impact of global financial crisis on banking sector

1.0 Introduction

“Bank” is a very common word for society nowadays since it’s always applied in our daily life. As we know that, banks are involved in the activity of finance transaction and business investment. In the Malaysian banking system, it can be divided into two main system which is Islamic banking system and conventional banking system. Both of the banking system operate in different ways and give a different perspective to the different customers. In this paper, I am going to investigate about the level of efficiency of the Islamic and conventional commercial banks before and after the Global Financial Crisis.

Islamic banking system has holds the six principles for their operation system which is (1) money as capital, (2) Rabbulmal and Mudarib relationships, (3) risk sharing (4) markets set prices and generate profits, (5) Islamic banking stability and (6) Islamic banks as agents for economic growth (Ismail, 2010). For Islamic banking system, payment of interest is prohibited. The money that invested in the business is considered as the potential capital and it can be used to purchase the goods and services. Besides, money which advanced to a business is a debt of the business and it is not allowed to apply to any interest.

For the conventional banking, their core principle is time has value which means that the amount of the financial transaction will affect by the time of payment (Ismail, 2010). The borrower is allowed to make their payment by a series of time through the conventional loan contract that fixed. For example, if you buy a car and borrow a loan, the bank will allow you to make the payment according to the period that agreed. At the end of the period, you will find that the amount of payment will exceed...

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...sis brings less effect to the Islamic bank due to their principles that hold in their management. The financial instability has been prevented from this crisis because of the rule of the Islamic financial system that being practiced by the bank. The rule involved such as the prohibition of interest charge and sharing of profit and loss had act as the cushion in this crisis. According to the International Monetary Fund (2010), the result also shown that Global Financial Crisis also has less impact on Islamic Banks compared to others. During the crisis, Islamic bank still stay to be stable for their financial performance even though the profitability had declined more than the conventional bank due to the weaknesses in management of risk. Based on Figure 1, it’s clearly shows that the profitability of Islamic banks is better than the conventional banks in Malaysia.