chapter 9-islamic banking
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CHAPTER 9
ISLAMIC BANKING
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INTRODUCTION The origin and basis of Islamic banking is
shariah, ie., Islamic laws and sometimes
referred to as Islamic Jurisprudence
Islam may be perceived as comprising threebasic elements, that are;
Aqidah
Concerns all forms of faith and belief by a Muslim in
Allah and His will, from the fundamental faith in His
being to the ordinary beliefs in His individual
commands
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ShariahConcerns all forms of practical actions by a
Muslim manifesting his faith and belief
Divided into:Ibadat
Concerned with the practicalities of
his worship to Allah, in the context of
man-to-Allah relationship
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CONTMuamalat
Concerned with the practicalities of hismundane daily life, in the context ofvarious forms of man-to-manrelationship
Muamalat conduct:
Muslims economic activities within hiseconomic system
Within the economic system, there isthe banking and financial systemwhere man conducts his banking andfinancial activities
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Akhlaq
Concerns behavior, attitude and work
ethics with which a Muslim performs his
practical actions
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ISLAM
AQIDAH SHARIAH AKHLAQ
(faith & belief) (Practices & Activities) (Moralities & Ethnics)
IBADAT MUAMALAT
(Man to God Worship) (Man to Man Activities)
POLITICAL ECONOMIC SOCIAL
ACTIVITIES ACTIVITIES ACTIVITIES
BANKING & FINANCIAL ACTIVITIES
ISLAM, SHARIAH, MUAMALAT, BANKING & FINANCE
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The primary sources of Shariah are:
Al-Quran
Al-Sunnah
Banking and financial activities are partand parcel of Islamic Muamalat, therefore
subject to the Shariah Laws on Muamalat
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THE OBJECTIVES OF ISLAMIC BANKS To promote, foster and develop the banking
services and product based on Islamic principles
Also responsible for promoting the
establishment of investment companies or otherbusiness enterprises as long as the activities of
these companies are not forbidden by Islam
The main principles of Islamic banking comprise
of prohibition of interest in all forms oftransactions, and undertaking business and
trade activities on the basis of fair and legitimate
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PROHIBITION OF RIBA (INTEREST)
The most important aspect of Islamic banking is
that its operations must be conducted without
any element ofriba
Ribatechnically refers to the premium that
must be paid by the borrower to the lender along
with the principle amount as a condition for the
loan or for an extension on its maturity
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PRINCIPLES OF SHARIAH IN ISLAMICBANKING The most widely used Shariah principles
recommended by Islamic scholars are:
Profit and loss sharing principles
Mudarabah
Musharakah
Fees or charges based principles
MurabahahBai mu azzal
Ijarah
Ijarah wa-iktina10
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Free service principle
Qard hassan
Ancillary principlesWadiah
Rahn
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MUDARABA Means profit-sharing or trust finance or
investment through self-employed entrepreneur
An agreement between at least 2 parties, one
being a lender or sometimes known as aninvestor and an entrepreneur also known as asagent-manager
In the agreement, the investor agrees to finance
or entrust money to the entrepreneur who is totrade in an agreed manner and then return tothe investor the principal and pre-agreedproportion of profits and keep for himself the
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The distribution of profits between the 2 parties
must be on a proportional basis and cannot be a
lump sum or a guaranteed amount
In the case of loss (as a result of circumstances
beyond the control of entrepreneur), the investor
will bear all financial risks and the entrepreneur
loses the time and his efforts only
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MUSHARAKAHPartnership or participating financingAlso means a joint venture agreement between
2 parties to engage in a specific business activitywith an aim of making profit
The termination of the agreement may be basedon time or after fulfillment of certain conditions
Under this concept, both parties will have to
provide capital to the business, and the investoror lender may also participate in themanagement of the business or company
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MURABAHAH Cost-plus financing or financing resale of
goods
Refers basically to the sale of goods at a price
covering the purchase price plus a profit marginagreed upon by both parties concerned
This arrangement transforms a traditionallending activity into a sale and purchase
agreement Lender buy goods that the borrower need, and
then sale it to the borrower at a higher price,agreed by both parties
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BAI MUAZZAL
Is a variant concept of murabahah
Under this principle, the borrower is allowed to
defer settlement of payment for goods purchased
within the period, and in a manner determined andagreed by both parties
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IJARAH WA-IKTINA
Refers to a contract whereby a bank will
purchase an asset, and then rent the asset to
the customer on an agreed rental, together
with the clients agreement to makepayments which will eventually lead to the
transfer of ownership from bank to customer
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QARD HASSAN
S benevolent loan that obliges a borrower to
repay the lender the principal sum borrowed
on maturity of the loan
The borrower, however has the discretion to
reward the lender for his loan by paying any
sum over and above the amount of the
principal
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WADIAH
Refers to an agreement between the owner
of assets and another party, whereby the
owner will deposit and give consent to the
custodian to make use of their assets (funds)as long as these assets remain in the
custodians hands
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RAHN
A contract of pledging a security and
becomes binding when possession of the
pledge has taken place In this principle, the ownership of the
security is not transferred to the pledgor
The pledgor will keep the security for acertain period agreed by both parties
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Upon maturity, the owner of the assets will
have to pay back the pledgors money and
he will get back his assets
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PRINCIPLE OF SHARIAH
Muslim scholars agreed that the principles
adopted by the Islamic banks belong to 2
categories:
Strongly Islamic
Weakly Islamic
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Only those principles which permit risk-returnsharing between providers and users offunds can be considered strongly Islamic
Muslim scholars consider only 2 principles asstrongly Islamic
Mudarabah
Musharakah
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