Islamic Banking and Financial System

1. Islamic Banking and Financial System

2. Introduction • Islamic banking refers to a system of banking or banking activity that is consistent with the principles of Shariah law and its practical application through the development of Islamic economics. • Sharia prohibits the payment of fees for the renting of money (riba) for specific terms, as well as investing in businesses that provide goods or services considered contrary to its principles (Haram).

3. History of Islamic Banking • During the Islamic Golden Age, early forms of proto-capitalism and free markets were present in the Caliphate, where an early market economy and an early form of mercantilism were developed between the 8th-12th centuries, which some refer to as "Islamic capitalism". • A vigorous monetary economy was created on the basis of the expanding levels of circulation of a stable high-value currency (the dinar) and the integration of monetary areas that were previously independent.

4. Early concept of banking • Bill of exchange, • Partnership (mufawada) such as limited partnerships (mudaraba), • The earliest forms of capital (al-mal), capital accumulation (nama al-mal),cheque, prommisory note. • Trusts ( Waqaf), • Transactional accounts, loaning, ledgers and assignments

5. Profit sharing (Mudharabah), Safekeeping (Wadiah), Joint venture (Musharakah), Cost plus (Murabahah), Bai' Bithaman Ajil Ijarah Ijarah wa Iqtina, Bai' al-Inah Musharaka al-Mutanaqisa As salam Istisna Wakalah (Agency) Takaful etc. Islamic banking services – NOW

6. Overview Islamic Financial System Inter bank market Money market Stock Market

7. Shariah Advisory Council (SAC) • SAC is up by Bank Negara Malaysia. • The Shariah Advisory Council of Bank Negara Malaysia (BNM) is responsible to advise on matters in relation to Islamic banking and takaful businesses or any other Islamic finance area that is supervised and regulated by BNM. • The Shariah Advisory Council of the Securities Commission Malaysia (SC) is responsible to advise on matters pertaining to the ICM.

8. Shariah Advisory Council (SAC) • SAC- members are prominent Shariah scholars, jurists and market practitioners, • SAC members are qualified individuals who can present Shariah opinions and have vast experience in banking, finance, economics, law and application of Shariah, particularly in the areas of Islamic economics and finance.

9. Shariah Advisory Council • As Islamic banking is restricted to Islamically acceptable deals, which exclude those involving alcohol, pork, gambling, etc. thus, ethical investment is the only acceptable form of investment. • In theory, Islamic banking is an example of full –reserve banking.

10. Equity financing • Equity-financing in Islam is to be done through the profit-sharing contracts of: • Al-Mudharabah (Trustee Profit-Sharing) • Al-Musyarakah (Joint-Venture Profit-Sharing) • Mazhab Shafie – as well as many others- recognizes two forms of companies, namely: • A)Inan company – based on Musyarakah • B)Mudharabah company

11. For Inan company, Minimum two, and no limit to the maximum number of shareholders. The shareholders retain their management control (voting rights) in the company in proportion to their shareholdings Profits are to be distributed in proportion to their shareholdings, or in other ways as they agree. Losses are to be shared in proportion to their shareholdings. Liabilities are limited for shareholders who do not involved in the management of the company. For Mudharabah company, Must be two – the entrepreneur and the provider of capital – and there is no limit on the number of providers of capital. Can be both Muslims and non-Muslims. The providers of capital do not participate in the management of the company. The liabilities of the providers of capital are strictly limited. Losses suffered by the capital provider, except in case of negligence by entrepreneur. Inan vs.Mudharabah