mohammad salleh bin abdul saha razizi bin tarmuji ctu351 razizi.uitm.edu.my
TRANSCRIPT
Chapter 1: Overview of financial system
Mohammad Salleh Bin Abdul SahaRazizi bin Tarmuji
CTU351
razizi.uitm.edu.my
razizi.uitm.edu.my
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)
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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.
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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.
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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
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.
a) Money & Foreign Exchange Markets :
• Money Market• Foreign Exchange Market
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)
Financial System Structure in Malaysia
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Banks as Financial intermediariesWho is financial intermediaries ? Financial intermediaries may include banks, broker-
dealers, investment advisers and financial planners.
Roles? Promote savings and capital accumulation to finance
projects using various modes of financing.
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Finance international trade.
Mobilize resources for investments for the benefit of society.
Contribute social welfare through Corporate Social Responsibilities (CSR) and zakat.
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Islamic bankingWhat 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).
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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 bankingproducts 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:
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Section 2
CORPORATE INFORMATION
Banking Industry in Malaysia
ESTABLISHMENT OF ISLAMIC FINANCIAL SYSTEM IN MALAYSIA
MILESTONES OF ISLAMIC BANKING PRODUCTS1983-1990
1991-2000
2001-2005
2006-2008
2009 onwar
ds
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
Sarf Forex
Mudharabah Interbank Investment
Musharakah Financing
Bay Inah Credit Card
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)
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
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’
Note - This listing is far from being exhaustive.
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(April2009,)
Philosophical foundations of Islamic Banks
Tawhid
Khilafah
Al-’adalah
Tazkiyah
Huriyyah
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(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.
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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.
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(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.
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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.
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(April2009)
Differences between Islamic Banking and Conventional Banking System
Business Framewor
kSyariah
Supervisory Board
Restrictions
Zakat (Religious
Tax)
Prohibition of Riba
in Financing
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Characteristics Islamic Banking System Conventional Banking System (Interest-Based)
Business Framework
Functions and operating modes are based on Syariah law.
Banks have to ensure that all business activities are in compliance with Syariah requirements.
Functions and operating modes are based on secular principles and not based on any religious law or guidelines.
Syariah Supervisory Board
Each bank should have a Syariah Supervisory Board to ensure that all business activities are in line with Syariah requirements.
There is no such requirement necessary.
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Prohibition of Riba in Financing
• Financing is not interest – oriented
• Based on the principle of buying and selling of assets, whereby the selling price include a profit margin
• Fixed from the beginning.
• Financing is interest – oriented
• A fixed/floating interest is charged for the use of money.
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 businesses involving pork, alcohol, etc.In the modern Islamic banking system, it has become one of the functions to collect and distribute zakat.
Do not deal in Zakat.
Islamic bank is a “bank” – intermediary in “indirect funding” between depositors and financing customers.
The difference is Shariah compliant الربا – حرم و البيع الله احل الربا مثل البيع انما
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 interest-based
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
ISSUE 1: SIMILAR TO CONVENTIONAL BANKING?
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Advantages of Islamic Banking Justice and Fairness ~ The main feature of the Islamic model is that it is based on a profit-
sharing 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.
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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.
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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.