Chapter 3


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Chapter 3

  1. 1.
  3. 3. LEARNING OBJECTIVES <ul><ul><ul><li>Explain the principles of muamalat. </li></ul></ul></ul><ul><ul><ul><li>Understand the pillars of trading. </li></ul></ul></ul><ul><ul><ul><li>Explain the principles of investment. </li></ul></ul></ul><ul><ul><ul><li>To understand the Islamic Finance scenario in Malaysia. </li></ul></ul></ul>
  4. 4. INTRODUCTION <ul><li>Trade is the most sourceful type of income that Allah gives to His ummah. </li></ul><ul><li>Complying this, Islam has condemned all unclean and unlawful means of making money as wicked and sinful. </li></ul><ul><li>It also has condemned all profits derived from such means as filthy and unlawful. </li></ul><ul><li>On the contrary, it has proclaimed great virtues in seeking one’s livelihood honestly and in engaging oneself cleanly in trade or any profession. </li></ul>
  5. 5. PRINCIPLES OF MUAMALAT <ul><li>Truthfulness </li></ul><ul><li>Allah blesses business dealings if both the buyer and the seller are true to each other. Telling lies and hiding facts will result in the loss of divine blessing. </li></ul><ul><li>Trustworthiness </li></ul><ul><li>It demands sincerity in work and purity of intention from every believer. </li></ul>
  6. 6. PRINCIPLES OF MUAMALAT <ul><li>Mutual Consent </li></ul><ul><li>A sale transaction is to be regarded as legal only if it is made through the mutual consent of the parties concerned. Taking advantage of someone’s plight and charging high price is also a form of pecuniary exploitation and as such forbidden in Islam. </li></ul><ul><li>Generosity and Leniency </li></ul><ul><li>One should be lenient and generous in bargaining. Therefore, whoever demands his debt back from the debtor should do so in a decent manner. </li></ul>
  7. 7. PILLARS OF TRADING <ul><li>Seller </li></ul><ul><li>Buyer </li></ul><ul><li>Commodity </li></ul><ul><li>Price </li></ul><ul><li>Sighah/ijab and qabul (offer and acceptance contract) </li></ul>
  8. 8. PRINCIPLES OF ISLAMIC INVESTMENTS <ul><li>Investment is an activity to transform an asset (usually money) to other assets (company shares, insurance, properties). </li></ul><ul><li>It is a time-value of money which we expect to earn more in the future. </li></ul><ul><li>In Islam, it encourages and allows this activity as long as it is according to the Sharia. </li></ul>
  9. 9. PRINCIPLES OF ISLAMIC INVESTMENTS <ul><li>There are five basic principles as a guideline for investment. If one of the principle does not accomplish, then the contract of investment is not valid. </li></ul>
  10. 10. PRINCIPLES OF ISLAMIC INVESTMENTS <ul><li>Invest to a company or activity that is permissible ( halal ) </li></ul><ul><li>A Muslim must be sure to deal only with companies that produce permissible or halal goods and services. It is prohibited to invest in interest-bearing financial contracts or instruments, in gambling or in items like wine and pork. </li></ul>
  11. 11. PRINCIPLES OF ISLAMIC INVESTMENTS <ul><li>No Guarantee of Profits Based on Capital </li></ul><ul><li>There must not be any guarantee of profits based on the capital invested because it involves riba ’. This prohibition is also because Islam wants a fair liability incurred to the parties in the contract. </li></ul>
  12. 12. PRINCIPLES OF ISLAMIC INVESTMENTS <ul><li>No Element of Gharar (Uncertainty) </li></ul><ul><li>Gharar refers to an unknown factor that would impair the validity of a contract. The contract of sale must not be made on an absolutely unknown factor that cannot be fairly defined or ascertained within reasonable grounds or upon something that the investor cannot, immediately or in the future, provide. </li></ul>
  13. 13. PRINCIPLES OF ISLAMIC INVESTMENTS <ul><li>Mutual Consent </li></ul><ul><li>A transaction is only valid if there is mutual consent between the investor and the company. This is alliance with the concept of Islam that highlighted the importance of brotherhood among Muslims. </li></ul>
  14. 14. PRINCIPLES OF ISLAMIC INVESTMENTS <ul><li>No element of Riba’ </li></ul><ul><li>Any transactions must not have the element of riba’. Riba is a form of return or contractual profit derived from lending and borrowing. Since it is free from risk and value-addition, Islam does not recognize wealth creation through riba’ as a legitimate way of making a living. </li></ul>
  15. 15. PRINCIPLES OF ISLAMIC INVESTMENTS <ul><li>One type of Islamic investment is Mudarabah. </li></ul><ul><li>It is a contract between two parties: one which provides 100 percent of the capital for the project and another party known as mudarib, who manages the project using his entrepreneurial skills. </li></ul><ul><li>Profits arising from the project are distributed according to a predetermined ratio. </li></ul><ul><li>Any losses accruing are borne by the provider of capital. </li></ul><ul><li>The provider of capital has no control over the management of the project. </li></ul>
  16. 16. ISLAMIC FINANCE IN MALAYSIA <ul><li>The legal and Shariah framework is a vital pillar in the sustainable development of Islamic finance. </li></ul><ul><li>It provides the legislative framework that unambiguously defines the conduct of Islamic financial institutions. </li></ul><ul><li>It also gives protection to consumers of Islamic finance, ensures the enforceability of Islamic financial contracts and provides and effective mechanism for legal redress </li></ul>
  17. 17. ISLAMIC FINANCE IN MALAYSIA <ul><li>In Malaysia, a series of legislation since 1983 has provided the foundation for a regulatory regime for Islamic banks, takaful operators, the Sharia Council for Islamic finance, Islamic finance windows in conventional banks and the various forms of bond and money market instruments. </li></ul><ul><li>In addition, the corporate, securities and insolvency laws and guidelines are compatible with the Sharia. </li></ul><ul><li>Figure 3.2 outlines the components bodies that play the functions of Islamic Financial Market in Malaysia. </li></ul>
  18. 18. ISLAMIC FINANCE IN MALAYSIA <ul><li>Malaysia 's development of Islamic finance has contributed positively to overall financial system in several respects. </li></ul><ul><li>Firstly, this has resulted to a more diversified financial system that has increased its overall resilience. </li></ul><ul><li>Secondly, it has increased the international linkages. </li></ul>
  19. 19. ISLAMIC FINANCE IN MALAYSIA <ul><li>Thirdly, it has also contributed to greater financial inclusion particularly in the area of financing for small and medium scale enterprises and micro financing. </li></ul><ul><li>Then, enhanced with the in-built checks and balances, it contributes towards financial stability. </li></ul><ul><li>Finally, Islamic finance has become a new area of growth that has become very vibrant in generating income, wealth and employment. </li></ul>
  20. 20. <ul><ul><li>Critical Thinking Questions </li></ul></ul><ul><ul><ul><li>Elaborate the principles of muamalat. </li></ul></ul></ul><ul><ul><ul><li>Explain the pillars of trading. </li></ul></ul></ul><ul><ul><ul><li>Elaborate the principles of investment.. </li></ul></ul></ul><ul><ul><ul><li>Elaborate about the Islamic finance in Malaysia </li></ul></ul></ul>
  21. 21. SUMMARY <ul><li>Principles of muamalat are: </li></ul><ul><li>- Truthfulness - Generosity and Leniency </li></ul><ul><li>- Trustworthiness - Honoring </li></ul><ul><li>- Mutual Consent - Fair Treatment </li></ul><ul><li>Pillars of trading are: </li></ul><ul><li>- Seller - Price </li></ul><ul><li>- Buyer - Sighah </li></ul><ul><li>- Commodity </li></ul><ul><li>Principles of investments are: </li></ul><ul><li>- Invest to a company or activity that is permissible ( halal ) </li></ul><ul><li>- No Guarantee of Profits Based on Capital </li></ul><ul><li>- No Element of Gharar (Uncertainty) </li></ul><ul><li>- Mutual Consent </li></ul><ul><li>- No element of Riba’ </li></ul>
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