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MALAYSIAN
FINANCIAL SYSTEM
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The Malaysian Financial System can be
dividing into three parts namely
The banking system
The non financial intermediaries
Financial Market
Ministry of
Finance
Financial MarketThe non financial
intermediaries
The banking
system
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1. The banking system
DISCOUNT
HOUSES
COMMERCIAL
BANK
FINANCE
COMPANIES
MERCHANT
BANK
ISLAMIC
BANK
CENTRAL BANK OFMALAYSIA
(BANK NEGARA MALAYSIA)
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2. Non bank financial
system
NON BANKFINANCIAL
SYSTEM
PROVIDENT
AND
PENSION
FUNDS
SAVINGS
INSTITUTIONS
INSURANCE
COMPANIES
DEVELOPMENT
FINANCE
INSTITUTIONS
OTHER FINANCIAL
INTERMEDIARIES
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3. Financial Market
FinancialMarket
Domestic Money Market &
Foreign Exchange Market
Capital Market Derivatives
Market
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ISLAMIC FINANCIALSYSTEM
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The Islamic Financial System can
be dividing into three parts namely;
The banking system
Financial market
Capital MarketMINISTRY
OF FINANCE
FINANCIAL
MARKET
BANKING
SYSTEM
CAPITAL
MARKET
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1. Banking System
Islamic financial institutions
CENTRAL BANK OF
MALAYSIA(BANK NEGARAMALAYSIA)
ISLAMIC BANKING
Bank Islam Malaysia Berhad
Bank Muamalat Malaysia
Berhad
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The several definition of Islamic
Banking
Islamic Banking is a banking activity that based on syariahprinciples. It does not allow the paying and receiving of interestand promotes profit sharing in the conduct of banking business.
Islamic banking is a form of modern banking based on Islamiclegal concept developed in the first centuries of Islam, usingrisk sharing as its main method, and excluding on a fixed, predetermined return.
As approved by General Secretariat of the OIC, Islamic
Banking is a financial institution whose status, rules andprocedures expressly state its commitment to the principle ofIslamic Syariah and to the banning the receipt and payment ofinterest on any of its operation
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Goals of Islamic Banking
1. Broad-based economic well-being with full employment andoptimum rate of economic growth.
2. Stability in the value of money to enable the medium of
exchange to be a reliable unit of account and a stable store ofvalue.
3. A just return is ensured on investment and developmentprojects.
4. Effective rendering of all services normally expected from thebanking system.
5. Socio-economic justice and equitable distribution of income and
wealth.
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Progressive Islamic Financial
Institution Development
1983-1992
Lembaga Tabung Haji (69)
Bank Islam Malaysia Berhad (83)
Syarikat Takaful Malaysia Berhad (84)
1993-2002
Islamic Banking Scheme (93)
Islamic Inter- bank Money Market (94)
Association of Islamic Bank in Malaysia (95)
Asean Retakaful International (L) Ltd Labuan (97)
Bank Muamalat Malaysia Berhad (99) Financial Sector Master Plan (01)
Islamic Financial Services Board (IFSB) (02)
Malaysian Takaful Association (02)
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Progressive Islamic Financial
Institution Development (cont..)
2003-2010
Issuance of 3 new Islamic bank licenses to foreign IFIs (04)
Liberation of Islamic Banking & Takaful industry to allow up to
49% foreign interest (05)
3 new Islamic Banking subsidiaries commence operation (06)
3 new Takaful Operators commence operation
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Differences between conventional and
Islamic Banking
Conventional Islamic1.The functions and operating modes of
conventional banks are based on fully
manmade principles.
2. The investor is assured of a predeterminedrate of interest.
3. It aims at maximizing profit without any
restriction.
4. It does not deal with Zakat.
1. The functions and operating modes
of Islamic banks are based on the
principles of Islamic Shariah.
2. In contrast, it promotes risk sharingbetween provider of capital
(investor) and the user of funds
(entrepreneur).
3. It also aims at maximizing profit but
subject to Shariah restrictions.
4. In the modern Islamic banking system,
it has become one of the service-
oriented functions of the Islamic
banks to be a Zakat Collection
Centre and they also pay out their
Zakat.
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5. Lending money and getting it back with
compounding interest is the fundamental
function of the conventional banks.
6. It can charge additional money (penalty
and compounded interest) in case of
defaulters.
7. Very often it results in the bank's own
interest becoming prominent. It makes no
effort to ensure growth with equity.
8. For interest-based commercial banks,borrowing from the money market is
relatively easier.
5. Participation in partnership business is
the fundamental function of the Islamic
banks. So we have to understand our
customer's business very well.
6. The Islamic banks have no provision to
charge any extra money from the
defaulters. Only small amount of
compensation and these proceeds is given
to charity. Rebates are giving for early
settlement at the Bank's discretion.
7. It gives due importance to the public
interest. Its ultimate aim is to ensure growth
with equity.
8. For the Islamic banks, it must be based
on a Shariah approved underlying
transaction.
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9. Since income from the advances is fixed,
it gives little importance to developing
expertise in project appraisal and
evaluations.
10. The conventional banks give greater
emphasis on credit-worthiness of the
clients
11. The status of a conventional bank, in
relation to its clients, is that of creditor anddebtors.
12. A conventional bank has to guarantee
all its deposits.
9. Since it shares profit and loss, the
Islamic banks pay greater attention to
developing project appraisal and
evaluations.
10. The Islamic banks, on the other hand,
give greater emphasis on the viability of the
projects.
11. The status of Islamic bank in relation to
its clients is that of partners, investors andtrader, buyer and seller.
12. Islamic bank can only guarantee
deposits for deposit account, which is
based on the principle of al-wadiah, thus
the depositors are guaranteed repaymentof their funds, however if the account is
based on the mudarabah concept, client
have to share in a loss position..
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Types of contract
CONTRACT
PARTICIPATING SUPPORTING
SALES LEASING
TRADING
BBA MURABAHAH SALAM ISTISNA.etc
OPERATONAL FINANCIAL
MUSYARAKAH MUDHARABAH
KAFALAH RAHN HIWALAH JUALAH IBRA
etc
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TRADING CONTRACT
1. Trading Contracts with Immediate Payment
Sarf (foreign exchange)
Sale of gold and silver
Bai Dayn (debt trading)
2. Trading Contracts with Deferred Payment
Murabahah (cost plus)
Bai Tawliyah (novation)
Bai Bithaman Ajil (deferred payment sale)
Bai Salam (advance payment sale)
Bai Istisnaa (sale by order) Bai Istijrar (supply, wholesale financing)
Bai Inah
Ijarah (leasing)
Ijarah Thumma Bai (Islamic hire purchase, AITAB)
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PARTICIPATING CONTRACTS
There are three types of participating contracts which are possible inpractice.
Two are subdivisions of Musharakah as follows:
Musharakah
- Shirkah Aamal- Shirkah Inan
Mudharabah
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SUPPORTING CONTRACTS
Rahnu (mortgage) Kafalah (guarantee)
Wakalah (agency)
Wadiah (safe custody)
Qardh (loan)
Hiwalah(transfer of debt)
Tabarru (donation)
Hibah (gift)
Wakaf (endowment)
Ibraa(rebate)
Muqasah (set-off)
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2. Financial Market
The Islamic Inter bank Money Market (IIMM) was introduced on January 3,1994 as a short-term intermediary to provide a ready source of short-terminvestment outlets based on Syariah principle.
Through the IIMM, the Islamic banks and banks participating in the IslamicBanking Scheme (IBS) would be able to match the funding requirementseffectively and efficiently
Provide the Islamic financial institutions with the facility for funding andadjusting portfolios over the short-term
Serving as a channel for the transmission of monetary policy.
Financial instruments and interbank investment would allow surplus banks tochannel funds to deficit banks, thereby maintaining the funding and liquiditymechanism necessary to promote stability in the system
Types of Instruments in Islamic Interbank Money Market is MudarabahInterbank Investment (MII), Wadiah Acceptance, Government InvestmentIssue (GII), Bank Negara Monetary Notes-i (BNMN-i), Sell and Buy Back
Agreement (SBBA), Cagamas Mudharabah Bonds (SMC), When Issue (WI),Islamic Accepted Bills (IAB), Islamic Negotiable Instruments (INI), Islamic
Private Debt Securities, Ar Rahnu Agreement-I (RA-i) and Sukuk BNM Ijarah(SBNMI)
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3. Capital Market
Debt Financing
Debt market of conventional banking involve interest based lendingcontract
which are prohibited in Islam. Debt Financing in Islamic financialsystem are
based on syariah under this several instruments of debt financing suchas;
Bai Bithaman Ajil (deferred payment sale)
Murabahah (cost plus financing / deferred lump sum sale)
Ijarah (leasing / hire contract)
Bai Salam (advance payment sale)
Bai Istisnaa (sale by order)
Others
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Equity Financing
In the equity market, Islamic bank will finance individual or firm whopossess
business skills and ideas but without capital under the profit sharingbasis
contracts. This mode of financing encourages existing entrepreneurs to
undertake projects that involve high risk but are also highly profitableand
productive. Islam has its own laws in the form of Uqud al-Istirak (profitsharing
contract). The two major contracts in this category are:
Al-Musharakah (lost profit sharing) Al-Mudharabah (trustee profit sharing)
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The external factors include the establishment
of Islamic banks in the Middle East in the mid-1970s coupled with the establishment of the
Islamic Development Bank in Saudi Arabia
The internal factors developments including the
establishment of the Pilgrims Fund Board in
1963
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In Malaysia, separate Islamic legislation and banking
regulations exist side-by-side with those for theconventional banking system.
The legal basis for the establishment of Islamic bankswas the Islamic Banking Act (IBA) which came intoeffect on 7 April 1983.
The IBA provides BNM with powers to supervise andregulate Islamic banks, similar to the case of otherlicensed banks.
The Government Investment Act 1983 was alsoenacted at the same time to empower the Government
of Malaysia to issue Government Investment Issue(GII), which are government securities issued based onSyariah principles.
http://www.bnm.gov.my/index.php?ch=174&pg=467&ac=373http://www.bnm.gov.my/index.php?ch=174&pg=467&ac=3737/31/2019 M FIN SYS- 655
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A large number of global player
A broad variety instruments
A comprehensive financial structure
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Th Sh i h Ad i C il
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The Shariah Advisory Council
of Bank Negara Malaysia
(SAC
Islamic banks and banking institutions thatoffer Islamic banking products and services
(IBS banks) are required to establish Shariahadvisory committees/consultants to advisethem and to ensure that the operations andactivities of the bank comply with Shariahprinciples.
In Malaysia, the National Shariah AdvisoryCouncil, which additionally set up at BankNegara Malaysia (BNM), advises BNM on theShariah aspects of the operations of these
institutions and on their products and services
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The Shariah Advisory Council of Bank NegaraMalaysia (SAC) was established on 1 May
1997 as the authority for the ascertainment of
Islamic law for the purposes of Islamic banking
business, takaful business, Islamic financialbusiness, Islamic development financial
business, or any other business which is based
on Shariah principles and is supervised and
regulated by Bank Negara Malaysia.
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One of the main regulatory provision peculiar to Islamic Law only isprovision relating to the establishment of Shariah Advisory Council.
There are four practices in this regard:
1) The establishment of Sharih Advisory Council at the countrieslevel and also Shariah Board at banks level. In this practice, SAC atthe countries level is accorded the final authority in determining theIslamicity of products. E.g. are Malaysia and Pakistan.
2) The establishment of SAC at the countries level as well as atbanks level, however, the SAC at the countries level has no finalauthority on the products offered. Their task is to investigate on theIslamicity of the products offered by the central bank. E.g are Bahrain
29
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3) No SAC at the countries level, but thereis a requirement that the bank which
operates IBF must have their own SSB,
and all the products are verified by thisboard, e.g Kuwait
4) In countries where IBF is still at the very
beginning, the banks are self regulated.E.g the Islamic Bank of Britain.
30
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The establishment of Shariah Advisory Council at Bank Negara
Malaysia by virtue of section 16B of the Central Bank of Malaysia Act
1958 (CBA)
The SAC is the final authority in matters relating toIslamic banking business,
takaful business,
Islamic financial business,
Islamic development financial business, or
any other business which is based on Shariah principles and is
supervised and regulated by Bank Negara Malaysia
31
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The SAC of BNM will be referred to by the court or arbitrator in
disputes involving Shariah issues in Islamic banking & finance and
takaful
In the case of the arbitrator, the SACs resolution shall be bindingon the arbitrator (obligatory)
In the case of the court, the SACs resolution shall be taken into
consideration on the court (advisory)
32
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BNM also issuedGuidelines of the Governance ofShariah Committees for Islamic Financial Institutions(BNM/GPS1) which provides that
A Shariah body which is to be known as a Shariah
Committee is to be established by each and every
Islamic banks, Islamic windows & takaful operators
Relationship all these Shariah Committees play a
complementary role to the SAC of BNM
33
Malaysia Model contd.
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Restrictions imposedMembers of SAC of BNM are not allowed to serve in
the Shariah Committee of any financial institutions (byvirtue of s. 16B (6) of the CBA 1958)
One Shariah advisor can only serve as a member of
Shariah Committee in one financial institution in thesame industry (Islamic banking and takaful areconsidered as different industries)
34
Malaysia Model contd.
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To advise the Board on Shariah matters in its
business operation to ensure compliance
To endorse Shariah compliance Manual To endorse and validate relevant
documentations to ensure the products of IFI
comply with shariah.
To advise on matters to be referred to the SAC.In case of conflict opinion of the SAC will
prevail
35
SAC Members
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SAC Members
Dr. Mohd Daud Bakar
-Chairman
Assoc. Prof. Dr. Abdul Halim
Muhammad- Deputy Chairman
Y.A.A. Datuk Sheikh GhazaliAbdul Rahman
Y.A. Dato' Abdul Hamid HajiMohamad
S.S. Dato' Haji Hassan HajiAhmad
Y. Bhg. Datuk Haji Md.Hashim Haji Yahaya
Y. Bhg. Dato' Dr. Abdul Halim
Ismail
Assoc. Prof. Dr. EngkuRabiah Adawiah Engku Ali
Dr. Mohd Parid Sheikh
Ahmad
Dr. Aznan Hasan
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Commercial banks
Commercial banks were brought under BNM supervision throughBanking Act, 1973, but this was subsequently replaced by the
BAFIA in 1989.The main functions of commercial banks are to provide:
Retail banking services such as the acceptance ofdeposit, granting of loans and advances, and financialguarantees;
Trade financing facilities such as letters of credit,discounting of trade bills, shipping guarantees, trustreceipts and Bankers Acceptances;
Treasury services;
Cross border payment services; and Custody services such as safe deposits and share
custody.
Commercial banks are also authorized to deal in foreignexchange and are the only financial institutions allowed toprovide current account facilities.
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COMMERCIAL BANKS
Full-fledged IslamicBanks
Participating banks inthe Islamic Banking
Scheme
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Full-fledge Islamic Banks
As an Islamic bank, we are expected to be clean of anykind of riba (usury) and gharar (uncertainty). No new
product can be adopted until it is cleared by Shariah
scholars.
Even after a new product is put into use, Shariah auditing
of the operations of financial institutions is very important to
ensure that the actual practice complies with the
requirements of Shariah.
A full-fledged Islamic bank can also offer investment
advisory and asset management-type services.
E l
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Examples:
Affin Islamic Bank Berhad
Al Rajhi Banking & Investment Corporation (Malaysia) Berhad
AmIslamic Bank Berhad
Maybank Islamic Berhad Bank Islam Malaysia Berhad
Bank Muamalat Malaysia Berhad
CIMB Islamic Bank Berhad
EONCAP Islamic Bank Berhad
Hong Leong Islamic Bank Berhad
RHB ISLAMIC Bank Berhad
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Participating banks in the Islamic
Banking Scheme
Under the Banking and FinancialInstitution Act 1989, a commercial bankis licensed to offer Islamic products andservices such as savings and currentaccounts, fixed deposits as well asconsumer and commercial financing.
In terms of products, all Islamic bankingentities are offering banking productsbased on the Islamic principles.
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Examples:
ABN Amro Bank Berhad
Alliance Bank Malaysia Berhad
Citibank Berhad
HSBC Bank Malaysia Berhad
Malayan Banking Berhad
OCBC Bank (Malaysia) Berhad
Public Bank Berhad
Standard Chartered Bank Malaysia Berhad
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