Lecture 1

INTRODUCTION TO
FINANCIAL SYSTEM IN
GENERAL

CHAPTER 1

Financial System
Collection of markets, institutions, laws,
regulations, and techniques
Bonds, stocks, and other securities are
traded, interest rates are determined,
and financial services are produced and
delivered around the world.

Financial System (Cont)

The primary task:

Economic System

The Role of Markets in

Global Economic System
To allocate scarce resources.
To determines type of goods and
services to be produced & quantity to
produce & at what price.
Income distribution profit, high salary
& other economic benefits

Types of Markets
3 types:
1) Factor Markets land, labour, skills,
capital, wages, rent
2) Product Markets consumers buy
goods & services
3) Financial Markets convert savings
funds to financing THE MOST
IMPORTANT FUNCTION IN
ECONOMIC SYSTEM

Why do we need to know about Financial Markets?

- The most important function in

economic system
- Direct effects to economic growth &
personal wealth
- Convert savings funds to financing
- A market where financial assets can be
purchased or sold

Financial Markets &

Financial System The
connection
Financial system will facilitates the
activities in financial markets

The Role of Financial system:

- Channel for savings & investment
- Resource allocation
- Risk management
- Clearing and settlement system

FINANCIAL SYSTEM IN
MALAYSIA

Why is it so important to
know about our financial
system?
Adapt to changes
The world continues to change in
economic, financial and geopolitical
terms. It continues to present
increased uncertainties, greater
interdependence, more intense
competition and continues to test our
ability to rise to emerging
challenges. Tan Sri Dr. Zeti Akhtar

Why is it so important to
know about our financial
system?

The importance of financial

stability
Stable financial institutions & stable
financial market financial stability
Failure or ineffective supervisory
authorities financial institutions
instability
Volatility in prices (interest rates,
exchange rates) financial market
instability

The importance of financial

stability (Cont..)
Financial institutions instability +
financial market instability
ineffective financial system
Ineffective financial system slow
down the economic growth
Good & effective financial system
mobilized & allocate financial
resources effectively

The importance of financial

stability (Cont..)
Financial stability = Effective
monetary policy
Monetary policy banking system
Ineffective banking system =
financially weak banking institutions
& inefficient market mechanisms
Ineffective banking system
ineffective monetary policy

The importance of financial

stability (Cont..)
Savings loanable funds
Loss of depositor confidence
banks are sensitive to liquidity pressure
1998, Asian crisis a particular
financial market instability has bad
effects to other markets & financial
institutions & across national border &
other countries in the world
This is called Risk of Contagion

Structure of Financial
System in Malaysia

Bank Negara Malaysia (BNM)

The objectives of BNM are as

follows:
To issue currency and keep reserves to
safeguard the value of the
currency;
To act as a banker and financial adviser
to the Government;
To promote monetary & financial
stability and a sound financial

LECTURE
1

ISLAMIC FINANCIAL
SYSTEM

ISLAM, SHARIAH,
MUAMALAT, BANKING AND
FINANCE

The Importance of
Islamic Finance
What is finance?
Mone
y?
Managem
ent
acquisitio
n?

Resourc
e
allocati
on?
Investm
ent?

The Importance of Islamic

Finance (Cont..)
What is Islamic Finance?
Religio
us
doctrin
e?

Financing
for mosque
Charities

Entrepreneu
rs

The Importance of Islamic

Finance (Cont..)
Islam
ic

Differences
between
Islamic &
conventional

Finan
ce

Resource
allocation,
management,
acquisition &
investment

The Importance of Islamic

Finance (Cont..)
ISLAMIC
FINANCE
Prohibit
ion of
riba

Prohibit
ion of
gharar

SHARI
AH

Prohibiti
on of
unlawful
& haram
activitie
s

Prohibit
ion of
maysir

Shariah: The foundation of

Islamic financial system
ISLAMIC FINANCIAL
SYSTEM

Shariah (Islamic
Law):
Integrated and
holistic Islamic
worldview

Shariah: The foundation of

Islamic financial system
(Cont..)
What is Shariah?

The way

A clear path
to be
followed

The way which leads

to a source

Body of Islamic teachings &

system

Qura
n

Sunn
ah

Shariah: The foundation of

Islamic financial system
(Cont..)

Shariah (Islamic Law):

- faith, worship, economic, social, political &

cultural aspects
- A system of ethics and values
- The domain for everyday affairs: politic,
economics, commercial & social
- More vast & flexible
- Jurist (fuqaha) formulate laws that are in
tune with respective time & place IJTIHAD
- Islamic Financial Institutions ensure Shariahcompliant transactions in terms of legal

Islamic Financial System vs

Conventional Financial
System
Islamic Financial
Conventional Financial
System
Noble values: Justice,
fairness, trust, honesty,
integrity & balanced
society
Philosophical
foundations:
Tauhid, Rububiyyah,
Risalah, Akhirah, Istikhlaf,
Tazkiyah, Kafalah, Adalah,
Falah
Maqasid al-Shariah:
To promote maslahah and

System
Value neutral: Not
concerned about moral
values & Unjust
Philosophical
foundations:
Doctrine of self-interest
Human beings are rational
in decision-making

Functions of Islamic
Financial System

To mobilize funds from Surplus funds units

(SFUs) to Deficits funds units (DFUs)
through Shariah-compliant manner.

Types of Islamic Financial

Markets

Debt and Equity Market

Avenue to raise funds in a financial market
Debt Market

Equity Market

Bonds

Stocks (Shares)

Short-term (less than 1

year) & Long-term (>
1year)

Short-term

Return to investor in the

form of interest income
(non-compliant with
Shariah principles)

Higher expected return

Islamic Debt securities

(Sukuk) is Shariah
compliant. Not based on
loan contract but it is
based on Shariah
compliant sales
contract, leasing and

Islamic equity stocks

must be structured
compliant to Shariah
(must not involved
Shariah prohibited &
unethical activities)

Money and Capital Market

Islamic Money Markets

Islamic
Money
Market
Monetary
Policies

Liquidity
Management
Secondary trading

Islamic Capital Markets

An integral part of Islamic financial
system
2 main components: Debt and
equity market
The core different from conventional
capital market is the element of
Shariah compliant
Islamic equity securities, Islamic bond
(Sukuk), Islamic real estate investment
trust (REITs)

Primary & Secondary

Markets

Organized Exchange & OTC

Markets
Trading of securities takes place in secondary
markets
Secondary

Markets
Organized
Exchanges

Buye
r

Trade
(through
brokers &
dealers)

Seller

(Well-known
corporations)

Over-TheCounter
(OTC)
Trade through
dealers at
different
locations

(Less-known
corporations)

TUTORIAL # 1
1) Please answer question no. 1, 3, 4, 5 & 6
from the text book
2) Because corporations do not actually raise
any funds in secondary markets, they are
less important to the economy than primary
markets. Comments.