BANKER-CUSTOMER RELATIONSHIP IN THE CONVENTIONAL AND ISLAMIC BANKS IN MALAYSIA, REVISITED

Abstract

The distinct feature of Islamic banking operations is the multiple contractual relationships between Islamic banks and their customers being that of partners, investors and traders, as well as buyer and seller. Conversely, conventional banking is primarily based on the debtor-creditor relationship (as enunciated in Foley v Hill) between the banks and the borrower with the bank earning money from a spread made between interest it receives from the borrower on loans and other assets and interest paid to the depositors in interest-bearing accounts. This article revisits previous papers related to these different types of banker-customer relationships. Afterwards, a reconsideration in comparative sense of the nature of banker-customer relationship in conventional and Islamic banks is discussed. This study is a library research which analyses the literature from books, research articles, official websites, industry report, journals and online newspapers to explore the development in the application of equity-based Shariah contract for deposit and financing to see whether the Islamic banks have distinctly move away from the debt- based financing of Foley v Hill position or otherwise. The research findings show that not many Islamic banks bode well with equity-based financing since the risks are above and beyond the threshold a normal bank is willing to take and it seems that Islamic banks are reversing back to the debt-based financing of Foley v Hill position. This study concludes with a call for a review of the duty of care of Islamic banks towards performing prudent risk management in debt-based financing in striving to adhere to higher objectives of Shariah (Maqasid al-Shari’ah). This study will be helpful for bringing policy formulation by Islamic banks to facilitate innovation in Islamic product offerings.