GLUP 3183
ISLAMIC BANKING & FINANCE
LAW
TOPIC 1:
INTRODUCTION
Scope of Discussion
❖ Overview of the concept of Islamic
financial business under Islamic law.
❖ The development of Islamic banking
business in Malaysia.
❖ Structure of the Islamic financial
business in Malaysia.
❖ Islamic finance regulators.
Overview of the concept of Islamic financial
business under Islamic law.
QUESTION!
IS THERE ANY RELATION BETWEEN ISLAMIC
LAW & ISLAMIC BANKING & FINANCE?
What is Islamic law (Shariah)?
▪ Schact (1964) : “Islamic law is an all-embracing
body of religious duties, the totally of Allah’s
commands that regulate the life of every Muslim in
all its aspects. It comprises, on an equal footing,
ordinances regarding worship and ritual, as well as
political and (in a narrow sense) legal rules.
Islamic law was created not only by an irrational
process of continuous revelation but by a rational
method of interpretation. Both religious standards
and moral values which were introduced into the
legal subject-matter provide the frame-work for a
structural order”.
– Rahman (1979) – the way which directs
man’s life to the right path. The word
Shariah also has its correlation with the
word din which literally means
‘submission’ or ‘following’. Shariah is the
ordination of the way and its proper
subject is God, whereas din is the
following of that way and its subject is
man.
What is Islamic banking &
finance?
▪ Islamic banking and finance must operate
within the ambit of Islamic principles
(Shariah laws).
▪ Islamic banking and finance are governed
by laws and regulations imposed by the
government (positive laws).
AL-SHARIAH AL-ISLAMIYYAH
Al-SHARIAH ISLAMIAH
AQIDAH (FAITH)
AKHLAK
Rukn Iman
MUAMALAT (ETHICS AND MORALITY)
Belief in God, the Angels, the
(INTERACTIONS) Knowledge of Conducts,
Prophets, the Holy Books
Virtues and Vices
and Predestination
GOD AND MAN
MAN AMONG MAN
Rukn Islam
Criminal Law, Family Law,
Shahadah, Solat, Fasting,
Commercial Law etc.
Zakat, Haji
Source : Saiful Azhar Rosly (2005), Critical Issues on Islamic Banking
and Financial Market. Kuala Lumpur : Dinamas. Page – 8)
The Relationship Between the Banking System and
Religion Within Islam
ISLAM
AQIDAH SHARIAH AKHLAQ
IBADAT MUAMALAT
POLITICAL ECONOMIC SOCIAL
ACTIVITIES ACTIVITIES ACTIVITIES
BANKING &
FINANCIAL
ACTIVITIES
Source : Ismail, Abdul Halim (1992), ‘Bank Islam Malaysia Berhad : Principles and Operations’ in
An Introduction to Islamic Finance, Sheikh Abod Sheikh Ghazali et. Al. (eds), Kuala Lumpur
(Malaysia), Quill Publications, pp. 243-283.
ISLAMIC FINANCIAL
SYSTEM
12
▪ What is Islamic financial system?
– The term “Islamic financial system” is
relatively new, appearing only in the mid
1980s.
– All the earlier references to commercial
activities conforming to Islamic
principles were mad under the umbrella
of either “interest-free” or “Islamic
banking”.
13
– Describing the Islamic financial system
simply as “interest free” does not
provide a true picture of the system as a
whole.
– This system is not limited to banking but
covers capital formation, capital markets
and all types of financial intermediation.
14
Interpreting the Islamic financial
system as “interest free” tends
to create confusion.
WHY?
15
▪ The philosophical foundation of an Islamic
financial system goes beyond the
interaction of factors of production and
economic behavior.
▪ The conventional financial system focuses
primarily on the economic and financial
aspects of transactions.
16
▪ The Islamic system places equal
emphasis on the ethical, moral, social and
religious dimensions to enhance equality
and fairness for the good of society as a
whole.
▪ The Islamic financial system is founded on
the absolute prohibition of the payment or
receipt of any predetermined, guaranteed
rate of return.
17
WHAT IS ISLAMIC
BANKING?
18
Objectives of Islamic Banks
▪ Prof. Dr. Ahmed El-Naggar (1985), Islamic Banking :
Concept and Implementation. International Conference
on Islam and Technology. Universiti Teknologi Malaysia.
– “To secure the effective integration of the
masses in Muslim countries in the
development process on a continuing basis.
Development, whether social or economic,
can be defined as the state and nature of
capital formation, which, in turn, has two parts
– Saving and Investment.”
19
▪ The existence of Islamic banks is to
promote, foster and develop the banking
and product based on Islamic principles.
▪ Islamic banks are also responsible for
promoting the establishment of investment
companies or other business enterprise as
long as the activities of these companies
are not forbidden by Islam.
20
▪ Islamic banks are expected to make a
profit from their operations. It is considered
unjust for Islamic banks if they are unable
to provide sufficient returns to the
depositors who entrusted their money to
Islamic banks.
21
▪ Making a profit is allowed in Islam.
However at the same time, Islamic banks
are required to recognize the message
stated in verse 87, Chapter 5 of the Qur’an
that prohibit Muslims from committing any
excess.
▪ Al-Quran, al-Maidah - 5:87;
– “O ye who believe! Make not unlawful the
good things which Allah hath made lawful for
you, but commit to no excess: for Allah loveth
not those given to excess.”
22
▪ Bank Islam Malaysia Berhad (BIMB):
– to provide banking facilities and services in
accordance with Islamic principles to all
Muslims as well as the populations of
Malaysia. The Islamic principles mentioned
here are essentially those belonging to the
body of Shariah rules on commercial
transactions that relate to banking and
finance. The bank’s effort to provide these
banking facilities and services are undertaken
within the framework of its viability and
capability to continuously grow and expand”.
23
Principles of Islamic Banking
▪ Any predetermined payment over and above
the actual amount of principal is prohibited.
– Islam allows only one kind of loan that is qard-
el-hassan.
– The lender does not charge any interest or
additional amount over the money lent.
– Associated or indirect benefits are prohibited.
24
▪ The lender must share in the profits or
losses arising out of the enterprise for
which the money was lent.
– Islam encourages Muslims to invest their
money and to become partners in order to
share profits and risks in the business instead
of becoming creditors.
– The depositor, the bank and the borrower
should all share the risks and the rewards of
financing business ventures.
25
▪ Making money from money is not
Islamically acceptable
– Money is only a medium of exchange, a way
of defining the value of thing.
– It has no value in itself, and therefore should
not be allowed to give rise to more money, via
fixed interest payment, simply by being put in
a bank or lent to someone else.
26
– In Islam, money represents purchasing power
which is considered to be the only proper use of
money. This purchasing power (money) cannot
be used to make purchasing power (money)
without undergoing the intermediate step of it
being used for the purchase of goods and
services.
27
▪ Gharar (uncertainty, risk or speculation) is
prohibited
– Any transaction entered into should free from
uncertainty, risk and speculation.
– Contracting parties should have perfect
knowledge of counter values intended to be
exchange as a result of their transactions.
– Parties cannot predetermine a guaranteed
profit.
– The rationale behind the prohibition is the
wish to protect the weak from exploitation.
28
▪ Investment should only support practices
or products that are not forbidden or even
discouraged by Islam
– Trade in alcohol – would not be financed by
Islamic bank.
– A real-estate could not be made for the
construction of a casino.
29
DEVELOPMENT OF ISLAMIC
BANKING & FINANCIAL
BUSINESS IN MALAYSIA
Malay states before 1963 - 1983 – Islamic
the advent of Lembaga 1981 - National Banking Act 1983
western rulers - Tabung Haji Steering
Canon Laws of (Pilgrimage Committee - Bank Islam
Malacca Fund Board) Malaysia Berhad
2005 – Subsidiary 1984 – Takaful Act
Structure – 1999 – Bank 1994 – Interest 1984
license under IBA Muamalat Free Banking
1983 Malaysia Berhad Scheme Syarikat Takaful
Malaysia Berhad
ISLAMIC CAPITAL MARKET?
Structure of Islamic Banking & Financial Business in
Malaysia
Islamic Bank
International
Islamic bank
Investment
Bank
Islamic
Banking Commercial
Bank
Development
Islamic Financial
Financial Institutions
Business in
Malaysia Takaful
Takaful
Operator
Re-Takaful
Operator
International
Islamic Takaful
Capital Operator
Market
Islamic Banking & Finance Regulators
Regulator
Labuan
Securities
Bank Negara Financial
Commission
Malaysia Services
Malaysia
Authority
Islamic Capital
Islamic banking Takaful ???
Market
Thank You…