Islamic Banking System Analysis

Question 3

Describe the structures of Islamic banking system in Malaysia in detail. Suggest Five (5) ways on how the Islamic banking system in Malaysia can be made more effective as comparable to the conventional banking system? Discuss with arguments/example.

Islamic financial system technically is quite new since it being introduced in the mid-1980. Islamic finance and Islamic financial products in this system basically target those investors and depositors who want to follow this system whose follow the Islamic laws (Shariah) that rule Muslim’s daily life. This system is being created where there have complete exclusion of payment or receipt and prevents use of debt-based instruments. Within this system, although exclusion of receipt and

Capital formation, capital markets and all categories of financial and intermediation also being covered by the Islamic financial system who’s not limited to the banking. If describing the system as “interest-free” tends to confuse people, when the philosophical basis of Islamic financial system drives past the collaboration of aspects of production plus economic behaviour. This system places equivalent value on the ethical, moral, social, and religious dimensions, in order to improve parity and fairness for the sake of the society while conventional financial system paid more attention on economic and financial features of transaction. Besides that, this system can only being grasp when in the perspective of Islam’s teachings which about the work principle, wealth distribution, social and economic justice, and the role of the state. There are several un-Islamic activities are taboo to the Islam

Not just local banks (Maybank, Public Bank and others), there also have foreign banks (OCBC, HSBC and other more) operating in Malaysia. Thus, it would provide a lot of challenge to Islamic Bank and besides, Islamic banks is still at early stage of the development which requires more work to strengthen up its basis along with maintain the stability of the system as comparable to conventional banks. In this case where Islamic banking system want to be more effective compared to conventional banking system in Malaysia, there are certain things need to be remember, which is conventional banks also provide Islamic banking services that known as dual banking system. Of course, the regulatory came out a plan where they formulate regulatory agenda for Islamic banking which parallel with the Syariah values. With the rights and responsibilities of the parties to a contract in Islamic banks are exceedingly clear and truthful. Also,with the mind-set that think for the whole nations not just for itself, the target is to provide benefits to the community in a broad way rather than just focus on profit plus, the Islamic system is protected from the risks of financial stress which restricting from speculative activities have made Islamic banking more ethical and efficient as compared to conventional banking (Zahar and Hassan,