ISLAMIC BANKING
MANAGEMENT (WB3053)
Chapter 4
Laws And Regulations
Of Islamic Banking
System
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Contents
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Introduction
Syariah laws in Islamic banking system
Sources of Syariah laws
National Syariah Supervisory Board
The positive laws and regulations in Islamic
banking system
The functions of Central Bank in Islamic
Banking System
The accounting polices in Islamic bank
The sources and uses of funds in Islamic
Bank
Conclusion
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Introduction

Islamic banks have to conform
with two types of laws:
Positive laws – promulgated by the
monetary authorities to safeguard
public interest.
 Syariah laws – based on religious
foundations
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Positive laws
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Laws and regulations imposed by the
government of their domiciled country
Refer to western laws and also secular
statutes borrowed by Islamic countries
Under supervision of the country’s
Central Bank
In Malaysia – establishment of Islamic
Banking is governed by The Banking Act
(1965) and its operations are subjected
to The Islamic Banking Act (1983).
Islamic Banks must conform to all
requirements in both acts.
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Syariah Laws
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•
•
•
Islamic law is known as Syariah Law
Syariah law has be defined as the body
of rules of conduct revealed by Allah
(SWT) to his prophet Muhammad (peace
be upon him) whereby the people are
directed to lead their life in this world.
Syariah law has not been given by any
ruler. It is given by Allah. Islamic law
remains valid whether recognized by the
state or not.
Syariah Law is holistic or eclectic in its
approach to guide the individual in most
daily matters.
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Syariah Laws
•
•
cont..
Syariah
Law
controls,
rules
and
regulates all public and private behavior.
It has regulations for personal hygiene,
diet, sexual conduct, and elements of
child rearing. It also prescribes specific
rules for prayers, fasting, giving to the
poor, and many other religious matters.
Civil Law and Common Law primarily
focus on public behavior, but both do
regulate some private matters.
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Syariah Laws
•
•
•
cont..
Syariah Law can also be used in larger situations
than guiding an individual's behavior. It can be
used as guide for how an individual acts in society
and how one group interacts with another.
The Syariah Law can be used to settle border
disputes between nations or within nations. It can
also be used to settle international disputes,
conflicts and wars. This Law does not exclude any
knowledge from other sources and is viewed by the
Muslim world as a vehicle to solve all problems
civil, criminal and international.
During medieval age of Islam it was frequently set
aside by orders of the Caliph and governors,
especially in matters related to commerce and civil
order.
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Sources of Islamic Law
Al-Quran
Al-Sunnah
Al-Ijma’
Qiyas
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1. Al-Quran
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The Quran may be defined as the Book
containing Allah’s revelation to the prophet
Muhammad (pbuh), which is in Arabic and
transmitted to us by continuous testimony
(mutawatir).
Al-Quran is the primary source containing all the
fundamental directives and instructions of Allah.
Herein are to be found not only directives
relating individual conduct but also principles
relating to all the aspects of social and cultural
life of human being.
Al-Quran is the last and complete edition of
Divine Guidance and this is the only book of
Allah which has not been distorted.
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Al-Quran
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cont..
Al-Quran is not only a book of law. The
main purpose of Al-Quran is to awaken
in man the higher consciousness of his
relation with Allah and the universe.
However, in Al-Quran there are at the
least five hundred verses which
possess definite legal elements. The
scholars of Islam have developed a
complete science of Interpretation of
the Quranic verses which can be seen
in any book of Islamic jurisprudence.
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Al-Quran
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cont..
Example of verse which is related to
muamalat :
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2. Al-Hadith/Al-Sunnah
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The hadith literally means a method, a
story, a narration or a report.
The word hadith refers to all that is
narrated from the Prophet (pbuh), his
acts, his sayings and whatever he has
tacitly approved, plus all the reports
which describe his physical attributes and
character.
The sunnah literally means a tradition or
a life story weather it is good or bad.
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Al-Sunnah
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cont
The word al-sunnah in Islamic culture refers to
Islamic way of life as an opposite meaning of
‘bid’ah’. It is also refers to recommended rule
(mandub/masnun) which denotes a demand to
perform deeds which is, however, not binding on a
mukallaf.
But the meaning of al-sunnah which is acceptable
as a source of Islamic Law, is referred to all that is
narrated from the Prophet (pbuh), his acts, his
sayings and whatever he has tacitly approved. This
definition excluded all the reports which describe
his physical attributes and character.
The Sunnah is the second source of Islamic
jurisprudence, the first being the Qur'an. Both
sources are indispensable; one cannot practice
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Islam without consulting both of them.
Example
of al-Sunnah which is related
to muamalat:
ِ ‫عن واثِلَةَ ب ِن ْاْلَس َق ِع ر‬
َّ
َّ
ِ
‫صلَّى اللَّهُ َعلَْي ِه َو َسلَّ َم قَ َال َم ْن‬
‫َِّب‬
‫ن‬
‫ال‬
‫َن‬
‫أ‬
‫ه‬
‫ن‬
‫ع‬
‫ه‬
‫ل‬
‫ال‬
‫ي‬
‫ض‬
ْ
َّ
َ
َ
ُ
ُ
ْ
ْ
َ
ْ
َ
َ
َ
ِ ‫باع عيبا ََل ي ب يِّ ْنه ََل ي زْل ِِف م ْق‬
.ُ‫ِ اللَّ ِه َوََلْ َ َزْل الْ ََ ََِِ ََةُ َ ْل ََنُه‬
ََ ْ ُ َُ ْ ًَْ َ َ
َ
)‫(ابن ماجه‬
Dari Wa'ilah bin al-Asqa' r.a. bahawa Nabi s.a.w.
bersabda: "Sesiapa yang menjual sesuatu barang yang
cacat dengan tidak menerangkan kecacatan itu kepada
pembelinya ia sentiasa dalam kemurkaan Allah dan
Malaikat pula sentiasa melaknatnya.“ - (Ibn Majah)
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3. Al-Ijma’
 Ijma
or the consensus of scholars
signifies the importance of
delegated legislation to the
Muslim community.
 The Muslim society requires such
a rule making power to meet the
practical problems for the
implementation of Islamic Syariah
(Islamic law).
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3. Al-Ijma’
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cont..
Ijma’ has been technically defined as the
unanimous agreement of the qualified
jurists of any period following the demise
of the Prophet Muhammad (pbuh) on any
matter.
Ijma’ is considered a sufficient evidence
for action because the prophet if islam
said,”Muslim will never agree on a wrong
matter”.
As such the agreement of the scholars of
Islam on any matter is a source of law in
Islam.
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4. Al-Qiyas
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Literally Qiyas means measuring by, or
ascertaining the length, weight or quality of
something.
Qiyas also means comparison to establish
equality or similarity between two things.
The ‘ulama’ defined Qiyas as the application of
a ruling to a new case on which the law is silent
(the ruling of an original case because of the
effective cause in both instances are similar or
common.
In the language of Usul, Qiyas is the extension
of a Shari`ah ruling (Hukm) from an original
case (Asl) to a new case (Far`) because the
new case has the same effective cause (`Illah)
as the original case.
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4. Al-Qiyas
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cont.
Thus, Qiyas has four
elements:
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Asl: original case,
Far`: new case,
`Illah: effective cause,
Hukm: ruling
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Al-Qiyas
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cont.
In the case of prohibition of wine
drinking if it is to be extended to
narcotic drugs. The requirement
of analogy would be fulfilled in
the following manner.

Asl:
Wine drinking
Far`: Taking narcotic drugs
`Illah: Intoxication
Hukm: Prohibition.
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National Syariah Supervisory
Board cont.
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To ensure that their banking activities are
in conformity with the Sharia law,religious
supervisory boards are widely used by
Islamic banks.
The board examines contracts, dealings
and transactions to assure that Islamic
beliefs are not dishonoured.
The committee can therefore be said to
exist as a guarantee against abuse to
certify that the banking activities are
halal (permissible).
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National Syariah Supervisory
Board cont.

Function And Responsibilities
to make sure that banking facilities and
services are in accordance with Islam
 to guarantee that the bank’s
investments and involvement in
projects are Syariah-conform
 ensure that the bank is managed in
agreement with Islamic values.
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The functions of Central Bank
in Islamic Banking System
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Pivot of the Islamic banking System
Issue of Currency
Stabilization of the Value of Money
Implementation of Monetary Policy
Promotion, Regulation and
Supervision
Ensure health and Development of
Public Interest
Lender of the Last Resort:
Current Account and Clearing House
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Facility
The accounting polices in
Islamic bank
Refer to the articles
THE CONVENTIONAL
ACCOUNTING SYSTEM:
PROCESSES AND PERSPECTIVES
and
ISLAMIC ACCOUNTING
STANDARDS
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The sources and uses of funds
 three
main sources of funds
for Islamic banks:
 deposits
from customers
 other liabilities (e.g profit
payable to depositors, notes
payable and ‘other’ payables)
 shareholders funds
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The sources and uses of funds
cont.
Islamic banks use their funds is
represented by the types of assets
held, as disclosed in the balance
sheet.
 These assets basically belong to five
main categories, (i) cash, (ii)
financing, (iii) investment, (iv)
others, and (v) fixed assets
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The sources and uses of funds
cont.
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Cash is cash in hand, balance with the
central bank or reserves, and balance with
other financial institutions.
Financing - all loans extended under the
principles of mudarabah, musharakah,
murabahah, bai mua’zzal, ijara and qard
hassan.
Investment - investments in government
securities, treasury bills, other Islamic
securities (e.g Islamic bonds and Islamic
bankers acceptance) and investments in
subsidiaries and associate companies.
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The sources and uses of funds
cont.
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Fixed assets include all land and
buildings, motor-vehicles, and furniture
and fixtures.
Assets such as prepayments, receivables,
stationeries, stock of commodities, and
intangible assets which belong to the
bank and can not be classified into any of
the four categories mentioned above are
classified as “other” assets
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Discussion
&
Conclusion
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