“Gotong Royong” Bank?

To the uninitiated, the term “gotong-royong” means cooperation in Bahasa Malaysia. It is a concept where the community may come together to assist its community members without expectation of returns. In Malaysia, this is a community event to achieve a certain purpose for example a village wedding.

But how about having a “gotong-royong” Bank? Ms Rozana Gulzar, who contributed an earlier article on this site, made this interesting proposition that while the current Islamic Finance system set-up based on the conventional banking model is working sufficiently, a different model of banking may provide a closer structure espoused under the Maqasid of Shariah (Objectives of Shariah). A more inclusive and less profit driven model? It may provide a refreshing alternative to the existing financial system. Maybe not as a full 100% replacement of the existing models (where it caters for a large scope of requirements) but to complement and complete the Islamic Banking financial infrastructure.

Read about what she wrote below, as well as her earlier writings on this site.

DOWNLOAD : Cooperative Banking as the Solution for Islamic Banking Woes (pdf)

Excerpt from Rosana’s being cooperative:

While there are some differences in the models of cooperative banks in various regions of the world, a basic common feature is that they are owned by members, who in turn tend to be their depositors and borrowers. That’s mutuality built right into the system. This form of ownership then sets the tone for a business model that is more Islamic than ‘Islamic’ commercial banks. For example, because cooperative banks are owned by members who may be their borrowers, profit maximisation is not the main objective. Their raison d’être is in fact to charge reasonable enough rates so that those who cannot get financing from blood-sucking commercial banks can do so through the cooperative banks. And yes, they are not Islamic in form but I think they are more Islamic in spirit.

Bankers of cooperative banks are also known to have close relationships with their customers. A Turkish German once told me that his neighbourhood banker would come regularly for tea. When he notices a child in the household is old enough for a bank account of his own, the banker will ask the parents if he should indeed open one for him. Germany by the way is home to the largest network of cooperative and savings banks in the world. This close relationship has important implications. One it answers a call by some quarters for a move towards relationship-based banking as opposed to the transactions-based frenzy that characterises commercial banking and has been blamed for the crises. Secondly, it addresses a key issue that has been plaguing Islamic finance since its modern birth: How to implement profit and loss sharing (PLS) contracts such as musharakah and mudarabah which are at the heart of an ideal Islamic financial system when early attempts failed due to moral hazard and adverse selection issues.

Additionally, she makes a call to academia to rise to the occasion of re-looking the existing model and having more research to support the building of the new model. She throws the challenge that the road is still long and hard and only the ones who are able to persevere will make a difference.

DOWNLOAD : Islamic Finance Academia – We Can Do Better (pdf)

Excerpt from Rosana’s war cry to Academia:

Firstly, we need to address the controversies. Islamic finance is suffering from a dichotomy between theory and practice. What is taught in schools is a world away from what is being practiced. While ‘Islamic’ bankers keep an almost sole focus on producing the best ROE for shareholders, at the obvious expense of social welfare, Islamic finance professors go on and on about the ideals that shape this form of finance, oblivious to the divergence in practice. It is thus not surprising that the ‘solutions’ they come up with have no semblance to reality. I keep thinking, ‘We are not yet in jannah so how will this work in the real world?’

To come up with better solutions, I think we need to first face facts. Don’t gloss over them. I would prefer an honest (and mature) discussion of how we have gone wrong in Islamic finance and how to address them. This obviously needs rigor in thought and analysis. And critical thinking. Just because someone is from the IMF or World Bank does not mean he knows what he is saying or his intentions are purer than pure. We still need to evaluate the rigor of his arguments. On the other end, those who do not understand Islamic finance need to keep silent. The problem in Islamic finance is that we have many talking heads who really sound like empty vessels. And you know what they say about empty vessels right? (They make the most noise).

I like to make the same challenge to my staff as well; 90% of the practices we see today are derived from decisions, opinion and fatwa made in mid 1990s and has been taken as Urf (custom) and not challenged anymore… but we should re-look at some of them (especially with standing controversies) and see if current regulations and Shariah Advisory Council resolutions and product thinking and market development can offer a better solution. Doesn’t Islamic Banking allow for intelligent discussion to always evolve into something better? Just because it has now become Urf, it does not mean there is no better solution and be happy with the status quo. There’s always room for improvements to this 30 year old industry.

The purpose of this website is to encourage constructive discussions and perhaps find a better solution to the existing ones. Let’s have your views on these topics. Have a read of Rosana’s writing and I know she appreciates honest feedback on her work. Do spend that time reading, and your comments may perhaps resonate in someone’s mind and change the world.

To go to Rosana’s page, click here.


6 thoughts on ““Gotong Royong” Bank?

    • Salam Ashraf

      The financial institutions under DFI do represent a potential to become an alternative to banks. Bank Rakyat would be perfect to take up such role, especially when traditional banks questions their scope and function as financial intermediaries. But I believe at the moment, DFI are still competing directly in the IFI space for consumer accounts, offering the same products. Political will is required, so is financial strength to make such shift.



  1. Salaam brothers, for some reason I missed this exchange but good one. Agree with Br Amir and if I may add, cooperative banks (as a group) is actually very interesting. I am fascinated with the European model because they work so well in terms of the mutual nature, the cooperative spirit and although not crazily profitable, the business model has been sustainable. It has been in existence for a long time. So when I say ‘cooperative bank’, I mean like the ones in Europe. Germany particularly has an inspiring network, which I am researching on as part of my PhD (I’m so glad to say because sometimes we end up working on something we couldn’t care less about). Details of this bank type is in my article – I wonder if you read the full one?

    Now if we compare that with the model in Malaysia, I think we can start weeping for reasons you both have highlighted. I read a paper which said that the reason why our ‘cooperative bank’ is different from the European ones is that ours is a legacy of the British colonial times. They used cooperative banks as part of the development policy and thus grant subsidies etc which unfortunately opened the door wide for political patronage, corruption and the works. I read another paper which questioned the operations of Bank Rakyat in terms of as Br Amir highlighted, the lack or non-existent Islamic, let alone, cooperative features, because they seem quite busy trying to be another profit-hungry, baby-killing ‘Islamic’ bank. And a chief banker told us the supposed ‘dividend payouts’ at Bank Rakyat are worrying. So I hope it’s not another Ponzi scheme when I’m not sure the goings-on at Tabung Haji have been resolved …

    So in summary, while yes, we have a ‘cooperative bank’, but as you pointed out br Ashraf, it has many buts. And I actually find the European ones more in line with Islamic principles. They don’t call themselves Islamic but they have learnt to mutually share the burdens and rewards. Here, we are so busy calling ourselves ‘Islamic’ and the moment I listen to the way an ‘Islamic’ banker talks, I feel like running for my life. There are exceptions of course but the norm is worrying, to say the least.



    • Salam all. I agree there are shortfalls in the current system, but I also understand where all this is coming from. 30 years ago when Islamic Banking first started in Malaysia, there were hardly any regulations and as a small industry, we believed in ourselves to be able to do everything. But as Islamic Banking grew globally, more and more attention was paid and more detailed regulations were needed. Things that we hoped can be fully developed under a banking system now becomes more difficult over many cycles of economic turmoil where standards such as Basel becomes prominent but not necessarily aligned to the Maqasid of Shariah. Suddenly, some islamic contracts had to evolve to meet the “non-islamic banking requirements” as well.

      There is no harm in thinking of a different model to carry these islamic contracts now, but political will is key to take it forward. Regulations for these models must be agreed upfront and developed for future expansion as well. It must fall under a national agenda, with support from regulators, and very clear view of the end result and the segment that we aim to serve. Then such structures can be developed more systematically.



  2. Salaam,

    Actually what concerns me also about Islamic banking in Malaysia is the seemingly new direction, or more accurately, the lack of it. If I piece Daud Bakar’s recent comments that PLS is impossible for Islamic banks (Quite surprised that the chairman of central bank’s Shariah advisory council came to this realisation 30 years into the industry … ) and BNM saying in its latest financial stability report 2016 that banks cannot be expected to fund SMEs because of the high risk and their fiduciary duty to protect deposits, it seems that the message is to not expect ‘Islamic’ banks to behave in an Islamic-like manner. Funding SMEs through PLS should ideally be the mainstay of Islamic banking. This is what the cooperative banks in Europe thrive at! They are known to be key financiers of the real economy, extending credit to households and small businesses not only in good but also bad times!! Moving back to Malaysia, yes, there are some mentions of investment accounts continuing its ‘growth’ but I wonder if that’s lip service since ‘Islamic’ banks should not be expected to do mudarabah/musharakah-like contracts … Given that the new focus areas are not necessarily Islamic (factoring is definitely not and it is one of the alternative financings that has been earmarked by the central bank for focus), I wonder if this means that Islamic banking in Malaysia will fall off the radar and die a slow death … No more will (political or otherwise) to improve the lack of Islamicity in our ‘Islamic’ banks … ??


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