Islamic banking

Chapter 1 Introduction

Background of Surveies

Islamic Banking is a banking system that based on Islamic Law ( Shariah ) . It follows the Shariah, called fiqh muamalat ( Islamic regulations on minutess ) . The regulations and patterns of fiqh muamalat came from the Quran and the Sunnah, and other secondary beginnings of Islamic jurisprudence such as sentiments jointly agreed among Shariah bookmans ( ijma ‘ ) , analogy ( qiyas ) and personal logical thinking ( ijtihad ) .

The chief rules of Islamic banking are the prohibitions of involvement ( vigorish ) in all minutess, the project concern and trade activities must be based on just and legitimate net income and the prohibitions of monopoly and billboard. By making so, Islamic Bankss will safeguard the Islamic communities and societies from activities that are forbidden in Islam.

Islamic Banking is one of the fast turning banking industries today, many establishments have stepped into this multi-billion dollar dining industry by set uping its Islamic wings and units. Thus it may hold a good chance in the hereafter.


Muslim Bankss have been runing like other traditional Bankss about four decennaries. Like another conventional or commercial bank, they besides mobilize sedimentations and allowing loan to other. However, there are some different between Islamic bank and conventional or commercial bank. Islamic bank running the concern based on Islamic Law ( Shariah ) . Besides, Islamic banking besides prohibited the minutess based on involvement rate. Beyond the above distinct, Islamic bank are similar with conventional or commercial bank as the merchandises and services provided are the same.

By and large, we can specify the Islamic bank as a non-interest based fiscal establishment, which complies to the full with Islamic Laws and has originative and progressive fiscal technology to offer efficient and competitory banking, investing, trade finance, commercial and existent estate funding services ( AbdulQawi, O. and O. Lynn, 2001. )

Islamic Banking is now one of the universe ‘s largest faster-growing economic sectors, consisting over 300 establishments over 75 states. Islamic Banking refers to a system of banking, which is following the Islamic Law or Sharia rules and guided by Islamic economic sciences. In Islamic banking, the aggregation and payment of involvement ( besides normally called ‘Riba ‘ is prohibited. In general, Islamic jurisprudence besides prohibits people from trading in fiscal hazard because is seen as a signifier of chancing. Besides, puting in concerns that are considered as ‘haram ‘ besides prohibited in Islamic jurisprudence.

  1. Assorted Concepts of Islamic Financial Products
  1. Net income sharing fiscal merchandises
  • Musyarakah ( partnership/ joint venture )
    • Involve 2 or more parties.
    • All parties invest their money in a concern.
    • Distribution of net income will be shared harmonizing to the agreed ratio.
    • Losingss will be borne by all parties ( portion the losingss on the footing of their equity engagement ) .
  • Mudharabah ( net income sharing )
    • There is an understanding between capital supplier and enterpriser.
    • Capital supplier provides money for an enterpriser to transport out a concern.
    • Net income will be shared in net income sharing based or pre-profit ratio ( Variable rate ) .
    • Losingss have to bear by capital supplier of the fund.
  • Qardhul Hassan ( benevolent loan )
    • Interest free loan
    • Need to refund the chief sum borrowed plus an excess sum at borrower ‘s borrower??s absolute discretion ( as item of grasp )
    • Example: Amanah Ikhtian Malaysian ( AIM )
      • The Bank may utilize an appropriate proportion of the financess at its disposal for what may be considered as the discharge of its societal duties through loans to truly meriting clients for worthy economic undertakings with the underlying aim of support and aid.
      • The borrower is obliged under Syariah to refund merely the chief sum of the loan harmonizing to its footings and conditions.
      • The Bank can non demand the borrower to pay anything apart from the chief sum of the loan, although in Syariah it is desirable that the borrower does so at his/her ain discretion.
  • Wakalah ( put uping another individual to move )
    • A state of affairs
    • A individual nominates another individual to move on his behalf.
  • Hawala
    • Bill of exchange, promissory note, check or bill of exchange.
    • Example: a debitor passes on the duty of payment of his debt to a 3rd party who owes the former a debt. Thus the duty of payment is finally shifted to a 3rd party.
    • A mechanism for settling international histories, by book transportations. This obviates, to a big extent, the necessity of physical transportation of hard currency.
  • Advance purchase fiscal merchandises
    • Murabahah ( cost plus )
      • Short term loan
      • Involve in plus purchasing
      • Bank buys it and sells it back to you when it is mature.
      • The monetary value will include a net income border as agreed to by both parties. ( Cost + net income border )
      • It is similar to lodging loan.
      • Payment can pay back in lump-sum or monthly payment and the period of paying back is set by the borrower.
    • Istisna ( Progressive Financing )
    • A contract of acquisition of goods by specification or order where the monetary value is paid increasingly in conformity with the advancement of a occupation.
    • Ijarah ( renting )
      • Leases equipment, edifice or other installation
      • At an in agreement lease against a fixed charge ( agreed by both parties )
  • Deposit merchandises
    • Wadiah Yad Dhamanah ( nest eggs with warrant )
      • For safekeeping or salvaging intent.
      • Wadiah is a Trust which means that the depositor must swear the depositary.
      • Bank ( depositary ) act as legal guardian
      • Depository becomes the surety who needs to vouch refund of sedimentation.
      • There is no involvement t be provided.
      • Depository has provided the return to a depositor as item of grasp.
      • Return ( net income ) given based on net income sharing ( Fixed rate )
        • Mudharabah
      • Deposit merchandises based on revenue-sharing between depositor and bank, including salvaging merchandises that can be withdrawn any clip and clip sedimentation merchandises.
    • Qard al-Hasanah
      • Unremunerated sedimentation merchandises, normally for charitable intents.
  • Insurance merchandises
    • Takaful
    • Islamic insurance with joint risk-sharing


    The first modern experiment with Islamic banking was undertaken in Egypt under screen without projecting an Muslim image to avoid of being seen as a manifestation of Islamic fundamentalism that was anathema to the political government. The pioneering attempt, led by Ahmad Elnaggar, took the signifier of a nest eggs bank based on profit-sharing in the Egyptian town of Mit Ghamr in 1963. This experiment lasted until 1967 ( Ready 1981 ) , by which clip, there were nine such Bankss in the state.

    In 1972, the Mit Ghamr Savings undertaking became portion of Nasr Social Bank which, until the day of the month, is still in concern in Egypt. In 1975, the Islamic Development Bank was set up with the mission to supply support to undertakings in the member states. The first modern commercial Islamic bank, Dubai Islamic Bank, opened its doors in 1975. In the early old ages, the merchandises offered were basic and strongly founded on conventional banking merchandises, but in the last few old ages the industry is get downing to see strong development in new merchandises and services.

    Islamic Banking is turning at a rate of 10-15 % per annum and with marks of consistent hereafter growing ( Muslim Banks and Financial Stability: An Empirical Analysis, 2008 ) . Muslim Bankss have more than 300 establishments spread over 51 states.

    The earliest signifier of Islamic Banking in Malaysia was set up by Perbadanan Wang Simpanan Bakal-Bakal Haji ( the Pilgrims ‘ Management and Fund Board ) in 1963. This establishment was set up for Muslim to salvage and help them to execute a pilgrim’s journey in Makkah every bit good as to promote them to take part in investing chances and economic. While the first Islamic bank established in Malaysia was Bank Islam Malaysia Berhad ( BIMB ) which commenced operations on 1 July 1983.

    The authorities of Malaysia had introduced a systematic procedure to implement a proper Islamic fiscal system among the people in Malaysia. The first stage is the period of familiarisation during twelvemonth 1983-1992, and this is the clip that Bank Islam Malaysia Berhad established. During this period, BIMB has developed itself as one of the most respectable fiscal establishments in the state, and been listed on Kuala Lumpur Stock Exchange ( KLSE ) on 17th January 1992.

    The 2nd stage was happened in twelvemonth 1993-2003. In these ten old ages, the authorities on Malaysia was aimed on making a more contributing environment for competition among the Bankss and give Bankss to seek to capture the market portion. During twelvemonth 1993, the conventional Bankss were allowed to offer Islamic banking services by puting up “ Muslim Windowss ” or “ Muslim banking strategy ( IBS ) ” to pull the populace particularly Muslim to involved in.

    The 3rd stage that commenced from 2004 was the period of farther fiscal release. At this clip, the authorities gives the chances to foreign Muslim Bankss to run in our state by publishing a licence to them. Malaya is the first state that implements double banking that Islamic banking system and conventional banking system operate side by side.

    Problem Statement

    The Islamic banking presents is deriving quickly and traveling popularity. Many local and foreign Bankss in Malaysia are offered and unfastened particular Islamic Banking counter. In this research, I will concentrate on the public presentation, jobs and chance of Islamic banking in Malaysia. There are tonss of issues about Islamic banking in Malaysia, such as public credence, factors of choice toward the services and merchandises, hazard direction and others. This will be discussed in the following chapter which is literature reappraisal. Even the Islamic banking has been introduced in our state over 20 old ages, but at that place still have to run into some job. Based on the above, the research jobs are listed as below:

    • Lack of cognition among public about the chance of Islamic banking in Malaya
    • Lack of understanding about Islamic banking makes the people do non affect in it.
    • Islamic banking has a different hazard profile than the conventional bank due to the Islamic prohibited of involvement.
    • Public credences of Islamic banking are non strong.

    Research Objective

    • To analyze the jobs and public presentation of Islamic Banking in Malaysia
      • Islamic Banking has emerged as a new world in the international fiscal scene since the 1970s and has been established in Malaysia over 20 old ages. The outgrowth of Islamic banking is frequently related to the resurgence of Islam and the desire of Muslims to populate in all facets of their life in conformity with the instructions of Islam. This paper is designed to analyze about the public presentation of Islamic banking and find how good it.
    • To analyse the chance and growing of Islamic Banking in Malaysia
    • Islamic banking has a important growing in Malaysia. Many local Bankss every bit good as foreign Bankss are now supplying Islamic banking and finance services to the populace. The factors that determine the chance and growing need to be studied. As a state that consisted of a double banking system, Malaysia plays an of import function as an illustration to other states on how to keep this sort of banking system. This may give the chances to Islamic banking to spread out and go on to growing.

    • To happen out the public credence and consciousness of Islamic Finance Product among Malayan
    • The public credence is playing an of import function to find the sequence of Islamic banking in Malaysia. Most of the people are covering with the conventional banking because the involvement rate provides a changeless return for the clients. Islamic banking advocator involvement free makes people think that there is no return by invest their money in Islamic banking services and merchandises. Thus the public credences need to be raised as this will merely convey a good chance and hereafter for Islamic banking industry.

    • To analyze the factor influence the choice of Islamic Banking.
    • Currently Islamic bank strategically offering high quality merchandises and services to fulfill their clients due to the strong competition, a client outlooks for high quality services and quickly alterations of engineering. Factors that are reflecting to clients ‘ perceptual experience and satisfaction on Islamic Banking demand to be investigated. This survey hope to analyse and find the perceptual experience, quality of services, handiness of services, assurance in bank and societal and spiritual position about the Islamic banking system.

    Scope of Surveies

    The range of surveies of this research paper is a focal point on the jobs, public presentation and chance about Islamic banking industry in Malaysia. This paper besides introduces assorted Islamic fiscal contracts provided and give a briefly describe about the merchandises and services. Besides, this research besides discussed about the factors of choice on Islamic banking and some current issues through the literature reappraisal.

    Organization of Research

    This research is divided into three subdivisions, which includes:

    • The usage of literature reappraisal to happen out what is the current state of affairs about Islamic banking industries. By reappraisal these diaries, I can easy place the public presentation, jobs and prospect about Islamic banking industry in Malaysia. This would be the first portion of research. After this measure, a model will be developed and to understand the variables.
    • Once the model is being done, a questionnaire will be created to understand the revolution and the impact of Internet Banking for the users. This questionnaire will so be distributed for consequences.
    • The 3rd portion of the research will be analysing if the consequences of questionnaires scientifically and come with decisions and grounds of peculiar go oning. Once this is being done, so we will explicate assorted steps that could be done to do the state of affairs more favorable.

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