Traditional banking in Malaysia

Malaysia is playing an iconic role in Islamic banking, having been a pioneer in the beginning and a frontrunner in the global arena at present. Malaysia has come a long way since the first Islamic bank was established in the country in 1983. There are now five wholesome Islamic banks, local and foreign, and eleven Islamic subsidiary banks owned by conventional banks, local and foreign.

As is well known, Islamic banking operations are driven by the shari’ah which defines the nature and character of the deposits mobilised and financing provided. Islam prohibits interest (riba) and permits trade (tijara). Accordingly, profits in Islamic banking operations are derived from the contract of trade (al-bai’), unlike the conventional banks’ profits which are derived largely from interest-bearing loans. In Islam, it is business risk taking, and not financial risk taking, that forms the basis for profits.  The al-bai’ principle is manifested by an exchange of money with an underlying asset, whereas a contract of interest-bearing loan entails an exchange of money for more money.

What legitimises profit in Islam is risk taking (ghorm), effort (kasb) and responsibility (daman). Theshari’ah objective (maqasid al-shari’ah) plays a critical role in determining the legality of Islamic transactions, as it inisists that all transactions must have positive impacts on general welfare. Seen in this context, there is much more to Islamic banking than the prohibition of riba. Other prohibitions include ambiguity (gharar), gambling (maisir), and bribery (rishwa). All transactions must be transparent based on mutual consent with offer and acceptance (ijab and qabul) being free from duress (ikroh).

Put in a nutshell, real sector connectivity and risk sharing distinguish Islamic banking from conventional banking. In Islamic banking, all financial transactions must relate to the real economy with no space for ‘financialisation’ or financing for the sake of financing. In the Islamic paradigm, the financial sector is inextricably linked to the real sector of the economy, which means that the financial sector would not exist on its own.  In other words, in the Islamic order, the financial sector primarily functions as the facilitator for the real sector.