Module Foundation of Banking

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 Foreign exchange market

i. Spot Market

 A spot market is a market for spot rate and spot date.

 dSpeolivteraryte.is the value of the currency to be transacted is for two good business days

 Spot date is two days after the transaction date.

 Tcurarrnesnaccytiotrnandsaatectiisonth.e date both parties dealt with each other to perform theforeign

ii. Forward Market

 Forward mdaayrsk.et is a foreign exchange market for value any time after two good
business

 So, a fbourswinaerdssradtaeysis.the value of the currency to be transacted for delivery after two
good

 rItacteasn.be one day after spot date or one week, I month, 3, 6, 9 and even one year



Derivatives Market

i. Futures contract

 A Futures contract is a sataspnedcairfdicized agreement made between two Parties to buy or sell
an underlying asset on

date in the future for a predetermined
price.

ii. Option contract

 A contract between two parties in which the

buyer (or seller) has the right, but not the
obligation, to buy (or sell) a specified asset at a
specified price, at or before a specified date,

from the seller (or to the buyer).

CHAPTER 7

7.0 ISLAMIC BANKING OPERATION

7.1 Describe the Islamic banking concept
7.2 Explain the development of Islamic banking in Malaysia
7.3 Describe the Islamic financial concepts

a. Mudharabah
b. Musyarakah
c. Bai Bithaman Ajil
d. Murabahah
e. Wadiah
f. Wakalah
g. Ijarah
h. Ar-Rahnu
7.4 Differentiate the Islamic banking system to the conventional banking system

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ISLAMIC BANKING OVERVIEW
Islamic banking is a finance management system that is based on the Islamic rules of Sharia. The
main concept of the Islamic banking is the prohibition on collection of interest and its utilization
for the business purposes. Banking in Islam is a saving money framework that depends on the
standards of Islamic law, additionally known as Shariah law, and guided by Islamic financial
matters. Two fundamental standards behind Islamic banking concepts are the sharing of benefit
and misfortune. Gathering interest or Riga isn't allowed under Islamic law.

ISLAMIC BANKING CONCEPT
Islamic banking concepts have an indistinguishable reason from traditional managing an account
aside from that it works as per the guidelines of Shari'ah, known as Fiqh al-Muamalat. Banking in
Islam as an account exercises must be polished reliable with the Shari'ah and its pragmatic application
through the improvement of Islamic financial aspects. A significant number of these standards where
upon banking in Islam is based are regularly acknowledged everywhere throughout the world, for
quite a long time as opposed to decades. These standards are not new but rather their unique state
has been changed throughout the hundreds of years.
To create an efficient, progressive and comprehensive Islamic financial system that contributes
significantly to the effectiveness of the Malaysian financial sector.

a) Development of the Islamic Banking system
- Exists through the conventional banking system
- Establish of Islamic Banking Act (1983) on 7 April 1983 to supervise and regulate
Islamic banks similar

b) Treatment of Profits
- Profits are paid to general investment account holders out of the bank’s revenue
from its financing and investment activities.

c) Financing facilities
d) Regulation

- Operation of Islamic banks is governed by some regulation of conventional banks.

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e) Requirements of a Banking
system Three requirements are:
i) a large number of players
ii) a broad variety of instruments
iii) an Islamic interbank market

f) Operations of the Islamic Banking System
(i) Setting up options
- To allow the setting up of new Islamic banks.
- To set up subsidiaries to offer Islamic banking services.
- To offer Islamic banking services using their infrastructure and branches.
(ii) Interest – was developed to allow existing financial institutions to offer Islamic
banking services

NEED FOR ISLAMIC BANKING

 To avoid interest based transactions.
 Argument of interest rate by some Muslim scholars.

 The resurgence of religious awareness induced Muslims to organize their way of life in
accordance with Islamic principles.

 To generate an alternative model of banking is compatible with Islamic rules.

 Establishment of the Pilgrims Management and Fund Board in 1969. The purpose is to
promote and accumulate savings from the Muslims for pilgrimage activities and to
accumulate funds are invested securities and activities permissible in Islam.

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DEVELOPMENT OF ISLAMIC BANKING IN MALAYSIA

Islamic banking in Malaysia began in September 1963 when Perbadanan Wang Simpanan Bakal-
Bakal Haji (PWSBH) was established. PWSBH was set up as an institution for Muslims to save for
their Hajj (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 Islamic finance
industry has gained popularity and captured the attention of people all over the world. Today,
Malaysia appears to be one of the leading Islamic finance players in the world, since the passing
of the first legislation of Islamic finance in 1983 i.e. the Islamic Banking Act 1983. The industry
continues to progress until today, further promising robust development in the coming future.

Tracking the development of the Islamic finance industry in Malaysia, it is notable to mention
that Malaysia adopts the holistic approach to the implementation of Islamic finance, owing
contribution from every industry player, including Bank Negara Malaysia, independent advisory
governmental bodies, financial institutions, accountants, auditors and legal practitioners and last
but not least, the consumers.

This holistic approach can be divided into several phases, the first being set for instituting the
foundation from the year 1983 to 1992. The second phase ranged from the year 1993 to 2000
which allowed for the institutional building, activity generation and market vibrancy. The third
phase ranged from the year 2001 to 2010, which synchronised the strategic positioning and
international integration of the whole Islamic financial framework in Malaysia to international
standards. In June 2004, Bank Negara Malaysia announced that they have issued three Islamic
full-fledged banking licenses to Kuwait Finance House (KFH), Saudi Arabia’s Al Rajhi Investment
Bank, and Qatar Investment Group. This major development marked the penetration of foreign
Islamic banks into the arena of the Malaysian Islamic financial sector. The fourth stage, which is
the present stage, beginning from 2011 until now, witness’s further exponential growth of the
Islamic finance industry in the country.

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PHASE 1 PHASE 2 PHASE 3

1983-1992 1993 - 2000 2001 - 2010

•dedicated legislations •Finance Minister allowed •setting up of the overall
have been formulated Bank Bumiputra Malaysia objective, including the
and passed to govern the Berhad (BBMB), United creation of an efficient,
operations of Islamic Malayan Banking progressive and
banking, takaful and Corporation (UMBC) and comprehensive Islamic
Shari’ah-compliant Maybank to open Islamic financial system
government funding. banking windows in
March 1993. •four-pronged strategic
•Bank Islam Malaysia approach for the further
Berhad (BIMB) 1st full- •establishment of the development of Islamic
fleged islamic bank. Association of Islamic finance in Malaysia,
Banking Institutions consisting of plans for the
•Syarikat Takaful Malaysia Malaysia (AIBIM) in 1995, development of the
Berhad, established in the National Shari’ah regulatory framework,
1984 the 1st full-fledged Advisory Council in 1997 legal and Shari’ah
takaful company. •In1999 Bank Muamalat frameworks, the
formed development of products
and markets and the
enhancement of
knowledge and expertise.

PHASE 4

In this respect, one of the most significant developments 2011-2020

in the Islamic banking and finance industry during this •Malaysia emerged tops on
phase is the introduction of the Islamic Financial Services various checkpoints for
Islamic finance in a newly
Act 2013 (IFSA) which repealed the Islamic Banking Act 1983 and released global
the Takaful Act 1984. The IFSA provides Bank Negara Malaysia measurement of the
(BNM) with the necessary regulatory and supervisory oversight industry, scoring high points
powers to fulfil its broad mandate within a more complex and for areas like sukuk growth
interconnected environment, given the regional and and performance, Islamic
mutual funds market, and
the level of education and
research.

international nature of financial developments. The law is

also expected to place Malaysia’s financial sector, on a platform for advancing forward as a sound,
responsible and progressive financial system. The IFSA has provided the BNM with statutory duty
to foster fair, responsible and professional business conduct amongst financial service providers.
The IFSA is expected to promote robust financial consumer protection regime particularly in the
aspect of unfair and deceptive business conduct and disclosure obligations and to provide clear
demarcation between conventional and Islamic banking.

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ISLAMIC FINANCIAL INSTRUMENTS

Principles of Al Wadiah
a. Wadiah is a contract between the owner of goods and custodian of goods. It is
protect the goods from being stolen or destroyed and to ensure safe custody.

b. In Islamic banking operations, under the savings and current accounts, Islamic
bank has the authority to use a client’s deposits and gives a guarantee to return
it to the client when he needs it.

c. Bank is entrusted with the safekeeping of the customers’ deposit, which can be

d. withdrawn at any time upon demand by customers.
Principles of Al Mudharabah

a. Mudharabah is a partnership in profit whereby one party provides capital and
the other party provides skill and labour. The provider of capital is called “rabbul
mal” or “shahibul mal”, while the provider of skill and labour is called “mudarib”.

b. An Islamic bank can enter into a two-tier mudharabah agreement between the
bank and the depositors, who agree to put their money into the bank’s
investment account and to share profits with it.

c. The second tier is an agreement between the bank and the entrepreneurs who
seek finance from the bank on the condition that profits accruing from their
business will be shared between them and the bank in a previously mutually
agreed proportion, but that

d. loss shall be borne by the financier only.
Principles of Al Musyarakah

a. Musyarakah is a contract of partnership between two or more parties in which
all the partners contribute capital, participate in the management, share the
profit in proportion to their capital or as per pre-agreed ratio and bear the loses
(if any) in proportion to their capital ratio.

b. In the Islamic banking operation, the Islamic bank may be a partner with its client
for running a business where both of them contribute capital, either both of
them or the client alone take part in the management of business as per terms
of the contract and share the profits at a pre-agreed ratio or bear the losses (if
incurred), as per their capital ratio.

97

Principles of Al Bai Bithaman Ajil
a. Bai bithaman ajil is a trading contract Bay baithaman ajil means ‘deferred installment
sale’, which is banks may finance customers who acquire an asset but wish to defer the
payment for a specific period (payment by installment).

b. Customer are allowed to settle the payment of the asset within a certain period
of time Bai bithaman ajil facility is used particularly in Malaysia for financing the
acquisition of

c. Assets and the payment usually is based on an installment basis payable over
longer periods compared to the murabahah facility repayment.

Principles of Al Murabahah
a. Murabahah can be defined as a contract between a buyer and a seller under
which the seller sells specific goods allowed under shariah principles and the law
of the the land to the buyer at a cost plus agreed profits payable in cash on any
fixed future date in a lump sum or by installments.

b. From the Islamic banking point of view, the customer will first identify the goods
to be financed. The bank will then secure the goods, add the mark up profit,
deliver the goods and collect the payment from the customer-usually in deferred
terms.

c. The mark up profit is a percentage of cost or purchase price of the goods or a lump sum
payment.

Principles of Al Ijarah
a. Ijarah is a term which originated from Islamic fiqh. It is derivative of the Arabic
words ‘ajr’ and ‘ujrah’ which means consideration, return, wages or rent.

b. This is a form of an exchange value or consideration, return, wages, or rent of
services of an asset.

c. Thus, Ijarah is defined as a contract between two parties, the lessor and lessee,
where the lessee enjoys or reaps a specific service or benefit against a specified
consideration or rent from the asset owned by the lessor.

98

Principles of Al Wakalah
a. Al Wakalah means agency or the delegating of a duty to another party for
specific purposes and under specific conditions.
b. It is a contract between two parties in which one party will appoint another
party to act on his behalf. The agreement is to authorize a power to represent
him or to exercise the power on his behalf in any manner that is instructed by
him.
c. In a contract of agency the person who authorizes the power is called the principal and

d. the person who is appointed to exercise the power is called the agent (al-wakil)
and the subject matter of which the authority is given to exercise the power is
called the object (al-mawkil bih).

Principles of Al Kafalah
a. Al Kafalah is a contract made between A and B whereby A agrees to discharge
the liability of a third party in the case of default by the third party. As a surety,
the third party will give some form of collateral and pay a small fee for the
service.

b. Legally, it is the pledge given by the guarantor or the surety (al-kafil) to a creditor
(al-makfullah) on behalf of the principal debtor (al-makful’annh) Toensure that
the guaranteed (al-makfulbih).

c. Islamic banks use Al-Kafalah to issue Bank and Shipping guarantees. Under
Kafalah Shipping Guarantee, the bank gives a surety to the owner of the shipping
vessel, to discharge goods to the importer pending receipt of the original bill of
lading. Under the Kafalah Bank Guarantee, the bank guarantees the company’s
standing to facilitate any business endeavours that may require such guarantees.

99

Principles of Ar Rahnu
a. An agreement whereby a valuable asset is placed as collateral for a debt. The
collateral may be disposed off in the event of a default.
b. Deposited goods as a pledge in exchange for debt that can be repaid in order to get the

goods back
Principles of Al Qardhul Hassan

a. Qard ul hasanah, literally ‘beautiful loan’, is a terminology derived from the Quran
where it occurs in different verses. It is unique contract in which no tangible profits
accrue.

b. In Islamic banking it refers to interest free loans. Qard ul hasanah is primarily a
business transaction that establishes a relationship of lender and borrower.

Principles of Al Hawalah
a. Al-hawalah means transferring a calim of a debt by shifting the responsibility
from one person to another or in other words it is a transfer of debt from a
debtor (transferor) to another (transferee). Once the transferee has accepted
the transfer of debt, the transferor would be released from any obligation to pay
the debt. The creditor can now claim his debt only from the transferee.

b. In Islamic banking operations, this refers to a transfer of funds/debt fromthe
depositor’s/debtor’s account to the receiver’s/creditor’s account whereby a
commission

c. may be charged for such services.
Principles of Bai Al dayn

a. Bay al dayn defined as trading (buying and selling) of a debt whereby the debt
traded is the price of an asset or a service, the payment of which is deferred to a
specified time.

b. The seller of the debt may be the original creditor or third person who has
bought the debt from the original creditor. The purchaser also may be a third
person or the original debtor himself who is settling his debt.

100

COMPARISON ISLAMIC BANKING SYSTEM BETWEEN CONVENTIONAL BANKING SYSTEM

Conventional Banking System Islamic Banking System

Money is a product besides medium of exchange and Real Asset is a product. Money is just a medium of

store of value exchange

Time value is the basis for charging interest on capital Profit on exchange of goods & services is the basis
for earning profit

The expanded money in the money market without Balance budget is the outcome of no expansion of
backing the real assets, results deficit financing money

Interest is charged even in case, the organization Loss is shared when the organization suffers loss
suffers losses. Thus no concept of sharing loss

While disbursing cash finance, running finance or The execution of agreements for the exchange of
working capital finance, no agreement for exchange goods & services is must, while disbursing funds
of goods & services is made under Murabaha, Salam & Istisna contracts

Due to non existence of goods & services behind the Due to existence of goods & services no expansion
money while disbursing funds, the expansion of of money takes place and thus no inflation is
money takes place, which creates inflation created

Due to inflation the entrepreneur increases prices of Due to control over inflation, no extra price is
his goods & services, due to incorporating inflationary charged by the entrepreneur
effect into cost of product

Bridge financing and long term loans lending is not Musharakah & Diminishing Musharakah
made on the basis of existence of capital goods agreements are made after making sure the
existence of capital good before disbursing funds
for a capital project

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Government very easily obtains loans from Central Government can not obtain loans from the
Bank through Money Market Operations without Monetary Agency without making sure the delivery
initiating capital development expenditure of goods to National Investment fund

Real growth of wealth does not take place, as the Real growth in the wealth of the people of the
money remains in few hands society takes place, due to multiplier effect and real
wealth goes into the ownership of lot of hands

Due to failure of the projects the loan is written off as Due to failure of the project, the management of
it becomes non performing loan the organization can be taken over to hand over to
a better management

Debts financing gets the advantage of leverage for an Sharing profits in case of Mudarabah and sharing in

enterprise, due to interest expense as deductible item the organization of business venture in case of

form taxable profits. This causes huge burden of taxes Musharakah, provides extra tax to Federal

on salaried persons. Thus the saving and disposable Government. This leads to minimize the tax burden

income of the people is effected badly. This results over salaried persons. Due to which savings &

decrease in the real gross domestic product disposable income of the people is increased, which

results the increase in the real gross domestic

product

Due to decrease in the real GDP, the net exports Due to increase in the real GDP, the net exports
amount becomes negative. This invites further amount becomes positive, this reduces foreign
foreign debts and the local-currency becomes weaker debts burden and local-currency becomes stronger

102

REFERENCES

Abdul Ghafar Ismail (2010), Money Islamic Banks and the Real Economy: Cengage
Learning Asia Pte Ltd

Bank Negara Malaysia, Financial Sector Market Blueprint 2010-2020, 1st Edition
(2011). ISBN 978-983-9586-47-3

Lee Khee Joo, Chin Nyuk Sang, & Pamela Chin (2010), Financial Sector Talent Enrichment
Programme (FSTEP), Conventional Banking Handbook. Institut Bank-Bank Malaysia
(35880-P). Kuala Lumpur.

Razli Ramli, Mohammad Khairi Saat, Haryani Aminuddin (2014), Islamic Banking Practices
From the Practitioner’s Perspective: Second Edition (updated), Islamic Banking and
Finance Institution of Malaysia (IBFIM)

Rohani A.Ghani (2011), The Development of Malaysian Financial Institutions: University
Publication Centre, UITM

Ruziah A.Latif, Tay Bee Hoong, Yuslizawati Mohd Yusoff (2011), Financial Institutions
in Malaysia: an Introduction: UITM Press, UITM

Simon Tan (2003), Study Manual: Treasury. Institut Bank-Bank Malaysia (35880-P).
Kuala Lumpur. ISBN 967-9927-93-8

Bank Negara Malaysia Annual Report 2015
https://keydifferences.com/difference-between-loans-and-advances.html
https://ringgitplus.com
https://www.thebalance.com
https://www.investopedia.com
http://www.moneysense.gov.sg
https://www.mybsn.com.my
http://www.kwsp.gov.my
http://www.pensionfundsonline.co.uk
http://www.nbc.com.my/socso/
http://www.insuranceinfo.com.my
http://www.cwealthadvisors.com.my
https://www.fimm.com.my/investor
http://www.aims.education/
www.bnm.gov.my
www.sc.com.my

CHAPTER 1 EXERCISES
1. Describe briefly the structure of the financial system in Malaysia.
103

(2 marks)

2. List down TWO (2) roles of financial system in Malaysia.(CLO1) (2 marks)
i.
ii.

3. Define:
(i) Financial Services Act 2013 (FSA). (CLO1)

(3 marks)

(ii) Islamic Financial Services Act 2013 (IFSA). (CLO1)

(2 marks)

4. State THREE (3) objective of establishment of Labuan international Business and Financial

Centre (Labuan IBFC) (3 marks)

EXERCISES
104

CHAPTER 2
1. Briefly explain TWO (2) monetary instruments tools used by Bank Negara Malaysia.

(6 marks)

2. Explain how Bank Negara Malaysia (BNM) acts as a banker and financial adviser to the

Government. (6 marks)

3. Explain FOUR(4) roles of Bank Negara Malaysia (10 marks)

EXERCISES

105

4. Analyze how BNM uses the following techniques to influence the supply of funds, credit

and interest rates using financial regulatory instruments and industry reforms.

a. Monetary Liquidity Requirement (MLR)

b. Open Market Operations (10 marks)

CHAPTER 3 EXERCISES
1. Identify THREE (3) roles and responsibilities of commercial banks. 106

(3 marks)

2. Elaborate TWO (2) types banking services provided by commercial banks. (6 marks)

3. Identify THREE (3) functions and business of commercial banks in Malaysia.
(3 marks)

EXERCISES

4. There are 3 types of deposit under commercial bank services. Explain these types 107

of deposits. (12 marks)

5. Explain the roles and responsibilities of commercial bank. (10 marks)

CHAPTER 4 EXERCISES
1. Describe of investment bank. (CLO1) 108

(2 marks)

2. State TWO (2) roles of investment bank. (CLO1) (2 marks)

3. Identify on the services of investment banks (based on fees) below. (CLO1)

a. Corporate Finance and Advisory (2 marks)

b. Investment and Portfolio Services (2 marks)

c. Corporate Banking (2 marks)

4. State FIVE (5) services offered by Investment Bank under Corporate Banking.
(5 marks)

EXERCISES

109

CHAPTER 5

1. Briefly explain the following institution under non-bank financial intermediaries:

a. Development finance institutions (4 marks)

b. Saving Institutions (3 marks)

c. Provident and pension funds (4 marks)

2. List FIVE (5) types of non-bank financial intermediaries in the Malaysian Financial

system. (5 marks)

EXERCISES

3. Describe the functions of FIVE (5) non-bank financial intermediaries.

(10 marks) 110

3. Explain the common characteristics under the Development Finance Institutions (DFIs)
(5 marks)

CHAPTER 6 EXERCISES
1. Define Financial Market. 111

2. Briefly explain these financial market:- (2 marks)
a) Foreign Exchange Market
b) Commodity Market
c) Money Market
d) Capital Marlet

(8 marks)

EXERCISES
112

CHAPTER 7

1. Describe TWO (2) comparisons between Islamic banking system and conventional

banking system. (4 marks)

2. List THREE (3) full-fledged Islamic Banking institutions available in Malaysia
(3 marks)

3. Explain briefly the principle of Islamic banking below: (10 marks)
a. Al-Mudharabah

b. Al-Ijarah EXERCISES
c. Al-Wadiah 113
d. Al-Musyarakah
e. Al-Bai Bithaman Ajil