Mitigating Shadow Economy Through Dual Banking Sector Development in Malaysia

  • Muzafar Shah HabibullahEmail author
  • Abdul Hamid Baharom
  • Badariah Haji Din
  • Fumitaka Furuoka
Part of the Palgrave CIBFR Studies in Islamic Finance book series (PCSIF)


Theory argues that as long as the shadow economy is of sufficient size, the leakage or loss of tax revenue through tax evasion will also be substantial. In this chapter, we provide new estimates of the size of the shadow economy in Malaysia for the period 1971–2013. Further, we relate the shadow economy to its determinants as measured by the misery index. This chapter reveals that the relationship between the shadow economy and financial development in Malaysia exhibits an inverted U-shaped curve. The chapter concludes that the Malaysian government should embark on programs that can reduce the size of the shadow economy, relying on its dual banking system of Islamic and conventional banks.


Shadow economy Islamic banking Malaysia 


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Copyright information

© The Author(s) 2017

Authors and Affiliations

  • Muzafar Shah Habibullah
    • 1
    Email author
  • Abdul Hamid Baharom
    • 2
  • Badariah Haji Din
    • 3
  • Fumitaka Furuoka
    • 4
  1. 1.Faculty of Economics and ManagementUniversiti Putra MalaysiaSelangorMalaysia
  2. 2.International Centre for Education in Islamic FinanceKuala LumpurMalaysia
  3. 3.College of Law, Government and International StudiesUniversiti Utara MalaysiaSelangorMalaysia
  4. 4.Asia-Europe InstituteUniversity of MalayaKuala LumpurMalaysia

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