This paper consists of three parts. Firstly, it provides an overview of the Islamic financial landscape in Malaysia. Secondly, it discusses the various approaches undertaken by the Malaysian Authorities in the development of an Islamic banking system in Malaysia. And finally, some issues and future directions in the implementation of Islamic banking in Malaysia.

PART 1

Overview

The Islamic financial system in Malaysia may be broadly classified into three categories, namely the Islamic banking system, the non-bank Islamic financial intermediaries and the Islamic financial markets. The system may also be characterised in three different forms as follows:-

1. Full-fledged Islamic financial institutions;
2. Conventional financial institutions with Islamic windows; and
3. Conventional financial institutions with Islamic windows and full-fledged Islamic banking branches.

Islamic Banking System

The Islamic banking system comprises Bank Negara Malaysia (BNM) as the central bank vested with powers under the Islamic Banking Act 1983 and the Banking and Financial Institutions Act 1989 (BAFIA) to regulate and supervise Islamic banking operations in Malaysia; the Islamic bank; and the commercial banks, finance companies, merchant banks and discount house participating in the Skim Perbankan Islam (SPI) (Note: the English translation is the Islamic Banking Scheme). The Islamic bank and the commercial banks are the only institutions allowed to offer Islamic current accounts.

Islamic banks

There is currently one Islamic bank operating in Malaysia, namely Bank Islam Malaysia Berhad (BIMB), established in 1983 under the Islamic Banking Act 1983. The Act provides BNM with powers to supervise and regulate Islamic banks, similar to the case of other licensed banks. BIMB operates a total of 80 branches with staff strength of 1,600 people.

A second Islamic bank, to be known as Bank Bumi-Muamalat Malaysia Berhad (BBMMB) will be established following the merger of Bank Bumiputra Malaysia Berhad (BBMB) and Bank of Commerce (M) Berhad (BOCB). Under the arrangement, all conventional banking assets and liabilities of BBMB will be transferred to BOCB while the Islamic banking assets and liabilities of BOCB and BBMB Kewangan Berhad will be migrated to BBMB. BBMMB is expected to commence operations by the fourth quarter of 1999.

Commercial banks

The commercial banks participating in the SPI (SPI commercial banks) form the largest group of financial institutions in the Islamic banking system. The number of SPI commercial banks as at end-June 1999 was 24, of which four are foreign-owned locally incorporated banks. Total assets of the SPI commercial banks as at end-May 1999 was RM18.7 billion, while deposits and financing totalled RM14.5 billion and RM5.3 billion respectively. Islamic banking facilities are available in 1,663 branches of the SPI commercial banks, including 7 full-fledged Islamic banking branches.

Finance companies

The second largest group of banking institutions in the Islamic banking system are the finance companies. There are 18 finance companies participating in the SPI (SPI finance companies) as at end-May 1999. Total assets of SPI finance companies as at end-May 1999 was RM5.1 billion while deposits and financing each amounted to RM4.1 billion and RM2.3 billion respectively. Islamic banking facilities are available in 820 branches of the SPI finance companies, including 3 full-fledged Islamic banking branches.

Merchant banks

Merchant banks as a group are relatively small in the Islamic banking system. Although there are only 5 SPI merchant banks, most of the Islamic banking activities are dominated by two large merchant banks, which represent 93% of the SPI merchant bank's assets. As at end-May 1999, total assets of the SPI merchant banks amounted to RM733 million while deposits and financing totalled RM238 million and RM438 million respectively.

Discount houses

The discount houses are the new entrants in the Islamic banking system, when they are allowed to participate in the SPI since December 1998. All the seven discount houses are participating in SPI and they focus on short-term Islamic money market operations and underwriting/ arranging of Islamic debt securities.

Non-Bank Islamic Financial Intermediaries

The non-bank Islamic financial intermediaries may be broadly divided into four groups of institutions, as follows:

1. the takaful companies;
2. the savings institutions;
3. the development financial institutions; and
4. other financial intermediaries which offer Islamic banking services such as Islamic leasing companies and National Mortgage Corporation.

Takaful companies (Islamic insurance)

Takaful operations are regulated and supervised by BNM since 1988 with the appointment of the BNM Governor as the Director-General of Insurance and Takaful. There are presently two takaful operators, namely Syarikat Takaful Malaysia Berhad (STMB) and Takaful Nasional Sendirian Berhad (TNSB) operating a total of 113 takaful offices throughout the country. As at end-March 1999, total assets of the family takaful funds and the general takaful funds amounted to RM572 million and RM205 million respectively.

Savings institutions

The most prominent Islamic savings institution is the Pilgrims and Management Fund Board or popularly known as Tabung Haji. Tabung Haji is considered the first Islamic financial institution in Malaysia, established by statute in August 1969. The objective of Tabung Haji is to promote and mobilise savings of Muslims intending to go on pilgrimage, and co-ordinate activities connected with Muslims going on pilgrimage. Tabung Haji manages a fund derived mainly from the accumulation of savings of intended pilgrims. The total assets of Tabung Haji as at end-June 1999 were RM7.66 billion. The growth of Tabung Haji was derived mainly from its expanded savings base due mainly to the increase in the number of depositors, totalling 3.6 million as at end-June 1999.

Bank Rakyat is the leading co-operative credit institution and has committed to establishing itself as a full-fledged Islamic co-operative bank. The bank introduced Islamic banking in 1993 and since then, the banking operations of Bank Rakyat have been geared towards Islamic banking through its 74 branches nationwide. All new branches of Bank Rakyat now offer solely Islamic banking products while the existing branches are gradually being converted to Islamic banking branches. Bank Rakyat is the fore-front institution in the provision of Islamic pawn-broking services or popularly known as Ar-Rahnu, as a joint-venture exercise with Yayasan Pembangunan Ekonomi Islam Malaysia. The National Savings Bank (NSB) offers Islamic banking services on a small scale via the Islamic window.

Development finance institutions

The development finance institutions (DFIs) are basically enterprises owned by the public sector. The DFIs which offer Islamic banking services are the Industrial Bank of Malaysia, the Development and Infrastructure Bank of Malaysia, and the Agriculture Bank of Malaysia, all of which provide the facilities on a window basis. The Development and Infrastructure Bank of Malaysia (DIBM) provides Islamic banking facilities in the provision of medium and long-term funds to promote industrial, investment and growth while the Agriculture Bank has developed a similar scheme to that of DIBM. In addition, the Industrial Bank of Malaysia and the Development and Infrastructure Bank of Malaysia (DIBM) are also the national agencies for the Islamic Development Bank's (IDB) financing facilities in Malaysia, in which IDB extends credit lines to both banks for direct financing and trade financing facilities. As at end-June 1999, the combined Islamic financing extended by the three institutions amounted to RM164 million.

Islamic Financial Markets

The Islamic financial markets in Malaysia comprise the Islamic money market and the Islamic capital market. The Islamic money market, introduced in 1994 may be regarded among the most structured Islamic money market in the world. It comprises the trading of Islamic papers, the Mudharabah inter-bank investment, and the Islamic clearing and settlement system. The participants in the Islamic money market are the Islamic bank, SPI commercial banks, SPI merchant banks, approved SPI finance companies and SPI discount houses. Among the instruments available in the Islamic money market are the Government Investment Issues, Islamic Accepted Bills, green Bankers Acceptances, Islamic debt securities (bonds and commercial papers) and Islamic Negotiable Instruments.

The Islamic capital market in Malaysia comprises a primary securities market, in which new issues of Islamic Government papers and Islamic corporate securities are offered to the public as well as institutions; a secondary market, in which existing Islamic Government papers and Islamic corporate securities are transacted; and the equity market and unit trusts. Islamic Government papers refer to Government Investment Issues, introduced in 1983 under the Government Investment Act 1983. Under the Act, the Government is allowed to issue non-interest bearing government papers to the public based on Islamic principles. Since the GII is defined as liquid assets, the Islamic bank and SPI banks purchase the GII to meet the liquidity requirements as well as to park their temporary idle funds. As at end-May 1999, total outstanding issues of GII were RM2 billion.

Islamic debt securities (IDS) made its debut in 1990 when a multinational company issued a RM125 million Bai' Bithaman Ajil facility for a distillation plant. Since then, IDS has become increasingly popular with various Islamic concepts such as Musyarakah, Ijarah, and Qardhul Hassan being applied. Islamic debt securities comprise the medium term Islamic bonds and the short-term Islamic commercial papers.

The Islamic equity market is reflected by the stock-broking activities, Islamic unit trusts, Islamic index and the list of the Syariah-approved counters. In terms of the stock-broking activities, the country now has a full-fledged Islamic stock-broking firm and three conventional stock-broking firms offering Islamic stock-broking services. In April 1999, the Kuala Lumpur Stock Exchange (KLSE) introduced an Islamic equity benchmark index for those who wish to invest according to Syariah. The KLSE Islamic Index tracks Syariah-compliant stocks in the KLSE, constructed from the list of Syariah-approved counters issued by the Securities Commission (SC).

Unit trusts

The unit trusts are a group of specialised financial intermediaries in the capital market which offer small investors the opportunity to pool their resources in a diversified portfolio of securities which are managed and selected by professional portfolio managers. The inception of Islamic unit trust began in 1993 when Tabung Ittikal was introduced by Arab-Malaysian Unit Trust. The success of the fund paved the way for the introduction of more Islamic unit trusts and as at end-May 1999, there were 13 Islamic unit trusts in the country with total fund size of RM3.55 billion.

PART 2

Approaches

Having painted broadly the Islamic financial landscape in Malaysia, it is useful to discuss the approaches undertaken by Bank Negara Malaysia (BNM) in the development of the Islamic banking system in Malaysia. The Central Bank has adopted several principles and approaches in developing Islamic banking in Malaysia as follows:

1. Dual banking system;
2. Gradual implementation;
3. Providing adequate infrastructure;
4. Optimising available opportunities; and
5. Openness.

Dual banking system

The first approach is to present a dual banking system to Malaysians ? Islamic banking system operating side-by-side with the conventional banking system. Perhaps Malaysia is the only country in the world that develops a dual banking system. Other countries, particularly Muslim countries, would either have a full-fledged Islamic banking system; or conventional system with a few Islamic banks; or a totally conventional banking system. Why this approach? First of all, through a dual banking system, Malaysian Muslims have a choice to bank in a system that is in line with their religious belief. It provided an alternative to Muslims who have restrained from using the banking system which, prior to 1983, was totally conventional.

SecondIy, a dual banking system provides a complete and comprehensive banking alternative to Malaysians. This means that a wider range of Islamic banking products and services will be made available in banking institutions which offer Islamic banking. In the dual banking system, there is not only an Islamic bank, but also other supporting banking institutions such as commercial banks, finance companies, merchant banks, takaful companies, securities firms, savings institutions, and rural co-operative bank. Islamic financial services are also available in the financial markets such as Islamic money market and the Islamic capital market. In short, all Malaysians would have no problem with the diversity and availability of Islamic products and services in the country.

Thirdly, the menu of Islamic financial products in a dual banking system tends to be more comprehensive and wider. In a competitive environment, where conventional banking tends to be a competitor, Islamic banking operators have to be innovative and creative to ensure that their products are superior to, or at least at par with the conventional products. Therefore, the elements of efficiency and innovation are vital to ensure Islamic banking will remain relevant, and able to capture a fair share of the banking system. The operators certainly cannot afford to remain complacent.

Finally, the level of sophistication in terms of Islamic banking products is prevalent in a dual banking system. It is a fact that the conventional banking system is in a sophisticated and advanced environment. Hence, Islamic banking has no choice but to keep up with the sophistication and advancement of the banking system. This element has been the plus factor on why Islamic banking products available in Malaysia are seen to be at a relatively advanced stage. As the country moves forward towards greater IT environment, Islamic banking is fortunate for being able to capitalise on the changes in the banking system. Innovation will always be an important element to motivate Islamic banking operators to be dynamic and pro-active in their pursuit to position Islamic banking in the mainstream banking.

Gradual implementation

Basically, the establishment of an Islamic financial system in Malaysia has undergone radical transformation in the last five years, although the first Islamic bank was established in 1983. Fundamentally, the timeline of the Islamic financial landscape may be characterised by three stages of development as follows:

1. 1983 ? 1990: Monopolistic years
2. 1990 ? 1994: Developing years
3. 1994 ? 2000: Take-off years

The first stage of Islamic banking may be dubbed as monopolistic years, but with a cause. The rationale to confine Islamic banking within the structure of a single Islamic bank was to allow the Islamic bank to operate in a smooth manner without undue competition which may hinders the progress of Islamic banking. There was an understanding that the Islamic bank would be given a grace period of 10 years before the Government decides to establish another Islamic bank.

The second stage was the developing years beginning 1990 when the Governor of BNM expressed his desire to create a comprehensive Islamic financial system operating in parallel with the conventional banking system in Malaysia. BNM embarked on the project to disseminate Islamic banking on a nation-wide basis, with as many players as possible and able to reach all Malaysians. Towards this end, BNM considered three options with regard to creating the nucleus of an Islamic banking system, namely:

1. allow the setting up of new Islamic banks,
2. allow the existing financial institutions to set up subsidiaries to offer Islamic banking services; and
3. allow existing financial institutions to offer Islamic banking services using their existing infrastructure and branches.

After a careful consideration of various factors, BNM decided on the third option as the best approach to disseminate Islamic banking throughout the country and as a medium for the development of an Islamic banking system. The third option was seen as the most effective and efficient mode of increasing the number of institutions offering Islamic banking services at the lowest cost and within the shortest time frame. It also allowed the existing infrastructure of the banking system, including the existing branches and staff to be tapped in offering Islamic banking services.

BNM consulted a number of prominent Islamic jurists whether such approach is in line with the Syariah. The feedback received was overwhelming. We received full support from the jurists who applauded the move as a positive step. The reasoning "if you cannot implement it all together, do not ignore it all together" was the strongest point to back-up the policy. This reasoning implies that if we cannot develop the Islamic banking system in total, we should not totally abandon the effort but to do it as per our efforts and capability.

Following the above, in March 1993 BNM introduced the Skim Perbankan Islam or SPI (previously known as Skim Perbankan Tanpa Faedah). The scheme allows conventional financial institutions to offer Islamic banking services alongside their conventional banking services. Three commercial banks were selected for the pilot test and by the end of 1993, 18 banking institutions participated in the scheme. The number of products, about 22, were considered adequate, while the infrastructure of the Islamic money market was already in place by end-1993.

The third stage was the take-off period where various measures were implemented to strengthen the Islamic banking system. This includes the introduction of the Islamic money market in January 1994, separate disclosure for SPI banking operations in October 1996, opening of full-fledged SPI banking branches beginning 1996 and the harmonisation of Syariah issues via the formation of the central Syariah advisory council at BNM in May 1997.

At present, we are riding on the take-off stage, and the growth of Islamic banking is being monitored closely to make it more resilient and robust. The assets of Islamic banking have grown from only RM2.4 billion in 1993 to RM29.9 billion as at end-May 1999. Deposits increased significantly from only RM2.3 billion in 1993 to RM22.9 billion while financing increased from only RM1 billion in 1993 to RM11.7 billion during the same period. The number of institutions participating in the SPI has also increased from only three players at launching stage to 54 players, comprising 24 commercial banks, 18 finance companies, 5 merchant banks and 7 discount houses. Islamic money market also recorded a sharp increase, from only a humble RM2.1 billion in 1994 to RM118.3 billion as at end-1998. Islamic debt securities, which has become a popular feature in the domestic private debt securities market has managed to capture 20.4% of the total PDS market, with an outstanding amount of RM17.1 billion as at end-April 1999.

The gradual implementation of Islamic banking has been instrumental in bringing Islamic banking to where it is today. It has not been the intention to call for a total replacement of the conventional banking system since the move may not only be unwise, but also will not meet the requirements of the economy. Thus, Malaysia will continue with the current approach to develop Islamic banking, as it has been tested to be successful.

Providing adequate infrastructure

One of the basic functions that determine the robustness of an Islamic banking system is adequate institutions and market infrastructure. The more complex a system, the more complicated the infrastructure will be. Similar rule also applies to Islamic banking. It must possess adequate infrastructure to enable the system to operate and function smoothly. The genesis of the present Islamic financial structure began with the institutional building undertaken since 1983. However, since there is only one Islamic bank, the structure is not complete as a banking system must have a large number of players, a broad variety of instruments and an inter-bank market to provide the matching mechanism between the deficit and surplus units in the Islamic banking system.

Some of the infrastructure of the Islamic banking system may be summarised as follows:

(i) Legal set-up and legal provisions

This is carried out through the Islamic Banking Act 1983 for the Islamic bank and the Banking and Financial Institutions 1989 for the SPI banking institutions.

(ii) Regulatory framework

BNM provided the necessary framework such as the statutory requirements, liquidity requirements, prudential guidelines (such as the Guidelines on SPI and Guidelines on the Islamic Money Market) and constant monitoring of the Islamic bank and SPI banks operations through off site and on-site supervision. BNM has also established a special unit in the Bank to carry out strategic planning and formulate policies for Islamic banking.

(iii) Financial disclosure

This is carried out via the GP8, a model financial statement which requires SPI banks to disclose their Islamic banking operations as part of the principal financial statements of the SPI banks. The disclosure, as part of the Notes to the Accounts entails the balance sheet and the P & L of the Islamic banking operations during the financial year. BNM is also working closely with the Malaysian Accounting Standard Board to study the various accounting standards developed by the Accounting and Auditing Organization for Islamic Financial Insitutions based on Bahrain.

(iv) Payment systems

The country has already a sound and reliable payment, clearing and settlement systems to ensure the process of settling monetary transactions are completed in a timely manner. The crucial issue in Islamic banking is the segregation of funds to avoid co-mingling between Islamic and conventional funds. To facilitate such arrangement, BNM has required the SPI banks to open and maintain separate current and clearing accounts with the central bank. This has resulted in each SPI banks maintaining two account numbers with the central bank, i. e. conventional account and Islamic account. In addition, the SPI banks are also required to maintain separate member accounts for funds transfer and payments. The separate payment system devised for Islamic banking has avoided possible abuse in terms of wrongful accounting entries by the SPI banks with respect to Islamic banking operations.

(v) Central Syariah board

BNM realised that differences in interpretations in Syariah may not be healthy for a relatively young Islamic banking system. To reduce such possibilities, BNM established the National Syariah Advisory Council in 1997, empowered as the sole authority to issue opinions and decisions in Islamic banking and takaful. Although the Islamic bank and the SPI banks also appointed Syariah advisers to advise them on day-to-day operations, they are required to refer to BNM on policy-related Syariah issues.

Optimising available opportunities

We are of the view that the most appropriate strategy would be to optimise opportunities, particularly on the wide array of instruments already available in the market. Firstly, we have the pure Islamic instruments. This is relatively easy since it has been accepted and recognised. Examples of such products are the Mudharabah investment account and Musyarakah financing. Next, we have the conventional financial instruments which we feel could be Islamised. What we have done is to first identify the Islamic and un-Islamic elements in the instrument. Then we eliminate all the un-Islamic features in the instrument and replaced it with Islamic elements. Islamic Accepted Bills and Islamic Negotiable Instruments are such examples. Through this approach, we have managed to increase the number of instruments in the shortest time possible without the need to reinvent the wheel. Given the abundance of banking products available in the market, it is only realistic if we capitalise and optimise the opportunities. Notwithstanding that, we still encourage innovations, because innovations are still the key factor to differentiate Islamic banking products from conventional products.

Openness

We are fortunate that the various schools of thoughts in Islam have adopted an open approach with regard to differences in interpretations in the field of Islamic banking. Our stance is quite simple. We respect all the recognized schools of thoughts ("mazhab") on differences in opinions. The rule of thumb is to treat all products, minus the riba, as permissible ("harus"). As long as even only one mazhab recognise a concept as acceptable from the Syariah point of view, the product will be classified as permissible. If we cannot find any source from the Quran, Sunnah, ijma' and qias, our central Syariah board may carry out an ijtihad. So far, the process has been smooth although the Malaysian interpretations on some Syariah issues have raised questions by others. It is important to learn to respect differences in opinion and interpretation, given that the process of ijtihad has allowed us to do so within the boundary and realm of the Syariah. If we keep on insisting that our approach in Islamic banking is better and purer, degrading the efforts of others, but yet at the same time do nothing constructive to implement Islamic banking, I cannot foresee Islamic banking making much headway. The bottom line by the end of the day is whether there is growth and development in Islamic banking. Performance is measured by achievements. If we are to offer a solution to the ills of the present financial system architecture, we have no choice but to adopt an open attitude.

PART 3

Issues and Future Directions

The final part will discuss some issues and the way forward in the implementation of an Islamic banking. At the outset, we are witnessing radical transformation in the world economy in the last two decades. Geographical and cultural boundaries have increasingly been broken down with the advent of efficient communication, Internet and satellite. The world is within reach with a flick of a button. Rapid economic and financial changes around us can easily render yesterday's winning business strategies obsolete. Even successful companies like IBM and General Motors have discovered that they can lose significant market share if they do not respond to fast changing business environment.

Progress in telecommunication has been the driving force in creating a huge global business landscape. Bankers, particularly Islamic bankers should take cognisance of this important development to strategise and position themselves. The notion that banks merely act as financial intermediaries between the ultimate savers, the households, the ultimate investors, the firms may no longer holds ground. Today, institutions that acquire telecommunication technology are able to encroach into the banking sector by their ability to offer products similar to banking products. It is only the state of readiness to manage the forces of competition that can ensure relevance of each individual institutions; whereby in the long run, the regulatory environment which has long protected the encroachment of competition, both globally and domestically, may have to be prudently dismantled. On the other hand, technology-driven domestic banks can tap the vast opportunities in the huge global banking landscape.

To cope with increased competition, Islamic financial institutions should take advantage of the advancement of high technology in the conduct of their business. Notwithstanding the desire to be high-tech driven, they should not, however ignore the other important aspect of banking i. e. the "high-touch" aspect. This refers to the importance of being customer-oriented and customer-driven in all their operations. Too many Islamic banks still design their products without customer input, only to find them rejected in the marketplace. And too many Islamic banks did not focus on consumer services, only to lose them to those who are consumer-driven.

Islamic financial institutions cannot be a passive spectator of these profound changes. Islamic financial institutions have to prepare themselves to play a meaningful role and contribute significantly to enhance the economic wealth. Establishing an Islamic financial institution is already a no mean feat. But to sustain its commercial role in a competitive financial landscape is more challenging and daunting. We cannot afford to remain complacent. Islamic financial institutions are lagging far behind the level necessary to enable it to thrive and compete effectively in a freely competitive global environment. There is hardly an Islamic bank in the top 500 banks in the world. This is not an enviable record. We can certainly do better than this.

Financial services, particularly banking are by nature long-haul business. Islamic financial services is not only long-haul business, it transcends beyond this world and the hereafter. There is no other way to generate active competition and the desire to seek out expansion than the need to justify returns on investments. Which is why there is a need for Islamic financial institutions to be adequately capitalised. An Islamic financial institution with a sound capital is able to assume greater risk and is, therefore, likely to be more willing to expand its operations and venture into new business. In view of the changing nature of financial services and the fast evolving financial landscape, size is increasingly important to compete in today's financial world. In my view, only large and strong Islamic financial institutions will have the capacity and ability to avail themselves of the opportunities. The future success of Islamic banking rests on the ability of this emerging sector to position itself strategically to overcome future challenges. The increasing globalisation of the financial system and the prospects of further liberalisation of the banking system in the time to come, both domestically and regionally, would pose challenges not only to conventional banking institutions, but also to Islamic banking.

Although size is important, we should not ignore another important aspect of banking, i. e. the need for an abundance of intellectual capital. Islamic banking lagged behind conventional banking and therefore has a lot of catching up to do. Indeed, the future of Islamic banking depends a lot on the capacity and ability of Islamic bankers to generate creative ideas and innovative products in order to convince the banking public that Islamic banking is at par if not better than the traditional banking. There is no substitute to this.

We all know that at the international level, Islamic syndications based on Ijarah usually used the LIBOR as the benchmark to price the product. It would be more meaningful if Islamic banks could come up and design their own reference rate rather than LIBOR, so that Islamic banks can have their own benchmark in the pricing of its products. Relying on LIBOR as the one and only reference rate without exploring into other Islamically-acceptable benchmarks would only prove our lack of creativity and will power. We are of the view that creating an international benchmark for pricing of Islamic products is an urgent tasks and thus, it is timely for Islamic bankers to explore this proposition and give it the necessary attention. In Malaysia, we are embarking on this project to establish a domestic Islamic reference rate which would serve as an indicator for investors to manage and plan their investments, and for Islamic financial institutions to price their products. Unlike conventional benchmarks which are cost-driven, the derivation of the reference rate would be sourced from the profitability trends of the SPI banks.

It is time for Islamic banks to generate practical and implementable action plan which can elevate the standards of Islamic banking in the international market place. There is a need for greater efforts and more effective means of networking to strengthen the relationship among Islamic banks. Strategic alliance arrangement and smart partnerships are some the approaches that Islamic banks should seriously explore into. Malaysia is always ready to share its experiences with other Islamic countries. It has done in the past with some countries in the region, and committed itself to the training programme in Islamic banking and takaful as one of the D-8 projects.

Islamic banking has a bigger agenda than just providing an alternative banking system to the Muslim community. It has to show that it has the dynamism and sophistication to strive for the betterment of the society, address to the ills of the nation, and overcome economic imbalances. Co-operation among Islamic banks should not rest merely on operational and product developments issues, but Islamic bankers should devise long-term strategies on ways and approaches to elevate the position of Islamic banking to greater heights.

Finally, the international Islamic financial system must be properly planned from now. The players must be identifed, the products must be made available and the international Islamic money market must be in place. The institutions that shape up the financial system must be made aware of their role in the establishment of an international Islamic financial system. The next stage then is to capitalise and maximise on each other's strengths so that Islamic banking and finance will not only prosper to benefit the Muslims but also contribute to the world as a whole. Perhaps the IDB and some of the international Islamic financial institutions should begin to explore the need to have at least a more structured although informal international Islamic financial system. The idea must be transformed into reality. Otherwise Islamic banking will continue to lag behind.

Bank Negara Malaysia
12 August 1999