Islamic Banking
Introduction
The earliest form of Islamic Banking activity may be traced back to september 1963 when Perbadanan Wang Simpanan Bakal-Bakal Haji(PWSBH) was set up. PWSBH was set up as an Institution for muslims to save their for their Haj(pilgrimage to Mecca) expenses. In 1969 PWSBH merged with Pejabat Urusan Haji to form Lembaga Urusan dan Tabung Haji(Now known as Lembaga Tabung Haji)
The first Islamic bank was established in 1983. In 1983 commercial banks,merchant banks and finance companies were allowed to offer Islamic Banking products and services under the Islamic Banking scheme(IBS). These Institutions howeer are required to separate funds and activities of Islamic Banking transaction from that of the convetional banking business to ensure that there would not be any co-mingling of fund.
Islamic banking is a banking activity that is based on Syariah Principles. It does not allow the paying and receiving of interest and promotes profit sharing in the conduct of banking business.
Syariah Principles in Islamic Banking
Islamic banking has the same purpose as conventional banking except that it operates in accordance with the rules of Syariah, know as Fiqh Al-Muamalat(Islamic rules of transaction). The Basic principle of Islamic banking is the sharing of profit and loss and the prohibition of riba’(interest). Amongst the common Islamic concepts used in Islamic banking are profit sharing(Mudharabah),Safekeeping(Wadiah),Joint Venture(Musyarakah),cost plus(Murabahah) and leasing(Ijarah).
Islamic banks and banking institutions that offer Islamic banking products and services(IBS Banks) are required to establish Syariah advisory committees/consultants to advice them and to ensure that the operation and activities of the bank comply with Syariah Principles. In additon, The National Syariah advisory council set up at Bank Negara Malaysia(BNM) advises BNM on the Syariah aspects of the operations of these institutions, as well as on their products and services.
Syariah Concepts in Islamic Banking
Wadiah(Safekeeping)
- In wadiah, a bank is deemed as a keeper and trustee of funds. A person deposits funds in the bank and the bank guarantees refund of the whole amount of the deposit, or any part of the outstanding amount, when the depositor demands for it. The depositor, at the bank’s discretion may be rewarded with ‘hibah’(gift) as a form of appreciation for the use of funds by the bank.
Mudharabah(Profit Sharing)
- Mudharabah is an arrangement or agreement between a capital provider and an entrepreneur, whereby the entrepreneur can mobilise funds for its business activity. Any profits made will be shared between the capital provider and the entrepreneur according to an agreed ration while losses are borne solely by the capital provider.
Musyarakah(Joint Venture)
- This concept is normally applied for business partnerships or joint ventures. The profits made are shared on an agreed ration while losses incurred will be divided based on the equity participation ration.
Murabahah(cost plus)
- The selling of goods at a price which includes a profit margin agreed by both parties. The purchase and selling price, other costs and the profit margin must be clearly stated at the time of the sale agreement.
Bai’ Bithaman Ajil(Deferred Payment sale)
- The selling of goods on a deferred payment basis at a price which includes a profit margin agreed by both parties.
Wakalah(Agency)
- When a person appoints a representative to undertake transactions on his/her behalf
Qardhul Hassan(Benevolent loan)
- A loan extended on a goodwill basis and the borrower is only required to repay the amount borrowed. However, the borrower may, at his discretion, pay extra(without promising it) as a token of appreciation.
Ijarah Thumma Al-Bai’(Hire Purchase)
- There are two contracts involved in this concept. The first contract(leasing/renting) and the second contract Bai’ contract(purchase) are undertaken one after the other. For example in a car financing facility, a customer enters into the first contract and leases the car from the owner(bank) at an agreed rental over a specific period. When the leasing period expires, the second contract comes in effect, which enables the customer to purchase the car at agreed price.
Bai’ Al-Inah (Sell and Buy Back Agreement)
- The financier sells an asset to the consumer on a deferred payment and then the asset is immediately repurchased by the financier for cash at a discount.
Hibah(gift)
- A token given voluntarily in return for loan given or benefit obtained