Background of the survey
Malaysia is one of the Muslim states that are committed in non merely developing Islamic banking system but besides a complete Islamic Financial system. The Islamic banking system in Malaysia started in 1983 when the first Islamic bank, Bank Islam Malaysia Berhad ( BIMB ) commenced its operations. It was the aim of the Malayan authorities to develop the Islamic banking system analogue to the conventional system. The construct of Islamic window started in March 1993 when the Central Bank of Malaysia or Bank Negara Malaysia ( BNM ) introduced the Interest-Free Banking Scheme ” . Twenty-one Islamic fiscal merchandises were developed to provide for this strategy with merely three major Bankss participated ab initio.
Banking system in Malaysia is alone in the sense that both conventional and Muslim Bankss are presently runing side by side. The first fully fledged Islamic bank established in the state was Bank Islam Malaysia Berhad ( BIMB ) , which commenced its operations on 1 July 1983.
Acknowledging the increasing demand for Islamic merchandises and services, Bank Negara Malaysia ( BNM ) has introduced a strategy known as ‘Skim Perbankan Tanpa Faedah ‘ . Or ‘Interest-free Banking Scheme ‘ ( frequently knows as Islamic Windowss ) in March 1993. Under this strategy, all conventional commercial Bankss, merchant Bankss and finance companies are given the chance to present Islamic banking merchandises and services to their clients. In 1998, the 2nd full-ledge Islamic bank that is Bank Muamalat was established. From a theoretical position, Islamic banking is different from conventional banking because involvement ( riba ) is prohibited in Islam, i.e. , Bankss are non allowed to offer a fixed rate of return on sedimentations and are non allowed to bear down involvement on loans. ( Beng Soon Chong and Ming Hua Liu, 2009 )
Shariah compliant finance does non let for the charging of involvement payments ( riba ) as merely goods and services are allowed to transport a monetary value. On the other manus, Shariah compliant finance relies on the thought of net income, loss, and hazard sharing, on both the liability and plus side. In pattern, nevertheless, Islamic bookmans have developed merchandises that resemble conventional banking merchandises, replacing involvement rate payments and dismissing with fees and contingent payment constructions. In add-on, renting like merchandises are popular among Muslim Bankss, as they are straight linked to existent sector minutess ( Thorsten Beck, et Al, 2010 )
The cardinal milepost of development of Islamic bank in Malaysia is when BNM allowed the conventional Bankss to set up Islamic subordinates in twelvemonth 2002. This transmutation of Islamic banking Windowss into Islamic subordinates is mandatary of which the subordinates shall come under the administration of Islamic Banking Act 1983 alternatively of BAFIA 1992.
From a structural point of position, Islamic Bankss operate alongside of conventional Bankss in different states and a parallel market for Islamic fiscal services has developed. Deficit and excess units in the economic system have the option to utilize the services provided by each manner of banking. If spiritual underpinnings for the proviso of fiscal services do matter, so the bank patronage will take to transact with fully fledged Islamic Bankss merely ( Rima Turk Ariss, 2010 ) .
In his article published in The Star dated 31 October 2005, Professor Saiful Azhar Rosly, Director of Research at the Malayan Institute of Economic Research ( MIER ) explained that the rationalisation for Islamic bank subordinates is chiefly driven by Shariah demand for greater conformity. For one thing, running interest-bearing and Islamic banking concern under one roof may ask for ambiguities ( gharar ) refering the legitimacy of net incomes generated from the concern. For illustration, in 2010, the Malayan economic system experienced a strong recommencement in growing, entering an enlargement of 7.2 % following the downswing in 2009 Funded chiefly by the interest-bearing female parent bank, the capital injection remains an eyesore to many people in position of the Islamic label it carries.
Before that, in twelvemonth 2004, BNM has issued Islamic banking licence to foreign banking participants to set up Islamic fiscal establishments. Two pioneer foreign Islamic Bankss that had setup their operations in Malaysia were Kuwait Finance House and Asian Finance Bank. Since so, the participants in Islamic banking have mushroomed from a individual monopoly 1980s i.e.
1.3 Problem statement
Many are disbelieving about Muslim Bankss ‘ public presentation as fledglings to the market which are like mushroom germination after the rain. Sing Bley and Kuehn ( 1999 ) , the cognition of conventional banking footings and constructs was higher than was Islamic banking nomenclature. The hapless cognition of Islamic finance rule has been one country of concern in this literature for over 10 old ages ( Omer, 1992 ) . Besides that, the analysis of involvement rate reveal that, finance companies by and large provide the highest involvement rate compared of Islamic bank net income rate, local conventional Bankss and foreign conventional Bankss involvement rate.
On the assets side, Muslim Bankss face a quandary to widen funding on the Profit Loss Sharing ( PLS ) footing to houses in which wide policies, strategic programs, and twenty-four hours to twenty-four hours determinations are mostly controlled by inside professional directors. While under PLS, Islamic Bankss portion fiscal hazard with the adoption houses yet they do non hold any controlling rights. The legal model in which they operate does non acknowledge the particular demands of Islamic Bankss. Therefore a cardinal job is how to do borrowing houses accountable to the Islamic Bankss while keeping the former ‘s freedom, inducements and control over production and investing determinations ( Humayon A. Dar and John R. Presley,2001 ) .
The PLS paradigm, furthermore, topics Muslim Bankss to greater market subject. Muslim Bankss, for illustration, are required to set in more attempt to separate good clients from bad 1s because they have more to lose than conventional Bankss. The Bankss besides need to supervise their investings and borrowers more closely to guarantee true coverage of net incomes and losingss. Islamic bank depositors, moreover, are required to take their Bankss more carefully and to supervise the Bankss more actively to guarantee that their financess are being invested providentially ( Beng Soon Chong and Ming Hua Liu, 2009 ) .
Harmonizing Abdus Samad ( 2004 ) , Muslim Bankss are non-conventional fiscal establishment. Interest, the basis of conventional Bankss, is wholly prohibited under Islamic banking. Muslim Bankss besides operate under double restraints. While operating as a commercial bank, Islamic Bankss obey non merely conventional concern Torahs of the land, but besides the Islamic Torahs. They have to give many profitable investing chances because those are non permitted under the Godhead Torahs of Islam.
It is of import to analyse the bank public presentation, what determines it and how it differs from conventional and Islamic bank public presentation. The different construction and features of conventional and Muslim Bankss on one manus, and the different influence of external factors on these Bankss on the other could take to public presentation differences between the two classs. Empirical analysis of conventional and Islamic bank public presentation will exemplify if the two groups of Bankss perform otherwise and the grounds behind the difference. This may assist clear up the necessary conditions for successful entry of commercial Bankss to commercial markets, and on the other manus, could help in developing a regulative model for Islamic bank entry and the enlargement in Malaysia. The job here is to placing what sorts of factors are impacting the public presentation of the conventional and Muslim Bankss and the comparing between the two banking types. This paper explores the comparative public presentation of Malaysia ‘s interest-free Islamic Bankss and the interest-based conventional commercial Bankss with regard to their concern volume and public presentation by using t-test to fiscal ratios for Islamic and conventional commercial Bankss in Malaysia for the period 2009-2011.
1.4 Research inquiry
The research inquiries of the survey are as follows: –
What determines the public presentations in conventional and Islamic banking?
What are the different and similarities between this two Bankss system?
How it differs from conventional and Islamic bank public presentation?
1.5 Research aim
The aim of this survey is to measure the public presentation of Islamic Bankss as compared to conventional Bankss in Malaysia. The specific aims of this survey are:
To measure the public presentation with the ratio and method by utilizing the motion on fiscal statement of both Bankss.
To analyze the different and similarities between this two Bankss system.
To analyze the differ public presentation of Malaysia ‘s interest-free Islamic Bankss and the interest-based conventional commercial Bankss with regard to profitableness, liquidness hazard, and recognition hazard.
1.6 Scope of research
This research will reexamine the public presentation of the Bankss from 2002 until 2011 i.e. 10 twelvemonth analysis. This research will split those Bankss in Malaysia include local and foreign Bankss as shown in table 1.1 and 1.2 below.
Table 1.1 Lists of accredited commercial Bankss in MalaysiaA
A Commercial Banks
Affin Bank Berhad
Alliance Bank Malaysia Berhad
AmBank ( M ) Berhad
BNP Paribas Malaysia Berhad
Bangkok Bank Berhad
Bank of America Malaysia Berhad
Bank of China ( Malaysia ) Berhad
Bank of Tokyo-Mitsubishi UFJ ( Malaysia ) Berhad
CIMB Bank Berhad
Deutsche Bank ( Malaysia ) Berhad
HSBC Bank Malaysia Berhad
Hong Leong Bank Berhad
India International Bank ( Malaysia ) Berhad
Industrial and Commercial Bank of China ( Malaysia ) Berhad
J.P. Morgan Chase Bank Berhad
Malayan Banking Berhad
Mizuho Corporate Bank ( Malaysia ) Berhad
National Bank of Abu Dhabi Malaysia Berhad
OCBC Bank ( Malaysia ) Berhad
Public Bank Berhad
RHB Bank Berhad
Standard Chartered Bank Malaysia Berhad
Sumitomo Mitsui Banking Corporation Malaysia Berhad
The Bank of Nova Scotia Berhad
The Royal Bank of Scotland Berhad
United Overseas Bank ( Malaysia ) Bhd.
( beginnings: BNM web site, updated September 2012 )
Table 1.2 Lists of accredited Islamic Bankss in MalaysiaA
Affin Islamic Bank Berhad
Al Rajhi Banking & A ; Investment Corporation ( Malaysia ) Berhad
Alliance Islamic Bank Berhad
AmIslamic Bank Berhad
Asiatic Finance Bank Berhad
Bank Islam Malaysia Berhad
Bank Muamalat Malaysia Berhad
CIMB Islamic Bank Berhad
HSBC Amanah Malaysia Berhad
Hong Leong Islamic Bank Berhad
Kuwait Finance House ( Malaysia ) Berhad
Maybank Islamic Berhad
OCBC Al-Amin Bank Berhad
Public Islamic Bank Berhad
RHB Islamic Bank Berhad
Standard Chartered Saadiq Berhad
( beginnings: BNM web site, updated September 2012 )
Note: L = Local
F = Foreign
1.7 Contribution of the Study
This survey will lend to the public presentation of interest-based in conventional Bankss and interest-free in Muslim Bankss literature by offering greater imminent into the Bankss constructions. In add-on, this survey besides will add a comparing is utile in supplying valuable information to relevant parties such as bank clients, bank direction and bank regulators.
The comparing of fiscal steps expressed in footings of assorted fiscal ratios indicates that there is no major difference in profitableness and liquidness between Islamic Bankss and conventional Bankss. The findings besides indicate that Muslim Bankss as fledglings to the fiscal market are making every bit good as conventional Bankss. In add-on, Islamic Bankss are exposed to less recognition hazard compared to conventional Bankss. Their recognition public presentation is superior to that of conventional Bankss. ( Abdus Samad, 2004 )
( Samad and Hasan, 2001 ) happening that the profitableness public presentation of Bank Islam, being the exclusive Islamic bank in Malaysia at that point of clip, was dawdling with the conventional Bankss due to limited concern chances due to spiritual restraint. As a consequence, the bank was more liquid, less hazardous, and more solvent than its conventional opposite numbers.
On overall consequences of Beng Soon Chong and Ming Hua Liu ( 2009 ) , suggest that Islamic banking, as it is practiced today in Malaysia, is non really different from conventional banking, and the alleged benefits of Islamic banking exist in theory merely. There are two of import deductions associated with this determination: First, the cardinal ground for the rapid growing in Islamic banking worldwide during the past decennaries is improbable to be associated with the properties of the Islamic PLS banking paradigm. Alternatively, its rapid growing is most likely spurred by the world-wide Islamic revival since the late sixtiess, which leads to a heightened demand by Muslims for fiscal merchandises and services that conform to their faith. Second, Islamic Bankss in pattern are similar to conventional Bankss, and, as such, should be regulated and supervised in a similar manner.
The consequences of this survey are besides really of import for directors of the Bankss as the public presentation of the bank can be compared to the overall Bankss public presentation. This would be a good index for them to understand their Bankss ‘ public presentation against the industry. Further analysis of fiscal ratios could besides supply a signal and be able to foretell future advancement of their Bankss ‘ state of affairs that heightening the fiscal establishment efficiency and stableness of the Malayan fiscal construction.
1.8 Organization of research paper
This survey consists of three chapters. Chapter one explains the debut of the survey. By and large, it describes about banking system and its public presentation of interest-based on conventional Bankss and interest-free on Muslim Bankss. It besides discusses the job statement, research inquiries, research aims and expected parts of the research. In chapter two, it covers the literature reappraisal on range of Bankss public presentation with or without involvement and most hazardous, liquid and solvency in banking system. Chapter three present the research methodological analysis used in this survey. It is besides includes research hypotheses, informations aggregation and informations analysis methods.
This chapter will present the function of commercial Bankss including the conventional and Islamic banking in Malaysian. Furthermore, this chapter describes about structural differences between conventional and Muslim Bankss. The item account about the overview and development in Islamic banking in Malaysia besides provided in this survey. Finally, the chapter sum-up will sum up all of the literature and will be terminal of the chapter.
The function of commercial Bankss
A commercial bank is a fiscal establishment that accepts demand sedimentations and makes loans and provides other services for the public, provides checking and savings histories.
The functions of the commercial Bankss are considered as a back bone to the endurance of the economic system in the state. They are the chief participants in the fiscal system and the most active sector in the economic system. Some aims of commercial Bankss such as a commercial bank ‘s are to do a net income by interceding between depositors ( rescuers ) and borrowers ( investors ) . In accomplishing this end Bankss requires a good direction squad to enable them to segregate between different degree of liquidness, adulthood, and hazard penchants. As such, the commercial Bankss must be able to measure a borrower ‘s recognition worthiness and proctor public presentation if they are to remain in net income.
However, bank could non get away form moral jeopardy and the hazards of contagious disease consequence that sometimes restrain their ability to do net income and Bankss besides exist in a much regulated environment that are commanding the economic activity, involvement rates, and hazard in order to outdo pull off their depositors ‘ money from the public financess. Besides above, commercial Bankss have payment function by which they conduct payments on behalf of clients. On the other manus, the cardinal bank manages pecuniary system in the state by commanding commercial Bankss and nonbanking fiscal establishments.
As a sample is Malayan Bankss, it is utile if to acquire an overview of Malaysian banking system. The banking system in Malaysia, consisting commercial Bankss, investing Bankss, and Islamic Bankss, is the primary mobilizer of financess and the chief beginning of funding to back up economic activities in Malaysia. The non-bank fiscal mediators, consisting development fiscal establishments, provident and pension financess insurance companies, and takaful operators, complement the banking establishments in mobilising nest eggs and run intoing the fiscal demands of the economic system.
Banks, including Muslim Bankss, operate through a web of more than 2,200 subdivisions across the state. Six Malayan banking groups have presence in 18 other states through subdivisions, representative offices, subordinates and joint ventures. There are besides 21 foreign Bankss which maintain representative offices in Malaysia.
The growing and development of the little, average and micro-enterprise ( SMME ) sector is acknowledged by most involvement groups and policy shapers as being of critical importance to the state ‘s economic system. ( Global China Times, July 14, 2009 ) . Decision of the Finance Ministry of Malaysia proves that commercial Bankss ‘ function in supplying funding to SMME is great to better the state ‘s economic system.
Structural differences between Islamic and conventional Bankss
In order to understand the strength and failing of Islamic Bankss with respect to its public presentation, it is indispensable to cognize the basic environment in which Islamic Bankss operate. It is the difference in environment that makes the Islamic bank unique and distinguished. Harmonizing to the Shariah, Islamic fiscal establishments must be based purely on four basic rules:
All minutess must be involvement free, i.e. , free from riba.
The turning away of economic activities affecting subjugation ( zulm ) .
Activities or minutess affecting guess ( gharar ) must be avoided.
The execution of zakat, the compulsory Islamic revenue enhancement.
No engagement in the production or ingestion of goods and services which are haram ( i.e. illegal from the Islamic point of position ) .
The followers is a treatment of these four rules that make the Islamic banking unique.
The Quran explicitly prohibits riba but does allow trade ( al-Quran, 2: 185 ) . It does non clearly reference whether riba is involvement or vigorish. The deficiency of lucidity led to a contention among the Muslim bookmans in the yesteryear. However, there now seems to be a general consensus that the term riba includes any sum charged over and above the principal. The payment of involvement or receiving of involvement, which is the cardinal rule of conventional banking and funding, is explicitly prohibited in Islamic banking and finance. Therefore, the prohibition of involvement, in payment or reception, is the karyon of Islamic banking and its fiscal instruments, while the charging of involvement in all manners of dealing whether it is in loan, progresss or leasing is the nucleus in the conventional banking. The Islamic banking is non merely interest-free banking. It takes into history issues of gharar, haram, zakat and qare al-uasan.
Gharar is guess or gaming and is forbidden in Islam. Islam allows hazard taking in concern minutess, but it prohibits bad activity and gaming. Any dealing affecting the component of guess like purchasing portions at a low monetary value and selling them at a higher monetary value in the hereafter is considered illegal. Conventional Bankss, on the other manus, have no restraint in funding investing affecting guess.
Zakat is a compulsory spiritual payment or revenue enhancement on the wealth of the rich collectible to the hapless. It is a built in mechanism in Islam for guaranting the redistribution of wealth and the protection of a just criterion of life for the hapless. Zakat is one of the five pillars of Islam. Each Islamic bank must set up a zakat fund and pay zakat on the net incomes earned. The payment of zakat is in add-on to any conventional revenue enhancement imposed ( if the authorities is non-Islamic ) . Therefore, the Islamic bank wages ‘dual’taxes – zakat and corporate concern revenue enhancement. The interest-based conventional Bankss, on the other manus, are subjected to merely corporate concern revenue enhancement, and therefore have particular advantage over the Islamic bank.
Islamic moralss of investing
In Islam, investing in production and ingestion is guided by rigorous ethical codifications. Moslems are non permitted to put in production, distribution and ingestion endeavors involved in intoxicant, porc, chancing, illegal drugs, etc. , even though these endeavors may be profitable. Supplying financing for such activities is illegal in Islam. Hence, it is out for an Islamic bank to finance activities or points that are non permitted by the Shariah. The restriction of investing and funding is extended to cover any activity or concern which may be harmful to the person or the society. Therefore, financing investing for the production or ingestion of baccy, intoxicant or erotica is besides prohibited. This limitation provides restriction on the profitableness of the Islamic Bankss. On the other manus, conventional Bankss do non confront any such restraint in their funding investings.
Therefore, Islamic Bankss face restraints and operate in a non friendly environment in most of the Muslim states. One should maintain the implicit in differences in head in order to do a just comparing between the Islamic and the conventional Bankss.
For the involvement of the readers, the alone characteristics of the conventional banking and Islamic banking are shown in footings of a table 2.1 as shown below: –
Table 2.1 The characteristics of the conventional banking and Islamic banking
1. The maps and runing manners of conventional Bankss are based on to the full manmade rules.
1. The maps and runing manners of Muslim Bankss are based on the rules of Islamic Shariah.
2. The investor is assured of a preset rate of involvement.
2. In contrast, it promotes hazard sharing between supplier of capital ( investor ) and the user of financess ( enterpriser ) .
3. It aims at maximising net income without any limitation.
3. It besides aims at maximising net income but capable toA ShariahA limitations.
4. It does non cover withA Zakat.
4. In the modern Islamic banking system, it has become one of the service-oriented maps of the Islamic Bankss to be aA ZakatA Collection Centre and they besides pay out theirA Zakat.
5. Lending money and acquiring it back with intensifying involvement is the cardinal map of the conventional Bankss.
5. Engagement in partnership concern is the cardinal map of the Islamic Bankss. So we have to understand our client ‘s concern really good.
6. It can bear down extra money ( punishment and compounded involvement ) in instance of defaulters.
6. The Muslim Bankss have no proviso to bear down any excess money from the defaulters. Merely little sum of compensation and these returns is given to charity. Rebates are given for early colony at the Bank ‘s discretion.
7. Very frequently it consequences in the bank ‘s ain involvement going outstanding. It makes no attempt to guarantee growing with equity.
7. It gives due importance to the public involvement. Its ultimate purpose is to guarantee growing with equity.
8. For interest-based commercial Bankss, borrowing from the money market is comparatively easy.
8. For the Islamic Bankss, it must be based on a Shariah approved implicit in dealing.
9. Since income from the progresss is fixed, it gives small importance to developing expertness in undertaking assessment and ratings.
9. Since it portions net income and loss, the Islamic Bankss pay greater attending to developing undertaking assessment and ratings.
10. The conventional Bankss give greater accent on credit-worthiness of the clients.
10. The Muslim Bankss, on the other manus, give greater accent on the viability of the undertakings.
11. The position of a conventional bank, in relation to its clients, is that of creditor and debitors.
11. The position of Islamic bank in relation to its clients is that of spouses, investors and bargainer, purchaser and marketer.
12. A conventional bank has to vouch all its sedimentations.
12. Islamic bank can merely vouch sedimentations for sedimentation history, which is based on the rule ofA al-wadiah, A therefore the depositors are guaranteed refund of their financess, nevertheless if the history is based on the mudarabah construct, client have to portion in a loss place.
Based on the characteristics of conventional and Muslim Bankss presented above, it is noted that Islamic Bankss face steep challenges in banking industry as the Bankss have to give many concern chances that do non follow with the Shariah demands. In add-on to the above, Muslim Bankss must obey non merely the Islamic Torahs, but besides the conventional concern Torahs of the land.
Harmonizing Muhammad Hanif ( 2011 ) , Islamic Financial Institutions ( IFIs ) are runing in the same society where conventional Bankss are runing and execute all those maps which are expected from a fiscal establishment. IFIs are helping concern universe by supplying all the services required to run the economic system swimmingly, nevertheless, the doctrine and operations are different. Any fiscal system is expected to help in running the economic system by supplying the undermentioned services grouped in two headers. First, nest eggs mobilisation from rescuers to enterprisers and 2nd, proviso of general public-service corporation services including transportation of financess, facilitation in international trades, consultancy services, safekeeping of valuables, and any other service for a fee. There is no limitation on proviso of such services by IFIs as for the service is non against the Shariah. However there exists difference in mechanism of financess mobilisation from rescuers to entrepreneurs as described following. Savings mobilisation consists of two stages ‘ i.e. accepting sedimentations and widening funding and investings.
Deposits are collected from rescuers under both type of establishments for wages irrespective a bank is runing under conventional system or Islamic system. The difference lies in understanding of wages. Under conventional system wages is fixed and predetermined while under Islamic sedimentations are accepted through Musharakah and Mudarabah where wages is variable. Under conventional banking return is higher on long term sedimentations and lower for short term sedimentations. Same is the pattern in Islamic banking to portion net income with depositors. Higher weight for net income sharing is assigned to long term sedimentations being available to bank for puting in longer term undertakings giving superior returns and lower weight for short term sedimentations which can non be invested in long term undertakings. The lone difference in conventional and Islamic system lies in sharing of hazard and wages. Under conventional system entire hazard is born by the bank and entire wages belongs to it after serving the depositors at fixed rate while under Islamic system hazard and honor both are shared with depositors. Reward of depositors is linked with results of investings made by IFIs. Under Islamic fiscal system merely those IFIs will be able to roll up sedimentations who can set up trust in the eyes of multitudes therefore taking to optimum public presentation by fiscal industry. So for IFIs working in rich person succeeded in set uping their credibleness in the eyes of rescuers as depicted an increasing tendency of sedimentations aggregation.
Financing and Investings
The 2nd stage in nest eggs mobilisation procedure is extension of recognition installation to concern and industry for return. Both types of establishments ( Islamic and conventional ) are supplying funding to productive channels for wages. The difference lies in funding understanding. Conventional Bankss are offering loan for a fixed wages while IFIs can non make that because they can non bear down involvement. IFIs can bear down net income on investings but non involvement on loans. In conventional banking three types of loans are issued to clients including short term loans, overdrafts and long term loans. Muslim Bankss can non publish loans except involvement free loans ( Qarze Hasna ) for any demand nevertheless they can make concern by supplying the needed plus to client.
Overdrafts/Credit Cards etc.
Conventional Bankss offer the installation of overdrawing from history of the client on involvement. One of its signifier is use of recognition card whereby bound of overdrawing for client is set by the bank. Credit card provides double installation to client including funding every bit good as installation of fictile money whereby client can run into his demand without transporting hard currency. As for installation of funding is concerned that is non offered by Islamic Bankss except in the signifier of Murabahah ( which means IFI shall present the coveted trade good and non the hard currency ) nevertheless installation to shop/meet demand is provided through debit card whereby a client can utilize his card if his history carries recognition balance. Under conventional banking a client is charged with involvement once the installation availed nevertheless under Murabahah merely net income is due when the trade good is delivered to the client. Furthermore in instance of default client is charged with farther involvement for the excess period under conventional system nevertheless excess charging is non allowed under Murabahah. Third under conventional system client can avail the chance of rescheduling by come ining into a new understanding to pay involvement for extended period which is non the instance under Murabahah. IFIs can claim merely the original receivable sum agreed in initial contract. Another practical issue under Murabahah is how to cover with knowing defaulters. Different options are lying with IFIs including to blacklist the defaulter for any farther funding installation, to qualify in the contract that in instance of default all installments will be due at one time, to qualify in the contract a punishment shall be imposed but the same shall non organize income of IFIs instead it will travel in charity ( Usmani, 2002 ) .
Short term loans
Short term and average term loans are provided to client to run into on the job capital demands of house by conventional Bankss. Working capital is required by houses to put in stock lists and histories receivables and run into the disbursals. As for stock list investing is concerned that is provided by Muslim Bankss through Murabahah. As for meeting of twenty-four hours to twenty-four hours disbursals of concern is concerned funding is provided through engagement term certifications where by net income of a certain period ( e.g. one-fourth, six month, one twelvemonth ) is shared by IFIs on prorate footing. However financing through engagement term certifications is non every bit easy as a short term loan from conventional bank due to put on the line involved for IFIs in the dealing. Firm seeking short term installation from IFIs has to turn out the viability of the project/business to the satisfaction of investor. For run intoing the working capital demands of non-profit-making organisations to day of the month there is no agreement under Islamic fiscal system. Personal ingestion loans are besides non issued by IFIs how of all time any person of sound fiscal place can get anything for his personal usage under Murabahah funding whereby a certain per centum of net income is added on cost by IFIs. Murabahah funding is really utile for short to medium term fiscal demands of business/nonprofit organisations and persons. Murabahah funding is plus based funding and anyone can bespeak to an IFI for proviso of an plus by and large used for Halal ( lawful ) intents. By default under Islamic fiscal system IFIs can non impart hard currency for involvement ( lone exclusion is Qarze Hasna – Charity loan ) . One of the characteristics of Murabahah is in instance of hold in payment by client IFI can non inquire for excess sum as clip value of money like conventional Bankss. However punishment is imposed on defaulter if stipulated in original contract of Murabahah duly signed by the client but same can non be included in the income of IFI. This punishment must be spent for charitable intents. Under Murabahah strategy of funding installation is linked with assets which leads to economic stableness and creates linkage between existent and fiscal sector. It is non zero sum game because public-service corporation is created through services and merchandises and non by mere constructing the blocks of wealth through covering in paper money. Although Murabahah is being used by IFIs successfully and have succeeded in run intoing short to medium term demands of houses by supplying a successful replacing of conventional loans yet certain differences exist in both type of funding. First is one can non acquire hard currency under Murabahah. Second plus is purchased by IFI ab initio so transferred to client hence IFI participate in hazard. Third refinancing installation is non available under Murabahah. Fourth in instance of default monetary value of the trade good can non be enhanced nevertheless punishment may be imposed if stipulated in original contract of Murabahah nevertheless same can non be included in income of IFI. Fifth merely those assets can be supplied by IFIs under Murabahah whose general and/or intended usage is non against the injunctions of Shariah ( e.g. supply of a machine to bring forth spirits )
Medium to long term loans
Medium to long-run loans are provided for purchase or edifice of fixed assets by houses to spread out or replace the bing assets. Under Islamic fiscal system demand of houses and persons are fulfilled through Murabahah, Bai Muajjal, and Istasna. Another funding option for long-run funding is profit sharing under Musharakah and Mudarabah. Although funding under Murabahah, Bai Muajjal and Istasna is really much expression like conventional loans with the lone difference of proviso of plus and non hard currency to client nevertheless differences exist in the contracts which alter the nature of hazards and returns. Financing under Musharakah and Mudarabah is disputing for IFIs and houses as good. Under Shariah based funding strategies houses have to turn out the viability/profitability of the project/business to the satisfaction of IFIs to acquire the finance because hazard of losing the sum is involved.
Renting is comparatively recent beginning of funding whereby usufruct of an plus is transferred to lessee for in agreement sums of leases. Under renting ownership may or may non be transferred. Same installation is provided by IFIs under understanding of Ijara. Under Ijara plus is provided to client for usage with out transportation of ownership for a specific period of clip in exchange for in agreement leases. Ownership of plus can be transferred to client through common understanding at the completion of lease term. All ownership hazards are born by IFIs during Ijara term of office. Certain differences exist in the dealing under both systems. First is rental under Ijara are non due until plus is delivered to the leaseholder for usage. Second extra rent can non be demanded in instance of default except a punishment ( if stipulated in original contract of rental ) which is non the income of IFI. Third during period of major fix rent can non be demanded by IFI. Fourth if plus is lost or destroyed IFI can non claim farther installments therefore all hazards of ownership are born by IFI.
Agricultural loans include both types of loans short-run every bit good as long term. Short-run loans are required by husbandmans for seeds and fertilisers and long-run loans are required to develop extra lands and purchase of equipments. Normally husbandmans return these loans after selling the finished harvests. Conventional Bankss are supplying recognition installation by bear downing involvement. Same installation is provided by IFIs to the husbandmans under Bai Salam, Murabahah, Musharakah, and Mudarabah. Under Bai Salam hard currency is provided to husbandmans for purchase of seeds and fertilisers nevertheless this is non loan instead purchase of finished harvests to be delivered by husbandmans. For purchase of equipments Murabahah installation is used and for development of extra land Musharakah and Mudarabah is used by IFIs. To acquire finance for land development husbandmans have to convert the IFIs about profitableness of the venture due to put on the line involved in the dealing.
Housing finance/Mortgages is the more secured signifier of funding for both conventional Bankss and IFIs. Under conventional system loan is provided for involvement while under Islamic fiscal system installation is provided through decreasing Musharakah. Under decreasing Musharakah house is purchased jointly by IFI and client. IFI rents out its portion in belongings to client for an in agreement sum of rent. Share of moneyman is divided in units of little denomination. Customer pays the installments to IFI consist of leases plus purchase monetary value of a unit. Stake of client in belongings is increasing while of IFI is diminishing with payment of every installment. Finally with the payment of last installment interest of IFI ranges to zero and belongings is transferred in the name of client. Decreasing Musharakah theoretical account can assist out in avoiding the existent estate crisis because when market value of belongings lessenings both IFI and client suffers harmonizing to their portion in belongings and whole load is non shifted on client entirely. Hijazi, & A ; Hanif ( 2010 ) have raised certain inquiries about the bing pattern of IFIs working and demands to be addressed by policymakers, Shariah boards and direction of IFIs.
In order to keep liquidness conventional Bankss have many avenues including authorities securities, shorter term loans and money at call and short notices, renting companies ‘ bonds, investing in portions etc. Interestingly compulsory modesty care by conventional Bankss with cardinal Bankss is besides rewarded in the signifier of involvement. Conventional Bankss can besides make liquidness by publishing the bonds against their receivables. Commercial Bankss are besides protected by cardinal bank by supplying liquidness in showery yearss for involvement. Interbank sedimentations are besides rewarded in the signifier of involvement by commercial Bankss. For IFIs avenues are really limited to make needed liquidness at the same clip to gain some gross by puting in short term and liquid securities. IFIs can non put in authorities securities, short term loans, bonds and money at call and short notices because of involvement based minutess. Mandatory modesty with cardinal bank is maintained by IFIs but they are non rewarded like conventional Bankss. Looking towards cardinal bank in showery yearss to keep liquidness is besides non as straightforward due to involvement demand of cardinal bank. IFIs can non demand involvement on interbank sedimentations. As for investing in market able securities are concerned once more IFIs are non free to put in any equity security due to two grounds. First Halal concern of the implicit in house is required. Second fiscal operations of implicit in house should be involvement free. Keeping in position the laterality of conventional banking and bing concern patterns one can reason safely that a really negligible figure of houses meet both conditions. IFIs can put merely in those securities which are declared Shariah compliant securities through filtering of Shariah conformity standards.
Table 2.2 below shows the figure of local Bankss and finance companies in 1980s until late ninetiess that was the anterior to the amalgamation between the commercial Bankss and several finance weaponries.
Table 2.2 Financial establishment in Malaysia in 1980s until late ninetiess
Fiscal establishments 1980 1990 1999 2009
Commercial Bankss 21 22 21 22
Finance companies 47 45 23 28
Muslim Bankss – 1 2 15
Entire 68 68 46 65
( beginning: Annual Report BNM 1999 and monthly statistical bulletin 2009 )
On 14 February 2000, BNM has confirmed its blessing of 10 big banking groups with the acquirers and their several marks ( Rubi, 2007 ) . Each groups consisted of at least a commercial bank, a finance company and a merchandiser bank.
On 31 May 2006, Bumiputra-Commerce Holdings Berhad, and Southern Bank Berhad have merged their concerns and marked as the Malaysia ‘s concluding and largest domestic banking in history. The new merged entity is renamed as CIMB Bank Bhd.
Overview on Islamic banking in Malaya
In Malaysia, Islamic banking is provided in double banking environment. This means that the Islamic banking system operates in analogue with the conventional banking system. Since Muslim banking does non forbid engagement by non-Muslims its possible for farther growing is enormous.
The Islamic Banking Act 1983 defines Islamic banking concern as banking concern whose purposes and operations do non affect any component which is prohibited by the faith of Islam. On the other manus, Ali and Sakar ( 1995 ) has defined Islamic Bankss as fiscal establishment whose statues, regulations and processs expressly province that its committedness to the rule of Shariah and to the forbiddance of the reception and payment of involvement on any of its operations. Therefore, Muslim Bankss are besides commercial Bankss, which are options to the conventional banking system and guided by chiefly some cardinal spiritual rules.
In full-fledge Islamic subdivision is merely allowed to:
Accept and withdraw sedimentation from conventional history
Accept payment for the conventional loan
In the words, in add-on to offerings Islamic merchandises and services, full-fledge Islamic subdivisions shall merely be used as bringing channels for conventional banking minutess ( if any ) .
2.4 Development of Islamic banking in Malaya
The journey of Islamic banking in Malaysia began with the constitution of Bank Islam Malaysia Berhad ( BIMB ) , which commenced its operations on 1 July 1983. During the first 10 old ages of its operations, the bank was given a privilege to be the exclusive Islamic bank runing in Malaysia as to let the bank to run in a smooth mode without undue the competition that might impede the advancement of Islamic banking.
In March 1993, Bank Negara Malaysia ( BNM ) has allowed all commercial Bankss, merchant Bankss, and finance companies to offer Islamic merchandises and service via strategy known as ‘Skim Perbankan Tanpa Faedah ‘ or ‘Interest-free Banking Scheme ‘ ( frequently known as Islamic Windowss ) . The 2nd full-fledge Islamic bank i.e. Bank Muamalat commenced its operations on 1 October 1999. Today, in add-on to Bank Islam and Bank Mualmalat, all the local conventional Bankss with Islamic banking Windowss have now migrated their Muslim operations to full accredited Islamic bank position as shown in table 2.3 below.
Table 2.3 List of Islamic subordinate Bankss and their parent bank
Islamic subordinate bank
Commence-ment day of the month
Affin Bank Bhd
Alliance Bank Malaysia Bhd
AmBank ( M ) Bhd
CIMB Bank Bhd
Hong Leong Bank Bhd
Malayan Banking Bhd
Public Bank Bhd
RHB Bank Bhd
Affin Islamic Bank Bhd
Alliance Islamic Bank Bhd
AmIslamic Bank Bhd
CIMB Islamic Bank Bhd
Hong Leong Islamic Bank Bhd
Maybank Islamic Bhd
Public Islamic Bank Bhd
RHB Islamic Bank Bhd
1 April 2006
1 April 2008
1 May 2006
8 March 2005
28 March 2005
1 January 2008
1 Nov 2008
1 March 2005
However, to a certain extent, the Islamic subordinate bank is besides sharing the same resources, system, forces, platform including subdivisions and selling schemes with the parent bank. In recently May 2011, EON Bank Group, dwelling of EON Bank Berhad, EONCAP Islamic Bank Berhad and MIMB Investment Bank Berhad are now portion of Hong Leong Bank Group and non listed as bank in Malaysia any longer, but it will look in Hong Leong Bank Berhad study as a portion of Hong Leong Bank Berhad..
With the liberalisation of the fiscal system, BNM has besides issued Islamic banking licences to foreign banking participants to set up Islamic fiscal establishments since 2004 as shown in table 2.4 below.
Table 2.4 List of foreign Muslim Bankss in Malaya
Beginning day of the month
Al Rajhi Banking & A ; Investment Corporation ( Malaysia ) Berhad
Asiatic Finance Bank Berhad
HSBC Amanah Malaysia Berhad
Kuwait Finance House ( Malaysia ) Berhad
OCBC Al-Amin Bank Berhad
Standard Chartered Saadiq Berhad
16 October 2006
28 November 2005
26 February 2008
25 August 2005
21 May 2008
30 June 2008
With that Malaysia has a sum of 16 Muslim Bankss as at 31 December 2011 which made her one of the states with highest figure of Islamic Bankss in the universe.
Table 2.5 Summary of presence Islamic Bankss in Malaya
No of Bankss
Local full-fledge Islamic Bankss
Local Islamic subordinate Bankss
Foreign Islamic Bankss
In drumhead, Malaysia presently has 43 commercial and Muslim Bankss i.e. 27 commercial Bankss and 16 Muslim Bankss as shown in table 1.1 before.
The cardinal component of Islamic banking is non merely the involvement free reception and usage of financess. One of the most of import elements of Islamic banking or finance is the construct of net income and loss sharing. Based on the net income and loss sharing rules, there are assorted types of Islamic fiscal instruments available in the market. Some of the instruments are equity like contracts and some of them are debt like contracts. Musharakah ( partnership ) and mudharabah ( trust funding ) are the equity like merchandises. On the other manus, the debt type contracts merchandises are murabahah ( cost-plus funding ) , ijarah ( renting ) , bay bithaman ajil ( deferred payment funding ) , istisna’a ( progressive payment ) and qare al-uasan ( benevolent loan ) . There is a big literature available as to how these fiscal merchandises work and can replace the proviso of involvement ( Siddiqi, 1983a ; Ahmad, 1984 ; Iqbal and Mirakhor, 1987 ; Ahmad, 1987 )
Today, Malaysia is widely believed to hold the most developed Islamic fiscal system in the universe that operates side by side with a conventional banking system. Besides the Interest-free Banking Scheme, Malaysia has a well-developed Islamic interbank money market, Muslim authorities debt securities market, and Islamic insurance market. The Islamic interbank money market, introduced in January 1994, allows Islamic banking establishments to merchandise in designated Islamic fiscal instruments among themselves.
The Mudarabah Interbank Investments ( MII ) mechanism, furthermore, allows a shortage Islamic banking establishment to obtain investing from a excess Islamic banking establishment on a mudarabah ( net income sharing ) footing. The Government Investment Issues ( GII ) market, which was introduced in 1983, is the Islamic equivalent of a conventional Treasury measure and bond market. Islamic insurance, or takaful, was foremost introduced in 1985 when the first takaful operator was established to carry through the populace ‘s demand for insurance merchandises that are Shariah compliant.
Although Islamic banking is said to hold made important inroads in Malaysia, some find that, in pattern, the acceptance of the PLS paradigm of Islamic banking in Malaysia has been much slower on the plus side than on the liability side. Table 1 provides a dislocation of the types of Islamic funding and Islamic sedimentations in Malaysia. Entire funding in the Islamic banking sector sums to RM57.9 billion as of the terminal of 2004. The Islamic banking sector, in general, has been spread outing much more quickly than the conventional banking sector. This has resulted in an enlargement of the market portion for Islamic funding to 11.3 % of entire banking sector funding as of the terminal of 2004 ( Beng Soon Chong and Ming Hua Liu, 2005 ) .
2.5 Chapter sum-up
This chapter has summarized the journey of the development of Malayan banking industry every bit good as foregrounding the development of Islamic banking in this state. This chapter besides reiterates the relationship between conventional bank and Islamic subordinates every bit good as indicating out the distinguish characteristics. In drumhead, Islamic banking has surpassed the infant phase as their foundation has been built for more than two decennaries in Malaysia. In fact, Islamic banking has emerged as quickly turning alternate system of fiscal direction in Muslim states every bit good as in the western universe.