The Pros And Cons Of Islamic Banking And Bank Negara Malaysia

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1.0 Introduction

Islamic banking refers to a system of banking that complies with Islamic law, also known as Shariah law. The underlying principles that govern Islamic banking are mutual risk and profit sharing between the provider of capital (investor) and the user of funds (entrepreneur). In other words, it ensures an equal contribution for all parties involved, whether in profitability or in case of any loss occurred. Activities that involve interest (riba), gambling (maisir) and speculative trading (gharar) are prohibited (Bank Negara Malaysia, 2010). Islamic banking is interest free banking; making it compulsory to take active part in business profit and loss sharing. Islamic banks prefer to take less risk (Shaikh & Jalbani, 2009)
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In this system, conventional banks make profit through the different rates of interest by borrowing and lending of money. However, one of the drawbacks of conventional banking is that it is prohibited from trading in the shareholding of the borrowing concern. (Shahid H. , et al., 2010). The performance of all the banks in the country may not necessarily be on the positive side especially since the recent financial crisis of 2007. Banks have managed to pull through but not without some being injured in terms of stock prices or profits. In 2002, the Malaysian government started the implementation of the banking sector reformation in respond to the 1997 financial crisis. Under the reform plan, Malaysian government guided the merger activities in the banking sector through the central bank. Prior to that date, the banking sector was made up of 54 domestic deposit taking institutions which became ten large-capitalized banks by the end of 2002. (Ahmad, Ariff, & Skully,…show more content…
Most banks have created a separate entity or subsidiary to earn profit from the growing Islamic banking sector. (Parker, 2011) (Ernst and Young (E&Y), 2014) in their latest World Islamic Banking Competitiveness report (2014), shows the assets of Islamic banks grew at an average rate of 17% per year between 2008 and 2012. This is two to three times faster than the rate at which conventional banks grew over the same period. Bank Muamalat provides a full range of Islamic financial services through its 59 branches nationwide. It has a market share of 4.2% and 5.0% of the domestic Islamic banking sector's gross financing and total deposits segments respectively as at end-March 2014. The bank's annual financing growth of between 8% and 15% was mostly lower than the Islamic banking industry's growth of above 20% per year in the last five years. (The Star-Business News,
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