Labourious beginning of the Islamic finance industry
Labourious and stepping into the unknown, those were the early beginnings of the Islamic finance industry in Malaysia where it all started with new legislations adopted in the 1980’s, Khazana Nasional Bhd deputy chairman Tan Sri Nor Mohamed Yaacop recalled in a speech in Kuala Lumpur.
At that time, he told the audience during the 10th Kuala Lumpur Islamic Finance Forum (KLIFF 2013), there was only one bank offering such services — that is the Bank Islam Malaysia (BNM) — and there was the need to pass new laws and regulations through the August Parliament in order to give Islamic banking its own characteristics.
“We could have granted exemptions to the Islamic banking industry with the existing banking laws, but we decided to implement our own Islamic banking laws. That led us to seek new legislations, which eventually became the Islamic Banking Act (IBA) in 1983,” Nor said.
The former minister said these were tough times though, since the legislators had to decided on how to interpret the Islamic banking sector and sought the help of late Tan Sri Professor Ahmad Ibrahim who drafted a law passed through Parliament.
“It was easier those days, because we did not have the complicated sukuk of today for example. We went to the simple then we took on the complicated,” Nor recalled.
After that, more laws were passed through Parliament, including the Takaful Act of 1984, and after we found we could not use the existing insurance laws to implement Islamic insurance industry in the country, Nor said.
He said Islamic banking today represented more than 24% of the entire Malaysian banking assets.
Malaysia’s Islamic banking assets has reached over RM500 billion in 2012, according to some reports.
The IBA today is known as the instrument that started the assimilation of Islamic laws in the Malaysian economic system, whereas the Takaful laws have helped the spreading of Islamic insurance in the country.
While in 1989, Malaysia implemented the Banking & Financial Institutions Act, 1989 which is the legal structure that allows banks to operate in the country, it means that the country had two banking laws guiding the local banks.
Thus Malaysia became the first country in the world with a dualistic system that allowed both the Islamic banking and the conventional banking systems to function separately, without interchange.
“Today, Malaysia may be the only country on earth that has both a conventional banking system and the Islamic banking system. It all started with conventional banks offering a window to Islamic banking solutions to their Muslim consumers,” he said.
This facilitation of both systems, he said, could be exported to other Muslim countries or to other jurisdictions where Islamic banking is being offered under existing conventional banking services, urging Malaysia to look forward to the spread of the local expertise in this matter.
In 1998, BNM changed some vital rules. Instead of the term “interest-free” banking, the Islamic banks offering interestfree services would be called “Islamic banking” institution.
Furthermore, in 1999, BNM decided that the Islamic banking units of banking institutions participating in the Islamic banking system were upgraded to become the Islamic banking divisions of the conventional banks.
“It was shameful in those days to go to pawn shops to exchange gold or anything for money. We were told, in our childhood, not to let friends or neighbours see when we enter pawn shops,” the former minister recalled.