Critical Review on Issues and Challenges of Malaysian Islamic financial system

Abstract

This paper seeks to analyze the issues of the Islamic financial system and its challenges in Malaysia. This research adopts a qualitative approach based on data collected from articles, books, and online sources. A thematic approach has been utilized for data analysis. This study finds that Islamic banks impose both taʿwīḍ (compensation) and gharāmah (penalty) if the customer procrastinates or delays the payment of installments to the banks. That could lead to ribā (interest) in the contract. Therefore, the study suggests that the Islamic banks need to form a tabarruʿ (donation) fund. In addition, the study reveals that the Islamic banks are trending towards debt-based financing, which contradicts the maqāṣid al-sharīʿah. To fulfill the objective of the Sharīʿah, Islamic banks should apply more profit-sharing-based financing products. Another challenge in Islamic capital markets is baiʿ al-dayn (sale of debt) in Sukuk (Islamic bond), leading to ribā. Thus, the research proposes improving the transaction with a concept that does not lead to controversy. In family takaful, there are Sharīʿah issues related to the nominee and distribution of surplus. The study suggests that the nominee should work as an executor. Moreover, takaful companies can receive a portion of surplus based only on the muḍārabah model. Finally, this research identifies challenges in Islamic finance about human capital, misconceptions of Islamic finance, standardization, and harmonization, and proposes solutions accordingly. The research will assist the Islamic financial industry in finding ways to overcome the current issues and challenges.