The Role of Islamic Financial Institutions in the Socio-economicDevelopment in Malaysia

It is a truism to say that the financial sector plays acritical role in the socio-economic development of any country.Financial institutions provide for effective mobilisation and allocationof savings and this contributes effectively towards socio-economicdevelopment. Malaysia, which is, as of now, perhaps the fastest growingcountry in the third world, is characterised by a well-developedfmancial system. What, however, is unique about Malaysia is that, as insome other Muslim countries, conventional and Islamic fmancialinstitutions exist side by side, interacting with one another. Thedevelopment of Islamic fmancial institutions in Malaysia has thepotential to play a leading role in serving the Muslim Ummah andcontribute towards socio-economic development of the country inconformity with Islamic se~ibilities. Yet their market share is ratherinsignificant in comparison with the conventional fmancial institutions.As elsewhere, financial institutions in Malaysia provide four distincttypes of intermediation in the process of exchanging funds and fmancialinstruments among the surplus units and the deficit units – viz.,denomination intermediation, maturity intermediation, riskdiversification intermediation, and liquidity intermediation.