ISLAMIC BANKING IN ASIA by Beate Reszat
Among the countries in Asia with aspiration to become one of the region's financial centres Malaysia is making
considerable efforts to enhance its financial industry. One of its peculiarities is Islamic banking and finance
which is fully integrated into the country's dual financial system and may serve as an example for the industry's
inventiveness and talent for innovation.
Islamic banking started in Malaysia with the Islamic Banking Act and the establishment of the Bank Islam
Malaysia Bhd in 1983 which was part of the Malaysian government's strategy to support the largely Muslim
Malay part of the population. Only a decade later, a dual banking system was introduced. Nowadays, almost all
financial institutions in Malaysia have opened separate Islamic departments and there are Islamic securities and
money markets. Meanwhile, there are two entirely Islamic Banks - the second is Bank Muamalat Malaysia Bhd
– which in December 1999 had 120 branches and RM11.7 billion (US$3,1bn) of assets.
In general, Islam prohibits paying and receiving interest. On the other hand, the productivity of capital is
recognised. As a consequence, providing capital for an economic activity and sharing the resulting profit or loss
is permitted as well as charging a higher price for deferred payments in trade.
In principle, this opens the way to two concepts:
- profit and loss sharing schemes and
- financing techniques based on permissible profits from trade.
In the latter case, the most straightforward way is that the bank itself is becoming a trader buying goods on
behalf of a client and selling them to him at a predetermined price in the future which contains a fixed profit
margin or mark-up.
More sophisticated forms of finance can be derived from this practice as soon as it is recognised that rights
resulting from a profit and loss sharing scheme, or from mark-up trade, can be transferred to third parties at par-
value or even traded at a premium or discount. This paves the way for asset-backed securities and Islamic
securities markets. But, there is an ongoing controversy among Islamic scholars whether trade in equity or debt-
based securities is still compatible with Islamic law.
In contrast to Islamic banks which have been set up since the end of the 1970s in Arab countries Malaysian
financial institutions, supported and encouraged by the government, have chosen an own approach in
interpreting Islamic law which allowed them to develop a wide range of Islamic financial instruments.
Today, Malaysia has the most developed interest-free financial system in the world. Beside the Interest-free
Banking Scheme, there is an Islamic debt securities market developed in 1990 and an Islamic equity market,
both operating since 1995. The Islamic Interbank Money Market was established in 1994.
In Malaysia, the consistency and uniform application of Islamic rules is supervised by a National Shariah
Advisory Council for Islamic Banking and Takaful (Islamic insurance) established by the central bank. Islamic
offshore banks operating in Labuan are exempt from its rules. They are allowed to have their own Shariah
boards and apply their own standards outside Malaysia.
LINKS AND REFERENCES
* An overview of the structure of the Malaysian financial system can be found at the website of the Central
Bank of Malaysia, Bank Negara Malaysia.
* Volker Nienhaus (1998): The Financial System of Malaysia, in: Lukas Menkhoff, Beate Reszat (eds):
Asian Financial Markets - Structures, Policy Issues and Prospects, Nomos, Baden-Baden 1998. Nienhaus offers
a thorough analysis of the Malaysia's financial system at the wake of the Asian crisis.
* A study of the effects of the Asian financial crisis and the latest developments in Malaysia in Japanese
provides Megumi Suto, Chuo University, Tokyo, in: Financial Crisis and Financial Reform in Malaysia, in:
Makoto Ito and Masayoshi Tsurumi (eds) Financial Big Bang in Asia, Hosei University Press, Tokyo (2000).
(in Japanese) Contact: firstname.lastname@example.org
* An English-language paper on this topic by Megumi Suto is: Money and Banking in Malaysia in the Light
of Asian Financial Crisis, Paper presented at the Seminar of Centre for Asian Studies, St. Anthony´s College,
Oxford University (1999), Revised Edition, Discussion Paper No. D99-11, Institute of Economic Research,
Hitotsubashi University, Tokyo (February 2000). Contact: email@example.com
* A fascinating account of the fundamentals and practice of Islamic banking in an Egyptian financial
institution is given by Martin Hauenstein in his master study in Oriental Studies at Hamburg University:
“Islamisches Bankwesen, dargestellt am Beispiel der ‘Islamic International Bank for Investment and
Development (IIBID)’ Kairo" [Islamic Banking: The Example of the ‘Islamic International Bank for Investment
and Development (IIBID)’ Kairo], Hamburg University, 2000 (in German). Order by eMail or contact the
* Despite the challenges Islamic restrictions pose to financial activities, Islamic banking and financial
services are also found at the internet where, at the moment, there are an estimated 160 financial institutions
across the world offering products for Muslim investors. One example is the site of IslamiQ.com, a London-
based financial services company: http://www.islamiQ.com/
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Letzte Aktualisierung: 12.04.2002