Mohammad Salleh Bin Abdul Saha
ISB 300
Centre for Islamic Thought and Understanding
University Teknologi MARA Terengganu
What is financial system ?
The processes and procedures used by an
organization management to exercise financial
control & accountant ability. These measures
include recording , verification, and timely
reporting of transactions that affect
revenues, expenditures, assets and liabilities.
The financial system is concerned about
money, credit and finance. (the three terms
are intimately related yet are somewhat different
from each other)
What is money ?
Money is anything of value that serves as a
generally medium of exchange.
Unit of accounting measures.
Means to save or store purchasing power.
What is credit/loan?
An arrangement in which a lender gives money
or property to a borrower, and the borrower
agrees to return the property or repay the money,
usually along with interest, at some future point
in time.
What is finance ?
A branch of economics concerned with resource
allocation as well as resource management,
acquisition and investment. Simply,finance deals
with matters related to money and the markets.
Financial System Structure in Malaysia
Financial Institutions
Financial Markets
a) Banking System
 BNM
 Banking Institutions :
- Commercial banks include Islamic
banks
- Finance Companies
- Merchant Banks
 Others:
- Discount Houses
- Representatives Offices of Foreign
Banks
- Offshore Banks in Labuan IOFC
a) Money & Foreign Exchange
Markets :
• Money Market
• Foreign Exchange Market
b)
•
•
•
•
Non-Bank Financial Intermediaries :
Provident & Pension Funds
Insurance companies include Takaful
Saving institutions
Others:
- Unit Trusts – Pilgrims Fund Board –
Housing Credit Institutions – Cagamas
Berhad –Credit Guarantee Corporation –
Leasing Companies –Factoring
Companies –Venture Capital Companies.
b) Capital Markets:
• Equity markets
• Bond Markets –Public Debt
Securities – Private Debt Securities
c)
•
•
•
Derivatives Markets:
Commodity Futures
KLSE CI Futures
KLIBOR Futures
d) Offshore Markets:
• Labuan International Offshore
Financial Centre (IOFC)
5
Banks as Financial intermediaries
Who is financial intermediaries ?

Financial intermediaries may include banks, brokerdealers, investment advisers and financial planners.
Roles?
 Promote savings and capital accumulation to finance
projects using various modes of financing.
 Finance international trade.
 Mobilize resources for investments for the benefit of
society.
 Contribute social welfare through Corporate Social
Responsibilities (CSR) and zakat.
Islamic banking
What is islamic banking ?
• Islamic banking is banking 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).
Islamic banking in Malaysia ?
 The first Islamic bank was established in Malaysia in
1983.
 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 You can identify an Islamic bank or an IBS bank from
the logo below:
ESTABLISHMENT OF ISLAMIC FINANCIAL SYSTEM IN MALAYSIA
Banking Industry in Malaysia
Section 2
CORPORATE INFORMATION
10
MILESTONES OF ISLAMIC BANKING PRODUCTS
1983-1990
Wadiah Current Account
Wadiah Savings Account
Mudharabah Financing
Ijarah Financing
BBA Financing
Mudharabah Investment
Account
 Murabahah LC
Musharakah LC
Wakalah LC
Bay Dayn Trade Financing
Murabahah Working
Capital Financing
1991-2000
Sarf Forex
Mudharabah Interbank
Investment
Musharakah Financing
Bay Inah Credit Card
Note - This listing is far from being exhaustive.
2001-2005
Bay Dayn, Musharakah,
Mudharabah ICDO
Wadiah Debit Card
Bay Inah Overdraft
Bay Inah Commercial
Credit Card
Bay Inah Personal
Financing
Bay Inah Negotiable
Instrument of Deposit
(NID)
2006-2008
Commodity Murabahah
Profit Rate Swap
Commodity Murabahah
Forward Rate Agreement
Ijarah Rental Swaps-i
BBA Floating Rate
Murabahah Floating Rate
Istisna’ Floating Rate
Ijarah Floating Rate
Mudharabah Capital
Protected Structured
Investment
Bay Inah Floating Rate
NID
Mudharabah Savings
Multiplier Deposit
Tawarruq Commodity
Undertaking
2009
onwards
Tawarruq Business
Financing
Tawarruq Personal
Financing
Tawarruq Credit Card
Murabahah with Novation
Agreement
Istisna’ convertible to
Ijarah
Bay and Ijarah (Sale and
Lease Back)
Musharakah Mutanaqisah
Istisna’ with Parallel
Istisna’
(April2009,)
Philosophical foundations of Islamic Banks
Tawhid
Khilafah
Amanah
Al-’adalah
Tazkiyah
Huriyyah
(April2008,April 2009,April 2011)
Goals and objectives of Islamic banking
• Offer Financial Services
 The thrust is towards financing on risk- sharing and strict focus on
halal activities
 Focus on offering banking transactions adhering to Syariah
principle and avoiding conventional interest- based banking
transactions.
• Economic Development
 Established a direct and close relationship between the bank’s
return on investment and the successful operation of the business
by the entrepreneur.
• Optimum Resources Allocation
 Considered to be most profitable, religiously permissible and are
beneficial to the economy.
 Optimum Approach
 Profit- sharing principle encourages banks to go for projects with
long- term gains instead of short- term gains.
 Banks conduct proper studies before getting into projects. High
returns distributed to shareholder maximize the social benefits
and bring prosperity to the economy.
 Equitable Distribution of Resources
 Ensures equitable distribution of income and resources among
the participation parties, with its profit- sharing approach which is
one of a kind.
 Facilitate Stability in Money Value
 Islam recognize money as a means of exchange and not as a
commodity.
 Riba- free system leads to stability in the value of money to
enable the medium of exchange.
(Oct2006,Oct2007,April 2008,April2009, Oct2009,April 2010,April 2011,Sept2011)
Principles of Islamic Banking
• Islamic banking is the conduct of banking based on Syariah principle
• Does not allow the paying and receiving of interest.
• The principles for Islamic banking are listed:
Prohibition of Riba

•
•
Riba is strictly prohibited under Islam and is considered as
haram.
Islam allows only one kind of loan that is Qardhul Hassan.
 Equity participation
• Islam encourages muslims invest their money and become
partners in order to share profits and risk in the business
instead of becoming creditors.
• In Islam, financing is based on the belief that the financier and
borrower should equally share the risks of the business
venture.
 Prohibition of gharar
 Gharar means to undertake a venture blindly without sufficient
knowledge or to undertake excessively transactions
 An Islamic financial system discourages hoarding and
prohibits transactions featuring extreme gharar.
 Contractual relationship

Depends upon the nature of transaction.

It could be a seller and buyer relationship (Murabaha), a
lessor- lessee relationship (Ijara), and a partnership
(Musyaraka)
 Money as Potential Capital
• It is way of defining the value of a thing.
• Should not be allowed to give rise to more money, via fixed
interest payments, simply by being put in a bank or when lent to
someone.
(April2009)
Differences between Islamic Banking and
Conventional Banking System
Business
Framework
Prohibition of
Riba in
Financing
Syariah
Supervisory
Board
Zakat
(Religious
Tax)
Restrictions
Characteristics Islamic Banking
System
Conventional
Banking System
(Interest-Based)
Business
Framework
Functions and
operating modes are
based on secular
principles and not
based on any religious
law or guidelines.
Functions and operating
modes are based on
Syariah law.
Banks have to ensure that
all business activities are
in compliance with
Syariah requirements.
Syariah
Supervisory
Board
Each bank should have a
There is no such
Syariah Supervisory Board requirement
to ensure that all business necessary.
activities are in line with
Syariah requirements.
Prohibition of
Riba in Financing
• Financing is not interest –
oriented
• Financing is interest –
oriented
• Based on the principle of
buying and selling of assets,
whereby the selling price
include a profit margin
• A fixed/floating
interest is charged for
the use of money.
• Fixed from the beginning.
Restrictions
Islamic banks are restricted to
participate in economic
activities, which are not
Syariah-compliant.
There are no such
restrictions.
Zakat
(Religious Tax)
E.g. Banks cannot finance
Do not deal in Zakat.
businesses involving pork,
alcohol, etc.
In the modern Islamic banking
system, it has become one of
the functions to collect and
distribute zakat.
ISSUE 1: SIMILAR TO CONVENTIONAL BANKING?
 Islamic bank is a “bank” – intermediary in “indirect funding” between depositors and financing
customers.
 The difference is Shariah compliant
 ‫انما البيع مثل الربا – احل هللا البيع و حرم الربا‬
KEY DIFFERENTIATING
FACTOR
CONVENTIONAL BANKING
ISLAMIC BANKING
FUNCTIONS AND
OPERATING MODES
Based on fully man-made principles
Based on the principles of Shariah
INTEREST- BASED
TRANSACTIONS
Most of the activities are interestbased
Absence of interest-based (riba)
transactions
RISK MANAGEMENT
Concerned with "elimination of
risk"
Islamic banks "bear the risk" when
involve in any transaction
AIMS AT MAXIMIZING
PROFIT
Without any restriction
Subject to Shariah restrictions
PENALTY
It can charge additional money
(penalty and compounded interest)
in case of defaulters
Charge in the form of ta’widh
(compensation) as determined by the
Shariah Advisory Council of BNM.
BANK-CUSTOMER
RELATIONSHIP
Creditor and debtors
Partners, investors and trader, buyer
and seller
Advantages of Islamic Banking

Justice and Fairness
~ The main feature of the Islamic model is that it is based on a profitsharing principle, whereby the risk is shared by the bank and the
customer.
~ This system of financial intermediation will contribute to a more
equitable distribution of income and wealth.

Liquidity
~ Follow the profit and loss-sharing principle to mobilize resources
and are less likely to face any sudden run on deposits.
~ As such, they have a minimum need for maintaining high liquidity.
 Better Customer Relations
~ Financing and deposits are extended under the profit and loss
sharing arrangement. The banks are likely to know their fund users
better in order to ensure that the funds are used for productive
purpose and vice-versa for investors.
~ It will develops better relations between the financial intermediary
and the fund providers or consumers.
~ Also promote productive economic activities and socio-economic
justice.
 No Fixed Obligations
~ Islamic banks do not have fixed obligations such as interest
payments on deposits. Therefore, they are able to allocate resources
to profitable and economically desirable activities.
~ Also holds good for Islamic financing, as the payment obligations
of the entrepreneur is associated with the revenue.
 Ethical and Moral Dimensions
~ Strong ethical and moral dimensions of doing business and
selecting business activities to be financed, play an important role in
promoting socially desirable investments and better individual or
corporate behavior.
 Banking for All
~ Although based on Syariah principles to meet the financial
needs of Muslims, it is not restricted to Muslim only and is available
to non-Muslims as well.