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CHAPTER 2 : FRAMEWORK OF ISLAMIC FINANCIAL SYSTEM

CHAPTER 2 : FRAMEWORK OF ISLAMIC FINANCIAL SYSTEM. Mohammad Salleh Abdul Saha Razizi bin Tarmuji. razizi.uitm.edu.my.

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CHAPTER 2 : FRAMEWORK OF ISLAMIC FINANCIAL SYSTEM

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  1. CHAPTER 2: FRAMEWORK OF ISLAMIC FINANCIAL SYSTEM Mohammad Salleh Abdul Saha Razizi bin Tarmuji razizi.uitm.edu.my

  2. يَا أَيُّهَا الَّذِينَ آمَنُوا لا تَأْكُلُوا الرِّبا أَضْعَافاً مُضَاعَفَةً وَاتَّقُوا اللَّهَ لَعَلَّكُمْ تُفْلِحُونَ“Hai orang-orang yang beriman, janganlahkamumemakanribadenganberlipatgandadanbertakwalahkamukepada Allah supayakamumendapatkeberuntungan”. (QS. Ali ‘Imran : 130).

  3. DEFINITION OF ISLAMIC BANKING • A financial institution that operates with the objectives to implement the economic and financial principles of Islam in the banking arena. • Islamic Banking Act 1983: • “..a company which carries on Islamic banking business means banking busines whose aims and operation do not involve any element which is not approved by the religion of Islam…” PAST YEAR

  4. 2.1.1 Historical development Of Islamic Banking

  5. PAST YEAR

  6. In the world 1st stage: Interest-free banking as an idea.. Anwar Qureshi (1946), NaiemSiddiqi (1948) and Mahmud Ahmad (1952), followed by a more elaborate exposition by Mawdudi in 1950, including all the writings of Muhammad Hamidullah (1944, 1955, 1957 and 1962), have proposed a banking system based on the basis of profit and loss sharing (Mudharabah) rather than interest

  7. 2nd stage: Interest-free banks became reality

  8. In Malaysia 1st phase : 1963-1992

  9. Recommendation made by NSC on Islamic Banking

  10. 2nd phase : 1993-2000

  11. 3rd phase : 2001-2010

  12. 2.1.1 Structure of Islamic Bank

  13. 2.1.1 Differences between islamic bank and conventional bank

  14. 2.1.2 Takaful

  15. Wakala model: The principal-agent relationship

  16. Mudaraba model: Partnership

  17. Combination model: Principal-agent relationship and partnership

  18. TAKAFUL

  19. History of Takaful in Malaysia

  20. 2.1.3 ISLAMIC CAPITAL MARKET (ICM)

  21. A global leader in Islamic Capital Market • As at end of 2007 • Total Islamic Bond Market- US$37 billion • 134 Islamic Unit Trust Funds with a net asset value of US$5.2 billion • First Global Sukuk - Guthrie’s US$150 million in 2001 • First Global Sovereign Sukuk – Malaysian Government’s US$600 million in 2002

  22. ISLAMIC CAPITAL MARKET

  23. Islamic Capital Market Statisitics as at 30 June 2012

  24. Islamic Capital Market products and services versus conventional market

  25. STRATEGIC INITIATIVES TAKEN BY SC TO MEET THE OBJECTIVES OF ESTABLISHING MALAYSIA AS INTERNATIONAL ISLAMIC CAPITAL MARKET CENTER • Facilitate the development of various competitive products and services related to the Islamic Capital Market (ICM) • Created an independent market mobilize Islamic funds effectively. • Enhance the value recognition of Malaysia ICM internationally. • To ensure and maintain public confidence in the ICM by ensuring the range of product and services offered by market participants are in full compliance with Syariah principles. • To review and provide guidance on all matters related to ICM to ensure conformity with Syariah principles. • to advices SC on all matters related to the comprehensive development of the ICM and function as a reference for issue related to ICM

  26. THE ROLE OF SHARIAH ADVISORY COUNCIL (SAC) OF SC • established by the SC in 1996 under section 18 of the Securities Commission Act 1993 (SCA) • To ensure harmonization and standardization of Syariah rulings to avoid possible divergence of Syariah scholars in the country. • Method that used by the SAC to introduced the ICM instruments. * To study the validity of conventional instruments used by the local capital market from the Syariah perspective. * Formulating and developing new financial instruments based on Syariah principles.

  27. SHARIAH- COMPLIANT SECURITIES BY THE SHARIAH ADVISORY (SAC) OF THE SUCURITIES COMMISSIONS (SC) • In classifying securities which are listed on Bursa Malaysia, SAC received input and support from the SC. • The SC gathered information on the companies from various sources. • The SC, through the SAC, continue to monitor the activities of all companies listed on Bursa Malaysia to determine their status from the Shariah perspective.

  28. NON- COMPLIANT SECURITIES • The SAC has applied a standard criterion in focusing on the activities of the companies listed on Bursa Malaysia. • The companies that considered under non- compliant securities if they are involved in the following core activities: • Financial based on riba(interest). • Gambling and gaming. • Manufacture or sale of non- halal products.

  29. d) Conventional insurance that containing element of gharar(uncertainty). e) Entertainment activities that are non- permissible according to Shariah. f) Manufacture or sale of tobacco-based product or related products. g) Stockbroking or share trading in Shariah non- compliant securities. h) Other activities deemed non- permissible according to Shariah.

  30. CAPITAL MARKET PRODUCT • Call warrants. * Underlying Assets * Exercise Price * Exercise Period • Transferable Subscription Rights (TSR). • Crude Palm Oil Future Contract. * Among the related issues to this instrument are gambling, gharar, bai’ ma’dum and ‘iwadh. 4) Composite Index Future Contract.

  31. ISLAMIC INTERBANK MONEY MARKET(IIMM)

  32. INTRODUCTION • THE ISLAMIC MONEY MARKET IS INTEGRAL TO THE FUNCTIONING OF THE ISLAMIC BANKING SYSTEM. • PROVIDE THE ISLAMIC FINANCIAL INSTITUTIONS WITH THE FACILITY FOR FUNDING AND ADJUSTING PORTFOLIOS OVER THE SHORT-TERM AND SERVING AS A CHANNEL FOR THE TRANSMISSION OF MONETARY POLICY. • FINANCIAL INSTRUMENT AND INTERBANK INVESTMENT WOULD ALLOW SURPLUS BANKS CHANNEL FUNDS TO DEFICIT BANKS, ALSO MANTAINING THE FUNDING AND LIQUIDITY MECHANISM NECESSARY TO PROMOTE STABILITY IN THE SYSTEM.

  33. IIMM WAS INTRODCED ON JANUARY 3, 1994 AS A SHORT-TERM INTERMEDIARY TO PROVIDE A READY SOURCE OF SHORT-TERM INVESTMENT OUTLETS BASED ON SYARIAH PRINCIPLE. • THE ISLAMIC BANKS AND BANKS PARTICIPATING IN THE ISLAMIC BANKING SCHEME (IBS) WOULD BE ABLE TO MATCH THE FUNDING REQUIREMENTS EFFECTIVELY AND EFFICIENTLY. • BANK NEGARA MALAYSIA (BNM) ISSUED THE GUIDELINES TO FACILITATE PROPER IMPLEMENTATION OF THE IIMM.

  34. DEVELOPMENT OF BNM OPERATIONS IN MALAYSIAN ISLAMIC INTER BANK MONEY MARKET • 18 DEC 1993: ISSUE THE GUIDELINES ON THE IIMM. • 03 JAN 1994: IIMM WAS INTRODUCED. • 13 FEB 1996: MUDHARABAH INTERBANK INVESTMENT. • 21 SEP 1999: MUDHARABAH MONEY MARKET TENDER. • 29 NOV 2000: BANK NEGARA NEGOTIABLE NOTES- BASED ON BAI AL- INAH. • 15 JUN 2001: GOVERNMENT INVESTMENT ISSUE BASED ON BAI AL-INAH AND ISSUE ON BEHALF OF THE GOVERNMENT MALAYSIA. • 01 OCT 2OO1: CIRCULAR ON WHEN ISSUE WAS ISSUED BY BNM TO ALL THE ISLAMIC BANKING INSTITUTIONS. • 15 APR 2002: WADIAH ACCEPTANCE BASED ON AL WADIAH.

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