Key Features Of Islamic Banking Business In Malaysia Finance Essay - Free Essay Example

Sample details Pages: 8 Words: 2290 Downloads: 9 Date added: 2017/06/26 Category Finance Essay Type Narrative essay Did you like this example? Since Malaysia was prepared for independence in 1950s, the government in Malaysia adopted the idea of establishing an Islamic financial institution as response to the wishes of Malaysian Muslim people, Muslim population in Malaysia are majority so they want their money to be saved so that they can visit Makah in Saudi Arabia (hajj trip).After Malaysias independent took place. The Government established the Pilgrims Administration and Funds (Tabung Hajj) and put all regulations requirement to make it more attractive to Muslim population in Malaysia, most Malays whose want to go for Hajj gave their savings to Tabung Hajj fund, in the behalf of Malays savers Tabung Hajj invested collective money in various sectors such as real estate, industry, and agriculture. This idea of such fund represented a foundation stone for establishing Islamic financial institutions in Malaysia. After about twenty years of establishing Pilgrim Hajj Fund the Government had been establis hing an Islamic Bank in response to a resolution that was proposed by participants in a seminar held in the National University of Malaysia. The legality of establishment of Islamic financial institution in Malaysia depended on the Islamic Bank Act (IBA) which was issued in 1983 Bank Negara Malaysia is given powers to control Islamic financial Institutions. The Government Act 1983 also was issued to give the Government of Malaysia the right to issue Government Investment Certificates (Governments Securities issued in accordance with shariah principles), the reasoning behind issuing these securities is to enable Islamic banks to invest its funds as well as to meet its liquidity needs. Bank Islamic Malaysia Berhad (BIMB) was consider the first Islamic bank starts commerce operation in 1july 1983, which has a network of 180 branches and 1,200 labour work other Islamic banks was follow suite (BIMB) such as Bank Muamalat Malaysia Berhad (BMMB). Manwar iqbal Philip (2004) It is pretty obvious that knowing of the financial market structure in any economy is most importance, particularly to policy maker, investors, and researchers whose know the significant role that financial institutions play in economy due to their competitive advantages which will lead them to economies of scale and scope. The bank system in Malaysia contains the central bank (Bank Negara Malaysia), bank institution and non bank institution. The number of commercial banks operated in Malaysia in 2007 was 22 commercial banks, (9 domestic commercial bank, 13 foreign banks) whereas investment and merchant banks was 14 , Islamic banks 11. Other players in Malaysian financial sector include: 7 financial companies, 1 universal broker, 41 insurance companies, 7 reinsurance companies, and 8 takaful operators. The banking industry sector has a dominant proportion accounting for around 70% of the total assets of Malaysian financial system, typically banking sector are largest mobilize of deposit. As exam ple the banking sector raise in 2005 about 83% of the total deposits of whole financial system in Malaysia and owned around 67% of the total assets of financial system. Like many countries in Asia, Malaysia was affected by the 1997 financial crisis which showed the weakness of Malaysian financial system. As response to this crisis as well as an attempt to reform and make bank industry invulnerable, rationalization of finance companies and commercial banking was invented in 1998 to protect, developed and allow merger take place in banking industry. Approximately Ten domestic banks have been merged into banking group such as Afflin Bank Berhad Group, Alliance Bank Berhad Group, and Arab-Malaysia Bank BHD Group. Foreign bank is a financial institution evolved in banking services like take deposit and make lending, in a country other than the country where it is headquarted Foreign banks have been in Malaysia since colonial periods like HSBC Bank and Standard Chartered Bank, almos t all foreign banks operating in Malaysia pared back their operation during the Asia financial crisis 1997 . In order to persuade reforms in financial institution system which would expected to lead to more competition among domestic banks the Government welcomed foreign banks that wish to perform in Malaysia , soon foreign banks were responding to enter Malaysian banking market aiming to achieve high profits in that emergent market. The share of foreign banks in Malaysian market was very poor 18% in 1998. To attain high retain foreign banks were forced to innovate new product such as phone and internet banking so that can compete with domestic banks and guarantee survive as City Bank Malaysia did that by exploiting their global marketing, technological, and managerial expertise. It is obvious that foreign banks played major role in Malaysian financial market by providing funds to individuals, investors and companies, it is also contributed in increasing competition and development in this sector. Both domestic and foreign commercial banks involved in retail and wholesale banking services, it is important to notice that domestic and foreign commercial banks are the only financial institution in Malaysian financial market that can take demand deposits, the huge more or less minor finance firms. On the other hand it offer installment credit to investors or client as well as to small companies with funding rise basically from account deposit such as investment, savings, and current accounts. Financial banking system in Malaysia is a dual banking system, and it is the first country in the world that has a full-fledged Islamic banking system that is performing along side with traditional banking system. The number of banks operating in Malaysia is 11 Islamic banks and about 8 Takaful operators, Islamic banks has been increasing gradually over time, in the year 2000 Islamic banking industry was growing very fast achieving an average rate of growth of around 19% p er annum of the total assets of banking system as whole, this average rate reached to about RM94.6 billion which amounted 10.5% of the total Islamic banking system share in total assets of Malaysian banking system in 2004. Whereas the market proportion of deposits and funds of Islamic banking sector was 11.2% and 11.3% respectively of the total banking industry deposits and funds, so the Bank Negara Malaysia took measures and other procedures to deregulate the Islamic banking sector so as to encourage competition and achieve the growth opportunities and enhance efficiency in Islamic banking. To do so, the government enacted three new full-fledge Islamic bank licenses to international banks especially foreign Middle East banks. Kuwait Finance House, AL-Rajhi Banking and Investment Corporation and Consortium, and Qatar Islamic Banks, were operating in Malaysia as the first full-fledge foreign Islamic bank. Fadzlan Sufian, Muhamed-Zulkhibri Abdul Majid (2007) In modern economy banks are play crucial role in channeling products and services for society that is it can raise funds from those who have surplus funds (savers) as deposits, and then lend it to those who have shortage funds (entrepreneurs, companies). In fact bank offers full array of products and services like chequing facilities, money transfer, letter of credit, ATMs and telephone banking etc. Islamic banks mostly do the same functions that conventional banks do with few differences in the modes they used and other religious issue. On the one hand, conventional banks are basically grounded on the borrower lender relationship between depositors and banks and borrowers and the bank, interest rate is rewarded for taking risk or alternative opportunity cost, in a word conventional banks are based on interest-based activity and their operation and performance is also based on manmade principle. On the other hand, Islamic banks are a system that performs in accordance with shariah principles (Islamic law) the framework of Islamic banks has been set up on the basis of risk profit sharing between the lender of funds and borrower of funds. Like conventional banks, Islamic banks objective is to maximize profit but that can be subject to shariah control, the obvious characteristic of Islamic banking system is the prohibition of riba (usury or interest). As mentioned above conventional banks system is characterized by depending on interest rate in providing their products and services on both assets and liabilities side of their balance sheet, as interest rate is completely prohibited in Islamic low, Islamic banks have to find an alternative ways to perform and to raise finance and transfer it to entrepreneurs such as mudarbah, murabaha, salam, and musharakah. Malaysias Islamic system has been developed for long time. The issuance of Islamic banking act in 1983 opened wide doors for Islamic banks to be established in Malaysia, as well as deregulation of Islamic banking sector encour aged Islamic financial institution to inter Malaysias financial market. Abdul Gafoor. (1995). Malaysias Islamic banking system has been grown very rabidly, it is enhanced by healthy environment that encouraged product innovation, Many foreign financial institution, a full array of Islamic financial instruments, a good infrastructure of financial system, regulation and other factors resulting in presence of Islamic banks in Malaysia and make the hub for Islamic financial institution products and services. Islamic banks in Malaysia provide various kinds of financial products and services such as subprime or mortgages and other complicated financial products and services, Arab Malaysia Bank is the first Islamic bank in Malaysia issuing credit card, and non interest visa card, there is also Islamic capital market in Malaysia which is developed by a group of Islamic banks to offer securities and sukuk (interest free bonds). Furthermore, Malaysian banks recently provide not less than 1 00 of Islamic banking products and services which use different types of Islamic financial modes such as Mudarabah (profit sharing), Musharakah (partnership), Murabahah, Bai Bithaman Ajil. Ijarah (leasing), Qard Hassan, Salam, and Istisnaa, side-by-side the Islamic interbank trade market. Due to high pressure from other international financial centers like London, Hong Kong, Singapore, and Dubai international financial center, Malaysia enacted rules and regulations to let Islamic Sukuk issuance in international currencies in order to win to be the main Islamic financial hub in the word. Malaysia has a dual financial system where conventional and Islamic financial system perform their works along side together, Islamic banking sector increased, and as a sequence many conventional banks in Malaysia started open windows for Islamic financial products and services, exploiting the interest free scheme which was began in 1993. There was an important event for Islamic banking system in Mal aysia that is, in 1999 Bank Muamalat Malaysia was established as a second Islamic bank, at the end of 2001 almost about 36 traditional banking institutions Islamic financial products and services in Malaysia about 14 of them are commercial banks, 10 finance companies, 5 merchant banks and 7 discount houses in addition to 2 full-fledged Islamic banks (Bank Malaysia 2001) The share market of Islamic banking system is less than the share market of conventional banking system in Malaysia in term of assets, deposits and efficiency , by the end of the year 2001 the total assets possessing by Islamic banking system was RM59 billion represent about 8.2% of the total banking system assets (RM717bllion), Islamic banking system activities is also small compared to traditional banks, which it amounted 6.5% about RM28 billion from the total of RM432 billion for the entire banking system, while the total deposit share of Islamic banking system in total deposit of banking system was RM47 billio n representing 9.5% compared to RM495 billion for the whole banking system(AbdulKader,2002). Local Islamic financial institution were facing strong competition with local non Islamic banking as well as foreign financial institutions both Islamic and non Islamic financial institutions, this competition was forced by deregulation and liberalization, which means that Islamic financial institutions will have to be more efficient , competitive and more flexible in financial markets, since foreign banks may be more efficient and they have ability to provide Islamic financial products and services to the public, conventional banks have also competitive advantage in the sense that they can adopt any business strategies that can be applied by Islamic banks and not vice versa, Malaysian central bank sketched financial sector master plan for Islamic financial institutions to be have share 20% of total market share of banking system at all in the year 2010. after 1980 Malaysia has confidentl y stepped ahead on its way to become an international Islamic financial centre, since then the Government has given financial institutions and investors who operate in Islamic finance tax incentives, with the presence of highly liquidity assets in Islamic institutions, and with the existence of increase demand of investors, Islamic products and services has became target for players and investors in Malaysia to satisfy their financial needs. There is no certain separate low of taxation that controls the Islamic financial system. All Islamic financial transactions are governing by the low of taxation of financial transactions in Malaysia, that means any profits generated by Islamic financial institution will be exposed to tax as the same as interest income in the traditional financial institutions. In its aiming to promote Islamic financial system and make Malaysia as global Islamic financial hub the Government provided many tax incentives that covered various area of Islamic finance activities to promote the issuance of Islamic sukuk outside Malaysia particularly in foreign currencies so that to bring international investors to Malaysia, income tax (Deduction for Expenditure on Issuance of Islamic Securities) Rules 2007 which offered tax deduction in the issuance of Islamic sukuk, approved by the Securities Commission Act(1993) applied to principle of musharakah, ijarahah murabahah and other Islamic financial modes or any financial principles that comply with Islamic shariah rules, agreed by the minister until year of estimation 2010. Conclusion: Malaysia is considered the heart of south east Asia, good business opportunities which exist in many sectors in Malaysia, dynamic political leaderships and stability, foreign investments, cross-cultural diversity, her transformation from agricultural economy 1970 to manufacturing economy 1990, increase local and external demands, employments and flexibility of Malaysian economy and other factors inspired Malays to developed an Islamic banking system that perform along side with the conventional banking system, the idea of establishment of Islamic banking was began in 1963 (Tabung Hajj) since that date Islamic banking was growing gradually , and it has played crucial role in Malaysian economy, Malaysian Government provide permission to non Islamic banks to offer Islamic banking products and services, it also encourage Islamic banks to issue Islamic bond (sukuk). Don’t waste time! 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