Islamic Banking Essay

Islamic banking has been adopted at the national level in Pakistan, Sudan, and Iran, and they have decided to Islamize the whole banking system. Islamic banking was established in Malaysia in 1983. Islamic banking products and services should come under the Islamic Banking Scheme (IBS). Kuwait Finance House (KFH) is one of the largest Islamic banks in the world. Headquartered in Kuwait, their business covers corporate, investment, commercial and retail banking. As part of their expansion programmed, they are now in Malaysia with the opening of Kuwait Finance House (Malaysia) Berhad (KFHMB).

Islamic banking and institutions is showing continuous growth and history has not shown any trends to reveal any slow down. Many studies have indicated that the industry should continue to grow at a rapid pace annually over the next few years. There are differences between Islamic banking and conventional banking. The Islamic banking based on the Islamic principles (sharia) and do not allow interest (riba’). The most important difference between Islamic banking and conventional banking is the prohibition of interest.

There are many services and products that Islamic banking provides according to the Islamic Sharia. From these services Mudharabah (Profit Sharing), Musyarakah (Joint Venture), Bai’ Bithaman Ajil (Deferred Payment Sale), Qard (Interest-free Loan), Murabahah (Cost Plus), Wakalah (Agency), Ijarah Thumma Bai’ (Hire Purchase), Hibah (Gift) and other which differ from Islamic banking to another but all should be halal. Islamic banking is rabidly increasing in the world and starts to appear as a competitor to the conventional banking.

Malaysia is one of the countries that provide a good environment for Islamic banking. The purpose of this report paper is to explore the issue regarding Islamic banking institutions and banks in Malaysia. Our group chose Kuwait Finance House (KFH) as our bank to study. The information was gathered by conducting interview session with the manager at head quarter KFH located at Kuala Lumpur and secondary data from researches and websites. Our group chose KFH because this bank doesn’t appear to be well known by the public especially in Malaysia.

In the other hand the bank declares that they are the second largest Islamic bank in the world that have main headquartered in Kuwait. Our group highlights several issues regarding the performance and the current situation that applied in their systems. This issue covers the syariah compliance, the differences between KFH and other bank, location selected and the acceptance by the public. New strategies were recommended to the bank as well to become more competitive in the Malaysian market.

The earliest form of Islamic banking in Malaysia may be traced back to September 1963 when Perbadanan Wang Simpanan Bakal-Bakal Haji (PWSBH) was set up. PWSBH was set up as an institution for Muslims to save for their Hajj (pilgrimage to Mecca) expenses. In 1969, PWSBH merged with Pejabat Urusan Haji to form Lembaga Urusan dan Tabung Haji (now known as Lembaga Tabung Haji). The first Islamic bank in Malaysia was established in 1983. In 1993, commercial banks, merchant banks and finance companies were allowed to offer Islamic banking products and services under the Islamic Banking Scheme (IBS).

These institutions however, are required to separate the funds and activities of Islamic banking transactions from that of the conventional banking business to ensure that there would not be any co-mingling of funds. In Malaysia, the National Syariah Advisory Council additionally set up at Bank Negara Malaysia (BNM) advises BNM on the Shariah aspects of the operations of these institutions, as well as on their products and services. Islamic banking has been adopted at the national level in Pakistan, Sudan, and Iran, and they have decided to Islamize the whole banking system.

Iran enacted a new banking law in August 1983 requiring complete abolition of interest by March 1985. Sudan opted for a total change when a presidential decree was issued in 1984, directing all banks to stop dealing with interest. The Central Bank of Sudan, on 10 December 1984, directed all commercial banks to stop dealing with interest with immediate effect, and to negotiate conversion of existing deposit into investment deposits or any other kind of deposits in accordance with shariah. All outstanding interest bearing advances were either to be settled through repayment or they had to be converted into one of the Islamic modes of financing.