Islamic Banking Ahmad Sanusi Presentation

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Introduction and Concepts of Banking and Islamic Banking

Presented by:Ahmad Sanusi Husain

Director of Training and Professional Development

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Ahlan Wasahlan

Assalamu alaikum

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PART 1

INTRODUCTION AND CONCEPT OF BANKING

(Conventional Banking)

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The Origin of Bank

The word “bank” is said to have it roots in French word banque (chest) or Italian word banca (bench).

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History of banking

Historically, then, a bank is associated with a place for safekeeping of valuables or money (refers to the meaning of chest) or a platform where exchange of valuable or money takes place (refer to the meaning of bench). The business of banking, as such, is believed to have started out in the form of safekeeping and exchange of money.

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Bank as a Financial Institution

In today’s meaning, a bank is a financial institution, i.e. an institution dealing in financial services. But not all financial institutions are banks. Financial institutions include:1.Banks 2.Finance companies3.Merchant banks4.Credit and leasing companies5.Discount houses 6.Co-operative banks7.Factoring companies8.National Savings Bank etc.

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Common Features of Financial Institutions

The common feature amongst these institutions is their role as a mobiliser of funds from those with surplus of fund (surplus unit) to those short of funds (deficit unit). They are thus financial intermediaries. These institutions received funds as deposits from clients or as capital from shareholders and lend these out as loans or advances to persons or business who need them. This is called intermediation function.

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Intermediation Functionin Conventional Banking

The role of a banking institution is to act as an intermediary between the surplus unit of the economy and the deficit unit.

BANK SURPLUS UNIT DEFICIT UNIT

Deposit/Capital

Loan /Advances

InterestInterest/Dividend

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Definition of Banking Business

Banking and Financial Institutions Act, 1989 (BAFIA) defines banking business as:

1.the business of:a. receiving deposits on current account, deposit account, savings account or other similar accounts.b. paying or collecting cheques drawn by or paid by customers; andc. provision of finance, or

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Definition of Banking Business

2. Such other businesses as the Central Bank (meaning, Bank Negara Malaysia), with the approval of the Minister (of Finance), may prescribe.

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Banking and Financial Institution Act, 1989 (BAFIA)

• Came into force on 1 October 1989• Repealed Finance Companies Act 1969 and Banking Act 1973• BAFIA governs regulatory framework in which banks and financial institutions in Malaysia operate.•BAFIA is intended to preserve the soundness and stability of banking and financial system in Malaysia.

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Banking and Financial Institution Act, 1989 (BAFIA)

• Provisions in BAFIA shall not apply to an Islamic banks i.e. Bank Islam Malaysia Berhad and Bank Muamalat Malaysia Berhad (this is provided under section 124(6).• However, it is noted that any licensed institutions carrying on Islamic banking or Islamic business shall not be deemed as an Islamic bank, and hence be subjected to BAFIA.

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The Malaysian Banking System

• The banking system in Malaysia comprises of Central Bank (Bank Negara Malaysia), the commercial banks and other institutions such as finance companies, merchant banks, discount houses, representatives of the foreign banks and offshore banks in Labuan IOFC.

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The Malaysian Banking System

• BNM is the apex of the monetary and banking system in Malaysia.•BNM has been entrusted with the regulation and supervision of the banking system in Malaysia.•This will ensure that a sound and strong financial system is maintained which is essential to a steady and balanced economic and social development in the country.

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PART 2INTRODUCTION AND CONCEPT OF

ISLAMIC BANKING

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GLOBAL DEVELOPMENTOF ISLAMIC BANKING

AND FINANCE

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GLOBAL ISLAMIC BANKING

•Total asset managed by Islamic banking worldwide = USD200 billions (estimate)

•About 200 Islamic banks worldwide

Note: Average asset per Islamic bank=USD1bil.

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1963•Mit Ghamir Local Savings Bank, Egypt - Founded by Ahmed Al Najar

- Considered as a major milestone in the development of Islamic banking worldwide.

- Received overwhelming support from customers- Due to political changes, the bank was taken over by National

Bank Egypt and then subsequently by Nasser Social Bank (government-owned Islamic bank)

•Lembaga Tabung Haji (Pilgrimage Fund Board), Malaysia- Mobilises deposits from Muslims for Investment and savings to

perform Haj (plilgrimage).- Afterward Muslim in Malaysia increasingly demanded Islamic

banking services.

HISTORICAL DEVELOPMENT OF ISLAMIC BANKING

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1975•Islamic Development Bank, Jeddah, KSA (est. 20 October 1975)

•Dubai Islamic Bank (the first Commercial Islamic Bank)

1983•Bank Islam Malaysia Berhad

- the first Islamic Bank in Malaysia- started operation on 1 July 1983

HISTORICAL DEVELOPMENT OF ISLAMIC BANKING

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1984

• Commencing March 21, 1984, no bank was allowed to provide interest-based deposit or credit facilities in Islamic Republic of Iran. From March 1985, all banking transactions were strictly based on Shariah.

• By September 1984, the entire banking system in Sudan was supposed to operate in accordance to Islamic principles

•1985

• From 1985, the entire banking system min Pakistan was supposed to operate in accordance to Islamic principle.

HISTORICAL DEVELOPMENT OF ISLAMIC BANKING

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1993•Interest-free banking scheme was introduced at conventional banks in Malaysia.

•Establishment of Islamic Bank of Brunei

1994•Malaysia introduced the first Islamic Inter-banks Money Market (IIMM)

1995•Accounting and Auditing Organisation For Islamic Financial Institutions (AAOFII) was established in Bahrain

HISTORICAL DEVELOPMENT OF ISLAMIC BANKING

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1996• Citicorp opened Citi Islamic Investment Bank in Bahrain (July 1996) 1997• National Syariah Supervisory Council was established by the Central Bank of Malaysia (Bank Negara Malaysia)

1997• establishment of Malaysian Accounting Standard Board-Issues Islamic Accounting Standard for Islamic Financial Institutions (MASB i-1)

1998• Interest-free Banking Scheme was upgraded to Islamic Banking Scheme with the setting up of Islamic Banking Division ( headed by senior level management) replacing Islamic Banking Unit.

HISTORICAL DEVELOPMENT OF ISLAMIC BANKING

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1999 Establishment of the second Islamic bank in Malaysia, Bank Muamalat Malaysia Berhad.

2000• Establishment of the second Islamic bank in Brunei, Islamic Development of Brunei

2002• Establishment of International Islamic Financial Market (IIFM) – based in Bahrain• Establishment of Islamic Financial Services Board (IFSB) to issue standards on Islamic banking products and services – based in Kuala Lumpur

HISTORICAL DEVELOPMENT OF ISLAMIC BANKING

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ISLAMIC BANKING SYSTEM IN MALAYSIA

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Establishment of Pilgrimage Fund Board in 1963

Systematic mobilization of funds from the Muslim community to assist them to perform the pilgrimage as well as to encourage participation in investment opportunities and economic activities

Members in 2001 : 4.4 mil.

Deposit in 2001 : USD2.6 bil.

Asset in 2001 : USD3.0 bil.

Institutional Building – The First Institutional Building – The First PhasePhase

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Establishment of the first Islamic bank in Establishment of the first Islamic bank in 19831983

Bank Islam Malaysia Berhad was given a grace period of 10 years to operate without competition –

to protect its growth and development to create as many products as possible

Listed on KLSE in 1992 BIMB achieved an average annual growth of

48% over the (1983-1993) period… 83 branch network to-date (incl. in Labuan

IOFC)

Enactment of new Islamic Banking Act 1983 and new Government Investment Act 1983

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Institutional Building – The Second Phase:Institutional Building – The Second Phase:

Increase Islamic Banks or Embark on Dual Banking…

Why Dual Banking… Instant increase in number of players Fastest way to disseminate Islamic banking on

nationwide basis Optimize existing banking infrastructure,

resources and network Facilitate achievement of econ. of scale,

synergies and critical mass

Allow conventional banking institutions to offer Islamic products

and services

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Amendments made in 1993 to existing Banking and Financial Institutions Act 1989 (BAFIA) to enable conventional banks to operate Islamic banking window

Section 32 of BAFIA amended to read:

“All licensed banks….may engage in the sale of property at a price which includes the profit margin so long as such trade is not conducted on the basis of interest”

Section 124 of BAFIA amended to read:

“….nothing in this Act or the IBA 1983 shall prohibit any licensed institution from carrying on Islamic banking business...in addition to its existing licensed business, provided that the licensed inst. shall consult the Central Bank before it carries on Islamic banking business”

Regulatory framework for dual Regulatory framework for dual bankingbanking

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Shariah (Islamic law) Advisory Shariah (Islamic law) Advisory FrameworkFramework

Requirement to have Shariah Advisory Councils at Islamic Banks

Requirement to have Shariah consultants at IBS Banks

Establishment of National Shariah Advisory Council (NSAC) in 1997 under BNM to oversee uniformity in terms of Shariah opinions and instill discipline among banks and takaful operators

NSAC is Shariah body of highest stature for Islamic banking and takaful

Comprises academicians and Shariah experts on Islamic banking and finance

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Growth of Islamic Banking in MalaysiaGrowth of Islamic Banking in Malaysia 1993-2001, average annual growth of

52% in terms of assets

At 31 Dec 2001, share of

Islamic assets : 8.2% (RM59 b)

Islamic deposit : 9.5% (RM47 b)

Islamic financing : 6.5% (RM28 b)

… of entire domestic banking system

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Islamic banking players and Islamic banking players and productsproducts

At 31 Dec 2001, 37 Islamic banking inst. (IBI) - two Islamic banks and 35 Islamic Banking Scheme banks

Over 2,100 IBIs’ branches throughout Malaysia Comprehensive and comparable product range -

retail & corporate products ranging from investment a/c & home financing to project financing & long-term bonds

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Islamic Interbank Money Market Islamic Interbank Money Market (IIMM)(IIMM)

Platform to provide ready source of short-term funding and investment outlets

Channel for transmission of monetary policy

Comprises Mudharabah inter-bank investment (MII), trading of Islamic instruments and Islamic cheque clearing system

For year 2001, volume of IIMM was RM277 billion (USD 73 billion)

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3 development financial institutions (DFIs) and the National Savings Bank offer Islamic banking products

A cooperative bank i.e Bank Rakyat has converted its activities into full-fledged Islamic operations

The national mortgage corporation, Cagamas Berhad, purchases and securitizes Islamic house financing

Credit Guarantee Corp. provides guarantee for Islamic financing

Rating agencies rate Islamic capital market products

The growth of Islamic banking and The growth of Islamic banking and finance has created spillover effects on finance has created spillover effects on other related sectors in the financial other related sectors in the financial system…system…

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3 takaful companies with composite license (family and general)

39 domestic branches throughout Malaysia

Both offer general takaful from motor insurance to high-end marine and aviation coverage

Takaful life provides coverage similar to life insurance (medical and health, education, annuity and pension products)

One offshore retakaful institution, Asean Retakaful International (L) Ltd, established in Labuan IOFC

...as part of the spillover effects - ...as part of the spillover effects - Takaful Takaful or Islamic insuranceor Islamic insurance

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1986-2001, average annual growth of 61% in terms of assets

At 31 Dec 2001, share of takaful assets = 4.9% (RM3.0 b or USD790 m) of total assets of industry

At 31 Dec 2001, share of takaful contributions = 8.6% (RM1.5 bil of USD0.4 bil) of total insurance industry

* * figures are for family and general business

Growth of Growth of takafultakaful business* in Malaysia business* in Malaysia

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CHARTING OUR WAY FORWARD FOR THE NEXT 10

YEARS

2001 - 2010

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Charting our way forwardCharting our way forward

Financial Sector Master Plan (FSMP) launched on 1 March 2001, charts the 10-year course for Islamic banking and takaful for Malaysia

FSMP contains a chapter on Islamic banking and takaful

“The overall objective is to createan efficient, progressive and comprehensive

Islamic financial system thatcontributes significantly to theeffectiveness and efficiency ofthe Malaysian financial sector

while meeting the economic needs ofthe nation….”

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Malaysia as a regional Islamic financial centre Kuala Lumpur as regional resource centre

Labuan IOFC as platform for foreign currency bond issue and regional HQ for FIs offering Islamic finance

Penetration rate of 20% vis-à-vis ... banking industry market by 2010 in terms of

assets, financing and deposit insurance industry’s market share (assets,

contribution)

20012001

8%8%

20102010

20%20%

20072007

15%15%

20042004

11%11%

Charting our way forwardCharting our way forward

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Sufficient number of strong and

highly capitalised IBIs and takaful

operators

Comprehensive and complete range of Islamic financial

products and services

Sufficient number of well-trained, high calibre

individuals and management teams with the required

expertise

Comprehensive and conducive

Syariah and regulatory framework

2010

Charting our way forwardCharting our way forward

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InternationalInternationalfinancialfinancial

landscapelandscapeof of

Islamic bankingIslamic bankingand and

financefinance

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LABUANLABUAN

Growing demands

from Muslim population> 200 mil

in the Region

INDONESIAINDONESIA

SOUTHSOUTHKOREAKOREA

H KONGH KONG

TAIWANTAIWAN

THAILANDTHAILANDTHE PHILIPPINESTHE PHILIPPINES

BRUNEIBRUNEI

SINGAPORESINGAPORE

PAKISTANPAKISTANIRANIRANIRAQIRAQ

KUWAITKUWAIT

OMANOMAN

UAEUAE

YEMENYEMEN

EGYPTEGYPTSAUDI SAUDI

ARABIAARABIA

SUDANSUDAN

JORDANJORDANSYRIASYRIA

TURKEYTURKEY

INDIAINDIA

CHINACHINA

Islamic banking and finance has vast potential Islamic banking and finance has vast potential on the regional front…on the regional front…

MALAYSIAMALAYSIA

Growing interest in Islamic banking and finance in Brunei, Indonesia, Thailand and Singapore

i) Bank Islam Malaysia Berhad (1983)

ii) Bank Muamalat Malaysia Berhad (1999)

ISLAMIC BANKS IN THE REGION

i) Islamic Bank of Brunei (1993)

ii) Islamic Development Bank of Brunei (2000)

i) Bank Muamalat Indonesia (1992) iii) Bank Syariah Mandiri

i) Alif Bank (2002) taken over Al-Amanah Bank (1974)

Introduced IBS in 2002

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Malaysia

Brunei

Indonesia

Philippines

Thailand

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International Islamic Financial Market –International Islamic Financial Market – serves to spur the growth of Islamic banking and finance

into the global financial system

IIFMIIFM

Liquidity

Match assetsand liabilities

Improve cooperativeframework

A system linkingmoney markets

worldwide

StreamlineShariahopinions

Universalproducts

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International Islamic Financial MarketInternational Islamic Financial Market (IIFM) (IIFM) Labuan Offshore Financial Services Authority

(LOFSA), which governs Malaysia’s IOFC, together with Bahrain, Brunei, Indonesia, Sudan and Islamic Development Bank (Saudi Arabia) have created IIFM

Articles of Agreement on IIFM Board establishment signed on 13 November 2001 in Paris by members (membership to be extended to other countries )

Creation of IIFM Board to establish, develop and regulate IIFM based on Shariah principles

Establishment of Market and Product Development Committee and Shariah Supervisory Committee

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Labuan – Hub of East Asia

LABUANLABUAN

Labuan

INDONESIAINDONESIA

JAPANJAPAN

SOUTHSOUTHKOREAKOREA

H KONGH KONG

TAIWANTAIWAN

THAILANDTHAILAND

THE PHILIPPINESTHE PHILIPPINES

BRUNEIBRUNEI

SINGAPORESINGAPORE

PAKISTANPAKISTANIRANIRANIRAQIRAQ

KUWAITKUWAIT

OMANOMAN

UAEUAE

International Islamic Financial MarketInternational Islamic Financial Market

Bahrain – Hubof Middle East

Bahrain

YEMENYEMEN

EGYPTEGYPTSAUDI SAUDI

ARABIAARABIA

SUDANSUDAN

JORDANJORDANSYRIASYRIA

TURKEYTURKEY

INDIAINDIA

CHINACHINA

MALAYSIAMALAYSIA

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Islamic Financial Services Board – serves to enhance the global prudential framework for

Islamic banking and finance

Streamline and standardize regulatory and supervisory framework for

IFIs

Focus on areas unique to Islamic

banking and finance

Regulate IFIs to be at par with

international best practices

Develop and issue prudential

standards

IFSB

International standard setting

body for IFIs

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Islamic Financial Services Board (IFSB)Islamic Financial Services Board (IFSB)

Structure to comprise the General Assembly, Council, Technical Committee and Secretariat

Malaysia as the host country for the Secretariat

Membership to be extended to countries that recognize Islamic banking by legislation or regulation

Established Preparatory Committees to formulate the framework of IFSB

IFSB is expected to be launched in November 2002

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SHARIAH BASIS

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What is Islamic Banking?

Islamic banking is a term that reflects banking business, which is not contradictory to Islamic law principles. Islamic banking is based on certain theoretical concepts and features before they are translated into practical operations. The most obvious feature of Islamic banking is that it denounces the practice of riba (usury or interest).

Malaysia’s Islamic Banking Act, Section Two defined Islamic banking as banking business whose aims and operations do not involve any element which is not approved by the Religion of Islam.

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ISLAM, SH AR IAH , MU AMALAH , BAN KIN G AN D FIN AN C E

ECONOM ICACTIVIT IES

BANKING ANDFINANCIALACTIVIT IES

POLIT ICALACTIVIT IES

SOCIALACTIVIT IES

AQIDAH(Faith & Belief)

IBADAH(Man-to God Worship

M UAM ALAH(Man-to Man Activities

SHARIAH(Practices & Activities

AKHLAQ(Moralities & Ethics)

ISLAM

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Al-Qur'an

Al-Sunnah (the traditions of prophet

Muhammad (peace be upon him)

Al-Ijma' (consensus of opinion among

jurists of Islamic law)

Al-Qiyas (reasoning by analogy)

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The Meaning of Riba

Riba is an Arabic word which literally means ‘increase’, ‘growth’, ‘to rise’ and ‘to become lofty’

From Shariah (Islamic law) point of view, however, riba technically refers to the ‘premium’ that must be paid by the borrower to the lender along with the principle amount as a condition for the loan or for an extension on its maturity

(M. Umer Chapra, 1992)

Al-BAQARAH:275

.....That is because they say: “Trade is like usury,” but Allah has permitted

trade and forbidden usury

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AL-BAQARAH : 275AL-BAQARAH : 275ORANG-ORANG YANG MEMAKAN (MENGAMBIL) RIBA ITU TIDAK DAPAT BERDIRI BETUL MELAINKAN SEPERTI BERDIRINYA ORANG YANG DIRASUK SYAITAN DENGAN TERHOYONG-HAYANG KERANA SENTUHAN (SYAITAN) ITU. YANG DEMIKIAN IALAH DISEBABKAN MEREKA MENGATAKAN “BAHAWA SESUNGGUHNYA BERJUAL BELI ITU SAMA SAHAJA SEPERTI RIBA”. PADAHAL ALLAH TELAH MENGHALALKAN BERJUAL BELI (BERNIAGA) DAN MENGHARAMKAN RIBA. OLEH ITU SESIAPA YANG TELAH SAMPAI KEPADANYA PERINGATAN (LARANGAN) DARI TUHANNYA LALU IA BERHENTI (DARI MENGAMBIL RIBA), MAKA APA YANG TELAH DIAMBILNYA DAHULU (SEBELUM PENGHARAMAN ITU) ADALAH MENJADI HAKNYA DAN PERKARANYA TERSERAHLAN KEPADA ALLAH. DAN SESIAPA YANG MENGULANGI LAGI (PERBUATAN MENGAMBIL RIBA ITU) MAKA MEREKA ITULAH AHLI NERAKA, MEREKA KEKAL DIDALAMNYA.

“PADAHAL ALLAH TELAH PADAHAL ALLAH TELAH MENGHALALKAN MENGHALALKAN BERJUALBERJUAL

BELI (BERNIAGA) DAN BELI (BERNIAGA) DAN MENGHARAMKAN RIBAMENGHARAMKAN RIBA””

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Hadith Diriwayatkan oleh Imam Al-Bukhari

Sabda Rasulullah S.A.W.Sabda Rasulullah S.A.W.““Allah melaknat (mengutuk) orang Allah melaknat (mengutuk) orang yang makan riba dan mengambil yang makan riba dan mengambil serta memberinya dan penulisnya serta memberinya dan penulisnya

dan saksinya”dan saksinya”

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ISLAMIC BANKING CONCEPTS,PRODUCTS AND SERVICES

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SURPLUS UNIT-Deposit•Saving Acc.•Current Acc.•Investment Acc.•Other deposits

DEFICIT UNIT:-Financing•Consumer Fin.•Corporate Fin.•Trade Fin.•Other Fin.

SIMPLIFIED MODEL OF ISLAMIC BANK

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Some Islamic Banking Concepts

1. WADIAH (Safe custody) a) Wadiah Yad Amanah (Trustee safe custody) b) Wadiah Yad Dhamanah (Guaranteed safe custody) -applied in Savings & Current Accounts

2. MUDHARABAH (Trustee profit sharing) -applied in Mudharabah Investment Account & Savings Account

A. DEPOSITS

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WADIAH DEPOSITS

2. Bank utilises the money invarious forms of investmentor financing

3.PROFIT

1. Depositor deposits a certain amount of money with the bank for the purpose of safe keeping and convenience. Under Wadiah contract, Bank acts a custodian of customer’s money and does not promise any return on the deposit. The principal amount is guaranteed by the bank.

4. RETURN to depositoris based on bank’s DISCRETION

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MUDHARABAHDEPOSITS

2. Bank utilises the money invarious forms of investmentor financing

3.PROFIT

1. Depositor invests a certain amount of money e.g. RM100,000 for a specific period e.g. 1 year. Both parties agree on profit sharing ratio (e.g. 70:30) i.e. 70% of gross profit to be distributed to depositor and 30% to bank.

LOSS

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FULFILMENT OF FINANCIAL NEED

OWN CAPITAL OTHERS’ CAPITAL

Deferred Payment Contracts/Debt Financing

Profit Sharing Contracts/ Equity Financing

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Some Islamic Banking Concepts

1. BAI BITHAMAN AJIL (Deferred Payment Sale) -applied in Landed Property Financing, Vehicle Financing, Consumer Goods Financing, Refinancing etc.2. MURABAHAH (Deferred Lump Sum Sale) -applied in Murabahah Working Capital Financing

B. FINANCING

3. IJARAH (Leasing) -applied in Vehicle Leasing, Equipment Leasing etc. 4. MUDHARABAH (Trustee Profit Sharing) -applied in project financing

5. MUSYARAKAH (Joint-venture profit sharing) -applied in project financing

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DEFINITION:

Bai Bithaman Ajil means deferred payment sale i.e. the sale of goods on deferred payment basis at a price which includes a profit margin agreed by both parties i.e. seller and buyer.

Similar concepts:1. Murabahah2. Bai Muajjal

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HOUSE FINANCING(Summarized Steps)

( 2 ) bank purchased the house at RM90,000.00.

( 3 )bank sells the house tocustomer at RM180,669.60

( 4 )customer charges the house to the bank. Amount secured under charge = RM180,669.60

( 1 )customer identifies a house to be purchased (sign Sale & Purchase agreement)

( 5 )customer pays RM180,669.60 by 240 equal monthly instalment of RM752.79

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VEHICLE FINANCING

( 2 )bank purchased the car at RM60,000.00.

( 3 )Bank sells the car tocustomer at RM75,000.00

( 4 )customer pays the selling price by 60 monthly instalment of RM1,250.00 ( 1 )

customer identifies the car to be purchased (submit quotation to the bank)

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( 1 )Customer identifiesComputer to be leased (submit quotation to bank)

( 2 )Bank purchases the computer at RM7,000

( 3 )Bank leases the computer with monthly rental of RM235.00 for 36 months

( 4 )Customer pays monthly rental

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Equity Financing-based on the contract of profit sharing

Musyarakah Financing(Joint venture profit sharing)

Mudharabah Financing(Trustee profit sharing)

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MUDHARABAH is a profit sharing venture between an owner of capital (e.g. bank) and an entrepreneur who provides the enterprise or expertise.

The objective is to match owner of capital with no opportunity or expertise to carry out business with an entrepreneur who has the opportunity and skills but no capital to carry out business. The owner of capital may be termed as “surplus unit” and the entrepreneur as “deficit unit”. This is a method within an Islamic economy to avoid idle capital and the wastage of unutilised business expertise.

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MUDHARABAH FINANCING

2.PROJECT

3.PROFIT

Bank provides capital to customer e.g. RM3 million.

LOSS

Agree on Profit Sharing Ratio: e.g. 40:60(40% to bank, 60% to customer based on gross profit)

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MUSHARAKAH is a partnership agreement between two or more individuals or bodies, each contributing capital, and profit or loss is shared between the partners according to the agreed ratios.

Musharakah is better known as Syarikat which is described as a grouping of capital by shareholders to finance a particular project and the profit from the project is divided according to agreed ratio. If the project incurs losses then the losses are borne by the shareholders according to their percentage of share.

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PROJECT

PROFIT

LOSS

Musharakah Financing

Agree on Profit Sharing Ratio: e.g. 50:50(40% to bank, 60% to customer based on gross profit)

CAPITALRM5m RM5m

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SOME ISLAMIC BANKING CONCEPTS

1. QARDHUL HASAN (Benevolent Loan)

2. KAFALAH (Guarantee) -applied in Letter of Guarantee

C. OTHER CONCEPTS

3. AL-RAHN (Charge / Pawning) -applied in Charge for Financing and Islamic Pawning

4. BAI AL-DAYN (Debt Trading) -applied in securitisation of debt

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LEGAL ASPECTS

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ISLAMIC BANKING ACT, 1983 (IBA)

-Passed by the Parliament in 1983

-Regarding Licensing and Regulation of Islamic Banking Business.

Section 2 defines “Islamic banking business” as banking business whose aims and operations do not involve any element which is not approved by the religion of Islam.

governs Islamic banks only

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BANK AND FINANCIAL INSTITUTIONS ACT, 1989 (BAFIA)

Section 124 was amended in 1996 to allow alicensed institution to carry on Islamic banking business and Islamic financial business(after consultation with BNM) in addition to itslicensed business.

Governs banks and financial institutions offering Islamic banking scheme (Skim Perbankan Islam) as a window or “bank within a bank”

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The Finance Act 1986 (Act A328) provides for the amendment of RPGT Act whereby in case of disposal of an asset by a person to an Islamic bank under a scheme where that person is financed by such bank in accordance with the Shariah, the disposal price shall be deemed to be equal to the acquisition price. Therefore no RPGT will be imposed for such financing.

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The Stamp Act 1949 (as amended by Act A 723 of 1989) by Section 14A provides in relation to financing under the principle of Shariah as follows:

“Where it is shown that a principle or primary security secures the repayment of moneys provided under a scheme of financing made according to Shariah, duty chargeable thereon shall be calculated on the principal amount provided by the financier or financing body”.

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SOME FAQs

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Is Islamic banking for Muslim only?

FAQ

THE FACT:Islamic banking is open to both Muslims and non-Muslims.

In fact at Bank Islam Malaysia Berhad, for Trade Finance facilities, there are more non-Muslim customers than Muslim.

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In case of legal action, which court should we go? Shariah Court

orCivil Court

FAQ

THE FACT:Currently banking and finance matters are not within the jurisdiction of Shariah Court and the court can only hear cases involving Muslims only. Therefore, presently, cases regarding Islamic banking will be referred to the Civil Court. However, modification to the modes of claim has been allowed in previous cases.

Note:There are proposals to set up Shariah Commercial Court.

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In Islamic contract (aqad), is it compulsory to shake hands?

FAQ

THE FACT:Shaking hands is not a necessary condition in a buy and sell contract (aqad).

Aqad can be done in 3 ways:1.Written

2.Verbal

3.Signals/sign language (for certain transactions)

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QUESTIONS

& ANSWERS

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