A Comparative Study of Profit and Interest Rate Practice in Malaysian Banking

Basically, a bank is an institution that conducts financial transactions by accepting and collecting funds from depositors and carrying out financing activities with the accumulated funds to generate profit. In carrying out its functions as a financial institution, the bank will carry out all financial related transactions as permitted. Financial related transactions carried out by banking institutions will usually result in interest payments or profits to the customer due to savings or investments made and for financing transactions it will result in interest payments or profits to the bank. The problem that arises is the perception that there is no difference between the operation of Islamic banking and conventional banking, thus making the rate of profit in long-term financial instruments in Islamic banking the same as the increase based on the interest rate carried out in conventional banking. The objective of this study is to examine the operational differences between Islamic and conventional banking in long-term financial instruments for the determination of profit rates practiced. The research methodology used is a qualitative design based on literature review by analysing documents thru a deductive method analysis on primary, secondary, and tertiary sources to identify conceptual, legal, and operational differences between Islamic and conventional banking. The results of the study show that there are fundamental differences between Islamic banking and conventional banking, including long-term financial instruments. This difference is proof that operations in Islamic banking are bound by Shariah law and at the same time prove that the long-term profit rate obtained is Shariah compliant, not the same as the interest rate practiced in conventional banking.