Introduction to Islamic

Financial System
Chapter 2 (FIN6063/FIN6023)
 • A financial system that is based on Islamic
principles and values.
Introduction • Eliminates riba' and ensure a profit and loss-
sharing mechanism in the financial system.
 • As an intermediary between savers and
investors.
• Facilitates the flow of funds from the areas of
surplus to the areas of deficit.
Concept of • Funds are mobilized through savings that are
Financial pooled to support the financial needs for those
who are known as capital seekers.
System • Funds: 
• 1. Saving Surplus Units (SSU)  - savers -
depositors
• 2. Saving Deficit Units (SDU) - borrowers
Understanding the Concepts of SSU and SDU

SSU SDU
 • Set of institutions, instruments and markets
that permit and practice the exchange of funds.
- promotes savings and channels them to their
most efficient use.
Cont. - Institutions: Banks, Insurance companies, Stock
exchanges.
- It consists of individuals (savers), intermediaries,
markets and users of savings (investors)
Structure of
Financial System
Malaysian Financial System
(MFS) is structure into two
major categories:

1. Financial Institutions
2. Financial Markets

Read more: 
https://studylib.net/doc/82330
38/chapter-5---malaysia
 • Wealth must be generated from legitimate
trade and asset-based investment.

Principles of - Use of money for the purposes of making money

is expressly forbidden.
Islamic • Investment activities should have a social and
ethical benefit to wider society beyond pure
Finance return.
• Risk should be shared
• All harmful activities (haram should be avoided.
 • Refers to the period of extreme stress in global financial

Global markets and banking systems between mid 2007 and early
2009. 

Financial • During the GFC, a downturn in the US housing market was a

catalyst for a financial crisis that spread from the United
States to the rest of the world through linkages in the global
Crisis (GFC) financial system. 
What cause of 2008 Financial Crisis?

1. Low interest rates 

- low lending standards fueled a housing price bubble.
- encouraged millions to borrow beyond they could not afford.
- subprime borrowers also be able to buy a house
2. Repackaged the mortgages widely
- Bank sell their mortgages on secondary market
- Financial firms bought and repackaged the mortgages into bundles
- Resold to investors as mortgage-backed securities
Impact of Financial Crisis

• Many banks around the world incurred large losses and relied on
government support to avoid bankruptcy. 
• Millions of people lost their jobs as the major advanced economies
experienced their deepest recessions. 
• Recovery from the crisis was also much slower than past recessions that
were not associated with a financial crisis.
• Upgrade made towards BASEL practiced by Basel Committee on Bank
Supervision (BCBS)
 • Facilitate the transfer of funds from surplus
Need for units to the deficit units.
• Promote the financial stability in market
efficient  functioning.
Financial • Supporting the economic growth of the
System company and country.
Bank Digital?