chpter 6 islamic banking 1

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chpter 6 islamic banking 1

  1. 1. ISLAMIC BANKING IN MALAYSIA CHAPTER 6 1 snurazani/2011
  2. 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  2 snurazani/2011
  3. 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).   3 snurazani/2011
  4. 4. 4 snurazani/2011
  5. 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. 5 snurazani/2011
  6. 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). snurazani/2011
  7. 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. snurazani/2011
  8. 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 8 snurazani/2011
  9. 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. • • 9 to supervise and regulate Islamic banks similar to the case of other licensed banks. snurazani/2011
  10. 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. 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. 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. 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. 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. 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) 15 snurazani/2011
  16. 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 16 snurazani/2011
  17. 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. 17 snurazani/2011
  18. 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 18
  19. 19. Shariah Principle prohibitions:  Riba - Interest  Maisir - Gambling  Gharar - Uncertainty 19 snurazani/2011
  20. 20. 20 snurazani/2011
  21. 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. 21 snurazani/2011
  22. 22. Prohibition : RIBA  Riba An-Nasiah:    22 "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 snurazani/2011
  23. 23. Prohibition : RIBA  Riba Al-Fadl:   23 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 snurazani/2011
  24. 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 24 snurazani/2011
  25. 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. 25 snurazani/2011
  26. 26. RIBA vs PROFIT 26 snurazani/2011
  27. 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.   27 Contract done with unequal counter-value Injustice to debtor- obligated to pay even no profit or loss snurazani/2011
  28. 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. – – – – 28 For example: Sale of birds in the air Sale of fish still in the sea Sale of unborn animal snurazani/2011
  29. 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   29 Contract will not valid-without full consent. Contract valid if certainty, full knowledge, full disclosure and transparency. snurazani/2011
  30. 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. 30 snurazani/2011
  31. 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.  31 Playing a lottery is one form of gambling. snurazani/2011
  32. 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. snurazani/2011
  33. 33. COMPARISON BETWEEN IB AND CB Sources: http://www.academicjournals.org/AJBM Afr. J. Bus. Manage. 33 snurazani/2011
  34. 34. ISLAMIC BANKING INSTRUMENTS              36  Mudharabah (perkongsian untung) Wadiah (simpanan) Musyarakah (Usaha sama) Murabahah (Kos tokok) Ijarah (Sewaan) Bai’ Bithaman Ajil (Pembayaran Jualan Tertangguh) Wakalah (Agensi) Qardhul Hassan (Pinjaman Ihsan) Bai’ al Inah (Perjanjian Jual dan Beli Balik) Hibah (Hadiah) Assalam Ar Rahn Al Hiwalah Al Dayn
  35. 35.  CONTINUE… 37 snurazani/2011
  36. 36. ADDITIONAL INFO 38 snurazani/2011
  37. 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. 39 snurazani/2011
  38. 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 40 snurazani/2011
  39. 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 41 snurazani/2011
  40. 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. 42 snurazani/2011

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