Interest-free banking: a case study of Malaysia

Islamic banking, within the larger context of Malaysia's economic and financial development, is partly the result of a favorable political atmosphere and a widespread acceptance of interest-free banking. To ensure its continued success as new Islamic financial institutions enter the scene, Bank Islam needs to assess the compliance of its portfolio with Islamic principles and to manage its risk exposure effectively. Because of the ethnic and religious diversity of the country, the future of Malaysian Islamic banking will most likely not involve a complete national switch-over to Islamic principles, as occurred in Pakistan. The establishment of a financial hub in Malaysia will probably avoid rigidity in the short run. Nonetheless, there is abundant room in the Malaysian economy for Islamic banking to thrive.