ISLAMIC BANKING IN

MALAYSIA
CHAPTER 6
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OBJECTIVES
By end of this chapter student must be able to:
1. Interpret the Islamic Banking concept
2. Explain the need for Islamic Banking in the
financial system
3. Describe the Islamic financial instrument the are
available in Malaysia
4. Compare Islamic banking system to conventional
banking system
5. Explain the implementation of Islamic banking in
Malaysia

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What is Islamic banking?

According to OIC Organization of the Islamic Conference
define the Islamic Banking as the company which
carries Islamic banking business.
Islamic banking business is banking activities based on
Islamic law (Shariah). It follows the Shariah, called fiqh
muamalat (Islamic rules on transactions).
The rules and practices of fiqh muamalat came from the
Quran and the Sunnah, and other secondary sources of Islamic
law such as opinions collectively agreed among Shariah
scholars (ijma), analogy (qiyas) and personal reasoning
(ijtihad).

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GENERAL OBJECTIVE
To implement the
economic and
1 financial principles
of Islam in the
banking industry.

To spread
economic
2 prosperity within
the framework of
Islam.

To create an efficient, progressive

and comprehensive Islamic financial
system that contributes significantly
3 to the effectiveness and efficiency of
the Malaysian financial sector while
meeting the economic needs of the
nation.
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Islamic banking in Malaysia

In Malaysia, the Islamic banking system exists side by
side with the conventional banking system.

In 1993, commercial banks, merchant banks and finance

companies begun to offer Islamic banking products and
services under the Islamic Banking Scheme (IBS banks).
The IBS banks have to separate the funds and activities of
the Islamic banking transactions from the non-Islamic
banking business (conventional banking).

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Islamic banking in Malaysia

Islamic banking in Malaysia began in September
1963 when Perbadanan Wang Simpanan Bakal-Bakal
Haji (PWSBH) was established.

PWSBH was set up as an institution for Muslims to save for

their Hajj (pilgrimage to Mecca) expenses. In 1969, PWSBH
merged with Pejabat Urusan Haji to form Lembaga Urusan
dan Tabung Haji (now known as Lembaga Tabung Haji).
The purpose of the Pilgrims Management and Fund Board ,
to promote and accumulate savings from the Muslims and
coordinate all aspects of pilgrimage activities undertaken by
members.

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ISLAMIC BANKING IN MALAYSIA

The first Islamic bank in Malaysia was established in

1983.

Commercial banks, merchant banks and finance

companies were allowed to offer Islamic banking products
and services under the Islamic Banking Scheme (IBS).
These institutions are required to separate the funds and
activities of Islamic banking transactions from that of the
conventional banking business to ensure that there would
not be any co-mingling of funds.

In 1983, Bank Islam Malaysia Berhad (BIMB) was

established.
Objective:To provide banking facilities and services to
Malaysians in accordance to Islamic Commercial Law
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You can identify an Islamic bank or an IBS bank from the logo
below:

All banking institutions that provide Islamic banking products and services
in banking logo as shown above. Malaysia are required to display the
Islamic

The legal basis for the introduction of banking products along

Islamic principles is the Islamic Banking Act 1983, which came
into effect on 7 April 1983.

to supervise and regulate Islamic banks similar to the case of other

licensed banks.
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ISLAMIC BANKING IN MALAYSIA

Malaysia advocates dual banking, in effect there are 3

categories of banking
1.
2.

3.

Conventional banking
Full-fledged Islamic banks
Conventional banks operating Islamic banking windows
under the Islamic banking scheme (IBS)

In relation to Islamic banking, there have been arguments

in support of both full-fledged Islamic banking as well as
Islamic banking windows

ISLAMIC BANKING IN MALAYSIA

Islamic banking windows

Refers to conventional banks that offer Islamic banking

products and services using their existing infrastructure,
including staff and branches

Full-fledged Islamic bank

Refers to a bank dedicated to only offering Islamic banking

products/services
In Malaysia, a number of these banks are set up as a subsidiary
to conventional banks
Operations and management are clearly separated between
the subsidiary Islamic bank and the parent conventional bank

Full-Fledged Islamic Banks in Malaysia

Local
1.
2.
3.
4.
5.
6.
7.

Bank Islam Malaysia Berhad

Bank Muamalat Malaysia Berhad
RHB Islamic Bank Berhad
Commerce Tijari Bank Berhad
Hong Leong Islamic Bank Berhad
Affin Islamic Bank Berhad
EONCAP Islamic Bank Berhad

Foreign
1.
2.
3.

Kuwait Finance House (Malaysia) Berhad

Consortium led by Qatar Islamic Bank
Al-Rajhi Banking & Investment Corp

Islamic banking windows in Malaysia

Commercial Banks
1. Alliance Bank Malaysia Berhad
2. AmBank (M) Berhad
3. Citibank Berhad
4. HSBC Bank Malaysia Berhad
5. Malayan Banking Berhad
6. OCBC Bank (Malaysia) Berhad
7. Public Bank Berhad
8. Southern Bank Berhad
9. Standard Chartered Bank Malaysia Berhad
Merchant Banks
1. Affin Merchant Bank Berhad
2. Alliance Merchant Bank Berhad
3. AmMerchant Bank Berhad
4. Commerce International Merchant Bankers Berhad

Islamic banking windows in Malaysia

Discount Houses
1.
2.
3.
4.
5.
6.

Abrar Discounts Berhad

Amanah Short Deposits Berhad
CIMB Discount House Berhad
KAF Discounts Berhad
Malaysia Discount Berhad
Mayban Discount Berhad

Development Financial Institutions (DFI) Offering

Islamic Banking Services
1.
2.
3.
4.
5.

Bank
Bank
Bank
Bank
Bank

Kerjasama Rakyat Malaysia Berhad

Simpanan Nasional
Pembangunan Malaysia Berhad
Pertanian Malaysia
Perusahaan Kecil & Sederhana Malaysia Berhad

LIBERALISATION in IBF:
Islamic

finance is an ethical and equitable mode of

finance.
Islamic finance encompasses a wide range of products
comparable to mainstream banking products
Government liberalization allows foreign entity to own
local Islamic banks up to 70%, provided the paid up capital
is increased to USD1 bil this will scale up operations
and expand into global markets
Malaysia:
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full fledged Islamic banks (2 locals and 3 GCCs)

12 Islamic subsidiary (9 local and 3 foreign)

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GOVERNANCE BODIES

Local

Bank Negara Malaysia

Securities Commission

International level
IFSB - Islamic Financial Services Board (IFSB)
AAOIFI - The Accounting and Auditing
Organisation for Islamic Financial Institutions

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WHY ISLAMIC BANKING?

No human effort is completely value-free
Human value are derived from human worldview
There can be errors, loopholes, injustice
Islamic worldview is different from the Western worldview
Principals and practices of conventional banking and finance
inconsistent with the Islamic Worldview

Islam provide a comprehensive solution, its prescriptions

encompasses all aspects of life-shumul
A specific discipline must be addressed with a larger context
holistic approach Islamic Worldview
Islamic banking Banks for All, not limited to
Muslim/Malays. Build on competitiveness, innovative financial
solutions and excellent service delivery.
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WHY ISLAMIC BANKING?

Muslim scholars collectively agreed that interest charges is known
as a form of usury which must be avoided by Muslim.

Muslims throughout the world not been able to avoid interestbased transactions which cover almost all aspects of their lives.
An alternatively banking system which free-interest payment is
necessary in Islamic countries to carter the demand of Muslim
customers.
Muslims now realize how important Islamic way in daily activities
especially in Islamic transaction

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Shariah Principle prohibitions:

Riba - Interest
Maisir - Gambling
Gharar - Uncertainty

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Prohibition : RIBA

Riba, interest, or usury is strictly prohibited in Islam.

The literal meaning of the Arabic word riba is increase,
excess, addition or growth
The Shariah meaning premium that must be paid by the
borrower to the lender along with the principal amount as a
condition for the loan or for an extension in its maturity.

The Holy Quran has clear instructions regarding business and trading
activities as earnings from trade (Bai) is halal but interest (Riba) based
activities are Haraam.

Banking activities are the part of economic activities and Islam

allows Riba-free banking only.

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Prohibition : RIBA

Riba An-Nasiah:

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"That kind of loan where specified repayment

period and an amount in excess of capital is
predetermined." Imam Abu Bakr Hassas Razi
"Every loan that draws profit is one of the forms of
Riba" Sahabi Fazala Bin Obaid
"Every loan that draws more than its actual
amount" Abu Ishaq az Zajjaj

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Prohibition : RIBA

Riba Al-Fadl:

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It involves excess received when two alike

commodities are exchanged.This is explained
further in the hadith:
Abu Sa'id al-Khudri (r) reported Allah's Messenger (p)
as saying: Gold is to be paid for by gold, silver by silver,
wheat by wheat, barley by barley, dates by dates, salt by
salt, like by like, payment being made hand to hand. He
who made an addition to it, or asked for an addition, in
fact dealt in riba. Sahih Muslim
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Prohibition : RIBA

Every excess in return of which no reward or equivalent

counter value is paid
A predetermined excess or surplus over and above the loan
received by the creditor conditionally in relation to specified
time period
A forced increased of value in the medium of
exchange that is loaned.
Quran :
they say, trade is like riba, but Allah has permitted trade and
prohibited riba. 2:275

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Riba and Inflation

Inflation, defined as a continuous rise in prices, can reduce

the value of money. Assume that person X provides a $100
loan to person Y, to be paid back in 12 months time.
However, if prices have increased by 10 per cent during
that time, the value of that $100 will be worth less to the
lender (person X). In such a case, can person X charge an
excess or premium to take into account the loss of value of
money? The Islamic opinion is against the charging of any
premium. Scholars contend that although it is unfortunate
that person X has lost some value, this is not the fault of
person Y (borrower), hence the borrower should not be
burdened with this excess.
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RIBA vs PROFIT

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RATIONALE BEHIND THE PROHIBITION:

Element of exploitation in financing consumption

1.

The rich is able to generate more without exerting much

effort

Inconsistent with Islam on the perspective of debt

2.

Incurring debt and interest is discouraged

Negative effects on credit society

3.

Easy availability of credit cultivates a materialistic society

Banks controller, Customers- enslaved

Elements of injustice in financing productive activities

4.

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Contract done with unequal counter-value

Injustice to debtor- obligated to pay even no profit or loss
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Prohibition : GHARAR

Literally: Deceit, fraud, uncertainty, danger, peril, or hazard that

might lead to destruction or loss.
Technically: Uncertainty and/or ignorance of one/both parties
in a contract over the substance or attributes of the object of
sales, or doubt over its existence and availability at the time of
contract.
An unknown fact or condition. An element which must be
avoided in Islamic banking dealings as excessive gharar may
make the contract null and void.

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For example:
Sale of birds in the air
Sale of fish still in the sea
Sale of unborn animal
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Prohibition : GHARAR

Rationale for prohibiton of gharar:

Gharar may lead to injustice, exploitation and

enmity among contracting parties.
To ensure full consent and satisfaction of both
parties in a contract

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Contract will not valid-without full consent.

Contract valid if certainty, full knowledge, full disclosure and
transparency.

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Prohibition : MAISIR

Definition: Easily obtaining something without effort,

acquisition and wealth by chance.
Applies to all activities where a person wins or losses by
mere chance; gambling.

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Prohibition : MAISIR

The main idea behind the prohibition of gambling

(maisir) in Islam is that money should be earned by
way of work and effort example knowledge and
not by mere pure chance.

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Playing a lottery is one form of gambling.

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Prohibition : MAISIR

Gambling include any activity where a person pays

something of value for the chance to win a prize. When
someone gambles, it will involve three things, namely:

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Prize: anything of value: money, physical items, software

Consideration: what the person must pay to enter
Pure chance: something that is opposite to the pure skill. For example, chess
requires pure skill and slot machine require pure chance. It seems apparent
that the chance factor is the dividing line between gambling and non-gambling
functions with a consideration.
For example, risking $10,000 (i.e. the consideration) in a joint-venture (JV)
project is not gambling because the outcome of the JV is based on knowledge
and market skills.

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COMPARISON BETWEEN IB AND CB

Sources: http://www.academicjournals.org/AJBM Afr. J. Bus. Manage.

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ISLAMIC BANKING INSTRUMENTS

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Mudharabah (perkongsian untung)

Wadiah (simpanan)
Musyarakah (Usaha sama)
Murabahah (Kos tokok)
Ijarah (Sewaan)
Bai Bithaman Ajil (Pembayaran Jualan Tertangguh)
Wakalah (Agensi)
Qardhul Hassan (Pinjaman Ihsan)
Bai al Inah (Perjanjian Jual dan Beli Balik)
Hibah (Hadiah)
Assalam
Ar Rahn
Al Hiwalah
Al Dayn

 CONTINUE

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ADDITIONAL

INFO

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THE ISLAMIC FINANCIAL SERVICES BOARD (IFSB)

The Islamic Financial Services Board (IFSB) is an

international standard-setting organisation that promotes
and enhances the soundness and stability of the Islamic
financial services industry by issuing global prudential
standards and guiding principles for the industry, broadly
defined to include banking, capital markets and insurance
sectors. The IFSB also conducts research and coordinates
initiatives on industry related issues, as well as organises
roundtables, seminars and conferences for regulators and
industry stakeholders.

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The Association of Islamic Banking Institutions Malaysia

(AIBIM) or Persatuan Institusi-Institusi Perbankan Islam Malaysia
was established in 1996 as the Association of Interest Free Banking
Institutions Malaysia.
The objective of AIBIM is to promote the establishment of sound Islamic
banking systems and practices and also aims at promoting and
representing the interests of members and to render where possible such
advice or assistance as may be deemed necessary and expedient to
members.
AIBIM promotes education and training in Islamic banking so as to
upgrade Islamic banking expertise in Malaysia and in pursuing the
above objectives, AIBIM works in co-operation with other similar
associations in the country and elsewhere in the world.
Website: www.aibim.com
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Islamic Banking and Finance Institute Malaysia (IBFIM),

mandated by the nations financial and capital market master plans
to develop human talent for the Islamic financial sector, has made a
number of achievements since its formation in 2001.
The institute, whose stakeholders include Bank Negara Malaysia, the
Islamic banks and takaful (Islamic insurance) operators, is a vital
training institute in Islamic finance, handling about 30% of the Islamic
finance sector manpower annually.
Its management team led by Dr Adnan Alias as its Managing Director
and Chief Executive Officer and is also the Shariah advisor to about
60% of the countrys Shariah-based unit trust funds.
Besides training, IBFIM provides total solutions to its clients through a
comprehensive range of inter-related services, which include business
consultancy and Shariah advisory in Islamic banking, takaful, Islamic
money and capital markets.
more info : www.ibfim.com

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Accounting and Auditing Organisation for Islamic Financial Institutions

(AAOIFI) is an independent industry body dedicated to the development of
international standards applicable for Islamic financial institutions. The
Bahrain-based organisation started producing standards as early as 1993.

AAOIFI standards have been developed in consultation with leading Sharia

scholars, with several counties adopting them. Although AAOIFI standards
are not binding on members, over the last few years the organisation has
made significant progress in encouraging the widespread adoption of the
standards.

Countries where AAOIFI standards are either mandatory or recommended

include: Bahrain, Malaysia, UAE, Saudi Arabia, Lebanon, Syria, Sudan and
Jordan.
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