Overview of Islamic Banking in Malaysia
BismillahAlthough the Islamic banking phenomenon in Malaysia practically emerged in the 1960s, its philosophies and principles are however, not new, having been outlined in the Holy Qur'an and the Sunnah of Prophet Muhammad (p.b.u.h.) more than 1,400 years ago. Fundamentally, the emergence of Islamic banking is often related to the revival of Islam and the desire of the Muslims to live all aspects of their live in accordance with the teachings of Islamic law or Shariah.
The birth of Islamic banking in Malaysia was influenced by both external and internal factors. The external factors include the establishment of Islamic banks in the Middle East in the mid-1970s coupled with the establishment of the Islamic Development Bank in Saudi Arabia. On the other hand, internal developments including the establishment of the Pilgrims Fund Board in 1963 and the calls from Malaysian Muslims for the need to establish an Islamic bank have prompted the government to respond accordingly.
In Malaysia, separate Islamic legislation and banking regulations exist side-by-side with those for the conventional banking system. The legal basis for the establishment of Islamic banks was the Islamic Banking Act (IBA) which came into effect on 7 April 1983. The IBA provides BNM with powers to supervise and regulate Islamic banks, similar to the case of other licensed banks. The Government Investment Act 1983 was also enacted at the same time to empower the Government of Malaysia to issue Government Investment Issue (GII), which are government securities issued based on Syariah principles. As the GII are regarded as liquid assets, the Islamic banks could invest in the GII to meet the prescribed liquidity requirements as well as to invest their surplus funds.
The first Islamic bank established in the country was Bank Islam Malaysia Berhad (BIMB) which commenced operations on 1 July 1983. In line with its objectives, the banking activities of the bank are based on Shariah principles. After more than a decade in operations, BIMB has proven that Islamic banking has a way forward with its activity expanding rapidly throughout the country. The bank was listed on the Main Board of the Kuala Lumpur Stock Exchange on 17 January 1992.
The long-term objective of BNM is to create an efficient, progressive and comprehensive Islamic financial system that contributes significantly to the effectiveness and efficiency of the Malaysian financial sector. However, similar to any banking system, an Islamic banking system requires three vital elements to qualify as a strong and resilient system, i.e.:-
* a large number of global players;
* a broad variety of instruments; and
* a comprehensive financial infrastructure.
In addition, the foundations of an Islamic banking system must also reflect the socio-economic justice and values in Islam, as well as must be Islamic in both substance and form.
ibtwRecognising the above, BNM adopted a step-by-step approach to achieve the above objectives. The first step to spread the virtues of Islamic banking was to disseminate Islamic banking on a nation-wide basis, with as many players as possible and to be able to reach all Malaysians. After a careful consideration of various factors, BNM decided to allow the existing banking institutions to offer Islamic banking services utilising their existing infrastructure and branches. The option was seen as 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. Following from the above, on 4 March 1993 BNM introduced a scheme known as "Skim Perbankan Islam" (Islamic Banking Scheme) or SPI in short.
In terms of products and services, there are more than 100 Islamic financial products and services which are currently offered by the banks using various Islamic concepts such as Mudharabah, Musyarakah, Murabahah, Bai' Bithaman Ajil (Bai' Muajjal), Ijarah, Qard, Istisna' and Ijarah Thumma Bai'. As a short-term intermediary to bridge between the Islamic banks and SPI institutions and their instruments, the Islamic Interbank Money Market (IIMM) was introduced on 4 January 1994.
In October 1996, BNM issued a model financial statement for the banking institutions participating in the SPI requiring the banks to disclose the Islamic banking operations (balance sheet and profit and loss account) as an additional item under the Notes to the Accounts.
As part of the effort to streamline and harmonise the Shariah interpretations among the Islamic banks and takaful companies, BNM established the Shariah Advisory Council for Islamic Banking and Takaful (SAC) on 1 May 1997. The Shariah Advisory Council set up at (BNM) is the highest Shariah authority on Islamic banking and takaful set up to provide advice on all Shariah matters pertaining to Islamic banking and takaful in Malaysia.
On 1 October 1999, the second Islamic bank, Bank Muamalat Malaysia Berhad (BMMB) commenced operations. The establishment BMMB was the effect of the spin-off following the merger between Bank Bumiputra Malaysia Berhad (BBMB) and Bank of Commerce (Malaysia) Berhad (BOCB). Under the merger arrangement, the Islamic banking assets and liabilities of BBMB, BOCB and BBMB Kewangan Berhad (BBMBK) were transferred to BMMB, while the conventional operations of BBMB, BOCB and BBMBK were transferred to BOCB accordingly.
Today, there are eleven Islamic banks under the Islamic Banking Act 1983 and eight IBS banks offering Islamic banking products and services in Malaysia.