Financial Products under Islamic Law

TOTAL DEPOSITS UNDER THE ISLAMIC LAWS.

(a) Current accounts under the Al-Wadiah Yad Dhamanah principle.
Under this principle, the bank accepts deposits from its customers who look for safe custody of their money while still retaining the absolute convenience in their usage. The customer is permitted to withdraw the whole funds or part of the balances standing to their credit, at any time they wish to do so. The bank guarantees the return of these balances upon request by its customers. As in conventional banking, the bank will provide its customers with cheque books for their use.
As long as the funds/deposits remain with the bank, the bank may utilize these funds with the
permission of its customers. All the profits/gains generated from the use of these funds belong
to the bank,. The bank may, at its own discretion, levy service charge on the current for servicing and maintaining the account. The current account holder must ensure that there is sufficient funds in their account, otherwise the bank reserves the rights to impose a penalty charge for those cheques returned due to insufficient fund, as in conventional banking.
Note : Current account deposits are covered under the Unclaimed Moneys Act 1965.

(b) Savings account under the Al-Wadiah Yad Dhamanah principle.
Savings deposits are accepted by the bank under similar principle as the current account deposits, but with a slightly different concept in regards to the payment of profit.
The bank accepts savings deposits from its customers seeking for safe custody of their funds but who prefer to retain a certain degree of convenience in their usage of funds together with a likelihood of making some profits.
As in the current account, the bank acts as the guarantor or custodian for the customers. It guarantees the repayment of the money due to its customers in the depositors’ accounts upon demand. The bank provides the depositors with savings passbooks as in the conventional banking system. The customers may withdraw a part or the whole lump sum of their credit balances at any time they desire to do so. The bank seeks the permission of its customers to make use of their money in the accounts as long as the funds are still deposited with the bank concerned. All the profits earned from the usage of the funds shall go to the bank. However, the bank may in its own discretion make some distribution to the customers part of the profits generated from the use of the latter’s funds.
Similarly, these savings accounts also covered under the Unclaimed Moneys Act, 1965.

(c) General Investment Account under the Al-Mudharabah principle.

If a customer is looking for investment opportunities for their funds, he may approach the bank and place with it the money for a specified tenure. Quite similar to the conventional banking, the bank may accept the funds for say, 1, 3, 6, 9, 12, 15months or over as the customer desire.
Under this principle, the bank provides the so called “entrepreneurship” and the depositors, i.e. the customers provide the “capital”. The distribution of profits (if any) generated will be agreed upon by both the bank and the depositors. The depositors do not get involved in the management of the investment undertaken by the bank. However, in the event of a loss, the depositors, not the bank shall responsible for all the loss suffered.
Profit distribution (if any) will be made based on the pre-determined ratio as stated in the investment certificate under the General Investment account.
Deposits accepted by the bank under this account are also under the ambit of the Unclaimed Moneys Act, 1965.

RESOURCES UNDER ISLAMIC BANKING LAW

TOTAL RESOURCES OF ISLAMIC BANKING UNDER ISLAMIC LAWS.

As in conventional banking, the Islamic Banking system needs to raise funds too. Deposits remained the primary source of funds, accounting for more than 90% of total resources. Islamic banking resources recorded positive annual growth, increased rapidly at an average rate of more than 60%. This is largely attributed to the tremendous hike in total deposits, shareholders’ funds of the Islamic banks and also the Islamic banking funds of the “Skim Perbankan Islam” (Islamic Banking Scheme which allows conventional banking institutions to offer Islamic banking products and services using their existing infrastructure.)

Due to the intensive publicity campaign to promote Islamic banking products in most banking institutions, the increased awareness among the general public on the availability of Islamic banking products coupled with the relatively competitive/attractive returns of Islamic banking deposits as compared to that on conventional banking deposits,Islamic banking deposits recorded a very high growth rate ever since the establishment of the Malaysia’s first Islamic bank licensed under the Islamic Banking Act 1983.

In order to allow the Malaysian Government to issue Government Investment Issues (GII) based on Islamic principles, another law, namely: Government Investment Act 1983 was also enacted along with the Islamic Banking Act, 1983. The introduction of GII enables the Islamic bank to meet their liquidity requirements and also acting as a financial instrument to absorb any idle funds in the short term.

Private sector (individuals, business enterprises and financial institutions, etc.) remained as the major depositors in the Islamic banking system in Malaysia. This significantly reflects the general expansion of business activities in the economy and also the continued acceptance of Islamic banking concepts by individuals.
Statutory authorities and the Federal government also contribute to the strong growth of total resources. Deposits from the Government bodies are mainly in the form of current account deposits.

In terms of deposits by type, the bulk of the total Islamic deposits are in the form of investment deposits, besides savings and demand deposits. With the introduction of the Islamic Negotiable Instruments in late 1998, additional funding avenue was opened for the Islamic banking institutions.

Islamic banking system provides numerous liability products similar to the various deposits products of the conventional banking.

All deposits accepted by the bank from its customers are under the ambit of the Unclaimed Moneys Act 1965._

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.

"MALAYSIA - MY SECOND HOME" PROGRAMME

R U INTERESTED IN REAL ESTATE INVESTMENT IN MALAYSIA ?


In line with the Malaysian Government's continuing commitments and liberalisation policy, foreigners could now purchase residential properties worth more than RM250,000.00 (USD70,600.00) a unit, without having to seek approval from Foreign Investment Committee (FIC).

FIC is under the control of Economic Planning Unit in the Prime Minister's Department. A Prime Minister's office statement mentioned that our Prime Minster, Datuk Seri Abdullah Ahmad Baduri has recently approved this new ruling. It said that there would no longer be a limit to the number (units) of residential properties that foreigners can own or any restrictions/conditions upon their usage.

In the past, FIC's approval must be obtained first before foreigners can purchase any residential properties, except that it is purchased for their own occupation/use only.

This latest relaxation in FIC's ruling would definitely augur well for the overal development of the local property sector, in particular high-end residential projects . Besides spurring the real estate and construction sub-sectors, it may increase the flow of foreign currency and may also boost the inflow of foreign direct investments, going forward.

Comparatively, High-end residential property prices in Klang Valley (Kuala Lumpur region), Southern Johore and Penang Island, are relatively cheaper than that in Singapore, therefore, it is HIGH TIME FOR FOREIGNERS to purchase residential properties, be it for own use or investment, or for those planning to participate in the "Malaysia - My 2nd Home" program.

KILLING 2 BIRDS WITH ONE STONE !

Yes, participating in this MM2H program will also giving you a golden opportunity to make an investment in the property/real estate markets which has good growth potential.

Effective Dec. 23, 2006, each participant of the MM2H program is allowed to purchase up to two units of residential houses at a minimum price of RM250,000 nation wide, except for the state of Sarawak (East Malaysia) whose minimum house price has remained at RM300,000.

Previously, the minimum price for the purchase of houses in Malaysia is set at:-

- RM350,000 and above each for certain areas in Sarawak.
- RM250,000 and above each for the states of Penang, Melaka and Johor ; and
- RM150,000 and above for other states in Malaysia.

CAPITAL CONTROLS ??? THREAT OF A REPEAT OF THE ASIAN FINANCIAL CRISIS IN 1997/98 ???

In June 1997,currency speculators attacked Thai baht causing its currency to dip by more than 35%...during 1997/98 Asian financial crisis.
Malaysia's central bank, BNM (Bank Negara Malaysia) in reaction to the regional currency crisis, imposed a series of capital control in Sept 1998 which shocked the financial/currency markets.
This drastic measure,according to BNM was to ward off currency speculators, after the Malaysian Ringgit (RM) fell (from RM2.50 - prior to the crisis) against the US dollar. BNM on 2.9.98 pegged the local currency at RM3.80 to the US dollar.
However, in June 2005 (after more than 6 years) BNM dismantled almost all of the capital controls, including removing the ringgit 3.80 peg against the US dollar.

Two days ago,Thailand's central bank 'shocked' the Asian financial and currency markets again ! - - by unexpectedly imposed restrictions on capital inflows into that country, to curb speculation on the baht !!!
This anti-speculation (of currency) move not only sent jitters in several Asian currency/money markets, but also weaken Asian bourses.
It triggered Thailand's stock market to plunge 108 points (almost 15%)- biggest one-day fall since 1990 ! - Losses ? - more than US$20 billion (or RM 72 billion)!
The Malaysian stock market fell as much as 35 points - its largest one-day dip in 5 years, before closing 21 points lower.
BNM - Malaysia central bank assured the investors that Malaysia is not going to follow Thailand, to impose capital controls. BNM said that they are in fact,, still on the mode of liberalising Malaysia's financial system progressively, in order to attract more foreign investments into the country.

THE SAID CONTROLS :-
- ALL THAILAND'S FINANCIAL INSTITUTIONS ARE REQUIRED TO WITHHOLD 30% OF FOREIGN CURRENCIES BOUGHT OR EXCHANGED AGAINST THE THAI BAHT
- IMPOSITION OF A 10% PENALTY FOR WITHDRAWAL OF FOREIGN FUNDS THAT HAD BEEN IN THAILAND FOR LESS THAN A YEAR.
EXEMPTIONS :-
- THOSE FOREIGN EXCHANGE TRANSACTIONS RELATED TO COMMERCIAL TRADES IN GOODS AND SERVICES OR REPATRIATION OF INVESTMENTS ABROAD BY RESIDENTS ARE EXEMPTED.
- FOREIGN EXCHANGED TRANSACTIONS WHICH HAVE BEEN TRADED PRIOR TO THE CAPITAL CONTROLS IMPOSED, ARE ALSO EXEMPTED FROM THE 'RESERVE REQUIREMENT ON SHORT-TERM CAPITAL INFLOW'.

LATEST !!!
THAILAND'S FINANCE MINISTER,SUBSEQUENTLY (one day after the control) EASED CURRENCY CONTROLS ON FOREIGN INVESTMENTS INTO THE STOCK MARKET, AFTER 15% SHARE PLUNGE CAUSED BY EARLIER IMPOSITION OF RESTRICTIONS.

COMMENTS :
Given the fact that Malaysia's fundamentals still remained strong and BNM's policy of gradual and sequenced liberalisation of the financial/currency markets, it is unlikely Malaysia will impose another capital controls.