Wednesday 10 January 2007

BANKING AND FINANCE UNDER ISLAMIC LAW

BANKING & FINANCE UNDER ISLAMIC LAW - SYARIAH

INTRODUCTION:-
In the international financial scene, Islamic Banking and Finance has emerged as a new financial market since early 1970s. Growing at the rate of 15% each year, it is said to be worth an estimated US$300 billion (RM1.06 trillion) .Islamic banking is based on Syariah principles (under the muamalat system). Islamic banking essentially is an organized institutional framework designed to promote the application of an interest-free (riba) banking concept by forming banks and investment institutions in order to carry banking and finance operations, in accordance with Islamic economic doctrines.
The earliest Islamic Banks, Dubai Islamic Bank and Islamic Development Bank was successfully set-up in 1975, which paved the way for the establishment of Islamic banking and finance systems, throughout the whole world.

FACTS ON INTERNATIONAL ISLAMIC BANKING:-
- Today, Islamic banking and finance are available to customers in over 60 countries globally.
- Total assets of Islamic banks and Islamic windows in conventional banks and finance houses exceed US$560 billion (RM1.97 trillion).
- Islamic mutual funds exceed US$300 billion (RM1.06 trillion)
- Islamic sovereign and corporate sukuk (Islamic bonds) have reached US$50 billion (RM176 billion) mark.
- Islamic private capital investments, especially among the Middle East’s high net worth individuals, are currently at US$1.5 trillion (RM5.28 trillion).

BANKING IN MALAYSIA UNDER ISLAMIC LAWS:-
In Malaysia, a separate banking Act* known as the Islamic Banking Act, 1983 was enacted for Islamic banking to co-exist with the conventional banking system. This Act is essentially modeled after existing conventional banking laws known as the Banking & Financial Institutions Act 1989, with some modifications to accommodate the Islamic laws under the Syariah principles
Today, Islamic banking accounts for some 12% of Malaysia’s total banking assets. Given positive industry outlook, it is targeted to reach 20% by 2010.
In Malaysia, the first Islamic bank, known as Bank Islam Malaysia Bhd (BIMB) was successfully established in July 1983. In order to raise funds for its daily business operations, BIMB provides products similar to the various deposits services of conventional banking, but along the Syariah law/principles.
Islamic banking services are also made available to “non-Muslim” customers. Out of the total Islamic banking customers in Malaysia, about 65% are non-Muslim. As far as non-Muslim consumers are concerned, they do not view at Islamic banking products from the religious perspective.
Given encouraging response from the public coupled with the successful implementation of SKIM PERBANKAN TANPA FAERAH (later known as SKIM PERBANKAN ISLAM) on 4th March 1993, all conventional banking institutions are allowed to offer Islamic banking products and services to their customers, using their existing banking infrastructure.
On 1st. Oct. 1999, Bank Muamalat Malaysia Bhd was established as the Malaysia’s second Islamic Bank providing full range of Islamic banking products and services, following the merger of 2 commercial banks, i.e. Bank Bumiputra Malaysia Bhd and Bank of Commerce (M) Bhd
*Note :
Malaysia’s 1st banking law was enacted in 1958 ,called “BANKING ORDINANCE 1958” (later known as the BANKING ACT 1973, subsequently replaced in 1989 with the BANKING & FINANCIAL INSTITUTIONS ACT 1989 (BAFIA), which combines the BANKING ACT 1973 & the FINANCE COMPANIES ACT 1969 under a single legislation..

ISLAMINC BANKING PRODUCTS AND SERVICES:-
Generally, Islamic banking system provides the following financial products:
(a) Current accounts under the Al-Wadiah (guaranteed custody) Yad Dhamanah principle.
(b) Savings accounts under the Al-Wadiah (guaranteed custody) Yad Dhamanah principle.
(c) General Investment accounts under the Al-Mudha Rabah (profit sharing) principle.
(d) Special Investment accounts under the Al-Mudharabah (profit sharing) principle.
Today, many innovative Islamic products are also made available to the public, such as Personal Financing- i a/c., Charge Card Account-i, Fixed Term Investments Account-i, etc. etc.

Islamic Banks also grant the following financing facilities to the public:
(a) Project Financing under the Al-Mudharabah (profit sharing) principle.
(b) Project Financing under the Al-Musyarakah (profit & loss sharing) principle.
(c) House Financing/Asset Acquisition under the Al-Bat Bithaman Ajil (deferred payment sale) principle.
(d) Leasing/Financing the use of Services under the Al-Ijarah principle.
(e) Financing the use of Services and subsequent Asset Acquisition under the Al-Ijarah Thumma Al-Bai principle

Besides the above-mentioned products, Islamic Banking system also provides commercial trade-related financial services. They are :-
(a) Working capital financing under the Al-Murabahah (cost-plus) principle. The financing of which is by way of a lump sum deferred payment cost plus profit sale.
(b) Letter of Credit for trade financing principles under any of the following 3 principles :-
- Al-Wakalah
- Al-Musyarakah
- Al-Murabahah
(c) Bankers’ Guarantee under the Al-Kafalah principle. The bank can provide guarantee to its clienteles for the following purposes :-
- Tender guarantee
- Performance guarantee
- Guarantee for sub-contracts
- Guarantee in lieu of security deposits
- Guarantee for exemption of customs duties
- Customs bond
- Credit guarantee.

OUTLOOK FOR ISLAMIC BANKING:-

Given the fact that Malaysia is gradually liberalizing her financial and capital markets, more foreign funds, including those funds from Arab/Middle East countries are flowing into the country. The ambition of the policy-makers and the Malaysian Government to make the country the international centre for Islamic banking is well in place. Malaysia is being used as a financial platform for international players to venture into the region for a share of Asia-Pacific’s Islamic Banking sector. The main reason for Malaysia being chosen as a key and important financial hub is because it is centrally located among the East Asia countries that most of the potential investors are keen to venture into. Another reason is because Malaysia has a better credibility than any other countries within the region when it comes to Islamic banking products and structures. Malaysia has more than 24 years of leadership experience in Islamic banking and finance.
Year 2007 is expected to be a brighter and better year for Islamic finance and banking as Malaysia is gearing up in the promotion and implementation of its “Malaysia International Islamic Financial Centre” initiative. It aims to create a sophisticated, more vibrant, innovative and competitive international Islamic financial services industry in the country.
New banking and takaful licenses will be offered to both foreign and Malaysian financial institutions to conduct full range of Islamic banking and takaful insurance businesses with foreigners and locals in international currencies.

P/s.
In 2004, the central bank of Malaysia, Bank Negera Malaysia granted banking licenses to 3 foreign Islamic banks to set up their business operations in Malaysia, they are :-
- Kuwait Finance House (Malaysia) Bhd which opened its office in 2005.
- Saudi Arabia’s Al Rajhi Bank, the largest Islamic bank in the world, started its business in Oct. 2006.
- Asian Finance Bank Bhd which will open its office in Malaysia in Jan 2007.

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