Mahathir told a conference on Islamic finance in Singapore that the 2008 global financial crisis was sparked by excessive lending by Western banks.
Islamic banks, in contrast, are constrained because every deal needs to be backed by a real asset under the principles of Sharia law, he said.
"So if you make a comparison, the Islamic system is in many ways superior to the conventional banking system," Mahathir said.
"The conventional banking system is much more open to abuse than the Islamic banking system," added the former leader, who steered Malaysia through the 1997-98 Asian financial crisis and stepped down as prime minister in 2003.
"So far, the Islamic banks have not been involved in the present crisis except those perhaps who dabble in the money markets in the West," he said.
"Islamic banking is almost immune to these kinds of crook deals."
Islamic banking fuses principles of Islamic law, known as Sharia, and modern banking methods. Islamic funds are banned from investing in companies associated with tobacco, alcohol or gambling.
Sharia-based finance also bans interest, which is seen as usury, and risks are shared between the creditor and borrower.
"The conventional bank lends 30 times the amount of money that they have but the Islamic bank, because they have to participate in taking the risk, they will have to be much more careful," Mahathir said.
End item/ 129