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Topic 1: History and development of Islamic Banking System
History and development Islamic Banking System
Objectives: 1.Explain the structure of financial system in Malaysia 2.Explain the definition and type of banks. 3.Explain history and the development of Islamic banking system.
THE FINANCIAL SYSTEM STRUCTURE IN MALAYSIA Financial System
BANKING SYSTEM ●Bank Negara Malaysia 2. Banking Institutions •Commercial Banks (22) •investment banks (15) •International Islamic banks (2) •Islamic Banks (17) 3. Others •Discount Houses •Representative Offices of Foreign Banks
NON-BANK FINANCIAL INTERMEDIARIES 1. Provident and Pension Funds 2. Insurance Companies/Takaful 3. Development Finance Institutions 4. Savings Institutions •National Savings Bank •Co-operative Societies 5. Others •Unit Trusts •Pilgrims Fund Board •Housing Credit Institutions •Cagamas Berhad •Credit Guarantee Corporation •Leasing Companies •Factoring Companies •Venture Capital Companies
Money & Foreign Exchange Market 1. Money Market 2. Foreign Exchange Market Capital Market 1. Equity Market 2. Bond Market • Public Debt Securities • Private Debt Securities Derivatives Market 1. Commodity Futures 2. KLSE CI Futures 3. KLIBOR Futures Offshore Market ●Labuan International Offshore Financial Center (IOFC )
A. BANKING SYSTEM The banking system consists of: i.Bank Negara Malaysia (Central Bank of Malaysia) ii.Banking institutions (commercial banks, investment banks, international banks and Islamic banks) iii.Miscellaneous group (discount houses and representative offices of foreign banks).
1. and •To influence the credit situation to the advantage of Malaysia. Bank Negara Malaysia (BNM) Bank Negara Malaysia (the Central Bank of Malaysia) was established on 26 January 1959. The objectives of BNM are as follows: •To issue currency and keep reserves to safeguard the value of currency. •To promote monetary stability and a sound financial structure. •To act as a banker and financial adviser to the government. under the Central Bank of Malaya Ordinance 1958. . The introduction of the Banking and Financial Institutions Act 1989 (BAFIA) on 1 October 1989 extended BNM’s powers for the supervision and regulation of financial institutions and deposittaking institutions who are also engaged in the provision of finance and credit.
but this was subsequently replaced by the BAFIA in 1989. and financial guarantees. ●Treasury services. granting of loans and advances. and ●Custody services such as safe deposits and share custody.2. trust receipts and Banker’s Acceptances. ●Cross border payment services. Commercial Banks Commercial banks were brought under BNM supervision through Banking Act. The main functions of commercial banks are to provide: ●Retail banking services such as the acceptance of deposit. ●Trade financing facilities such as letters of credit. Commercial banks are also authorized to deal in foreign exchange and are the only financial institutions allowed to provide current account facilities. discounting of trade bills. 1973. . shipping guarantees.
3. aims to strengthen the capacity and capabilities of domestic banking groups through internal rationalization so that they can contribute to the economic transformation process and better face the challenges of liberalization and globalization. ● . diversify their source of funding and enhance their market making capabilities in the capital market. ●Universal brokers currently undertake and offer similar range of products and services as investment banks. in line with the recommendation of the financial sector. Investment Banks The establishment of investment banks. competitive and dynamic financial system and support economic transformation. ●This move is aimed towards further enhancing the capacity and capabilities of domestic capital market intermediaries to contribute towards the development of a more resilient. ●The framework on investment banks is now extended to universal brokers. The transformation of universal brokers to investment banks will thus strengthen their potential to capitalize on larger business opportunities.
● Eligibility criteria: ● 1) It is a well capitalized and reputable licensed financial institution.4. 4) Possesses a sound track record. 2)Adopts the international banking practices set by the Bank for International Settlements or any other international standard-setting body. ●The IIB is eligible for full tax exemption accorded under the Income Tax Act 1967 for ten years from the year of assessment 2007. International Islamic Banks An International Islamic Bank (IIB) is allowed to conduct a wide range of Islamic banking business in Malaysia under the Islamic Banking Act 1983 (IBA) with nonresidents in international currencies other than Malaysian ringgit. . The IIB is a resident for the purpose of foreign exchange administration policies. 3)Regulated and supervised by a competent home regulatory authority. These Guidelines will be effective from 15 September 2006.
●The IBA provides BNM with powers to supervise and regulate Islamic banks. a second Islamic bank. In terms of products. ● . ●Apart from Islamic banks. ●The first Islamic bank established was Bank Islam Malaysia Berhad. all Islamic banking entities are offering banking products based on the Islamic principles. separate Islamic legislation and banking regulations exist side-by-side with those for the conventional banking system. namely Bank Mualamat Malaysia Berhad was established.5. Islamic Banks In Malaysia. ●The banking activities of Islamic banks are based on Syariah principles (the Islamic principles). ●The legal basis for the establishment of Islamic banks was the Islamic Banking Act (IBA). which came into effect on 7 April 1983. similar to the case of other licensed banks. other financial institutions also offer Islamic banking services through the “Islamic Banking Scheme”. On 1 October 1999. which commenced operations on 1 July 1983.
as well as to provide an active secondary market for these activities.6. overnight money and short term deposits. . Discount Houses ■Discount houses began operations in Malaysia since 1963. ■Generally. banker acceptances (BAs). Malaysian Government Securities (MGS). the discount houses specialize in short term money market operations and mobilize deposits from the financial institutions and corporations in the form of money at call. negotiable certificates of deposit (NCDs). ■The funds mobilized are invested in Malaysian Treasury bills. Cagamas bonds and Floating Rate Negotiable Certificates of Deposit (FRNCDs).
Representative Offices of Foreign Banks in Malaysia There are 32 foreign banks that have establishing representative offices in Malaysia. with all concentrated in Kuala Lumpur.7. ● . ●Representative office is merely a liaison office and does not offer banking products directly to the Malaysian market. ● Most of the banks originate from Europe and Japan.
B. ● . NON-BANK FINANCIAL INTERMEDIARIES Non Bank Financial Intermediaries mainly comprise of Provident and Pension Funds ●Insurance Companies ●Development Finance Institutions ●Savings Institutions ●Others. .
the Social Security Organization (SOCSO). medical. The PPFs are the second largest group of financial institutions in the country in terms of aggregate assets. Provident and Pension Funds ● ● ● Provident and Pension Funds (PPFs) are a group of financial schemes designed to provide members and their dependents with a measure of social security in the form of retirement. death or disability benefits. the Armed Forces Fund and the Teachers Provident Funds. next to banking institutions . The major PPFs in Malaysia comprise the Employees Provident Fund (EPF).1.
36 brokers and 41 adjusters.2. Insurance Companies Currently. The 64 insurers that were licensed under the Act is categorized into the following groups: • 7 life and general business • 9 life business only • 24 General business only • 1 life and general reinsurance business • 1 life reinsurance business • 5 general reinsurance business . the total number of licensees under the Insurance Act 1996 stands at 141. comprising 64 insurers.
such as agriculture. infrastructure development and international trade. DFIs generally specialize in the provision of medium and long term financing of projects that may carry higher credit or market risk. The following are the main DFIs in Malaysia:i) Bank Pertanian Malaysia ii) Bank Industri & Technologi Malaysia iii) Bank Pembangunan & Infrastruktur Malaysia Berhad iv) EXIM Bank v) Malaysian Industrial Development Finance (MIDF) . Development Financial Institutions Development Financial Institutions (DFIs) are established by the Government to promote the development of certain identified priority sectors and sub-sectors of the economy.3.
Bank Rakyat and coOperatives. Savings Institutions These institutions play a particularly important role in the promotion and mobilization of savings among the middle and lower-income group. Among the savings institution in Malaysia are Bank Simpanan Nasional.4. ● Several of them introduced Islamic banking facilities in tandem with Government’s objective to develop an Islamic banking system in Malaysia. ● .
Others The group of institutions classified as other financial intermediaries are those which operate on a much smaller scale than the major financial and deposit-taking institutions. ● These intermediaries were established in response to government efforts to promote greater Bumiputera participation in the Malaysian economy as well as to assist in the development of financial markets.5. ● .
FINANCIAL MARKET The Financial Market mainly comprises:1) Money Market ●is an avenue for the channeling of short term funds with maturities typically not exceeding 12 month. Cagamas notes. . while at the same time. providing short term investment outlets for those with temporary surplus funds. negotiable instruments of deposit (NID). treasury bills (T-bill). ●It provides a ready source of funds for market participants facing temporary shortfalls in funding.C. etc. Operations in the money market comprise 2 broad categories: i) The placement of deposits ii) The purchase and sale of short term securities (bankers acceptances (BA).
3) Capital market is the market for raising long term funds and comprise the equity and bond markets. ●Equity market : provides the avenue for corporations to raise funds by issuing stocks. It can be undertaken in the spot market. forward and swap market. while secondary market trading in stocks is conducted through stockbrokers on the Bursa Malaysia as well as the Malaysian Exchange of Securities Dealing and Automated Quotation (MESDAQ) ● .2) Foreign exchange market ● is the market for the trading of foreign currencies against the ringgit of against other foreign currencies.
and whose values depend on the price of the underlying assets or securities. ●is . Examples of derivatives are forwards.4) Bond market ● is the market through which both the private and public sectors can raise funds by issuing private debt securities (PDS) and Government Securities. futures. 5) Derivatives market for trading instruments that provide contingent claims on underlying assets. Secondary market trading in unlisted bonds is done through the over-thecounter (OTC) market and for the listed bonds on the Bursa Malaysia. options and swaps. The main use of derivatives is to hedge against volatility in the price of the underlying assets.
fund management.6. trust business. ●Labuan IOFC is aimed enhancing the attractiveness of Malaysia as a regional financial centre as well as to promote the economic development of Labuan and its vicinity. ● It provides a wide range of offshore products including banking. Offshore market is a new addition to the financial landscape of Malaysia with the establishment of the Labuan International Offshore Financial Centre (Labuan IOFC) in October 1990. Islamic financing and company management services. ● . insurance. investment holding.
1993. and for speeding up the processing and approval of corporate transactions. ●It has direct responsibility in supervising and monitoring the activities of market institutions and regulating all persons licensed under the Securities Industry Act. ●To take responsibility for streamlining the regulations of the securities market.SECURITIES COMMISSION The Securities Commission (SC) is a statutory body entrusted with the responsibility of regulating and systematically developing Malaysia’s capital markets. ●Its two main roles under the Securities Commission Act 1993 are: ●To act as a single regulatory body to promote the development of capital markets. 1983 and Futures Industry Act. ● .
Anti-Money Laundering Act 2001 .FINANCIAL REGULATION Among the main regulations and guidelines issued by the authorities to govern the financial system in Malaysia are:1. 1989 (BAFIA) 2. Banking and Financial Institutions Act. Insurance Act 1996 3.
is not affected. 1989 (BAFIA) was passed in Parliament and came into force on October 1.1. 1989. 1989 (BAFIA) The Banking and Financial Institutions Act. merchant banks. Banking and Financial Institutions Act. ● . ●The Islamic Banking Act 1983. finance companies. with the direct responsibilities to regulate and supervise all licensed institutions (commercial banks. ●The BAFIA is a comprehensive act and extends comprehensive powers to Bank Negara Malaysia (BNM) to supervise a larger spectrum of financial institutions. ●BAFIA has effectively replaced the Banking Act 1973 and the Finance Companies Act 1969. however. discount houses and money brokers) and also regulate scheduled and non-scheduled institutions.
The Act provides a framework that enables BNM to supervise and regulate three broad groups of financial institutions: •Scheduled institutions comprising non-bank sources of credit and finance. development finance institutions. operations of cash dispensing machines.5. . which include issuers of charge/credit cards and travellers’ cheques. leasing companies. factoring companies. BAFIA 1989 is divided into 16 parts and covers a wide spectrum of subject matters related to the banking industry in Malaysia. building societies and housing credit institutions. representative offices of foreign banks or foreign institutions which carry out the business or activities similar to the scheduled institutions.
submission of statistics to BNM. net working funds. liquid assets by the financial institutions •Appointment of auditors. submission of financial statement. • Non-scheduled institutions comprising all other statutory bodies and institutions involved in the provision of finance and credit. . merchant banks. capital. money brokers and foreign exchange brokers. discount houses. finance companies. The Act also provides BNM the regulatory power to regulate the following: •Control of establishment or acquisition of subsidiaries or opening of offices in Malaysia by a local or foreign licensed institutions •Maintenance of reserve fund. exhibition of financial statements.•Licensed institutions comprising the commercial banks.
BNM retains a substantial degree of regulatory control over the management. •The acquisition or disposal of substantial interests in shares of a licensee. •Appointment of auditors and actuaries.2. Among the areas subject to BNM’s approval under the Insurance Act 1996 are: •The appointment of directors and chief executive officers. . control of licensees and the critical aspects of their operations. Insurance Act 1996 Under the Insurance Act 1996. •The establishment of offices and subsidiaries. and •Outsourcing of core insurance activities.
The subsidiary legislation. the Insurance Regulations 1996 (Regulations) saw several changes in 1999 in respect of minimum capital requirement as follows:●The minimum paid-up capital prescribed for a licensed local insurer underwriting direct insurance business. or surplus of assets over liabilities in the case of a licensed foreign insurer is set at RM50 million from 31 December 2000. has incorporated amendments made to the Insurance Act 1963.” ● .The Insurance Act 1996 which became effective on 1 January 1997. and ●The absolute minimum margin of solvency (before taking into account insurance fund liabilities) for each class of insurance business of direct and local professional reinsurers is set at RM50 million from 1 January 2001.
AMLA provides comprehensive new laws for the prevention. Anti-Money Laundering Act 2001 The Anti-Money Laundering Act 2001 (AMLA) was gazette on 5 July 2001. the forfeiture of property derived from.3. AMLA addresses the following broad issues:•Money laundering offences •Financial Intelligence Unit •Reporting obligations •Powers of investigation. seizure and forfeiture of property . detection and prosecution of money laundering. or involvement in money laundering and the requirements for record keeping and reporting of suspicious transactions for reporting institutions. search and seizure •Powers of freezing.
● .History and Development of Islamic Banking Banking Under The Influence of Islamic Culture ● Prophet Muhammad (peace be upon him) noted as trustworthy’. It represent a secure guarantee to the owner because where money remains a deposit without use. when he assigned Ali to return the deposits to their owners Az-Zubair bin Awwam was one of those who entrusted with the safekeeping of money. and ii. it would constitute a loss to the owner. He reserved his right to dispose of the money considering it a loan not a deposit. thus realizing two objectives: i. but when deposit becomes a loan it would be secure as the borrower liable for it. he was a man of sagacity and intelligence who refused to take money on deposit preferring to take it as a loan. deposits remained in his custody until a short while before he emigrated from Mekka to Medina.
I sell by dinars and take darahim (kind of money) and sell by darahim and take the dinars.and said: ‘ Oh God’s Prophet. . I wish to ask you: ‘I sell the camels in Baqi’. which thing had an effect on me. take it easy.or. he said when he left Hafsa’s house.1. so I came to the Prophet (peace be upon him) while he was in Hafsa’s house.Exchange of money Ibn Omar said: I used to sell camels in Baqi’ (a place in Al Medina). The Prophet said: ‘It would be unobjectionable if you take them at the price of their day unless you depart and leave something between you”. I sell by dinars and take darahim and sell by darahim and take dinars.
but did not know him. where they used to cash it. he replied that he was Saif au-Dawla Alhamadani. It is related that Saif ed-Daulah al Hamadani who was Amir of Aleppo about the middle of 4th. they served. ● . When they asked the money changer who was the man who wrote the paper. when they unfolded the paper they found it was addressed to some money changers in the sum of one thousand dinars.H. silver minted into dirhams) in Mekka and write acknowledgement thereof to El-Kufa. who honored the paper and paid the sum of dinars therein stated ‘immediately and in time'. visited Baghdad and wanted to see it without being recognised.e.2) Transfer Operation ● It is narrated that Ibn Al Abbas used to take the ‘warik’ (i. When he was about to leave he asked for an inkpot and wrote on a slip of paper and left in the pot. Century A. he went disguised to the houses of Bani Khaqan to listen and drink. When they presented the slip of paper to the money changer.
● The use of cheques for commercial purposes. exchange is carried out in Khaza’ market. reported in one place how the work was being carried out in the city of Basra as he witnessed it himself: ‘A market is set up in three locations in Basra every day: in the morning. in Othman Market and at sunset in Qaddahin market. The Persian explorer Naser Khasro in his book entitled: ‘Safarnama’ in which he recorded what he had seen during his travel between the years 437-444 A. a purchaser uses no other than the cheque of the money changers so long as he is resident in the city’ . the work in a market is as follows: every person who has money gives it to the money changer and take in return a cheque and then buy all needs and pays for them by money changer’s cheque.H. at noon.
B. C.Islamic Banking in The Modern Era The Attempts to establish an interest-free bank A. The bank was considered to be the most innovative and successful experiment with interest-free banking.The first attempt came in Malaysia mid-1940s. A plan to invest prospective pilgrim savings in real estate and plantations in accordance with Syariah was.The first experimental local Islamic bank was established in the late 1950s in a rural area of Pakistan that charged no interest on its lending.The establishment of Mit Ghamr Local Savings Bank marked a new milestone in the revolution of the modern Islamic banking system. unsuccessful. . however.
List of Islamic Banks Name Nasser Social Bank Country Egypt Date of Establishment 1972 1975 1975 1977 1977 1978 1978 1979 Islamic Development Bank Saudi Arabia Dubai Islamic Bank Faisal Islamic Bank of Egypt Faisal Islamic Bank of Sudan Islamic Banking System International Holding Jordan Islam Bank Bahrain Islamic Bank UAE Egypt Sudan Luxembourg Jordan Bahrain .
& Development Islamic Investment House Jordan Al-Baraka Investment & Development Company Saudi-Philippine Islamic Development Bank. Saudi Arabia Saudi Arabia 1981 1981 1982 1982 1982 1983 Faisal Islamic Bank Kibris Turkey BIMB Malaysia .List of Islamic Banks Islamic International Bank Egypt for Inv.
The proposed bank is to be incorporated as a company under the auspices of the Companies Act. ii.Development of Islamic Banking system in Malaysia Year Remark 1980 Formal request to set-up Islamic Bank was made during the Bumiputera Economic Congress The Government appointed National Steering Committee on Islamic Banking. 1965.The Islamic bank is to establish its own Shariah Supervisory Board . iii.The Government should establish an Islamic bank whose operations are in accordance to the principles of Syariah. to ensure that the operations of Islamic bank are in accordance to the Shariah. 1982 . Among the recommendations made by the committee : i.A new Islamic banking act must be introduced to license and supervise the Islamic bank. iv.This committee studied both operations of the Faisal Islamic Bank of Egypt and The Faisal Islamic Bank of Sudan.
1983 The Government introduced The Government Investment Act in 1983 to enable the government to issue Government Investment Certificates. 1983 April 7. 1983 BIMB commenced operations.Mac 1. July 1. March 10. 1983 BIMB was incorporated and commenced operations on July 1. . 1983. The Islamic Banking Act came into effect. which are government bonds issued in accordance to Islamic principles. 1983 The Islamic Banking Act was gazetted.
The second phase started with 10 more finance 1993 institutions joining the scheme. merchant banks and finance companies are given an opportunity to introduce Islamic banking products and services.March 4. Under this scheme. The pilot phase of the scheme involved the three largest commercial banks in Malaysia. all commercial banks. . August 21. 1993 Central Bank has introduced a scheme known as ‘Skim Perbankan Tanpa Faedah’ or ‘Interest-free Banking Scheme’ (Often known as ‘Islamic windows).
i. 1994 The Islamic inter-bank market was introduced in Malaysian financial system.Islamic inter-bank investments iii. Bank Muamalah Malaysia Bhd. Oct 1999 .January. which consists of three elements namely. ii.Islamic inter-bank cheque clearing system The establishment of 2nd Islamic bank .Interbank trading in financial instruments.
2006 Until 2006 we have 9 Islamic Banks Affin Islamic Bank Berhad AmIslamic Bank Berhad Bank Islam Malaysia Berhad Bank Muamalat Malaysia Berhad Commerce TIJARI Bank Berhad EONCAP Islamic Bank Berhad Hong Leong Islamic Bank Berhad Kuwait Finance House (Malaysia) Berhad RHB Islamic Bank Berhad .
2009 Until 2009 we have 17 Islamic Banks HSBC Amanah Malaysia Berhad Maybank Islamic Berhad Al Rajhi Banking & Investment Corporation (Malaysia)Berhad Alliance Islamic Bank Berhad Asian Finance Bank Berhad Affin Islamic Bank Berhad AmIslam Bank Berhad Bank Islam Malaysia Berhad Bank Muamalat Malaysia Berhad CIMB Islamic Bank Berhad EONCAP Islamic Bank Berhad Hong Leong Islamic Bank Berhad Kuwait Finance House (Malaysia) Berhad OCBC Al-Amin Bank Berhad Public Islamic Bank Berhad RHB Islamic Bank Berhad Standard Chartered Saadiq Berhad .
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