Islamic banking is referring to the principles of shariah.

Where there conduct by

banking according Islamic law simply defined by shariah such as Al-Quran and Sunnah.

Shariah refer to a ‘code of law or divine injunctions that regulate the conduct of human being

in their individual and collective lives’. Malaysia has maintained its leadership in Islamic

banking for three decades by the prime minister of Malaysia. Islamic banking assets reached

USD65.6 billion with an average growth rate of 20% recorded by Bank Negara Malaysia's

website. The main factor that distinguishes between Islamic banking and conventional

banking is that everything in Islamic banking should be done without involving Shariah-

compliant elements.

The earliest form of Islamic banking activity is known to have begun in September

1963 with the establishment of the Perbadanan Wang Simpanan Bakal-Bakal Haji

(PWSBH). The PWSBH was set up to serve as an institution for Muslims to save in

preparation for pilgrimage to the holy land of Mecca. The first Islamic Bank was established

in 1983. In 1993, commercial banks, merchant banks and finance companies began to offer

Islamic banking products and services under the Non-Profit Banking Scheme. However,

these institutions are required to separate funds and activities of Islamic banking transactions

from conventional banking transactions to ensure no mix of funds.

Islamic banking emphasizes on profit and loss sharing where the return is not

guaranteed since they share the profit and loss together with depositor. Islamic banking used

this principle for operation such as prohibition of Riba (interest), ethical standard, moral and

social value and liability and business risk.

ISLAMIC BANKING PRODUCT DEVELOPMENT

Most Islamic products are introduced as an alternative to conventional products. Islamic

banks have to innovate and create new products to remain competitive due to the constantly

changing environment and dynamic. In order to have a competitive product, the product must

be attractive to individual and corporate clients. Not only that, but advances in technology

and the evolution of financial markets must be introduced in a timely manner. Islamic

banking and financial system can be used as an instrument to verify the economic growth and

the benefit of mankind as it will contribute to macroeconomic stability positively. Islamic

banking sector is divided into two categories which is individual and corporate. To meet their

needs, the banking sector needs different products.

According Haidi and Malik (2006), Islamic banking products are increasing every

day. Previous studies have found that Islamic banking products are on par with conventional

banking products. There are many products of Islamic banking in Malaysia, but there are

some Islamic products that are discussed in this section such as Wadiah (safekeeping),

Bai’al’inah (sale and buy back agreement), Bai’bithamanajil (Deferred payment sale),

Murabahah (Mark-up), Mudharabah (trust financing), Musharakah (Partnership contract),

ijarah (leasing), istisna (Manufacturing contract), and Takaful (Islamic insurance).

i. Wadiah (safekeeping)

Wadiah or savings is a concept of Islamic banking that is very similar to the concept

of savings account in conventional banking. In the concept of wadiah, the bank is

considered a trustee of the fund. A depositor will deposit the funds into the bank and

the bank will guarantee the repayment of all deposits, or part of the outstanding

amount when the depositor requests it. Depositors may be given 'hibah' (gift), at the

bank's discretion, as a form of appreciation for allowing the bank to use depositors'

deposits. There are two basic types of wadiah:

a) Wadiah yad amanah

 Wadiah yad amanah is a trust action in which the trustee (bank) will be given

the right to make deposits securely. In addition, depositors are also given clear

and understandable information about the contract.

b) Wadiah yad dhamanah

Wadiah yad dhamanah is a good or deposits entrusted to the care of a person,

who is not the owner, to be kept. The depository becomes the guarantor, thus

guaranteeing the repayment of the entire amount or any portion of the deposit

that has not been deposited in the depositor's account, upon request. The

depositors have no right to share any profits but depository may provide

returns to the director as a token of appreciation.

ii. Bai' al 'inah (buy and sell)

Bai’al‘inah refers to a contract involving the sale and purchase of assets. In this

transaction, the seller sells the asset to the buyer for cash and then repurchases at a

higher deferred price than the cash sale price. This transaction occurs when the seller

sells the asset to the buyer at a deferred price and subsequently repurchases at a lower

price than the deferred sale price.

iii. Bai’bithamanajil (deffered payment sell)

Bai’bithamanajil is the concept of Islamic banking used in the purchase or purchase

of insurance. Under this concept, the bank provides financing to customers to own

property or services by buying the assets belonging to the customer or from the

vendor with the cash price and then resell the asset to the customer with the purchase

price plus profit. Customers can pay back by deferment or installment. The amount

of fees charged to customers depending on the total purchase cost involved, the risk
 of payment and duration of the agreement. Bai'bithamanajil method is considered as

a method of financing that replaces the method of financing by lending practiced by

the conventional banking system.

iv. Murabahah (mark-up)

Murabahah is an agreement between the two parties, the financier and the needy.

The financier would buy goods desired by the related parties. The financier then

resells the goods to those in need with the original price plus profit. However, the

price must be agreed to by both parties. Therefore, payment methods can be made

either directly or in instalment.

v. Mudharabah (trust financing)

Mudharabah is an agreement between the two parties in which they invest for the

other person, while the profit is divided between the two terms according to the terms

agreed upon. Mudharabah is divided into two types which is Mudharabah

Muthlaqah and Mudharabah Muqayyadah. Mudharabah will be void and invalid

when there are any of the following:

a) does not meet or exceed the requirements of mudharabah

b) manager accidentally left his job as manager of capital or do anything

contrary to the purpose of the contract

c) if the executor or capital owners died or one of the owners dies

vi. Musharakah (partnership contract)

Musharakah is an Islamic banking concept commonly used for a partnership business

or business venture for a business partner. The profits will be shared based on an
 agreed ratio while the disadvantaged would be borne by the capital contribution ratio.

Among the terms of musharakah are:

a) Shareholder

Each shareholder and partner shall be entitled to appoint a representative and

a deputy. This requirement became mandatory in doing business

musharakah. Every shareholder is the owner of the company and has the right

to manage the company's business on behalf of itself and on behalf of the

shareholders of the other as representative

b) Capital

Capital should consist of money and valuables. It should be mixed into

common ownership among shareholders without distinguishing between one

and another.

c) Project

All projects must be lawful. Shareholders assigned to carry out the project of

the company may perform all matters relating to the project except those

matters which may cause other shareholders to doubt such as mixing the

property of the company with its property, making an agreement with another

party without the consent of the shareholders or lending to any party of the

company property without consent.

d) Profit

The rate of profit sharing must be determined during the contract. Profit

distribution may be at an agreed rate at the time of the agreement.

vii. Ijarah (leasing)

Ijarah is a financing mechanism involving the rental of an asset or hire purchase

where a form of rental fee is paid for a stipulated period of time agreed by the parties.
 This is more in accordance with the Shariah concept of leasing where the bank

acquires ownership based on the promise and leases back to the client for a given

period. The customer pays the rental but the ownership still remains with the bank.

As the ownership remains with the lessor (bank), who is responsible for its

maintenance, it continues to give the service for which it was rented.

viii. Istisna (manufacturing contract)

Istisna is a contract with the manufacturer, manufacturer of a particular task and

responsibility for completion. Among the requirements of Istisna are:

 clarify the nature of the desired item clearly

 sets the completion time of the manufacture, whether long or short

 the goods allowed in Istisna are those that require the manufacturing and

manufacturing process

 payments can be delayed and payable on a regular basis according to the

percentage of work completed

ix. Takaful (Islamic insurance)

Takaful is a conventional Islamic insurance and also is an alternative form of cover

that Muslims can avail themselves against the risk of loss due to accident. It is

depend on the concept of what is uncertain with respect to an individual may cease to

be uncertain with respect to a very large number of similar individuals.

References
Islamic Banking Products: Regulations, Issues and Challenges. (2013). The Journal of Applied Business
Research, 29(4).

Kunhibava, S. (2012). Islamic Banking in Malaysia. International Journal of Legal Information.

Waseem, M. (2014). Islamic Banking Information. Islamic Banking and Fiannce Journal.