Are Islamic Banks in Malaysia Really 'Islamic'?

This paper attempts to clear some common misgivings about Islamic banking.

The development of Islamic banking and the services that Islamic banks offer may be similar to those of conventional banks with some exceptions. In Malaysia, the first Islamic bank, known as Bank Islam Malaysia Berhad, was established in 1983. The Central Bank of Malaysia introduced the Islamic Banking Act in 1983, whereby Islamic banking in Malaysia can be transacted only by a licensed Islamic bank. The paper states that:

• Understanding the underlying wisdom of the origin of Muamalat could clear some misconceptions about Islamic banks in Malaysia;
• Misconceptions arise when there are discussions about conventional banks transforming into Islamic banks;
• Islamic banking cannot be applied in isolation, while other laws and customs repugnant to the Sharia requirements are still in force;
• Islamic banks in Malaysia are fully Sharia-compliant.

Islamic banking is expected to grow rapidly in Malaysia, because it has proved to be a commercially viable proposition. It could provide a reprieve from interest-based transactions and support the establishment of a truly Islamic financial system.