Video #19 - Malaysia: Islamic Banking
Tuesday, January 10, 2006BACKGROUND INFORMATION
Malaysia is considered the epicenter for Islamic-style financial services, which are becoming popular internationally. (Malaysian government census figures place the country's Islamic population at around 59 percent.) Sharia, or Islamic law, considers interest payments a form of usury because depositors and lenders earn a profit without providing labor or sharing in the risks involved. Islamic banking has circumvented that restriction with a provision that allows those players to share in the bank's profits. The bank then pools deposits to invest in construction, commodities trading and other businesses that do not generate interest payments. This means that commercial banks and their depositors do not technically receive any interest. Because losses are also possible, this arrangement involves some risk, and thereby gets around the Sharia's prohibition.
Banking by Islamic principles began in Egypt thirty years ago to provide traditional Muslims a safe place to keep their money. During the seventies, when oil profits began coming into the Arab world, western financial institutions controlled the local banking industry. Since then, banks which follow Islamic law have developed and competition has grown. As the NBR report shows, investment in Islamic banks may no longer be driven by religious practice. It is now a multibillion-dollar industry expanding rapidly internationally.
Islamic banks are most common in the Middle East but have also opened in London and the Philippines. Theocracies such as Iran and Sudan require banks to do business by Islamic law. In Malaysia, Bank Islam has received encouragement from the government and offers home mortgages and other sophisticated financial services. Saudi Arabia's al-Rajhi Banking and Investment Corp., has $8 billion in assets. Reports place the total deposits for the world's Islamic bankers at $70 billion. The rapid growth of this industry has caused Citibank and other major international banks to open Islamic subsidiaries.
Bank Islam of Malaysia reports that its deposits have grown to 3 billion ringgit, about $1.2 billion. Arab-Malaysian Bank has issued Southeast Asia's first Islamic credit card, an interest-free Visa card. Users can charge an amount equal to their deposits and the fee is a percentage of their annual spending. Islamic bankers also boast thousands of mortgage borrowers from Malaysia's Chinese and Indian minorities. Reportedly, borrowers like the simple terms of their mortgages-- a flat monthly fee without fluctuating interest rates.
Additionally, the nation is developing what it calls an "Islamic capital market." Aimed at attracting foreign investors to Malaysia, the market is planned to offer interest-free bonds and other securities. This Muslim version of the stock market is planned to promote Malaysia as a model for Islamic societies using high technology and nurturing modern finance.
"We feel that we have a good chance of attracting Muslim money from the region and farther away, the Middle East or wherever," said Nik Ramlah, an official of Malaysia's Securities Commission. However, conservative Muslims criticize Malaysia's practice of allowing banks to conduct both Islamic-oriented and interest-paying services under the same roof. They are also concerned with Islamic stockbrokers handling companies receiving profit from interest payments.
Critics say that Malaysia will be unable to manage a totally Muslim financial system because interest-earning activities are a major practice in modern corporate business. However, Islamic banking there continues to grow at a rapid pace. Arab News reported that: "At the end of 2002, Islamic banking deposits as a percentage of total banking deposits (in Malaysia) broke the 10 percent barrier to reach 10.2 percent or 53.4 billion ringgit. The country's Financial Sector Master Plan has targeted the Islamic banking market share to reach 20 percent by 2010.
SOURCES
"Islamic Banking," Radio National, June 3, 2002. "Islamic Banking Comes of Age - But What's Next?" knowledge.wharton.upenn.edu
"Malaysia: International Religious Freedom Report," U.S. Department of State, October 26, 2001.
McDonald, Joe, "Malaysia's Islamic bankers trying to go global." The Augusta Chronicle Online, December 30, 1996. business@augusta
Parker, Mushtak, "Malaysia Banking Liberalization a Step in the Right Direction," Arab News, September 29, 2003
LESSON PLAN
GRADE LEVEL/SUBJECT:
10-12 grade Economics, International Relations, World History, Geography, International Baccalaureate Programs (IB), Current Events.
PURPOSE:
To present activities to be used in a variety of classroom situations in order to enhance student understanding of the Malaysian economy and its significance globally.
OBJECTIVES:
Students will be able to:
- Describe Islamic banking.
- List nations where Islamic banking is practiced.
- Evaluate Malaysia's role in the Islamic banking industry.
- Forecast the future of Islamic banking as an international player.
MATERIALS:
- Background information provided.
- Resources on Hong Kong available at your school's Media Center and the Public Library System in your area.
- Background information available through Internet "search engines."
- www.usc.edu/dept/MSA/economics/islamic_banking.html
- www.vitrade.com/banking_finance/islamic_banking_history.html
ACTIVITIES:
May be assigned as group activities or as individual tasks. They may also be designed as preparation for related presentations either by individuals or groups.
- Develop a time line illustrating the major events in the development of the Islamic banking industry.
- Use charts and graphs to show the growth of Islamic banking in Malaysia.
- Use charts and graphs to show the growth of Islamic banking around the world.
- Write a pamphlet promoting the use of an Islamic style bank by explaining the religious traditions it upholds.
- Report on the role Malaysia plays in the future development of Islamic banking internationally.
EVALUATION:
Individual assignments should be graded by the teacher using established criteria.
Group activities, presentations and projects may be evaluated by teachers and students using the following criteria and scale: Content 1 = Superior (A) Creativity 2 = Excellent (B) Clarity 3 = Good (C) 4 = Fair (D) 5 = Poor (F)
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