ISLAMIC CREDIT MANAGEMENT

BWFS2043
Topic 3
The Rules of Islamic Financing
NORIZA ABD
AZIZ

Islamic Business School

UUM

 The candidates should be able to understand

The roles & intervention by monetary
authorities
The roles & intervention by the Shariah
Board
The roles & intervention by profesional
bodies
The importance of compliance with the
standards on financing practices

Islamic Business School

Intervention by the Monetary Authorities

Monetary authority is a generic term in finance
& economics for the entity which controls the
money supply of a given currency, and has the
right to set interest rate, and other parameters
which control the cost and availability of
money
Generally, a monetary authority is a central
bank
One of the functions of a monetary authority
or central bank is to supervise and regulate
the country`s banking system

MONETARY AUTORITIES INTERVENTION

ISLAMIC BANK 6 MAJOR TASK OF REGULATIONS: MAINTENANCE OF PAID UP CAPITAL AND RESERVE
ESTABLISHED MINIMUM AMOUNT OF LIQUID ASSETS
AT ALL TIMES
TYPES AND CONTENT OF REPORTS
FORMAL PRESENTATION AND CONTENTS OF
FINANCIAL STATEMENTS
GRANTING OF ADVANCES, LOANS AND CREDIT
FACILITIES
INVESTIGATION AND EXAMINATION OF BOOKS,
SECURITIES,AND TRANSACTION

Monetary Policy in Islamic Bank

It is important for the central bank to maintain
a sound and stable financial system
One of the ways of to accomplish this task is
by introducing an affective monetary policy

EFFECTIVE MONETARY POLICY IN ISLAMIC BANKING SYSTEM

MAIN OBJECTIVE OF MONETARY POLICY IS TO ESTABLISH AN OPTIMUM

LEVEL OF MONEY SUPPLY IN THE COUNTRY. AND DEPENDED ON:
EXTENT OF ITS CONTRIBUTION TO THE ATTAINMENT OF FULL
EMPLOYMENT

THE PREVENTION OF INFLATION

A RISE ON ECONOMIC GROWTH

CONVENTIONAL MONETARY POLICY ARE:

OPEN MARKET OPERATION

RESERVE REQUIREMENTS

DISCOUNT RATE
ISLAMIC MONETARY POLICY (CHAPRA 1983):

ECONOMIC WELL BEING WITH FULL EMPLOYMENT AND AN

OPTIMUM RATE OF ECONOMIC GROWTH

SOCIO-ECONOMIC JUSTICE AND EQUITABLE DISTRIBUTION OF

INCOME AND WEALTH

STABILITY IN THE VALUE OF MONEY

EFFECTIVE MONETARY POLICY IN ISLAMIC BANKING SYSTEM

MONETARY INSTRUMENTS UNAFFECTED ARE:

MINIMUM CASH RESERVE REQUIREMENT

LIQUIDITY RATIO REQUIREMENT
OVERALL CEILINGS ON THE LENDING AND INVESTMENT
OPERATIONS OF BANKS
MANDATORY TARGETS FOR PROVIDING FINANCE TO
PRIORITY SECTORS (SELECTIVE CREDIT CONTROLS)
ISSUE OF DIRECTIONS TO BANKS ON VARIOUS ASPECT OF
BANKING OPERATION NOT COVERED BY SPECIFIC POLICY
INSTRUMENTS

EFFECTIVE MONETARY POLICY IN ISLAMIC BANKING SYSTEM

MONETARY INSTRUMENTS SUGGESTED BY MUSLIM
SCHOLARS (ARIFF, 1983)

REFINANCE RATIO REFERS TO CENTRAL BANK REFINANCING

OF A PART OF INTEREST-FREE LOAN PROVIDED BY
COMMERCIAL BANKS
QARD HASAN RATIO WHICH IS THE PERCENTAGE OF
DEMAND DEPOSITS OF COMMERCIAL BANKS ARE OBLIGED
TO LEND AS INTEREST FREE LOAN
PROFIT-SHARING RATIO WHICH FORMS THE BASIS ON
WHICH MUDARABA INVESTMENTS ARE TO TAKE PLACE
BETWEEN BANKS AND CLIENTS
THE RATIO OF INTEREST-LESS GOVERNMENT SECURITIES IN
THE INVESTMENT PORTFOLIO OF ISLAMIC FINANCIAL
INSTITUTIONS.

College of Business
UUM

 Khan & Mirakhor (1987) suggested that central

banks should not only purchase the equities of
banks and other financial institutions but
should also invest directly in the real sector of
the economy on a profit sharing basis or joint
venture basis with other banks.
To finance public enterprise projects,
governments of Muslim countries have been
urged to issue securities or shares based on
the principles of mudarabah ( Siddiqi, 1983)

SHARIAH INTERVENTION: MAIN FUCNTION OF SHARIAH COMMITTEE:

OPERATIONS OF THE BANK ARE NOT IN VIOLATION OF
SHARIAH PRINCIPLES
INVESTMENTS OR PROJECTS ARE SHARIAH
COMPLIANT
BANK MANAGED ACCORDING TO ISLAMIC PRINCIPLES
ROLE OF SHARIAH COMMITTEE
ALL STRUCTURES TAILORED BY ISLAMIC BANKS ARE
RELIGIOUSLY PERMISSIBLE
THESE STRUCTURES ARE OF INTRINSIC FINANCIAL
VALUE

SHARIAH INTERVENTION: 4 QUESTIONS ASKED BY SHARIAH COMMITTEE

DO THE TERMS OF THE TRANSACTION COMPLY WITH
SHARIAH LAW?
IS THIS THE BEST INSTRUMETNS FOR THE CLIENT?
DOES THE INVESTMENT PRODUCE VALUE TO THE
CLIENT?

AS AN ASSET MANAGER, IS THIS A TRANSACTION I

WHICH THE BANKER, AS AN INDIVIDUAL, WOULD BE
PREPARE TO INVEST HIS OWN MONEY?
THE PRINCIPAL DIFFERENCE BWTEEN AN ISLAMIC BANK
AND CONVENTIONAL BANK IS THE TREATMENT OF
MONEY

INTERVENTION BY PROFESSIONAL BODIES ISLAMIC FINANCIAL SERVICES BOARDS

ACCOUNTING AND AUDITING ORGANIZATION FOR
ISLAMIC FINANCIAL INSTITUTIONS (AAOIFI)
GENERAL COUNCIL FOR ISLAMIC BANKS AND FINANCIAL
INSITUTIONS
ASSOCIATION OF BANKS IN MALAYSIA (ABM)
ASSOCIATION OF ISLAMIC BANKING INSTITUTIONS
MALAYSIA (AIBM)
MALAYSIA ACCOUNTING STANDARD BOARD
ISLAMIC BANKS NEEDS TO COMPLY WITH BOTH
INTERNATIONAL AND LOCAL STANDARDS SET BY
RELEVANT AUTHORITIES OR PROFESSIONAL BODIES.

Exercise
Explain the process of money creation?
Why is intervention by a monetary authority
necessary?

THANK YOU

Islamic Business School