Islamic banks are the financial institutions that operate base on Shariah principles. Islamic scholars commend trade-oriented banking in place of traditional interest-bearing credit oriented banking. The major vehicle of interest-free banking is a two-tier mudarabah, which is a business contract negotiated on the basis of profit-sharing ratios between two profits-seeking parties, A and B. Parties A provide funds to party B, party B independently manages the business according to the agreed terms. From the banking point of view, it is an advance agreement on a ratio in which realized business profits are to be shared.
The basis of two-tier mudarabah is one mudarabah between the surplus economic units (depositors) and financial institution in order to replace interest-bearing contracts between savers and banks; and another mudarabah between the financial institutions and the deficit economic units in order to replace interest-bearing contracts between banks and ultimate users of funds. So, banks can negotiate deposits and advances on the basis of profit-sharing ratios. In effect, interest-bearing loans are replaced by profit-seeking investments and qard hasanah (loans on zero interest). Interest-free financial institution can efficiently perform all types of intermediation after eliminating interest from the system and the replacement of interest rates by profit-sharing ratios has profound macroeconomic consequences for unemployment, inflation, stability, growth, and income distribution.
The Needs of Islamic Banks’ With Conventional Bank
Many Islamic banks use the facilities of conventional banks for treasury management, foreign exchange, portfolio services and investment banking. Major multinational conventional banks have the critical mass to provide specialist service while Islamic banks are usually too small in size to take on such services themselves. Outsourcing makes sense for organizations when the benefits of internalization are outweighed by the administrative costs of trying to extend their functions into new areas where demand is limited. As most Islamic banks are located in the Muslim world, where most of the demand is for core banking services rather than for highly specialized finance, it is a potential management distraction to widen the facilities on offer excessively. This could actually result in deterioration in the quality of the basic level of deposit and funding services.
Islamic Bank is Viable
Islamic banking and finance are emerging as viable alternatives to conventional interest-based banking and financing. The long run goal of BNM is to construct an Islamic banking system operates same as the conventional banking system. However, an Islamic banking system requires three important elements to qualify as a viable system, such as a large number of players, various types of instruments and money market in Islamic wolrd. In addition, the socio-economic values in Islam must be reflected in an Islamic banking system.
BNM spreads the virtues of Islamic banking to distribute Islamic banking on countrywide with a lot of players and able to reach all Malaysians by achieving the above objective. Islamic financial products and services are being in their existing infrastructure and branches. It was seen as the most successful way to increase the number of financial institutions offering Islamic banking services efficiently. On 4 March 1993, BNM introduced an idea is known as Interest-free Banking Scheme or Skim Perbankan Tanpa Faedah. There are many Islamic banking services that provided by the banks using a range of Islamic concepts such as Mudarabah, Musyarakah, Murabahah, Ijarah and others.
Mudarabah (Profit-sharing)
A capital provider and another party to allow the entrepreneur to carry out business projects based on a profit sharing ratio under an agreement. However, the capital provider of the funds needs to bear all losses.
Musyarakah (Joint Venture)
The sharing of profits will be distributed base on predetermined ratio for a partnership or joint venture of a particular business. Both parties will bear the losses base on equity participation.
Murabahah (Cost Plus)
Sales agreement is applicable on the condition that the sale of goods at a price, other costs and the profit margin are agreed to by both parties.
Ijarah (Leasing)
A lessor (owner) leases property to a lessee at an agreed rental against a fixed charge.
Islamic Banking vs. Conventional Banking
The difference between Islamic Banking and Conventional Banking which is conventional banking eliminates the risk while Islamic banks bear the risk when involve in any transaction. In addition, conventional banks do not take the liability only get the benefit from customers when involve in transaction with customers in form of interest whereas Islamic banks bear all the liability in transaction with consumer because in getting out any benefit without bearing its liability is illegal in Islamic principles.
In retail deposit services include the provision of current accounts and low-risk investment accounts base on mudarabah with clients sharing in any bank profits. Conventional banks provide similar deposit services at retail level and allow overdrafts on current accounts, which often incur both fixed-rate charges and interest. Islamic banks cannot offer overdraft facilities on current accounts. However, depositors who get temporary financial difficulties due to events beyond their control such as illness may receive interest-free loans. Conventional banks offer savings rather than investment accounts, the major attraction of such accounts being the interest paid to depositors. This often increases as the minimum notice period for withdrawals lengthens, with accounts which for example require three months’ notice for withdrawals paying more interest than those requiring one months’ notice. Some Islamic banks apply similar stepped returns with their investment accounts, with a higher proportionate profit share as the period of notice for withdrawals increases.
Moreover, conventional bank concern on money as a medium of exchange, valuable and interest on capital is charging on time value basis. Islamic banks focus on the real asset but money is just a medium of exchange goods & services for earning profit. In conventional banks, Government gets the loans easily from BNM through Money Market without any capital development expenses. In Islamic banks, Government cannot obtain loans without capital development expenditure.
Lastly, debts financing in conventional banks has the benefit of leverage for a project because interest expense is deductible expense form taxable profits. This leads to maximize the tax burden over salaried persons. So, the saving and disposable income is affected badly and decrease in the real GDP. In Islamic banks, Mudarabah and Musharakah provide extra tax to Federal Government and minimize the tax burden over salaried persons. Hence, the savings and disposable income is rise and increase in the real GDP.
List of Other Financial Institutions Offer Islamic Financial Products and Services
According to the General Council for Islamic Banks and Financial Institutions, there are currently 275 institutions worldwide that follow Islamic banking and financing principles, collectively managing in excess of $200 billion. These institutions are spread throughout 53 countries, including Europe and the United States. Twenty institutions now offer a variety of Islamic financial services in the United States. The Islamic banks are not the only banking institutions drawn in in Islamic banking but Islamic banking services were introduced by other financial institutions via the Islamic Banking Scheme. In Malaysia, there are separate Islamic legislation and banking regulations in financial systems. The Islamic Banking Act (IBA) was established to provide BNM with the authorizations of supervising and regulating the Islamic banks.
On 1 July 1983, Bank Islam Malaysia Berhad (BIMB) was the first Islamic bank established and was operated base on Shariah principles. After few years, BIMB expanded rapidly and was being listed on the Main Board of the Kuala Lumpur Stock Exchange (KLSE). After that, BNM allowed the existing financial institutions to offer Islamic banking services through "Skim Perbankan Tanpa Faedah". The Islamic Interbank Money Market (IIMM) was established to link the institutions and the instruments. The National Shariah Advisory Council on Islamic Banking and Takaful (NSAC) was established as the highest Shariah authority on and takaful in Malaysia.
On 1 October 1999, Bank Muamalat Malaysia Berhad (BMMB) was established. The establishment of BMMB was the result of the joining between Bank Bumiputra Malaysia Berhad (BBMB) and Bank of Commerce Berhad (BOCB).
Islamic Banks
1. Bank Islam Malaysia Berhad (BIMB)
2. Bank Muamalat Malaysia Berhad (BMMB)
Commercial Banks
1.Alliance Bank Berhad 8. Malayan Banking Berhad
2.AFFIN Bank Berhad 9. AmBank Berhad
3. OCBC Bank (Malaysia) Berhad 10. Public Bank Berhad
4. Citibank Berhad 11. RHB Bank Berhad
5. EON Bank Berhad 12. Southern Bank Berhad
6. Hong Leong Bank Berhad 13. HSBC Bank (M) Berhad
7. Standard Chartered Bank Malaysia Berhad
Finance Companies
1. AFFIN-ACF Finance Berhad 4. AmFinance Berhad
2. Hong Leong Finance Berhad 5. Mayban Finance Berhad
3. EON Finance Berhad 6. Public Finance Berhad
Merchant Banks
1. AFFIN Merchant Bank Berhad 3. Alliance Merchant Berhad
2. Commerce International Merchant Bankers Berhad 4. AmMerchant Bank Berhad
Discount Houses
1. Abrar Discounts Berhad 5. KAF Discounts Berhad
2. AFFIN Discount Berhad 6. Malaysia Discount Berhad
3. Amanah Short Deposits Berhad 7. Mayban Discount Berhad
4. CIMB Discount House Berhad
