ISLAMIC BANKING

~SHARIAH AND LEGAL

FRAMEWORK
CHAPTER 2

LAW AND RULES OF ISLAM

ISLAM
BELIEFS
(AQIDAH)
-6 BELIEFS

DUTIES
(SHARIAH)

MAN-TO-GOD
ACTIVITIES
(IBADAH)
-5 PILLARS

MORALS
(AKHLAK)

MAN-TO-MAN
ACTIVITIES
(MUAMALAT AMMAH)

MARRIAGE &
FAMILY
(MUNAKAHAT)

COMMERCIAL
TRANSACTIONS

PUNISHMENT
(JINAYAT)

MUAMALAT

IF PRINCIPLES
& CONTRACTS

FINANCIAL
SYSTEM &
REGULATIONS

FINANCING

TRADE
FINANCING

SAVING &
SPENDING

INSURANCE

INVESTING

MICROFINANCE

ETHICAL
COMPANY

SHARIAH

When prophet Muhammad (pbuh) relocated to Madinah from Mekah, he quickly found himself
with a large community of believers. \

Focused on social, individual and other man-to-man duties.

Shariah the combined set of individual and social duties prescribed for every believer by
the Islamic faith. It is the sacred law.

The principle source is the holy Quran.

The very core of Shariah is the 5 pillars. Not only concern about now, but also in the
afterlife.

Covers all aspect of life from marriage to criminality to the economic life of the community.

HUMAN ACTIONS
~In the sacred law of Islam, all human actions are
divided into 5 types:

OBLIGATORY ACTIONS
(WAJIB)
Example: Belief in
Allah

RECOMMENDED
ACTIONS (MANDOOB)
Example: Kindness

PERMITTED ACTIONS
(MUBAAH)
Example: Doing
business

DISCOURAGED
ACTIONS
(MAKRUH)
Example: Divorced

FORBIDEN ACTIONS
(HARAM)
Example: Gambling

THE GOALS OF AN ISLAMIC ECONOMIC

SYSTEM

Sufficiency and peace.

Eradicate hunger and fear from society

Individuals basic needs are fulfill. Create values and morale.

Food, shelter, medical services, education and everything necessary

according to the custom of the society.

Fulfillment of spiritual needs;

Example: Zakat (sharing of wealth) -> growth of more wealth and part of the
reason to enter heaven.

The poor will not envy the riches or steal from them. And the rich will not
become arrogant instead treat others like their family.

FUNDAMENTAL PROHIBITIONS OF ISLAMIC

FINANCE
RIBA
(INTEREST)

GHARAR
(UNCERTAINTY)

Transactions that
involved
exploitations.
Lending money and
requesting borrower
to pay more.
Price manipulations.
Unfair transactions.

Contracts and
transactions must
be free of
uncertainty that is
major and
excessive.
Trading without
seeing the product.

MAYSIR
(GAMBLING)
Short term
speculative
investments.
Betting on prices
increase or
decrease.

PROHIBITION AGAINST RIBA

Prohibition of Riba, not just in Islam but also in Judaism and Christianity.

Judaism : Jews are allowed to practice Riba with non-Jew.

To make it permissible, people confused it with service charge.

Former Nigerian President, Olusegun Obasanjo:

All that we had borrowed up to 1985 was around US$5 billion, and we have paid
about US$16 billion. Yet we are still being told that we owe about US$28 billion.
That US$28 billion came about because of injustice in the foreign creditors
interest rates. If you asked me what the worst thing in the world is, I will say it is
compound interest.

TWO MAIN SOURCES OF RIBA

Riba Dayun
(Arising from debt)

Riba Buyun
(Arising from
sales)

Riba Qardh: Interest

duration of a loan.

is

charged

during

Riba Jahaliyyah: Penalty that is imposed when

you default in your payment.

Riba Fadhl: Exchange 1kg of barley and 3 kg of

barley on the same day and time.
Riba nasiah: Exchange 1kg of barley on 1 April
for 1 kg of barley to be received on 15 April.
Deferment of time.

PROHIBITION AGAINST GHARAR

(UNCERTAINTY)

Gharar means uncertainty, risks, hazards.

It also imply deceits and can cause injustice to the parties involved.

Uncertainty of ownership or possession : sale of fish in the sea

Inadequacy of information : Selling a house without disclosing its termite

problem.

Interdependent and conditional contracts: Contract cannot be combined or

link. For example hire-purchase car. Hire and purchase must have 2 different
contract.

Also sometimes used in the context of gambling, games of chance and

speculation.

Conventional Insurance: policy holder pay premiums but never collect any
payout.

Derivatives: The object of the sale may not exist at the time of the trade is
executed, i.e. palm oil Jan 2016 contract.

PROHIBITION AGAINST MAYSIR

(GAMBLING)

Where one transaction is based on 1 side winning and the other side
losing.

Buy a stock and betting the stock price going to increase the next day.

Casino is the worst place where the odds of winning are strongly
stacked against you.

Unjust seizures of another persons wealth, cripples the poor, widen

the wealth gap between rich and poor.

Social setbacks: Unproductive exchange of property which often leads

to arguments, violence, family and social crisis.

LICENSING OF ISLAMIC BANKS

Islamic banks are licensed and regulated by BNM under a separate

legal framework - the Islamic Banking Act (IBA) of 1983.

This is due to the differences in their operational aspects whereby

Islamic banks have to comply with Shariah principles.

Several requirements had to be fulfilled before IB license granted by

the BNM.

ISLAMIC BANKING ACT 1983

~Definition of Islamic Banking Business

Section 2 provides the following definition:

Islamic bank means any company which carries on Islamic banking

business and holds a valid licence

Islamic banking business means banking business whose aim and

operations do not involve any element which is not approved by the
Religion of Islam.

International Islamic bank means any company or an office of any

foreign institution which carries on international Islamic banking
business and holds a valid license under section 30B

ISLAMIC BANKING ACT 1983

~Licensing

Section 3(1) : Islamic banking business shall not be conducted except by a

company that possesses a written license from the Minister of Finance .

The act specifies only a company can engage in Islamic banking business.
Statutory body or a cooperative society cannot be granted a license.

Issues: Bank Rakyat could not be granted Islamic banks license because of its
status as a cooperative bank.

Section 3(5) :BNM or the Minister shall not recommend the grant of a license,
unless he is satisfied:

The aims and operations of the banking business will not involve any element which
is not approved by Islam

Provision for the establishment of Shariah advisory body in the article of association
of the bank to advise the bank

ISLAMIC BANKING PRACTISES

Prof Ahmad Ibrahim asserted:

Where the normal banking practices do not clash with Islamic principles, the
Islamic banks have adopted the current banking practices and procedures.

Where any clash arise the Islamic banks have devised their own practices and
procedure to accomplish their banking activities.

However, the general definition may have some positive aspects such as: To
give much flexibility and scope as possible to enable IB to grow, expand
their operations and evolve into viable competitors to conventional banking.

Would also allow the adoption and application of different Islamic commercial
laws from the various madhabs, thus making it broader and the resulting
proposition of the law more widely acceptable.

ISLAMIC BANKING BUSINESS

The banking business provided by the Islamic bank in general similar to the
business provided by other commercial banks.

IBA does not stipulate clearly the concepts of its business, a so that IB can
engage in such trade and commerce as long as it does not contravene Islamic
principles.

This is due to the fact that principles of Islamic banking which prohibit any
involvement with interest.

Instead, an Islamic bank should derive its income from profit through trade or
business.

SHARIAH ADVISORY BOARD

Islamic bank under the IBA 1983 must set up the Shariah Advisory Body (SAB)
to advise the bank on the operations of its banking business in order to ensure
that the business does not contravene the principles of Shariah.

The provision for the establishment of SAB clearly stated in Section 3(5) of
the IBA.

However, the IBA do not mention how the SAB will perform its role and duties.
Section 13A (1) : Islamic bank may seek the advice of the SAC on Shariah
matters relating to its banking business and the Islamic bank shall comply
with the advice of the SAC.

In this section, SAC means the Shariah Advisory Council established under
subsection 16B(1) of the CBA 1958.

CONVENTIONAL BANKS NEED NOT

ESTABLISHED SAB

For the banks and financial institutions licensed under the BAFIA which carry
Islamic banking business, there is no requirement to establish their own SAB.

Section 124(3) of the BAFIA requires any licensed institution carrying on

Islamic banking and financial businesses to seek the advice of the SAC of the
BNM.

It is not mandatory for the conventional banks and financial institutions that
offer Islamic banking products and facilities to have an internal SAC to advise
the banks.

INTERNATIONAL ISLAMIC BANK

Section 30A (1) : No person shall carry on international Islamic banking unless
it is:

Islamic bank; or company or a foreign institution and holds a valid license to

carry on such business.

Section 30A (2) : Any person who contravenes the provisions commits an
offence and be liable to a fine not exceeding RM20K or to imprisonment not
exceeding three years or both.

ISLAMIC BANKING ACT 1983

~GOVERNANCE

Section 31 : The Central Bank shall investigate, under conditions of secrecy,

the books, accounts and transactions of each Islamic bank and of any branch,
agency or office outside Malaysia opened by an Islamic bank.

Section 55 : Islamic bank is incorporated under the Companies Act 1965

subject to the provisions of that Act and IBA.

Where there is any conflict or inconsistency between the provisions of

Companies Act and the provisions of IBA the provisions of IBA shall prevail.

IBA prevail over Companies Act.

TUTORIAL

What is Riba? How many types of Riba existed? Gives 10 examples of Riba.

Read the article The Terrorism of Debt and answer the following questions:

http://www.informationclearinghouse.info/article4368.htm
Questions to be answered:
1) What were the 2 scenarios mentioned?
2) What is the main point discussed in this article?
3) How a country's economy being crippled? What are the organizations involved?
4) What options do these countries have?
5) Who is benefitting from this process?
6) Who is the victim and how?
7) What can be done to solve this problem? (From this article and provide your own
ideas)
Submit a minimum 10 pages report after the tutorial.