The Islamic banks may not be popular in some parts of the world, but they grow with time. Although Islamic banks resemble conventional banks, there are slight variations in the operations when these two financial institutions are compared. For the case of Malaysia, the deposit rates in Islamic banks show the exact behavior of conventional banks regarding interest rates. Only a small number of Islamic banks in Malaysia are strictly based on profit and loss sharing (PLS). The resurgence of Islamic globally has contributed to the significant rise in Islamic banks. Therefore, there is a need to apply the same regulations applied to conventional banks (Zulkhibri, 2018). The interest rates in Islamic banks and other conventional banks have a great similarity regarding deposit market.
From 2008 to 2015, Islamic banks in Malaysia were operating in a monopolistic competition environment, although it had a discreetly concentrated market structure. However, following an introduction of the foreign Islamic banks; they led to more competition in the market structure resulting in less concentration (Basri, 2020). In addition, the financial reforms in Bank Negara Malaysia and liberalization of banks led to more rivalry, strengthening the financial system. As a result, the financial banks have seen a steady positive annual performance, with the struggling Islamic banks closing on the top performers in the industry.
Regulation in the Islamic banking system has played a role in the structural changes witnessed in the Islamic banking industry. Evident structural changes from various financial institutions have greatly influenced banking market structure, mainly regarding market concentration. For example, in the early period, Bank Islam Malaysia Berhad monopolized Islamic banking in Malaysia for almost a decade, from 1983 to 193 (Mohammed, Ismail, & Muhammad, 2015). But following regulations, there has been an increase in the participation of domestic and international players in the Islamic financial sector. Therefore, due to the entry of the domestic Islamic banks, they opened the industry to greater competition and more open to foreign Islamic banks.
Apart from encountering competition from the conventional banking system, the Islamic banks in Malaysia compete internationally to be identified as a center of Islamic finance. Therefore, Bank Negara Malaysia has created an innovative and competitive Islamic banking market through directives and advancing the current domestic Islamic financial institutions. The steps that Bank Negara Malaysia has taken have altered the structure of the Islamic banking industry based on the number and range of banking activities on these banks (Mohammed et al., 2015).
The Great Recession of 2008 caused most financial markets to collapse, but some nations recorded unforeseen market growth after the global crisis. Islamic banks recorded positive growth during this period. In countries like Malaysia, there is no longer an interest to enter the Islamic market as it transacts over 30 percent of the overall financial transactions. Some arguments like a religious governance approach guided by common faith based codes are why Islamic institutions have shown a strong financial performance even when other financial institutions are struggling (Apaydin, 2018). Others argue that a shared vied of morality means regulation should be the same favoring orderly risk-taking.