biB 3114

Islamic banking
Norizaton azmin mohd nordin
fom: 2023

Financial
development

Chapter 1: introduction
Commodity
Money
~metals (gold,
silver & copper)
~cowrie shells
~sheep and
cattle

Barter system

Gold Standard

~change of
goods with other
goods

~Currencies
based on gold or
also known as
gold-backed
currencies

~problem in
matching the
demand and
supply

~Replaced by
Fiat Money
(Currencies that
is backed by a
basket of other
currencies).

Further development
Savings

Borrowings

Business
Entities
Partnership
and
Companies
Market
- Primary
and
Secondary
Market

Financial market as intermediary of funds

Surplus Unit

Financial
Intermediaries
~Monetary
~Non-monetary

Deficit Unit

Factors contributing to economic growth

Capital Formation

Funds to Finance Capital Formation

Finance
~Self finance
~ Direct finance
~Indirect finance

banks are efficient at allocating scarce

resources (funds) for investment purposes:
through their expertise in assessing the creditworthiness of the borrower and in
appraising the viability of the business venture, banks succeed in eliminating the
riskier or less productive investments;

due to the large scale of their operations, economies of scale are realized, the
administration cost per unit loan is reduced, thus resulting in a reduction in the
overall cost of finance;

being able to mobilise large amount of resources, banks enlarge the scope of
lending. The availability of finance from banks allow entrepreneurs to 'think big' and
thereby undertake larger investments;

by lending the pool of saving to diverse sectors and regions the aggregate risk of
investment for the economy as a whole is diminished;

being profit motivated banks tend to lend to borrowers who are able to pay the
highest price thus ensuring the migration of funds to the users with the highest
yields.

The Relationship Between Islam and the

Islamic Banking System

Shariah and Rationale for Islamic

Banking

Shariah or shar ~ 'the path or the road leading to the water'

Verb sharaa ~ 'to chalk out or mark out a clear road to water.'
Religious perspective ~ meant 'the highway of good life.'
Shariah ~ is the way which directs a man's life to the right path.
The path not only leading to Allah, but also the path shown by
Allah, the Creator Himself through His Messenger, Prophet
Muhammad (pbuh).

Shariah also has its correlation with the word din which literally
means 'submission' or 'following'. Shariah is the ordaining of the
Way and its proper subject is God, whereas din is the following of
that Way and its subject is man. Therefore, as far as the Quranic
idiom goes, one may speak of Shariah and din interchangeably.

Shariah
Governs man in conducting his life in order to realise the Divine
Will.

It includes all forms of behaviour spiritual, mental and physical.

Shariah principles are more than law, not only covering the total
way of life that includes both faith and practices, but also all
personal behaviour, legal and social transactions.

Shariah is a comprehensive principle of the total way of life.

Shariah comprises all that might be positively called law and
occupies the central place in the Islamic system of final authority.
It is an ideal as well as a reality and unites and guides Muslims in
both time and space, down through the generations and across
the diverse and widespread regions of Islam. It gives Muslims a
profound sense of security and stability.

Sources of shariah
Al-Quran

Qiyas

Shariah

Ijma

Hadith /Sunnah

What is Islamic finance?

Is a form of finance that is based on Shariah or the body
of Islamic Law.

It is common to use the term Shariah-compliant to

describe anything that is permissible under Islamic Law.

Halal anything that is Shariah-compliant. It includes

aspects of human behaviour, speech, clothing and diet.

Haram the opposite of halal. Anything that is

forbidden

Key principles of Islamic finance

Belief in
divine
guidance

No interest

Risk sharing
is
encouraged

No haram
investments

Financing is
based on real
assets

Believe in divine guidance

The universe was created by Allah (swt) and He created
human on earth to fulfil certain objectives through
obeying His commands.

Human is imperfect and sometimes confused reasons

with desires.

Commands given by Allah are through the last messenger

Rasulullah (Prophet Muhammad)

No interest
You cannot earn interest on a loan or be required to
pay interest on a loan.

No haram investment
Money is to be invested in worthy causes.
Companies that manufacture or participate in haram products like
alcohol, tobacco, prostitution, pork, pornography are to be avoided.

Risk sharing is encouraged

Favoured in business dealings with its customers.

Fosters the equitable distribution of risk, profits
and losses.

Enhanced transparency, promote mutual trusts

and fairness in dealings among business partners,
institutions and consumers.

Financing is based on real assets

Transactions are tied to real assets.

Able to curb excessive speculation and credit
expansion.

Trading and transactions in al-Quran

(Al-Nisa: 29)
O ye who believe! Eat not up your property among

yourselves in vanities; but let there be amongst you traffic

and trade by mutual good-will; nor kill (or destroy)
yourselves; for verily Allah hath been to you Most Merciful.

Wahai orang yang beriman! Janganlah kamu saling

memakan harta sesamamu dengan jalan yang batil (tidak

bernar); kecuali dalam perdagangan yang berlaku diatas
dasar redha meredhai diantara kamu; dan janganlah kamu
membunuh dirimu. Sesungguhnya Allah Maha Penyayang
kepadamu.

History and development of islamic bank

in the world and malaysia
18th, 19th and first half of 20th century, nearly all
Islamic world was colonised by European nations that
managed the economies and finances of Muslim
countries.

After WW2, most countries achieved independence

and want to manage their own financial affairs.

timeline

1975

First modern Islamic Financial institutions in Egypt Mit Ghamr (a

savings bank)
Lembaga Urusan Tabung Haji (LUTH)-Muslim Pilgrims Savings
Corporation
Islamic Development Bank (IDB) Jeddah, Saudi Arabia
Dubai Islamic Bank

1983

Bank Islam Malaysia Berhad (BIMB)

Banks, Takaful Insurance (1984), IFSB and IIFM (2002)

1963

tutorial
Form a group of 2 persons.
Presents and write a minimum 10 pages report on the following:
a) The difference between Al-Quran, Sunnah, Hadith, Ijma and Qiyas.
b) Analyse what is halal and haram from Al-Quran, Sunnah, Hadith, Ijma
and Qiyas in terms of trading, transactions, savings and economy.

c)

History and development of LUTH, BIMB and Bank Muamalat.

Spacing 1.5, provide footnote, minimum 10 references.
For presentation only 6 slides is allowed, duration 5 minutes and max
3 minutes video. Presentation is based on alternate members. Each
group need to prepare at least 1 question to the presenter. Presenter
is not allowed to bring small notes or reading card when presenting.