ISLAMIC

BANKING AND FINANCIAL SYSTEM

Introduction to Islamic Banking and Finance:

q Islam and Shariah

q Islamic Economic System

qMaqasid Shariah

q History and Development of Islamic Banking

and Finance
 1/ WHY STUDY ISLAMIC FINANCE

q Argument:
Ø Islamic finance is just another religious doctrine.
Ø Secularist argue that Islamic finance is political agenda to
transform the present state to accord more closely with the
principles of Islam.
ü In reality, far from philanthropic endeavor.
ü Islamic finance market is estimated at by 2020 will reach up to
USD3.25 trillion.

q Islamic finance :
o Deal with resource allocation, management, acquisition &
investment.
o Are based upon principles underlined by Shariah
1/ ISLAM AND SHARIAH
Islam

Aqidah Shariah/Fiqh Akhlak

Mu’amalah
Ibadah Ammah

Munakahat Mu’amalat Jinayat

Political Economic Social

activities activities activities

Banking
activities

Diagram: The position of banking activities within the holistic

Shariah framework
 1/ ISLAM AND SHARIAH

Ø An Arabic term means ‘the way’ or ‘path’ to watering place.

Ø Shariah is the straight path to be followed(way of life)
Ø Divinely revealed principles governing faith, conduct and legal injunctions.
Ø Shariah is about Islamic laws and rules governing the practices and activities of
mankind
Ø Its offer guidance as regard to perform ibadah and muamalat
Ø Two (2) primary sources - Recorded in the Quran and deduced from the
Sunnah
Ø Ready made and given guidance

Ø In most cases is in the form of general principles , i.e:

ü Prohibition of riba
ü Prohibition of Gharar (Uncertainty)
ü Adalah (Justice)
ü Prohibition of Maisir
 2/ ISLAMIC ECONOMICS

Ø Economic is a branch of knowledge that deals with

distribution of resources on the face of the earth to meet
man’s need.

Ø In Islam, Tawhid is not only about belief in God’s existence

but also about believing in God’s contact with human
through his Messengers to prescribe norms of good conduct.

Ø Then came Shariah to cope justly with different target

populations at different times in history.

Ø Justice is the primary objective (Fitrah).

 2/ ISLAMIC ECONOMICS
Ø The primary propeller of economic development is the people’s
pursuit of ‘well being’. (Satisfaction of human want)

Ø Al Mulk:2, “best in deed” are those contributing directly or

indirectly to better living standard.

Ø Islam encouraged to enjoy the beauties of the world while

abstaining from prohibited things.

Ø Objectives of an Islamic Economy are part of Shariah objectives

Ø Fives key element (Religion, Self-for human life, Mind, Progeny &
Wealth)
 2/ ISLAMIC ECONOMICS (OBJECTIVES OF AN
ISLAMIC ECONOMY)
Ø Objective of an Islamic economy are part of the Shariah
objectives.
Ø Maqasid Shariah was developed by Islamic Scholar that elaborate
scheme of core values shared by almost all human societies
irrespective of religion, culture and history.
Ø Relevant to the key question “How does Shariah address the
overall objective of well being?
Ø Maqasid & Three-stage development model:
• Necessities (daruriyyat) – minimal requirement
• Needs (Hajiyyat) – to remove hardship & extend conveniences
• Perfections (tahsiniyyat) – refinement towards excellence in
quality
 2/ ISLAMIC ECONOMICS (OBJECTIVES OF AN ISLAMIC
ECONOMY)
1. Religion – The Vision Of Well Being
2. Self – The Centre Goal
3. Mind – Human Resources
4. Progeny – Inter-generational Continuity
The Five 5. Wealth – The Material Economic Resources
Necessiti
es of
Maqasid The maqasid model answer the
Shariah important question of “how the
S
R Islamic worldview helps priorities
R(1) S(2) Necessities, Need and Perfections of
human life in the on-going pursuit of
M M(3) P(4) socio-economic well-being”
P
W(5) Note : Religion (R), Self (S), Mind (M), Progeny (P) &
Wealth (W)
W
 3/ EVOLUTION OF ISLAMIC BANKING SYSTEM
FINANCIAL SECTOR BLUEPRINT 2011–2020
Ø 40% share of Islamic Finance of total domestic financing

q Commercial contracts were practiced i.e. Mudharabah,

Musyarakah, Bai’ Murabahah, Bai’ Bithaman Ajil, Ijarah,
NEW ISLAMIC Istisna’, Wadi’ah, Qard etc.
BANKS
q 1st July 1983 – Bank Islam started its operation
1999 q 30 July 1981 – Government of Malaysia initiated
BANK MUAMALAT National Steering Committee on Islamic Bank – lead by
YM Raja Tan Sri Mohar Badiozaman.
1994
ISLAMIC INTERBANK q March 1981 – resolution of National Seminar on
MONEY MARKET
Development from Islamic perspective – establishment
1993 of Islamic Banking Act
BANKING WITHOUT
INTEREST SCHEME q 1974 – Dubai Islamic Bank – 1st modern Islamic bank.

1983
q 1963 – 1st Islamic bank in the world - “Mit Ghamr” in
ISLAMIC BANKING Egypt.
ACT/ BANK ISLAM
q 1859 – 1st conventional bank in Malaysia i.e. Standard
Merchantile Bank of India, China & London
q No “bank” in the early history of Islam.
 3/EVOLUTION OF MODERN ISLAMIC FINANCE
• Three factors attributed to modern Islamic banking:
– The rise of oil prices after 1974
– Devout Muslims want their money which comply with
Shariah
– Countries that gain freedom from colonialism
• While first references to interest-free finance appeared in 1940s
and more serious discussions and debates on fundamentals of
Islamic finance took place in 1950s and 1960s, modern forms of
Islamic financial institutions can be traced back to:
– 1962 when the Malaysian Govt set up Tabung Haji, a
pilgrimage fund board
– 1963 when a small banking experiment was set up “under
cover” in Mit Ghamr, Egypt, based on a German savings bank
model but modified to comply with Shariah principles in
particular profit-sharing (lasted until 1967)
 3/EVOLUTION OF MODERN ISLAMIC FINANCE
• The institutional development of Islamic finance in particular its
banking segment began to gather speed with the establishment
of:
– Islamic Development Bank in 1974 (in the world)
– Bank Islam Malaysia Berhad in 1983 (in Malaysia level)
• Islamic assets of the global IFSI are worth about US$1.87 trillion
as at 1H2014, expanding at a compounded average growth rate
(CAGR) of 17% from US$1.79 trillion ast at end-2013 although
the CAGR is higher in some regions such as the Gulf Cooperation
Council (GCC).
• Today, there are more than 600 Islamic financial institutions
operating in at least 75 countries although Islamic finance in
some form or another, institutionalised or otherwise, is probably
present in some 90 countries worldwide in the Muslim and the
Western world.
 3/EVOLUTION OF THE IFSI: BEYOND NATIONS WITH LARGE MUSLIM
POPULATIONS

• Burgeoning interest in Islamic finance over the past decade among:

– the so-called non-Muslim nations such as Australia, China, Germany,
France, Holland, Italy, Hong Kong, Japan, Luxembourg, New Zealand,
Russia, Singapore, South Africa, South Korea, the UK and the US
– the so-called non-traditional key Islamic finance markets in particular
countries in Central Asia such as Kazakhstan, Kyrgystan, Tajikistan,
Turkmenistan and Uzbekistan; in Eurasia such as Azerbaijan and in Africa
such as the Comoros, Gambia, Kenya, Mali, Nigeria, Senegal, Tanzania
 EVOLUTION OF THE IFSI : WHAT THE FUTURE HOLDS
Maturity Curve of the IFSI

Measure or Fast
success or
profitability
growth

Saturation
High

Take off Maturity

Medium

Early start Islamic finance probably

stands here; best time in
terms of business
Low development as relatively
still early in the “fast
growth” phase

1960 1970 2000 20xx

 COMPOSITION OF THE ISLAMIC FINANCE INDUSTRY
• Over the past 10 years, the IFSI has experienced phenomenal growth as
evidenced by the increasingly widening diversity of Islamic financial institutions,
product range as well as capabilities, resources infrastructure across the entire
Islamic financial system.

• As the Islamic financial system can perform all functions related to finance such
as fund mobilisation and reallocation, asset allocation, payment & settlement
services, remittance services, risk mitigation & transformation, among many
others, the IFSI consists of 5 major segments:
– Islamic banking (retail/consumer banking, commercial banking, SME
banking, corporate banking, investment banking, treasury, wealth
management/private banking, etc)
– Islamic interbank or money market
– Islamic capital market (equity market, Sukuk market, derivatives market)
– Islamic insurance/re-insurance or Takaful/re-Takaful
– Islamic asset management/fund management