Free-riba Islamic muamalat transactions have been practiced in Malaysia since the 7th century in line with the advent of Islam. Officially, it was enforced in the law of Malacca in the 16th century. Among the Islamic muamalat transactions that were practiced is bay' al-wafa' or known as conditional sale. After Malaysia was colonized, the conventional banking system was established until it became the mainstream system. The success of Islamic banking in other Islamic countries and the Lembaga Urusan Tabung Haji (LUTH) has led the Muslim community to demand Islamic banking in Malaysia. However, the establishment of Islamic banking in Malaysia was not as comfortable as it was necessary to compete with long-established conventional banks. Hence, this paper is to study the history and establishment of Islamic banking in Malaysia. This study uses a qualitative method where the data are derived from literature studies, i.e. referring to secondary sources such as books and journals. The data collected were analyzed using document and content analysis methods based on the objective. The study found that the success of the establishment of LUTH and Islamic banks in the Middle East has resulted in the Malaysian community demanding to set up Islamic banking in Malaysia and the government welcomed it. The findings also found that the success of Islamic banking in Malaysia was the result of the government's initiative in introducing Islamic banking schemes (IBS) or known as (SKIM PERBANKAN ISLAM SPI) to becoming the mainstream schemes in Malaysia despite having to compete with long-established conventional banks. The study found that the development of Islamic banking was drastically due to the inherent privilege of the Islamic banking scheme, where there was an element of profit sharing and loss in every banking transaction between the bank and the customer, which was different from conventional banking scheme.
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To Cite this Article: Asni, F. (2019). History of the Establishment and Development of Islamic Banking in Malaysia. International Journal of Academic Research in Business and Social Sciences, 9(6), 305–315.
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