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Date [ 2014-11-19, 05:05 ]

Islamic finance has made leaps and bounds to put Malaysia in the forefront on a worldwide scale.

(Kuala Lumpur=Koreanpress) Ramani Radir =


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.

In 1983 the Islamic Banking Act was enacted and gave the country more than a 30-year start.  The first Islamic bank, Bank Islam Malaysia Berhad, was established ten years after in 1993. It introduced a system called Perbankan Tanpa Faedah, an interest free window concept, actually conducted mainly within conventional banks, so they have a window for Islamic business. Thereafter, with this liberalisation of the Islamic financial system, more Islamic financial institutions have been established.

 In 1993, commercial banks, merchant banks and finance companies were allowed to offer Islamic banking products and services under the Islamic Banking Scheme (IBS). Three foreign based institutions coming to set up business here were Kuwait Finance House, Al-Rajhi Banking and Investment Corporation, a consortium led by Qatar Islam bank. These institutions however, are required to separate the funds and activities of Islamic banking transactions from that of the conventional banking business to ensure that there would not be any co-mingling of funds.

In Malaysia, the National Syariah Advisory Council additionally set up at Bank Negara Malaysia (BNM) advises the national bank on the Syariah aspects of the operations of these institutions, as well as on their products and services. In 2006, Bank Negara Malaysia set up the International Centre for Education in Islamic Finance (INCEIF) a dedicated University to provide skilled and certified personnel for Islamic Finance in Malaysia.

The university was established as part of the Malaysian Government's initiative to further strengthen the country’s position as an international Islamic financial centre. It is the only university in the world that is wholly dedicated to postgraduate study in Islamic Finance. ` This strong emphasis on human capital development alongside the development of the Islamic financial industry ensures the availability of Islamic finance talent

Islamic financing has differences with conventional banking. The most important difference and which acts as the blanket difference is that Islamic and banks must follow Syariah (the way) laws that has the tenets of Islam. . I

Islamic banking must also avoid activities such as riba(interest) or gharar (excessive uncertainty).One example would be, instead of charging interest on financing given out, Islamic banks give financing based on musharakah, which is the sharing of any profit and loss.

Thus in the financing of a home purchase, Islamic banks will fix the selling price (including the bank’s profit margin) from the very beginning. So unlike conventional banks where the first rule is to raise the profit margin, Islamic banks have the rules of the Koran and other Islamic teachings, tamper the operations of the bank’s business.

The Islamic Banking Industry

Islamic banking refers to a system of banking that complies with Islamic law also known as Syariah law. The main principles that govern Islamic banking are mutual risk and profit sharing between parties, the assurance of fairness for all and that transactions are based on an underlying business activity or asset.

Islamic banking's main aim is to cultivate entrepreneurship, trade and commerce and bring social development in the regions where they operate.  Activities that involve interest (riba), gambling (maisir) and speculative trading (gharar) are prohibited.

Through the use of various Islamic financial concepts such as ijarah (leasing), mudharabah (profit sharing), musyarakah (partnership), financial institutions have a great deal of flexibility in the creation of Islamic financial products. The emphasis on transactions to be supported by genuine trade or business related activities, allows more stable standards for investments and promotes greater accountability and risk mitigation.

Malaysia's Islamic banking assets have passed USD65.6 billion with an average growth rate of 18-20% annually. Today, Malaysia's Islamic finance continues to grow rapidly, supported by conducive government support that has created an environment renowned for continuous product innovation, a diversity of financial institutions from across the world, a broad range of innovative Islamic investment instruments, a comprehensive financial infrastructure and adopting global regulatory and legal best practices.

All of these steps have transformed Malaysia into one of the most developed Islamic banking markets in the world. It has also encouraged foreign financial institutions to make Malaysia their destination of choice to conduct Islamic banking business. This has created a diverse and growing community of local and international financial institutions.

Currently, Malaysia has a significant number of full-fledged Islamic banks including several foreign owned entities; conventional institutions who have established Islamic subsidiaries and also entities who are conducting foreign currency business. All financial institutions are given permission to conduct both ringgit and non-ringgit businesses. The country continues to invite foreign financial institutions to establish international Islamic banking business in Malaysia, alongside the conduction of foreign currency business.   
The Various Contracts

There are various contracts, of which the most used are Ijarah,  Mudarabah, Musyarakah, Takaful and Wakalah. Closer details of some contracts are:

Refers to a lease or commission contract that involves an exchange of usufruct or benefits of an asset or a service for rent or commission for an agreed period. It is generally used to finance real property , vehicles, projects and personal financing.

Wakalah\ (Agency)
It refers to an agency relationship where one party is appointed to act as an agent on behalf of another party.

Murabahah (Cost Plus)
Under Murabahah contract, the Bank sells the goods to you at the Bank’s selling price which comprises the principal amount (i.e. the cost  price of the goods) plus Bank’s profit payable by you.

Kafalah (Guarantee)
It refers to a contract of performance or financial guarantee given by one party to discharge the liability of a third party in the case of defaults.

Bai’ Dayn (Debt Trading)
This contract refers to the selling of your trade debts/receivable arising from trade-related transactions. You will sell your trade debts/receivable to the Bank for a discounted amount.

This is used mainly for customers’ bank accounts, usually for current and savings accounts, It is also used for currency transactions, general investments and corporate deposits.

Ujrah (Fee)
It refers to commission or fee charged for services rendered by the Bank.

Other contacts that are available in Malaysian Islamic banks are: Istisna,, Musyarakah, ,Qard,, Rahn,.Tawarruq, , Bai' Dayn and Bai' 'Inah.

There are also financing products that enable customers to lease assets with an option to
acquire the leased assets at the end of the lease tenure based on the concept of
ijarah muntahia bi al-tamlik or al-ijarah thumma al-bai`.

Supporting Syariah Concepts

There are known as Hibah. Ibra', Ta'widh and Gharamah.

The Hibah is a gift or donation. It entails the transfer of a determinate property (land) without any material consideration. Muslims have been exhorted by the Prophet to donate gifts to others.

Ibra’ means a rebate for financing based on buy and sell contracts. Banks are obliged to grant ibra' to customers for early settlement of financing based on buy and sell contracts (such as bai' bithaman ajil or murabahah ). This must be included as a clause in the legal documentation of the financing.

Ta’widh and Gharamah are both applied for Late Payment Charges. However they differ in application.  “Ta’widh” the amount that may be compensated to the bank is based on the actual loss incurred due to default.  “Gharamah” refers to penalty charged on the defaulters over and above the Ta’widh. There have been cases of confusion over this matter due to the word “late payment charge” being used in the same sentence as “Ta’widh” or “Gharamah”; giving the impression that late payment charge is distinct from “Ta’widh” or “Gharamah”.

Banks now have the option whether to charge Ta’widh only OR  a combination of Ta’widh and Gharamah. The rationale is because the Ta’widh amount is usually minimal and Gharamah is used to top up the Ta’widh amount.


In Islamic banking, sooner or later the word ‘sukuk’ is bound to rise. It is a syariah compliant ‘Bond’. In its simplest form, sukuk represents ownership of an asset or its usufruct. The claim embodied in sukuk is not simply a claim to cash flow but an ownership claim. This also differentiates sukuk from conventional bonds as the latter proceed over interest bearing securities, whereas sukuk are basically investment certificates consisting of ownership claims in a pool of assets.

Conventional banks offer a bond that is a contractual debt obligation whereby the issuer is contractually obliged to pay to bondholders, on certain specified dates, interest and principal. Whereas, the sukuk holders having an undivided beneficial ownership of the assets, are therefore entitled to share in the revenues generated by the sukuk assets.
The sukuk certificate represents a debt to the holder and will not be tradable on the secondary market and instead is held until maturity or sold at par.


It is a generic name for legally binding agreements whose values are derived from the value of an underlying commodity, financial instrument or reference rate. The basic purpose of derivatives is to transfer risk arising from a variable factor, such as the price of a commodity (wheat, sugar, gold) or the exchange rate of a currency, from one party to another who is willing or able to accept the risk.

There are four main derivative contracts:

-     a buyer pays immediately for a commodity or other fungible goods which the seller will deliver at a specified future date. Such as sacks of rice six months later. This is the closest to the Western forward contract..

-     However, an istisna’ contract does not deal with fungible goods and the purchase price cannot be paid in full when the parties enter into the contract. It is more a forward contract, modified for a progress payment. The progress payment can only be used for the production of the goods. The seller cannot use it for hedging or other market purposes, such as investing in other goods.

-    The buyer makes an immediate down payment –for goods and agrees either to pay the remaining balance at a specified point in the future when he takes delivery of the goods, or to forfeit the down payment and forego the contract because he has found a better deal somewhere else.

Khiyar al-shart

-    Is an option by stipulation contract, whereby one party receives an absolute option to confirm or undo a contract. This gives all involved parties the right to confirm or cancel the contract within a determined period of time. The contract also offers parties a time frame to revise their decisions and so reduce conflicts. Western conventional options ignore rights and obligations that involve financial significance.

Islamic Credit Card

The modern credit card charges interest for purchases made on the card and further payments have to be made if the bill is not settled in due time.. This will be a big no-no for Muslims to use the traditional credit card. The cards have to be completely free from any riba(interest) or gharar.)uncertainty).

Emerge the syariah-based credit cards which can be used by Muslims and. even non-Muslims alike.  Now several banks in Malaysia offer this service and cardholders may collect reward points, air miles and discounted accommodation. Cards on offer range from the ordinary, gold to platinum. These cards however cannot be used for the purchase of alcohol, tobacco, pornography, gambling or pork.
.The first Islamic credit card was launched by Bank Islam Malaysia in 2003 using the concept of bay al inah. Since then more banks have jumped on the bandwagon and today customers are spoilt for choice.. Some use the ujrah or  tawarraq concepts with rebates running from 5% to more and even added travel insurance worth up to RM500,000.

RinngitPlus in a poll has released the five top Islamic credit cards in Malaysia. These are – Bank Islam Gold Master Card-i, RHB Gold Credit Card-i, Visa, Bank Raayat Classic Credit Card-I, HSBC Amanah Advance and Visa Platinum Credit Card-i.

The Future

 Malaysia's Islamic finance continues to grow rapidly, supported by a conducive environment provided by its government. There is continuous product innovation, the latest of which is the Investment Account Platform which will come into effect early next year. It had put in an initial start-up capital of RM150 million to serve as a central marketplace for the financing of small and medium-sized businesses. Following syariah-complaints it aims to broaden the traditional role of Islamic banks from credit provider to investment intermediary.

The country now has a diversity of financial institutions from across the world, a broad range of innovative Islamic investment instruments, a comprehensive financial infrastructure and adopting global regulatory and legal best practices. This has transformed Malaysia into the world’s biggest Islamic financial market.

Currently, Malaysia has a significant number of full-fledged Islamic banks, including several foreign owned conventional institutions who have established Islamic subsidiaries and also entities who are conducting foreign currency business. All financial institutions are given permission to conduct both ringgit and non-ringgit businesses. This has resulted in a diverse and growing community of local and international financial institutions.

Malaysian banks that have branches abroad have begun offering Islamic finances to their foreign customers. However in the case of South Korea there have been some complications. It has now rejected providing loans through ringgit bonds to Korean banks and financial companies.

The Malaysian government wants Korean institutions to raise funds by issuing Islamic bonds, in effect as ‘sucks.’ Kuala Lumpur sees the issuance of ringgit bonds as a temporary measure until Korea introduces the bill in Islamic bonds. This has .not come to pass and banks now cannot use more than half the borrowed ringgit. Hence Malaysia has halted further funding.

Malaysia, the world`s largest Islamic financial market, has rejected providing loans through ringgit bonds to According to Ernst & Young, Islamic banking assets grew at an annual rate of 17.6% between 2009 and 2013, and will grow by an average of 19.7% a year to 2018 worldwide.

In Malaysia’s case, its Islamic banking assets have passed USD65.6 billion with an average growth rate of 18-20% annually. Data from the Malaysia Islamic Finance Centre shows that Islamic banking assets in Malaysia are already at US$132billion as of November 2013. That amount represents 13% of all of the assets of all Islamic banks in the world. abc@koreanpress.net

Nor Sharizan Sulaiman, Deputy CEO of Maybank Islamic

Badlisyah Abdul Ghani, Executive Director and CEO of CIMB Islamic

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