PowerPoint Presentation

ISLAMIC BANKING AND FINANCEOVERVIEW OF FINANCIAL SYSTEMCONTENTOVERVIEW OF FINANCIAL SYSTEMFINANCIAL SYSTEM STRUCTURE IN MALAYSIABANKS AS FINANCIAL INTERMEDIARIESISLAMIC BANKINGGOALS AND OBJECTIVES OF ISLAMIC BANKINGDIFFERENCES BETWEEN ISLAMIC BANKING AND CONVENTIONAL BANKING SYSTEMADVANTAGES OF ISLAMIC BANKINGCHALLENGES OF ISLAMIC BANKS2FINANCIAL SYSTEMConcept of Financial SystemThe collection of accounting processes and procedures that allow a business to keep accurate financial records, monitor accounts, prevent fraud and mistakes, and catch any discrepancies. A financial system allows a company to maintain accountability for expenditures and revenues, and to control their finances to minimize waste and loss.A financial system is concerned about money, credit and finance. 3FINANCIAL SYSTEMConcept of MoneyMoney is anything generally accepted as a means of paying for goods and services and a measure of value. Functions of Money :Medium of exchangeMeasure of valueTemporary store of valueConcept of Credit/Loan An arrangement in which a lender gives money or property to a borrower, and the borrower agrees to return the property or repay the money, usually along with interest, at some future point(s) in time. There is a predetermined time for repaying a loan, and generally the lender has to bear the risk that the borrower may not repay a loan (though modern capital markets have developed many ways of managing this risk).4FINANCIAL SYSTEMConcept of FinanceFinance is the procurement (to get, obtain) of funds and effective (properly planned) utilization of funds. It also deals with profits that adequately compensate for the cost and risks borne by the business.Finance deals with matters related to money and the markets.5FINANCIAL SYSTEM STRUCTURE IN MALAYSIA Financial Institutions Financial Markets Banking System BNMBanking Institutions : - Commercial banks include Islamic banks - Finance Companies - Merchant Banks Others: - Discount Houses - Representatives Offices of Foreign Banks - Offshore Banks in Labuan IOFC

Non-Bank Financial Intermediaries :Provident & Pension FundsInsurance companies include TakafulSaving institutionsOthers: - Unit Trusts Pilgrims Fund Board Housing Credit Institutions Cagamas Berhad Credit Guarantee Corporation Leasing Companies Factoring Companies Venture Capital Companies.a) Money & Foreign Exchange Markets :Money MarketForeign Exchange Market

b) Capital Markets:Equity marketsBond Markets Public Debt Securities Private Debt Securities

c) Derivatives Markets:Commodity FuturesKLSE CI FuturesKLIBOR Futures

d) Offshore Markets:Labuan International Offshore Financial Centre (IOFC)

6BANKS AS FINANCIAL INTERMEDIARIESFinancial intermediaries is an entity that acts as the middleman between two parties in a financial transaction.Financial intermediaries encompass a wide range of entities in terms of size and scale of operation ranging from a banks, broker-dealers, investment advisers and financial planners.Roles of banks as financial intermediaries:Promote savings and capital accumulation to finance projects using various modes of financing.Finance international trade.Mobilize resources for investments for the benefit of society.Contribute social welfare through Corporate Social Responsibilities (CSR) and zakat.

7PRINCIPLES GOVERNING OF ISLAMIC BANKINGISLAMIC BANKINGIslamic banking is defined as banking system which is in consonance with the spirit, ethos and value system of Islam and governed by the principles laid down by Islamic Shariah.Islamic Banking according to Islamic Banking Act 1983:..a company which carries on Islamic banking business means banking business whose aims and operation do not involve any element which is not approved by the religion of IslamIslamic banking, the more general term, is based not only to avoid interest-based transactions prohibited in Islamic Shariah but also to avoid unethical and un-social practices. In practical sense, Islamic Banking is the transformation of conventional money lending into transactions based on tangible assets and real services. 99ISLAMIC BANKING IN MALAYSIAThe first Islamic bank was established in Malaysia in 1983 through Bank Islam Malaysia Berhad.Later in March 1993, Bank Negara Malaysia (BNM) introduced Interest Free Banking Scheme (now replaced with Islamic banking scheme (IBS). The scheme allowed conventional banking institutions to offer Islamic banking products and services using their existing infrastructure, including staff and branches10SALIENT FEATURES OF ISLAMIC BANKING

PHILOSOPHICAL FOUNDATIONS OF ISLAMIC BANKING12GOALS AND OBJECTIVES OF ISLAMIC BANKING 13GOALS AND OBJECTIVES OF ISLAMIC BANKING 14PRINCIPLES OF ISLAMIC BANKINGIslamic banking is the conduct of banking based on SHARIAH principle, subject to among others:Prohibition of Riba Riba is strictly prohibited under Islam and is considered as haram.Islam allows only one kind of loan that is Qardhul Hassan.Equity participation Islam encourages Muslims invest their money and become partners in order to share profits and risk in the business instead of becoming creditors.In Islam, financing is based on the belief that the financier and borrower should equally share the risks of the business venture.15PRINCIPLES OF ISLAMIC BANKINGProhibition of gharar Gharar means to undertake a venture blindly without sufficient knowledge or to undertake excessively transactionsAn Islamic financial system discourages hoarding and prohibits transactions featuring extreme gharar.Contractual relationshipDepends upon the nature of transaction. It could be a seller and buyer relationship (Murabaha), a lessor- lessee relationship (Ijarah), and a partnership (Musyaraka)Money as Potential CapitalIt is way of defining the value of a thing.Should not be allowed to give rise to more money, via fixed interest payments, simply by being put in a bank or when lent to someone.16Islamic Banking SystemCharacteristicsConventional Banking SystemFunctions and operating modes are based on Shariah law.Banks have to ensure that all business activities are in compliance with Shariah requirements.Business FrameworkFunctions and operating modes are based on secular principles and not based on any religious law or guidelines.Each bank should have a Shariah Supervisory Board to ensure that all business activities are in line with Shariah requirements.Shariah Supervisory BoardThere is no such requirement necessary.DIFFERENCES BETWEEN ISLAMIC BANKING AND CONVENTIONAL BANKING SYSTEM17COMPARISON BETWEEN ISLAMIC BANKING AND CONVENTIONAL BANKING SYSTEM

Islamic Banking SystemCharacteristicsConventional BankingPromotes risk sharing between investor and the bank & the bank and the entrepreneur : pre-agreed proportionRisk sharingPredetermined rate of interestUnder PLS-return only if there is a profit-more concern with soundness of the project and managerial competence of the entrepreneur.Emphasis to productCredit worthinessAll economic agents have to work within the Islamic moral value.Moral DimensionLittle attention to the moral implications of the activitiesIslamic Banking SystemCharacteristicsConventional Banking System Financing is not interest oriented Based on the principle of buying and selling of assets, whereby the selling price include a profit margin Fixed from the beginning.Prohibition of Riba in Financing Financing is interest oriented A fixed/floating interest is charged for the use of money.Islamic banks are restricted to participate in economic activities, which are not Shariah-compliant.RestrictionsThere are no such restrictions.Pay zakat as a religious obligation and tax required by the governmentZakat (Religious Tax)Dont pay zakat but only pay tax as required by the governmentCOMPARISON BETWEEN ISLAMIC BANKING AND CONVENTIONAL BANKING SYSTEM1919ADVANTAGES OF ISLAMIC BANKING20ADVANTAGES OF ISLAMIC BANKING21ADVANTAGES OF ISLAMIC BANKING22CHALLENGES OF ISLAMIC BANKINGMisconception about Islamic bankingMany still has a wrong understanding or misconception against Islamic Banking which among the thoughts are:Islamic Banking is only for MuslimsIslamic Banking is not profitable because no interest is chargedIslamic Bank is a charitable organizationThus better awareness shall be create among the customers that Islamic Banking is not only an alternative financial approach but also in some aspects provides better value propositions to the consumers.Divergence of opinionsShariah interpretation versus business practicability/ financing commercial viability23CHALLENGES OF ISLAMIC BANKINGMoving towards equity based financing (Musharakah/ Mudharabah) financing?Commercial banks requires a new set of technical and risk management capabilities i.e. industry experts and know-howMarket readiness profit sharing, trade secrets, bank as strategic business partners (potential conflicting interest).Balance sheet size, risk appetite and underwriting capabilitiesSupervisory and prudential regulatory framework.Accounting and auditing standards.War of talentsGlobal shortage of Islamic finance talents at almost all levels Inadequate pool of Shariah scholars with the right combination of knowledge in Shariah and modern financeRising Cost for Small Islamic BanksBallooning operating costs for Islamic banks as opposed to relative cost stability for the overall banking system - expenditure on IT infrastructure, expenses for R&D and product innovation and network expansion and new delivery channels24END OF CHAPTER25