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  • 5751.tp(cast) 31/3/06 9:36 AM Page 1

    ISLAMIBANKING & FINANCE

    Its Development & Future

    IN SOUTH-EAST ASIA

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  • 5751.tp(cast) 31/3/06 9:36 AM Page 2

    ISLAMIBANKING & FINANCE

    Its Development & Fututre

    IN SOUTH-EAST ASIA

    Angelo M. Venardos

    World ScientificWeNEW JERSEY LONDON SINGAPORE BEIJING SHANGHAI HONG KONG TAIPEI CHENNAI

  • Library of Congress Cataloging-in-Publication DataVenardos, Angelo M.

    Islamic banking and finance in South-east Asia : Its development and future / by AngeloM. Venardos.

    p. cm.Includes bibliographical references and index.ISBN 981-256-152-8 (alk. paper) 1. Banks and banking--Asia, Southeastern. 2. Banks and banking--Islamic countries. 3.

    Banks and banking--Religious aspects--Islam. 4. Asia, Southeastern--Economic conditions.5. Islamic law--Asia, Southeastern. I. Title.

    HG3.V46 2005332.1'0959--dc22

    2005041730

    British Library Cataloguing-in-Publication DataA catalogue record for this book is available from the British Library.

    For photocopying of material in this volume, please pay a copying fee through the CopyrightClearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, USA. In this case permission tophotocopy is not required from the publisher.

    Typeset by Stallion PressEmail: enquiries@stallionpress.com

    All rights reserved. This book, or parts thereof, may not be reproduced in any form or by any means,electronic or mechanical, including photocopying, recording or any information storage and retrievalsystem now known or to be invented, without written permission from the Publisher.

    Copyright 2005 by World Scientific Publishing Co. Pte. Ltd.

    Published by

    World Scientific Publishing Co. Pte. Ltd.5 Toh Tuck Link, Singapore 596224USA office: 27 Warren Street, Suite 401-402, Hackensack, NJ 07601UK office: 57 Shelton Street, Covent Garden, London WC2H 9HE

    Printed in Singapore.

  • April 7, 2005 10:13 WSPC/SPI-B265: Islamic History FM

    This book would not have been possible without the supportof Mona, who reminded me many times, during this stage of

    lifes journey, of the virtues of humility and patience.

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  • April 7, 2005 10:13 WSPC/SPI-B265: Islamic History FM

    Contents

    Foreword xv

    Acknowledgements xvii

    Introduction 1

    Chapter 1 Islamic History 10

    1.1 The Quran . . . . . . . . . . . . . . . . . . . . . . . . 101.2 The Five Principles of Islam . . . . . . . . . . . . . . 111.3 The Mosque . . . . . . . . . . . . . . . . . . . . . . . 121.4 Muhammad and the Origins of Islam . . . . . . . . 121.5 The Spread of Islam . . . . . . . . . . . . . . . . . . 141.6 The Golden Age of Islam . . . . . . . . . . . . . . . 151.7 Decline and Fall . . . . . . . . . . . . . . . . . . . . . 171.8 A Revival of Fortunes . . . . . . . . . . . . . . . . . 181.9 Middle-Eastern Oil . . . . . . . . . . . . . . . . . . . 201.10 Islamic Nationhood in the Late Twentieth

    Century . . . . . . . . . . . . . . . . . . . . . . . . . 211.11 The Iranian Revolution and After . . . . . . . . . . . 221.12 Islamic Banking and Islamic Revival . . . . . . . . . 25

    Chapter 2 Shariah Law and Islamic Jurisprudence 27

    2.1 From the Obligatory to the Forbidden . . . . . . . . 282.2 The Quran, the Sunnah and the Hadith . . . . . . . . 28

    vii

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    viii Contents

    2.3 The Five Major Schools of Islamic Law . . . . . . . 292.4 Classical Islamic Jurisprudence and the

    Processes for Ascertaining the Law . . . . . . . . . . 322.5 The Concept of Fatwah . . . . . . . . . . . . . . . . . 352.6 FromRevelation toCodication: Scholasticismand

    the Formulation of Doctrine . . . . . . . . . . . . . . 362.7 Closing of the Door of Ijtihad . . . . . . . . . . . . . 382.8 Shariah and State Law in the Modern Era . . . . . 39

    Chapter 3 Islamic Commercial Law 42

    3.1 Islamic vs. Non-Islamic CommercialTransactions . . . . . . . . . . . . . . . . . . . . . . . 43

    3.2 Principal Requirements of the Shariah inRelation to Commercial Activities . . . . . . . . . . 44

    3.3 Islam: the Difference between Equity and Debt . . . 463.4 Rationale of the Prohibition of Interest . . . . . . . . 473.5 Conventional Banking and the Prohibition of Riba

    in Islam . . . . . . . . . . . . . . . . . . . . . . . . . 493.6 Treatment of Deposits with Interest . . . . . . . . . 503.7 Prot and Loss Sharing . . . . . . . . . . . . . . . . 513.8 Prot-Sharing Enterprises . . . . . . . . . . . . . . . 513.9 Islamic Contract Law . . . . . . . . . . . . . . . . . . 523.10 Types of Contract in Shariah . . . . . . . . . . . . . 543.11 Islamic Financing in a Contemporary Setting . . . . 563.12 The Problem of Uncertainty (gharar) . . . . . . . . . 563.13 Summary . . . . . . . . . . . . . . . . . . . . . . . . 58

    Chapter 4 Islamic Financial Products 62

    4.1 The Emergence of Islamic Banking . . . . . . . . . . 634.2 Different Paths, Same Goal . . . . . . . . . . . . . . 674.3 What Investment Products are Permissible under

    Islamic Shariah Law . . . . . . . . . . . . . . . . . . 694.4 Shariah Investment Principles . . . . . . . . . . . . 70

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    Contents ix

    4.5 Equity-Financing and Debt-Financing inPre-Islamic Arab Society . . . . . . . . . . . . . . . . 71

    4.6 Islamic Equity-Financing and Debt-Financing . . . 744.7 Equity Securities: Prot-Sharing Contracts . . . . . 754.8 Debt-Financing Contracts . . . . . . . . . . . . . . . 774.9 Debt Securities . . . . . . . . . . . . . . . . . . . . . 834.10 Shariah Qualications in Leasing . . . . . . . . . . 844.11 Other Risk-Taking Products . . . . . . . . . . . . . . 854.12 Islamic Insurance . . . . . . . . . . . . . . . . . . . 854.13 Takaful Insurance in a Contemporary Context . . . . 874.14 Takaful Compared with Conventional Insurance . . 884.15 Summary . . . . . . . . . . . . . . . . . . . . . . . . 89

    Chapter 5 Issues and Challenges of IslamicBanking Today 92

    5.1 Obstacles to the Application of Islamic Law toPresent Day Banking . . . . . . . . . . . . . . . . . . 93

    5.2 Derivation from Revealed Sources . . . . . . . . . . 945.3 Methodological Differences . . . . . . . . . . . . . . 955.4 Pluralism of Fatwahs . . . . . . . . . . . . . . . . . . 985.5 The Problem ofApplying Islamic Law in aWestern

    Legal Environment . . . . . . . . . . . . . . . . . . . 995.6 Accounting and Corporate Regulatory Practices . . 1015.7 Depositors and Regulators . . . . . . . . . . . . . . 1045.8 Regulators Concerns . . . . . . . . . . . . . . . . . . 1065.9 Legal Challenges . . . . . . . . . . . . . . . . . . . . 1105.10 Developing an Efcient Regulatory Framework . . 1115.11 Special Requirements of Islamic Banking . . . . . . 1135.12 Assessment and Management of Investment

    Risks . . . . . . . . . . . . . . . . . . . . . . . . . . . 1145.13 Proposals for a Regulatory Framework for Islamic

    Banking . . . . . . . . . . . . . . . . . . . . . . . . . 1175.14 Conclusion . . . . . . . . . . . . . . . . . . . . . . . 118

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    x Contents

    Chapter 6 Islam in South-east Asia 122

    6.1 The Coming of Islam to South-east Asia . . . . . . . 1226.2 European Rivalries and Colonisation . . . . . . . . 1246.3 The Road to Independence . . . . . . . . . . . . . . 1266.4 Post-Independence: ANew World Order . . . . . . 1286.5 The Philippines . . . . . . . . . . . . . . . . . . . . . 1296.6 Indonesia . . . . . . . . . . . . . . . . . . . . . . . . 1306.7 Malaysia . . . . . . . . . . . . . . . . . . . . . . . . . 1326.8 Brunei . . . . . . . . . . . . . . . . . . . . . . . . . . 1356.9 Islam in South-east Asia Today . . . . . . . . . . . . 137

    Chapter 7 Colonial Legacies: Islam and StateLaw in South-east Asia 138

    7.1 Shariah vs. State Law . . . . . . . . . . . . . . . . . 1397.2 British Malaya . . . . . . . . . . . . . . . . . . . . . . 1407.3 The Introduction of English Common Law to

    Malaya . . . . . . . . . . . . . . . . . . . . . . . . . . 1437.4 Out of India . . . . . . . . . . . . . . . . . . . . . . . 1437.5 Muslim Law in Malaysia . . . . . . . . . . . . . . . 1467.6 Conict between Muslim Law and English

    Common Law . . . . . . . . . . . . . . . . . . . . . . 1477.7 Maria Hertogh: A Case in Point . . . . . . . . . . . . 1487.8 Post-Independence . . . . . . . . . . . . . . . . . . . 151

    Chapter 8 Islamic Banking in Malaysia 154

    8.1 Origins of Islamic Banking in Malaysia . . . . . . . 1568.2 Bank Negara Guidelines on Islamic Banking . . . . 1588.3 The Shariah Supervisory Council . . . . . . . . . . 1588.4 Making Islamic Banking Compatible with

    Conventional Banking . . . . . . . . . . . . . . . . . 1598.5 Some Observations on the Malaysian Legal

    Framework . . . . . . . . . . . . . . . . . . . . . . . 161

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    8.6 Islamic Financial Products in Malaysia:The Concept of an Islamic Window . . . . . . . . . 162

    8.7 The Malaysian Government InvestmentCerticate . . . . . . . . . . . . . . . . . . . . . . . . 163

    8.8 Debt Securities . . . . . . . . . . . . . . . . . . . . . 1648.9 Islamic Accepted Bills . . . . . . . . . . . . . . . . . 1658.10 Takaful Insurance in Malaysia . . . . . . . . . . . . . 1668.11 Conclusion . . . . . . . . . . . . . . . . . . . . . . . 168

    Chapter 9 Islamic Banking in Indonesia 172

    9.1 Islam and Government in Indonesia . . . . . . . . . 1739.2 Traditional Islamic Financial Institutions in

    Indonesia . . . . . . . . . . . . . . .