MULTIMEDIA UNIVERSITY

BFN2224
FINANCIAL MARKETS & INSTITUTION
ASSIGNMENT

Trimester 1, Session 2017 / 2018

Assignment 2: Islamic Banking

No. Student ID Student Name Section

1. 1142700665 MUHAMMAD NAIF NAQIUDDEEN BIN MOHD B01

NADZARI

2. 1151103063 AIZZAT NAZRAN BIN NAZEER KHAN B01

3. 1151101874 MUHAMMAD HASIF BIN MOHAMAD EZAM B01

4. 1151101470 MOHAMMAD MUNIR BIN MOHAMMAD HUSNI B01

5. 1141125303 QAMARUL ARIFIN BIN ARIFF HAZNAL B01

PREPARED FOR:
DR. RIDZWAN BIN BAKAR
REPORT SUBMISSION DATE:
Table of Contents

1.0 Introduction ............................................................................................................................................. 3

2.0 Definition ................................................................................................................................................ 4
3.0 History .................................................................................................................................................... 5
4.0 Market Analysis ...................................................................................................................................... 6
4.1 Islamic Banking Products ................................................................................................................... 6
4.1.1 Mudarabah .................................................................................... Error! Bookmark not defined.
4.1.2 Musharakah ................................................................................... Error! Bookmark not defined.
4.1.3 Murabahah .................................................................................... Error! Bookmark not defined.
4.1.4 Sukuk ............................................................................................ Error! Bookmark not defined.
4.2 Differences between Islamic Banking and Conventional Banking..................................................... 6
4.3 ............................................................................................................................................................. 9
5.0 Growth of The Market .......................................................................................................................... 10
6.0 Prospect and Challenges ....................................................................................................................... 11
7.0 Conclusion ............................................................................................................................................ 12
1.0 Introduction
2.0 Definition

What is Islamic Banking

Islamic banking is defined as banking system which is in consonance with the spirit, ethos and

value system of Islam and governed by the principles laid down by Islamic Shariah. While

Islamic banking has a broader scope and meaning, it is generally referred to the transformation

of conventional money lending system into Asset-backed financing transactions conducted by

the Financial Institutions.

The philosophy of Islamic banking takes the lead from Islamic Shariah. According to Islamic

Shariah, Transactions involving interest/riba, Gharar and Maiser are prohibited. Moreover, they

cannot deal in any transaction, the subject matter of which is invalid (haram in the eyes of

Islam). Islamic banks focus on generating returns through investment tools which are also

Shariah compliant. Islamic Shariah links the gain on capital with its performance. Operating

within the ambit of Shariah, the operations of Islamic banking are based on sharing the risk

which may arise through trading and investment activities using contracts of various Islamic

modes of finance.

What is meant by Shariah/Islamic Law?

Shariah lexically means a way or path. In Islam Shariah refers to the divine guidance and laws

given by the Holy Quran, the Hadith (sayings) of the Prophet Muhammad (Sallalahu Alaihi

Wassalam) and supplemented by the juristic interpretations by Islamic scholars. Shariah

embodies all aspects of the Islamic faith, including beliefs and practices.
3.0 History
4.0 Market Analysis
4.1 Islamic Banking Product
4.1.1 Mudarabah

They are two type of Mudarabah contracts. The first one is a contract in which the capital
provider specifies which projects to invest his/her money in, and the manager is supposed to
restrict the investment to the specified businesses; this type of contract is known as Al
Mudarabah al Muqayyadah (Restricted Mudarabah). The other type is where the capital provider
does not specify any project for investment and the manager has choice; this type of contract is
known as Al Mudarabah al Mutlaqah (Unrestricted Mudarabah). If the manager wants to make
an extraordinary investment which is beyond the normal routine of business, this cannot be done
without the express permission of the capital provider.

4.1.2 Musharakah

Musharakah is a partnership-based contract or an investment product with a partnership structure

for sharing profits and losses, which is based on the Islamic Shareeah. It involves investment
from all the partners and an agreement to share profits in a predetermined ratio and to share
losses in the ratio of contribution. Parties to the contract of Musharakah are referred as
musharik which literally means partner.

4.1.3 Murabahah

Murabahah is another product based on the Islamic Shareeah; it refers to the sale of goods at a
price which includes a profit margin, i.e. cost plus. This product is predominantly offered by
Islamic banks in asset financing, property, microfinance and commodity import and export. A
Murabahah contract has an honest declaration of cost and the expenses incurred on the product,
along with the profit mark up being taken by the seller, which is the bank in this case.

4.1.4 Sukuk

By definition, Sukuk are shares in the ownership of tangible assets with reference to a particular
project or an investment activity. Conventional bonds require the investor to pay the bond holder
the amount owed, along with interest on a specified date. In case of Sukuk, the element of debt is
non-existent, bond holders share the beneficial ownership of the asset or the project that the
bonds represent.
4.2 Differences between Islamic and Conventional Capital Market
The key difference is that Islamic Banking is based on Shariah foundation. Thus, all dealing,
transaction, business approach, product feature, investment focus, responsibility are derived from
the Shariah law, which lead to the significant difference in many part of the operations with as of
the conventional.

The foundation of Islamic bank is based on the Islamic faith and must stay within the limits of
Islamic Law or the Shariah in all of its actions and deeds. The original meaning of the Arabic word
Shariah is the way to the source of life and is now used to refer to legal system in keeping with
the code of behaviour called for by the Quran. On the other hand, conventional banking is
essentially based on the debtor-creditor relationship between the depositors and the bank on one
hand, and between the borrowers and the bank on the other. Interest is considered to be the price
of credit, reflecting the opportunity cost of money.

Islamic Banking Conventional Banking

The functions and operating
modes of Islamic
banks are based on the
principles of Shariah
i.e. the divine guidance.
Money is not regarded as a
commodity,
though it is used as a medium
of exchange and
store of value. Therefore, it
cannot be sold at a
price higher than its face
value or rented out.
The functions and operating
modes of
conventional banks are based
on man-made
principles.
Money is treated as a
commodity, besides
medium of exchange and
store of value.
Therefore, it can be sold at a
price higher than
its face value and it can also
be rented out
Islamic bank operates on the
basis of profit
and loss sharing. In case, the
businessman has
suffered losses, the bank will
share these
losses based on the mode of
finance used
(Modaraba, Musharaka).
The Islamic banks have no
provision to charge
any extra money from the
defaulters. Instead
an amount of payment is
charged and these
proceeds are given to charity
In contrast, it promotes risk
sharing between
provider of capital (investor)
and the user of
funds (entrepreneur).
Interest is charged even in
case the
organization suffers losses by
using banks
funds. Therefore, it is not
based on profit and
loss sharing.
It can charge additional
money (penalty and
compounded interest) in case
of defaults.
The investor is assured of a
predetermined
rate of interest.
4.3
5.0 Growth of The Market
6.0 Prospect and Challenges
7.0 Conclusion