2. OBJECTIVES
By end of this chapter student must be able to:
1. Interpret the Islamic Banking concept
2. Explain the need for Islamic Banking in the
financial system
3. Describe the Islamic financial instrument the are
available in Malaysia
4. Compare Islamic banking system to conventional
banking system
5. Explain the implementation of Islamic banking in
Malaysia
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3. What is Islamic banking?
According to OIC – Organization of the Islamic Conference
define the Islamic Banking as the company which
carries Islamic banking business.
Islamic banking business is banking activities based on
Islamic law (Shariah). It follows the Shariah, called fiqh
muamalat (Islamic rules on transactions).
The rules and practices of fiqh muamalat came from the
Quran and the Sunnah, and other secondary sources of Islamic
law such as opinions collectively agreed among Shariah
scholars (ijma’), analogy (qiyas) and personal reasoning
(ijtihad).
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5. GENERAL OBJECTIVE
To implement the
economic and
1 financial principles
of Islam in the
banking industry.
To spread
economic
2 prosperity within
the framework of
Islam.
To create an efficient, progressive
and comprehensive Islamic financial
system that contributes significantly
3 to the effectiveness and efficiency of
the Malaysian financial sector while
meeting the economic needs of the
nation.
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6. Islamic banking in Malaysia
In Malaysia, the Islamic banking system exists side by
side with the conventional banking system.
6
In 1993, commercial banks, merchant banks and finance
companies begun to offer Islamic banking products and
services under the Islamic Banking Scheme (IBS banks).
The IBS banks have to separate the funds and activities of
the Islamic banking transactions from the non-Islamic
banking business (conventional banking).
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7. Islamic banking in Malaysia
Islamic banking in Malaysia began in September
1963 when Perbadanan Wang Simpanan Bakal-Bakal
Haji (PWSBH) was established.
7
PWSBH was set up as an institution for Muslims to save for
their Hajj (pilgrimage to Mecca) expenses. In 1969, PWSBH
merged with Pejabat Urusan Haji to form Lembaga Urusan
dan Tabung Haji (now known as Lembaga Tabung Haji).
The purpose of the Pilgrims Management and Fund Board ,
to promote and accumulate savings from the Muslims and
coordinate all aspects of pilgrimage activities undertaken by
members.
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8. ISLAMIC BANKING IN MALAYSIA
The first Islamic bank in Malaysia was established in
1983.
Commercial banks, merchant banks and finance
companies were allowed to offer Islamic banking products
and services under the Islamic Banking Scheme (IBS).
These institutions are required to separate the funds and
activities of Islamic banking transactions from that of the
conventional banking business to ensure that there would
not be any co-mingling of funds.
In 1983, Bank Islam Malaysia Berhad (BIMB) was
established.
Objective:To provide banking facilities and services to
Malaysians in accordance to Islamic Commercial Law
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9. You can identify an Islamic bank or an IBS bank from the logo
below:
•
All banking institutions that provide Islamic banking products and services
in banking logo as shown above. Malaysia are required to display the
Islamic
The legal basis for the introduction of banking products along
Islamic principles is the Islamic Banking Act 1983, which came
into effect on 7 April 1983.
•
•
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to supervise and regulate Islamic banks similar to the case of other
licensed banks.
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10. ISLAMIC BANKING IN MALAYSIA
Malaysia advocates dual banking, in effect there are 3
categories of banking
1.
2.
3.
Conventional banking
Full-fledged Islamic banks
Conventional banks operating Islamic banking windows
under the Islamic banking scheme (IBS)
In relation to Islamic banking, there have been arguments
in support of both full-fledged Islamic banking as well as
Islamic banking windows
11. ISLAMIC BANKING IN MALAYSIA
Islamic banking windows
Refers to conventional banks that offer Islamic banking
products and services using their existing infrastructure,
including staff and branches
Full-fledged Islamic bank
Refers to a bank dedicated to only offering Islamic banking
products/services
In Malaysia, a number of these banks are set up as a subsidiary
to conventional banks
Operations and management are clearly separated between
the subsidiary Islamic bank and the parent conventional bank
12. Full-Fledged Islamic Banks in Malaysia
Local
1.
2.
3.
4.
5.
6.
7.
Bank Islam Malaysia Berhad
Bank Muamalat Malaysia Berhad
RHB Islamic Bank Berhad
Commerce Tijari Bank Berhad
Hong Leong Islamic Bank Berhad
Affin Islamic Bank Berhad
EONCAP Islamic Bank Berhad
Foreign
1.
2.
3.
Kuwait Finance House (Malaysia) Berhad
Consortium led by Qatar Islamic Bank
Al-Rajhi Banking & Investment Corp
13. Islamic banking windows in Malaysia
Commercial Banks
1. Alliance Bank Malaysia Berhad
2. AmBank (M) Berhad
3. Citibank Berhad
4. HSBC Bank Malaysia Berhad
5. Malayan Banking Berhad
6. OCBC Bank (Malaysia) Berhad
7. Public Bank Berhad
8. Southern Bank Berhad
9. Standard Chartered Bank Malaysia Berhad
Merchant Banks
1. Affin Merchant Bank Berhad
2. Alliance Merchant Bank Berhad
3. AmMerchant Bank Berhad
4. Commerce International Merchant Bankers Berhad
14. Islamic banking windows in Malaysia
Discount Houses
1.
2.
3.
4.
5.
6.
Abrar Discounts Berhad
Amanah Short Deposits Berhad
CIMB Discount House Berhad
KAF Discounts Berhad
Malaysia Discount Berhad
Mayban Discount Berhad
Development Financial Institutions (DFI) Offering
Islamic Banking Services
1.
2.
3.
4.
5.
Bank
Bank
Bank
Bank
Bank
Kerjasama Rakyat Malaysia Berhad
Simpanan Nasional
Pembangunan Malaysia Berhad
Pertanian Malaysia
Perusahaan Kecil & Sederhana Malaysia Berhad
15. LIBERALISATION in IBF:
Islamic
finance is an ethical and equitable mode of
finance.
Islamic finance encompasses a wide range of products
comparable to mainstream banking products
Government liberalization allows foreign entity to own
local Islamic banks up to 70%, provided the paid up capital
is increased to USD1 bil – this will scale up operations
and expand into global markets
Malaysia:
5
full fledged Islamic banks (2 locals and 3 GCCs)
12 Islamic subsidiary (9 local and 3 foreign)
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16. GOVERNANCE BODIES
Local
Bank Negara Malaysia
Securities Commission
International level
IFSB - Islamic Financial Services Board (IFSB)
AAOIFI - The Accounting and Auditing
Organisation for Islamic Financial Institutions
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17. WHY ISLAMIC BANKING?
No human effort is completely value-free
• Human value are derived from human worldview
• There can be errors, loopholes, injustice
Islamic worldview is different from the Western worldview
• Principals and practices of conventional banking and finance
inconsistent with the Islamic Worldview
Islam provide a comprehensive solution, its prescriptions
encompasses all aspects of life-shumul
• A specific discipline must be addressed with a larger context
– holistic approach – Islamic Worldview
• Islamic banking – “Banks for All”, not limited to
Muslim/Malays. Build on competitiveness, innovative financial
solutions and excellent service delivery.
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18. WHY ISLAMIC BANKING?
Muslim scholars collectively agreed that interest charges is known
as a form of usury which must be avoided by Muslim.
Muslims throughout the world not been able to avoid interestbased transactions which cover almost all aspects of their lives.
An alternatively banking system which free-interest payment is
necessary in Islamic countries to carter the demand of Muslim
customers.
Muslims now realize how important Islamic way in daily activities
especially in Islamic transaction
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21. Prohibition : RIBA
Riba, interest, or usury is strictly prohibited in Islam.
The literal meaning of the Arabic word riba is increase,
excess, addition or growth
The Shariah meaning ‘premium’ that must be paid by the
borrower to the lender along with the principal amount as a
condition for the loan or for an extension in its maturity.
The Holy Quran has clear instructions regarding business and trading
activities as earnings from trade (Bai) is halal but interest (Riba) based
activities are Haraam.
Banking activities are the part of economic activities and Islam
allows Riba-free banking only.
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22. Prohibition : RIBA
Riba An-Nasiah:
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"That kind of loan where specified repayment
period and an amount in excess of capital is
predetermined." Imam Abu Bakr Hassas Razi
"Every loan that draws profit is one of the forms of
Riba" Sahabi Fazala Bin Obaid
"Every loan that draws more than its actual
amount" Abu Ishaq az Zajjaj
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23. Prohibition : RIBA
Riba Al-Fadl:
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It involves excess received when two alike
commodities are exchanged.This is explained
further in the hadith:
Abu Sa'id al-Khudri (r) reported Allah's Messenger (p)
as saying: Gold is to be paid for by gold, silver by silver,
wheat by wheat, barley by barley, dates by dates, salt by
salt, like by like, payment being made hand to hand. He
who made an addition to it, or asked for an addition, in
fact dealt in riba. Sahih Muslim
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24. Prohibition : RIBA
Every excess in return of which no reward or equivalent
counter value is paid
A predetermined excess or surplus over and above the loan
received by the creditor conditionally in relation to specified
time period
A forced “increased of value” in “the medium of
exchange” that is loaned.
Quran :
“ they say, trade is like riba, but Allah has permitted trade and
prohibited riba….” 2:275
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25. Riba and Inflation
Inflation, defined as a continuous rise in prices, can reduce
the value of money. Assume that person X provides a $100
loan to person Y, to be paid back in 12 months time.
However, if prices have increased by 10 per cent during
that time, the value of that $100 will be worth less to the
lender (person X). In such a case, can person X charge an
excess or premium to take into account the loss of value of
money? The Islamic opinion is against the charging of any
premium. Scholars contend that although it is unfortunate
that person X has lost some value, this is not the fault of
person Y (borrower), hence the borrower should not be
burdened with this excess.
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27. RATIONALE BEHIND THE PROHIBITION:
Element of exploitation in financing consumption
1.
The rich is able to generate more without exerting much
effort
Inconsistent with Islam on the perspective of debt
2.
Incurring debt and interest is discouraged
Negative effects on “credit society”
3.
Easy availability of credit cultivates a materialistic society
Banks – controller, Customers- enslaved
Elements of injustice in financing productive activities
4.
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Contract done with unequal counter-value
Injustice to debtor- obligated to pay even no profit or loss
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28. Prohibition : GHARAR
•
•
•
Literally: Deceit, fraud, uncertainty, danger, peril, or hazard that
might lead to destruction or loss.
Technically: Uncertainty and/or ignorance of one/both parties
in a contract over the substance or attributes of the object of
sales, or doubt over its existence and availability at the time of
contract.
An unknown fact or condition. An element which must be
avoided in Islamic banking dealings as excessive gharar may
make the contract null and void.
–
–
–
–
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For example:
Sale of birds in the air
Sale of fish still in the sea
Sale of unborn animal
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29. Prohibition : GHARAR
Rationale for prohibiton of gharar:
Gharar may lead to injustice, exploitation and
enmity among contracting parties.
To ensure full consent and satisfaction of both
parties in a contract
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Contract will not valid-without full consent.
Contract valid if certainty, full knowledge, full disclosure and
transparency.
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30. Prohibition : MAISIR
Definition: Easily obtaining something without effort,
acquisition and wealth by chance.
Applies to all activities where a person wins or losses by
mere chance; gambling.
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31. Prohibition : MAISIR
The main idea behind the prohibition of gambling
(maisir) in Islam is that money should be earned by
way of work and effort example knowledge and
not by mere pure chance.
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Playing a lottery is one form of gambling.
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32. Prohibition : MAISIR
Gambling include any activity where a person pays
something of value for the chance to win a prize. When
someone gambles, it will involve three things, namely:
32
Prize: anything of value: money, physical items, software
Consideration: what the person must pay to enter
Pure chance: something that is opposite to the pure skill. For example, chess
requires pure skill and slot machine require pure chance. It seems apparent
that the chance factor is the dividing line between gambling and non-gambling
functions with a consideration.
For example, risking $10,000 (i.e. the consideration) in a joint-venture (JV)
project is not gambling because the outcome of the JV is based on knowledge
and market skills.
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33. COMPARISON BETWEEN IB AND CB
Sources: http://www.academicjournals.org/AJBM Afr. J. Bus. Manage.
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37. THE ISLAMIC FINANCIAL SERVICES BOARD (IFSB)
The Islamic Financial Services Board (IFSB) is an
international standard-setting organisation that promotes
and enhances the soundness and stability of the Islamic
financial services industry by issuing global prudential
standards and guiding principles for the industry, broadly
defined to include banking, capital markets and insurance
sectors. The IFSB also conducts research and coordinates
initiatives on industry related issues, as well as organises
roundtables, seminars and conferences for regulators and
industry stakeholders.
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38. •
•
•
•
The Association of Islamic Banking Institutions Malaysia
(AIBIM) or Persatuan Institusi-Institusi Perbankan Islam Malaysia
was established in 1996 as the Association of Interest Free Banking
Institutions Malaysia.
The objective of AIBIM is to promote the establishment of sound Islamic
banking systems and practices and also aims at promoting and
representing the interests of members and to render where possible such
advice or assistance as may be deemed necessary and expedient to
members.
AIBIM promotes education and training in Islamic banking so as to
upgrade Islamic banking expertise in Malaysia and in pursuing the
above objectives, AIBIM works in co-operation with other similar
associations in the country and elsewhere in the world.
Website: www.aibim.com
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39. Islamic Banking and Finance Institute Malaysia (IBFIM),
• mandated by the nation’s financial and capital market master plans
to develop human talent for the Islamic financial sector, has made a
number of achievements since its formation in 2001.
• The institute, whose stakeholders include Bank Negara Malaysia, the
Islamic banks and takaful (Islamic insurance) operators, is a vital
training institute in Islamic finance, handling about 30% of the Islamic
finance sector manpower annually.
• Its management team led by Dr Adnan Alias as its Managing Director
and Chief Executive Officer and is also the Shariah advisor to about
60% of the country’s Shariah-based unit trust funds.
• Besides training, IBFIM provides total solutions to its clients through a
comprehensive range of inter-related services, which include business
consultancy and Shariah advisory in Islamic banking, takaful, Islamic
money and capital markets.
• more info : www.ibfim.com
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40.
Accounting and Auditing Organisation for Islamic Financial Institutions
(AAOIFI) is an independent industry body dedicated to the development of
international standards applicable for Islamic financial institutions. The
Bahrain-based organisation started producing standards as early as 1993.
AAOIFI standards have been developed in consultation with leading Sharia
scholars, with several counties adopting them. Although AAOIFI standards
are not binding on members, over the last few years the organisation has
made significant progress in encouraging the widespread adoption of the
standards.
Countries where AAOIFI standards are either mandatory or recommended
include: Bahrain, Malaysia, UAE, Saudi Arabia, Lebanon, Syria, Sudan and
Jordan.
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