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Middle East Insights Islamic Finance Special Middle East Institute, National University of Singapore

German Banks:

More Islamic Than Islamic Banks?

By Rosana Gulzar Mohd “Islamic banking, in its current form, will go down in history as a mighty deceit based on anoperationalprinciplethat issimplyunfeasible. Islamicbanksgiveandtakeinterestasamatterofcourse, though under the guise of commissions, fees, penalties or profit shares. The holder of a“halal”creditcardpaysapenaltyonunpaidbalances;thispenaltyisproportionatetothesizeofthebalance,whichmakesitequivalenttointerest.”

TimurKuranina2013FinancialTimesinterview1While this isanaccuratedescriptionof Islamicbankingcurrently,whereKuran iswronghowever,isinhisassertionthatthefaultlieswiththeShariah.Thattheyareunsuitableforcurrenttimes.ThispaperarguesthatgenuineIslamicbankingispossiblewhenthereisanecologyof institutionsandpeoplewhoembracetheprecisevaluesthatdrivethisformoffinance.ThemalaisethatafflictsIslamicbankingcurrentlyisbroughtonbyanunthinkingsubmissionto the freemarketobjectivesofprofit-maximisationat theexpenseof justice,equityandsocialwelfare.

Malaysia isaclassiccase inpoint. Its latest scandal, involving thecountry’smulti-billion-dollar pilgrims’ fund, Tabung Haji (TH),2 belies deep fractures in the financial

1Barnes,W.(2013).Islamicfinancesitsawkwardlyinamodernbusinessschool(InterviewwithTimurKuran).Retrievedfromhttp://www.ft.com/intl/cms/s/2/ee2a2b36-9de5-11e2-9ccc-00144feabdc0.html#axzz3pjcHa6LI

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system.TheissueisnotonlyinthestateofitsIslamicfinance.ItgoesfurtherintowhetherthecountryhasaneconomicsystemthatisconducivetoIslamicfinance.Malaysiaisataninterestingcrossroadthatmayofferitspeopleachanceofredemptionoratleastachange.Rockedbyapolitical turmoil thathasspilled intotheeconomy,thecalls foranewprimeministeraregettinglouder,justasitslong-servinggovernorofthecentralbankvacatedtheseatforhersuccessor.

Under the patronage of Zeti Akhtar Aziz, the recently retired governor, Islamicfinance’smarket sharehasgrown to26.8percentofdomesticbankingassets3.Maybank,the country’s largest, said that it disbursedmore Islamic than conventional financing forthefirsttimein2015.4Alookbeyondthenumbershowever,givescauseforworry.Islamicfinance has been accused of being no different from conventional finance although theirfounding theories are diametrically apart.5 In theory, its ban on interest or riba calls forearningsthatcanonlybejustifiedthroughwork,ownershiporliability.Byextension,theprohibitionencouragesaspiritofmutualityinhelpingoneanothershoulderburdensandshare rewards. In practice, however, Islamic finance in Malaysia embodies more of theprofit-maximisation,risk-transfercharacteristicofriba-basedconventionalbanking.6

Recognising this conundrum, Bank Negara Malaysia (BNM), its central bank, hasmade a laudable attempt to right the ship. As part of the Islamic Financial Services Act(IFSA) 2013, it requires Islamic banks tomake a clear distinction between deposits andinvestments.Theformerareprincipallyguaranteedwhile investors, inthespiritofprofitandlosssharinginIslam,needtoacceptmarket-basedreturns,evenifthatmeansaloss.Islamicbanksarenotsurprisinglyresistingtheseefforts,citingtheir incompatibilitywithcurrentfinancingandlegalsystems.7.

2 TabungHaji is a development financial institution (DFI) that isnot regulatedby the central bank. It fallsundertheauspicesoftheMinistryofFinance,whichisheadedbyMalaysia’sPrimeMinister(PM).ConcernsovertheinstitutioncametoaheadinJanuary2016whenlettersfromtheBNMgovernor, ZetiAkhtarAziz,warningthatTHisinsolventandthatitsreserveswereinthered,wereleakedtothepress.Thelettersweresent to the PM’s office andTH’s chairman. TH assured contributors that the deposits are safe even as thepossibility of a RM 1 billion government bailout was raised. This is because the TH Act provides thisguarantee should the institution falter. In a bid to stemwithdrawals, a minister in the PM’s Department,Datuk Seri Jamil Khir Baharom said that depositors who withdrew their savings will lose their turn toperformthepilgrimageforupto70years.3BNM’s2015FinancialStabilityandPaymentSystemsReport.TableA.2KeyFinancialIndicators–Islamicbankingandtakafulsectors.4MaybanksaysIslamicloansovertakeconventionalfinancingforthe1sttime.Bloomberg.3March2016.5Azmat,S.etal.(2015).CanIslamicbankingeverbecomeIslamic?Chong,B.S.,&Liu,M.H.(2009).Islamicbanking:interest-freeorinterest-based?Khan,F.(2010).How“Islamic”isIslamicBanking?JournalofEconomicBehaviorandOrganization,76,805–820.6Charap,J.,&Cevik,S.(2011).ThebehaviourofconventionalandIslamicbankdepositreturnsinMalaysiaandTurkey.Gulzar,R.,Masih,M.(2015).Islamicbanking:40yearslater,stillinterest-based?EvidencefromMalaysia.7Presentation:‘TheShiftofMudharabahProductsintoInvestmentAccounts.MarketImpactandItsAcceptance’byStandardCharteredSaadiq,18November2015.

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Bankerssaytherearestill limitedoptionsforShariah-compliantinvestments,bothshort- and long-term. And customers, including Muslims, are accustomed to depositguarantees and fixed returns. How then do banks suddenly sell them an ‘investmentaccount’ thatpromisesneither?Most importantly,howdoes thedual system inMalaysiahandledifferentratesofreturnforconventionalandIslamicbanks?DoesBNMhaveaplanfortheensuingcapitalflight?ThesefactorshaveledIslamicbanksinMalaysiatodomore,notlesscommoditymurabaha,thecontractknowntoofferribathroughthebackdoor.

BNM said in its ‘2015 Financial Stability and Payment Systems Report’, “On theliabilityside, Islamicbanks issuedmore fixedrate funding instrumentssuchas tawarruq(fixed rate deposits) with longer contractual maturities to narrow the re-pricing gapagainstIslamicbanks’fixedrateassets.Asatend-2015,fixedratedepositsofIslamicbanksincreasedtoaccountforasignificantlyhighershareof56.8percent(2014:35.7percent)oftotaldeposits,or42.7percent(2014:30percent)ofthetotalfundingbase.”

It continues, “The shift towards tawarruq was also partly in response to theregulatory requirement to clearly differentiate between deposit and investment accountproducts inaccordancewith the IFSA2013.This increaseddemand fordepositproductsthat are principal-guaranteed. In contrast, mudarabah-based general and specificinvestmentdepositsdeclinedby84percenttoaccountfor3.1percent(2014:19.7percent)ofthefundingbase.”8Thereasonforthisfailureisthatthepolicymakers,indraftingIFSA2013,seemtonothaveborneinmindthebiggereconomicsettinginwhichtheirIslamicfinanceindustryfits.Asmentioned, for Islamic finance to flourish, it needs an ecology of people and institutionswhoaresympatheticto itshigher idealsofsocialwelfareandjustice.Thecurrentreformeffortcanthusbelikenedtosqueezingasquarepegintoaroundhole.Theyjustdonotfit.ComparingtheMalaysianSystemAgainstGermanyThis study thus setsout to compare theMalaysian systemagainstanother systemwhichseems better at upholding the Shariah principles. Germany is an interesting case studybecausebesideshavingaWorldCupchampionfootballteam,thecountryalsorankshighlyfor economic development, financial inclusion, funding for small and medium-sizedenterprises (SMEs) and the provision of state welfare without losing competitiveness.9Therecouldthusbemuchtolearnfromsuchasociety.

Specifically, this study compares the profitability and stability of banks in bothcountriesbetween2006and2014.Thiscoverstheirperformancesbefore,duringandaftertheglobal financialcrisis.Theprofitabilityandstabilityaremeasuredthroughthebanks’returns on average equity (ROAE), returns on average assets (ROAA) and net loan todepositandshort-termfunding.ROAE,whichisnetincome/averageshareholder'sequity,

8Ibid.Pg46.

9TheWorldBank’s2014GlobalFindexsurveyand‘SMEFinanceForum’whichcites‘SMEPerformanceReviewEU,2011’.

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reflects the banks’ ability to generate profits out of shareholders’monies. ROAA, on theother hand, measures net income/average total assets. It shows the management’sefficiency inusingassets togenerateearnings.Thestability indicator,net loantodepositandshort-termfunding,isaproxyforBasel’sNetStableFundingRatio,whichmeasurestheproportionoflong-termassetsfundedbylong-term,stablefunding.10

AlthoughitfocusesontheIslamicnessofIslamicbanks,thepresentanalysisextendstoconventionalbanksandinterest-bearinginstitutionsinMalaysiabecauseasmentioned,theformofIslamicfinancecurrentlyis inessence,conventionalfinance.Thus,evenifthecountry achieves its 2020 goal of a 40 percent market share, or becomes 100 percent‘Islamic’, the system remains at heart, conventional. Another reason why the analysisincludesother institutionssuchasconventionalbanks,developmentfinancial institutions(DFIs)andcooperativesisthat,asmentionedalso,inrightingtheshipforIslamicfinance,oneneedstobearinmindthebroadereconomicsettingandtheIslamicbanks’interactionswith other institutions. Islamic finance does not exist in a vacuum, so correcting it willlikelyrequirechangesintheoverallsystemaswell.Germany’sUniqueSystemGermany is chosenbecauseof itsunique financial landscape,which ismadeupof “threepillars”.While ithasprivate, commercialbanks, thesystem isdominatedbystate-ownedsavings banks, or Sparkassen in German, and community-owned cooperative banks.Together,theycontributealmosthalfofthefinancialsystem’sassets.Table1:TypeofbanksinGermanyAsof2010 Numberofinstitutions

(%oftotal)Assets(%oftotal)

Commercial 14.5 36

Savings1 22.4 31Cooperatives 59.4 11Others2 3.7 22Total 100 1001IncludesLandesbanken,whicharethecentralbanksforsavingsbanks.

10ThedataaresourcedthroughBankscope.Whilelimitationsabound,effortshavebeenmadetoplugthegapsasfaraspossible.Forexample,whilethepriorityistousetheconsolidatedstatementsofeachbank,whentheseareunavailable,theirunconsolidatedstatementshavebeenused.FortheMalaysianfinancialinstitutions,thelimitationisthatwhilethelistismostlyalignedwithBNM,someinstitutions,suchasLembagaTabungHajiandtheCreditGuaranteeCorporationBerhadcouldnotbeincludedasBankscopedoesnothavetheirdataandtheyarenotpubliclyavailable.Additionally,BNMclassifiesBankKerjasamaRakyatMalaysiaBerhadasaDFIwhenthebankisinactualfact,acooperative.ThisstudythusclassifiesBankRakyatasabankingcooperativetomoreaccuratelyreflectitsbusiness.

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2Othersincludemortgagebanksandbuildingandloanassociations.Source:IMF.(2011).Germany:TechnicalNoteonBankingSectorStructure,CountryReportNo.11/370,pg25. GiventheobjectiveofdrawinglessonsforasystemconducivetoIslamicfinance,thispaperfocuses on the latter two types namely, the savings and cooperative banks. In Germany,thereare439savingsbanksand1,140cooperativebanks,11whichcontributealmosthalfofthe financial system’s assets. The restmainly comes from the three private banks there.Thesavingsbanks,whichareownedby localgovernments,arenotrequiredtomaximizeprofitsalthoughtheyneedtoavoidmakinglosses.Thisallowsthemtopursueothergoalssuchassupportinglocalcultural,socialandeconomicdevelopment.Thecooperativebankshaveasimilarmandatebuttheyareownedbytheirmemberswho,inturntendtobetheirdepositorsandborrowers.Thecooperativebanksoperateamutualguaranteeschemeandtheirkey role is to support theeconomicundertakingsof theirmembers,who representabout half of their customers. Essentially, both the savings and cooperative banks aregearedtoprovidefinancialservicestotheGermanpublicandSMEs.

Germany presents an interesting case study for Islamic finance because its longhistoryofsavingsandcooperativebanksshowshowthesocietyhasembodiedtheShariahprinciplesofpoolingresourcesforagreater,commongoodasinthecaseoftakaful.Thesetwotypesofbanksalsoshowhowthecountryhasembracedthemutualsharingofprofitsand losses, a key requisite of themusharakah contract in Islamic finance. Their successseemstobeduetothefactthatthesavingsandcooperativebanksareunderlesspressuretomaximiseprofitscomparedtocommercialbanksbecausetheshareholdersarethestateor the communities themselves. This allows them to focus on due diligence to spotsustainablebusinessesforfinancing,afterwhichtheywillpartnerthecompaniesoverthelong haul. These features have not only helped the less credit-worthymembers of theirsocietygainfinancingbuthasalsomadetheGermanfinancialsystemmorestable.12Infact,a 2010 study by S. Rehman andAskari found that theGerman economy ismore IslamicthanMalaysia. In their ‘Economic IslamicityIndex’, Germany is ranked26whileMalaysiacameinatnumber33,thehighestforaMuslimmajoritycountry.13

Indeed the founder of the world’s first Islamic bank, Ahmed El-Najjar, wasimpressed with how the German savings banks aided the economic recovery of WestGermanyafterWorldWarII.In1963,hesetupMitGhamrlocalsavingsbankinEgyptbycombining the German savings banks’ way of inculcating thrift with the village people’sdeep religiosity. Most significantly, El-Najjar’s bank showed how we can foster a

11Source:IMF.(2011).Germany:TechnicalNoteonBankingSectorStructure,CountryReportNo.11/370,pg25.12TheGermanFinancialSystemandtheFinancialCrisis,Detzer,Daniel;Intereconomics/ReviewofEuropeanEconomicPolicy,March2014,v.49,iss.2.Pg63-4.13Thestudyinvolvedarankingof208Islamicandnon-IslamiccountriesbasedontheiradherencetothetheoreticalworkingsofanIslamiceconomy.Theresearchersdeveloped113proxiesunderthreebroadheadings;achievementofeconomicjusticeandsustainedeconomicgrowth,broad-basedprosperityandjobcreation,andlastly,theadoptionofIslamiceconomicandfinancialpractices.

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responsible financial attitude among customers, something grossly lacking in today’sconsumeristic and debt-laden world. Specifically, the way his bank linked investmentfinancingtotheinvestmentaccountsmayofferlessonsforthearchitectsofIslamicfinancereform.El-Najjarusedprofit-sharingcontractssuchasmudarabaandmusharakahfortheinvestment accounts, the monies of which could only be withdrawn after a year. Thereturns would be commensurate with the size of the deposit and the bank’s profits.Anotherincentiveforinvestorswastheiraccesstoinvestmentloans.14

Even the way the loans were disbursed offers lessons. They went exclusivelytowardsthesettingupofsmallbusinessesinthearea.Wheninvestorsshowedpromisebutlacked the initiative to secure financing, the bank’s staffs would help. For one suchcustomer,thebankbuiltafactoryandgraduallytransferredownershiptohim.Mayer,A.E.(1985) cited someonewho observed the project, R K Ready, as saying that the villagersweredeeplygrateful for thecritical financing,which theybelievedwouldnothavecomefromothersources.El-Najjar’smodelwas,however,short-livedduetoadisputewiththeEgyptiangovernment.15

Another renowned academician, Mahmoud el-Gamal, argues that the concept ofmutuality, as exemplified by the German Sparkassen and cooperative banks, can bringcontemporary, erroneouspractices of Islamic financeback to its roots. It simultaneouslyaddresses corporate governance as well as religious concerns.16 The former is an issue,especially for investment accounts, because their owners lack protection both internallythroughboardrepresentationorexternallythroughmarketdiscipline.

Thereligiousconcernthatmutualisationcanameliorateisironicallytheprohibitionof riba. As El-Gamal argues, Islamic banks currently avoid the formal prohibition in amoney-for-money transaction by turning it into a money-for-property transaction (inmurabahafinancing)ormoney-for-usufructtransaction(inijarafinancing).Buthighlevelsofinterest,orprofit,asIslamicbankscallit,canstilloccursincetherearenolegalceilingsonprofitsinsales.Addtothattheprofit-maximisationdriveofcurrentIslamicbanksandborrowerswillmostlikelyendupwiththehighestinterestratespossibleasdepositorsgetpaidthelowest.Mutualisation,byaligningtheinterestsofinvestmentaccountholderswiththe banks’ shareholders, ameliorates the current warped incentive structure wheremanagersprioritise the interestsofshareholdersbymaximisingprofitsat theexpenseofcustomersonbothsidesofthebalancesheet.IssueswithMalaysia’sIslamicFinanceMalaysiahasparallelstotheGermansystem.Ithastwogroupsoffinancialinstitutions:onefalls under BNM and the other is supervised by various government ministries. BNM

14Mayer, A. E. 1985. Islamic Banking and Credit Policies in the Sadat Era: The Social Origins of Islamic Banking in Egypt. Arab Law Quarterly, pg 36-7.15Hegazy,WalidS.(2007)"ContemporaryIslamicFinance:FromSocioeconomicIdealismtoPureLegalism,"ChicagoJournalofInternationalLaw:Vol.7:No.2,Article13.Pg585-9.16El-Gamal,M.A.(2005).Islamicbankcorporategovernanceandregulation:Acallformutualization.Pg9-15.

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supervises the commercial banks (Islamic and conventional), investment banks and sixDFIs. The rest, made up of non-bank financial institutions such as cooperatives,17 otherDFIsandabuildingsociety,aresupervisedbythegovernmentministries.

Like Germany, Malaysia has commercial banks, state-backed development banksandcooperativesbutunlikeGermany,thecommercialbanksdominatethesystemintermsofassets.Theyarethelargestprovidersoffundsinthebankingsystem,asreflectedinthefirstfourrowsofthetablebelow.Table2:TypeofbanksinMalaysiaAsof2014 Assets

(%oftotal)Commercialbanks: Conventionalbanks 65.3Islamicbanks2 18.2Investmentbanks 2.1DFIs3 10.0Cooperatives 4.4Total 100.02Thisdiffersfromthe25.5percentmarketsharein2014asthelatterincludesDFIs.3DFIsrefertodevelopmentfinancialinstitutions(bothunder/notBNM).Source:BNMFinancialStabilityandPaymentSystemsReport2014,BNMmonthlystatisticalbulletin,December2014,1.7BankingSystem:StatementofAssets,Malaysiaco-operativesocietiescommission.Note:Thetableexcludesothersectorssuchasinsurancecompanies,pensionfundetc.

HereinliestheissuewiththewayMalaysiahasbuiltitsIslamicfinancepractice.Likemostcountriesintheworldtoday,Malaysiaadoptsamixedeconomicsystemwherefreemarketprinciples interspersewithadegreeof economicplanningand state-directedactivities.18Largely a reflection of the free market principles, its banking system is dominated bycommercial banks. This creates a problem for Islamic banks because they are made tocompetehead-onwithothercommercialbanksinaprofit-maximisingarenawhentheyarebased on diametrically opposite founding theories of a prohibition of interest and,

17Malaysiahasninetypesofcooperativessuchasbanking,credit,housingandfarmingbutthisstudyfocuseson the banking cooperatives because Bankscope has data only on this group. It is the largest type ofcooperativeintermsofassetsandprofitability.Noteworthyalsoisthefactthatthegroupismadeupofonlytwomembers;BankRakyatandBankPersatuanMalaysiaBerhadbutdatainthisgroupismainlyfromBankRakyatasthereislimiteddatafromBankPersatuan;itnotbeingregulatedbythecentralbank.18BNMFinancialsectorblueprint2011-2020,p18.

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therefore,non-profitmaximisation.IndeedBankscopedataconfirmedthehypothesisthatMalaysianIslamicbanksaresignificantlymoreprofitableandmoreefficientatusingassetstogenerateincomecomparedtoGermansavingsbanks(Table3).19ThetrendlargelyholdsexceptforablipinROAAinthepre-crisisyears.Table3:Profitability:MalaysiaIslamicbanksvsGermanSparkassenTypesofbanks ROAA ROAE 2006-7 2008-10 2011-14 2006-7 2008-10 2011-14Malaysia(Islamic)

0.10

0.65

0.56

42.13

9.03

9.10

Germany (Savingsbanks)

0.17

0.12

0.20

3.17

2.37

2.53

Source:Bankscope,January2016.Thisraceforprofitabilitybeliesadireissue.Inordertosurvive,theIslamicbankshavehadto quickly adopt contracts that mirror their conventional counterparts. This led to anadherenceoftheinterestprohibitioninform,butnotspirit20.Likewise,theIslamicbankshavecompromisedontheirsocialobligationsinexchangeformaximumprofits21.Anothercasualty seems to be the system’s stability. Although the German savings banks are lessprofitable than theMalaysian Islamicbanks, their recoverypost-crisiswas stronger.TheGermansavingsbanksenjoyedanROAEreboundof6.75percent22comparedto the0.78percent23improvementforIslamicbanks.Further,theformers’ROAAjumped66.7percentpost crisis compared to a decline of 13.8 percent for Islamic banks. These results affirmAhmedEl-Najjar’sobservationsoftheGermansavingsbanks’tenacityinridingoutacrisiswhile supporting the notion that Islamic banks in Malaysia, in their drive for profit-maximisation,areasunstableastheirconventionalcounterparts.

In terms of their lending aggressiveness too, an interesting trend unfolds whenMalaysianIslamicbanksarecomparedagainsttheGermansavingsbanks.Theformeraregettingmoreaggressivepost-crisis compared toGermansavingsbanks (Table4).Beforethecrisis,theirnetloantodepositandshort-termfundingratiowaslowerthantheGermansavingsbanks.Thisratiobecamecomparableduringthecrisisandcontinuednorthwardsin recent post-crisis years. This may be due to the government’s concerted effort toincreasethemarketshareofIslamicfinanceto40percentby2020.24

19Giventheirideologicallink,theMalaysianIslamicbanksarespecificallycomparedagainsttheGermansavingsbanks.20Theedgemarkets.com.(2015). SpecialReport:TheshariahdebateonIslamicfinancing.21PublicLecturebytheRecipientofTheRoyalAwardforIslamicFinance2014,DatukDrAbdulHalimIsmail(Malaysia).22ObtainedfromTable3:(2.53-2.37/2.37)*100.23ObtainedfromTable3:(9.10-9.03/9.03)*100.24BNM’s‘Financialsectorblueprint2011-2020’,p49.

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Table4:Lendingaggressiveness:MalaysiaIslamicbanksvsGermanySparkassenTypeofbank Netloan/Deposit&short-termfunding 2006-7 2008-10 2011-14Germany(Savingsbanks)

68.70

65.93

65.43

Malaysia(Islamicbanks)

57.30

63.39

72.89

Source:Bankscope,January2016.Thisfixationofregisteringeverhighernumbers,however,mayhaveworryingimplications.ThemostobviousisthehigherliquidityanddefaultrisksthatIslamicbanksarepilingonwithanincreasingloan-to-depositratio.Theurgencytogrowhasalsoledtoafocusofformoversubstance.WhiletheGermansavingsbanksareknownforinculcatingthriftandridingout crises, Islamic banks in Malaysia are accused of using ‘shariah-compliant’ contractswhicharenotanchoredonIslamicprinciplesofjusticeandequity.ContractsusedforhomefinancingsuchasbaibithmanajilorBBAandmorerecently,murabahah,musharakahandijarahhaveleftcustomerswithmostoftherisksandIslamicbanksmostoftheprofits.25

In one landmark ruling in 2006, the judge of a local, civil court said in a caseinvolving a home financingdefault26 that a borrowerunder a riba loanwouldhavepaidlessinterestthanapurchaserunderthe‘Islamic’facility.27TheHighCourtthenreducedtheamountsoughtbythebankfromthehomebuyerbyRM376,000.BNMlateravoidedfutureembarrassing judgments by mandating its Shariah Advisory Council as the ultimatedecisionmakeroncasesinvolvingtheShariah-compliantnessofitsIslamicbanks.28

The 2020 goal also means the country has less than four years to garner anadditional15percentmarketsharewhenithastakenover30yearstoreachthecurrent26.8percent.Inshort,aslongastheIslamicbanksinMalaysiaaremadetocompetehead-onwithconventionalbanksintheprivatesector,wemayfallshort,quantity-wise,ofthe40percenttargetmarketshare,nottomention,theapparentdisconnect, intermsofquality,between their profit-maximisation drive and the Islamic values that the banks aresupposedtoembody.MalaysianDFIsandCooperatives

25Theedgemarkets.com.(2015). SpecialReport:TheshariahdebateonIslamicfinancing.26AffinBankBerhadversusZulkiflibinAbdullah.27SeeniMohideen,H.(2006).AffinBankBhdvsZulkifliAbdullah–Shariahperspective.MalayanLawJournal.Pg3.28Thiswasdonebyaddingclauseno.58totheCentralBankofMalaysiaAct2009.

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AnotherissuewiththeMalaysianfinancialsystemisthatwhileithas‘community-oriented’financial institutions suchas theDFIs and cooperatives, theyaredwarfed in asset size.29Additionally,sincethe1970s,theyhavebeenbeleagueredwithallegationsofmisconductofsenior executives, fund misappropriations and even predatory lending tactics.30 SoalthoughtheDFIsandcooperativeshavethelargestpotentialtouplifttheeconomicwell-beingofMalaysiansociety,especiallythelower-incomegroups,theyhavehadtheoppositeeffect in Malaysia. The country’s level of financial inclusion, while higher than itsbenchmarkgroupof countries, showsa5-7percentdisparitybetweenall adults and thepoorest40percentandthoselivinginruralareas.Similarly,whileMinistryofMicro,SmallandMediumEnterprises(MSME)formalmostalltypesofenterpriseinMalaysia,theyonlycontributetoathirdoftheGDP.Comparable,ifNotHigher,ROAEandROAAthanCommercialBanksIndeed Bankscope findings on Malaysia’s DFIs and cooperatives are startling. Firstly, interms of profitability, both the ROAE and ROAA for DFIs and banking cooperatives arecomparable,ifnothigher,thancommercialbanks(Table5).31Table5:ProfitabilityofMalaysianfinancialinstitutionsTypeofinstitutions ROAA ROAE 2006-7 2008-10 2011-14 2006-7 2008-10 2011-14Bankingcooperatives

2.18

2.57

2.42

16.57

23.37

16.86

DFIs

0.99

1.23

1.62

38.08

10.20

9.16

Banks(weighted average ofcommercial, Islamic andinvestmentbanks)

0.85

0.95

0.85

21.60

10.47

9.57

Islamicbanks

0.10

0.65

0.56

42.13

9.03

9.10

Source:Bankscope,January2016.

29DFIsandcooperativescontribute14.4percentofassetsinthebankingsystemin2014(Table2).30NewStraitsTimes.(2005).Helpfortroubledcoopstostop.Othman,I.W.etal.,(2013,January).CooperativeMovementsinMalaysia:TheIssueofGovernance.31TheanomalyforROAEin2006isbecausethenumbersforIslamicbanksandDFIsareinflatedbyoneinstitutionineachcategory,namelyBankIslamandBankSimpananNasional(NationalSavingsbank).Otherwise,thetrendholds.

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That theDFIs and banking cooperatives aremore profitable than the commercial banks,even the Islamic banks, are unexpected as the former two institutions are supposed tofocusonfinancial inclusionattheexpenseofhigherprofits. Indeed,Germancooperativesand savings banks have lowerROAEs andROAAs than their commercial and investmentbanks.

DFIsandBankingCooperativesareAlarminglyAggressiveintheirLendingThe second surprise was in the lending aggressiveness of the DFIs and bankingcooperatives.Whilethecommercialbanksseemprudentintheirlendingusingshort-termfunds, these two institutions are alarmingly aggressive (Table 6). During the crisis, DFIsincreased their proportions of net loans using short-term funding by 55 percent whenothertypesofbanksincreasedtheirsby8.5to10percent.Table6:StabilityofMalaysianfinancialinstitutionsTypeofinstitutions

Netloan/Deposit&short-termfunding(%)

Impairedloans/Grossloans(%)

2006-7

2008-10

2011-14

2006-7

2008-10

2011-14

Bankingcooperatives

83.96

91.09

94.77

6.73

4.35

2.40

DFIs

128.52

199.53

145.02

15.20

18.31

15.42

Banks(excludinginvestmentbanks)

57.15

62.96

65.58

5.80

3.23

2.48

Islamicbanks

57.30

63.39

72.89

7.18

3.78

3.62

Source:Bankscope,January2016.To an extent, this is understandable as the crisis and post-crisis period was one ofdeleveraging for banks. As leverage shifted from the private to public sector, publicinstitutions such as DFIs and cooperatives stepped in to provide finance while banksretrenched. However, the extent of lending aggressiveness in these institutions is stillalarming. In comparison, a study of credit unions worldwide, a particular type of

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cooperative,showedloantodepositratioswhichonaverage, iswellbelowunity.32GiventhattheMalaysianDFIsandbankingcooperativesalsohavehigherpercentagesofimpairedloanscomparedtocommercialbanks,thesesuggestthattheMalaysianfinancialsystemislessstablethanGermanynotbecauseoftheprofit-drivencommercialbanksbutbecauseofitsDFIsandcooperatives.

Thisissurprisingbecausethepresenceoftheselattertwoinstitutionstendtoadd,notreducestability.Ontheotherhand,profit-drivencommercialbankstendtobeblamedforbringingthe ‘house’downwiththeirriskypracticesandrecklesstradingpositions. InMalaysia,itseemstobetheotherwayround.IssueswiththeDFIsandCooperativesIndeedtheDFIsandcooperativesinMalaysiasufferfromanumberofissues,namelytheiraggressive lending and a lack of protection for depositors. To be fair, these institutionsconstituteasmallpartofthebankingsystemor14.4percentofassets,tobeexact(Table2).Butastherecentscandalinvolvingthecountry’smulti-billion-dollarpilgrims’fund,TH,shows,concernsovertheirfinancialscanquicklyescalateandleadtowidersystemicrisks.Thisisnottomentiontheerosioninconfidenceofthesocialandreligiousvaluesthattheseinstitutions are expected to uphold. AsMalaysia heralds the adoption of Islamic financeacrossallfinancialinstitutions,includingDFIsandcooperatives,itisworthasking,justhow‘Islamic’aretheseinstitutions?

ThefactthatMalaysia’sDFIsandbankingcooperativesarereportingcomparable,ifnot,higherprofits thancommercialbanks,on thebackofaggressive lending, isan issue.WhileIslamallowsbothprofitanddebt, the latter isnottobetakenlightlyandprofitingfrom debt is to earn riba. Admittedly, not all DFIs and cooperatives adhere to Islamicfinance but as mentioned earlier, Islamic finance in Malaysia currently mirrors itsconventional counterpart. Thus even if all of the institutions become Islamic, the formwouldinessence,stillbeconventionalfinance.

Further, any wrongdoing by the DFIs can pose reputational and Shariah non-compliance risks to the Islamic finance sector because 7.4 percent of the 25.6 percentmarket share in 2014 came fromDFI assetswhile 18.2 percentwas from Islamic banks(Table 2). This means that DFIs contribute almost one-third of the Islamic assets inMalaysia.LendingonaHighToputintopropercontexttheDFIs’netloanstodepositandshort-termfundingratios,oneneedstounderstandwhethertheyhavealternativesourcesoffunding.AccordingtoBNM’s2015 Financial Stability and Payment Systems Report, 65 percent of their funding came32Al-Muharrami,S.M.,&Hardy,D.(2013).CooperativeandIslamicBanks:WhatcantheyLearnfromEachOther?Pg8.

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fromdeposits,includingthosebystatutorybodies(Table7).Giventhatdepositsaretheirmainsourceoffunding,thefactthattheirnetloansaretwotothreetimesmorethantheirdepositandshort-termfundingisworryingandquestionablefromaShariahperspective.Table7:SourcesoffundsforMalaysianDFIs,2015 RMmillion %oftotalShareholders'equity 36,217.60 13%Liabilities Depositsaccepted 177,492.00 65%Borrowings 23,035.30 8%Government 11,391.60 4%Multilateral/Internationalagencies

3,930.30 1%

Others 7,713.40 3%

Debtsecuritiesissued 17,692.30 6%Others(eggovernmentassistance,miscellaneousliabilities)

20,371.40 7%

Totalliabilities 238,591.00 87%Totalsourcesoffunds 274,808.60 100%Source:BNM’sTableA.14:DevelopmentFinancialInstitutions:SourcesandUsesofFunds.Note:Under‘liabilities’,thepercentagesdonotaddupto87percentbecauseofrounding.Thegovernmentandcentralbankseemawareoftheseissuesandhavebeentakingsteps,sinceearly2000,toamelioratethem.InBNM’sFinancialSectorMasterplanfor2001-2010,itsrecommendationsforDFIsincludearingfencingofthegovernment’sloans,presumablyto increase accountability. It then encouraged DFIs to raise funds through the capitalmarketasfaraspossible.Also,BNMcalledforabetterregulationoftheDFIssothattheirpolicieswillbebrought in linewithnationalpolicies.33Sincethen,sixofthecountry’s13DFIshavecomeunderitswatchandaguidelinehasbeenissuedtoenableDFIstosourcecheaperfundsfromtheinterbankmarket.34Still,asof2015,debtsecuritiesformedonly6percent of the DFIs’ source of funding while the portion of deposits and governmentborrowingshasincreasedfrom66.7percentin200935to69percent(Table7).AstheTHscandalremindsus,MalaysiafacesreputationalandShariahnon-compliancerisksifmoreisnotdonetotightenregulationsforthecountry’s13DFIs.

33BNMFinancialSectorMasterplanfor2001-2010,pg91.34MonetaryandFinancialdevelopments,Economicreport,2008/2009.MinistryofFinance.Pg138.35Ibid,pg139.

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LackofDepositorProtectionThe other issue that afflicts DFIs and cooperatives inMalaysia is the uneven regulationwhen it comes to deposit protection. While Germany has more than sufficient depositinsurance for all financial institutions, including its savings and cooperatives banks,36Malaysia’sdepositinsuranceiscompulsoryonlyforitsconventionalandIslamicbanksbutnot theDFIs and cooperatives.37 Thismeans that in the case of bank runs, depositors ofconventionalandIslamicbanksareassuredofreceivingamaximumofRM250,000eachbut not all who deposited with DFIs and cooperatives are backed by governmentguarantees of bailouts. The International Monetary Fund (IMF) picked up on this issuewheninvitedbytheMalaysiangovernmenttoassessitsdepositinsurancesystem.

InareportdatedFebruary2013,theIMFsaid,“MembershipinPIDMiscompulsoryfor all licensed commercial and Islamic banks. However, there are other deposit takinginstitutions which together comprise about 10 percent of the deposits in the bankingsystem which are not members of PIDM. The majority of these deposits are held ininstitutionsthataresubjecttoexplicitorimplicitgovernmentguaranteesoftheirdeposits(althoughthese institutionsdonotpayapremiumforthecoverage)butthereareothers(credit cooperatives) that are not part of anydeposit insurance systemanddonot havesuchguarantees.Itisnotclearthatthecreditcooperativesaresubjecttothesamelevelofsupervision and regulation as the commercial banks.” IMF added that the deposit-takinginstitutions,whichdonotpaypremiumsfordepositinsurancebuthaveexplicitorimplicitgovernment guarantees, are gaining an unfair advantage over banks which pay depositinsurance.IMFratedMalaysia‘largelycompliant’forthisaspectoftheassessment.38PlayingwiththePilgrims’FundsThree years on, the situation has become worse with the TH scandal. Being a DFI, itsdepositsarenotinsuredbyPIDMbutSection24oftheTHActprovidesforagovernmentbailoutshouldtheinstitutionfalter.This,however,maynotmeanmuchatatimeofdryinggovernmentcoffers.Further,thenation’spilgrims’ fundisalsoguiltyofblurringthelinesbetweendepositsandinvestments.Thiscreatestwoissues,oneofwhichisthedifficultyinrationalising the products to determinewhether they qualify for deposit insurance. TheotherissueismorealarmingbecauseitinvolvestheextentofTH’sShariah-compliance.

36BAFIN,Depositprotectionandinvestorcompensation.http://www.bafin.de/SharedDocs/FAQs/EN/Consumers/BankenBauSparkassen/SicherungEntschaedigung/03_institutssicherung.html?nn=302464637PIDM(PerbadananInsuransDepositMalaysia)http://www.pidm.gov.my/For-Public/About-Deposit-Insurance/Member-Banks38Largelycompliantmeans“whenonlyminorshortcomingsareobservedandtheauthoritiesareabletoachievefullcompliancewithinaprescribedtimeframe”.

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TH is currently using terms such as ‘deposits’ alongside ‘bonus’ or what iscommonlycited in thepressas ‘dividends’.ThiscreatesaShariah issuebecausedepositsunder the wadiah (safekeeping) contract should bear no return while those underinvestment-typeofcontractssuchasmudarabashouldpaymarket-basedreturns.TH,andIslamicbanksindualsystemssuchasMalaysia,howeverfacetheproblemofcapitalflightiftheir returns on deposits are lower than conventional banks. Thus, they haveturned thecontract intoawadiahyaddhamanah (safekeepingwithguarantee)wherethebankswillgettoinvesttheircustomers’moniesinexchangeforprovidingaprincipalguarantee.Thebanks then use hibah (gift) as a concept to pay depositors rates thatmatchwhat otherbanksarepaying.WhiletechnicallyallowedinShariah,thisisoneofnumerousexamplesofhow Islamic banks conform to the Shariah in formbutnot spirit. In essence, the Islamicbankshavedevisedawaytooperatejustliketheirconventionalcounterparts.

In fact, IFSA2013precisely tries to solve this conundrumby requiring its Islamicbanks to make a distinction between deposits and investments. This new regulationinterestingly does not apply to TH since it is not regulated by the central bank. It doeshowever apply to another DFI, Bank Rakyat, which is under BNM supervision.39 Thisuneven regulation raises thequestionofwhy some financial institutionsprovidedepositprotectionwhile others do not andwhy some such as TH can continue to blur the linesbetweendepositandinvestmentswhenothershavehadtomakeadistinctionbetweenthetwo.AstheTHscandalshows,theseconundrumsleadtoquestionsnotonlyonthefinancialinstitution’sgoingconcernbutalsotheextenttowhichitupholdstheIslamicvaluesthatitpurportstoserveitscustomers.WhytheUnevenRegulation?In Malaysia, however, the DFIs and cooperatives seem sidelined in the financialinstitutionalframework.PIDMisagovernment-backedinsurancescheme,whoseboardofdirectorsincludetheMinistryofFinance(MoF)’sSecretaryGeneralofTreasuryaswellastheCentralBankGovernor.BothMoFandBNMalsoshareregulatoryoversightoftheDFIssowhyexcludetheseinstitutionsfromthedepositinsurancescheme? TheanswercouldbeinthequalificationcriteriaforPIDM.Thepremiumspaidbythebanksdependon their scoring,whichhavequantitativeandqualitativecomponents.Theformer,whichhasa60percentweightage,looksintoindicatorssuchasthecapitalbuffer,returnonrisk-weightedassetsratioandloanstodepositsratio.40Thequalitativeaspect,onthe other hand, evaluates among others, whether the bank has received any letter ofwarning from a regulator on a deficient or non-compliant aspect of its business andwhetherthebankhasreceivedanyformofassistance,financialorotherwise,fromBNMorPIDM. GiventheissuesraisedinthispaperabouttheDFIs’unexpectedlyhighprofitability,39BankRakyat2013annualreport,page181.40Malaysiadepositinsurancecorporation(Differentialpremiumsystemsinrespectofdeposit-takingmembers)(Amendment)Regulations2015,pg23,32.

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aggressivelendinganddependencyongovernmentassistance,itisperhapsnotsurprisingwhy these institutions cannot be held on par with commercial banks when it comes toregulations. This however begs more questions: is the government guarantee then animplicit recognition and encouragement of the DFIs and cooperatives’ substandardpractices? Should notmore have been done to bring standards on parwith commercialbanksasisthecaseinGermany?LessonsforIslamicFinanceReformThe study of Germany’s financial system shows that a truer type of Islamic finance ispossible.Thepresenceofcooperativesandsavingsbanks inthesystemhas ledtohigherfinancial inclusion and stability, albeit at a lower profitability when comparedinternationally.Bothinstitutionsembodyvaluessuchasbeingwelfare-orientedthatshouldhaveresonatedwithIslamicbanksinMalaysia.

The banks’ business models are also supported by an institutional set-up that‘forces’ormakesitconduciveforthemtocultivatelong-termrelationshipswithcustomers.Thisishowthebanksgatherin-depthknowledgeofthefinancingneedsandriskprofilesoftheirretailcustomersandbusinesses.Forexample,thesavingsandcooperativesbanksinGermanyfollowa‘regionalprinciple’,wheredepositsfromaregioncanonlybedisbursedforloanswithintheregion.Thisalignsthebanks’interestwithcustomersinthattheybothbenefit from the region’s economic development and prevent the bank from ‘cherry-picking’customersfrommoreprosperousregions.41

Further, theownershipstructureofbothbankshaselementsofprotectionagainsttheprofit-maximisationgoalofcertaintypesofshareholders.Thecooperatives,bynature,areownedbytheircustomers,whoexertpressureonthebanks’managementtoadvancetheir interests. Interestingly, thesavingsbanks inGermanyhave the legalstatusofbeing‘institutionsincorporatedunderpublic law’.Thisprotectsthemfrombeingtakenoverby“private banking groups or investors, whose principal aim is generally to increaseprofits.”42Thus,thesavingsbankshavenoownerandcannotbesold.

Caretooseemstohavebeentakentoreduceanabuseofpower.Thepopulationintheregionthatthesavingsbankoperatesisrepresentedinitssupervisoryboardthroughrepresentatives from the city council. But first, these representatives need to prove thattheyarefinancially-competent.

Contrast these with Malaysia. Making the Islamic banks run head-to-head alongside their conventional counterparts in a celebrated dual system has been more of a curse than a blessing. The Islamic banks have had to compete tooth and nail for profits in an environment that does not allow them to pay any more than lip service to social welfare considerations. Nor the time and space to better understand customers. The constant competition for higher numbers, especially to a parent who owns both conventional and Islamic banking businesses, naturally means the

41GermanSavingsBanksAssociation.(2012).ConstitutiveElementsofa(German)SavingsBank.42Ibid.

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interests of the Islamic bankers are more aligned with the profit-driven ambitions of their shareholders than any customer. RethinkingtheDrivers It is thusworthquestioningMalaysia’s strategyofpushing Islamic financevia itsprivatesector. For it to succeed in creating a truer Islamic finance system, Malaysia needs agovernmentandpolicymakerswhocanenvisionawholeeconomicsystem,andwithinit,abankingstructurethat,likeGermany,balancestheneedtobeprofitablewithsocialwelfareconsiderations. For starters, Malaysia may need to rethink the drivers of her financialsystem.Germany’ssavingsandcooperativebanksarethrivingbecausetheyarestillalargepart of the system. The private sector commercial banks contribute only one-third ofassets.Withsizecomesbargainingpowerandfinancialclouttobeastheyare.TheGermangovernment has resisted calls to privatise more of its banking system. Malaysia on theotherhand,isledbytheprivatesector,withprofit-maximisationastheraisond`etre.CanIslamicfinancethriveinsuchanenvironment?

Secondly,theremayneedtobeinstitutionalprop-upstoprotectthesocialwelfarefunctionsofthisnewsystemfromtheincursionsoftheprofit-drivencapitalists.Thepublicownershipof the savingsbanks inGermany for example, is adeliberatemove toprotectthemfromtheeverpervasivehandsofprivateinvestors.The ‘regionalprinciple’alsohasshowntobeeffectiveinsecuringthelong-termcommitmentofthesavingsandcooperativebanks. A natural outcome of which is their in-depth understanding of that region’scustomers’ needs. Coincidentally, this is exactly what Islamic banks need if they are totransform themselves, under IFSA 2013, from being mere financial intermediaries toinvestmentbridges.

Thirdly, this study’s comparison between Germany and Malaysia has shown theneedtoconditionoreducateMalaysiansonadifferentrisk-rewardsystemifwearetotrulyembraceIslamicfinance.TheanalysisoftheGermansystemindicatesatrade-offbetweenprofits, stability and financial inclusion. The Germans seem to have given up moreopportunitiesforprofit-makinginexchangeforastablesystemandonethatincludesthelesscredit-worthymembersofitssocietyandSMEs.ThisismoreinlinewiththeShariahofIslam. Malaysians may thus need to be weaned off their private sector tendencies forguaranteesandpredictable returns. In exchange,wemay finallybeable towalk the talkwitha formof Islamic finance thatgenuinely rewards investors for theireffortandriskstaken.

Fourthly,ifMalaysiaistrulykeentobuildagenuineIslamicfinanceindustry,thereneedstobeabetterregardforshariah-compliance.Asthisresearchshows,thecountryhastakenonetoomanyquestionablesteps in its fixationtoregistereverhighernumbersforIslamicfinance.WhileMalaysiahasundeniablybuiltanentire infrastructurewhichspanseducation,regulationsandancillarysupportssuchas Islamiccapitalandmoneymarkets,thecountryhasalsogainedareputation,notentirelyunfounded,forallowinganumberofquestionablepracticesandcontractsinIslamicfinance.Whilestepshavealsobeentakento

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align Malaysia’s Shariah standards with the Middle East, the other dominant region ofIslamicfinance,atruertypeofIslamicfinancemayonlybepossiblewitharethinkofthedriversofherfinancialsystem.CleaningUptheDFIsandCooperativesIn rethinking the drivers, the DFIs and cooperatives in Malaysia actually hold the mostpotentialtohelpbringaboutgenuineIslamicfinance.AsGermanyhasshown,thespiritofmutuality, as in the sharingofburdensand rewards,which is among thekey featuresofIslamic finance, isbetteruplifted through institutions thatarewelfare-orientedand thus,notstrictlyprofit-maximising.InMalaysiahowever,theDFIsandcooperativesseemtobesidelined. Their depositors receive no deposit insurance protection, regulatory oversightremainsweakandinacademiatoo,thereisscantresearchontheirissues.IfMalaysiaistoleadtheworldinIslamicfinance,itwillneedmorecommitmentfromthegovernmentandregulatortocleanupitsDFIsandcooperativesandbringthemtonationalstandards.

For cooperatives specifically, because of their different business model, one mayarguethattheirmembersshouldnotbecoveredwithdepositinsurancebecausetheideaisforthemtopartakeinthecooperative’sfinancialperformance.Somewhatlikemusharakah,the profit-and-loss sharing contract in Islamic finance. The reality, however is that thecollapseofanyfinancialinstitutioninacountryposessystemicriskstotheentirefinancialsector through a loss of confidence. Hence the series of government bailouts for itstroubledcooperativessinceat least30yearsago.43Also thesharingofprofitsand lossesworksbestinafunctionalsystemwithpropergovernance.This,however,isamajorissueforthecooperativesinMalaysia,anditneedsrectification.

Overtly,therearenumerousattemptsbythegovernmenttoimprovetheregulatoryoversight of its DFIs and cooperatives. For the latter specifically, there is the secondNationalCooperativePolicy (NCP) for theyears2011-2020,anumberofamendments totheCooperativeActandthesettingupof theMalaysiaCooperativeSocietiesCommission(MCSC) under the Ministry of Domestic Trade, Cooperatives and Consumerism. But thesector is still riddled with issues of corporate governance, accountability and poorlyqualified or ignorant management. Othman et al (2013) cited an MCSC 2010 economicreport44forinstancesofcooperativeboardmembersabusingtheirpositions.Accordingtothepublishedresearch,“Someevenmeddlewithillegalinvestmentactivities,characterisedbydodgyquick-richschemes.Theabsenceofauthenticcooperativeprinciplesandvalueshas resulted in certain unscrupulous and irresponsible people in the society to formcooperatives and take advantage by collecting investments and deposits for their ownpersonalgain.”45

AnotherissuewithDFIsandcooperativesinMalaysiathatneedsrectificationisthenumberofacademicresearchreportsontheirchallengesandviability.Sofar,researchon43NewStraitsTimes.(2005).Helpfortroubledcoopstostop.44Thereportseemstohavebeenremovedfromthewebsite.45Othman,I.W.etal.,(2013).CooperativeMovementsinMalaysia:TheIssueofGovernance.

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these institutions is a fraction of what has been published about the conventional andIslamicbanksinMalaysia.46TohelpDFIsandcooperativesplaytheirmuchneededrolesinsociety,academicsneedtoextendtheirresearchintotheissuesfacingtheseinstitutions.ConclusionIn conclusion, not only are the German banks, particularly its savings and cooperativebanks,moreIslamicthanIslamicbanksinMalaysia,theirentiresystemupholdstheIslamicvalues of justice, equity and socialwelfare better than anyMuslim country. TheGermanmodel isproof that these Islamicvaluesaresoundand time-tested inadifferentculturalsetting.Inoneword,universal.InMalaysia,however,whileBNMhasmadeacommendableattempt toright theship through IFSA2013, ithas ineffect,pushed Islamicbanks in theoppositedirection.Thisstudythusconcludeswithtworeformrecommendations:arethinkoftheeconomicdriversinMalaysiaandasprucingupoftheDFIsandcooperatives’balancesheets towards national standards. Until then, Germany will continue to show the waybecause their banks, leaving aside the riba elements, are indeed more Islamic than thefinancialinstitutionsinMalaysia.With more than 10 years of experience as financial journalist and banker, Rosana Gulzar Mohd is pursuing her Master of Science in Islamic finance at INCEIF, Malaysia. She graduated from Nanyang Technological University (Singapore) with a Second Upper Class Honours in Communications Studies in 2003. Following stints with several business newspapers, she was headhunted to join HSBC in Singapore. Her work, which involved investment communications for retail bankers, included helping the bank manage raging customers during the 2008 global financial crisis. In 2010, she joined HSBC’s global Islamic banking business in Dubai and led HSBC Amanah’s corporate communications efforts across their retail, commercial and investment banking businesses in Southeast Asia, the Middle East and the UK. She has also completed Chartered Financial Analyst examination level 1. As an MSc candidate at INCEIF, her research interest is the reform of Islamic banking. ReferencesAbdulLatiff,R.“BankKerjasamaRakyatMalaysiaBerhad:AcaseofacooperativeIslamicbankinMalaysia”Bangi:UniversitiKebangsaanMalaysia,2010.46Ibid,Islam,M.A.(2012).AnAppraisalofthePerformanceofTwoDevelopmentFinancialInstitutionsinMalaysia.

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Ahmed,H.ProductdevelopmentinIslamicbanks.Edinburgh:EdinburghUniversityPress,2011.A.K.Malim,Nurhafiza.FinancialIntermediationCostsinIslamicBanks:TheRoleofBank-specific,Market-specificandInstitutional-governanceFactors.INCEIFPhDdissertation,2015Al-MuharramiS.M.andD.Hardy.“CooperativeandIslamicBanks:WhatcantheyLearnfromEachOther?”2013.AmirAlfatakh.“TheShiftofMudharabahProductsintoInvestmentAccounts.MarketImpactandItsAcceptance.”2015.Anuar,K.,Mohamad,S.,andM.E.Shah.“AreDepositandInvestmentAccountsinIslamicBanksinMalaysiaInterestFree?”JKAU:IslamicEconomics27,no.2(2014):27–55.Attorney’sGeneralChambers.“Malaysiadepositinsurancecorporation(Differentialpremiumsystemsinrespectofdeposit-takingmembers)(Amendment)Regulations2015.”2015.Azmat,S.,Skully,M.,andK.Brown.“CanIslamicbankingeverbecomeIslamic?”Pacific-BasinFinanceJournal34(2015):253-272.BAFIN,GermanFederalFinancialSupervisoryAuthority.“Depositprotectionandinvestorcompensation.”2016.http://www.bafin.de/SharedDocs/FAQs/EN/Consumers/BankenBauSparkassen/SicherungEntschaedigung/03_institutssicherung.html?nn=3024646BankforInternationalSettlements.“BaselCommitteeonBankingSupervisionBaselIII:thenetstablefundingratio.”2014.Retrievedfromhttp://www.bis.org/bcbs/publ/d295.pdfBankforInternationalSettlements.“DatukZamaniAbdulGhani:Roleofdevelopmentfinancialinstitutionsinthefinancialsystem.”2005.http://www.bis.org/review/r050923e.pdfBarnes,W.“Islamicfinancesitsawkwardlyinamodernbusinessschool(InterviewwithTimurKuran).”2013.http://www.ft.com/intl/cms/s/2/ee2a2b36-9de5-11e2-9ccc-00144feabdc0.html#axzz3pjcHa6LI

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