CHAPTER 1 - Introduction of Islamic Banking.pptx

1st chapter about the Introduction of Islamic Banking for master students (MIFB & MIBS) in UUM.

1. CHAPTER 1: Introduction to Islamic Banking MAJOR DR. MOHD ADIB ABD MUIN, IFP, CQIF (WEALTH MANAGEMENT) Senior Lecturer Islamic Business school ( Ibs ), uum BWSB5053 Contemporary Islamic Banking - 2024

2. OUTLINE BWSB5053 Contemporary Islamic Banking 2 Philosophy of Islamic banking. Principles and concepts of Islamic finance. Historical development of Islamic banking in Malaysia. Introducing the products Positioning stage Strengthening stage

3. AL-QURAN يَـٰٓأَيُّهَا ٱلَّذِينَ ءَامَنُوا۟ لَا تَأْكُلُوٓا۟ أَمْوَٰلَكُم بَيْنَكُم بِٱلْبَـٰطِلِ إِلَّآ أَن تَكُونَ تِجَـٰرَةً عَن تَرَاضٍۢ مِّنكُمْ ۚ وَلَا تَقْتُلُوٓا۟ أَنفُسَكُمْ ۚ إِنَّ ٱللَّهَ كَانَ بِكُمْ رَحِيمًۭا ٢٩ “ O believers! Do not devour one another’s wealth illegally, but rather trade by mutual consent. And do not kill ˹each other or˺ yourselves. Surely Allah is ever Merciful to you .” (An-Nisa: 29) 3 BWSB5053 Contemporary Islamic Banking

4. Introduction BWSB5053 Contemporary Islamic Banking 4 Islamic banking, also known as Sharia-compliant banking or Islamic finance, is a system of banking and financial activities that comply with Islamic law (Sharia). It is based on the concept of profit-and-loss sharing, where both the bank and the customer share the risks and rewards of financial transactions. The fundamental principles that guide Islamic banking are rooted in Sharia, which prohibits certain financial activities such as charging or paying interest ( riba ), engaging in excessive uncertainty ( gharar ), and investing in businesses that are considered haram (forbidden), such as those involved in alcohol, gambling, uncertainty, manipulation, speculation, ihtikar and any other related to haram thing

5. Philosophy of Islamic banking BWSB5053 Contemporary Islamic Banking 5 The philosophy of Islamic banking: 1. Economic Justice and Equity Fair Distribution of Wealth: Islamic banking seeks to promote a fair and equitable distribution of wealth and resources. It aims to minimize the gap between the rich and the poor by ensuring that wealth circulates widely and benefits all segments of society. Avoidance of Exploitation: The prohibition of riba (interest) is central to this philosophy, as charging interest can lead to exploitation and concentration of wealth among a few. By eliminating interest, Islamic banking promotes fairness and equity. 2. Risk Sharing Partnership-Based Models: Islamic banking emphasizes profit and loss sharing (PLS) arrangements, such as Mudarabah and Musharakah . These models foster a sense of partnership and mutual cooperation between the bank and its clients, ensuring that both parties share the risks and rewards of any venture. Encouragement of Entrepreneurship: By sharing risks, Islamic banking encourages entrepreneurship and innovation, as entrepreneurs are not burdened with fixed interest payments regardless of their business performance.

6. CONT… BWSB5053 Contemporary Islamic Banking 6 3. Asset-Backed Financing Real Economic Activity: Islamic banking ensures that all financial transactions are backed by tangible assets or real economic activity. This linkage to the real economy helps to prevent speculative bubbles and ensures that finance supports productive ventures. Transparency and Authenticity: Transactions must involve genuine trade and commerce, promoting transparency and authenticity in financial dealings. 4. Social Responsibility and Ethical Investments Halal Investments: Investments must be made in halal (permissible) activities. This excludes businesses involved in gambling, alcohol, pork products, and other haram (prohibited) sectors. Positive Social Impact: Islamic banking seeks to invest in projects that have a positive impact on society, such as those that promote social welfare, infrastructure development, and environmental sustainability.

7. CONT… BWSB5053 Contemporary Islamic Banking 7 5. Prohibition of Speculation and Uncertainty Gharar (Uncertainty): Islamic banking prohibits transactions that involve excessive uncertainty or ambiguity, ensuring that all contractual terms are clear and well-defined. Maisir (Gambling): Speculative activities akin to gambling are also prohibited, promoting stability and reducing the risk of financial crises caused by speculative bubbles. 6. Ethical Conduct and Integrity Honesty and Transparency: Islamic banking requires honesty and full disclosure in all financial transactions. This builds trust between the bank and its clients and ensures that all parties are fully informed. Ethical Practices: Banks are expected to conduct their operations with integrity, adhering to ethical standards and avoiding any form of deceit or fraud. 7. Community Welfare and Development Social Welfare: Islamic banking emphasizes the welfare of the community. It encourages practices that contribute to the social and economic development of society, such as providing interest-free loans ( Qard al-Hasan) for those in need. Charitable Contributions: Islamic banks are also encouraged to engage in charitable activities and support social causes, reflecting the principle of helping those less fortunate.

8. Principles of Islamic Finance 1. Prohibition of Interest ( Riba ) Definition: Riba Refers To Any Guaranteed Interest or Profit On Loaned Money, Which Is Prohibited In Islam. Implication: Islamic Financial Institutions Do Not Charge or Pay Interest. Instead, They Use Profit-sharing or Leasing Arrangements To Generate Returns.

9. Principles of Islamic Finance 2. Profit And Loss Sharing (PLS) Mudarabah: A Partnership Where One Party Provides The Capital, and The Other Provides Expertise and Management. Profits are Shared According To a Pre-agreed Ratio, While Losses are Borne By The Capital Provider. Musharakah : A Joint Venture Where All Partners Contribute Capital And Share Profits And Losses According To Their Respective Equity Shares. 3. Asset-backed Financing Real Economy Linkage: Financial Transactions Must Be Backed By Tangible Assets Or Services. This Ensures That The Financial Activities Are Connected To The Real Economy. Types Of Contracts: Murabaha: A Cost-plus Financing Structure Where The Bank Buys An Asset And Sells It To The Customer at A Markup. Ijara : Leasing Where The Bank Buys And Leases Out An Asset, Retaining Ownership While The Customer Uses It. Istisna : A Contract For Manufacturing Goods And Commodities, Allowing Cash Payment In Advance And Future Delivery Or Sale.

10. Principles of Islamic Finance 4. Risk Sharing Equity-based Financing: The Risk Is Shared Between The Bank And The Customer. In Case Of Profit, Both Benefit, And In Case Of Loss, Both Bear The Loss Proportionately. No Guarantees Of Returns: Fixed Or Guaranteed Returns Are Not Permissible, Promoting A Fair Distribution Of Risk And Return. 5. Prohibition Of Uncertainty ( Gharar ) Definition: Gharar Involves Excessive Uncertainty And Ambiguity In Contracts. Implication: Contracts Must Be Clear And Transparent, Specifying All Terms And Conditions To Avoid Any Form Of Deceit Or Speculation.

11. Principles of Islamic Finance 6. Ethical Investments Halal Activities: Investments Must Be Made In Halal (Permissible) Activities. Investments In Businesses Involving Alcohol, Gambling, Pork, And Other Haram (Prohibited) Activities Are Not Allowed. Social Responsibility: Investments Should Consider Social Welfare And Development, Promoting Ethical And Socially Responsible Business Practices. 7. No Speculation ( Maisir ) Definition: Maisir Refers To Gambling Or Betting. Implication: Islamic Finance Prohibits Speculative Activities That Involve Excessive Risk And Uncertainty, Such As Derivatives And Futures Trading.

12. Principles of Islamic Finance 8. Transparency And Disclosure Clear Terms: Financial Agreements Must Be Clearly Documented With Full Disclosure Of Terms To All Parties Involved. Honesty: Transparency And Honesty Are Crucial To Maintaining Trust And Fairness In Financial Transactions.

13. PRACTICAL APPLICATIONS IN ISLAMIC BANKING Islamic Banking Products: Islamic Mortgages: Home Purchase Plans Based On Diminishing Musharakah Or Ijara . Savings Accounts: Profit-sharing Investment Accounts Instead Of Interest-bearing Accounts. Islamic Bonds (Sukuk): Asset-backed Securities That Provide Returns To Investors Without Interest.

14. Historical development of Islamic banking in Malaysia. BWSB5053 Contemporary Islamic Banking 14 The historical development of Islamic banking in Malaysia is a notable example of how a nation has systematically integrated Islamic financial principles into its economic framework. Here is a detailed overview of the key milestones and developments:

15. CONT... BWSB5053 Contemporary Islamic Banking 15 Malaysia's journey in Islamic banking has been characterized by strategic planning, strong regulatory support, and a commitment to innovation and excellence. The country's dual banking system, robust regulatory framework, and proactive measures to promote Islamic finance have made Malaysia a global leader in the field. Moving forward, Malaysia aims to leverage technology and sustainability to further enhance its Islamic banking sector and contribute to global financial stability and inclusiveness.

16. Introducing the product of Islamic banking in Malaysia 16 BWSB5053 Contemporary Islamic Banking Murabaha (Cost-Plus Financing) Mudarabah (Profit-Sharing Investment) A partnership where one party provides the capital ( rab - ul -mal) and the other provides expertise and management ( mudarib ). Profits are shared based on a pre-agreed ratio, while losses are borne by the capital provider. Musharakah (Joint Venture) I n a Murabaha transaction, the bank purchases an asset and sells it to the customer at a profit margin agreed upon in advance. Commonly used for asset financing, such as purchasing property, vehicles, or equipment. A partnership where all parties contribute capital and share profits and losses according to their respective shares. Commonly used in business ventures, property financing, and project financing.

17. CONT… 17 BWSB5053 Contemporary Islamic Banking Ijara (Leasing) Istisna (Manufacturing/Construction Financing) A contract for manufacturing goods or constructing projects, where the bank agrees to produce or build and deliver at a future date. Commonly used in construction and manufacturing sectors for financing projects. Wakalah (Agency Agreement) The bank purchases an asset and leases it to the customer for a fixed period. Ownership remains with the bank, and the customer pays rent. The bank acts as an agent on behalf of the customer to invest funds in Sharia-compliant investments. Applied in investment products where the bank manages the investment portfolio for the customer.

18. CONT… 18 BWSB5053 Contemporary Islamic Banking Takaful (Islamic Insurance) Sukuk (Islamic Bonds) Asset-backed securities representing ownership in a tangible asset, usufruct, or services, providing returns to investors without interest. Used by corporations and governments to raise capital for projects while providing Sharia-compliant investment opportunities. Qard al-Hasan (Benevolent Loan) A cooperative system of reimbursement or repayment in case of loss, where participants contribute funds into a pool. Provides insurance coverage for health, life, property, and other areas, ensuring risk-sharing among participants. An interest-free loan extended on a goodwill basis, where the borrower is required to repay only the principal amount. Typically used for social welfare purposes, such as helping individuals in financial distress.

19. CONT… 19 BWSB5053 Contemporary Islamic Banking Islamic Deposit Accounts Islamic Credit Cards These cards operate on the principles of Tawarruq or Ujrah (service fee) to provide Sharia-compliant credit facilities. Used for making purchases, with the outstanding balance typically converted into a fixed-term financing arrangement to avoid interest. Savings Accounts: Profit-sharing accounts where depositors earn a share of the bank's profit rather than interest. Current Accounts: Sharia-compliant checking accounts that may not offer profit-sharing but provide safekeeping of funds. Investment Accounts: Based on Mudarabah, these accounts offer higher potential returns through profit-sharing mechanisms.

20. Positioning stage of Islamic banking in Malaysia. The positioning stage of Islamic banking in Malaysia reflects the strategic efforts to integrate and establish Islamic banking as a mainstream financial system within the country. This stage involves creating a distinct identity, enhancing regulatory frameworks, promoting public awareness, and achieving competitive parity with conventional banking. 20 BWSB5053 Contemporary Islamic Banking

21. overview of the positioning stage of Islamic banking in Malaysia: 1. Creating a Distinct Identity Branding and Differentiation: Islamic banks in Malaysia have focused on building a distinct brand that emphasizes Sharia-compliant financial products and ethical banking practices. They highlight the unique features of Islamic banking, such as profit-sharing, risk-sharing, and interest-free transactions. Cultural and Religious Appeal: By aligning with the cultural and religious values of the Muslim population, Islamic banks appeal to customers seeking financial solutions that comply with Islamic principles. 2. Regulatory Framework and Support Government and Regulatory Support: The Malaysian government and Bank Negara Malaysia (BNM) have been instrumental in developing a robust regulatory framework for Islamic banking. Key legislations such as the Islamic Banking Act 1983 and the Islamic Financial Services Act 2013 provide the necessary legal foundation. Sharia Governance: Establishing Sharia advisory councils and boards within Islamic banks ensures compliance with Islamic principles. These bodies review and approve all financial products and services to ensure they meet Sharia standards. 21 BWSB5053 Contemporary Islamic Banking

22. CONT.. 3 . Public Awareness and Education Marketing and Outreach: Islamic banks conduct extensive marketing campaigns to educate the public about the benefits and principles of Islamic banking. This includes seminars, workshops, and media campaigns. Financial Literacy Programs: Initiatives to enhance financial literacy among the general public and specific communities (such as entrepreneurs and small businesses) help in understanding and adopting Islamic banking products. 4. Product and Service Innovation Broad Range of Products: Islamic banks have developed a wide range of products and services that cater to various customer needs, including retail banking, corporate banking, investment banking, and takaful (Islamic insurance). Technology Integration: Embracing digital banking and fintech innovations ensures that Islamic banking services are convenient, competitive, and accessible to a broader audience. 22 BWSB5053 Contemporary Islamic Banking

23. CONT.. 5. Achieving Competitive Parity Operational Efficiency: Islamic banks strive to achieve operational efficiency on par with conventional banks. This includes investing in technology, enhancing customer service, and optimizing business processes. Competitive Pricing: Offering competitive rates and terms for financing and investment products helps Islamic banks attract customers who might otherwise use conventional banking services. 6. International Collaboration and Recognition Global Standards and Best Practices: Malaysia actively participates in international Islamic finance forums and collaborates with global bodies such as the Islamic Financial Services Board (IFSB) and the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) to adopt best practices. Positioning as a Global Hub: Malaysia aims to position itself as a global hub for Islamic finance by hosting international conferences, promoting cross-border Islamic finance transactions, and encouraging foreign Islamic banks to establish operations in the country. 7. Sustainability and Ethical Focus Sustainable Finance: Integrating principles of sustainability and social responsibility into Islamic finance products, such as green sukuk (Islamic bonds for environmental projects), aligns with global trends towards sustainable finance. Ethical Investments: Emphasizing investments in sectors that promote social welfare, environmental sustainability, and ethical business practices reinforces the ethical foundation of Islamic banking. 23 BWSB5053 Contemporary Islamic Banking

24. The positioning stage of Islamic banking in Malaysia has been marked by deliberate efforts to distinguish Islamic banking as a viable, competitive, and ethically driven alternative to conventional banking. Through robust regulatory support, public education, product innovation, and international collaboration, Islamic banking has carved out a significant niche in Malaysia’s financial landscape. This strategic positioning not only caters to the religious and ethical preferences of the Muslim population but also appeals to a broader audience seeking ethical and sustainable financial solutions.

25. Strengthening stage of Islamic banking in Malaysia. 25 BWSB5053 Contemporary Islamic Banking

26. Strengthening stage of Islamic banking in Malaysia. The strengthening stage of Islamic banking in Malaysia involves consolidating gains made during the initial establishment and positioning phases and focusing on enhancing the robustness, competitiveness, and sustainability of the sector. This stage is characterized by several strategic initiatives aimed at deepening market penetration, improving operational efficiencies, and expanding the range of products and services. 26 BWSB5053 Contemporary Islamic Banking

27. components of the strengthening stage of Islamic banking in Malaysia: 1. Enhancing Regulatory Framework Robust Sharia Governance: Strengthening the framework for Sharia governance ensures higher compliance and consistency across all Islamic financial institutions. This includes enhancing the role of Sharia advisory councils and boards, and implementing more rigorous Sharia audit processes. Regulatory Enhancements: Continuous updates to regulations, such as the Islamic Financial Services Act (IFSA) 2013, help address emerging challenges and align with international standards. Bank Negara Malaysia (BNM) plays a crucial role in this ongoing process. 2. Market Deepening and Broadening Increased Market Penetration: Islamic banks aim to deepen their penetration into the Malaysian market by targeting underserved segments, such as micro, small, and medium-sized enterprises (MSMEs), and rural populations. Product Diversification: Expanding the range of Sharia-compliant products and services, including sophisticated investment products, wealth management services, and comprehensive insurance solutions (takaful). 3. Technological Advancements Digital Transformation: Embracing fintech and digital banking innovations to enhance customer experience, operational efficiency, and reach. This includes mobile banking apps, online banking platforms, and blockchain-based solutions. Cybersecurity: Strengthening cybersecurity measures to protect customer data and ensure the integrity of financial transactions. 4. Talent Development and Capacity Building Educational Initiatives: Investing in education and training programs to develop a skilled workforce proficient in Islamic finance. Institutions such as the International Centre for Education in Islamic Finance (INCEIF) play a pivotal role in this area. Professional Certifications: Promoting certifications and continuous professional development to ensure that professionals in the industry remain up-to-date with the latest practices and standards. 27 BWSB5053 Contemporary Islamic Banking

28. CONT… 5. Global Integration and Collaboration International Partnerships: Forming strategic partnerships with international Islamic financial institutions to facilitate cross-border transactions and knowledge exchange. Standardization Efforts: Actively participating in global standard-setting bodies such as the Islamic Financial Services Board (IFSB) and the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) to harmonize practices and standards. 6. Enhancing Financial Inclusion Inclusive Financial Products: Developing financial products that cater to the needs of various segments of society, including those with lower incomes. This includes microfinance initiatives and affordable housing finance. Community Outreach: Conducting outreach programs to educate the public about the benefits of Islamic banking and improve financial literacy. 7. Sustainable and Ethical Finance Green Financing: Promoting green sukuk and other sustainable financial products that fund environmentally friendly projects. This aligns with global trends towards sustainable finance and appeals to ethically-conscious investors. Corporate Social Responsibility (CSR): Strengthening CSR initiatives to enhance the social impact of Islamic banking, focusing on areas such as poverty alleviation, education, and healthcare. 28 BWSB5053 Contemporary Islamic Banking

29. CONT… 8. Operational Efficiency and Risk Management Process Optimization: Implementing best practices in process optimization to improve efficiency and reduce costs. This includes adopting lean management techniques and automating routine processes. Advanced Risk Management: Enhancing risk management frameworks to better identify, assess, and mitigate financial and operational risks. This includes stress testing, scenario analysis, and the development of comprehensive risk management policies. 9. Customer-Centric Approach Enhanced Customer Experience: Focusing on customer satisfaction by providing personalized services, improving service delivery channels, and resolving customer complaints efficiently. Feedback Mechanisms: Implementing robust feedback mechanisms to continuously gather customer insights and make necessary adjustments to products and services. 10. Strengthening Capital and Liquidity Capital Adequacy: Ensuring that Islamic banks maintain strong capital positions to withstand economic shocks and support sustainable growth. This involves adhering to Basel III requirements and other relevant international standards. Liquidity Management: Developing sophisticated liquidity management tools that comply with Sharia principles, ensuring that banks have adequate liquidity to meet their obligations. 29 BWSB5053 Contemporary Islamic Banking

30. The Strengthening Stage Of Islamic Banking In Malaysia Focuses On Building A Resilient, Competitive, And Sustainable Islamic Financial Sector. Through Regulatory Enhancements, Technological Advancements, Talent Development, Global Integration, And A Commitment To Ethical And Sustainable Finance, Malaysia Aims To Solidify Its Position As A Global Leader In Islamic Banking. This Stage Is Crucial For Ensuring That Islamic Banking Not Only Meets The Needs Of The Muslim Community But Also Appeals To A Broader Audience Seeking Ethical And Innovative Financial Solutions. 30 BWSB5053 Contemporary Islamic Banking

31. CONCLUSION BWSB5053 Contemporary Islamic Banking 31 The philosophy of Islamic banking is comprehensive and deeply rooted in the ethical and moral values of Islam. It aims to create a financial system that is just, equitable, and socially responsible. By focusing on risk sharing, asset-backed financing, and ethical investments, Islamic banking not only seeks to avoid harmful practices but also promotes positive economic and social outcomes. This philosophy aligns financial activities with the broader goals of social justice, economic stability, and community welfare. Islamic finance and banking aim to create a just and equitable financial system by adhering to ethical principles rooted in Islamic law. This approach ensures that financial transactions are not only profitable but also socially responsible and fair, aligning with the values of the broader Islamic community. Islamic banking products in Malaysia cater to a wide range of financial needs while adhering to ethical and religious principles. This diversity and adherence to Sharia compliance have helped Islamic banking gain widespread acceptance and growth in Malaysia. With continuous innovation and support from regulatory authorities, the sector is poised for further expansion, offering viable alternatives to conventional banking products.

32. Thank you Dr. mohd adib abd muin [email protected] | [phone]