ISLAMIC BANKING MANAGEMENT (WB3053)

1. ISLAMIC BANKING MANAGEMENT (WB3053) Chapter 4 Laws And Regulations Of Islamic Banking System

2. Contents • 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

3. 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

4. Positive laws • 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.

5. Syariah Laws • 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.

6. 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.

7. 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.

8. Sources of Islamic Law • Al-Quran • Al-Sunnah • Al-Ijma’ • Qiyas

9. 1. Al-Quran • 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.

10. Al-Quran 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.

11. Al-Quran cont.. • Example of verse which is related to muamalat :

12. 2. Al-Hadith/Al-Sunnah • 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.

13. Al-Sunnah 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 Islam without consulting both of them.

14. Example of al-Sunnah which is related to muamalat: عَنْ وَاثِلَةَ بْنِ الْأَسْقَعِ رَضِيَ اللَّهُ عَنْهُ أَنَّ النَّبِيَّ صَلَّى اللَّهُ عَلَيْهِ وَسَلَّمَ قَالَ مَنْ بَاعَ عَيْبًا لَمْ يُبَيِّنْهُ لَمْ يَزَلْ فِي مَقْتِ اللَّهِ وَلَمْ تَزَلْ الْمَلَائِكَةُ تَلْعَنُهُ. (ابن ماجه) Dari Wa'ilah bin al-Asqa' r.a. bahawa Nabis.a.w. bersabda: "Sesiapa yang menjual sesuatu barang yang cacat dengan tidak menerangkankecacatan itu kepada pembelinya ia sentiasadalam kemurkaanAllah dan Malaikat pula sentiasamelaknatnya.“ - (Ibn Majah)

15. 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).

16. 3. Al-Ijma’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.

17. 4. Al-Qiyas • 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.

18. 4. Al-Qiyas cont. • Thus, Qiyas has four elements: • Asl: original case, • Far`: new case, • `Illah: effective cause, • Hukm: ruling

19. Al-Qiyas 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 drinkingFar`: Taking narcotic drugs`Illah: IntoxicationHukm: Prohibition.

20. National Syariah Supervisory Board cont. • 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).

21. 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.

22. The functions of Central Bank in Islamic Banking System • 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 Facility • Regulation and Supervision of Islamic Banks • Inspection of Islamic Banks

23. The accounting polices in Islamic bank Refer to the articles THE CONVENTIONAL ACCOUNTING SYSTEM:PROCESSES AND PERSPECTIVES and ISLAMIC ACCOUNTING STANDARDS

24. 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

25. 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

26. The sources and uses of funds cont. • 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.

27. The sources and uses of funds cont. • 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

28. Discussion & Conclusion