Malaysia is one of the largest and fastest growing markets for Islamic Finance and Banking worldwide. The current market-share of Islamic banking (IB) accounts for ca. ten 10% of the total banking sector, compared to about 0.1% in 1994. The total share of bank assets held by Islamic banks worldwide amounts to 0.5%. On the one hand this outstanding growth stems from the initiative of Malaysia’s central bank, Bank Negara Malaysia (BNM). BNM provided for an Islamic Inter-bank money market (IIMM) in January 1994. On the other hand the opportunity to invest in Shari’a-compliant financial products is more and more embraced by the Muslim community all around the globe. This consensus is not argued about, but the influence of the Islamic Banking-specific properties on the financial system and the real economy is a field of scientific quarrel. The author tries to analyse the influence of Islamic Banking with regard to Malaysia and its dual financial system. This essay is structured as follows: In the beginning the author will outline a short history of Islamic Banking, followed by a comparison between conventional and Shari’a-compliant financial services. The question, if Islamic Banking could prove as a bottleneck for economic development is answered in the concluding section of this essay.
Table of Contents
1. Introduction
2. Theoretical Foundations of Islamic Banking
2.1 History and Religious Origins
2.2 Core Principles and Shari’a Compliance
2.3 Conventional versus Islamic Banking
3. The Malaysian Financial System
3.1 The Islamic Inter-bank Money Market (IIMM)
3.2 Risks and Stability in a Dual System
4. Conclusion
Objectives and Research Themes
This essay analyzes the influence of Islamic Banking on Malaysia's dual financial system and investigates whether the specific properties and practices of Islamic financial institutions act as a potential bottleneck for sustainable economic growth.
- Historical evolution and religious foundations of Islamic finance
- Comparative analysis of conventional and Shari'a-compliant banking models
- Operational structure and risk profile of the Malaysian Islamic Inter-bank Money Market
- Economic implications of liquidity management and consumption-led business cycles
Excerpt from the Book
Contemporary Islamic Banking is supposed to originate from the foundation of the “Mit Ghamr Islamic Bank” in Egypt in 1963.
The history of the Islam and its influence on banking and finance transaction, however, dates back to the practice of commodity trading using temples as places for financial intermediation around the Mediterranean Sea. Priests and moneylenders accepted deposits in, what is believed to be the first currency, grain. As times changed these bulky deposits were replaced by easier-to-carry precious metals, i.e. gold and silver. In Mesopotamia, today’s Iran, records of transactions and loans were kept in temples. The emergence of stable coinage, namely the “gold bezant” in the 4th century, fostered capital mobility and allowed for larger business ventures. It can be concluded from this short outline, that Islamic Banking has a strong religious background. Experts believe that the principle of risk and reward sharing was in practice even prior to the teachings of Prophet Muhammad who died in 632 A.D. Over time the centre of economic gravity moved to the western world, thus institutions adopted the interest-based financial system from the western world. The difference is that today’s western financial system is only subject to restrictions codified in law, not in religion.
Summary of Chapters
1. Introduction: Outlines the growth of Islamic Finance in Malaysia and defines the research objective regarding the potential economic bottlenecks of the system.
2. Theoretical Foundations of Islamic Banking: Explores the historical roots, the prohibition of interest, and the fundamental shift from the "homo oeconomicus" to the "homo islamicus" model.
3. The Malaysian Financial System: Examines the implementation of the Islamic Inter-bank Money Market and the systemic risks arising from the integration of Islamic banks into a conventional macro environment.
4. Conclusion: Summarizes findings that the interdependence in Malaysia's dual system may lead to non-sustainable investments and consumption-led growth rather than stabilizing the economy.
Keywords
Islamic Banking, Malaysia, Shari'a, Interest-free, Economic Growth, Financial Stability, Dual Banking System, IIMM, Zakat, Risk-sharing, Asset Inflation, Liquidity Management, Conventional Finance, Monetary Policy, Economic Development
Frequently Asked Questions
What is the primary focus of this essay?
The essay examines the growth and operational impact of Islamic Banking within Malaysia's dual financial system, specifically questioning if it hinders or supports national economic development.
What are the central themes of the work?
Central themes include the prohibition of interest, the principles of risk and reward sharing, the structure of the Islamic Inter-bank Money Market, and the macroeconomic stability of the Malaysian economy.
What is the core research question?
The author addresses whether Islamic Banking, given its specific constraints and requirements, acts as a potential bottleneck for long-term economic growth in Malaysia.
Which scientific methodology is applied?
The work utilizes a literature-based analysis and comparative review of financial theories to contrast conventional banking models with Shari'a-compliant financial practices.
What topics are covered in the main body?
The main body covers the historical development of Islamic finance, the legal differences regarding interest and collateral, the structure of the Malaysian money market, and the risks of overcapitalization and asset inflation.
Which keywords define this research?
Key terms include Islamic Banking, Malaysia, Financial Stability, Shari'a, IIMM, and Economic Growth.
How does the author explain the difference between conventional and Islamic customer relationships?
In Islamic banking, the relationship is defined as one between partners and investors, whereas conventional banks operate primarily as creditors or debtors to their clients.
What role does the 'Zakat' play in the author's argument regarding economic stability?
The author argues that Zakat, by being mandatory on unused savings but not on invested capital, may penalize liquidity and contribute to asset inflation by encouraging consumption-led investment behavior.
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- B.A. Georg Körnig (Autor:in), 2011, Islamic Banking in Malaysia, München, GRIN Verlag, https://www.grin.com/document/177707
