Background of Malaysian Islamic
When Bank Negara Malaysia set out to introduce Islamic
banking in Malaysia in the early 1980s, it had in mind a two-phased
approach. In the first phase, the bank wanted to ensure that the
Islamic banking system contained all the three important components
of a viable banking system, namely a large number of Islamic financial
instruments to meet the various needs of the Muslim business community,
a large number of financial institutions providing Islamic financing
facilities and an Islamic inter bank money market. The Islamic
inter bank money market, by linking the institutions and the instruments,
was expected to provide depth to the Islamic financial system.
Malaysias first Islamic bank, Bank Islam Malaysia Berhad
(BIMB) was set up in 1983, licensed under section 3 (4) of the
Islamic Banking Act 1983. The first 10 years were concentrated
on developing a large number of Islamic financial instruments.
By early 1993, a total of 21 Islamic financial products had successfully
been introduced, to meet the needs of the Muslim business community
The next step was to create a large number of financial instruments
offering Islamic products. Bank Negara implemented this in 1993
by allowing existing commercial banks, finance companies and merchant
banks to offer Islamic banking services on a parallel basis with
their conventional banking services. The scheme was
called Skim Perbankan Tanpa Faedah (IBD OF) or Interest-Free Banking
Scheme. By the end of 1993, two of the three components for a
viable Islamic banking system were already in place.
What remained missing was the third component, namely and Islamic
Inter bank Money Market (IIMM). Bank Negara introduced this on
January 3, 1994. The scope of activities of the IIMM included
the purchase and sale of Islamic financial instruments among market
participants (including the Bank), inter bank investment activities
through the Mudarabah Inter bank Investment (MII) Scheme and a
cheque clearing and settlement system through an Islamic Inter
bank Cheque Clearing System (IICCS).
The Islamic financial instruments that are currently being traded
in the IIMM on the basis of Bai al Dayn, are Islamic accepted
bills, Islamic mortgage bonds and Islamic private debt securities.
In addition, financial institutions can sell Government Investment
Issues (GIIs) to the Central Bank as and when required to meet
their liquidity needs. GIIs are government securities issued on
an Islamic basis, which financial institutions can also buy from
the Central Bank, depending on availability.
Although there were no major teething problems during the implementation
of the IIMM, one drawback the scheme continues to face is the
inadequate amount of tradeable Islamic papers. Efforts will have
to be expanded to create a critical mass of Islamic financing
papers that can be easily traded in the IIMM.