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CONTENT
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OVERVIEW OF FINANCIAL SYSTEM FINANCIAL SYSTEM STRUCTURE IN MALAYSIA BANKS AS FINANCIAL INTERMEDIARIES ISLAMIC BANKING GOALS AND OBJECTIVES OF ISLAMIC BANKING DIFFERENCES BETWEEN ISLAMIC BANKING AND CONVENTIONAL BANKING SYSTEM ADVANTAGES OF ISLAMIC BANKING
FINANCIAL SYSTEM
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collection of accounting processes and procedures that allow a business to keep accurate financial records, monitor accounts, prevent fraud and mistakes, and catch any discrepancies. A financial system allows a company to maintain accountability for expenditures and revenues, and to control their finances to minimize waste and loss. A financial system is concerned about money, credit and finance.
FINANCIAL SYSTEM
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Concept of Money
Money is anything generally accepted as a means of paying for goods and services and a measure of value. Functions of Money :
Concept of 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(s) in time. There is a predetermined time for repaying a loan, and generally the lender has to bear the risk that the borrower may not repay a loan (though modern capital markets have developed many ways of managing this risk).
FINANCIAL SYSTEM
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Concept of Finance
Finance
is the procurement (to get, obtain) of funds and effective (properly planned) utilization of funds. It also deals with profits that adequately compensate for the cost and risks borne by the business. Finance deals with matters related to money and the markets.
Financial Institutions 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 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.
Financial Markets 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)
b)
Financial intermediaries is an entity that acts as the middleman between two parties in a financial transaction. Financial intermediaries encompass a wide range of entities in terms of size and scale of operation ranging from a banks, broker-dealers, investment advisers and financial planners. Roles of banks as financial intermediaries:
1.
2. 3.
4.
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.
Ibadat
Muamalat
Political Activities
Economic Activities
Social Activities
ISLAMIC BANKING
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Islamic banking is defined as banking system which is in consonance with the spirit, ethos and value system of Islam and governed by the principles laid down by Islamic Shariah. Islamic Banking according to Islamic Banking Act 1983:
..a company which carries on Islamic banking business means banking business whose aims and operation do not involve any element which is not approved by the religion of Islam
Islamic banking, the more general term, is based not only to avoid interest-based transactions prohibited in Islamic Shariah but also to avoid unethical and unsocial practices. In practical sense, Islamic Banking is the transformation of conventional money lending into transactions based on tangible assets and real
The first Islamic bank was established in Malaysia in 1983 through Bank Islam Malaysia Berhad. Later in March 1993, Bank Negara Malaysia (BNM) introduced Interest Free Banking Scheme (now replaced with Islamic banking scheme (IBS). The scheme allowed conventional banking institutions to offer Islamic banking products and services using their existing infrastructure, including staff and branches
Financial transaction
Main concern
Prohibition of riba
Al-adalah
Tazkiyah Huriyyah
The thrust is towards financing on risk- sharing and strict focus on halal activities Focus on offering banking transactions adhering to Shariah principle and avoiding conventional interest- based banking transactions.
Economic Development Established a direct and close relationship between the banks 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 longterm 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.
Islamic banking is the conduct of banking based on SHARIAH principle, subject to among others:
1.
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.
2.
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.
3.
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.
4.
Contractual relationship
Depends upon the nature of transaction. It could be a seller and buyer relationship (Murabaha), a lessor- lessee relationship (Ijarah), and a partnership (Musyaraka)
5.
Islamic Banking System Functions and operating modes are based on Shariah law. Banks have to ensure that all business activities are in compliance with Shariah requirements.
Characteristic Conventional Banking s System Business Framework Functions and operating modes are based on secular principles and not based on any religious law or guidelines.
Each bank should have a Shariah Supervisory Board to ensure that all business activities are in line with Shariah requirements.
Emphasis to product
Credit worthiness
Moral Dimension
Islamic Banking System 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. Islamic banks are restricted to participate in economic activities, which are not Shariah-compliant. Pay zakat as a religious obligation and tax required by the government
Conventional Banking System Financing is interest oriented A fixed/floating interest is charged for the use of money.
Restrictions
Dont pay zakat but only pay tax as required by the government
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Many still has a wrong understanding or misconception against Islamic Banking which among the thoughts are:
Islamic Banking is only for Muslims Islamic Banking is not profitable because no interest is charged Islamic Bank is a charitable organization
Thus better awareness shall be create among the customers that Islamic Banking is not only an alternative financial approach but also in some aspects provides better value propositions to the consumers.
Shariah interpretation versus business practicability/
Divergence of opinions
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Commercial banks requires a new set of technical and risk management capabilities i.e. industry experts and know-how Market readiness profit sharing, trade secrets, bank as strategic business partners (potential conflicting interest). Balance sheet size, risk appetite and underwriting capabilities Supervisory and prudential regulatory framework. Accounting and auditing standards.
War of talents
Global shortage of Islamic finance talents at almost all levels Inadequate pool of Shariah scholars with the right combination of knowledge in Shariah and modern finance
Ballooning operating costs for Islamic banks as opposed to relative cost stability for the overall banking system - expenditure on IT infrastructure, expenses for R&D and product innovation and network expansion and new delivery channels
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