CHAPTER 9

ISLAMIC BANKING
 INTRODUCTION
 The origin and basis of Islamic banking is
shariah, ie., Islamic laws and sometimes
referred to as Islamic Jurisprudence
 Islam may be perceived as comprising three
basic elements, that are;
 Aqidah信仰学
 Concerns all forms of faith and belief by a Muslim in
Allah and His will, from the fundamental faith in His
being to the ordinary beliefs in His individual
commands

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CONT…
 Shariah教法
Concerns all forms of practical actions by a
Muslim manifesting his faith and belief
Divided into:

Ibadat主命

 Concerned with the practicalities of

his worship to Allah, in the context of
man-to-Allah relationship

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CONT…
Muamalat待人接物，交易
Concerned with the practicalities of his

mundane daily life, in the context of
various forms of man-to-man
relationship
Muamalat conduct:
 Muslim’s economic activities within his
economic system
 Within the economic system, there is
the banking and financial system
where man conducts his banking and
financial activities
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CONT…

 Akhlaq 道德品行
Concerns behavior, attitude and work
ethics with which a Muslim performs his
practical actions

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 ISLAM

AQIDAH SHARIAH AKHLAQ

(faith & belief) (Practices & Activities) (Moralities & Ethnics)

IBADAT MUAMALAT
(Man to God Worship) (Man to Man Activities)

POLITICAL ECONOMIC SOCIAL

ACTIVITIES ACTIVITIES ACTIVITIES

BANKING & FINANCIAL ACTIVITIES

ISLAM, SHARIAH, MUAMALAT, BANKING & FINANCE

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CONT…

 The primary sources of Shariah are:

 Al-Quran

 Al-Sunnah

 Banking and financial activities are part

and parcel of Islamic Muamalat, therefore
subject to the Shariah Laws on Muamalat

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THE OBJECTIVES OF ISLAMIC BANKS

 To promote, foster and develop the banking

services and product based on Islamic principles
 Also responsible for promoting the
establishment of investment companies or other
business enterprises as long as the activities of
these companies are not forbidden by Islam
 The main principles of Islamic banking comprise
of prohibition of interest in all forms of
transactions, and undertaking business and
trade activities on the basis of fair and legitimate
profit
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PROHIBITION OF RIBA (INTEREST)

 The most important aspect of Islamic banking is

that its operations must be conducted without
any element of riba
 Riba – technically refers to the ‘premium’ that
must be paid by the borrower to the lender along
with the principle amount as a condition for the
loan or for an extension on its maturity

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PRINCIPLES OF SHARIAH IN ISLAMIC
BANKING
 The most widely used Shariah principles
recommended by Islamic scholars are:
 Profitand loss sharing principles
Mudarabah
Musharakah
 Fees or charges based principles
Murabahah
Bai mu’ azzal
Ijarah
Ijarah wa-iktina
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CONT…

 Free service principle

Qard hassan

 Ancillary principles
 Wadiah

 Rahn

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MUDARABA分红制

 Means ‘profit-sharing’ or ‘trust finance’ or

‘investment through self-employed entrepreneur’
 An agreement between at least 2 parties, one
being a lender or sometimes known as an
investor and an entrepreneur also known as as
agent-manager
 In the agreement, the investor agrees to finance
or entrust money to the entrepreneur who is to
trade in an agreed manner and then return to
the investor the principal and pre-agreed
proportion of profits and keep for himself the
remainder 12
CONT…

 The distribution of profits between the 2 parties

must be on a proportional basis and cannot be a
lump sum or a guaranteed amount
 In the case of loss (as a result of circumstances
beyond the control of entrepreneur), the investor
will bear all financial risks and the entrepreneur
loses the time and his efforts only

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MUSHARAKAH合伙制
 ‘Partnership’ or ‘participating financing’
 Also means a joint venture agreement between
2 parties to engage in a specific business activity
with an aim of making profit
 The termination of the agreement may be based
on time or after fulfillment of certain conditions
 Under this concept, both parties will have to
provide capital to the business, and the investor
or lender may also participate in the
management of the business or company

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CONT…
 As in the case of Mudarabah, all parties agree
through negotiation on the distribution of profit
ratio
 The profit ratio need not coincide with the ratio of
participation in the financing of the activity,
however in the case of losses, all parties bear
the loss in propotion to their share in the
financing

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MURABAHAH
 ‘Cost-plus financing’ or ‘financing resale of
goods’
 Refers basically to the sale of goods at a price
covering the purchase price plus a profit margin
agreed upon by both parties concerned
 This arrangement transforms a traditional
lending activity into a sale and purchase
agreement
 Lender buy goods that the borrower need, and
then sale it to the borrower at a higher price,
agreed by both parties
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CONT…

 In this principle, Islamic banks play the

same role as any other business entity,i.e.
giving services or sale of goods to
customers with the aim of making profit
(reasonable profits)

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BAI MUA’ZZAL
 Is a variant concept of murabahah
 Under this principle, the borrower is allowed to
defer settlement of payment for goods purchased
within the period, and in a manner determined and
agreed by both parties

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IJARAH
 Shariah’s concept of leasing
 Bank purchase assets required by a customer, and
then lease the asset to the customer for a given
period of time
 The lease, rental and other terms and conditions
are agreed upon by both parties

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IJARAH WA-IKTINA

 Refers to a contract whereby a bank will

purchase an asset, and then rent the asset to
the customer on an agreed rental, together
with the client’s agreement to make
payments which will eventually lead to the
transfer of ownership from bank to customer

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QARD HASSAN

 S benevolent loan that obliges a borrower to

repay the lender the principal sum borrowed
on maturity of the loan
 The borrower, however has the discretion to
reward the lender for his loan by paying any
sum over and above the amount of the
principal

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WADIAH

 Refers to an agreement between the owner

of assets and another party, whereby the
owner will deposit and give consent to the
custodian to make use of their assets (funds)
as long as these assets remain in the
custodian’s hands

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RAHN

 A contract of pledging a security and

becomes binding when possession of the
pledge has taken place
 In this principle, the ownership of the
security is not transferred to the pledgor
 The pledgor will keep the security for a
certain period agreed by both parties

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CONT…

 Upon maturity, the owner of the assets will

have to pay back the pledgor’s money and
he will get back his assets

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PRINCIPLE OF SHARIAH

 Muslim scholars agreed that the principles

adopted by the Islamic banks belong to 2
categories:
 StronglyIslamic
 Weakly Islamic

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CONT…

 Strongly Islamic
 If
the bank’s operations conform to Islamic
objectives both in form and in substance
 Weakly Islamic
 Practices which conform to Islamic norms in form
but not in substance

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CONT…
 Only those principles which permit risk-return
sharing between providers and users of
funds can be considered strongly Islamic
 Muslim scholars consider only 2 principles as
strongly Islamic
 Mudarabah
 Musharakah

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