Islamic Finance Case Study

Islamic finance is a financial system that operates and governs according to Islamic law or Shari’ah principles. The elements of Islamic finance systems are similar to conventional financial system that includes banks, capital markets, fund managers, investment organizations, and insurance firms except that Shari’ah principles. According to Beck et al. (2013), Islamic finance can be described as the system that does not allow for the charging of interest payments, does not allow for speculation, and prohibits financing of specific illegal activities Islamic finance started in the 6th century where the Muslims practiced a version of Islamic finance for many centuries such that in the product trading. After a while, the Islamic territory falling

The establishment of the Haj fund management organization is implemented and named as Tabung Haji. According to Al Nasser and Muhammed (2013), the planning of Tabung Haji was presented by Royal Professor Ungku Aziz in 1959 under the ‘Plan to improve economy of prospective pilgrims’. The idea of Tabung Haji was created to save the fund of Malaysian Muslims that wanted to perform Haj without affecting the living standard and the saving must be no interest influence. Because of the outstanding performance of Tabung Haji, many organizations suggested Malaysian government to establish a full fledge Islamic bank. After several studies were conducted on the worth of making a new Islamic bank in Malaysia, Bank Islam Berhad was the first Islamic bank introduced in Malaysia on 1st July 1983. This is considered as the first step in constructing the Islamic financial system in Malaysia. This first bank followed by Bank Muamalat Malaysia Berhad on 1st October

Because of the good plan that are shown in Islamic banking system such as no interest rate, the non – Muslim citizen also started to manage their financial by using Islamic banking system. Due to overwhelming response and to encourage competitiveness, Malaysian government thinks that the Islamic banks are needed more to operate and manage the Islamic banking system in the country. On top of that in 1993, many studies were done to determine the performance of Islamic bank. Due to the positive result of the researches, government allowed the conventional banks to open Islamic windows or Islamic subsidiaries. The chosen banks were allowed to use their existing infrastructure, staff and branches but must follow Shari’ah principles. On 4th March 1993, Bank Negara Malaysia introduced a scheme known as Interest–free Banking Scheme, which later renamed as Islamic windows. According to Wasiuzzaman and Gunasegavan (2013), Bank Negara Malaysia is giving more focus to the Islamic banking industry as the strategy to establish Malaysia as a global Islamic hub. The principles of Islamic banking are mutual risk and the profit sharing between parties. Other than that, they also stated that the assurance of equality for all and the transactions are based on an underlying business or