THE EFFECTIVENESS OF ISLAMIC BANKING IN MALAYSIA The first attempt to establish Islamic Banking was in 1950s start in rural

area of Pakistan. It was when the pious landowners deposit their funds without interest rewards. Credit then was advanced to other poorer landowners for agricultural improvement. Although it was no shortage of borrowers, for the depositors, it was once and for all effort. The depositors took considerable interest on how the money was loaned out. However in Malaysia development of Islamic Banking just began in 1963. In September 1963, Perbadanan Wang Simpanan Bakal-Bakal Haji was established. Perbadanan Wang Simpanan Bakal- Bakal Haji was set up as an institution for Muslim to save their money for Hajj expenses. Sis years later, in 1969, Perbadanan Wang Simpanan Bakal Bakal Haji merged with Pejabat Urusan Haji to form Lembaga Tabung Haji. Only in 1983, about 20 years after Perbadanan Wang Simpanan Bakal- Bakal Haji founded, the first Islamic Banking in Malaysia established with the formation of Bank Islam Malaysia Berhad (BIMB) under Islamic Banking Act 1983. Bank Islam is also become the first stand alone Islamic Bank in Malaysia. Stand alone Islamic Bank meaning that it is an independent financial institution that offers full range of Islamic compliant products and services from retail banking wealth and asset management, corporate banking advisory and capital market trading. There are many examples of stand alone Islamic Banking in this world such as Bank Syariah Mandiri, Bank Muamalat, Al-Rajhi Bank, Dubai Islamic Bank, Al Baraka Banking Group and Kuwait Finance House. In Malaysia, Islamic Banking is provided in dual banking environment. It is the first country in the world that has dual system of banking and finance. This means that Islamic Banking system operates in parallel with the conventional banking system. Since Islamic Banking does not prohibit participation by non-Muslims, its potential for further growth is tremendous. Bank Negara Malaysia Financial Sector Master Plan (FSMP) and MIFC initiatives help spur further the development of Islamic Banking. During the first 10 years of its establishment, Bank Islam Malaysia Berhad (BIMB) was the sole bank given an Islamic banking license to operate in the country. This was to allow Bank Islam to operate in a smooth manner without undue competition that might hinder the progress of Islamic Banking. In 1993, Bank Negara Malaysia set up the Skim Perbankan Tanpa Faedah which was later known as Islamic Banking Scheme (IBS) that allow conventional banks to offer Islamic Windows banking products. Islamic windows specialized set ups within conventional banks that offer Islamic compliant products and services. It generally targeted at affluent customer segments and institutional investor. These institution however are required to separate the funds and activities of Islamic banking transaction from the conventional banking business to ensure that there would not be any co-mingling of funds.

In 1994 Interbank Islamic Money Market was established. This introduced the Islamic Interbank cheque clearing system based on Mudharabah principles where the deficit of clearing account of one Islamic Banking Scheme will be funded by the surplus funds from other Islamic Banking Scheme bank or by Bank Negara Malaysia. In 1997, under Bank Negara Malaysia, National Shariah Advisory Council was set up. It is functioning as advisor to Bank Negara Malaysia. It advices Bank Negara Malaysia on Syariah aspects of the operations of these institutions, as well as on their product and services. In 1999, the second full fledge Islamic Bank arrived as new competitor of Bank Islam Malaysia Berhad named as Bank Muamalat. Bank Muamalat Malaysia Berhad (BMMB) commenced operation 1 October 1999 with a network of 40 branches. In 2001, Bank Negara Malaysia launch of the Financial Sector Masterplan which included a 10 years plan for the development of Islamic Banking and Takaful. Takaful got their first licensed operator as early as 1984. The Malaysian government then issues the Malaysian Government Sukuk the worlds first global sovereign Sukuk. Kumpulan Guthrie Berhad issued the world first global corporate Islamic bond. In year 2002, Islamic Banking and Finance Institute Malaysia was established as the industry owned training and research centre. Only in 2004, conventional banks allowed to establish Islamic subsidiaries and new banking licenses were issued to foreign Islamic Institution such as Kuwait Finance House, Asian Finance Bank and Al Rajhi Bank. However only in Aug 2005 they operate their operation in Malaysia. Today, almost all conventional banks operates Islamic banking window such as RHB Islamic Bank, AmIslamic Bank, OCBC Al Amin, HSBC Amanah and so on. International Currency Business Unit (ICBU) was established in September 2006. ICBU of Islamic bank allowed to conduct wide range of Islamic Banking business under the Islamic Banking Act 1983 with non-residents in international currencies other than Malaysian Ringgit (except currency of Israel). The income arising from the transactions of the ICBU is eligible for tax exemption accorded under the Income Tax Act 1967 for 10 years from the year assessment 2007. In 2009, Corporate Murabahah Master Agreement had launched in a move to boost the Islamic Market. Nowadays, Islamic banking in Malaysia is continuously tremendously well known in universe.