Interest-free transaction is a primary concept that derived from Islamic banking. It operates with the original ethical and professional standards that exclude the "Muslims" from receiving or paying any kind of interest. An Islamic bank is a deposit-taking banking institution whose scope of activities includes all currently known banking activities, excluding borrowing and lending on the basis of interest. On the liabilities side, it mobilizes funds on the basis of a mudarÄbah or wakÄlah (agent) contract. It can also accept demand deposits which are treated as interest-free loans from the clients to the bank and which are guaranteed. On the assets side, it advances funds on a profit-and-loss sharing or a debt-creating basis, in accordance with the principles of the SharÄ«ah. It plays the role of an investment manager for the owners of time deposits, usually called investment deposits. In addition, equity holding as well as commodity and asset trading constitute an integral part of Islamic banking operations. An Islamic bank shares its net earnings with its depositors in a way that depends on the size and date-to-maturity of each deposit. Depositors must be informed beforehand of the formula used for sharing the net earnings with the bank
Do we really need Islamic banks?
Islamic banks are needed and it is important in Malaysia. Islamic banks have the goal of being more solidarity and more competition with huge sum of expenditures and savings. According to Justice Mufti Muhammad Taqi Usmani, an exper form Pakistan in the fields of Islamic banking system, he emphasized that Islamic Principles and system that direct the conscience or the natural justice to the settlement of financial controversies. Islamic banks bring those who invest and those who save closer to the real market by eliminate the barrier between them. Although there are many, the most important challenges are the lack of Islamic banking professionals and the lack of scholars who have specialized in Islamic economics. Further the board should have a fair influence on the bank's operational and strategic planning. For this process to be successful, the boards of our Islamic banks should absorb Islamic scholars based on their technical expertise rather than their popularity.
Is Islamic banking viable?
Theoretical arguments and models developed by Islamic economists and the successful practice of hundreds of institutions in heterogeneous conditions both testify to the viability of Islamic banking. Islamic banking and financial institutions have now spread across several Muslim countries. Some non-Muslim countries or institutions are also keen to experiment with Islamic financial techniques. The average growth rate of deposits in Islamic banks over the thirty years has been over 10% per annum. Many studies testify to the great success of Islamic banks in mobilizing resources. Another manifestation of the viability of Islamic banking is the fact that many conventional banks have also started using Islamic banking techniques in the conduct of their business, particularly in dealing either with Muslim clients or in predominantly Muslim regions.
How does Islamic banking and conventional banking differ?
Islamic Banking is a concept that based on the Islamic law. The Islamic laws are known as Shariah, and it also called as fiqh muamalat. Frqh muamalat`s rules and practices are all came from the Quran and Sunnah, and other secondary sources of Islamic law that agreed among personal reasoning, analogy and, Shariah scholars. It provides a system or banking activity with the practical application through development of Islamic economies. Basically, Shariah concepts are included Wadiah (safekeeping), Mudharabah (profit sharing), Murabahah (cost plus), Musyarakah (joint venture), and Ijarah Thumma Bai` (hire purchase).
Conventional banking does not follow one pattern. Naturally, commercial banking is based on a pure financial intermediation model. They make the profit from the margin that between lending and borrowing rates of interest. They are providing banking services such as letters of guarantees and credit. Commercial banks are prohibited from trading and the shareholding is restricted to a small proportion of their net worth. Because of the fractional reserve system, they produce derivative deposits, which allow them to multiply their low-cost resources.
Difference between conventional bank and Islamic bank are as follow:
Major Differences between Islamic and Banking System
Conventional System
Islamic System
Money is the product that besides store of value and medium of exchange.
Money is just a medium of exchange whereas Real Asset is a product.
Charging interest on capital`s basis is time value.
Earning profit`s basis is profit on exchange of goods & services.
Interest is charged even in case, the organization suffers losses. Thus no concept of sharing loss.
When the organization suffers loss, it is shared.
While disbursing cash finance, running finance or working capital finance, no agreement for exchange of goods & services is made.
The execution of agreements for the exchange of goods & services is must, while disbursing funds under Murabaha, Salam & Istisna contracts.
Due to non existence of goods & services behind the money while disbursing funds, the expansion of money takes place, which creates inflation.
Due to existence of goods & services no expansion of money takes place and thus no inflation is created.
Due to inflation the entrepreneur increases prices of his goods & services, due to incorporating inflationary effect into cost of product.
Due to control over inflation, no extra price is charged by the entrepreneur.
Bridge financing and long term loans lending are not made on the basis of existence of capital goods. Rather, they are disbursed on the basis of Windo Dressed project feasibility and credibility of the entrepreneur.
Musharakah & Diminishing Musharakah agreements are made after making sure the existence of capital good before disbursing funds for a capital project.
Government very easily obtains loans from Central Bank through Money Market Operations without initiating capital development expenditure.
Government can not obtain loans from the Monetary Agency without making sure the delivery of goods to National Investment fund.
The expanded money in the money market without backing the real assets, results deficit financing.
Balance budget is the outcome of no expansion of money.
Real growth of wealth does not take place, as the money remains in few hands.
Real growth in the wealth of the people of the 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 it becomes non performing loan.
Due to failure of the project, the management of the organization can be taken over to hand over to a better management.
Debts financing gets the advantage of leverage for an enterprise, due to interest expense as deductible item form taxable profits. This causes huge burden of taxes on salaried persons. Thus the saving and disposable income of the people is affected badly. This results decrease in the real gross domestic product.
Sharing profits in case of Mudarabah and sharing in the organization of business venture in case of Musharakah, provides extra tax to Federal Government. This leads to minimize the tax burden over salaried persons. Due to which savings & disposable income of the people is increased, this results the increase in the real gross domestic product.
Due to decrease in the real GDP, the net exports amount becomes negative. This invites further foreign debts and the local-currency becomes weaker.
Due to increase in the real GDP, the net exports amount becomes positive, this reduces foreign debts burden and local-currency becomes stronger.
How many Islamic banks are working at present and where?
Islamic banks have spread in all parts of the Islamic World alongside conventional banks. Some conventional banks, both in and outside Islamic countries, have found in Islamic banking an innovation worthy to be followed. Therefore, a number of them have opened branches, windows and funds, which provide Islamic financial and banking services. Nowadays it`s over 250 Islamic banks and financial institution currently operating in the world. There are total 17 Islamic banks which registered and licensed under Bank Negara Malaysia.
Below are the banks, HQ located and the company logo that listed under Bank Negara Malaysia
No.
Name
HQ located
Logo
1.
Affin Islamic Bank Berhad
Kuala Lumpur
2.
Al Rajhi Banking & Investment Corporation (Malaysia) Berhad
Kuala Lumpur
3.
Alliance Islamic Bank Berhad
Kuala Lumpur
4.
AmIslamic Bank Berhad
Kuala Lumpur
5.
Asian Finance Bank Berhad
Kuala Lumpur
6.
Bank Islam Malaysia Berhad
Kuala Lumpur
7.
Bank Mualamat Malaysia Berhad
Kuala Lumpur
8.
CIMB Islamic Bank Berhad
Kuala Lumpur
9.
EONCAP Islamic Bank Berhad
Kuala Lumpur
10.
Hong Leong Islamic Bank Berhad
Kuala Lumpur
11.
HSBS Amanah Malaysia Berhad
Kuala Lumpur
12.
Kuwait Finance House (Malaysia) Berhad
Kuala Lumpur
13.
Maybank Islamic Berhad
Kuala Lumpur
14.
OCBC Al-Amin Bank Berhad
Kuala Lumpur
15.
Public Islamic Bank Berhad
Kuala Lumpur
16.
RHB Islamic Bank Berhad
Kuala Lumpur
17.
Standard Charted Saadiq Berhad
Kuala Lumpur
