ISLAMIC
BANKING: THE UPCOMING BANKING CHANCES
Islamic banks have been
operating like other traditional banks about four decades. Like another
conventional or commercial bank, they also mobilize deposits and granting loan
to other. However, there are some different between Islamic bank and
conventional or commercial bank. Islamic bank running the business based on
Islamic Law (Shariah). Besides, Islamic banking also prohibited the
transactions based on interest rate. Beyond the above distinct, Islamic bank
are similar with conventional or commercial bank as the products and services
provided are the same.
Generally, we can
define the Islamic bank as a non-interest based financial institution, which
complies fully with Islamic Laws and has creative and progressive financial
engineering to offer efficient and competitive banking, investment, trade
finance, commercial and real estate financing services (AbdulQawi, O. and O.
Lynn, 2001.)
Islamic Banking is now
one of the world's largest faster-growing economic sectors, comprising over 300
institutions over 75 countries. Islamic Banking refers to a system of banking,
which is following the Islamic Law or Sharia principles and guided by Islamic
economics. In Islamic banking, the collection and payment of interest (also
commonly called 'Riba' is prohibited. In general, Islamic law also prohibits
people from trading in financial risk because is seen as a form of gambling.
Besides, investing in businesses that are considered as 'haram' also prohibited
in Islamic law.
Various Concepts of Islamic
Financial Products
1. Profit sharing financial products
Ø Musyarakah
(partnership/ joint venture)
§ Involve
2 or more parties.
§ All
parties invest their money in a business.
§ Distribution
of profit will be shared according to the agreed ratio.
§ Losses
will be borne by all parties (share the losses on the basis of their equity
participation).
Ø Mudharabah
(profit sharing)
§ There
is an agreement between capital provider and entrepreneur.
§ Capital
provider provides money for an entrepreneur to carry out a business.
§ Profit
will be shared in profit sharing based or pre-profit ratio (Variable rate).
§ Losses
have to bear by capital provider of the fund.
Ø Qardhul
Hassan (benevolent loan)
§ Interest
free loan
§ Need
to repay the principal amount borrowed plus an extra amount at borrower's
borrower¡¯s absolute discretion (as token of appreciation)
§ Example:
Amanah Ikhtian Malaysian (AIM)
§ The
Bank may use an appropriate proportion of the funds at its disposal for what
may be considered as the discharge of its social responsibilities through loans
to truly deserving customers for worthy economic projects with the underlying
objective of support and assistance.
§ The
borrower is obliged under Syariah to repay only the principal amount of the
loan according to its terms and conditions.
§ The
Bank cannot demand the borrower to pay anything apart from the principal amount
of the loan, although in Syariah it is desirable that the borrower does so at
his/her own discretion.
Ø Wakalah
(nominating another person to act)
§ A
situation
§ A
person nominates another person to act on his behalf.
Ø Hawala
§ Bill
of exchange, promissory note, cheque or draft.
§ Example:
a debtor passes on the responsibility of payment of his debt to a third party
who owes the former a debt. Thus the responsibility of payment is ultimately
shifted to a third party.
§ A
mechanism for settling international accounts, by book transfers. This
obviates, to a large extent, the necessity of physical transfer of cash.
2. Advance purchase financial products
Ø Murabahah
(cost plus)
§ Short
term loan
§ Involve
in asset buying
§ Bank
buys it and sells it back to you when it is mature.
§ The
price will include a profit margin as agreed to by both parties. (Cost + profit
margin)
§ It
is similar to housing loan.
§ Payment
can pay back in lump-sum or monthly payment and the period of paying back is
set by the borrower.
Ø Istisna
(Progressive Financing)
Ø A
contract of acquisition of goods by specification or order where the price is
paid progressively in accordance with the progress of a job.
Ø Ijarah
(leasing)
§ Leases
equipment, building or other facility
§ At
an agreed rental against a fixed charge (agreed by both parties)
3. Deposit products
Wadiah Yad Dhamanah
(savings with guarantee)
For safekeeping or
saving purpose.
Ø Wadiah
is a Trust which means that the depositor must trust the depository.
§ Bank
(depository) act as trustee
§ Depository
becomes the guarantor who needs to guarantee repayment of deposit.
§ There
is no interest t be provided.
§ Depository
has provided the return to a depositor as token of appreciation.
§ Return
(profit) given based on profit sharing (Fixed rate)
§ Mudharabah
§ Deposit
products based on revenue-sharing between depositor and bank, including saving
products that can be withdrawn any time and time deposit products.
Ø Qard
al-Hasanah
§ Unremunerated
deposit products, usually for charitable purposes.
Ø Insurance
products
Ø Takaful
Ø Islamic
insurance with joint risk-sharing
History
The first modern
experiment with Islamic banking was undertaken in Egypt under cover without
projecting an Islamic image to avoid of being seen as a manifestation of
Islamic fundamentalism that was anathema to the political regime. The
pioneering effort, led by Ahmad Elnaggar, took the form of a savings bank based
on profit-sharing in the Egyptian town of Mit Ghamr in 1963. This experiment
lasted until 1967 (Ready 1981), by which time, there were nine such banks in
the country.
In 1972, the Mit Ghamr
Savings project became part of Nasr Social Bank which, until the date, is still
in business in Egypt. In 1975, the Islamic Development Bank was set up with the
mission to provide funding to projects in the member countries. The first
modern commercial Islamic bank, Dubai Islamic Bank, opened its doors in 1975.
In the early years, the products offered were basic and strongly founded on
conventional banking products, but in the last few years the industry is
starting to see strong development in new products and services.
Islamic Banking is
growing at a rate of 10-15% per annum and with signs of consistent future
growth (Islamic Banks and Financial Stability: An Empirical Analysis, 2008).
Islamic banks have more than 300 institutions spread over 51 countries.
The earliest form of
Islamic Banking in Malaysia was set up by Perbadanan Wang Simpanan Bakal-Bakal
Haji (the Pilgrims' Management and Fund Board) in 1963. This institution was
set up for Muslim to save and assist them to perform a pilgrimage in Makkah as
well as to encourage them to participate in investment opportunities and
economic. While the first Islamic bank established in Malaysia was Bank Islam
Malaysia Berhad (BIMB) which commenced operations on 1 July 1983.
The government of
Malaysia had introduced a systematic process to implement a proper Islamic
financial system among the people in Malaysia. The first phase is the period of
familiarization during year 1983-1992, and this is the time that Bank Islam
Malaysia Berhad established. During this period, BIMB has developed itself as
one of the most respectable financial institutions in the country, and been
listed on Kuala Lumpur Stock Exchange (KLSE) on 17th January 1992.
The second phase was
happened in year 1993-2003. In these ten years, the government on Malaysia was
aimed on creating a more conducive environment for competition among the banks
and give banks to try to capture the market share. During year 1993, the
conventional banks were allowed to offer Islamic banking services by setting up
"Islamic windows" or "Islamic banking scheme (IBS)" to
attract the public especially Muslim to involved in.
The third phase that
commenced from 2004 was the period of further financial liberation. At this
time, the government gives the opportunities to foreign Islamic banks to
operate in our country by issuing a license to them. Malaysia is the first
country that implements dual banking that Islamic banking system and
conventional banking system operate side by side.
Problem Statement
The Islamic banking
nowadays is gaining rapidly and going popularity. Many local and foreign banks
in Malaysia are offered and open special Islamic Banking counter. In this
research, I will focus on the performance, problems and prospect of Islamic
banking in Malaysia. There are lots of issues about Islamic banking in
Malaysia, such as public acceptance, factors of selection toward the services
and products, risk management and others. This will be discussed in the next
chapter which is literature review. Even the Islamic banking has been
introduced in our country over 20 years, but there still have to meet some
problem. Based on the above, the research problems are listed as below:
Ø Lack
of knowledge among public about the prospect of Islamic banking in Malaysia
Ø Lack
of understanding about Islamic banking makes the people do not involve in it.
Ø Islamic
banking has a different risk profile than the conventional bank due to the
Islamic prohibited of interest.
Ø Public
acceptances of Islamic banking are not strong.
Research Objective
Ø To study the problems and
performance of Islamic Banking in Malaysia
§ Islamic
Banking has emerged as a new reality in the international financial scene since
the 1970s and has been established in Malaysia over 20 years. The emergence of
Islamic banking is often related to the revival of Islam and the desire of
Muslims to live in all aspects of their life in accordance with the teachings
of Islam. This paper is designed to study about the performance of Islamic
banking and determine how well it.
Ø To analyze the prospect and growth
of Islamic Banking in Malaysia
§ Islamic
banking has a significant growth in Malaysia. Many local banks as well as
foreign banks are now providing Islamic banking and finance services to the
public. The factors that determine the prospect and growth need to be studied.
As a country that consisted of a dual banking system, Malaysia plays an
important role as an example to other countries on how to maintain this kind of
banking system. This may give the opportunities to Islamic banking to expand
and continue to growth.
Ø To find out the public acceptance
and awareness of Islamic Finance Product among Malaysian
§ The
public acceptance is playing an important role to determine the succession of
Islamic banking in Malaysia. Most of the people are dealing with the
conventional banking because the interest rate provides a constant return for
the customers. Islamic banking advocate interest free makes people think that
there is no return by invest their money in Islamic banking services and
products. Thus the public acceptances need to be raised as this will only bring
a good prospect and future for Islamic banking industry.
Ø To study the factor influence the
selection of Islamic Banking.
§ Currently
Islamic bank strategically offering high quality products and services to
satisfy their customers due to the strong competition, a customer expectations
for high quality services and rapidly changes of technology. Factors that are
reflecting to customers' perception and satisfaction on Islamic Banking need to
be investigated. This study hope to analyze and determine the perception,
quality of services, availability of services, confidence in bank and social
and religious perspective about the Islamic banking system.
Scope of Studies
The scope of studies of
this research paper is a focus on the problems, performance and prospect about
Islamic banking industry in Malaysia. This paper also introduces various
Islamic financial contracts provided and give a briefly describe about the
products and services. Besides, this research also discussed about the factors
of selection on Islamic banking and some current issues through the literature
review.
Organization of Research
This research is divided
into three sections, which includes:
Ø The
use of literature review to find out what is the current situation about
Islamic banking industries. By review these journals, I can easily identify the
performance, problems and prospect about Islamic banking industry in Malaysia.
This would be the first part of research. After this step, a framework will be
developed and to understand the variables.
Ø Once
the framework is being done, a questionnaire will be created to understand the
revolution and the impact of Internet Banking for the users. This questionnaire
will then be distributed for results.
Ø The
third part of the research will be analyzing if the results of questionnaires
scientifically and come with conclusions and reasons of particular happening.
Once this is being done, then we will formulate various measures that could be
done to make the situation more favourable.
