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Islamic Banking - Emphasis On Malaysia

Word Count: 2930

Question: In recent decades, Islamic banking has surged in popularity and Malaysia has played a major role in developing and promoting its services. Review the factors that have contributed to this growth and analyse the success of Islamic economists in creating a viable alternative to Western commercial banks. In doing so, have particular regard to the Malaysian experience.
(This question springs from a question I asked at the talk given at the Bank Negara Malaysia, Wednesday 15th April)

Introduction

There is now no question that Islamic banking has established itself as a major player in international finance (Dusuki and Abdulluh, 2007, pg. 142). However, it is important at this juncture to review the reasons for its success in order to determine whether it represents a paradigm shift in how banks operate or whether it is riding the growing wave of support for a more general form of ethical banking practice.

This paper will first detail the fundamental tenets and characteristics of Islamic finance and the arguments used by promoters of this form of banking. It will then explore the success of Islamic banks with particular regard to the form that it has taken in Malaysia. Finally, it will analyse the extent to which the Malaysian version of Islamic banking is a model on which the Islamic world can build or is merely providing 'Islam trademarked' services in order to develop a niche market (Cateora & Graham, 2005).

Ultimately, it will be contended that Islamic economics is still in its infancy, caught between the need to secure investors and provide a religiously compliant form of money management. As a result, the current stage of Islamic banking, with all its noble goals, fails to provide a coherent framework in which a "well-defined and operational method of analysis" can develop, necessary for any effective economic system (Kuran, 1995, pg. 155). Moreover, the claim that is Islamic banking is based on ethics and is therefore a...