The Role of Islamic Financial Institutions in the Socio-economic Development in Malaysia

Abstract

It is a truism to say that the financial sector plays a critical role in the socio-economic development of any country. Financial institutions provide for effective mobilisation and allocation of savings and this contributes effectively towards socio-economic development. Malaysia, which is, as of now, perhaps the fastest growing country in the third world, is characterised by a well-developed fmancial system. What, however, is unique about Malaysia is that, as in some other Muslim countries, conventional and Islamic fmancial institutions exist side by side, interacting with one another. The development of Islamic fmancial institutions in Malaysia has the potential to play a leading role in serving the Muslim Ummah and contribute towards socio-economic development of the country in conformity with Islamic se~ibilities. Yet their market share is rather insignificant in comparison with the conventional fmancial institutions. As elsewhere, financial institutions in Malaysia provide four distinct types of intermediation in the process of exchanging funds and fmancial instruments among the surplus units and the deficit units - viz., denomination intermediation, maturity intermediation, risk diversification intermediation, and liquidity intermediation.