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Islamic Banking

Islamic Banking

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Published by The CSS Point

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Categories:Topics, Art & Design
Published by: The CSS Point on Oct 24, 2010
Copyright:Attribution Non-commercial

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04/26/2011

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What is Islamic BankingINTRODUCTION
 This booklet aims to provide you some basic concepts and principles on Islamicbanking.
Islamic banking
Islamic banking is a banking activity which is consistent with the Islamic law(
Shariah 
). Islamic banking is carried out in accordance with the rules of
Shariah 
,known as
fiqh muamalat 
(Islamic rules on transactions). It does not allow thepaying and receiving of
riba’ 
(interest) and promotes greater degree of fairnessand equity in the conduct of banking businessThe first Islamic bank was established in Malaysia in 1983. In 1993, commercialbanks, merchant banks and finance companies were allowed to offer Islamicbanking products and services under the Islamic Banking Scheme (IBS banks).The IBS banks are required to ensure that the funds and activities of the Islamicbanking transactions are separated from the conventional banking business. All licensed Islamic banks and IBS banks are required to display the Islamicbanking logo as shown below:
SHARIAH 
PRINCIPLES IN ISLAMIC BANKING
The rules and norms of
fiqh muamalat 
emanated from two primary sources of
Shariah 
namely the
Quran 
and the
Sunnah 
and other secondary andauthoritative sources of Islamic law.
 
2
Islamic banking operates under a number of contracts under
fiqh muamalat 
.Amongst the widely used concepts in Islamic banking include profit sharing(
Mudharabah 
), safekeeping (
Wadiah 
), joint venture (
Musyarakah 
), cost plus(
Murabahah 
) and leasing (
Ijarah 
).
SHARIAH 
COMMITTEE
The Islamic banks and IBS banks must ensure that their operations comply withthe principles of
Shariah.
Each institution is therefore required to set up a
Shariah 
 Committee to provide advice on
Shariah 
issues and to ensure that its operationsand activities comply with the
Shariah 
principles. In addition, the ShariahAdvisory Council set up at Bank Negara Malaysia (BNM) is the highest
Shariah 
 authority set up to provide advice on the
Shariah 
matters pertaining to Islamicbanking and takaful in Malaysia.
SHARIAH 
CONCEPTS IN ISLAMIC BANKING
 
Wadiah 
(Safekeeping)
 For deposit product or
Wadiah 
contract, a bank is the custodian and trustee offunds. A person deposits funds in the bank and the bank guarantees refund ofany part or the whole amount of the deposit when requested by the depositor.The depositor, at the bank's discretion, may be given '
hibah 
' (gift) as a form ofappreciation for the use of funds by the bank. As a trustee of the items, thecustodian may charge a fee to the customer.
Mudharabah 
(Profit Sharing)
Mudharabah 
is a profit sharing arrangement or agreement between a capitalprovider and an entrepreneur. The entrepreneur is provided with funds by thecapital provider to undertake a business activity. Any profits made will be sharedbetween the capital provider and the entrepreneur according to the pre-determined profit-sharing ratio. However, losses shall be borne by the capitalprovider.
 
3
Musyarakah 
(Joint Venture)
This concept is normally applied for business partnerships or joint ventures. Theprofits made are shared on an agreed ratio while losses incurred, will be dividedbased on the equity participation ratio.
Murabahah 
(Cost Plus)
The selling of goods at a price, which includes a profit margin agreed by bothparties. The purchase and selling price, other costs and the profit margin must beclearly stated at the time of the sale agreement.
Bai' Bithaman Ajil 
(Deferred Payment Sale)
The selling of goods on a deferred payment basis at a price, which includes aprofit margin agreed by both parties.
Wakalah 
(Agency)
This is the situation when a person appoints a representative or delegates a dutyto another party to undertake transactions on his behalf. As an agent, the bankwill be paid a fee for the services it provided.
Qard 
(Interest-free Loan)
A loan extended on a goodwill basis and the borrower is only required to repaythe amount borrowed. However, the borrower may, at his discretion, pay extra(without promising it) as a token of appreciation.
Ijarah Thumma Bai' 
(Hire Purchase)
There are two contracts involved in this concept: Ijarah contract (leasing/renting)and
Bai' 
contract (purchase). The contracts are undertaken one after the other.For example, in a car financing facility, a customer enters into the
Ijarah 
contractto lease the car from the owner (financier) at an agreed rental for a specificperiod. When the leasing period ends, the
Bai’ 
contract comes into effect, toenable the customer to purchase the car from the owner at an agreed price.

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