The Aims and Objectives of an Islamic Bank

The Aims and Objectives of an Moslem beachMuslim swaning is becoming increasingly popular and plays a heavy(a) role in the financial services firmament in Malaysia. According to latest statistics shown, the Muslim population of Malaysia is approximately 25 million. There is definitely a strong demand and strong growth authorisation in this sector. In Malaysia, the cashboxing sector is mainly dominated by the unoriginal desireing constitution whereby interest is non be prohibited. It is because the Muslim bordering constitution is relatively new and there argon insufficient regulations at present to govern them. If these obstacles are world resolved, the Moslem Banking sector will blossom given the influence of Malaysia in the international Muslim community.The primary aim of this research is to examine and understand in depth the ontogeny of Islamic banking in the world of finance. This piece of research can be separate into three sections. The first section looks at significant differences between naturalized banking and Islamic banking. Products and services offered by these financial institutions will be marked to comparison. The second section looks at how the practice of Islamic banking started and how it has emerged to become a ampul force in the economy. The final part of the research will focus on how the Islamic banks penetrated the Malaysian market and the challenges face up.1.1 Structure of DissertationThis dissertation is divided into a few topics and each topic covers different areas of research. This is to give readers a clearer view of the research and make it more than user-friendly. It is well thought and designed to verify the smooth flow of the reading. The structure of the dissertation can be summarized as followsChapter 1 This chapter describes the aims and objectives of this research.Chapter 2 This chapter discusses the principles and fundamentals of Islamic bankingChapter 3 This chapter explains in detailed the p ut forward and scope of Islamic banking industry in Malaysia. I ca-ca in addition mentioned to objectives and roles the Malaysia planetary Islamic Financial Centre Initiatives plays in the industry.Chapter 4 Research methodologies and strategies that were being adopted for this paper was discussed.Chapter 5 I have marked two Islamic banks in Malaysia for side by side comparison. I have skeletal up a table to compare their financial performance and position over the past two years.Chapter 6 I have interviewed two Islamic bankers from Malaysia. On top of that, I have alike provided my in-person analysis of their answers.Chapter 7 Competition and globalization of the Islamic banking industry. Moreover, I have also discussed opportunities and challenges faced in the world and in Malaysia.Chapter 8 A summary of the paper was included with recommendations and limitations to research.2 INTRODUCTIONSo, what exactly is Islamic Banking? Islamic Banking is banking based on Islamic laws ( shariah law). The Shariah principles are derived from the Quran and the Sunnah (sayings of Prophet Muhammad). Moreover, secondary sources of Islamic laws much(prenominal) as opinions collectively concord among Shariah scholars, analogy and personal reasoning are also adopted in the rules and practices of Islamic banks (Al-Omar, 1996).The research then looks at the differences between pompous banking and Islamic banking. There governing principles of Islamic banks areRibaAbsence of interest-based transactions. Charging of interest is prohibited under Shariah principles. Money itself does not have inherent value and should not be used to manufacture more money. Wealth can only be generated through legitimate trade and investment.GhirarActs of speculation are not accepted under Islamic principles. For instance, purchasing goods now at lower price in the hope of selling them at higher price in future. The reason being speculators make clubby gains at the expense of society at lar ge.ZakatIntroduction of Islamic tax for the purpose of wealth distribution so that every Muslim is guaranteed a jolly standard of living.HaramIt is forbidden for Islamic banks to finance activities forbidden in Islam much(prenominal) as prok meat and alcoholic beverage. In order to check that the trading activities do not contradict with Shariah principles, all Islamic banks are required to enclothe up Shariah Committee, who acts as advisor to the banks.On the other hand, naturalized banks charge interest on transactions. These interests are widely seen as price of credit. Furthermore, conventional banks focuses on elimination of risks and thus do not share every liabilities with the borrower.(Figure 1)Islamic Bank Vs Conventional BankBased on Shariahprinciples.Based on best economic principles.Bank should not take advantage of borrower. No interest charged.Charges interest to reflect price of credit.Does not allow involvement in haramactivities such as pork meat and alcoholic beverage.Aims at maximizing profit without restrictions other than compliance with relevant regulatory frameworks.Intoduction of zakat.Non-existence of zakat.Promotes risk sharing between providers of credit and borrower.Interest is assured to providers of credit. No liabilities borne by the bank.Emphasis fit(p) on viability and feasibility of projects.Emphasis placed on credit-worthiness of customers.Only provide guarantee for gear up ac calculate (al-wadiah). If funds placed under mudarabah accounts, customers shares profit or loss incurred by bank.Provides guarantee to all its depositors.www.learn islamicfinance.com2.1 Fundamentals of Islamic Banking financeIslamic commercial law is based on a few major(ip) principles. They will be discussed in detailed as followsMusharakah (Partnership Finance)Musharakah is a contract in which the bank and the client contribute jointly to the capital of a circumstantial project or deal to make a profit. Therefore, risks of profits and losses are being shared between these two parties according to terms and conditions stipulated in the contract. This principle exposes bank to the risks of the project, in other words protecting the interests of the community. This will prevent banks from yielding their unfair influence and sells disadvantage products to clients.Mudarabah (Trust Financing)Mudarabah is a contract in which the banks provides all the capital required whilst the partner contributes in terms of skills, experiences and efforts. The bank receives a pre-determined share of profits as agreed by both parties upon startle of the project. The major difference between mudarabah and musharakah is that in this case, the bank bears all financial loss whilst the client goes unrewarded. Therefore, it is also the banks responsibilities to assess the feasibility and viability of the project. As such, it is vital for the bank to have a good and credible credit system to evaluate all its exposures on these projects. In short, this principle encourages individuals to participate in financial activities It also gives individuals without sufficient resources an opportunity and platform to prove themselves in the society.Murabaha (Cost-plus Financing)Murabaha is a contract in which the banks informs their client about the acquisition price of certain goods and products and sells them with a margin. It requires the bank to declare an honest price of acquisition. It is one of the most common principles adopted in Islamic banking system to promote interest-free transactions. It is widely practiced in addition financing and both commodity import and export.Bai-Muajjal (Deferred Payment Sale)It is a contract in which the seller sells a certain goods or products to the buyer at an agreed fixed price to be paid later at a specific date by the buyer. In short, it is a sale on credit. The bank merely acts as the financier by deferring the receipt of the sale price of goods it sells.Ijara (Leasing)In this case, the bank buys capital equipment or property and leases it out under component to clients. Similar to conventional leasing, the client has the option to purchase the goods at the end of the lease period. The fact that there is real good to be financed means that it is Shariah compliant. A very common product adopting this principle is Islamic mortgage whereby the buyer buys the property on an instalment basis.Qard HassanIslamic teachings promote brotherhood amongst Muslims. Qard Hassan is seen as a gratuitous loan that helps fellow Muslims who need financial assistance. It can be defined as a loan to be repaid at a later date without incurring any interests. According to Rob (1992), Islamic banks may raise funds through sale of shares to public and main deposit accounts. Therefore, the bank has a responsibility to lend a helping hand to those in desperate situation without taking of their advantaged position.2.2 Compatibility of Islamic Banking with Conventional BankingIslamic banking s ystem has very similar features to conventional banking except that Islamic banks operate in compliant to Shariah laws and principles. Both banking systems have common features and common products. The main differences being prohibition of interests being incurred and sharing of profits and losses between banks and their clients (Abdur Rahim, cc9). They have the same objectives except interpretation of interest. Islamic banks fall into realms of the economic world as well. They try to ensure all their operations comply with Shariah laws yet at the same time conform to rules set by international bodies such as International Accounting Standards Board and Audit Practices Board. This is to ensure they remain relevant to the society and at the same time conform to their religious principles. Islamic banks sell products such as mortgages, savings accounts, insurance which is also sold by all conventional banks across the world. According to Nienhaus (1995), Islamic banks offer facilities more or less the same as conventional banks, in compliance with the welfare principles of Islam.3 LITERATURE REVIEWA literature review is a process in which published articles or information are studied as part of the research for the preparation of a dissertation. For the purpose of this project, I have gathered information from books and articles from discordant sources. I have studied the concept of Islamic banking, having limited understanding about this topic previously. Further, I have also included discussion about the development of Islamic banking in the world, and in particular, Malaysia. This paper allows readers to have a good grasp of Islamic banking in world-wide. It gives readers the opportunity to study about Islamic banking in greater detail when the interest of this industry gathering strong momentum. This is of particular importance because Islamic banking has a huge impact of the world economy because of the strong influence of the oil-rich Gulf States.3.1 In troductionSince a few decades agone, Islamic banking has emerged as a new reality in the world economy. Its philosophies and principles are however, not new, having been outlined in the Holy Quran and the Sunnah of Prophet Muhammad (p.b.u.h.) more than 1,400 years ago. The emergence of Islamic banking is often related to to the revival of Islam and the desire of Muslims to live all aspects of their live in accordance with the teachings of Islam (Siddiqi, 1983).This chapter provides a brief overview of how Islamic Banking was introduced in the World and how it penetrated the Malaysian market. Islamic banking nowadays has proven to be a popular and reliable financial system in the world. It is widely seen as a viable alternative to the conventional banking system over last 3 decades. Islamic banking was described by scholars as wishful thinking when the idea was first mooted almost thirty years ago (Iqbal and Philip, 2006). Many conferences and discussions were carried out at that t ime to work on the finer details of this system. Several blueprints were drafted by Islamic scholars from all over the world to ensure a detailed system is created.The first international conference on Islamic Economics was organized by Kings Abdul Aziz University in Makkah marked an important milepost in the history of Islamic banking (Iqbal, 2005). Financial gurus, economic experts and Islamic leaders were invited to present their view and opinions.Following this, the first Islamic bank, Dubai Islamic Bank (DIB) was constituted in the United Arab Emirates in 1975. Since its formation, it has established itself as the leader in the industry and has won several accolades internationally. In 2009, it recorded net profit of 200 million with assets worth over 14 billion. Islamic banking has gained tremendous momentum and has been growing rapidly over the years. Islamic banks now offer products in various areas such as banking, insurance, mortgage and asset management with annual growt h of 10% for many years.3.2 History of Islamic Banking in MalaysiaIslamic banking industry in Malaysia is growing at a moderate pace. It is a unique market because Islamic banks in Malaysia are allowed to operate in parallel to conventional banks (interest-based). The multiethnic population of Malaysia makes the entire change of financial system to follow the Shariah system not viable. Government of Malaysia opted for gradual fashion of introducing Islamic banking by allowing conventional banks to sell Islamic banking products and services such as sukuk (Arif, 1989). The dual banking system has been recognised by both West and East leaders and it is seen to be the sticker of the future. In fact, many underlying bankers have visited Malaysia to see the effectiveness of this dual system first hand. Furthermore, this dual system also eliminates the wrong concept of general public that Islamic banking products are sold exclusively to Muslims.The history of Islamic banking industry g oes back to as far as 1963, when the foresighted government set up the Lembaga Tabung Haji also known as the Pilgrims Management and Fund Board. It was set-up primarily to encourage Muslims in the country to save up on their income in order to perform pilgrimage in Mecca (Kamarulzaman Bhupalan, 1983). Besides, the fund was also created to provide a platform for participation in the economic and investment activities. Based on the success of the Lembaga Tabung Haji, coupled with the consultation of Shariah experts and economic gurus, government then proceeded to set up the first ever Islamic Bank in 1983. saddle horse up of Bank Islam Berhad Malaysia (BIMB) marked a milestone in the banking industry. It proved to be hugely popular because over half the Malaysian population are Islam followers. What followed through was the listing of the bank in the stock exchange of Malaysia in the early 1990s. As of today, the bank has 100 braches located all over Malaysia.With the fairytale of BIMB, central bank decided to allow commercial banks and merchant banks to offer Islamic banking products under the Islamic Banking Scheme. It was not long after that the central bank set up the National Shariah Advisory Council to oversee all issues pertaining to Islamic Banking.Due to the economic liberalisation, central bank finally grants licenses to foreign Islamic banks to operate in Malaysia in 2004. Al-Rahji Bank and capital of Kuwait Finance House took full advantage of this ruling and step foot into the Malaysian banking industry. The last count of Islamic banks operating in Malaysia stood at 21.3.3 Scope of Islamic Banking in MalaysiaIslamic Banking started out as mere deposit taking and lending zeal has since transformed into all aspects of banking, money and capital market operations. In Malaysia, the central bank is in favour of a dual banking system, whereby Islamic banks are allowed to co-exist with conventional banks. It is at the consumers choice to select which s ervices they prefer that cater to their needs. This is in stark contrast with the scenario in Iran and Pakistan, where conventional banking system is abolished completely to make way for Islamic banking. They claim to be devoid of conventional interest based financial transactions.Today, the Malaysian Islamic banking sector is blossoming as reflected in the prolonged distribution networks comprising 152 full-fledged Islamic banking branches. The ability of these Islamic banks to offer competitive products with attractive and innovative features has attracted both Muslim and non-Muslim population in the country. This has also spurred non banking institutions such as savings institutions to introduce Shariah compliance product to appeal to a wider consumer base.According to Association of Islamic Banking Institutions Malaysia, there are 21 Islamic banks who have subscribed to their membership. The list of Islamic banks is provided as followsAffin Islamic Bank BerhadAlliance Islamic B ank BerhadAl-Rajhi Banking Investment Corporation BerhadAmIslamic Bank BerhadAsian Finance Bank BerhadBank Islam Malaysia Bank BerhadBank Kerjasama Rakyat Malaysia Bank BerhadBank Muamalat Malaysia Bank BerhadBank Simpanan Malaysia BerhadCIMB Islamic Bank BerhadEONCAP Islamic Bank BerhadHong Leong Islamic Bank BerhadHSBC Amanah Malaysia BerhadKuwait Finance House (Malaysia) BerhadMaybank Islamic Bank BerhadOCBC Al-Amin Bank BerhadPT Bank Muamalat IndonesiaPublic Islamic Bank BerhadRHB Islamic Bank BerhadStandard Chartered Saadiq BerhadUnicorn International Islamic Bank BerhadAs evident from the list above, there are 21 banks offering Islamic products in the Malaysian market. Confidence is clearly shown on the Malaysian market with international banking powerhouse presence such as Standard Chartered group and Kuwait Finance House.The Governor of Central Bank Malaysia recently declared the central banks intention to lure larger overseas banks to provided services that comply with Mus lim tenets. As a sweetener to any potential deal, the central bank has raised foreign ownership limits at local Islamic banks and insurance companies to 70%. Rising oil wealth has turned the Islamic banking into an industry with assets with $1 trillion in assets globally. The central bank is doing its utmost, implementing initiatives to explore this relatively untapped market. In addition to the changes in foreign ownership limits, the central bank is also offering tax breaks for Islamic products and has relaxed rules for Islamic banks to trade in foreign currencies (Aziz, 2006). This is seen as a major breakthrough because the foreign currencies dealing is tightly regulated due to the impact Malaysian market suffered in the 1997 Asian Financial Crisis.In July 2010, Khazanah, Malaysia sovereign wealth fund made its entranceway in Singapore debt market issuing sukuk or Islamic bonds worth $1.5 billion, three times the size of Singapore sukuk market until now. This further strengthe ned the Malaysian government efforts to promote Islamic banking products both domestically and internationally.