ISLAMIC FINANCIAL SYSTEM

CHAPTER 2 : FINANCIAL SYSTEM IN MALAYSIA

2.2

NON-BANK FINANCIAL INTERMEDIARIES

2.2

THE NON-BANK FINANCIAL INSTITUITION

• Non-banking financial Institutions or NBFCs, are financial institutions that provide banking services, but does not hold a banking license. these institutions are not allowed to take deposits from the public. however, all the operations of these institutions are covered under banking regulations.

a) PROVIDENT & PENSION FUNDS

• Provident and Pension Funds (PPFs) are a group of financial schemes designed to provide members and their dependents with a measure of social security in the form of retirement, medical, death or disability benefits.

• The major PPFs in Malaysia comprise the Employees Provident Fund (EPF), the Social Security Organization (SOCSO), the Armed Forces Fund and the Teachers Provident Funds.

• The PPFs are the second largest group of financial institutions in the country in terms of aggregate assets, next to banking institutions.

b) INSURANCE COMPANIES• Currently, the total number of licensees under the insurance

Act 1996 stands at 141 comprising 64 insurers, 36 brokers and 41 adjusters.

The 64 insurers that were licensed under the Act is categorized into following groups: 10 life and general insurance companies (include Motor

insurance) 7 life insurance companies 36 general insurance companies (include Motor insurance) 1 life reinsurance company 9 general reinsurance companies (include Motor insurance) 1 companies reinsurance company

Takaful Companies Conventional Insurance CompaniesTakaful is based on mutual cooperation. Conventional insurance is based solely on commercial

factors.Takaful is free from interest (Riba), gambling, (Maysir), and uncertainty (Gharar).

Conventional insurance includes elements of interest, gambling, and uncertainty.

All or part of the contribution paid by the Participant is a donation to the Takaful Fund, which helps other Participants by providing protection against potential risks.

The premium is paid to conventional insurance companies and is owned by them in exchange for bearing all expected risks.

Takaful companies are subject to the governing law as well as a Shari’a Supervisory Board.

Conventional companies are only subject to the governing laws.

There is a full segregation between the ParticipantsTakaful Fund account and the shareholders' accounts.

Premium paid by the Policyholder is considered as income to the company, belonging to the shareholders.

Any surplus in the Takaful Fund is shared among Participants only, and the investment profits are distributed among Participants and shareholders on the basis of Mudaraba or Wakala models.

All surpluses and profits belong to the shareholders only.

In case of the deficit of a Participants’ Takaful Fund, theTakaful operator (Wakeel) provides free interest loan (QardHasan) to the Participants.

In case of deficit, the conventional insurance company covers the risks.

The Plan Owners’ and shareholders’ capital is invested in investment funds that are Shari’a compliant.

The capital of the premium is invested in funds and investment channels that are not necessarily Shari’a compliant.

Takaful companies have re-insurance with Re-Takafulcompanies or with conventional re-insurance companies that adhere to certain conditions of Shari’a.

Conventional insurance companies do not necessarily have re-insurance with re-insurance companies that abide by Shari’a principles.

Eg: Insurance Companies

c) AL-RAHNU• The establishment of islamic bank, Insurance through Takaful

the scheme of banking without interest (Skim Perbankan Tanpa Faedah) and the Islamic system of Rahn are examples of regulating economic activities on Islamic lines by the Muslims in Malaysia.

• Normally, customers for Islamic banking activities are from the middle class of society and above, while customer for al-Rahn are from middle class of society and lower.

• Without Islamic mortgage system, lower income group of Islamic society, will be pushed to engage with interest practiced by Pawnbroker shops and “Along” in fulfilling their needs.

d) YAPEIM• The Malaysian Islamic Economic Development Foundation

(YPEIM) suggested Ar-Rahnu to be introduced.

• The first Ar-Rahnu shop was set up in 1992 by Kelantan state government , later entrusted a co-operative to manage and operate other branches.

• The first co-op to run Ar-Rahnu in Malaysia is the co-op bank or Bank Rakyat in October 1993 with the co-operation from YPEIM.

e) DEVELOPMENT FINANCIAL INSTITUTIONS (DFI)Development Financial Institutions (DFIs) are established by the Government to promote the development of certain identified priority sectors and sub-sectors of the economy such as agriculture, infrastrusture development and international trade.

DFIs generally speciallice in the provision of medium and long term financing of projects that may carry higher credit or market risk. The following are the main DFIs in Malaysia:I. Bank Pertanian MalaysiaII. Bank Industri & Techonologi MalaysiaIII. Bank Pembangunan & Infranstruktur Malaysia Berhad IV. EXIM BankV. Malaysian Industrial Development Finance (MIDF)

Eg: Development Financial Institutions

f) SAVING INSTITUTIONS• These institutions play a particularly important role in the

promotion and mobilisation of savings among the middle and lower-income group. Among the savings institution in Malaysia are Bank Simpanan National, Bank Rakyat and co-Operatives.

• Several of them introduced Islamic banking facilities in tandern with Government’s objective to develop an Islamic banking system in Malaysia.

g) NATIONAL SAVINGS BANK• Bank Simpanan Malaysia (BSN), established in 1974 though a

reorganization of the Post Office Saving Bank.

• The BSN was then set up to promote and mobilize private savings, especially the small savers in rural areas.

• To finance economic development programmers in the country.

• Also provide loan programmers for small businesses.

h) CO-OPERATIVE SOCIETIES• Co-operative means working together.• So those who want to work together with some common

economic objective can form a society which is termed as “co-operative society”

• It is a voluntary associations of persons who work together to promote their economic interest.

• It works on the principle of self-help as well as mutual help. The main objective is to provide support to the members.

• Nobody joins a cooperative society to earn profit. People come forward as group, pool their individual resources, utilise them into the best possible manner, and derive some common benefit out of it.

i) UNIT TRUSTS

• Is a collective investment scheme that pools the saving of a large number of investors.

• The money collected is invested by the fund manager in different types of stocks, bonds, or other securities in various depending upon the objective of the fund.

j) PILGRIMS FUND BOARD

• Establish in 1969

• 1st financial institution applies Islamic principles in its activities.

• Involved in providing facilities for performing Haj in Mecca

• One of its major activity is deposit taking

k) HOUSING CREDIT INSTITUTIONS

i. Housing credit institution – provide credit to buy house.

Example: MBSB

ii. Unit trust – mobilising private saving and investment. Example: ASB, Public Mutual

l) CAGAMAS BERHAD• Cagamas Berhad (Cagamas), the National Mortgage

Corporation, was established in 1986 to promote the broader spread of house ownership and growth of the secondary mortgage market in Malaysia

• It issue debt securities to finance the purchase of housing loans from financial institutions and non-financial institution. The provision of liquidity to financial institution at a reasonable cost to the primary lenders of housing loans encourages further expansion of financing for housing loans encourages further expansion of financing for houses at an affordable cost.

m) CREDIT GUARENTEE COOPERATION (CGC)

• iGuarantee is the e-business venture of the Credit Guarantee Corporation (CGC) to provide a one-shop web services portal at which business loan applocation can be made.

• CGC was established with the objective to assist Small and Medium Scale Enterprises (SMEs) without or with inadequate collateral to access credit facilities from financial institutions.

n) LEASING COMPANIES

• Leasing and factory company – set up to complement banking institution lending activities by enabling business to lease equipment and machinery or to finance their activities in advance.

o) FACTORING COMPANIES• Factoring is a flexible from of loan, which advance money to a

company as it issues new invoices. This is different to overdrafts or more formal loans, which are usually for a fix amount.

• There are two major advantage of factoring compared to overdrafts other loans.

- Firstly, factory is flexible in that the amount a company can borrow grows with sales. This is often essential to enable companies to fund that grows, since they must usually pay for supplies before they receve payment from cuntomers.

- The second advantage factoring offers is that no other assets are needed to secure the funding.

p) VENTURE CAPITAL COMPANIES

• Venture capital company – provide financing companies in higher risk ventures or ventures technology.

• Example: Malaysian Venture Bhd.

q) ZAKAH ADMINISTRATION IN MALAYSIA• Zakat is a part of the wealth and property that Muslims must

pay annually, to help the poor of their community

• One of the main purposes of Zakat is to keep those who are wealthy clean, monetarily, from sin. It is a form of Sadaqah (charity) which is obligatory on Muslims.

r) WAKAF

• Wakaf defines wakaf (charitable trust/endowment) as the legal act of a Wakif (the donalor) in dividing and/or transferring part of their wealth either permanently or for a set period for religious purposes and/or public welfare in accordance with the Syar’iyah (Islamic Law).

s) TRUSTEE

• Maybank Trustees Bhd (MTB) owned by the Maybank Group, was incorporated on 12 April 1963 and registered as a Trust Company under the Trust Companies Act 1949 on 11 November 1963. We have been delivering fiduciary solutions to our clients in Malaysia for over 40 years and offer a wide range of services to individuals, corporations and government bodies.

• Mission statement: We want to be the leading trust company in Malaysia. To achieve this, we are committed to maintaining high professional standards and providing reliable and quality services to all our clients.