MALAYSIAN FINANCIAL SYSTEM

The Malaysian Financial System can be

dividing into three parts namely;

The banking system The non financial intermediaries Financial Market

Ministry of Finance

The banking system

The non financial intermediaries

Financial Market

1. The banking system

CENTRAL BANK OF MALAYSIA (BANK NEGARA MALAYSIA)

ISLAMIC BANK

COMMERCIAL BANK

FINANCE COMPANIES

MERCHANT BANK

DISCOUNT HOUSES

2. Non bank financial system

NON BANK FINANCIAL SYSTEM

DEVELOPMENT FINANCE INSTITUTIONS

SAVINGS INSTITUTIONS

PROVIDENT AND PENSION FUNDS

INSURANCE COMPANIES

OTHER FINANCIAL INTERMEDIARIES

3. Financial Market
Financial Market

Domestic Money Market & Foreign Exchange Market

Capital Market

Derivatives Market

ISLAMIC FINANCIAL SYSTEM

The Islamic Financial System can be dividing into three parts namely;
The banking system Financial market Capital Market
MINISTRY OF FINANCE

BANKING SYSTEM

FINANCIAL MARKET

CAPITAL MARKET

1. Banking System
Islamic financial institutions
CENTRAL BANK OF MALAYSIA (BANK NEGARA MALAYSIA)

ISLAMIC BANKING Bank Islam Malaysia Berhad Bank Muamalat Malaysia Berhad

The several definition of Islamic Banking

Islamic Banking is a banking activity that based on syariah principles. It does not allow the paying and receiving of interest and promotes profit sharing in the conduct of banking business. Islamic banking is a form of modern banking based on Islamic legal concept developed in the first centuries of Islam, using risk sharing as its main method, and excluding on a fixed, pre determined return. As approved by General Secretariat of the OIC, Islamic Banking is a financial institution whose status, rules and procedures expressly state its commitment to the principle of Islamic Syariah and to the banning the receipt and payment of interest on any of its operation

Goals of Islamic Banking

1. Broad-based economic well-being with full employment and optimum rate of economic growth. Stability in the value of money to enable the medium of exchange to be a reliable unit of account and a stable store of value. A just return is ensured on investment and development projects.

2.

3.

4.

Effective rendering of all services normally expected from the banking system.
Socio-economic justice and equitable distribution of income and wealth.

5.

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)

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

Differences between conventional and Islamic Banking Conventional

1.The functions and operating modes of conventional banks are based on fully manmade principles. 2. The investor is assured of a predetermined rate of interest. 3. It aims at maximizing profit without any restriction. 4. It does not deal with Zakat. 1.

Islamic
The functions and operating modes of Islamic banks are based on the principles of Islamic Shariah.

2. In contrast, it promotes risk sharing between 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 serviceoriented functions of the Islamic banks to be a Zakat Collection Centre and they also pay out their Zakat.

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.

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.

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.

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 and debtors. 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 and trader, 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 repayment of their funds, however if the account is based on the mudarabah concept, client have to share in a loss position..

Types of contract
CONTRACT

TRADING

PARTICIPATING

SUPPORTING

SALES

LEASING

BBA MURABAHAH SALAM ISTISNA .etc

OPERATONAL FINANCIAL

MUSYARAKAH MUDHARABAH

KAFALAH RAHN HIWALAH JUALAH IBRA etc

TRADING CONTRACT
1. Trading Contracts with Immediate Payment

2.

Sarf (foreign exchange) Sale of gold and silver Bai Dayn (debt trading)
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)

PARTICIPATING CONTRACTS
There are three types of participating contracts which are possible in practice. Two are subdivisions of Musharakah as follows: Musharakah - Shirkah Aamal - Shirkah Inan Mudharabah

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)

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-term investment outlets based on Syariah principle. Through the IIMM, the Islamic banks and banks participating in the Islamic Banking Scheme (IBS) would be able to match the funding requirements effectively and efficiently Provide the Islamic financial institutions with the facility for funding and adjusting portfolios over the short-term Serving as a channel for the transmission of monetary policy. Financial instruments and interbank investment would allow surplus banks to channel funds to deficit banks, thereby maintaining the funding and liquidity mechanism necessary to promote stability in the system Types of Instruments in Islamic Interbank Money Market is Mudarabah Interbank Investment (MII), Wadiah Acceptance, Government Investment Issue (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)

3. Capital Market
Debt Financing
Debt market of conventional banking involve interest based lending contract which are prohibited in Islam. Debt Financing in Islamic financial system are based on syariah under this several instruments of debt financing such as; 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

Equity Financing
In the equity market, Islamic bank will finance individual or firm who possess business skills and ideas but without capital under the profit sharing basis contracts. This mode of financing encourages existing entrepreneurs to undertake projects that involve high risk but are also highly profitable and productive. Islam has its own laws in the form of Uqud al-Istirak (profit sharing contract). The two major contracts in this category are: Al-Musharakah (lost profit sharing) Al-Mudharabah (trustee profit sharing)

External and internal birth of islamic banking:

The external factors include the establishment of Islamic banks in the Middle East in the mid1970s 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

 In Malaysia, separate Islamic legislation and banking regulations exist side-by-side with those for the conventional banking system. The legal basis for the establishment of Islamic banks was the Islamic Banking Act (IBA) which came into effect on 7 April 1983. The IBA provides BNM with powers to supervise and regulate Islamic banks, similar to the case of other licensed banks. The Government Investment Act 1983 was also enacted at the same time to empower the Government of Malaysia to issue Government Investment Issue (GII), which are government securities issued based on Syariah principles.

Islamic banking requirement 3 vital elements in order to achieve long term objectives: A large number of global player A broad variety instruments A comprehensive financial structure

The Shariah Advisory Council of Bank Negara Malaysia (SAC

Islamic banks and banking institutions that offer Islamic banking products and services (IBS banks) are required to establish Shariah advisory committees/consultants to advise them and to ensure that the operations and activities of the bank comply with Shariah principles. In Malaysia, the National Shariah Advisory Council, which additionally set up at Bank Negara Malaysia (BNM), advises BNM on the Shariah aspects of the operations of these institutions and on their products and services

 The Shariah Advisory Council of Bank Negara Malaysia (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 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.

Establishment of Shariah Advisory Council

One of the main regulatory provision peculiar to Islamic Law only is provision relating to the establishment of Shariah Advisory Council. There are four practices in this regard: 1) The establishment of Sharih Advisory Council at the countries level and also Shariah Board at banks level. In this practice, SAC at the countries level is accorded the final authority in determining the Islamicity of products. E.g. are Malaysia and Pakistan. 2) The establishment of SAC at the countries level as well as at banks level, however, the SAC at the countries level has no final authority on the products offered. Their task is to investigate on the Islamicity of the products offered by the central bank. E.g are Bahrain
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Contd
3) No SAC at the countries level, but there is a requirement that the bank which operates IBF must have their own SSB, and all the products are verified by this board, 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.

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Regulatory Framework For Shariah Compliance in Malaysia

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 to Islamic 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

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Malaysia Model contd.

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 binding on the arbitrator (obligatory) In the case of the court, the SACs resolution shall be taken into consideration on the court (advisory)

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Malaysia Model contd.

BNM also issued Guidelines of the Governance of Shariah 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
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Malaysia Model contd.

Restrictions imposed
Members of SAC of BNM are not allowed to serve in the Shariah Committee of any financial institutions (by virtue 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 the same industry (Islamic banking and takaful are considered as different industries)

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Duties & Responsibilities

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
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SAC Members Session 2007-2008

Dr. Mohd Daud Bakar -Chairman
Assoc. Prof. Dr. Abdul Halim Muhammad - Deputy Chairman Y.A.A. Datuk Sheikh Ghazali Abdul Rahman Y.A. Dato' Abdul Hamid Haji Mohamad S.S. Dato' Haji Hassan Haji Ahmad Y. Bhg. Datuk Haji Md. Hashim Haji Yahaya Y. Bhg. Dato' Dr. Abdul Halim Ismail Assoc. Prof. Dr. Engku Rabiah Adawiah Engku Ali Dr. Mohd Parid Sheikh Ahmad Dr. Aznan Hasan

Commercial banks
Commercial banks were brought under BNM supervision through Banking 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 of deposit, granting of loans and advances, and financial guarantees; Trade financing facilities such as letters of credit, discounting of trade bills, shipping guarantees, trust receipts 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 foreign exchange and are the only financial institutions allowed to provide current account facilities.

COMMERCIAL BANKS

Full-fledged Islamic Banks

Participating banks in the Islamic Banking Scheme

Full-fledge Islamic Banks

As an Islamic bank, we are expected to be clean of any kind 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.

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

Participating banks in the Islamic Banking Scheme

Under the Banking and Financial Institution Act 1989, a commercial bank is licensed to offer Islamic products and services such as savings and current accounts, fixed deposits as well as consumer and commercial financing. In terms of products, all Islamic banking entities are offering banking products based on the Islamic principles.

 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