Essay: Malaysian Islamic Banking Industry And Regulatory Landscape Overview.

Topic: Monetary Policy in the Islamic and Conventional Financial Industry in Malaysia

The Islamic banks may not be popular in some parts of the world, but they grow with time. Although Islamic banks resemble conventional banks, there are slight variations in the operations when these two financial institutions are compared. For the case of Malaysia, the deposit rates in Islamic banks show the exact behavior of conventional banks regarding interest rates. Only a small number of Islamic banks in Malaysia are strictly based on profit and loss sharing (PLS). The resurgence of Islamic globally has contributed to the significant rise in Islamic banks. Therefore, there is a need to apply the same regulations applied to conventional banks (Zulkhibri, 2018). The interest rates in Islamic banks and other conventional banks have a great similarity regarding deposit market.

           From 2008 to 2015, Islamic banks in Malaysia were operating in a monopolistic competition environment, although it had a discreetly concentrated market structure. However, following an introduction of the foreign Islamic banks; they led to more competition in the market structure resulting in less concentration (Basri, 2020). In addition, the financial reforms in Bank Negara Malaysia and liberalization of banks led to more rivalry, strengthening the financial system. As a result, the financial banks have seen a steady positive annual performance, with the struggling Islamic banks closing on the top performers in the industry.

           Regulation in the Islamic banking system has played a role in the structural changes witnessed in the Islamic banking industry. Evident structural changes from various financial institutions have greatly influenced banking market structure, mainly regarding market concentration. For example, in the early period, Bank Islam Malaysia Berhad monopolized Islamic banking in Malaysia for almost a decade, from 1983 to 193 (Mohammed, Ismail, & Muhammad, 2015). But following regulations, there has been an increase in the participation of domestic and international players in the Islamic financial sector. Therefore, due to the entry of the domestic Islamic banks, they opened the industry to greater competition and more open to foreign Islamic banks.

Apart from encountering competition from the conventional banking system, the Islamic banks in Malaysia compete internationally to be identified as a center of Islamic finance. Therefore, Bank Negara Malaysia has created an innovative and competitive Islamic banking market through directives and advancing the current domestic Islamic financial institutions. The steps that Bank Negara Malaysia has taken have altered the structure of the Islamic banking industry based on the number and range of banking activities on these banks (Mohammed et al., 2015).

The Great Recession of 2008 caused most financial markets to collapse, but some nations recorded unforeseen market growth after the global crisis. Islamic banks recorded positive growth during this period. In countries like Malaysia, there is no longer an interest to enter the Islamic market as it transacts over 30 percent of the overall financial transactions. Some arguments like a religious governance approach guided by common faith based codes are why Islamic institutions have shown a strong financial performance even when other financial institutions are struggling (Apaydin, 2018). Others argue that a shared vied of morality means regulation should be the same favoring orderly risk-taking.

Though a glance at the guidelines used in Islamic banking and financial institutions shows that they are not convergent, they are observable differences based on countries' structure and regulatory content that monitor these institutions' activities. Due to the absence of the modern standard to guide the operations of Islamic banks, nations that embrace Islamic banks need to face emerging risks as the industry continues to grow beyond national borders. The range in the regulatory approaches leaves many questions (Apaydin, 2018). Islamic banks are expected to be regulated by the same religious background. Therefore, they would have the same regulatory frameworks, but this is not the case as these regulatory approaches widely vary.  

Islamic finance can be used to solve the economic disorder. Islamic financial banking can address the crisis resulting from excess debts and an interest-based financial framework. There is a need to carry out a benchmark by developing a new Islamic approach to permit policy guidance. In the Islamic macroeconomic ideal, the monetary policy directly influences the real sector with the present indirect impact through a risk and profit-sharing approach (Othman et al., 2017). The Islamic banks do not operate in isolation as most economies that have Islamic banks also have conventional banks; hence, a need for a broad approach to monetary policy (Khatat, 2016). However, at the same time, there is a need for a dual system to monetary policy when dealing with Islamic financial institutions that are not advanced as conventional ones.

References

Apaydin, F. (2018). Regulating Islamic banks in authoritarian settings: Malaysia and the United Arab Emirates in comparative perspective. Regulation & Governance, 12(4), 466-485.

Basri, M. F. (2020). Competition and market structure of the Malaysian Islamic banking industry. Journal of Islamic Accounting and Business Research.

Khatat, M. E. H. (2016). Monetary policy in the presence of Islamic banking. International Monetary Fund.

Mohammed, N., Ismail, A. G., & Muhammad, J. (2015). Evidence on market concentration in Malaysian dual banking system. Procedia-social and behavioral sciences, 172, 169-176.

Mohammed, N., Ismail, A. G., Muhammad, J., Jalil, S. A., & Noor, Z. M. (2015). Market concentration of Malaysia’s Islamic banking industry. Jurnal Ekonomi Malaysia, 49(1), 3-14.

Othman, A., Sari, N. M., Alhabshi, S. O., & Mirakhor, A. (2017). Monetary Policy and Islamic Finance: Malaysia. In Macroeconomic Policy and Islamic Finance in Malaysia (pp. 175-237). Palgrave Macmillan, New York.

Zulkhibri, M. (2018). The impact of monetary policy on Islamic bank financing: bank-level evidence from Malaysia. Journal of Economics, Finance and Administrative Science.