Professional Documents
Culture Documents
INTRODUCTION AND
FUNDAMENTALS TO
ISLAMIC BANKING
AND FINANCE
OUTLINE
Introduction
Evolution of Islamic banks and finance
Factors leading to the emergence of
Islamic banks
The underlying principles of Islamic
banking business
The concept of usury in Quran,
Sunnah and Fiqh
Categories of usury
Introduction
BANKING
Convention
al
Commercial
Banks (25)
Islamic
Banks
(16)
Internation
al Islamic
Banks (5)
NON BANKING
Investment
Banks (15)
Development
Financial
Institutions (6)
Takaful
Operator
s (12)
Insurance
Companies
(36)
Savings
Institutions
(EPF)
Building
societies,
Trusts
properties,
Leasing
companies,
Investment
agencies
Why Do We Need
Financial System?
Financial Intermediation
Savings &
Investment
Financing
Surplus Units
Individuals
Businesses
Government
Return on investment
& savings
Banks Liabilities
Deficit Units
Financial
Intermediary
(e.g. bank)
Individuals
Businesses
Government
Return on
financing
Banks Assets
Functions of an
Efficient Financial
System
Facilitate Efficient
Financial Intermediation
i.e. Reduce information
and allocation costs
Ensure stable payment
system
Stimulate economic
growth and development
Activities
1960s
19701980s
1983
Bank Islam Malaysia Berhad was set up in 1983, under Islamic Banking Act, 1983.
1984
Syarikat Takaful Malaysia Berhad (Takaful Malaysia) was incorporated on the 29th of November
1984. (1st Islamic Insurance Company)
1993
1994
1997
Formation of shari'ah Advisory Council (SAC) for Islamic Banking & Takaful
1999
2001
Formation of the Financial Sector Masterplan which outlined a detailed long term strategy to
promote the Islamic banking industry as a niche area
2002
Activities
2004
2005
2006
Activities
2010
Targeting Islamic banking and finance sector constitutes 20% of overall market
Why Do
We Need
Islamic Financial System?
SHARIAH PRINCIPLES
Prohibition of riba, and
Sharing of profit & loss
Islamic financial products
as
defined by AQAD methodology,
should contain more benefits
(masalih) and less or no harm
(madarah).
MAQASID/OBJECTIVES OF Shari'ah
The objectives of shari'ah are as follows:
1. To protect religion/ad-deen: which Islam regulates the
relationship between human and his creator and
human versus human
2. To protect `aqal which permit the right of promoting
& attaining knowledge (therefore forbids consumption
alcohol)
3. To protect the life or living of human being as such
punish those who transgress against it
4. To protect individual descendant of generation to
ensure integrity & unlawful relationship
5. To protect asset / wealth of individual and public to
encourage people to work hard & living lawfully,
17
prohibits exploitation & injustice
MAQASID/OBJECTIVES OF Shari'ah
To protect the interest of the public /society by the following;
MAQASID
shari'ah
Removing the
Haram (IBQA)
Securing of
Benefits (TAHSIL)
Maisir gambling
Benefit (Manfaat)
Wealth creation
Gharar uncertainty of
contract/goods
Values
Welfare
Satisfaction
18
SHARIAH
(Practices &
Activities)
Ibadah
(Man to God)
AKHLAQ
(Moralities &
Ethics)
Muamalat Ammah
(Human to human activities)
Munakahat
(Family
relationship)
Political
Muamalat
(Transaction/
interaction activities)
Economic
Jinayat
(Legislation)
Social
Salient Features of
Islamic Financial System
Shari'ah
Compliance
Meaning of
Shari'ah
Compliance
Valid
&
Permissible
Characteristic
s of Islamic
Financial
System
A system grounded on
moral and ethical
framework of shari'ah
Community oriented and
entrepreneur-friendly emphasising
on productivity and physical
expansion of economic production
and services
Al-Maysir
The
Forbidden
Cont..
Al-Gharar
Cont..Prohibition of Gharar
All jurists agree that gharar should be avoided in commercial
exchange contracts
Prohibition of gharar are:o Indirect references made in the Quran
o Conclusively prohibited by the Sunnah of the Prophet s.a.w.
Types of gharar:o Gharar yasir (minor or slight)
Tolerated and will not invalidate a contract. Examples: Purchase fruit without peeling/cutting skin to see inside
Charging fixed rate of room although difference time
check-in
o Gharar fahish (major or excessive)
Not tolerated and may result in contract voidability.
Examples of gharar fahish: Sale of fish still in the sea
Sale of birds in the sky
Riba Prohibited
Al Quran (Surah Al-Baqarah),
verse 2:275, which Allah says:
`Allah has permitted trade and
has forbidden usury (riba)
Riba was made forbidden in the 8th or 9th year after the
Hijrah (flight from Makkah)
Quranic Prohibitions
Hadith Justification
Categories of Riba
1.
1.
2.
Riba al-Duyun
2.
1.
2.
Riba al-Buyu
Riba al bay
Bank Interest is
NOT RIBA
because NOT
EXCESSIVE
INTEREST Should be
Allowed because of
Inflation
MISCONCEPTIONS ABOUT
RIBA
RIBA is not
relevant to
commercial loans
RIBA should be
allowed under
Dharurah
Interest-based
commercial transactions
is NOT RIBA because
its newly invented
Comparison between
conventional and Islamic banking
Main
difference
Principles
Islamic bank
Conventional bank
Source of
earnings
Risk sharing
Profit
maximization
Objectives
Islamic bank works as a trading concern to It generates income as financial intermediary. Its
generate its income.
prime goal is the maximization of shareholders
value at any cost.
Nature of
earnings