FIN 536

PPT 3
March 2015

OVERVIEW OF FINANCIAL
SYSTEM

(Islamic Banking)

CHAPTER 1c
Dr. Norliza Che Yahya
Center for Economics and Finance Studies
Faculty of Business and Management
Universiti Teknologi MARA (UiTM),
42300 Puncak Alam Campus,
Office: PFI 04 -032 Office (tel): 03-3258 7077
Email: norliza9911@puncakalam.uitm.edu.my or norlizacheyahya@yahoo.com
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Content of Syllabus

CODE CHAPTER WEEK NOTE

Ppt 1- 4 Introduction and Overview of Financial System 1-3
Ppt 5-6 Interest rates and the role of a central bank 4 Test 1
Ppt 7-8 Money & Foreign Exchange market 5-6 (15%)
Ppt 9-10 Capital market Equity and Bond market 7-8
Ppt 11 Derivatives market 9
Ppt 12 Offshore market 9 - 10
Ppt 13 Financial Legal Framework 10 - 11 Test 2
Ppt 14 Banking products & services 11 - 12 (15%)
Ppt 15-16 Banking regulation and management 12 - 14

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Chapter Outline

NO. CONTENT
1. Islamic Banking objectives, development,
comparison with conventional banks
2. Shariah contracts and its application on banking
products

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Introduction
Needs of Islamic banking arises due to the increase in desire to
lead people lives in accordance with shariah law.

Shariah compliance in daily lives includes economic activities

such as in the area of banking and finance.

Historical development: 1963 - first Islamic bank - Mit Ghamr

Local Savings Bank (Egypt) ; 1971 second Islamic bank
Nasser Social Bank (Egypt); 1975 OIC helped in the
development of a globally Islamic bank by forming the Islamic
Development Bank ; 1975 - Dubai Islamic Bank (UAE). First
attempt in the West to establish Islamic banking was in
Luxembourg in 1978.
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Development in Malaysia
First formal request made in 1980 during Bumiputra Economic Congress;
Pilgrimage Board establish Islamic bank.
Islamic Financial Services Act 2013 (formerly known as Islamic banking
Act 1983) was enacted to establish Islamic banks.
Bank Islam Malaysia Berhad (BIMB) was established in July 1983
carrying out banking business similar to conventional banks but based on
shariah.
Gradual implementation measures March 1993 SPTF (interest-free
banking Scheme) was introduced, offered by 3 conventional banks (pilot
basis); July 1993 opened to other commercial banks, finance companies
and merchant banks establish Islamic banking unit, separate accounts
with BNM, appoint syariah consultant.
Number increased to 16 in 2015 from 3 in 1993.
In 1998 SPTF was replaced with Skim Perbankan Islam (SPI) (Islamic
Banking Scheme).

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Islamic Banks
Provide services that conform to the shariah law.
Establishment of Bank Islam (1983) under the IBA
1983.
Similar types of products and services with conventional
except that these products are according to shariah
(i) operations not based riba
(ii) fairness in the distribution of wealth
Significant increase in number of Islamic banks around
the world. How is the trend or development of Islamic
Banks in Malaysia?

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Features of Sharia Compliance Banks

Banking activities based on syariah principles:

Same products line but

- not allowing payment and receiving interest
- promote profit sharing

operates in accordance with fiqh muamalat (Islamic rules on

transaction) where basic principles are:
- sharing of profit and loss
- prohibition of riba (interest)

Same products line like conventional: Deposits, Investment,

Financing, Trade Finance, Card Services, Money Market

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Shariah Concepts in Islamic Banking

Wadiah - safekeeping
Mudharabah - profit sharing
Musyarakah - joint venture
Murabahah cost plus
Bai Bithaman Ajil deferred payment sale
Wakalah agency (on behalf e.g., investment)
Qardhul Hassan benevolent loan (interest free)
Ijarah Thumma Al bai hire purchase
Bai al-inah sell and buy back agreement
Hibah - gift

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 ( BAI AL-INAH)

Sale of an asset or property by first

party(bank) to a second party(customer) for
immediate or spot payments followed with an
immediate sale of the same asset by the
second party to the first party for a higher
unit of differed payment.

Selling of an asset by the Bank to the

customer through deffered payments. At a
later date, the Bank will repurchase the
asset and pay the customer in cash terms.
 How it Works?
1. BANK SELLS AN ASSET FOR RM 15,600

1.1 Customer pays RM15,600 by 60 equal

monthly installment of RM260

2. BANK BUYS THE ASSET FOR RM 10,000

2.1 Bank pays the customer RM10,000 (Cash

Basis)
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Application of Islamic Concepts on Products and Services

Examples:
a) Investment deposits al-mudharabah (profit sharing)
b) Financing facilities working capital financing under al-
murabahah (cost-plus); house financing under baibithaman
ajil (deferred payment sale); leasing under al-ijarah; project
financing under al-musyarakah (profit-loss sharing)
c) Deposits products current and savings deposits under al-
wadiah (guaranteed custody)

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Dr. Norliza Che Yahya, FIN 536

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