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The Seeks and Objectives of Islamic Bank

Islamic banking is becoming ever more popular and performs a dominant role in the financial services sector in Malaysia. Regarding to latest statistics shown, the Muslim population of Malaysia is around 25 million. There is certainly a strong demand and strong growth potential in this sector. In Malaysia, the banking sector is principally dominated by the traditional bank operating system whereby interest is not being prohibited. It is because the Islamic bank operating system is relatively new and there are inadequate regulations at the moment to govern them. If these obstacles are being solved, the Islamic Banking sector will blossom given the effect of Malaysia in the international Muslim community.

The primary aim of this research is to examine and understand comprehensive the development of Islamic banking in the world of finance. This little bit of research can be split into three parts. The first section looks at significant dissimilarities between conventional banking and Islamic bank. Products offered by these financial institutions will be marked to comparison. The next section looks at the way the practice of Islamic bank started and exactly how it has surfaced to become a vial force in the economy. The final area of the research will give attention to how the Islamic banking institutions penetrated the Malaysian market and the obstacles faced.

1. 1 Structure of Dissertation

This dissertation is divided into a few subject areas and each subject matter covers different regions of research. That is to give visitors a clearer view of the study and make it more user-friendly. It is well thought and designed to ensure the smooth circulation of the reading. The composition of the dissertation can be summarized as follows:

Chapter 1: This chapter describes the goals and objectives of this research.

Chapter 2: This section discusses the rules and basic principles of Islamic banking

Chapter 3: This chapter explains in complete the state of hawaii and opportunity of Islamic banking industry in Malaysia. I've also brought up to targets and roles the Malaysia International Islamic Financial Centre Initiatives performs in the industry.

Chapter 4: Research methodologies and strategies that were being adopted because of this paper was mentioned.

Chapter 5: I've designated two Islamic banks in Malaysia for hand and hand comparison. I have drawn up a table to compare their financial performance and position within the last 2 yrs.

Chapter 6: I've interviewed two Islamic bankers from Malaysia. In addition, I have also provided my personal analysis with their answers.

Chapter 7: Competition and globalization of the Islamic bank industry. Moreover, I've also talked about opportunities and difficulties faced on the planet and in Malaysia.

Chapter 8: A listing of the paper was included with recommendations and limitations to research.


So, precisely what is Islamic Bank? Islamic Bank is banking predicated on Islamic regulations (Shariah). The Shariah principles are derived from the Quran and the Sunnah (sayings of Prophet Muhammad). Additionally, secondary resources of Islamic laws such as thoughts collectively agreed among Shariah scholars, analogy and personal reasoning are also used in the guidelines and methods of Islamic banks (Al-Omar, 1996).

The research then looks at the distinctions between conventional banking and Islamic bank. There governing concepts of Islamic lenders are:


Absence of interest-based deals. Charging appealing is prohibited under Shariah key points. Money itself does not have inherent value and should not be used to create additional money. Wealth can only just be produced through respectable trade and investment.


Acts of speculation are not accepted under Islamic rules. For instance, buying goods now at cheap in the trust of providing them at higher price in future. For the reason that speculators make private benefits at the expense of society most importantly.


Introduction of Islamic taxes for the purpose of wealth circulation so that each Muslim is guaranteed a fair quality lifestyle.


It is forbidden for Islamic banks to fund activities forbidden in Islam such as prok meats and alcoholic beverage. To be able to ensure that the trading activities do not contradict with Shariah concepts, all Islamic bankers are required to set up Shariah Committee, who acts as advisor to the finance institutions.

On the other hands, conventional banks bill interest on deals. These passions are widely viewed as price of credit. Furthermore, regular banks focuses on 'elimination' of dangers and therefore do not promote any liabilities with the customer.

(Shape 1)

Islamic Loan provider Vs Conventional Bank

Based on Shariahprinciples.

Based on best economical principles.

Bank should not take advantage of borrower. No interest recharged.

Charges interest to mirror price of credit.

Does not allow engagement in haramactivities such as pork meats and liquor.

Aims at increasing profit without limitations other than conformity with relevant regulatory frameworks.

Intoduction of zakat.

Non-existence of zakat.

Promotes risk writing between providers of credit and borrower.

Interest is assured to providers of credit. No liabilities borne by the lender.

Emphasis put on viability and feasibility of assignments.

Emphasis put on credit-worthiness of customers.

Only provide warrant for deposit bill (al-wadiah). If funds located under mudarabah accounts, customers shares loss or profit incurred by bank or investment company.

Provides guarantee to all its depositors.

www. learn islamicfinance. com

2. 1 Fundamentals of Islamic Bank & Finance

Islamic commercial legislations is based on a few major key points. They'll be discussed in thorough the following:

Musharakah (Collaboration Finance)

Musharakah is a agreement in which the bank and your client contribute jointly to the capital of a specific project or package to produce a profit. Therefore, hazards of profits and deficits are being distributed between both of these parties according to conditions and conditions stipulated in the deal. This basic principle exposes bank or investment company to the potential risks of the job, quite simply protecting the pursuits of the community. This will prevent banking institutions from yielding their unfair impact and sells drawback products to clients.

Mudarabah (Trust Financing)

Mudarabah is a contract where the finance institutions provides all the administrative centre required whilst the spouse contributes in conditions of skills, encounters and efforts. The lender will get a pre-determined share of income as agreed by both get-togethers after commencement of the project. The major difference between mudarabah and musharakah is the fact in this case, the lender bears all financial reduction whilst the client moves unrewarded. Therefore, additionally it is the bank's duties to evaluate the feasibility and viability of the job. Consequently, it is vital for the bank to have a good and credible credit system to judge all its exposures on these jobs. In short, this principle encourages individuals to take part in financial activities In addition, it gives individuals without sufficient resources an opportunity and platform to prove themselves in the population.

Murabaha (Cost-plus Financing)

Murabaha is a agreement in which the bankers informs their consumer about the acquisition price of certain goods and products and sells them with a margin. It requires the lender to declare a genuine price of acquisition. It is one of the most common principles used in Islamic bank operating system to promote interest-free transactions. It really is widely used in asset financing and both product import and export.

Bai-Mua"jjal (Deferred Payment Sale)

It is a contract where the seller markets a certain goods or products to the buyer at an agreed set price to be paid later at a particular date by the customer. In short, this is a sales on credit. The bank merely serves as the financier by deferring the receipt of the deal price of goods it offers.

Ijara (Leasing)

In this circumstance, the bank buys capital equipment or property and leases it out under instalment to clients. Very much like conventional leasing, the client gets the option to purchase the goods by the end of the lease period. The fact that there is real good to be financed means that it is Shariah compliant. An extremely common product implementing this theory is Islamic mortgage whereby the buyer buys the house with an instalment basis.

Qard Hassan

Islamic teachings promote brotherhood between Muslims. Qard Hassan sometimes appears as a gratuitous loan that helps fellow Muslims who need financial assistance. It could be defined as financing to be repaid at a later time without incurring any pursuits. Relating to Rob (1992), Islamic finance institutions may raise cash through deal of shares to general population and main first deposit accounts. Therefore, the lender has a responsibility to give a helping side to those in anxious situation without taking of these advantaged position.

2. 2 Compatibility of Islamic Bank with Conventional Banking

Islamic banking system has very similar features to normal bank except that Islamic lenders operate in compliant to Shariah laws and regulations and principles. Both banking systems have common features and common products. The primary distinctions being prohibition of hobbies being incurred and showing of gains and loss between finance institutions and their clients (Abdur Rahim, 2009). They may have the same targets except interpretation appealing. Islamic banks belong to realms of the financial world as well. They make an effort to ensure almost all their operations adhere to Shariah laws yet at the same time conform to guidelines place by international bodies such as International Accounting Standards Panel and Audit Methods Board. This is to ensure they stay relevant to the population and at the same time conform to their religious key points. Islamic banking companies sell products such as mortgage loans, personal savings accounts, insurance which is also sold by all standard banks across the world. Relating to Nienhaus (1995), Islamic banking institutions offer facilities more or less exactly like conventional banking companies, in conformity with the welfare key points of Islam.

3 Books REVIEW

A books review is an activity in which printed articles or information are examined as part of the research for the planning of an dissertation. For the purpose of this project, I've compiled information from books and articles from various sources. I have analyzed the idea of Islamic banking, having limited understanding about this topic recently. Further, I have also included talk about the introduction of Islamic banking on the globe, and in particular, Malaysia. This paper allows readers to truly have a good knowledge of Islamic bank in general. It gives readers the possibility to analyze about Islamic banking in greater detail when the interest of this industry gathering strong momentum. That is of particular importance because Islamic banking has an enormous impact of the world economy due to strong effect of the oil-rich Gulf State governments.

3. 1 Introduction

Since a few decades ago, Islamic bank has surfaced as a new reality on earth market. Its philosophies and guidelines are however, not new, having been layed out in the Holy Qur'an and the Sunnah of Prophet Muhammad (p. b. u. h. ) more than 1, 400 years back. The emergence of Islamic banking is often related to the revival of Islam and the desire of Muslims to live all aspects of their stay in accordance with the teachings of Islam (Siddiqi, 1983).

This chapter provides a brief overview of how Islamic Banking was introduced in the World and exactly how it penetrated the Malaysian market. Islamic banking today has shown to be a popular and reliable financial system on the globe. It is widely regarded as a viable option to the conventional banking system over last 3 years. Islamic bank was defined by scholars as 'wishful thinking' when the idea was first mooted almost thirty years ago (Iqbal and Philip, 2006). Many conferences and conversations were completed at that time to focus on the finer details of this system. Several blueprints were drafted by Islamic scholars from across the world to ensure a detailed system is created.

The first international conference on Islamic Economics was arranged by Kings Abdul Aziz School in Makkah designated an important milestone in the annals of Islamic banking (Iqbal, 2005). Financial gurus, financial experts and Islamic market leaders were invited to provide their view and thoughts.

Following this, the first Islamic loan provider, Dubai Islamic Bank (DIB) was proven in the United Arab Emirates in 1975. Since its creation, it has established itself as the leader on the market and has acquired several accolades internationally. In '09 2009, it recorded net earnings of 200 million with resources well worth over 14 billion. Islamic banking has gained remarkable momentum and has been growing quickly over the years. Islamic bankers now offer products in various areas such as banking, insurance, home loan and asset management with total annual growth of 10% for quite some time.

3. 2 Background of Islamic Banking in Malaysia

Islamic banking industry in Malaysia is growing at a modest pace. It is a distinctive market because Islamic banking institutions in Malaysia are allowed to operate in parallel to normal bankers (interest-based). The multi-ethnic inhabitants of Malaysia makes the complete change of economic climate to check out the Shariah system not feasible. Federal of Malaysia opted for steady way of launching Islamic bank by allowing conventional banks to market Islamic bank products and services such as sukuk (Arif, 1989). The dual bank operating system has been recognised by both Western and East leaders and it is seen to be the model of the future. Actually, many central bankers have seen Malaysia to see the effectiveness of the dual system first hand. Furthermore, this dual system also gets rid of the wrong concept of public that Islamic banking products are sold solely to Muslims.

The record of Islamic bank industry goes back to so far as 1963, when the foresighted administration setup the Lembaga Tabung Haji also known as the Pilgrims Management and Account Board. It had been set-up generally to encourage Muslims in the country to save up on their income in order to execute pilgrimage in Mecca (Kamarulzaman & Bhupalan, 1983). Besides, the account was also created to provide a program for participation in the financial and investment activities. Based on the success of the Lembaga Tabung Haji, in conjunction with the appointment of Shariah experts and economic gurus, government then proceeded to create the first ever Islamic Bank or investment company in 1983. Setting up of Loan provider Islam Berhad Malaysia (BIMB) proclaimed a milestone in the bank industry. It became greatly popular because over one half the Malaysian society are Islam followers. What adopted through was the report on the bank in the stock market of Malaysia in the first 1990s. As of today, the lender has 100 braches located all over Malaysia.

With the fairytale of BIMB, central bank or investment company made a decision to allow commercial banks and merchant banking companies to provide Islamic banking products under the Islamic Banking Scheme. It had been not long after that the central standard bank set up the National Shariah Advisory Council to oversee all issues pertaining to Islamic Bank.

Due to the monetary liberalisation, central bank or investment company finally grants licenses to international Islamic banks to operate in Malaysia in 2004. Al-Rahji Lender and Kuwait Money House required full good thing about this ruling and step ft. into the Malaysian banking industry. The very last matter of Islamic banking institutions functioning in Malaysia stood at 21.

3. 3 Scope of Islamic Bank in Malaysia

Islamic Banking started out as mere deposit taking and lending facility has since transformed into all areas of bank, money and capital market procedures. In Malaysia, the central loan company is towards a dual banking system, whereby Islamic bankers are permitted to co-exist with conventional banks. It is at the consumers' choice to select which services they favor that cater to their needs. That is in stark distinction with the scenario in Iran and Pakistan, where classic banking system is abolished completely to make method for Islamic banking. They promise to be devoid of conventional interest structured financial transactions.

Today, the Malaysian Islamic bank sector is blossoming as shown in the comprehensive distribution networks composed of 152 full-fledged Islamic bank branches. The ability of these Islamic banks to offer competitive products with attractive and innovative features has attracted both Muslim and non-Muslim inhabitants in the country. It has also spurred non banking institutions such as cost savings institutions to expose Shariah compliance product to appeal to a wider consumer platform.

According to Relationship of Islamic FINANCIAL INSTITUTIONS Malaysia, there are 21 Islamic banking companies who've subscribed to their membership. The set of Islamic banking companies is provided the following:

Affin Islamic Loan company Berhad

Alliance Islamic Lender Berhad

Al-Rajhi Bank & Investment Organization Berhad

AmIslamic Bank or investment company Berhad

Asian Finance Bank Berhad

Bank Islam Malaysia Bank or investment company Berhad

Bank Kerjasama Rakyat Malaysia Bank or investment company Berhad

Bank Muamalat Malaysia Lender Berhad

Bank Simpanan Malaysia Berhad

CIMB Islamic Loan provider Berhad

EONCAP Islamic Lender Berhad

Hong Leong Islamic Loan company Berhad

HSBC Amanah Malaysia Berhad

Kuwait Funding House (Malaysia) Berhad

Maybank Islamic Loan company Berhad

OCBC Al-Amin Standard bank Berhad

PT Lender Muamalat Indonesia

Public Islamic Lender Berhad

RHB Islamic Lender Berhad

Standard Chartered Saadiq Berhad

Unicorn International Islamic Bank or investment company Berhad

As evident from the list above, there are 21 finance institutions offering Islamic products in the Malaysian market. Self-assurance is plainly shown on the Malaysian market with international banking powerhouse existence such as Standard Chartered group and Kuwait Money House.

The Governor of Central Loan provider Malaysia recently declared the central bank's objective to lure bigger overseas banking institutions to provided services that adhere to Muslim tenets. As being a sweetener to any potential deal, the central lender has raised overseas ownership limits at local Islamic banking institutions and insurance firms to 70%. Increasing oil riches has turned the Islamic banking into a business with resources with $1 trillion in assets globally. The central bank or investment company does its utmost, applying initiatives to explore this relatively untapped market. As well as the changes in overseas ownership limits, the central bank or investment company is also offering taxes breaks for Islamic products and has calm rules for Islamic finance institutions to operate in foreign currency (Aziz, 2006). That is regarded as a major discovery because the foreign currencies dealing is firmly regulated because of the impact Malaysian market endured in the 1997 Asian FINANCIAL MELTDOWN.

In July 2010, Khazanah, Malaysia sovereign riches finance made its debut in Singapore debts market issuing sukuk or Islamic bonds worth $1. 5 billion, 3 x how big is Singapore sukuk market as yet. This further strengthened the Malaysian federal efforts to market Islamic bank products both domestically and internationally.

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