FRAMEWORK OF ISLAMIC FINANCIAL SYSTEM

Framework of Islamic Finance System

Islamic Banking

Takaful

Islamic Capital Market

Islamic Interbank Money Market

ISLAM

• Peace

• Submission

• Surrender

• Obedience to Allah

• A way of life that is revealed by Allah to Prophet Muhammad

ISLAMIC ECONOMIC

• Science which studies human behavior as relationship between ends and scare means and which have alternative uses

ISLAMIC BANKING

• Banco=shelf, brench, counter

• Bank=person who conduct a banking business

• Banking business

• Receiving money

• Paying and collecting cheque

• Provision of finance

• Islamic banking

• Banking activities that based on shariah principles

ISLAMIC FINANCE

• Process by which miney is transferred (financing and investing) among business

• Islamic finance=conducting of banking and financial operations in line with islamic principles

INTRODUCTION TO ISLAMIC BANKING

ISLAM, ECONOMIC, BANKING AND FINANCE

Islam

Content of Ilslam=Aqidah,

shariah (ibadah+muamalah)

, akhlak

Economic

The knowledge and application on

injuctions and rules of shariah that

prevent injustice in the acquisition and disposal of material resources in order

to provide satisfaction of

human beings and enable them to perform their

obligation to Allah and the society

Economic activities includes

-> production

-> consumption

-> distribution

-> transaction

Important economic and business

activities is financial system@banking system includes

=leasing,lending,Investing,trading,insur

ance managemenet,Secu

rities broking

Islamic banking

Banking business

->receiving money

->paying and collecting cheque drawn or paid by

cutomer

->provision of finance

Islamic finance system

Divided into 2

1)Banking system

2)Capital market

FULFILLMENT OF FINANCING NEED

Own capital Other’s capital

Equity financing

When economic unit takes on the capital of other party@parties in the form of equity to undertake a

commercial project

In form of

a)Partnership

b)co-operative company

c)Joint stock company

Party @parties involve has

1)Share in the entity propotionate

2)Voting right in the entity

3)Receive any profit

2 major contract

->al-musharakah (lost-profit sharing)

->al-mudharabah (trustee profit-sharing)

Debt financing

The need for debt financing

=consumer financing

=domestic trade financing

=international trade financing

=corporate finance

=international finance

Government financial operation

Contract used=

bay’ bithaman ajil

Al-ijarah

Al-ijarah thumma bay’

Murabahah

etc

PRINCIPLES OF ISLAMIC BANKING AND FINANCE

Based on shariah

Based on shariah product and service offered known as shariah complience

Concept of islamic banking and financialRisk sharingRight and duties of individualSanctity of contract

Major rules of islamic banking and financeProhibition of usury (riba)Application of bay’Avoidance of ghararProhibition of maisirProhibition in engaging of prohibited commodities

PrinciplesAl-Amanah (trusthworthy)Al-Hurriyah (freedom)Al-milk (ownership)

• To promote and develop products and services based on shariah principles

• Uphold consistantly the concept of islamic universal brotherhood and solidarity of mankind

• To provide facilities and services in the various fields (trade, investment, industry, &commerce)Inter-related to

islamic economic system

•Dar al-Mal al-Islami Trust

•To put before all muslim, contemporary islamic financila services

•To serve all muslim communities in mobilizing and utilizing financial resources needed

•To serve the ummah islamiyyah

•Bank Islam Malaysia Berhad

•To continualy develop and innovate universal accepted financial solutions in line with the shariah principles

•To provide a reasonable and sustainable return to shareholders

•To provide for a conducive working environment and to become an employer of choice for top talents in market

•To deliver comprehensive financial solutions of global standard using state-of-the-art technology

Own set of operational objectives

• To provide a competitive banking products and services both in deposits and financing

• To promote a banking system based on principles of justice, welfare, equality and legitimate profit

• To establish an economic system which completely based on islamic principle or shariah –based economic model

• To contribute for social welfare through zakat

General set of objectives

OBJECTIVES OF ISLAMIC BANKING AND FINANCE

NEEDS FOR

BANKING

Surplus unit vs defisit unit

Bank as intermediary

Deposit, financing, investing,

using services

Fulfill individual

needs

Fulfill business

needs

Import & export

activites

Other (depend on the role of banking)

GOAL AND STRATEGIES OF ISLAMIC BANKING

GOAL STRATEGIES

Economic well-beingFull employmentOptimum rate of

growth

Socio-economic justice and equal

distribution of income and wealth

Stability and in the value of money

Mobilization of saving for economic development

Intergration of all supposedly mundane

aspect of life with spiritual uplift

Provide blueprint for the reorganization of

all aspect of life

The role of the state

Reform of the money and banking system

Avoiding the abuse of power

Avoiding the misuse of

information

Improve accuracy and

perfectness of bookkeeping

Secracy and confidentially in relationship with customer

Improving justice and fair

treatment

Avoiding the conflict of

interest

ETHICS OF ISLAMIC BANKING

ISLAMIC BANKING

Shariah based

Offer financing

Mobilize resources to develop the society

Review by certified auditors and shariah advisory board

Pay zakat (religious obligation) and tax (government requirement)

CONVENTIONAL BANKING

Conventional and interest based

Offer cash loan

Attract resources and lend them to gain maximum profit

Review solely by certified auditors

Pay tax as required by the goverment

COMPARISON

SOURCES OF ISLAMIC LAW

• Al-Quran

• Al-Sunnah

• Ijma’

• Qiyas

Primary

• Istihsan

• Masalih mursalah

• ‘Uruf

• Istishab

• Sadd al-zhara’I

• Revealed laws prior to islam

• Fatwa of al-sahabah

Secondary