The Islamic banking system has generated much interest in the last few years both locally and internationally. The government’s efforts in positioning Malaysia as an international Islamic financial hub have shown much progress evidenced by the double-digit percentage growth of Islamic based assets and liabilities of the banking sector between the year 2000 to 2004.
Other initiatives include the liberalization of the Islamic banking sector through the granting of licenses to major foreign Islamic financial institutions three years earlier than planned and encouraging the setting up of Islamic subsidiaries through joint-ventures between local banking groups and foreign Islamic banking institutions.
The Islamic banking system can attain further significant growth when its value proposition is better understood. Any misconceptions held about Islamic banking, once eliminated, will certainly drive more consumers to switch to Islamic banking. One of the key misperceptions is that Islamic banking is exclusively for Muslims.
The bold step taken by Bank Negara Malaysia in 2003 to affix an “i” to Islamic products rather than applying its Arabic name, has to a certain extent, made the products more approachable and friendlier to non-Muslims.
Islamic banking products and services address the requirements of all, regardless of race, religion or creed. They fulfill various requirements, be it from the religious, ethical or dynamic value proposition perspective e.g. for Muslims, it is to fulfill their religious obligations while to non-Muslims, it provides viable alternatives to their conventional banking products. The latter is pre-dominantly driven by a floating interest rate system, as opposed to Islamic banking which subscribes to fixed rate mechanism and profit sharing concept, thus, promoting certainty, clarity and predictability in its financial transactions.
Investors can enjoy higher returns as profit generated from investment is equitably shared between the bank and its customer, as opposed to the conventional banking model where profits reside in the hands of the bank.
Determination of buying and selling price upfront, which are sacrosanct in any Islamic financing contracts are principles that enable consumers to better manage their cash flow effectively given that Islamic financing contracts provide for clarity, certainty and predictability in the distribution of risk and return.
These are a few of the many benefits, which can be derived from Islamic banking. A series of articles on the value proposition of Islamic banking and its products contributed by Hong Leong Islamic Bank in the coming weeks will give you a better perspective of the system. We believe that you will better appreciate these products, services and solutions once you get to understand their benefits.
Press Release - 31/8/2005