Chapter 1
Chapter 1
Chapter 1
Return on Return on
investment & financing
savings
Year Activities
2004 Entrance of Kuwait Finance House, Al Rajhi & Asian Finance (a consortium •
of Qatar Islamic Bank, RUSD Investment Bank Inc. & Global Investment
House)
A guideline on the issuance of credit card based on shari'ah principles •
(Credit Card-i)
Market Risk Capital Adequacy Framework for Islamic banks was issued •
BNM issued the guidelines on the governance of shari'ah Committee for •
the Islamic Financial Institutions to rationalize and streamline the
functions and duties of shari'ah bodies of the financial institutions
2005 BNM approved the Islamic subsidiaries structure to replace of Islamic •
window institutions structure
Foreign participation in Islamic subsidiaries and allowed to have up to 49% •
equity
Announcement the tax neutrality policy for Islamic banking and finance •
Government Investment Act 1983 was amended and renamed as •
Government Funding Act 1983
MALAYSIAN HISTORY OF ISLAMIC BANKING
Year Activities
The Shari’ah
• Defines man-to-God and man-to-man relationships
The Qur’an
• The first source of the Shari’ah
• General and specific rules on religious, commercial, political,
economic, legal and social norms
• Emphasis on mutual consent and consensus among
consenting parties
• Prohibits exploitative measures:
○ Excessive risk or uncertaintly (gharar)
○ Usary or interest (riba)
The Sunnah
• The second primary source of the Shari’ah
•Al-
Hadith is the saying, deeds and approvals of
Prophet Muhammad SAW
•In
Shariah, Hadith describes as Sunnah ( the way or
manner) of Prophet Muhammad.
•There are three kinds of Sunnah:
a. A qaul or a ‘saying’ of the Prophet Muhammad
which has a bearing on a religious question.
b. A fi’l which represent an ‘action’ or ‘practice’ of
the Prophet Muhammad.
c. A taqrir or a ‘silent approval’ of Prophet
Muhammad of action or practice of another.
17
SECONDARY SOURCES
IJMA’:
o IJMA’ is the verbal noun of the Arabic word ajma’a which has two
meanings: To determine, To agree upon something.
o The consensus of the jurists in understanding, interpreting and applying
the teachings of the Quran and the Sunnah forms the third basic source
of the Shariah.
o Ijma’ means a unanimous agreement among the mujtahidun of a Muslim
community on any Shariah ruling in a particular period following the
demise of the Prophet Muhammad (Peace Be Upon Him).
o However, it is difficult to classify a particular Shariah ruling as ijma’
considering the wide coverage of Islamic territory and the emergence of
the various school of thoughts among the Muslim community.
o Therefore, the majority of Islamic scholars are of the opinion that ijma’
only happened during the period of the companions of Prophet
Muhammad PBUH before they migrated to other territories.
o As such, the claim that ijma’ had occurred after such period is quite
difficult to be accepted.
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EXAMPLE OF IJMA’
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SECONDARY SOURCES
Qiyâs
20
SECONDARY SOURCES
IJTIHAD:
o Mujtahid, required:
o Enough knowledge of Arabic so that the scholar can read and understand
both the Qur'an and the Sunnah.
o Extensive comprehensive knowledge of the Qur'an and the Sunnah. More
specifically, the scholar must have a full understanding of the Qur'an's legal
contents. In regards to the Sunnah the scholar must understand the specific
texts that refer to law and also the incidence of abrogation in the Sunnah.
o Must be able to confirm the consensus (Ijma) of the Companions, the
Successors, and the leading Imams and mujtahideen of the past, in order to
prevent making decisions that disregard these honored decisions made in
the past.
o Should be able to fully understand the objectives of the Shariah and be
dedicated to the protection of the Five Principles of Islam, which are life,
religion, intellect, lineage, and property.
21
SECONDARY SOURCES
IJTIHAD:
22
The underlying principles of Islamic
banking business
Al-Riba
◦ Any excess, increase, expansion, growth
Al-Maysir
◦ Any acts of gambling/speculation that relate to the
financial instrument
◦ Eg: Casino
The Forbidden
◦ Any forbidden items
◦ Eg: Short-guns,
Origins and Historical Overview of
Islamic Banking and Finance
• Retail banking
• Corporate banking
• Real estate
• Investment banking
Figure 1.2:
Timeline of
Modern-day
Experiments of
Islamic banking
and finance
from 1962 to
1975
Conceptual Arguments for Islamic
Banking and Finance
• Interest-free
• Ethical
1. Islamic banking
2. Takaful
Islamic Banking
• Fund mobilization
• Fund utilization
- Sharing modes
- Sale modes
- Leasing modes
Key Operating Mechanisms of
Islamic Banking and Finance
Fund mobilization
The process of raising funds to establish a viable financial
institution through the sale of shares to investors and
receiving funds from depositors. Features include:
• An ethical manner
• Net equities owned by shareholders
• Investment deposits
• Demand deposits
Key Operating Mechanisms of
Islamic Banking and Finance
Fund utilization
The process of using the funds realized in Sharī'ah-compliant
business:
Sharing modes - Partnership where funds initially mobilized
are invested in Sharī'ah-compliant business; parties share
profits or loss
Sale modes – The bank purchases an item on behalf the client
and resells it to them on a deferred basis or immediately
Leasing modes - The rent of an asset or hire purchase where
a rental fee is paid for a stipulated period of time mutually
agreed by the parties
Debt Financing – Extension from existing conventional
practices
The Development of Islamic Banking
Products
• Islamic banking products - financial tools through which the
financial institutions carry out business