank Islam, this means the indigenous needs of the Muslims.