The Evolution Of Islamic Finance In Southeast Asia: The Case Of Malaysia

Abstract

<p class="MsoNormal" style="line-height: 12pt; margin: 0in 36.1pt 0pt 0.5in; mso-line-height-rule: exactly;"><span style="font-family: "Times New Roman","serif"; font-size: 10pt;">The purpose of this paper is threefold: to explain why the Islamic financial system was introduced in Malaysia; to outline how the Malaysian government has promoted this system; and to analyze the development of the Islamic financial system with a specific focus on the banking sector. <span style="mso-spacerun: yes;"> </span>In Malaysia, the first Islamic bank, Bank Islam Malaysia Bhd., was established in 1983.<span style="mso-spacerun: yes;">  </span>One turning point of the Islamic financial system in the country was the Financial Sector Master Plan presented by the central bank in 2001.<span style="mso-spacerun: yes;">  </span>The government, in accordance with the plan, has taken a strong initiative in the development of an Islamic financial system.<span style="mso-spacerun: yes;">  </span>As a result, the country has succeeded in promoting a comprehensive Islamic financial system, banking and insurance sectors and capital markets.<span style="mso-spacerun: yes;">  </span>In the banking sector, this paper reveals that the profit-sharing system does not seem to be popular in this country although the reward system is central to Islamic Finance.<span style="mso-spacerun: yes;">  </span>In order for further development of the Islamic financial sector, the reasons why the percentage of contracts under the profit-sharing system is small need to be analyzed.<span style="mso-spacerun: yes;">  </span></span></p>