Islamic finance industry in Malaysia has been in existences more than 30 years. The enactment of the Islamic Banking Act 1983 enabled the country’s first Islamic Bank to be established. Malaysia’s long track record of building a successful domestic Islamic financial industry of over 30 years gives the country a solid financial that adds to the richness, diversity and maturity of the financial system. (RosniaMasruki, 2010).
Before the advent of Islamic banks, financial market had been monopoly by conventional banks. However, in recent years Malaysian Islamic banks have to operate in an increasingly competitive environment. Alongside the conventional banking system, the Islamic banking system has steadily evolved to become a major player on the Malaysian financial landscape. The establishment of Bank Islam Malaysia Berhad (BIMB) in 1983 really marks the beginning of a new era in Islamic banking in Malaysia. The Islamic banking system received a further boost when a scheme where conventional banks can open windows for Islamic banking products that called Interest-free banking system. (Mariani Abdul Majid, 2003).
However, the world has known several financial crises over the course of history, particularly in the 20th century, since the Great Depression of 1930s followed by the oil price boom in the 70s. Apart from these major crises, smaller breakdowns occurred in economy, which is normal, considering the cyclical nature of the economic system in economic production, inflation rate, the level of GDP, trade, and other factors. Yet it does not occur in each cycle, or downturn, that so many factors coexist in one time that shakes the global economic system as much as it happened in the latest crisis starting in 2007-2008. (Renata JankaToth).
The financial crisis of 2007-2008 also known as the Global Financial Crisis is considered the worst financial crisis. It resulted in the threat of total collapse of large financial institutions, the bailout of banks by national governments, and downturns in stock markets around the world. The crisis played a significant role in the failure of key businesses, declines in consumer wealth estimated in trillions of U.S. dollars, and a downturn in economic activity leading to the 2008–2012 global recession and contributing to the European sovereign-debt crisis. The active phase of the crisis leads to global economic problem including Malaysian economy as well.
The Islamic banking institutions were reported to remain stable and register commendable performance during the crisis period. Even though there were some impact on their performance, the extent to which the Islamic banks being affected by the crisis was not as bad as that on the conventional banks. (Kassim and Abd. Majid, 2010).
While conventional intermediation is largely debt based, and allows for risk transfer, Islamic intermediation, by contrast, is asset based, and centers on risk sharing. One key difference between conventional banks and Islamic banks is...