The was first commence in 1970’s. Malaysia is

The meaning of Islamic Banking (IB) refers
to a banking activity or a system of banking that follows the basic principles
of Shariah (rules and values in accordance with Allah’s (God) decree in the
Holy Quran and according to the hadith. Islamic banking is also known as
interest free banking system as the Shariah disallows the acceptance of “Riba”
or interest rate for the accepting and lending of money. In IB system, a
business that offers good interest rates or services is strictly prohibited and
it is in fact considered Haram (forbidden). Islamic banking offers the same
facilities as conventional banking system except that it strictly follows the
rules of Shariah or Fiqh al- Muamalat.

The IB system offers almost similar with
its conventional counterpart such as saving account, current account, credit
card, loan and other financial product but it must follow and not prohibited by
principles of Shariah. Islamic Banking has gone through numerous changes and
has been evolved since it was first commence in 1970’s.

We Will Write a Custom Essay Specifically
For You For Only $13.90/page!

order now

Malaysia is playing an iconic role in
Islamic banking, having been a pioneer in the beginning and a frontrunner in
the global arena at present. Malaysia Islamic Finance industry has been in
existence for more than 30 years. The enactment of Islamic Banking Act 1983
allow the first Islamic Bank to established The first shariah based banking
system was introduced through the establishment Bank Islam Malaysia Berhad
(BIMB) and has been playing the leading role in the development of the
country’s IB Industry. BIMB has been providing technical assistance in the
setting up of several Islamic institutions in the Asian region such as
Indonesia, Thailand and Sri Lanka.

.           In
1993, the “Islamic banking window” concept was introduced, which allowed
interested conventional banks to use their existing banking infrastructure to
offer the IB products. Through this concept, bank customers could opt for
either the conventional or Islamic banking products by patronizing a particular
conventional bank. The window concept was well-received by the conventional
banks, as they were able to leverage on their existing reputation and network
infrastructure to capture new market segments and diversify their customer
base. More importantly, the Islamic banking windows provided a positive
competitive pressure to the full-fledged BIMB to increase its efficiency and be
innovative in its products offering and delivery channels (Shabri & Salina,

to RAM Rating Service Berhad, the expansion of Malaysia Islamic financing continued
to surpass conventional banking loans in 2016 amid weaker economic conditions.
The agency also noted that the size of Islamic financing grew to RM45 billion
last year, compared to RM32 billion that was achieved by the conventional
banking sector. Despite
of the rapid expansion of Islamic bank all over the world, Islamic banks are
still being treated as territory for some capitalism countries. This is due to
the practices of IB are conflicted with the practices that have been held by
the capitalist for a long time. It is to believe that the trend of penetration
of Islamic bank into the conventional banking system will continue.

IB rapid growth and increasing demand on Islamic Banking products require a
deeper understanding and further re-assessment of the contribution of IB to the
overall economic performance. The industry rapid development also requires
further enrichment as there are limited studies conducted in this field on a
country, specifically a developing country such as Malaysia which is certain to
find a way to advanced them toward becoming a well-developed country.

The conventional
banking are based on interest whereas the IB like have been stated above
follows the Shariah law in all of its operation. In 2008, the global economic
world has been shocked with one of the largest financial crisis happened in the
modern world and it revolved with the used of interest in conventional banking.
During this time, the IB industry was seen to have manage to minimize the
effect created by the financial crisis because of their focus on the
maintaining the stability of the financial system with its profit sharing
system and also the disallowed of the interest-based activity. Based on the
study made by (Arouri 2013), he has found that the Islamic bank does help the
investors from the financial crises by comparing the Islamic stock indices to
the conventional ones. This context however has been contradicted by some of
the other researchers such as (Charles, 2011) who had found that the Islamic
finances indices are as likely to be affected as its conventional counterparts
and they also conclude that there were no empirical evidence that could prove
the IB to be more resilience towards the impact of the financial crisis rather
than the conventional. In order to validate this issue, as such further
investigation are needed regarding this topic since the IB industry has always
been said to be able to withstand and survive the effects of a financial.

Furthermore, one of
the indicators that will be used in this research is the total deposit (TD) of
the chosen Islamic banks in Malaysia. Total deposits are really important for
banks since it can provide the needed funds for the banks to carry out their
activities. By having these funds, banks can then provide loans or any other
financial service for its consumers or businesses thus promoting the economic
growth of the country itself. That is why the total deposits in banks are
really important for the economy. (Walid, 2015) said that operations conducted
by Islamic banking system have been characterized by the ability of attracting
large amount of deposit from both Muslim and Non-Muslims customers through
syariah-compliance retail banking, wholesale and investment banking services,
which serve as a mechanism that allow sustainable growth to businesses that
could encourage economic development.

However, conventional
banks also have the funding from the collection of interest payment from its
consumers. Whereas IBs which forbid the usage of any interest-based activity
rely mainly on the deposits gained from its consumers thus making the total
deposits in IBs are much more important than their conventional counterparts.
This may be a problem for the IBs to gain more fund to finance their activities
thus making it really important for us to see whether or not the total deposits
of IBs affect the economic condition of the country itself. In the study
conducted by (Walid, 2015) has found that the total savings of the IB’s in
Kenya does have a positive relationship with the economic growth of the country
thus proven that the IB activity does influence the economic growth of the
country in a good way. So even though the IB has harder time to gain their
fund, it might help them in the long run to see it affecting the economic growth
positively particularly in Malaysia. Therefore there is a need for this study
to be conducted so that we can determine the actual relationship between the
said indices with the dependent variable.

This two main issues
which were the possibility of another global financial crisis affecting the
country and how the IBs can survive with the funding mostly from its total
deposits has led us to prioritize on this topic so that we can find the
relativity between the said problems and the Islamic banking which will then be
determined whether or not it affect the Malaysian economy as a whole. The other
reason for the research would also because of the lack of research in this
particular area and since the future of Islamic banks remains vague in the
current financial world. The condition of the issue also has been stated to be
ambiguous and there are scarce information to prove that the IB activities does
affect the economic growth of a country by being better than the interest-based
banking activity (Furqani and Mulyany, 2009). By completing this study, it
would contribute to the fact of the relationship between the chosen indices
which are the total financing (TF) and also the Total Deposit (TD) of the IBs
towards the economic growth of Malaysia and with those results, it might help
us to determine and guess the pathway of the IBs in the country.


This paper aims to explore the effect of
Islamic Banks total deposit and total financing towards the GDP of Malaysia in
the short-term and immediate effect. The basic system of the IB that it follows
the Shariah Law as its guidance. The possibility of another global financial
crisis affecting the country and how the IBs can survive with the funding
mostly from its total deposits has led us to prioritize on this topic so that we
can find the relativity between the said problems and the Islamic banking which
will then be determined whether or not it affect the Malaysian economy as a
whole. The detailed review from the prior studies will be presented in the
following chapter.