ISLAMIC
BANKING AND
FINANCE
Mahyuddin Khalid
emkay@salam.uitm.edu.my
FRAMEWORK OF ISLAMIC FINANCIAL
SYSTEM
CONTENT
 HISTORICAL DEVELOPMENT OF ISLAMIC FINANCIAL
SYSTEM
 DEVELOPMENT OF ISLAMIC BANKING
 DEVELOPMENT OF TAKAFUL
 D...
• Mit Ghamr, Egypt1963
• Pilgrims’ Fund Board (Lembaga Tabung Haji), Malaysia1969
• Oil boom1970
• Islamic Development Ban...
Gradual and pragmatic
..achieved significant milestones in building comprehensive and integrated
Islamic financial system ...
1ST PHASE : 1963-1992
1963
• Establishment of
the Pilgrims Fund
Board
• It is saving
mechanism -
Malaysian Muslim
set asid...
2ND PHASE : 1993-2000
1993
• March: Interest-Free
banking Scheme
(IFSB)/ Skim
Perbankan Tanpa
Faedah (SPTF) was
launched o...
3RD PHASE : 2001-2010
2001
• March: BNM had
launched Financial
Sector Master Plan
(FSMP) –
incorporated a
comprehensive 10...
TAKAFUL
 Arabic word ) ‘) guaranteeing each other’ / ‘joint guarantee’.
 It is an Islamic insurance concept which is gro...
HISTORICAL DEVELOPMENT OF TAKAFUL IN
MALAYSIA
1983
• The
development
of takaful
industry in
Malaysia was
inspired
through ...
COMPARISON BETWEEN TAKAFUL AND
INSURANCE
TAKAFUL CRITERIA INSURANCE
Prohibited all of this
elements because it’s
contradic...
COMPARISON BETWEEN TAKAFUL AND
INSURANCE
TAKAFUL CRITERIA INSURANCE
Specifies from the outset how
the profits from.
Takafu...
COMPARISON BETWEEN TAKAFUL AND
INSURANCE
TAKAFUL CRITERIA INSURANCE
The entire operation aims
at paying the way of
brother...
ISLAMIC CAPITAL MARKET
 Islamic capital market means where
investment and financing activities and
products are structure...
14
ISLAMIC CAPITAL MARKET
 The SC’s efforts to develop the ICM by setting up of
the necessary infrastructure:
 Establish...
ISLAMIC CAPITAL MARKET
YEAR CRITICAL MILESTONES
1990 SHELL MDS Sdn. Bhd. Issued the first Islamic bond.
1993 Launch of fir...
ISLAMIC CAPITAL MARKET
YEAR CRITICAL MILESTONES
2000 • The SC imposed the requirement to engage independent
Shariah advise...
ISLAMIC MONEY MARKET
 The Islamic Money Market (IIMM) is integral
to the functioning of the Islamic banking
system.
 IIM...
ISLAMIC MONEY MARKET
 IIMM was introduced on January 3, 1994 as a
short-term intermediary to provide a ready
source of sh...
19
SHARIAH ADVISORY COUNCIL (SAC) OF THE
BNM
 BNM established its Shariah Advisory Council (SAC)
on Islamic Banking and T...
20
DEVELOPMENT FINANCIAL INSTITUTIONS
(DFIS)
 The aspiration of BNM to develop a
comprehensive Islamic banking system had...
21
LABUAN AS AN ISLAMIC IOFC
 Government has made a decision to promote
Labuan as an International Offshore Financial Cen...
22
INTERNATIONAL ISLAMIC FINANCIAL
MARKET (IIFM)
 Labuan Offshore Financial Services Authority (LOFSA) was
established an...
23
FIRST SOVEREIGN GLOBAL ISLAMIC
SUKUK
 Malaysia successfully launched the first
Sovereign Global Islamic Sukuk, structu...
24
INTERNATIONAL ISLAMIC FINANCIAL
MARKET (IIFM)
 LOFSA initiated the establishment of a global
network of Islamic financ...
25
ISLAMIC FINANCIAL SERVICES BOARD
(IFSB)
 Islamic Financial Services Board (IFSB) was
established in 2002.
 The establ...
26
LICENSING OF FOREIGN ISLAMIC BANKS AND
ISLAMIC BANKS SUBSIDIARIES
 The financial liberation of the Islamic banking sec...
27
LICENSING OF FOREIGN ISLAMIC BANKS AND
ISLAMIC BANKS SUBSIDIARIES
 In 2004, BNM also continued to further
strengthen t...
28
FINANCIAL SECTOR MASTER PELAN FOR ISLAMIC
BANKING
 Financial Sector Master Plan was launched on
March 2001 incorporate...
29
VISION OF ISLAMIC BANKING AND
TAKAFUL
 Malaysia as a regional Islamic financial center.
 Constitute 20% of the bankin...
30
CONCLUSION
 Islamic banking system has experienced a rapid
growth and tremendous development since its first
debut in ...
END OF CHAPTER31
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Fundamental of Islamic Banking - Framework of Islamic Financial System and Historical Development of Islamic Banking and Finance in Malaysia

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Fundamental of Islamic Banking - Framework of Islamic Financial System

  1. 1. ISLAMIC BANKING AND FINANCE Mahyuddin Khalid emkay@salam.uitm.edu.my FRAMEWORK OF ISLAMIC FINANCIAL SYSTEM
  2. 2. CONTENT  HISTORICAL DEVELOPMENT OF ISLAMIC FINANCIAL SYSTEM  DEVELOPMENT OF ISLAMIC BANKING  DEVELOPMENT OF TAKAFUL  DEVELOPMENT OF ISLAMIC CAPITAL MARKET  ISLAMIC MONEY MARKET  SHARIAH ADVISORY COUNCIL (SAC)  LABUAN AS ISLAMIC IOFC  INTERNATIONAL ISLAMIC FINANCIAL MARKET  ISLAMIC FINANCIAL SERVICE BOARD  LICENSING OF FOREIGN ISLAMIC BANKS AND ISLAMIC BANKS SUBSIDIARIES  FINANCIAL SECTOR MASTER PLAN 2
  3. 3. • Mit Ghamr, Egypt1963 • Pilgrims’ Fund Board (Lembaga Tabung Haji), Malaysia1969 • Oil boom1970 • Islamic Development Bank, Saudi Arabia • Dubai Islamic Bank, UAE1975 • Fatwa issued by the Fiqh Council of Muslim World League in favor of Islamic insurance (takaful)1977 • Luxembourg Islamic Bank (1st attempt in the West )1978 • Sudanese Islamic Insurance Company is established as the world’s 1st Takaful company by Faisal Islamic Bank of Sudan1979 • Malaysia passes comprehensive legislation on Islamic finance (Islamic Banking Act)1983 • OIC Islamic Fiqh Academy legitimizes Sukuk which paves the way to the development of Islamic debt securities1988 • World 1st sukuk issued in Malaysia (Based on BBA) by Shell MDS worth USD 30 million1990 • AAOIFI , Bahrain1991 • IFSB, Malaysia2002 • International Islamic Liquidity Management (IILM), Malaysia2011 HISTORICAL LANDMARKS IN ISLAMIC FINANCE DEVELOPMENT 3
  4. 4. Gradual and pragmatic ..achieved significant milestones in building comprehensive and integrated Islamic financial system with diversity of players…. Milestones 1969 1983 1993 2003 Pilgrimage Fund Board Bank Islam Malaysia Bhd. Bank Muamalat Malaysia Bhd. Foreign Islamic banks Full-fledged Islamic banks Conventional banks offer Islamic window Takaful Operators Syarikat Takaful Malaysia Bhd. Takaful Nasional, Mayban Takaful, Takaful Iklhas, Commerce Takaful Islamic subsidiary Islamic Money Markets STAGES OF DEVELOPMENT 4
  5. 5. 1ST PHASE : 1963-1992 1963 • Establishment of the Pilgrims Fund Board • It is saving mechanism - Malaysian Muslim set aside regular funds to cover them performing annual pilgrimage 1969 • Pilgrims Fund Board combined with Pilgrim’s Management Fund Board/ Lembaga Urusan dan Tabung Haji (LUTH) 1980 • Several parties were calling for establishment of Islamic bank due to resurgence that happened in the Middle East • Eg: Malaysian government had being offered by Bumiputra Economic Congress to set up Islamic Bank in this country 1981 • Set up National Steering Committee (NSC), chaired by Raja Mohar Badiozaman • NSC undertake study and make recommendations to government on all aspects relating Islamic Bank in Malaysia, including legal, religious and operational aspects. • LUTH take over the secretarial functions 1983 • July : NSC submitted their report to government • The first Islamic bank was established in Malaysia- Bank Islam Malaysia Berhad (BIMB) under Islamic Banking Act 1983 5
  6. 6. 2ND PHASE : 1993-2000 1993 • March: Interest-Free banking Scheme (IFSB)/ Skim Perbankan Tanpa Faedah (SPTF) was launched on a pilot basis involving Malayan Banking Bhd. , Bank Bumiputra Malaysia Berhad and United Malayan Banking Corporation Bhd. • July: Commercial banks, merchant banks and finance companies begun to offer Islamic banking products and services under the Islamic Banking Scheme (IBS banks). May 1997 • BNM establish Shariah Advisory Council (SAC) which consist of academicians and Shariah experts in Islamic Banking and Takaful • Role: • Harmonize different opinion in Shariah • Advise BNM • Analyze Shariah aspects of new products submitted by banking institutions and takaful companies December 1998 • The IFSB/SPTF was replaced with Islamic Banking Scheme (IBS)/ Sistem Perbankan Islam October 1999 • Establishment 2nd Islamic Bank, Bank Muamalat Malaysia Berhad ( merger between Bank Bumiputera Malaysia Bhd. + Bank Commerce (M) Berhad 6
  7. 7. 3RD PHASE : 2001-2010 2001 • March: BNM had launched Financial Sector Master Plan (FSMP) – incorporated a comprehensive 10 year master plan for Islamic banking and Takaful • Declaration of Labuan as International Offshore Financial Centre (IOFC) to promote Malaysia as International financial system 2002 • Establishment of Islamic Financial Services Board (IFSB) in Kuala Lumpur 2004 • Financial liberation of Islamic Banking sector with the issuance of three new Islamic license under IB Act 1983, from Middle East to Islamic financial institution Today • Implementing dual banking system • Become the first nation have full- fledge Islamic system operating side-by-side with conventional system 7
  8. 8. TAKAFUL  Arabic word ) ‘) guaranteeing each other’ / ‘joint guarantee’.  It is an Islamic insurance concept which is grounded in Islamic muamalat, observing the rules and regulations of Islamic law.  Basic concept  Social solidarity  Cooperation  Mutual indemnification of losses among members  Principles  Policyholders (Takaful partners) cooperate among themselves for their common good. (wakalah)  Every policyholder pays his subscription to help those who need assistance (tabarru’)  Losses are divided and liabilities spread according to the community pooling system. (mudharabah)  Uncertainty (gharar) is eliminated concerning subscription and compensation.  It does not derive advantage at the cost of others. (no riba’) 8
  9. 9. HISTORICAL DEVELOPMENT OF TAKAFUL IN MALAYSIA 1983 • The development of takaful industry in Malaysia was inspired through the establishment of Bank Islam Malaysia Berhad (BIMB) in 1983 1984 • The Takaful Act was drafted • Syarikat Takaful Malaysia Berhad (Takaful Malaysia)was established as the pioneer takaful operator in Malaysia 1985 • Takaful Malaysia offering Family Takaful & General Takaful Business 1996 • July-Takaful Malaysia was listed on the Main Board of Bursa Malaysia 1997 • May- BNM established NSAC on Islamic banking and Takaful 9
  10. 10. COMPARISON BETWEEN TAKAFUL AND INSURANCE TAKAFUL CRITERIA INSURANCE Prohibited all of this elements because it’s contradict with Shariah. Elements Of Gharar (uncertainty), Maisir(gambling ), And Riba’ Contains all these elements Objective is to ensure that the activities of company are carried out according to principles of Shariah. Shariah Supervision Don’t have Shariah Supervision The account is known as general insurance account and life insurance account of fund. Accounts The account known as Tabarru’ which means donation, the other one is treated in line with the principle of Mudharabah. 10
  11. 11. COMPARISON BETWEEN TAKAFUL AND INSURANCE TAKAFUL CRITERIA INSURANCE Specifies from the outset how the profits from. Takaful investment are to be shared between the operator(mudharib) and the participants(sahib ul-mal). Bonus May offer bonus or profit in general terms only especially with profit policies, there is no exact specification with regard to the profit-sharing in contract. It may also decide to give or not to give bonus for any particular year depending on the result of the investment return. The funds shall be invested in any interest free from Shariah justified scheme. The entire procedure shall comply the guidelines of the Shariah investment return must not be driven by any unethical commercial activities. Investment The funds may also be invested in an interest-based scheme. They can also be invested in any scheme or project, which may not be supported by the Shariah discipline. 11
  12. 12. COMPARISON BETWEEN TAKAFUL AND INSURANCE TAKAFUL CRITERIA INSURANCE The entire operation aims at paying the way of brotherhood, solidarity and mutual cooperation. Nature The operation aims a commercial gain on the basis of the principles of business. Regulations affecting Takaful are based on the Divine sanction (Qur’an and Hadith) Regulations Insurance law is based on the human thoughts and cultures Participants own the Takaful fund and managed by the operator. Participants give up individual rights to gain collective rights over contribution and benefits Contract Insurance is a buy-sale contract in which policies are sold and the policy holders are the purchasers. 12
  13. 13. ISLAMIC CAPITAL MARKET  Islamic capital market means where investment and financing activities and products are structured in accordance with Shariah principles.  The Islamic Capital Market (ICM) refers to the market where activities are carried out in ways which doesn’t conflict with the principles of Islam.  The ICM represents an assertion of religious law in capital market transactions where the market is free from prohibited activities and elements such as riba, maysir and gharar 13
  14. 14. 14 ISLAMIC CAPITAL MARKET  The SC’s efforts to develop the ICM by setting up of the necessary infrastructure:  Establishing an Islamic Capital Market Unit (ICMU)  to carry out research and development of ICM instruments  analyzing the existing securities from Shariah perspectives  Establishing Islamic Instruments Study Group (IISG)  to advise the SC on development ICM  to study issues related to the operation of the ICM  Establishing Shariah Advisory Council (SAC) of SC  succeeded the role and function of IISG  to ensure that the operation of the ICM conform to Shariah principles  to advise the SC on all matters related to the development of the Islamic capital market  as a reference center for issues related to Islamic capital market.
  15. 15. ISLAMIC CAPITAL MARKET YEAR CRITICAL MILESTONES 1990 SHELL MDS Sdn. Bhd. Issued the first Islamic bond. 1993 Launch of first Islamic Equity unit trust fund by Arab- Malaysian Unit Trust Bhd 1994 BIMB Securities Sdn. Bhd was established. 1995 SC established ICM Unit. 1996 The Shariah Advisory Council (SAC) was established. RHB launched the country’s first Islamic equity index, comprising shares of KLSE main board companies. 1997 The SC introduced an official list of Shariah approved securities traded on the KLSE. 1999 The KLSE launched the country’s second Islamic equity index, the KLSE Shariah index (KLSI) 15
  16. 16. ISLAMIC CAPITAL MARKET YEAR CRITICAL MILESTONES 2000 • The SC imposed the requirement to engage independent Shariah adviser for issuing Islamic Bonds, as stipulated in the Guidelines on the Offering of Private Debt Securities. • Islamic Bond Fund launched. 2001 • The minister of Finance launched the Capital Market Master plan. • Issuance of the world’s first Global Sukuk by Kumpulan Guthrie 2002 • First Global Islamic Bond Issues. • The Prime Minister launched the book, resolutions of the Securities Commission SAC. • Issuance of the world’s first Global Sovereign Sukuk 2003 • The Malaysia Government, in its Federal Budget 2004, allowed tax deduction for 5 years on expenses occurred in the issuance of Islamic bonds, based on Shariah principles of Istisna’. 16
  17. 17. ISLAMIC MONEY MARKET  The Islamic Money Market (IIMM) is integral to the functioning of the Islamic banking system.  IIMM provide the Islamic financial institutions with the facility for funding and adjusting portfolios over the short-term and serving as a channel for the transmission of monetary policy.  Financial instrument and interbank investment would allow surplus banks channel funds to deficit banks, also maintaining the funding and liquidity mechanism necessary to promote stability in 17
  18. 18. ISLAMIC MONEY MARKET  IIMM was introduced on January 3, 1994 as a short-term intermediary to provide a ready source of short-term investment outlets based on Shariah principle.  The Islamic banks and banks participating in the Islamic Banking Scheme (IBS) would be able to match the funding requirements effectively and efficiently.  Bank Negara Malaysia (BNM) issued the guidelines to facilitate proper implementation of the IIMM. 18
  19. 19. 19 SHARIAH ADVISORY COUNCIL (SAC) OF THE BNM  BNM established its Shariah Advisory Council (SAC) on Islamic Banking and Takaful on 1 May 1997 to streamline and harmonize the Shariah interpretations among banks and takaful companies.  The SAC is the highest authority in deciding Shariah issues pertaining to Islamic banking and takaful operations in Malaysia.  The primary objectives of SAC are as follows:  To act as the sole authoritative body to advise BNM on Islamic banking and takaful operations  To co-ordinate Shariah issues with respect to Islamic banking, finance and takaful  To analyze and evaluate Shariah aspects of new products/ schemes submitted by the banking institutions and takaful companies.
  20. 20. 20 DEVELOPMENT FINANCIAL INSTITUTIONS (DFIS)  The aspiration of BNM to develop a comprehensive Islamic banking system had stimulated the non-banking financial intermediaries to offer Islamic banking products and services includes:  Bank Simpanan Nasional (BSN)  Bank Kerjasama Rakyat Malaysia (BR)  Development Finance Institutions (DFIs) i.e. Bank Pembangunan dan Infrastruktur Malaysia (BPIM) and Bank Pertanian Malaysia (BPM).
  21. 21. 21 LABUAN AS AN ISLAMIC IOFC  Government has made a decision to promote Labuan as an International Offshore Financial Centre (IOFC) to position itself as an international center for offshore Islamic banking and finance with the objectives:  To complement domestic financial activities in Kuala Lumpur  To strengthen the contribution of the financial services sector in the gross national product of Malaysia  To promote the economic development of Labuan  Labuan with the status of IOFC has the advantage to attract international banking business by:  Reducing or eliminating the need for full compliance with local capital requirements  Having lower license fees, corporate taxes and other business levies
  22. 22. 22 INTERNATIONAL ISLAMIC FINANCIAL MARKET (IIFM)  Labuan Offshore Financial Services Authority (LOFSA) was established and responsible for setting national objectives, policies and priorities for the development and administration of offshore financial services in Labuan.  In its efforts to develop Labuan as an Islamic IOFC, LOFSA worked with Islamic scholars to identify potential offshore activities as well as to develop viable Islamic financial instruments which would attract Islamic investors to the Labuan  Following this, Malaysia, Bahrain, Indonesia, Sudan, Iran and the Islamic Development Bank (IDB) established an IIFM Board April 2002  The IIFM Board was entrusted to develop and supervise the development of the IIFM and supported by two committees, the Market and Product Development Committee MPDC and the Shariah Supervisory Committee (SSC).
  23. 23. 23 FIRST SOVEREIGN GLOBAL ISLAMIC SUKUK  Malaysia successfully launched the first Sovereign Global Islamic Sukuk, structured on the principle of ijarah on 25 June 2002.  The launching of the global Islamic bond signified Malaysia’s strong commitment in supporting the development of Islamic banking and finance on the global front.  The move to access the international Islamic capital market would give impetus to the development of the Islamic financial market.
  24. 24. 24 INTERNATIONAL ISLAMIC FINANCIAL MARKET (IIFM)  LOFSA initiated the establishment of a global network of Islamic financial markets known as International Islamic Financial Market (IIFM) with the objectives:  To establish a structured global financial market that is based on Shariah principles  To enhance the cooperative framework among Islamic countries and financial institutions  To generate the liquidity, creation and trading of financial instruments, thus enhancing investment opportunities and spins-off of other related services and activities such as custodial, brokerage and treasury.  To promote greater awareness of Islamic banking and finance, and facilitate cross border transactions.
  25. 25. 25 ISLAMIC FINANCIAL SERVICES BOARD (IFSB)  Islamic Financial Services Board (IFSB) was established in 2002.  The establishment of the IFSB will set the stage for the adaptation, harmonization and development of the international regulatory and supervisory standards as well as best practices for the governance of all financial institutions offering Islamic financial services and products.  The nine founding members are Bahrain, Indonesia, Iran, Kuwait, Malaysia, Pakistan, Saudi Arabia, Sudan and the Islamic Development Bank, The IFSB secretariat is located in Kuala Lumpur. Malaysia.  The Board will also contribute towards ensuring the soundness and stability of the Islamic financial system, thus paving the way for Islamic banking to expand globally.
  26. 26. 26 LICENSING OF FOREIGN ISLAMIC BANKS AND ISLAMIC BANKS SUBSIDIARIES  The financial liberation of the Islamic banking sector was introduced on 2007 with the issuance of three new Islamic bank licenses under the Islamic Banking Act 1983 (IBA)  The new entries of the foreign Islamic banks were in line with the recommendations of the Financial Sector Master plan (FCMP) to position Malaysia as an international Islamic financial hub.  The presence of foreign players will promote healthy competition which is necessary to elevate the industry to new levels of dynamism as well as to accelerate the global integration the domestic Islamic banking system.  It will also promote greater economic and financial linkages between Malaysia and the Middle East, and foster greater harmonization in terms of Shariah interpretation and understanding.
  27. 27. 27 LICENSING OF FOREIGN ISLAMIC BANKS AND ISLAMIC BANKS SUBSIDIARIES  In 2004, BNM also continued to further strengthen the overall infrastructure development of the Islamic banking system as the Islamic banking industry entered a more advanced stage of development.  The window-based’ institutional structure was reviewed to further strengthen and elevate the development of domestic Islamic banking industry through a new enabling institutional structure.  The domestic banking groups and foreign Islamic Banking Scheme (IBS) banks were encouraged to set up Islamic subsidiaries (IS) as full-fledged Islamic banks which would be licensed under the
  28. 28. 28 FINANCIAL SECTOR MASTER PELAN FOR ISLAMIC BANKING  Financial Sector Master Plan was launched on March 2001 incorporates 10 years master plan for Islamic banking a  FSMP’s aim is to create an efficient, progressive and comprehensive Islamic financial system that contributes significantly to the effectiveness and efficiency of then Malaysian financial sector.  FSMP provides recommendations which focus on three main areas:  Institutional capacity enhancement  Financial infrastructure development  Regulatory framework development
  29. 29. 29 VISION OF ISLAMIC BANKING AND TAKAFUL  Malaysia as a regional Islamic financial center.  Constitute 20% of the banking and insurance market share with an effective contribution to the financial sector of the Malaysian economy  Represented by a number of strong and highly capitalized IBIs and takaful operators  Offering a comprehensive and complete range of Islamic financial products and services  Underpinned by a comprehensive and conducive Shariah and regulatory framework  Supported by a dedicated institution (Shariah commercial court) in the judiciary system that addresses legal issues  Supported by a sufficient number individuals and management teams with the required expertise
  30. 30. 30 CONCLUSION  Islamic banking system has experienced a rapid growth and tremendous development since its first debut in 1983  Various measures have been adopted by the authorities in implementing the Islamic banking system with a step by step and open-minded approach with each step taken after careful consideration of all implications.  In order to he a viable Islamic banking system, all the basic elements towards this purpose were being established by the authority.  These include a large number of products, instruments and institutions and the establishment of an Islamic money and capital market which would link the institutions and the instruments.
  31. 31. END OF CHAPTER31
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