Risk and Regulation of Islamic Banking

Risk and Regulation of Islamic Banking

Foundations of Islamic Finance series

Edited by Mervyn K. Lewis, Mohamed Ariff and Shamsher Mohamad

From a single product offering in 1963, the Islamic financial services industry has grown to an estimated $1.6 trillion in assets. Products must comply with profit and risk-sharing criteria and regulations preventing banks from venturing into activities with high risk and excessive uncertainty. This timely volume analyses these matters and considers the range of new products, discussing both conceptual and practical dimensions. It connects Islamic finance to the mainstream theoretical literature on financial intermediation while also exploring its differences. The expert contributors also examine why an ethical foundation is important and why the system requires well-thought-out regulations to ensure outcomes that protect the community’s well-being.

Chapter 7: The role of the central bank in dual banking Malaysia

Shamsher Mohamad and Veelaiporn Promwichit

Subjects: asian studies, asian economics, economics and finance, asian economics, financial economics and regulation, islamic economics and finance, money and banking


Islamic banks (IBs) in Malaysia have been growing rapidly since their debut in 1983, and are now an important component in the economy and financial system, which aims to become a major international Islamic finance hub. The policies, regulations and activities proposed and implemented by the Bank Negara Malaysia (BNM, the central bank) have significantly contributed to this development. It has been further enhanced by regulation of the Securities Commission. This chapter provides an overview of the role of BNM in regulating the Islamic banking industry in Malaysia. Globally, IBs started operations as early as the 1960s as nonbank financial entities, while the first Islamic bank in the world–Dubai Islamic Bank (DIB)–was established in 1975 in Dubai (Ahmed, 2006). Overall, it is expected that the assets in IBs will growing at 15 per cent per annum over the next 20 years (El-Qorchi, 2005). In contrast, in 2008, the world total conventional banking assets, equities and bonds were estimated to be US$ 221,494 billion or 3.6 times world gross domestic product (GDP) (IMF, 2010). The GDP share of the 57 Muslim majority countries is estimated to be somewhere between 12 and 18 per cent of the world GDP, depending on US dollar or purchasing power parity (PPP) terms.

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