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CTU351

Chapter 8: Other Services

Prepared by:
Mohammad Salleh Bin Abd Saha
Razizi bin Tarmuji

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CONTENTS
Agency ( al-Wakalah)
Guarantee (al-Kafalah)
Commission (Jualah)
Fee (al-Ujr)
Remittance (al-Hiwalah)
Currency Exchange (al-Sarf)

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AGENCY (AL-WAKALAH)
Literally
Agency, representation, proxy, mandate, authorization, delegation,

empowerment etc.
Technically:
The appointment of someone to take over the appointers affairs on

his/her behalf for the purpose of accomplishment of certain tasks


Wakalah implies a kind of delegation by a person of his

business to act on his behalf.


It is lawful if a person appoints another as his representative for
selling or buying, letting or hiring, giving or taking a pledge for
depositing or receiving a gift, for safe keeping, for making a
compromise, and for giving an acquaintance and for making an
admission etc.

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Al-Quran

The verse indicate the assigning of agents for zakat

management (collection and distribution)


Hadith:
Reported by Urwah R.A that the prophet S.A.W gave him one

gold Dinar to buy with it (be an agent for the Prophet S.A.W) a
sheep but instead he managed to buy two sheep. He then sold
one of it for one gold Dinar and then presented the prophet
with both the sheep and one gold Dinar that he acquired. The
prophet S.A.W prayed for him to be given blessings (barakah)
in all his trade and transactions and mentioned that even if he
sells solid soil, he will definitely gain profit in it.
Reported by Abi Hurairah R.A to the effect that: the Prophet
S.A.W had sent Umar R.A to be his agent in Zakat collection
(representative in zakat collections)

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Reported by Sulayman bin Yasar that: The prophet S.A.W


sent Abu Rafi and a man of the Ansar to accept (Qabul)his
S.A.W marriage to Maimunah binti alHarith on his S.A.W
behalf while he was in Medinah before he had left for Hajj
(representative in Marriage)

PILLARS OF WAKALAH
1. Wakil
The authorized agent, representative, proxy, trustee

2. Muwakkil.
Authorizer, mandatory, client, principal

3. Muwakkal Bih
Things or subject matter that is being entrusted for, or the

business deals involved


4. Sighah
Ijab (Offer)
Qabul (Acceptance)

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FLOWS OF WAKALAH

Ijab
(Offer)

Muwakkil.
(Authorizer,
mandatory, client,
principal)

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Wakil
Muwakkal Bih
(Things or
subject matter)

Qabul
(Acceptance)

(authorized
agent,
representative,
proxy)

TYPES OF WAKALAH
1.

Wakalah Mutlaqah

Unlimited Agency/
Unrestricted
Wakalah
A Wakalah contract that is
not restricted to any conditions
except for those that are
permitted in Islam
Not confined to certain
circumstances or time limit.

2.

Wakalah Muqayyadah

Limited Agency/ Restricted


Wakalah
A Wakalah contract that is
restricted or confined with
certain conditions that are
legitimized by Islam
Bounded by special
circumstances or time limit

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CONDITIONS OF WAKALAH
1. The agent must be someone that is capable of

performing the responsibility and fulfill the minimum


requirement (being sane, adult and smart)
2. The subject matter or business dealings must be
clearly specified in the contract by the authorizer.
3. It is legal to entrust certain business dealings to an
agent even if the authorizer is capable of performing
the same deal himself.
4. The authorizer has the freedom to terminate the
contract or the service of the agent and the agent
could also withdraw from the contract
Except if the responsibility of the agent towards the other

party is still pending or his obligation towards the other


party has yet to be fulfilled.
5. The Wakalah contract ends with the accomplishment

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the entrusted tasks or mission

6. The money or property received by the agent and has yet to

be handed over to the actual owner will be under the rules


and regulations of Al-Wadiah
7. It is permissible to charge some fees or commission on the
tasks and works involved in the Wakalah contract
8. It is not permissible to conduct Wakalah for physical prayers
since the objective behind these prayers are to test and act as
trials to the believers with the exception of certain prayers
such as the Pilgrimage (Hajj), slaughtering animals for
sacrifice (Qurban), distribution of Zakat, and fasting of Kafarah
(on behalf of the dead) as stated in the previous hadiths that
support the legality of Wakalah.
9. The entrusted agent will not be held responsible for any
damage or disruption of the business deal except for cases of
proven negligence or ignorance on part of the agent
10. The agent is not permitted to act beyond what he was
entrusted for by the authorizer in the first place except if it is
an unlimited agency ( Wakalah Mutlaqah ).
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MODERN APPLICATION
Letter of Credit (LC)
Under the concept of al-Wakalah, the bank acts as an agent to
the customer:
1. The customer informs the bank of his LC requirement and
requests the bank to provide the facility.
2.
The bank may require the customer to place a deposit to the
full amount of the price of the goods to be purchase, which the
bank accepts under the principle of al-Wadiah Yadd Dhamanah.
3. The bank establishes the LC and pays the proceeds to the
negotiating bank utilizing the customers deposit and
subsequently releases the document to the customer
4. The bank charges the customer fees and commission for its
services under the principles of al-Ijarah.

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GUARANTEE (ALKAFALAH)
Kafalah
Guarantee for future obligations involving human

beings such as bailing to ensure the attendance of


the accused criminals to the court for judgement
Dhamanah
Guarantee for future obligations involving property

such as debt obligation, the return of borrowed


property, the delivery of products, payment for
purchase of products or services or the security if
goods.
Hamalah
Guarantee for future obligations involving diyat

(blood-money)
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DEFINITION
Kafalah comes from the root word kafala ( )which means

junction joining combination responsibility or suretyship.


Legally kafalah means the joining of one obligation to another
obligation with regard to a claim on.
Literally
Guarantee, bail, surety, responsibility, suretyship

Technically
The pledge given by the guarantor/surety (al-kafil) to a creditor

(al-makful lah) on behalf of the principal debtor (al-makful anh) to


secure that the guaranteed (al-makful bih) i.e the debtor, will be
present at a definite place, e.g to pay his debt, or fine, or, in the
case of retaliation, to undergo punishment.
In kafalah a person joins another person in undertaking certain

obligation. Consequently, both persons become jointly liable to


meet any claim that may arise from this obligation
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PILLARS OF AL-KAFALAH
1. Guarantor/surety (al-kafil)
A person who gives the guarantee is also called

surety. A person who agrees to be responsible for


another persons liability especially paying for his debt
2. Creditor (al-makful lah)
A creditor to whom the guarantee is given

3. Principal debtor (al-makful anh)


The person in respect of whose default the guarantee

is given. He is also called the principal debtor.


4. Guaranteed (al-makful bih) i.e the debtor, things
The claim itself whether it relates to the person or

property.

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Kafil (Gurantor)

Makful Bih (Debtor/ Things)

Makful Anh
(Principle Debtor)
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Makful Lah
(Creditor)

Creditor can retrieve his


debt in case of default by
the principle debtor

Guarantor agrees to be
responsible Principle
Debtors liability

FLOWS OF AL-KAFALAH

EVIDENCE
Al-Quran

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Hadith
The prophet (s.a.w) said to the effect, The

Guarantor is the debtor


Salamah al-Akwa narrated that: The Prophet
(s.a.w) was presented with a corpse of a man to
be prayed upon (before the burial). He (s.a.w)
asked: Did he leaving anything? They
answered: Nothing at all! He (s.a.w) asked: Is
he owing anything? They answered: Yes indeed,
he owes 2 gold dinars: He (s.a.w) said: Proceed
with the funeral prayer with your friend (without
me) Abu Qatadah said: o the messenger of
Allah, I will be guarantor (for the repayment) of
those 2 dinars After that, the Prophet (s.a.w)
performed the funeral prayer for him
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TYPES OF AL-KAFALAH
Al-Kafalah Bi Al-nafs
Guarantee of Person
In Suretyship for a person ( ) the guarantor is

assuming the responsibility to make sure the presence of


the principal in a lawsuit.
This is also possible in cases where the principal owes the
creditor.
The guarantor is required only to make sure the presence
of the person.
He is not liable to settle the debt on behalf of the
principal.
If the principal dies the guarantor is not bound to pay on
his behalf. This is because the guarantee given is for the
presence of the principal and not for the settlement of his
debt.
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Al-Kafalah Bi Al-mal
Kafalah for the property ( ) can be

both for the settlement of a debt (dain) or a


guarantee that a certain specific thing (ain)
would be returned.
In this case a guarantor is not freed of from
liability if the creditor or the owner of the thing
dies. The heirs of the creditor or the owner of the
thing can demand that the guarantor settle the
debt or return the thing.
For instance, the guarantor is liable to make sure
that a certain property bought by the buyer will
be returned to him. The creditor has the option
of demanding repayment from either the
principal or the guarantor.
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EFFECTS OF AL-KAFALAH
Once a valid kafalah is concluded it establishes a

right to the creditor to claim the debt from the


guarantor. The principal debtor is not released from
the debt.
The creditor has an option whether to demand the
payment of debt from the principal debtor or from the
guarantor.
Kafalah is a gratuitous contract. This means that the
service rendered by the guarantor is done freely
without any reward or payment. However, it is
possible that a guarantor may demand a certain fee
for his service.
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THE ADVANTAGE OF ALKAFALAH


Kafalah is gratuitous contract and

authenticate/ security contract


Creditor:
Could authenticate the loan repayment and

ensure that he (the creditor) can retrieve his


money back by demanding the payment from
the guarantor in case of default payment by
the debtor.
Entitles the creditor to call upon either the
debtor or the guarantor to perform the
obligation and demand from one will not affect
his right to go after the other if the obligation
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is not fully satisfied

Debtor
Minimize and spread his risk because the

guarantor by his guarantee, joined his


liability to the creditor
Can convince the creditor to lend him the
money since he has somebody to back him
up as the guarantor of payment. Nobody will
normally lend him any amount of money if
he has nobody that can support him and
perform the obligation on his behalf in case
of default

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CONDITIONS OF ALKAFALAH
Guarantor
Has the capacity to be a guarantor
Has the capability
Cant withdraw or pullback after the loan agreement has been

sealed or after the money has been given to the debtor


No limit to the number of people that can be a guarantor to the
debtor
Not forced or threatened by anybody to be the guarantor
Creditor
Must be known by the guarantor
Has the right to claim the debt from either the debtor or the

guarantor in case of default


Can relief the guarantor from his obligation but the debtor is still
obligated to settle his debt
Can relief the debtor from his obligation and in this case, the
guarantor is no longer obliged to settle the debt on behalf of the
debtor
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MODERN APPLICATION
Letter of Guarantee (LG)
Principle of kafalah has been used in Guarantee facilities as

a basis in structuring the Letter of Guarantee


Guarantee facilities refers to contract or assurances made by
Islamic bank to 3rd parties.
Customer will fulfill his/ her obligations towards the respected
third party.
In this assurance, bank agrees to assume the liability of its
customer in the case of default or breaching of contract as
agreed between customer and the 3 rd party.
The issuance of LG usually subject to various terms and
conditions. A common practice is that the bank would require
customer to cover fully or at least partially value of the LG.

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COMMISSION (JUALAH)
Ju alah comes from the root word Jaala (held) ,

jaala,yajalu-jalan
( ) .
Technically, Jaala means to be held or to make, while for
Jualah means fee, price or salary (Al-Mujam Al-Wa -Jiz)
Definition of Jualah:
Declaration(akad) for a commitment or a promise for a person
to pay some fee to another person for the task that have been
done.
In Jualah, there are two parties that would be the subject in
this promise which is Jail (a person that promise to give the
commission for the achievement of the task ) and Majullah ( a
person that perform the task).

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Jualah must be clearly stated in term of the task that need

to be done, the time of the task, and also the object of


Jualah is not prohibited in Syariah.
The commission for Jualah must be given only after the
task have been done.
According to the majority of the Maliki ,Shafie,Hambali and
Shiite scholars,Ja'alais a permissible contract to be
adapted in transactions. On the other hand, the majority of
the Hanafi and Dhahirri scholars take an opposite view that
theJaalacontract is not compatible
with IslamicShariah due to the existing of Gharar in order
for the task to be done.

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THE NATURE OF JUALAH


Ju alah (service charge) A party pays another a specified amount

of money as a fee for rending a specific service in accordance with


the terms of the contract stipulated between the two parties.
Ju alah allows contracting on an object not certain to exist or come
under a partys control. It can be utilized to introduce innovative
financing structures. This mode usually applies to transactions such
as consultations and professional services, fund placements and
trust services.
In addition, by using this contract, a financial intermediary can offer
custodial services for customers in the securities market as well,
where securities exchange hands in a relatively short period of
time, thus performing another important task of a modern financial
intermediary.

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FEE (AL-UJR)
Refers to commissions or fees charged for

service.

2. Finance the
students

PTPTN

STUDENT

3. Payback the
money + Al-Ujr.
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1. Student apply for


PTPTN

REMITTANCE (ALHIWALAH)
DEFINITION
Literally
To turn over; move or transfer

Technically
To make a transfer of a debt from one debtor to the debtor

account of another
To transfer a debt from one person (debtor) to another with
the same price, it comes to the consequence than the
liability of the debtor is abolished. In other words, the first
obligator is freed from any financial obligations.
Hiwalah is a contract which caused the transfer of debt

from one party to another.


According to Mughni Muhtaj, the term Hiwalah is refer to
the debt transfer from a party/person to another.
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NATURE OF AL-HIWALAH
Through the transfer of a claim of a debt, the responsibility

for its settlement is shifted from one person to another.


Hiwalah is similar to the sale of debt but is not sale, it also
resemble kafalah and wakalah.
However, it is a unique contract which has its own distinct
features and condition.
The three important participants in a hawalah contract
are: the principal debtor, the creditor and the transferee.
When a valid hawalah is concluded, the debt is no longer
demanded from the principal debtor.
This is because in hawalah, the debt is transferred from
the principal debtor to the transferee.
Furthermore, hawalah establishes a right for the creditor to
demand the settlement of debt from the transferee.
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EVIDENCE
Hadith
The Prophet S.A.W:The deferment (of paying debt) by the

richer is an injustice. When there is one of you, get the offer


from other to transfer your debt to another person, just
accept it
In Riwayat Ahmad, Prophet Muhammad S.A.W: Whom of
you (the debt is transferred to a rich person) to settle the
debt, please just accept the offer.
Ijma
The majority of Muslim Scholars opined that the word

please just follow or please just transfer is bring the


means unnecessary command, not as an obligation.
In other words, when the person A gives a debt to B, and
after a period of time, B is transfers the debt to C. C will
going to pay the debt to A. A has the option, whether to
accept or decline the offer.
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PILLARS OF AL-HIWALAH
1. Muhil
A person who is transfers his debt to another person.

2. Muhal-Lah
A creditor, whom his property/ debt is transferred to

be paid by another person instead of his debtor.


3. Muhal Alaihi
Tranferee a person who accept a hiwalah to himself

4. Muhal Bih
The things which is transferred by Hiwalah

5. Sighah
Ijab (Offer)
Qabul (Acceptance)
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Muhil
(Transferor/
Debtor)
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Muhal Alaihi
(Transferee)

Muhal Lah (Creditor)


Muhal Bih
(Debt/ Things
which is
transfered)

Transferee will have


to pay the debt to
the creditor

Debtor will make offer (ijab) to


transfer his debt to the transferee
and transferee will accept (qabul)
the hiwalah process

FLOWS OF AL-HIWALAH

Muhal Lah
(Creditor)

CATEGORIES OF ALHIWALAH
1.

Hiwalah
Muqayya
dah

Restricted
hiwalah

Hiwalah restricted by a
stipulation
The transferee to pay from
property of the transferor,
owed to him by the
transferee, or in the hand of
the transferee
This type of hiwalah when a
transfer is made with reference to
the debt on the transferee. The
majority only recognizes this type
of hiwalah.

2.

Hiwalah
Mutlaqah

Absolute hiwalah

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A hiwalah which is not restricted


for payment to be made from
property of the transferor in the
hands of the transferee
This is a type of hawalah where
the contract is concluded without
reference to the debt on the

TYPES OF RESTRICTION
Hawalah al-Dayn
The transfer of a debt from an obligation of a person to another

persons obligation (replacement of a debtor with another debtor)


Hawalah al-Haq
The transfer of right or right to claim from one person to the other

(replacement of a creditor with another creditor);


Hawalah al-dayn is practically inseparable from Hawalah al-

Haqq because when the debt is transferred to the transferee, it


transfers other all the rights such as right of guarantee or right
of surety;
If the established debt for which one debtor replaces another is
a fungible established as a liability, then the transfer of debt is
a valid transfer of rights, which the principal debtor is the
transferor and the ultimate debtor is the transferee. (agreed);
Example: A pawn-broker may transfer a creditor to the pawner
for collection of his debt (restricted).
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CONDITIONS OF ALHIWALAH
1. The parties should be competent
2. The parties should agree with the hawalah
3. The acceptance of the creditor and the transferee should
4.
5.

6.
7.

be given during the session of the contract.


The subject matter of hawalah should be debt (dain) and
not a specific thing (ain).
The transferee should owe a debt to the principal debtor. If
the transferee is not indebted to the principal debtor and
agrees to pay to the creditor the contract is changed to
kafalah. As in this case the transferee is paying for the
principal debtor.
Both the debts should be known.
The principal debtor (muhil) should owe a debt to the
creditor (muhal). In the absence of such a debt if the
creditor (muhal) is refereed to the transferee, the contract
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not a hawalah but is considered wakalah.

ADVANTAGES OF ALHIWALAH
Creditor
Could authenticate loan repayment and ensure that

he/she (the creditor) could retrieve his/ her money


back by demanding payment from the transferor
(muhal alaih) under normal circumstances or even in
case of default payment it could be retrieved from the
1st debtor ( transferee)
Debtor
Minimize and spread his/her risk because he/she can

remit or pass over his debt to his own debtor


Could convince the creditor to lend him money since
he/she has somebody to back him up as the transferor
of the payment.
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MODERN APPLICATION
Suftajah (Bills Of Exchange)
By this application it enables a debtor to make payments in

another place through his agent or a second person.


Example: A person gives a portion of his property to a
merchant to pay to another person in a different country. The
sender benefits by insuring himself against the risks of
transferring that property himself.
Other banking products and facilities
Issuance of a cheque against a current account(Issuer =

transferor/ Bank = Transferee/ Beneficiary = Creditor)


Overdrawing from an account or overdraft: Issuer = Transferor
(no balance)/ Beneficiary = Creditor (get cheque)/ Bank
=Transferee.
Endorsement of a negotiable instrument.
Transfer of money (remittance).
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CURRENCY EXCHANGE
(AL-SARF)
The currency exchange(sarf) contract is the exchange of

one monetary form for another in the same or different


form, i.e. gold for gold coins, silver for silver, etc.
Such transaction is permissible in Syariah provided it
meets general conditions for the currencies exchange
contract as follows :
1. Spot basis.
2. Equality of quantities if monies of the same currencies
are traded.
3. Inapplicability of options (khiyar al syart) and nondeferment.
. Currency exchange, i.e. buying and selling of foreign

currencies.
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EVIDENCE
Narrated by Muslim on the authority of

Ubadah bi al-Samit, that the


Prophet(p.b.u.h) said : Gold for the gold,
silver to silver, wheat for wheat, barley for
barley, dates for dates, and salt for salt, in
equal amounts, hand-to-hand; and if the
kinds of assets differ, then trade as you
wish provided it is hand-to-hand (spot).
The other hadith narrated by Bukhari on
the authority of Abu Said Al-Khudri is that
the Prophet (p.b.u.h) said: Do not sell gold
for gold except equal for equal and do not
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sell what is deferred for the spot

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Corporati
ons

Trade (Export/Import)
Investment (short term capital/long
term capital)

Individual
s

Investment (short term capitaldeposits, stock, notes)

Commerci
al Banks

Provide service to corporations and


individuals
Trading own account/customers

Major Participants in the


Foreign Exchange Market

Passive participations
Financial middleman
Provide direction to other
participants
Managing reserves,
intervention

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Money
Brokers

Central
Banks

Overall Performance (July


2011)
847 Shariah compliant securities were hosted

on Bursa Malaysia, representing 89% of the


total
listed
securities
with
a
market
capitalisation of RM826 billion or 61.7% of total
market capitalisation
Malaysia remained a leader in global sukuk
market outstanding and Bursa Malaysia is also
the top sukuk listing destination, with 19 sukuk
totalling RM88.3 billion (USD29.6 billion)
Asset of Takaful industry grew 16.8% to RM16.3
billion, accounting to 8.7% of total assets in the
insurance and takaful sectors.
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Cont
Malaysia's Islamic banking assets rose 15

percent to RM389.3 billion, strengthening


the country's position as the global hub of
Shariah compliant financing. Based on total
banking system. Financing asset increased
to 17 percent (RM246.8 billion) and make
up 23 percent of total loans and financing,
while deposits grew 14 percent to RM299.1
billion.

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GLOBALISATION PROCESS OF ISLAMIC BANKING

DEVELOP PRODUCT WHICH NOT ONLY MET LOCAL ACCEPTANCE BUT


ALSO ABLE TO PENETRATE THE GLOBAL MARKET ESPECIALLY GCC

INVITING FOREIGN ISLAMIC BANKING INSTITUTIONS TO OPERATE IN


MALAYSIA WILL ENABLE THE HARMONISATION OF ISLAMIC BANKING
PRACTICE BETWEEN THE GULF STATES AND MALAYSIA

THE ESTABLISHMENT OF IIFM WILL ACT AS A CATALYST TO SPUR THE


ISLAMIC FINANCIAL MARKET BUSINESS ACROSS THE GLOBE

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GLOBALISATION PROCESS OF ISLAMIC BANKING

NARROWING
NARROWING THE
THE GAP
GAP OF
OF SHARIAH
SHARIAH UNDERSTANDING
UNDERSTANDING BETWEEN
BETWEEN THE
THE
GULF
GULF AND
AND MALAYSIA
MALAYSIA BY
BY INVITING
INVITING GULF
GULF SHARIAH
SHARIAH SCHOLARS
SCHOLARS TO
TO BE
BE A
A
MEMBER
MEMBER OF
OF THE
THE LOCAL
LOCAL SHARIAH
SHARIAH SUPERVISORY
SUPERVISORY COUNCIL
COUNCIL

GROOMING
GROOMING NEW
NEW BREEDS
BREEDS OF
OF SHARIAH
SHARIAH SCHOLARS
SCHOLARS WITH
WITH NEW
NEW MINDSETS
MINDSETS
AND
AND CAPABILITIES
CAPABILITIES THAT
THAT COULD
COULD ADAPT
ADAPT TO
TO THE
THE MODERN
MODERN NEEDS
NEEDS OF
OF
FINANCIAL
FINANCIAL BUSINESS
BUSINESS IN
IN TERMS
TERMS OF
OF COMPETENCIES
COMPETENCIES AND
AND CAPABILITIES
CAPABILITIES
NOT
NOT ONLY
ONLY IN
IN SHARIAH
SHARIAH FUNCTIONS
FUNCTIONS BUT
BUT THE
THE ENTIRE
ENTIRE RANGE
RANGE OF
OF BANKING
BANKING
FUNCTIONALITIES.
FUNCTIONALITIES. THIS
THIS WILL
WILL ENRICH
ENRICH THE
THE POOL
POOL OF
OF SHARIAH
SHARIAH EXPERTISE
EXPERTISE
AT
AT GLOBAL
GLOBAL ARENA
ARENA AND
AND WILL
WILL MAKE
MAKE A
A SIGNIFICANT
SIGNIFICANT CONTRIBUTION
CONTRIBUTION THAT
THAT
COME
COME FROM
FROM MALAYSIA
MALAYSIA

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GLOBALISATION PROCESS OF ISLAMIC BANKING

ISLAMIC FINANCE HAS CONTINUED TO DEMONSTRATE ITS VIABILITY


AND COMPETITIVENESS IN THIS MORE LIBERALISED AND GLOBALISED
FINANCIAL ENVIRONMENT. THE TOTAL ISLAMIC FINANCIAL ASSETS
SIZE NOW HAS SURPASSED U$1 TRILLION FOLLOWING UNABATED
GROWTH FROM THE MID 1990s. THERE ARE NOW MORE THAN 600
ISLAMIC FINANCIAL INSTITUTIONS OPERATING IN MORE THAN 75
COUNTRIES.
INCREASINGLY,
EXISTING
ISLAMIC
BANKING
INSTITUTIONS ARE EXPANDING THEIR OPERATIONS WITH PRESENCE
IN NEW JURISDICTIONS. THIS IS RESULTING IN INCREASED CROSS
BORDER FINANCIAL FLOWS. THERE HAS ALSO BEEN INCREASED
INTERNATIONAL PARTICIPATION IN ISLAMIC FINANCIAL MARKETS

razizi.uitm.edu.my

CHALLENGES OF ISLAMIC BANKS


1. Misconception about Islamic banking
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 organisation
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.
2. Divergence of opinions
Shariah interpretation versus business practicability/ financing
commercial viability

CHALLENGES OF ISLAMIC BANKS


3. Moving towards equity based financing (Musharakah/ Mudharabah)
financing?
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.
4. 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
The issue of poaching by competitors in Malaysia as well as by those in
emerging Islamic financial hubs in particular Dubai, Bahrain, Singapore,
Hong Kong and London with their lucrative packages

CHALLENGES OF ISLAMIC BANKS


5. Rising Cost to Income Ratio Especially for Small Islamic Banks
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

ISSUE 3: EXPENSIVE AND "TIME VALUE OF MONEY"

Variable Rate Financing Response to Lower BLR


Regime

1. Monthly installment throughout the financing period is based on Effective Profit Rate (EPR).
2. Sale price is determined based on Contracted/ Ceiling Profit Rate (CPR).
3. Bank undertakes to give rebate (Ibra) on the early settlement and the difference between EPR

and CPR.
4. EPR is capped at the sale price CPR as agreed during inception of the contract.
5. Benefits to Islamic banks customers:
Rebate between EPR and CPR
If EPR rises above CPR, the rate is capped CPR).

ISSUE 4: COMPENSATION (TA'WIDH) VS PENALTY INTEREST


Compounding Interest in Conventional Banking

Compounding interest is riba Jahiliyyah (

In addition to the practice of riba al-qardh in a conventional banking practices, defaulted customers face compounding interest