1. Chapter 1: Overview of financial system
Mohammad Salleh Bin Abdul Saha
Razizi bin Tarmuji
CTU351
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2. What is financial system ?
The processes and procedures used by an
organization management to exercise financial
control & accountant ability. These measures
include recording , verification, and timely
reporting of transactions that affect
revenues, expenditures, assets and liabilities.
The financial system is concerned about
money, credit and finance. (the three terms
are intimately related yet are somewhat different
from each other)
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3. What is money ? What is credit/loan?
Money is anything of value that serves as a generally medium of exchange.
Unit of accounting measures.
Means to save or store purchasing power.
What is credit/loan?
An arrangement in which a lender gives money or property to a borrower, and the borrower agrees to return the property or repay the money, usually along with interest, at some future point in time.
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4. What is finance ?
A branch of economics concerned with resource allocation as well as resource management, acquisition and investment. Simply,finance deals with matters related to money and the markets.
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5. Financial System Structure in Malaysia Financial Markets
Financial Institutions
Financial Markets
Banking System
BNM
Banking Institutions :
- Commercial banks include Islamic banks
- Finance Companies
- Merchant Banks
Others:
- Discount Houses
- Representatives Offices of Foreign Banks
- Offshore Banks in Labuan IOFC
Non-Bank Financial Intermediaries :
Provident & Pension Funds
Insurance companies include Takaful
Saving institutions
- Unit Trusts – Pilgrims Fund Board – Housing Credit Institutions – Cagamas Berhad –Credit Guarantee Corporation –Leasing Companies –Factoring Companies –Venture Capital Companies.
a) Money & Foreign Exchange Markets :
Money Market
Foreign Exchange Market
b) Capital Markets:
Equity markets
Bond Markets –Public Debt Securities – Private Debt Securities
c) Derivatives Markets:
Commodity Futures
KLSE CI Futures
KLIBOR Futures
d) Offshore Markets:
Labuan International Offshore Financial Centre (IOFC)
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6. Banks as Financial intermediaries
Who is financial intermediaries ?
Financial intermediaries may include banks, broker-dealers, investment advisers and financial planners.
Roles?
Promote savings and capital accumulation to finance projects using various modes of financing.
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7. Finance international trade.
Mobilize resources for investments for the benefit of society.
Contribute social welfare through Corporate Social Responsibilities (CSR) and zakat.
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8. Islamic banking What is islamic banking ?
Islamic banking is banking based on Islamic law (Shariah). It follows the Shariah, called fiqh muamalat (Islamic rules on transactions). The rules and practices of fiqh muamalat came from the Quran and the Sunnah, and other secondary sources of Islamic law such as opinions collectively agreed among Shariah scholars (ijma’), analogy (qiyas) and personal reasoning (ijtihad).
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9. Islamic banking in Malaysia ?
The first Islamic bank was established in Malaysia in 1983.
In 1993, commercial banks, merchant banks and finance companies begun to offer Islamic banking
products and services under the Islamic Banking Scheme (IBS banks).
The IBS banks have to separate the funds and activities of the Islamic banking transactions from the non-
You can identify an Islamic bank or an IBS bank from the logo below:
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10. CORPORATE INFORMATION
ESTABLISHMENT OF ISLAMIC FINANCIAL SYSTEM IN MALAYSIA
Banking Industry in Malaysia
Section 2
CORPORATE INFORMATION
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11. MILESTONES OF ISLAMIC BANKING PRODUCTS
2009 onwards
Wadiah Current Account
Wadiah Savings Account
Mudharabah Financing
Ijarah Financing
BBA Financing
Mudharabah Investment Account
Murabahah LC
Musharakah LC
Wakalah LC
Bay Dayn Trade Financing
Murabahah Working Capital Financing
Sarf Forex
Mudharabah Interbank Investment
Musharakah Financing
Bay Inah Credit Card
Bay Dayn, Musharakah, Mudharabah ICDO
Wadiah Debit Card
Bay Inah Overdraft
Bay Inah Commercial Credit Card
Bay Inah Personal Financing
Bay Inah Negotiable Instrument of Deposit (NID)
Commodity Murabahah Profit Rate Swap
Commodity Murabahah Forward Rate Agreement
Ijarah Rental Swaps-i
BBA Floating Rate
Murabahah Floating Rate
Istisna’ Floating Rate
Ijarah Floating Rate
Mudharabah Capital Protected Structured Investment
Bay Inah Floating Rate NID
Mudharabah Savings Multiplier Deposit
Tawarruq Commodity Undertaking
Tawarruq Business Financing
Tawarruq Personal Financing
Tawarruq Credit Card
Murabahah with Novation Agreement
Istisna’ convertible to Ijarah
Bay and Ijarah (Sale and Lease Back)
Musharakah Mutanaqisah
Istisna’ with Parallel Istisna’
Note - This listing is far from being exhaustive.

12. (April2009,) Philosophical foundations of Islamic Banks
Tawhid
Khilafah
Amanah
Al-’adalah
Tazkiyah
Huriyyah
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13. (April2008,April 2009,April 2011) Goals and objectives of Islamic banking
Offer Financial Services
The thrust is towards financing on risk- sharing and strict focus on halal activities
Focus on offering banking transactions adhering to Syariah principle and avoiding conventional interest- based banking transactions.
Economic Development
Established a direct and close relationship between the bank’s return on investment and the successful operation of the business by the entrepreneur.
Optimum Resources Allocation
Considered to be most profitable, religiously permissible and are beneficial to the economy.
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14. Equitable Distribution of Resources
Optimum Approach
Profit- sharing principle encourages banks to go for projects with long- term gains instead of short- term gains.
Banks conduct proper studies before getting into projects. High returns distributed to shareholder maximize the social benefits and bring prosperity to the economy.
Equitable Distribution of Resources
Ensures equitable distribution of income and resources among the participation parties, with its profit- sharing approach which is one of a kind.
Facilitate Stability in Money Value
Islam recognize money as a means of exchange and not as a commodity.
Riba- free system leads to stability in the value of money to enable the medium of exchange.
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15. (Oct2006,Oct2007,April 2008,April2009, Oct2009,April 2010,April 2011,Sept2011) Principles of Islamic Banking
Islamic banking is the conduct of banking based on Syariah principle
Does not allow the paying and receiving of interest.
The principles for Islamic banking are listed:
Prohibition of Riba
Riba is strictly prohibited under Islam and is considered as haram.
Islam allows only one kind of loan that is Qardhul Hassan.
Equity participation
Islam encourages muslims invest their money and become partners in order to share profits and risk in the business instead of becoming creditors.
In Islam, financing is based on the belief that the financier and borrower should equally share the risks of the business venture.
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16. Contractual relationship
Prohibition of gharar
Gharar means to undertake a venture blindly without sufficient knowledge or to undertake excessively transactions
An Islamic financial system discourages hoarding and
prohibits transactions featuring extreme gharar.
Contractual relationship
Depends upon the nature of transaction.
It could be a seller and buyer relationship (Murabaha), a lessor- lessee relationship (Ijara), and a partnership (Musyaraka)
Money as Potential Capital
It is way of defining the value of a thing.
Should not be allowed to give rise to more money, via fixed interest payments, simply by being put in a bank or when lent to someone.
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17. Syariah Supervisory Board Prohibition of Riba in Financing
(April2009) Differences between Islamic Banking and Conventional Banking System
Business Framework
Syariah Supervisory Board
Restrictions
Zakat
(Religious Tax)
Prohibition of Riba in Financing
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18. Islamic Banking System Conventional Banking System (Interest-Based)
Characteristics
Islamic Banking System
Conventional Banking System (Interest-Based)
Business Framework
Functions and operating modes are based on Syariah law.
Banks have to ensure that all business activities are in compliance with Syariah requirements.
Functions and operating modes are based on secular principles and not based on any religious law or guidelines.
Syariah Supervisory Board
Each bank should have a Syariah Supervisory Board to ensure that all business activities are in line with Syariah requirements.
There is no such requirement necessary.
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19. Prohibition of Riba in Financing Financing is not interest – oriented
Based on the principle of buying and selling of assets, whereby the selling price include a profit margin
Fixed from the beginning.
Financing is interest – oriented
A fixed/floating interest is charged for the use of money.
Restrictions
Islamic banks are restricted to participate in economic activities, which are not Syariah-compliant.
There are no such restrictions.
Zakat
(Religious Tax)
E.g. Banks cannot finance businesses involving pork, alcohol, etc.
In the modern Islamic banking system, it has become one of the functions to collect and distribute zakat.
Do not deal in Zakat.
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20. KEY DIFFERENTIATING FACTOR
ISSUE 1: SIMILAR TO CONVENTIONAL BANKING?
Islamic bank is a “bank” – intermediary in “indirect funding” between depositors and financing customers.
The difference is Shariah compliant
انما البيع مثل الربا – احل الله البيع و حرم الربا
KEY DIFFERENTIATING FACTOR
CONVENTIONAL BANKING
ISLAMIC BANKING
FUNCTIONS AND OPERATING MODES
Based on fully man-made principles
Based on the principles of Shariah
INTEREST- BASED TRANSACTIONS
Most of the activities are interest-based
Absence of interest-based (riba) transactions
RISK MANAGEMENT
Concerned with "elimination of risk"
Islamic banks "bear the risk" when involve in any transaction
AIMS AT MAXIMIZING PROFIT
Without any restriction
Subject to Shariah restrictions
PENALTY
It can charge additional money (penalty and compounded interest) in case of defaulters
Charge in the form of ta’widh (compensation) as determined by the Shariah Advisory Council of BNM.
BANK-CUSTOMER RELATIONSHIP
Creditor and debtors
Partners, investors and trader, buyer and seller

21. Advantages of Islamic Banking
Justice and Fairness
~ The main feature of the Islamic model is that it is based on a profit-sharing principle, whereby the risk is shared by the bank and the customer.
~ This system of financial intermediation will contribute to a more equitable distribution of income and wealth.
Liquidity
~ Follow the profit and loss-sharing principle to mobilize resources and are less likely to face any sudden run on deposits.
~ As such, they have a minimum need for maintaining high liquidity.
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22. Better Customer Relations
~ Financing and deposits are extended under the profit and loss sharing arrangement. The banks are likely to know their fund users better in order to ensure that the funds are used for productive purpose and vice-versa for investors.
~ It will develops better relations between the financial intermediary and the fund providers or consumers.
~ Also promote productive economic activities and socio-economic justice.
No Fixed Obligations
~ Islamic banks do not have fixed obligations such as interest payments on deposits. Therefore, they are able to allocate resources to profitable and economically desirable activities.
~ Also holds good for Islamic financing, as the payment obligations of the entrepreneur is associated with the revenue.
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23. Ethical and Moral Dimensions
~ Strong ethical and moral dimensions of doing business and selecting business activities to be financed, play an important role in promoting socially desirable investments and better individual or corporate behavior.
Banking for All
~ Although based on Syariah principles to meet the financial needs of Muslims, it is not restricted to Muslim only and is available to non-Muslims as well.
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