Islamic Banking in Malaysia: The Changing Landscape

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Mohamed Ariff


The banking industry in Malaysia is dominated by conventional banks, with
Islamic banks accounting for roughly one-fifth. In addition, the Islamic banking sector is
overwhelmingly in the hands of conventional banks, thanks to their Islamic subsidiaries
which outnumber the ‘wholesome’ Islamic banks whose market share of the Islamic
banking business is on the decline. In this equation, the Islamic subsidiaries of
conventional banks have an upper hand, as they can ride on the coattails of their parents
– which gives them a competitive edge - while the stand-alone domestic Islamic banks and
foreign-owned full-fledged Islamic banks have to fend for themselves. The Islamic
subsidiaries of conventional parents are in the driver’s seat actively leading the industry,
while the wholesome Islamic banks have apparently taken the backseat, which may not
augur well for the future of Islamic banking that is currently stuck in the initial stage of
product differentiation. It is likely that the Islamic subsidiaries of conventional banks will
continue to ‘Islamise’ their conventional products, with wholesome Islamic banks
passively following suit, rendering the transition from Shari’ah-compliant products to
Shari’ah-based products somewhat elusive.


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