Your SlideShare is downloading. ×
Shuai peng (pdf)  future of islamic financial institutions
Upcoming SlideShare
Loading in...5

Thanks for flagging this SlideShare!

Oops! An error has occurred.

Saving this for later? Get the SlideShare app to save on your phone or tablet. Read anywhere, anytime – even offline.
Text the download link to your phone
Standard text messaging rates apply

Shuai peng (pdf) future of islamic financial institutions


Published on

Published in: Economy & Finance, Business

  • Be the first to comment

  • Be the first to like this

No Downloads
Total Views
On Slideshare
From Embeds
Number of Embeds
Embeds 0
No embeds

Report content
Flagged as inappropriate Flag as inappropriate
Flag as inappropriate

Select your reason for flagging this presentation as inappropriate.

No notes for slide


  • 2. Future Prospects Islamic Financial Institution in Malaysia TABLE OF CONTENTSNUM TOPIC PAGE NUM1.0 Abstract 2-32.0 Introduction 3-63.0 Scope of Study 64.0 Objectives of Study 75.0 Literature Review 7-96.0 Body of Research Project 9-137.0 Findings & Discussion 13-218.0 Future Prospects of Islamic Financial Institution 22-249.0 Challenges toward Islamic Financial Institution 25-2610.0 Problem & Recommendation 27-2811.0 Conclusion 2912.0 References 30 2
  • 3. Future Prospects Islamic Financial Institution in Malaysia1.0 ABSTRACT Malaysia is one of a multiethnic, and one of developing country in Asia that has relied heavily onincome from its natural resources to engineer successful diversification into manufacturing and sharplyincreased incomes for all ethnic groups. The Islamic financial system in Malaysia showed significantprogress in an increasingly liberalized and competitive in line with increased international integration of theMalaysian Islamic financial system. Islamic finance now has a presence in over 60 countries, especially inMuslim countries. In the context of the financial infrastructure, the Malaysian Islamic financial system isstrong and growing rapidly. Markets have a variety of players, with Islamic banks, investment banks, fundmanagement companies, stock brokers, takaful companies, development financial institutions, savingsinstitutions and units trust. In this study, we are going to find the future prospect of Islamic financialinstitution in Malaysia. Nowadays the Islamic financial system in Malaysia has evolved as a practical andcompetitive component on the financial system that reacts as a driver of economic growth anddevelopment. Development of financial markets is necessary to promote Malaysian economy development.In the long term, Islamic institutions will provide a positive outlook to the economic growth and also thesociety. Islamic banking has effectively played its role as financial intermediaries that functions totransmission of savings from surplus households to deficit households. The achievements in the Islamicbanking sector are not easily reached but it will require careful planning and full of wise. This improvementis so well realized through whether a holistic approach in terms of banking policy and the implementation ofeffective laws. In view of that, Islamic banking in Malaysia has a great potential for growth as Malaysia is anIslamic country and has a large Muslim population. On 27 April 2009, Prime Minister Datuk Seri Mohd.Najib Tun Razak has announced liberalisation measures for the financial services sector which include theissuance of up to two new licenses for Islamic banking with a minimum paid-up capital of USD 1 billion (BNM, 2009). In the press statement issued by Prime Minister’s Office mentioned that these new licenseesmust be locally incorporated in Malaysia and will be regulated by Bank Negara Malaysia. The new Islamicbank may have a foreign equity interest. This is a proof of commitment by the government to furtherstrengthen Malaysia’s competitive position in Islamic finance to become an international financial hub. Theformer Prime Minister, Tun Dr Mahathir Mohamad also stated that Islamic banks have great potential ascompared to their conventional counterparts. He also envisioned that Islamic banking to replace theexisting conventional system which is less effective and easily manipulated by irresponsible parties. DrMahathir gave Petronas as an example as the most successful corporation in Malaysia who has greatlyparticipated in Islamic banking. Prospects for the development of Islamic finance should contain a balanced 3
  • 4. Future Prospects Islamic Financial Institution in Malaysiadevelopment of the shariah and included market by the prospect of a unique Islamic finance. Plus, theproducts and services must also not be limited to Muslim’s market only but also globally. Islamic financehas a role in shaping the future of the global financial system and reinforcing ethical and moral values thatare inherent in Islamic finance principles. Ongoing efforts to further strengthen the resilience of Islamicfinancial industry would enhance the prospects for global growth and the potential of Islamic finance tocontribute toward global financial stability (Mushtak, 2010).2.0 INTRODUCTIONMalaysia’s Islamic finance sector has enjoyed exponential growth in recent years and is often consideredone of the world’s leading Islamic finance centres. Malaysia is making considerable efforts to enhance itsfinancial industry. A distinctive feature of Malaysia’s economy is the fact that Islamic banking and financialservices have been fully integrated into the country’s existing financial system. On top of that, Malaysiaprovides a good example of the financial and banking industry’s inventiveness and capacity for innovation.Following the liberalisation of the financial sector, the view for future growth looks positive. Liberalisationmeasures now allow for an increase in foreign equity ownership of up to 70% in Islamic banks, investmentsbanks and insurance companies. Malaysia has been promoting itself as a regional Islamic financial centre.Labuan is being developed as an International Offshore Financial Centre (IOFC) including of Islamicbanking and capital markets. Efforts are being organized to equip Labuan IOFC with the appropriateinfrastructure, institutional capacity as well as legal aspects to enable Labuan to position itself as anefficient and highly rated Islamic financial center for the region. In the process of promoting Islamic financing, Malaysia has gained huge experience that must beshared if Malaysia are to benefit from the collective experience and wisdom. We need to exchangeinformation and eventually develop a system of best practices that is universally acceptable. The financialsystem mobilises and drives financial resources in global capital markets. It is estimated that there is morethan USD1 trillion worth of Islamic wealth available within the global financial system. These representopportunities for both conventional as well as Islamic banking and finance system to explore Islamic wealthglobally. The trend is expected to contribute to more changes in the local financial landscape as well. While the opportunities for Islamic financing will continue to grow, products, services and standards thatare in line with the times need to develop. Islamic finance is an alternative source of financing whichcomplement conventional finance to meet the needs and requirements of Muslims and non-muslims 4
  • 5. Future Prospects Islamic Financial Institution in Malaysiathroughout the world. Any of the products and services produced in the conventional financial system couldbe made possible for the application of Muslims provided adjustments are made to comply with shariahprinciples. According to Maybank Islamic Bhd Executive VicePresident and acting Executive Officer IbrahimHassan, Islamic financing assets grew at a compounded annual growth rate of 15% between 2004 and2008. This statistics prove than Islamic Financing is at least 5% higher than the conventional banking loansand advances. In Malaysia, Islamic banking assets amount to US$30.9 billion, while takaful assets amount to US$1.7billion. Malaysia now has the largest Islamic private debt securities market and a critical mass of diversifiedplayers, including Islamic banks, investment banks, takaful companies, savings institutions, fundmanagement companies and stock brokers. According to experts from the Issuers and Investors forum inKuala Lumpur, it is strongly suggested that Malaysia as an Islamic nation should focus on developinginnovative products in order to continuously stimulate future growth of the Islamic financial industry. Malaysia now has a reasonably comprehensive Islamic Capital Market with a wide range of productscomprising Global Sukuks, Islamic Reits, Islamic Residential Mortgage-backed Securities and a variety ofother Islamic bonds and financial products, including Islamic bonds issued. Many of these productsegments have been popular with both investors and issuers and continue to grow at a rapid pace. TheIslamic collective investment industry in particular has shown much evidence and is likely to be the mainnest growth area. As Malaysia’s Islamic financial sector achieves this level of maturity and sophistication,two points become evident. First, the role of the private sector becomes more important in leading thegrowth of the market. Increasingly, the role of regulator shifts from being a developer to that of a facilitator.The private sector must drive the increasing commercialisation of Islamic finance through higher level ofinvestments into product origination and distribution capabilities and into building intellectual capacity toaccelerate growth momentum and to maximise capture of opportuinities. in fact, the common availability ofhigh quality intermediation services is essential to the next phase of growth for Islamic finance. Malaysia’s Islamic finance sector provides great opportunities for tie ups with other successful Islamiccentres elsewhere in the world, particularly in the Middle East. Increasing co-operation and linkagesbetween the various Islamic centres is important to building a successful global Islamic financial marketgiven the highly integrated nature of Islamic financial services. According to Executive Director and CEO ofHSBC Amanah Malaysia Bhd Musa Abdul Malek, Malaysia Islamic Financing growth will continue toincrease as Bank Negara focuses on providing conducive regulatory framework in line with growth and 5
  • 6. Future Prospects Islamic Financial Institution in Malaysiadevelopment. At the international level, Malaysia is also seeing significant progress being made in thedevelopment of Islamic finance. There are more and more institutions offering Shariah based financialservices being established today to explore on the opportunities in this fast growing industry. This includesthe participation from global conventional banking giants. This participation of established financial centerssuch as London and Hong Kong has further reinforced the trend of internationalization in Islamic finance. As Malaysia’s Islamic finance industry continues to grow and develop beyond domestic boundaries, ourIslamic financial institutions are well positioned to initiate and lead efforts in converging differentorganizations financial practices to establish uniform standards or instruments that may be applied acrossborders. These areas cover from accounting, legal and operational practices. Cross border alliances byIslamic financial institutions in setting up new business ventures would also facilitate knowledge sharingand the globalization of Islamic business products and services. In this aspect, financial market instrumentsthat enable better allocation of resources in the international Islamic financial system need to be furtherenhanced and developed. This certainly needs to be supported by more international collaborative efforts inthe area of research and development to provide the motivation for more innovation to take place andaddress global and contemporary issues of market and risk management practices. These initiatives areimportant for the industry to develop as it becomes more internationally integrated. The development of the Islamic financial system in Malaysia started with the establishment ofpilgrimage fund (Tabung Haji) in 1963 as the first Islamic savings institution. After a few years of break, thefirst full-fledged Islamic bank was established in 1983 with the name Bank Islam Malaysia Berhad. It wasintroduced through the Islamic Banking Act 1983. Bank Islam Malaysia Berhad operates through eighty-fivebranches in the country whilst the more recently-established Bank Muammalat Malaysia Berhad has fifty-six branches. In addition to the Islamic banks, there are also thirteen commercial banks that offer productand services under Islamic banking scheme. Today, Malaysia is believed to have one of the most developed interest-free financial systems in theworld. Besides the interest-free financial systems Banking Scheme, there is an Islamic debt securitiesmarket developed in 1990 and Islamic Equity Market operate in 1995 and Islamic Interbank Money Marketwas establish in 1994. In 30 june 2003, Islamic banking assets accounted for 9.4 per cent or RM75.5 billionof the banking system in Malaysia. 6
  • 7. Future Prospects Islamic Financial Institution in Malaysia In order to internationalize the Islamic banking industry and making Malaysia as Islamic financialhub, the Malaysian government has started opening it market to international players in this field. It startedby allowing international banks which operates Islamic product to open their branches in Malaysia. Atpresent there are three international players which are Al-Rajhi Banking and Investment Corporation,Kuwait Finance House and RUSD Bank-led consortium which includes Qatar Islamic Bank and GlobalInvestment House. This approach which is taken by Malaysia Government is to help the country emerge asregional hub for Islamic finance.3.0 SCOPE OF STUDYThe main focus of this report is to study the future prospects of Islamic financial institutions in Malaysia.More specifically, this study focused on several important scopes which is our objective of the research thatis, examine the structure and, studying the strength of Islamic financial institutions on Malaysian and thechallenges of Islamic financial institutions in Malaysia. The research in the analysis of the structure of Malaysias Islamic finance system will be dividedinto several fractions which are the background of the Islamic financial institutions, principle in the Islamicfinancial institutions and the products offered in Islamic institutions. We will also discuss the strength ofIslamic financial institutions on Malaysia’s economic development. Moreover this paper will explain aboutphilosophy Islamic banking system, the advantages of Islamic financial institutions, and the future prospectfor achievement of Islamic financial institutions in Malaysia. Last but not least this study will also highlightsome of the problems or challenges encountered in the achievement of the Islamic financial institutions inMalaysia. In addition a few of solutions and recommendation also is made in this research. 7
  • 8. Future Prospects Islamic Financial Institution in Malaysia4.0 OBJECTIVES OF THE STUDYIn this report, our primary objective is to discover and analyse the future prospect of Islamic financialinstitutions in Malaysia.The other objectives are explained further below: 1. To examine the structure of Islamic financial institutions in Malaysia 2. To examine the strength and weakness of Islamic financial institutions in Malaysia 3. To seek the contribution of Islamic Financial Institution towards the steady growth of Malaysia economy 4. To seek the challenges facing all Islamic financial institutions in Malaysia5.0 LITERATURE REVIEWSince the 1970s, Islamic banking has emerged as a new reality in the international financial scene. Itsphilosophies and principles are however, not new, having been outlined in the Holy Quran and the Sunnahof Prophet Muhammad (p.b.u.h.) more than 1,400 years ago. The emergence of Islamic banking is oftenrelated to the revival of Islam and the desire of Muslims to live all aspects of their live in accordance withthe teachings of Islam. Iqbal (1997) define Islamic financial system as a set of rules and laws, collectively referred to asshariah, governing economic, social, political, and cultural aspects of Islamic societies. Shariah originatesfrom the rules dictated by the Quran and its practices, and explanations rendered (more commonly knownas Sunnah) by the Prophet Muhammad. Further elaboration of the rules is provided by scholars in Islamicjurisprudence within the framework of the Quran and Sunnah. Malaysia has emerged as a country that has the most comprehensive Islamic finance sector in theworld, supported by all components required of a financial system of Islamic banking, Takaful, and Islamicmoney market and equity based on its own legal system and comprehensive. Laldin (2008) states that thedevelopment of the Islamic financial system in Malaysia started with the establishment of pilgrimage fundcorporations in 1963 as the first Islamic saving institutions. The fund was known as Tabung Haji. In 1983,Bank Islam Malaysia Berhad (BIMB) was established in Malaysia as the first full-fledged Islamic bank.According to Markom and Islmail (2009), the emergence of Islamic banking in Malaysia stemmed from the 8
  • 9. Future Prospects Islamic Financial Institution in Malaysiaestablishment of the first full-fledged Islamic bank offering Islamic products and services in 1983 know asBank Islam Malaysia Berhad (BIMB) under the Islamic Bank Act 1983. Furthermore, in year 1993 a buildupof the Islamic money market followed suit, turning out to be the quickest growing segment in the Islamicfinancial instrument. The development of the Islamic banking and finance industry in Malaysia because ofIslamic banking has staged a very impressive growth as well as reflected by high growth of the asset of theIslamic banking industry in Malaysia grew by approximately 30 per cent per annum since its inception in1983 ( Sukmana & Kassim, 2010). Qorchi (n.d) said that Islamic financial institutions in Malaysia, and havebeen gearing up for further expansion by continuing to develop, refine, and market innovative Islamicfinancial instruments, on both the asset and liability sides. The Malaysian government commenced to open its market to the international players in order tointernationalize the Islamic banking industry and cultivate Malaysia as an Islamic financial hub whichautomatically contributes to the Malaysia economic development. In the beginning, international banks thatoffers Islamic product was given permission to open their branches in Malaysia. It is significant to havesufficient advance planning in order for Islamic financial sector to be competitive and to assure the vision ofmaking Malaysia as international financial hub (Laldin, 2008). The Islamic financial system constitutes asmall fraction of the entire financial system and comprises of only two institutions in formal arrangement; inthe banking sector is Islamic Bank Malaysia (IBM) while in the non-banking sector Pilgrimage Managementand Fund Board (PMFB). While the makeup of Islamic financial system is characteristically small, it haspotential to contribute a significant share towards eudemonia economic of nation by stimulating bothdistribution and growth (Salleh & Hamat, 1997). Besides that, Islamic financial institutions play their role in the economic development of Malaysiatoward the economy growth such as transformation from a banking entity to a universal financialinstitutions, developing the nation holistically, and also springboard for Malaysia into a global Islamiccentre. In addition Islamic financial institutions in Malaysia also play as a driver of economic growth anddevelopment is it evolved as a viable and competitive component on the overall financial system (Furqani &Mulyany, 2009). The other role of Islamic financial system in Malaysia economic development is the rapidevolution of Islamic financial system in Malaysia has set the juncture for global integration (Furqani &Mulyany, 2009). 9
  • 10. Future Prospects Islamic Financial Institution in Malaysia Islamic financial institutions also have their own products and services offered to their clients.Islamic products consist of mutual fund, takaful insurance, murabahah financing, Islamic bond, sukuk,syariah complaint stocks and Islamic stock broking (Razak & Karim, 2008). These products are offered byIslamic institutions like commercial Islamic banks, takaful, Islamic investment companies, Islamicinvestment banks and so on. One of the Islamic financial system policies is that all business or transactionmust be based on Islamic principle where riba or interest for all types of loans is prohibited (interest freebanking). Other than that, the Islamic core value that is justice with fairness has enormously led to thecountry’s miraculous accomplishment via the introduction of a pragmatic policy. This is supported by theestablishment of New Economic Policy (NEP) (Pramanik, 2002). As a conclusion, Malaysia’s financial sector has experienced rapid growth particularly in the Islamicbanking and financial industry. Although brief, it is worth noting that Islamic banking has shown veryencouraging development, where annual asset growth accounts for approximately 30 percent since itsestablishment in 1983. Therefore, it is reasonable to examine the relevance of Islamic financial systembased on its contribution to the Malaysian economy (Sukmana & Kassim, 2010).6.0 BODY OF RESEARCH PROJECT 6.1 Structure of Islamic Financial System in MalaysiaIn Malaysia, the roots of Islamic financial system go back to 1963 when the government establishedTabung Haji or Pilgrims Management and Fund Board. The institution was established to invest the savingsof the local Muslims in interest free places, who intend to perform pilgrim (Hajj). Tabung Haji utilizesMudarabah (profit and loss sharing), Musharikah (joint venture) and Ijara (leasing) modes of financing forinvestment under the guidance of National Fatawah Committee of Malaysia. Below, there have someimportant points which is consist of the structure of Islamic Financial System that we will discuss on thisproject. 10
  • 11. Future Prospects Islamic Financial Institution in Malaysia 6.1.1 Background of Islamic Financial SystemThe establishment of Bank Islam Malaysia Berhad (BIMB) in July 1983 marked a milestone for thedevelopment of the Islamic financial system in Malaysia. BIMB carries out banking business similar to othercommercial banks, but along the principles of Islamic laws (Shariah). The bank offers deposit-takingproducts such as current and savings deposit under the concept of Wadiah (guaranteed custody) andinvestment deposits under the concept of Mudarabah (profit-sharing). The bank grants finance facilitiessuch as working capital financing under Murabaha (cost-plus financing), house financing under BaiBithaman Ajil (deferred payment sale), leasing under Ijara (leasing) and project financing under Musharikah(joint venture). BIMB has grown tremendously since its inception. It was listed on the Main Board of theKuala Lumpur Stock Exchange on 17 January 1992. At the end of 2003, the bank has a network of 82branches throughout the country and staff of 1,200 employees. The long-term objective of the Central Bank of Malaysia was to create an Islamic banking systemoperate parallel to the conventional banking system. A single Islamic bank (BIMB) did not represent thewhole financial system. It required large number of pro-active players, wide range of products andinnovative instruments, and a vibrant Islamic money market. Realizing the situation, the Central Bankintroduced Interest Free Banking Scheme (now replaced with Islamic banking scheme (IBS) in March 1993.The scheme allowed conventional banking institutions to offer Islamic banking products and services usingtheir existing infrastructure, including staff and branches. Since then, the numbers of IBS bankinginstitutions have increased to 36 till the end of 2003, comprising 14 commercial banks (of which 4 areforeign banks), 10 finance companies, 5 merchant banks and 7 discount houses. 6.1.2 Basic Principle of Islamic Financial SystemThe basic framework for an Islamic financial system is a set of rules and laws, collectively referred to asshariah, governing economic, social, political, and cultural aspects of Islamic societies. Shariah originatesfrom the rules dictated by the Quran and its practices, and explanations rendered (more commonly knownas Sunnah) by the Prophet Muhammad. Further elaboration of the rules is provided by scholars in Islamicjurisprudence within the framework of the Quran and Sunnah. There are several basic principle of Islamicfinancial systems which is will be discuss on this project papers: 11
  • 12. Future Prospects Islamic Financial Institution in Malaysia a) Prohibition of interest.Prohibition of riba, a term literally meaning “an excess” and interpreted as “any unjustifiable increase ofcapital whether in loans or sales” is the central tenet of the system. More precisely, any positive, fixed,predetermined rate tied to the maturity and the amount of principal (i.e., guaranteed regardless of theperformance of the investment) is considered riba and is prohibited. The general consensus among Islamicscholars is that riba covers not only usury but also the charging of “interest” as widely practiced. Islamencourages the earning of profits but forbids the charging of interest because profits. b) Risk sharing.Because interest is prohibited, suppliers of funds become investors instead of creditors. The provider offinancial capital and the entrepreneur share business risks in return for shares of the profits. c) Prohibition of speculative behaviour.An Islamic financial system discourages hoarding and prohibits transactions featuring extremeuncertainties, gambling, and risks. d) Shariah-approved activities.Only those business activities that do not violate the rules of shariah qualify for investment. For example,any investment in businesses dealing with alcohol, gambling, and casinos would be prohibited e) Gharar.Under this prohibition any transaction entered into should be free from uncertainty, risk and speculation.Contracting parties should have perfect knowledge of the counter values intended to be exchanged as aresult of their transactions. Also, parties cannot predetermine a guaranteed profit. This is based on theprinciple of uncertain gains which, on a strict interpretation, does not even allow an undertaking from thecustomer to repay the borrowed principal plus an amount to take into account inflation. The rationalebehind the prohibition is the wish to protect the weak from exploitation. Therefore, options and futures areconsidered as un-Islamic and so are forward foreign exchange transactions because rates are determinedby interest differentials. 12
  • 13. Future Prospects Islamic Financial Institution in Malaysia 6.1.3 Products of Islamic Finance a) TakafulTakaful in Arabic, means joint guarantee. This Islamic alternative to insurance is based on the concept ofsocial solidarity, cooperation and mutual indemnification of losses of members. The Tabarru system is themain core of the takaful system making it free from uncertainty and gambling. Tabarru means "donation;gift; contribution." It is an accord among a group of persons who agree to jointly indemnify the loss ordamage that may be caused, out of the fund they donate collectively. Such a contract usually involves theconcepts of Mudaraba, Tabarru (to donate for benefit of others). It is based on the concept of mutualsharing of losses with the aim of eliminating the element of uncertainty. Takaful is a way to reduce thefinancial risk of loss due to accident and misfortunes.. The objective of takaful is to pay a defined loss froma defined fund. Muslim jurists conclude that insurance in Islam should be based on principles of mutualityand cooperation. b) MurabahaThe others of the more popular instruments in Islamic financial markets are Trade with markup or cost-plussale (murabaha). One of the most widely used instruments for short-term financing is based on thetraditional notion of purchase finance. The investor undertakes to supply specific goods or commodities,incorporating a mutually agreed contract for resale to the client and a mutually negotiated margin. Around75 percent of Islamic financial transactions are cost-plus sales. c) Leasing (ijara).Another popular instrument, accounting for about 10 percent of Islamic financial transactions, is leasing.Leasing is designed for financing vehicles, machinery, equipment, and aircraft. Different forms of leasingare permissible, including leases where a portion of the instalment payment goes toward the final purchase(with the transfer of ownership to the lessee). d) Profit-sharing agreement (mudaraba).This is identical to an investment fund in which managers handle a pool of funds. The agent-manager hasrelatively limited liability while having sufficient incentives to perform. The capital is invested in broadly 13
  • 14. Future Prospects Islamic Financial Institution in Malaysiadefined activities, and the terms of profit and risk sharing are customized for each investment. The maturitystructure ranges from short to medium term and is more suitable for trade activities. e) Equity participation (musharaka).This is analogous to a classical joint venture. Both entrepreneur and investor contribute to the capital(assets, technical and managerial expertise, working capital, etc.) of the operation in varying degrees andagree to share the returns (as well as the risks) in proportions agreed to in advance. Traditionally, this formof transaction has been used for financing fixed assets and working capital of medium- and long-termduration. f) Sales contracts.Deferred-payment sale (bay’ mu’ajjal) and deferred-delivery sale (bay’salam) contracts, in addition to spotsales, are used for conducting credit sales. In a deferred-payment sale, delivery of the product is taken onthe spot but delivery of the payment is delayed for an agreed period. Payment can be made in a lump sumor in installments, provided there is no extra charge for the delay. A deferred-delivery sale is similar to aforward contract where delivery of the product is in the future in exchange for payment on the spot market.7.0 FINDINGS & DISCUSSION7.1 Strength of Islamic Financial System on Malaysia Economic DevelopmentThe strength of Islamic Financial System (IFS) compared to Conventional System is that there are manydifferences to conventional system and in this project paper. The discussion about the strength of IFS willfocus on the philosophy, the advantages and the future prospect of IFS. 7.1.1 Philosophy of Islamic Financial SystemThe philosophical basis of the Islamic financial system is to place equal emphasis on the ethical, moral,social and religious dimensions, to improve equality and justice for the good of society as a whole. TheIslamic financial system is developed on the following bases abstain from activities involved in usury in allmatters, and this implies that all investment activities shall be based on profit sharing. 14
  • 15. Future Prospects Islamic Financial Institution in Malaysia The Islamic financial system also based on participation in the production process rather thanbusiness debts. This means that Islamic banks participate in either the production activities either asexecutor of the project or be a partner in the project. Islamic financial system must have two key elements partnerthat it must be based on Islam fully, not just the name and label, but must reflect the philosophy, values,ethics and goals of the Islamic shariah. In addition, it also must have the characteristics of a system ofsophisticated and viable in order to compete with conventional systems in all aspects. For realizing thispurpose the three pre-conditions must be found in the financial systems it must has a variety of conditionsinstruments, number of large institutions and adequate and establish a mechanism to link between the fearlier of the instrument. Islam considers money only as a medium of exchange, not unlike the intrinsicvalue of any commodity. Sancity of Contract Prohibition Money as on Potential speculative Capital transaction Islamic Financial System Shariah Prohibition compliant of Interest activities Risk Sharing Figure 2: Philosophy Islamic Financial System 15
  • 16. Future Prospects Islamic Financial Institution in Malaysia 7.1.2 Role of Islamic Financial Institution in MalaysiaAn Islamic financial institution is an organization that performs a lot of the typical functions of financialintermediation while still maintaining its Islamic character. It undertakes both mobilization of funds fromsavings-surplus economic units usually household sector, through a collection of financial assets anddevelopment of funds into profitable projects floated and operated by savings-deficit economic units whichusually are the corporate and government sector. While conventional banking uses the interest ratemechanism to perform its task of financial intermediation, Islamic banking relies on profit or loss sharing forpurposes of financial intermediation. Islamic commercial banks play the role of intermediaries in the financial system. They buy funds byoffering a variety of deposit products such as wadiah and qard is based current account deposits,mudarabah is based savings account and investment account deposits. They sell funds through a variety offinancing products such as equity-based and debt-based. Islamic equity-based financing products comprisetrustee partnership (mudarabah) facility, joint venture (musharakah) facility, and declining partnership(musharakah) facility. Islamic debt-based financing products comprise cost-plus sale (murabahah) withdeferred payment (bai-bithaman-ajil) facility, leasing (ijara) facility, deferred delivery sale (salam) facility,manufacture-sale (istisna) facility, recurring sale (istijrar) facility, benevolent loan (qard) facility. In addition to that, certain Islamic commercial banks also provide a range of fee-based services,such as, opening of letter of credit (wakala) and letter of guarantee (kafala). Islamic financial institutionsprovide a range of products and services that is in line with the Shariah Law. There are exchange-basedcontracts, such as, murabahah, bai-bithaman-ajil, ijara, salam, istisna, istijrar that create debt and hence,underlie debt-based financing products and securities. There are also a few participatory contracts, such asmudarabah and musharakah that underlies equity-based financing contracts and securities. Contracts suchas, wadiah and qard are underlying deposit products. The Islamic bank also plays an important role in re-channeling the funds, especially for the interests ofthe society and for enhancing the productive capacity of the economy. In the Islamic context, this would involvehelping the needy and financing activities that is not considered illegal (haram). The asset structure of an Islamic financial institution is usually more diverse. For short-termmaturity and risk-limited investments, Islamic financial institutions have a choice of assets originating fromtrade related activities that include murabahah, bai muajjal, and bai salam. Furthermore, Islamic financial 16
  • 17. Future Prospects Islamic Financial Institution in Malaysiainstitutions also provide short-term funds to its clients to meet their working capital needs. For the medium-term maturity investments, Islamic financial institutions invest in ijara and istisna based assets. For longer-term maturity investments, Islamic financial institutions engage into venture capital or private equityactivities in the form of musharakah. Next, Islamic financial institution in Malaysia that provide mobilizing savings and preventing thefragmentation of wealth by assisting Muslims to perform the pilgrimage without impoverishing them or furtherimposing financial hardships after their pilgrimage is called Tabung Haji. Role of Tabung Haji is to collectssavings throughout Peninsula Malaysia, Sabah and Sarawak in 345 locations. Besides that, to offer betterand convenient services, Tabung Haji allows the deduction of salary of employees from both public andprivate sectors. Recently, Tabung Haji has further enhance its services by collaborating with Bank IslamMalaysia Berhad and Bank Rakyat Malaysia Berhad for deposit, transfer and withdrawal services and alsothe use of ATM cards issued by them. The Islamic financial institution has contribution in the economic development. They have implanthabits of saving and investment among the Muslims, and have provided opportunities for employment havehelped small businesses and the agricultural sector and also have enabled the Muslims for the systematiccollection of zakat funds and their distribution to the poor and needy. 17
  • 18. Future Prospects Islamic Financial Institution in Malaysia 7.1.3 Advantages of Islamic Financial System a) The principle of fairness and justice. The first advantages of Islamic Financial System are the principle of fairness and justice. Theunderlying principle of Islamic banks is the principle of justice which is an essential requirement for all kindsof Islamic financing. The principle of fairness and justice requires that the actual output of such a projectshould be fairly distributed among the two parties. If a financier is expecting a claim on profits of a project,he should also carry a proportional share of the loss of that project. In contrast with conventional financemethods, Islamic financing is not centered only on credit worthiness and ability to repay the loans andinterest; instead the worthiness and profitability of a project are the most important criteria of Islamicfinancing while the ability to repay the loan is sub-segmented under profitability. b) Integration of ethical and moral values with its banking operation. The second advantages of Islamic Financial System are the integration of ethical and moral valueswith its banking operation. It is one of the unique and salient characteristics of Islamic banks. The ethicaland moral consideration of Islamic banks cannot be detached and their behavior should be consistent withthe moral and ethical standards laid down by the Islamic Shari’ah. Unlike the conventional banks, thefinancing of Islamic banks are restricted to useful goods and services and refrain from anything that’sprohibited in Islam. Differences with conventional banks, Islamic banks do not consider only the creditworthiness and interest rate as standards; instead they must apply Islamic moral and ethical criteria in theirprovision of financing. This adds another merit for Islamic banks since there is a beneficial impact on theproductivity in the economy as it reduces the social and economic cost of such harmful products andactivities. c) The relationship with depositors The third advantages of Islamic Financial System are the relationship with depositors. They deal withtheir customers on investment grounds rather than a pre-determined fixed interest rate. They invest themoney of their depositors on high profitable projects after going through a strategic analysis in order to givea substantial return to their depositors. Thus in Islamic banking industry, each bank will attempt to out-perform other banks if it wants to attract funds from investors. And the ultimate result is that a high returnon investments for the investors, which is unlikely in a conventional bank where it deals with their 18
  • 19. Future Prospects Islamic Financial Institution in Malaysiadepositors on a pre-determined fixed interest rate. Furthermore, Islamic banks eliminate the barrierbetween those who save and those who invest, and bring them closer to the real market. The nature of thefinancial intermediation of Islamic banks significantly defers from conventional banks and it is in harmonywith real market and developmental changes in it. 7.1.4 Perception & Acceptance of Islamic Financial Institutions in MalaysiaIn this study, we also incorporate the perceptions of the citizens of Malaysia on Islamic Financial Institutionthat is operating in Malaysia. All aspects are taken into account ranging from product and services,customer service, efficiency and mobility. The Islamic Financial Institutions divided the differences ofperceptions and also acceptance into a few types including the demographics differences, servicesattribute by and also religious influences. In Malaysia, there have 3 major races that active on the banking transaction including Malay,Indian, and Chinese. Based on that, we are going to analyze the differences of all three races onperception and acceptations to the Islamic Financial Institutions. Most of the Malay respondents agreedthat Islamic banking availed modern looking equipment. According to these respondents, Islamic banksoffered secured transactions, fulfilled personal needs, provided easy–to-access account information, usedintegrated value-added services, their staff treated their customers as “friendly”, and they had provision ofprofit sharing. Religious reason also played an important role behind their attitude towards Islamic FinancialInstitutions for the Malay people. On the other hand, most of the Chinese respondents agreed that Islamicbanks had been using integrated value added services. Besides that, these respondents also agreed that itwas easy for them to access to their account information, staffs treated their customers as “friendly”, andalso they had the provision of profit sharing. The Islamic Financial Institutions possesses a sound capability to attract customers by offeringintegrated value added services, they seem to be very useful for obtaining account information, and theyalso use latest technology alike the conventional banking. This quality of Islamic Financial Institution tocreate value based services that can best suit with the needs of the entire population regardless of theirracial diversity. 19
  • 20. Future Prospects Islamic Financial Institution in Malaysia Furthermore, Malaysian people also choose each of the Islamic Financial Institutions depends onthe reliability. It is including by the empathy, responsiveness and compliance, respectively on how thebanking institutions use the customer behavior to complete the mission on giving their satisfaction. Other than that, the factor of “free interest loan” also influences the customers on using theseIslamic Financial Institutions and it also attract non-Muslim to perform banking services with the Islamicfinancial institutions. Therefore, understanding differences in cultural values among the three races are important inorder to attract all three races to utilize Islamic Financial Institutions. Chinese mostly have positive attitudetowards Islamic banking. Perhaps the Chinese are very conscious of the different type of schemes andservices offered by the both conventional and Islamic banks. On the other hand, the Malays are concernedabout the religious and profitability reasons. Despite these differences between the Malays and Chinese,the consistency in citizens’ responses indicates that all those three races accepted the schemes andservices offered by the Islamic Financial Institutions. 7.1.4 Impact & Contribution of Islamic Financial Institutions towards MalaysiaThe establishment and progress of Islamic financial institutions in Malaysia has resulted in positive impactfor the country as a whole. This involves the banking industry, other financial institutions as well as for thesociety and so on. Nowadays, many countries are already practicing this system especially among Islamiccountries. When we mention Islamic financial system, most people will say it only consists of banks,however it not only restricted to Islamic banks but also financial institutions agencies such as Zakat, Waqf,Baitulmal and others. There is no doubt that Islamic financial system is also a medium that creates wealth for financialinstitutions, society and at time same time contributes to economy growth. General perception indicatesthat money is the actual wealth. Financial institutions play the important role in this situation. We can usegoods and services which this things we enable to use by doing our owned. In Islam, banks have financinginstrument like murabaha, ijarah, musyarakah and bank’s activities also focus on fund management. Forexample, for home financing, there is an agreement between the leaser and lessee. If the lessee is able topay the full amount therefore the lessee will own the house. This is different compared to conventional as 20
  • 21. Future Prospects Islamic Financial Institution in Malaysiaan end of agreement the lessee has to pay an extra amount to own house which is depending on theiragreement. This method uses the concept of rent versus interest (conventional system) and it givesbenefits to the lessee. So, lessee even with low level of income can own the home eventually. Besides the modern institutions, the Zakat institution also as one of the agency which givesbenefits to the society especially for Muslims. In Zakat institution, it totally involves of Islamic rule andprinciple in managing this institutions. Since Zakat was applied about hundred years ago, this institutionalready gives positive impact to social-economic development. According to the Islamic system, theseZakat funds will distributed to 8 of the recipients such as fakir (fukaha), poor (masaqin), Amil (collector),Muallaf (converters), Fisabilillah, Gharimin, Ibnu Sabil, Riqab. All the recipients will benefit from the fund.This is done in order to increase the standard of living. Therefore, no parties will be left out in the process.Zakat also played an important role in improving the infrastructure. Zakat fund are used in order to providesponsorship of education for poor people in vocational school. Waqf institutions are another type Islamic financial institutions that spreads benefits to peoples.Waqf have played a major role in financing, infrastructure development and also economic growth in certaincountry. Many public facilities have been support by Waqf. Waqf was created in order to support schoolsystem such as universities, hospital and others. The Waqf fund also can be used to finance education ofthe poor people, fund research and others. In short, this institution provides huge impact to the well being ofthe society as a whole and increases their education of the citizens. Next is the pilgrimage fund (Tabung Haji) that was started on 1963 as the first Islamic savinginstitutions. Many individuals realized that Tabung Haji have good future which suitable for Muslimcommunity. This saving institution was established for those who were interested to travel to the holy land.This institution will manage the savings from clients through the Islamic principles. It begins withestablishment of the first Takaful or Islamic insurance. Before Takaful was implemented, most people wereinterested on the conventional insurance, but after that, most Muslim people realized that these insurancesare not following the Syariah principle. Therefore, most Muslims changed to Takaful insurance and thiseventually served the people objective and welfare. Hence, with the pilgrimage fund and Takaful, theseinstitutions was growing as well as increasing in economic growth. 21
  • 22. Future Prospects Islamic Financial Institution in MalaysiaECONOMYIn view of the impact towards the Malaysian economy, it is for definite that the establishment and theappearance of Islamic Financial institution in Malaysia has boost and improved the economy growth inMalaysia. Malaysia is facing with rapid growth since government introduces Islamic financial institutionsearly 1960’s. Islamic system has been implemented in the country stage by stage and this development isdone by professional from all around the world after analyzing the Malaysian economy and market structurein terms of population. Islamic capital market (ICM) in Malaysia has emerged in significant growth. At the firstimplementation which stand with 2 equity fund in 1993 and at the end 2007 there are 77 unit trust funds. Itconsists of both equity and bond fund with net assets value (NAV) of about RM6.8 Billion. Within 1993-2007, Islamic unit trust funds have been growing 47% of annual rate while unit trust industry grown at 9.6%.This is was major breakthrough in the unit trust industry. Next, Malaysia’s was the first to introduce Sukuk and the demand for this product worldwide wasvery encouraging. More of the demand was concentrated on Sukuk (Islamic bond). In 2002 receivedinternational subscription of investors, 51% from Middle East, 30% from Asia, 15% from Euro and 4% fromU.S. So there is no doubt that by implementation of Islamic financial system in Malaysia it effectively givesunlimited positive impact to the people, financial institutions as well as for the Malaysia’s economicdevelopment. 22
  • 23. Future Prospects Islamic Financial Institution in Malaysia8.0 Future Prospect of Islamic Financial SystemPROSPECTSThe Islamic financial institution in Malaysia has developed into a feasible and competitive component of theoverall Malaysian financial system and act as a catalyst of economic growth and nationwide development.Malaysia has build up comprehensive Islamic financial infrastructures such as Islamic banking (1983),Islamic insurance (1984), Islamic capital market ( 1993), Islamic inter-bank money market (1994), KualaLumpur Stock Exchange (KLSE) Shariah Index (1990) and in March 2001, Central Bank of Malaysia (BNM) launched the financial sector master plan which incorporated the 10-years master plan for Islamicbanking and Takaful that is aimed at creating an efficient, progressive and comprehensive Islamic financialsystem and at the same time, to promote Malaysia as regional financial centre for Islamic banking andfinance. In the Financial Sector Master Plan, Central Bank of Malaysia has envisioned Islamic baking toconstitute 20% of the banking market share in 2010 ( BNM Annual Report, 2003). Other than that, Malaysia expected to become an international Islamic financial hub. To fulfil thechanging requirements of domestic and international businesses, Malaysia offers the range of highlyinnovative Shariah compliant products and structures. Malaysia, an international Islamic financial centre, isat the forefront of Islamic finance by taking a leadership role in advancing Islamic finance globally. Peoplecan access the progressive and integrated sectors of an international Islamic financial centre such asIslamic banking, takaful and re-takaful, Islamic capital market and money market, Islamic fundmanagement, human capital development and ancillary services. Malaysia’s Islamic financial industry ismarket-driven with strong and continues government commitment. According to Dr. Mahathir Mohamad, aformer Malaysian prime minister, Islamic banking without interest and subjected to high moral codes, on theother hand would or should not yield the aforesaid results. It would however slow growth and wealthcreation, but the wealth created would be real, would be more fairly distributed, and would be spin-off intoreal economic activities, creating jobs, increasing trade domestically and internationally. Mahathir predictedthat Islamic banking and the wealth of the Muslims will cause the rest of the world to connect with Muslimcountries. 23
  • 24. Future Prospects Islamic Financial Institution in Malaysia In term of economic growth, Malaysia has a remarkable record of consistently high growth in thepast three decades. The growth of GDP increases to 5.3 percent in 2005. As a country slightly shiftedtowards industrial country, industrial sectors and services contributed 80 percents to total of GDP ofMalaysia. With total population 26.7 million, Malaysia maintains its Per capita GDP above US$ 3,000 since1995. Malaysia was the first to introduce a global corporate Sukuk (the world’s largest corporate Sukuk ofUS$4.7 billion), sovereign Sukuk and redeemable Sukuk. As for the 31st March 2008, Malaysia has issuedUS$46.3 billion onshore outstanding corporate Sukuk, representing 24% average annual growth or 149%increase from US$18.52 billion in 2002. In maintaining its lead position, Malaysia is focused on nurturing talents in the Islamic financesector that would significantly contribute towards developing more innovative products to further acceleratethe industry growth momentum. In view of this, there is a few higher learning institution are offeringprofesional qualification papers and degree in Islamic finance. An example is Institute of Islamic Bankingand Finance.OPPORTUNITIESWith Islamic capital market and derivatives as the next potential area of high growth, Bursa Malaysia is in aprime position to further innovate new Islamic products to meet market demand. Malaysian financialinstitutions have been invited to explore expansion opportunities in Pakistan, particularly in Islamic banking.Pakistan’s High Commissioner to Malaysia, Masood Khalid expects Bank Negara Malaysia Governor, TanSri Dr Zeti Akhtar Aziz to have a discussion on how Malaysian financial insitutions can expand theiroperations to Pakistan. According to Masood, he would like to see more investments from Malaysia as wellas joint ventures. He said that major areas which provided opportunities included construction, surgicalgoods, energy, oil and gas, halal products, gemstones, pharmaceutical, textiles, leather products and rice. Besides that, Bank Negara Malaysia recently held a seminar on Islamic Finance in Istanbul,Turkey, in support of the Malaysia International Islamic Financial Centre (MIFC) initiative. With the theme‘Malaysia and Turkey: The New Silk Route in Islamic Finance’, it is a strategies for collaboration,cooperation and smart partnership aimed to strengthen the relationship between Malaysia and Turkey andsignifies the growing internationalisation of Islamic finance. The seminar provide a platform for theMalaysian and Turkish financial and business community to share and exchange knowledge and industryviews on the current development of the Islamic financial market. Malaysia is a gateway for Turkish 24
  • 25. Future Prospects Islamic Financial Institution in Malaysiainvestors and financial institutions to expand their trade and investment opportunities in the ASEAN region.Conversely, the Malaysian financial community can use Turkey as a platform to the Central Asian andEurope regions. Among the key potential areas of collaboration between Malaysia and Turkey includeTurkish financial and business community to use Malaysia as a platform to raise funds such as Sukuk andIslamic syndication, and Malaysia and Turkey’s financial community can collaborate to formulate or offerinnovative solutions in Islamic finance, Islamic finance education and professional services. Futhermore, MIFC delegation headed by Raja Nazrin Shah visited Saudi Arabia recently topromote Islamic finance relations. The 33 member delegation including reprentatives from 17 Islamic banksand 12 Islamic fund management companies and also some asset management firms. Malaysian ConsulGeneral, Hidayat Abdul Hamid said the delegation was to introduce the MIFC to this part of the world andstudy the opportunities available specifically in the financial and investment sectors. He added that, theywould like to invite the Saudi to counterparts to Malaysia for further interaction. The discussions centeredon promoting business and investment opportunities in Islamic finance in Malaysia, which is globally knownfor its highly developed and diversified Islamic banking and financial market. Delegation leader, YusryYusoff, manager MIFC Promotion Unit at Central Bank of Malaysia, explained that the delegation wasseeking to establish relationship with the key institutional investors in Saudi Arabia for potential investmentopportunities including Sukuk mandate, asset management as well as interest to set up Islamic bankingand Takaful business in Malaysia. Currently, Malaysia is considered to have a comprehensive Islamicfinancial landscape. These show a positive sign of Malaysian to grab all the opportunities thus expandingits role of Islamic financial leading and thus introduce Malaysia towards the worlds. 25
  • 26. Future Prospects Islamic Financial Institution in Malaysia9.0 Challenges Facing Islamic Financial Institutions 1. Banking regulations Although the market has recognized the existence and importance of Islamic financial institutions to the global financial system, a uniform regulatory and legal framework supportive of an Islamic financial system has not yet been developed. Existing banking regulations in Islamic countries like Malaysia are based on the western banking model. 2. Insufficient legal protection Laws relating to companies, commerce, investment, the courts and legal procedures need to be reviewed and reformulated to suit the requirement of the Islamic financial institutions. It is not acceptable that company law continues to talk about bonds and interests while ignoring participation deeds and profits. The laws should accommodate rules and regulations which permit Islamic financial institutions to apply their loss profit sharing modes so that they can participate in partnership businesses either in form of Mudharabah or Musharakah. 3. Prohibition of interest The prohibition of interest or riba, literally translated as increase, excess or usury. Riba restrictions are best understood as a type of price setting regime designed to reinforce a public guarantee of a minimum distribution of basic goods. Nowadays, every transaction is currently using interest rate as their base to calculate either profit gain or losses. 4. Prohibition of speculative risk It encompasses some forms of incomplete information and or deception, as well as risk and uncertainty intrinsic to the objects of contract’. However, since contracts are never complete and therefore always 26
  • 27. Future Prospects Islamic Financial Institution in Malaysia contain some measure of risk and uncertainty, it is only excessive gharar, affecting the principal component of a contract, which is prohibited.5. Competition with conventional banking Since the conventional banking system is widely spread inside as well as outside the Islamic countries for decades, it gains the clients’ trust especially if it is well regulated and actively contributed to the economy. On the other side, Islamic financial institutions are new player in the financial market therefore, they have to compete with the existing system inside the Islamic countries. Islamic Financial Institutions are still building up their regulatory system and trying to contribute to the country’s economy in line with Islamic Shariah.6. Shareholders and investors Risk premium in Islamic financial institutions is relatively high while risk mitigation, risk allocation and risk transfer techniques are not that well developed unless risk adjusted returns are equalized across the two market segments, the Islamic financial institutions growth will remain stunted. Absence of hedging products places the Islamic products at a relative disadvantage as far as risk mitigation is concerned. 27
  • 28. Future Prospects Islamic Financial Institution in Malaysia9.0 PROBLEM & RECOMMENDATIONS a) Lack of serious human capital in the Islamic financial systemIn the development of an Islamic economy especially in Malaysia, an increase in human capital is veryimportant. As the current lack of qualified Islamic young banker looks set to hamper the development of thesector should it not be addressed. The lack of human capital in the sector affects to the growth of currentand new markets such as the U.K. Training of Islamic bankers has not kept pace with the rapid growth ofthe sector and, as a result, there are shortages throughout the industry. To overcome these problems, the more higher education institutions should offer courses that areappropriate to request the Islamic finance industry. One of the positive steps taken by Bank NegaraMalaysia (BNM), which has created a Center for International Education in Islamic Finance (INCEIF). In2006, for example, Bank Negara set up an RM500m endowment fund to support The International Centrefor Education in Islamic Finance (INCEIF), with the main objectives of making Malaysia the leading centerfor Islamic finance education and developing human capital for the global Islamic finance industry. Toovercome the shortage of human capital, more education centers such as INCEIF be established in thefuture because of the potential of Islamic financial system developed at the international level. With thecooperation of all parties who can ensure that the Islamic financial system not only acceptable but also theglobal community can become their first choice. b) Restructuring of the financial institutionThe functions of institution actually as the intermediary financial are also important players in financialmarkets. Thus, to create a financial market-based right to full-fledged Islamic financial system, there have aneeds to provide a sophisticated and viable, an Islamic financial system and the need for more adequate. Ifnot, how do we create a financial market in the absence of Islamic financial institutions and large enough? The order form of our institutions see the need to present a complete order form institutions to createa sophisticated Islamic financial system and viable. It is another proof of the importance of the number ofinstitutions is extensive and sufficient prerequisite to a sophisticated system and viable. For exampleinstitutes such as central bank is important in determining a countrys monetary policy, as well as to achievea sophisticated Islamic financial system and viable. 28
  • 29. Future Prospects Islamic Financial Institution in Malaysia Authorities should have specific strategies for the proposal to increase the number of institutions thatoffer Islamic banking is establishment of dual banking system thus allowing conventional banks to offerIslamic banking service in order to ensure the successfulness of restructuring financial institution. So, after inspection, the authorities must agree to the third as the third choice was right for the mostefficient and effective way to increase the number of institutions offering Islamic banking at lower costs andin a short time. This is because the first and second choice is costly due to hold a branch going to cost atotal of RM500, 000, time consuming and requires a large workforce. c) Product and Market DevelopmentProduct and market development is important in enhancing and expanding the economy. Although it isdifficult and complex that includes creative thinking, knowledge, patience, perseverance and businessenvironment that encourages. in conjunction with the strong management team will be required to do so.Islamic banks and the industry should have an employee who is experienced and qualified staff of thoseexpatriates to facilitate transfer of knowledge and expertise. To further promote Malaysia as an Islamic hub, in-depth market structure is important, thereforeresearch and development should be intensified in this area. These Initiatives of running R & D could beundertaken individually by the Islamic banking industry. There are different kinds of contractual relationshipbetween Islamic Banks and Their Customers, and this attributes to distinct risk. A Comprehensive riskmanagement and appropriate mechanisms be developed to mitigate should risk. Besides, it is importantthat Islamic banking industry to pay attention to build a financially sound portfolio. This is to sustain thecompetitiveness of Islamic naming in a dual financial system in Malaysia. In conjunction with that, in ensuring the development of Islamic financial sector in the future, we needplans and strategies more explicit, planned, systematic and consistent in producing more ulama’,intellectuals and intellectual quality and competitiveness. 29
  • 30. Future Prospects Islamic Financial Institution in Malaysia10.0 CONCLUSION Malaysian culture is the one of the unique cosmopolitans as it is composed of Malays, Chinese andIndians culture. Moreover, racial unity and interactions formed a diverse and vibrant society based onsharing mutual respects. This is perhaps an example of a unique society. This has been the main catalystfor Malaysias political stability and growth. All the races in Malaysia have made massive contributions tothe resilient and prosperous socio-political and economic structure in Malaysia. All Malaysian enjoys aactive lifestyle and they have high ambitions, which make them dynamic force in Malaysias economy. Allcitizens’ of Malaysia represents an integral and vital component of Malaysian society and areproud of theiractions and their contributions to Malaysias success.Islamic financial institutions have made significant impact on the development of Malaysian economy. Thegrowth of this financial system is hugely depending on the efforts of government, banking sectors and alsothe trust of consumers. Furthermore, the contributions of Islamic banking and finance to the main sectorsof Malaysia has increased economic growth and Foreign Direct investment (FDI) which indicatesimprovement of the Islamic financial infrastructure in Malaysia may benefit to society and the economicdevelopment and it is important in the long run for economic welfare. Therefore, Islamic financial systemsignificantly and effectively played its main role as financial intermediaries to ensure Malaysia as ainternational Islamic financial hub and the one of the most developed interest-free financial system in theworld.The future prospects of the Islamic financial services industry will be the result of the combined efforts of allthe relevant entities in the financial sector - the industry, the regulators, the market participants and theinternational community. These collective efforts need to be galvanized as a coordinated and concertedeffort to maximize the potential for the industry. Evolving the shared vision and common goal to beachieved will be an important first step. Of greater importance will be the actions that need to be taken tomake this happen. It will be our actions and initiatives taken today that will contribute towards determiningthe future that we aspire. 30
  • 31. Future Prospects Islamic Financial Institution in Malaysia11.0 REFERENCESAtaul Huq Pramanik. (2002). Islam and Development Revisited with Evidences from Malaysia. IslamicEconomic Studies, Vol. 10 No. 1.Dusuki, A. W., & Abdullah, N. I. (2007). Why do Malaysia Customers patronize Islamic Banks?International Journal of Bank Marketing, 142-160.Darwis Abd Razak & Mohd Azhar Abdul Karim. (2008). Development of Islamic Finance in Malaysia: AConceptual Paper. Paper presented at the 8th Global Conference on Business & Economics.El Qorchi, M. (2005). Islamic Finance Gears Up. First published in Finance & Development Vol. 42, No. 4. ,1-7.Hafas Furqany and Ratna Mulyany. (2009). Islamic Banking ang Economic Growth: Empirical Evidencefrom Malaysia. Journal of Economic Cooperation and Development, 30, 59-74.Iqbal, Z. (1997). Islamic Financial Systems. Finance & Development , 1-4.Laldin, M. A. (2008). Islamic financial system: the Malaysian experience and the way forward. HumanomicsVol. 24 No. 3 , 217-238.Markom, R., & Ismail, N. (2009). The Development Of Islamic Banking Laws In Malaysia: An Overview.Jurnal Undang-undang, 13.Muhammad Syukri Salleh & Abdul Fatah Che Hamat. (1997). Equity versus Growth: the MalaysianExperience of the Islamic Financial System under the Dual Systems. USM Journal of Humanomics, Vol. 13No. ¾.Sukmana, R., & H. Kassim, S. (2010). Roles of the Islamic banks in the monetary transmission in themonetary transmission. International Journal of Islamic and Middle Eastern Finance and Management Vol.3 No. 1 , 7-19. 31
  • 32. Future Prospects Islamic Financial Institution in Malaysia 32