chp 1

• Islamic banking and finance


  An alternative banking system within the framework of an already established conventional one
• Islamic banking and finance

  • It has grown tremendously since its inception in the 1960s
  • It is firmly grounded in the ideals of the Qur'an and Sunnah
  • It serves conventional customers as well
• Components of Islamic banking and finance


  • Islamic banking
  • Takaful (insurance)
  • Capital markets
• Shari'ah


  The divine prescription in form of faith and belief, laws, and moral norms
• Ibadah


  Worship and devotional practices
• Mu'amalat


  Civil transactions
• Shari'ah is the source by which Islamic banking practices and instruments have been exteriorized within the financial system
• Gharar


  Excessive or absolute risk relating to the major elements of a contract
• Riba


  Interest, which is regarded as an undeserving income. Unlawful appropriation of other people's property through excessive profits is also considered Riba.
• Qur'an 2:275–276: '"Those who benefit from riba shall be raised like those who have been driven to madness by the touch of the Devil; that is because they say: 'Trade is like riba' while God has permitted trade and forbidden riba. God deprives interest of all but blesses charity. He loves not the ungrateful sinners."'
• Sunnah


  The Prophet's traditions - his habits, words, practices, and tacit approvals
• Apart from these Qur'anic riba, there is another category called riba al-fadl (interest of an increase in the quantity of one of the counter values), which is clarified in the Sunnah
• Abu Sa'iad: '"Apart from these Qur'anic riba, there is another category called riba al-fadl (interest of an increase in the quantity of one of the counter values), which is clarified in the Sunnah." It has been reported that the Prophet said on numerous occasions that, "...if the commodities differ, then you may sell as you wish, provided that the exchange is hand to hand."'
• All textual evidence of forbidden transactions (unjust enrichment, excessive risk, monopoly, hoarding of commodities, embezzlement, trading in unlawful commodities, and other corrupt tendencies) give credence to Islamic banking and finance being a just and ethical financial system
• Trade and investment activities during the time of the Prophet

  • They were prevalent among Arab people and took different forms
  • The financial principles were based on the Islamic economic regime in power at the dawn of the 8th century CE
• The economic revolution that took place during this time was introduced through injunctions in the Qur'an and Sunnah
• The Prophet and his companions engaged in commercial transactions that were trans-regional, particularly prevalent in the Arabian Peninsula, which involved trade caravans travelling between Mecca and Syria
• It was the ethical values and practices of the Prophet that allowed him to gain the trust of co-traders and customers, which led him to Khadijah, a rich and reputable merchant in Mecca, whom he would eventually marry
• Prevailing modes of transactions during the early period

  • Shirkah (partnership) (either mudarabah- trust financing and musharakah- joint venture partnership)
  • Qard, benevolent loans
  • Salam contracts against cash payment until the season
  • Sarf (exchange of money e.g. gold for gold/silver for silver at the same sitting)
  • Ijarah (leasing)
• Dinar


  Gold currency of the Roman Empire
• Dirham


  Silver currency of the Persian Empire
• The Prophet's pronouncements recognized several mediums of exchange during this era, including gold, silver, wheat, barley, dates, and salt
• Due to the fact that new laws regulating commercial and financial transactions were established during the time of the Prophet, the noble companions had no choice but to adhere to the Prophetic precedents
• The fiqh (Islamic jurisprudence) was furthered developed during this period because new socioeconomic questions emerged that had not existed during the time of the Prophet
• The successive Caliphs designed and implemented certain economic reforms (which were made after the consultation with the Prophet's leading companions and were in the general spirit of Islam)
• During the period of the first Caliph, Abu Bakr, began consolidation of the Prophet's economic policies (after a segment of the Islamic state refused to pay the compulsory alms known as zakat)
• The reforms were continued under the second Rightly Guided Caliph, Umar, who introduced a more expansive set of reforms, including the establishment of a centralized and permanent treasury, Bai al-mal
• The Umayyad period witnessed significant development in Islamic financial policies, including the Islamic state's minting of the first Islamic dirham in 695 CE
• The Ottoman Caliphate, which succeeded the Islamic caliphate, completely altered many of the structures put in place by Islamic Caliphs, and as a result, Islamic banking and finance virtually disappeared
• Introduction of Gold and Silver Coins in Two States in Malaysia

  • Many Malaysian states have reinvented the Islamic gold dinar and silver dirham as part of a reform initiative aimed at the reintroduction of some of the practices that were present during the Caliphate
• Following the disintegration of previously Ottoman-controlled territories, Muslim nations were fragmented into several different countries, many of which were colonized by various European powers, and as a result, the financial systems of these nations became primarily interest-based
• This spurred Muslim communities seeking to return to their Islamic economic roots, so many communities within Muslim countries, including Egypt, Malaysia, and Pakistan, began to test the practical application of traditional Islamic banking principles
• PLS


  Profit-loss sharing
• The Banking Companies Ordinance in 1962 in Pakistan made way for non-interest banking, particularly the Islamic modes of financing: PLS, leasing and hire purchase, and mark-up sales
• Mit Ghamr Local Savings Bank in Egypt, 1963


  • It is considered to be the first modern-day trial of Islamic banking
  • It gave short-term, interest-free loans specifically for productive purposes
  • It attracted funds from investors who wanted to invest their money in Shari'ah-compliant products based on PLS, whereby profits and losses are shared between investors and the bank in accordance with predetermined ratios
  • The primary purpose was to introduce meaningful private initiatives to industrialize Egyptian villages through Islamic financial methods
• The Mit Ghamr savings project led to a rise in awareness of Islamic banking in other Muslim countries
• The Malaysian Pilgrims Savings Board, Tabung Haji, started operating on September 30, 1963
• Tabung Haji


  A small non-banking Shari'ah compliant savings initiative in Malaysia, whose primary objective is to manage the savings of prospective pilgrims by investing them in Shari'ah-compliant investments within a given period of time
• The success of Tabung Haji led to the enactment of the Islamic Banking Act of 1983 in Malaysia
• Functions of Tabung Haji


  • General administration of the fund
  • Acquisition of shares and securities in any corporation, public authority or other corporate bodies
  • Establishment of companies under the Companies Act of Malaysia to engage in an activity that is aimed at boosting the investment fund