ISLAMIC BANKING

GROUP ASSIGNMENT MODULE:

ISLAMIC BANKING

NO
.
1
2
3
4

GROUP MEMBERS:
NAME
STUDENT ID
TAN YEAN SUAN
CHAN KHAR YEAN
SEN TIAN NI
LIM PEY YING

SIGNATURE

DIA 090412/012
DIA 130212/001
DIA 090412/019
DDIA 030912/005

DIPLOMA/ DEGREE OF ACCOUNTING

1

ADVANCED LEARNING COLLEGE

19th JULY 2014

QUESTION:
Islamic banking has a rapid growth in Malaysia past 2 decade. There are many special
characteristics guided by Syariah ruling in Islamic Bank. Almost all the product in conventional
banking is available in Islamic Banking.
You are required:
(a) Distinguished the major difference between conventional and Islamic Banking.
(10 marks)
(b) Explain any five financial product provided by Islamic Banking.
2

(20 marks)
(Total: 30 marks)

Content
1.0
2.0

Question (a) difference between conventional and Islamic Banking

Question (b) five financial product
2.1 Ijarah
2.2 Murabaha
2.3 Mudarabah
2.4 Musharaka
2.5 Salam and Parallel Salam

page 4
page 6
page 7
page 8
page 9
page 10

References

page 11

Appendix

page 12

1.0 Question (a)

Distinguished the major difference between conventional and Islamic Banking.
(10 marks)
There are major difference between Conventional and Islamic Banking.
First, the functions and operating modes of Islamic Banks are based on the principles of Islamic
Sharia. Islamic law is not created from people but is from supreme power. It behind Islamic bank
is the sharing of profits and loss, and it is prohibition of collection and payment of interest.
While, conventional Banks is fully based on the manmade principles. They do collect interest.
Second, Islamic bank will maximizing profit but it has to subject to Shariah restrictions. For
example, loan shark is not allowed to borrow money from Islamic Bank although can earn much
more profits from them. Conventional bank is only aims to maximizing profit and without
looking at any restriction.
Third, Islamic bank dont have any provision to charge extra money from defaulters. There is
only small amount of compensation collected and these proceeds will be given to charity as well.
Rebates are give for early settlement at the banks discretion. In conventional banking, they will
charge additional money as penalty and compound interest in case of defaulters. Then, they will
keep the penalty as their profits.
Fourth, Islamic bank has become one of the service orientated functions to be a Zakat Collection
Centre in this modern Islamic bank system. They also pay out their zakat as well. For
conventional bank, it does not deal with Zakat.

Lastly, Islamic bank is operating on the basis of profit and loss sharing. When the businessman
had suffered losses, Islamic bank will share these losses based on the mode of finance used
(Musharakah & Mudarabah). In Conventional bank, investor is assured of a predetermined rate
of interest. Interest will be charged even in case the organization suffers losses. Therefore, it is
not based on profit and loss sharing.

2.0 Question (b)

Explain any five financial product provided by Islamic Banking.
(20 marks)
The five financial products provided by Islamic banking are:
2.1

Ijarah
One of the financial products provided by Islamic bank is Ijarah Financing. It is a mode
of finance that Islamic bank will purchases an asset or equipment at the request of their
client and lease to the client at a higher price which includes a fair return for Islamic
bank. Islamic bank using the regular re-pricing of the lease to ensure the returns are
competitive in the prevailing market. In Ijarah Financing, it is generally for financing
consumer goods, vehicles and equipment, home financing; it is also can way into
transportation financing and other project that into larger and more complex transactions.
Client must pay lease rental to Islamic bank as the lease is made operative from the date
the lessee take delivery of the asset. The asset is still belongs to Islamic bank. Normally,
client does not have the option or ability to purchase the asset, however they may
purchase the assets at the end of the lease period if they are willing to own the asset.
(Financial Islam - Islamic Finance, n.d.)

2.2

Murabaha
Murabaha is one of the most commonly used modes of financing by Islamic Banks. It is
contract for purchase and resale and allows the customer to make purchase without
having to take out a loan and pay interest. That has two types of Murabaha, direct
Murabaha and Murabaha to the purchase ordered. Direct Murabaha is the Islamic bank
purchases the goods without any prior promise from a customer to purchase it and make
it available for sales. Murabaha to the purchase ordered is the bank purchase the goods
ordered by customer and has made the contract before. Normally, Murabaha can be used
in short term, medium term and long term. For example: equipment, house financing,
vehicle financing and others. Besides that, Murabaha to the purchase ordered have with
obligation and without obligation. With obligation is the purchaser offers the asset to the
ordered, who should accept it by the mutual promise. Without obligation is the purchaser
offer the asset to the order, purchaser shall have the option to conclude a sale contract.
(Islamic-banking.com, n.d.)

2.3

Mudarabah
Mudarabah is one of the partnership based model. Mudarabah is refers to an investment
on behalf by a more skilled person. It takes the form of contract between two parties,
which is rabbul mal and mudarib. Rabbul mal is the parties provide the funds. Mudarib is
provides the expertise and who agreed to the division of any profits make in advance.
Mandate of the mudarib shall be provided under the terms and condition of the contract.
Rabbul mal shall not involve in managing the contract but shall have a right of access to
information regarding the contract. (Financial Islam - Islamic Finance, n.d.) Mudarabah
categories into two type unrestricted mudarabah and restricted mudarabah. Unrestricted
mudarabah is a contract; the rabbul mal permits the mudarib to manage the capital
without any specific restriction. Restricted mudarabah is a contract in which the rabbul
mal impose specific restriction on the mudarabah terms. (www.bnm.gov.my, n.d.)

2.4

Musharaka
Musharaka implies partnership in a venture. It is partnership contract between where
parties combine their capital and labour to share profits while enjoying the same rights
and liabilities. A more limited investment partnership is known as Inan. (Kettell, 2011) It
occurs when two or more parties contribute investment capital which may be in the form
of cash, properties, patents or rights. Each partner acts as an agent of the other.
The general requirement of Musharaka is the profit is shared based on prearranged
agreement whereas loss bearing is based on capital contribution ratio. Profit sharing ratio
may be changed upon mutual consent of all partners and the bear the unlimited liability. It
is permissible that one party exert more works in return of additional share of profit. The
contribution of capital, profit sharing and participation of work is not necessarily to be
equal.
There are two types of Musharaka. The first is Constant Musharaka. In this type of
contract, the shares of capital will remain the same among the partners. It will not
increase or decrease like according to customers will. The second is Diminishing
Musharaka which the partners promises to purchase the share of Islamic bank one by one
periodically, thus decreasing share of Islamic bank and increasing his own share until the
title to the equity is completely transferred to him and becomes the sole owner of the
venture. (Ullah, 2014)

10

2.5

Salam and Parallel Salam

Salam and Parallel Salam are belonging to the financial product provided by Islamic
Banking.
Salam is a future contract. The Islamic Bank will be the buyer and have a contract with
the seller to buy the specified assets. The delivery will be deferred to a future date. After
Islamic Bank pays the money to the seller, the seller will produce in specific quality and
quantity then supply the products in pre-agreed date. The buyers can have the strict rule
that, if the seller is late to supply the specified assets need to pay in an amount as a
penalty. But the amount of money cant become to buyers income, it should become to a
charity purpose. (Financial Islam - Islamic Finance, n.d.)
Parallel Salam is different with Salam. In this situation, Islamic Bank will be the roles of
buyer and seller. It will involve in two contracts. After Islamic Bank buying the products
by through the way of Salam, they may sell it through a Parallel Salam to the other buyer
in the same date of delivery. The price of Islamic Bank selling to the buyer will be a little
higher than the first Salam contract which is the Islamic Bank buying with the seller
because of the Islamic Bank need to earn the profit. (Dahabshilbank.com, n.d.)

(Words count : 1282 words)

References
11

Dahabshilbank.com,

(n.d.). Salam

and

Parallel

Salam.

[Online]

Available

from:

http://dahabshilbank.com/cms.php?id=saps& [Accessed: 5th July 2014]

Islamic-banking.com, (n.d.). Institute of Islamic Banking and Insurance - Murabaha on Shari'ah
Ruling.

[Online]

Available

from:

http://www.islamic-

banking.com/murabaha_sruling.aspx [Accessed: 3rd July 2014]

Financial Islam - Islamic Finance, (n.d.). Ijarah financing. [Online] Available from:
http://www.financialislam.com/ijarah-financing.html [Accessed: 2nd July 2014]
Financial

Islam

Islamic

Finance,

(n.d.).

Mudarabah.

[Online]

Available

from:

http://www.financialislam.com/mudarabah.html [Accessed: 3rd July 2014]

Financial Islam - Islamic Finance, (n.d.). Salam and Parallel Salam. [Online] Available from:
http://www.financialislam.com/salam.html [Accessed: 5th July 2014]
Kettell, B. (2011) Introduction To Islamic Banking And Finance, Chichester, U.K.: Wiley
Ullah.H

(2014)

MUSHARAKA

Finance.

[Online]

Available

from:

http://www.linkedin.com/today/post/article/20140629121045-109251364-musharakafinance. [Accessed: 4th July 2014]

www.bnm.gov.my, (n.d.). Shariah Standard on MUDARABAH. [Online] Available from:
http://www.bnm.gov.my/guidelines/05_shariah/shariah_std_mudarabah [Accessed: 6th
July 2014]

Appendix
12

1) Ijarah

2) Murabaha

13

3) Mudarabah

4) Salam

5) Parallel Salam

14

15