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MALAYSIAN

FINANCIAL SYSTEM

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The Malaysian Financial System can be

dividing into three parts namely

The banking system

The non financial intermediaries

Financial Market

Ministry of

Finance

Financial MarketThe non financial

intermediaries

The banking

system

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1. The banking system

DISCOUNT

HOUSES

COMMERCIAL

BANK

FINANCE

COMPANIES

MERCHANT

BANK

ISLAMIC

BANK

CENTRAL BANK OFMALAYSIA

(BANK NEGARA MALAYSIA)

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2. Non bank financial

system

NON BANKFINANCIAL

SYSTEM

PROVIDENT

AND

PENSION

FUNDS

SAVINGS

INSTITUTIONS

INSURANCE

COMPANIES

DEVELOPMENT

FINANCE

INSTITUTIONS

OTHER FINANCIAL

INTERMEDIARIES

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3. Financial Market

FinancialMarket

Domestic Money Market &

Foreign Exchange Market

Capital Market Derivatives

Market

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ISLAMIC FINANCIALSYSTEM

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The Islamic Financial System can

be dividing into three parts namely;

The banking system

Financial market

Capital MarketMINISTRY

OF FINANCE

FINANCIAL

MARKET

BANKING

SYSTEM

CAPITAL

MARKET

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1. Banking System

Islamic financial institutions

CENTRAL BANK OF

MALAYSIA(BANK NEGARAMALAYSIA)

ISLAMIC BANKING

Bank Islam Malaysia Berhad

Bank Muamalat Malaysia

Berhad

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The several definition of Islamic

Banking

Islamic Banking is a banking activity that based on syariahprinciples. It does not allow the paying and receiving of interestand promotes profit sharing in the conduct of banking business.

Islamic banking is a form of modern banking based on Islamiclegal concept developed in the first centuries of Islam, usingrisk sharing as its main method, and excluding on a fixed, predetermined return.

As approved by General Secretariat of the OIC, Islamic

Banking is a financial institution whose status, rules andprocedures expressly state its commitment to the principle ofIslamic Syariah and to the banning the receipt and payment ofinterest on any of its operation

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Goals of Islamic Banking

1. Broad-based economic well-being with full employment andoptimum rate of economic growth.

2. Stability in the value of money to enable the medium of

exchange to be a reliable unit of account and a stable store ofvalue.

3. A just return is ensured on investment and developmentprojects.

4. Effective rendering of all services normally expected from thebanking system.

5. Socio-economic justice and equitable distribution of income and

wealth.

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Progressive Islamic Financial

Institution Development

1983-1992

Lembaga Tabung Haji (69)

Bank Islam Malaysia Berhad (83)

Syarikat Takaful Malaysia Berhad (84)

1993-2002

Islamic Banking Scheme (93)

Islamic Inter- bank Money Market (94)

Association of Islamic Bank in Malaysia (95)

Asean Retakaful International (L) Ltd Labuan (97)

Bank Muamalat Malaysia Berhad (99) Financial Sector Master Plan (01)

Islamic Financial Services Board (IFSB) (02)

Malaysian Takaful Association (02)

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Progressive Islamic Financial

Institution Development (cont..)

2003-2010

Issuance of 3 new Islamic bank licenses to foreign IFIs (04)

Liberation of Islamic Banking & Takaful industry to allow up to

49% foreign interest (05)

3 new Islamic Banking subsidiaries commence operation (06)

3 new Takaful Operators commence operation

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Differences between conventional and

Islamic Banking

Conventional Islamic1.The functions and operating modes of

conventional banks are based on fully

manmade principles.

2. The investor is assured of a predeterminedrate of interest.

3. It aims at maximizing profit without any

restriction.

4. It does not deal with Zakat.

1. The functions and operating modes

of Islamic banks are based on the

principles of Islamic Shariah.

2. In contrast, it promotes risk sharingbetween provider of capital

(investor) and the user of funds

(entrepreneur).

3. It also aims at maximizing profit but

subject to Shariah restrictions.

4. In the modern Islamic banking system,

it has become one of the service-

oriented functions of the Islamic

banks to be a Zakat Collection

Centre and they also pay out their

Zakat.

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5. Lending money and getting it back with

compounding interest is the fundamental

function of the conventional banks.

6. It can charge additional money (penalty

and compounded interest) in case of

defaulters.

7. Very often it results in the bank's own

interest becoming prominent. It makes no

effort to ensure growth with equity.

8. For interest-based commercial banks,borrowing from the money market is

relatively easier.

5. Participation in partnership business is

the fundamental function of the Islamic

banks. So we have to understand our

customer's business very well.

6. The Islamic banks have no provision to

charge any extra money from the

defaulters. Only small amount of

compensation and these proceeds is given

to charity. Rebates are giving for early

settlement at the Bank's discretion.

7. It gives due importance to the public

interest. Its ultimate aim is to ensure growth

with equity.

8. For the Islamic banks, it must be based

on a Shariah approved underlying

transaction.

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9. Since income from the advances is fixed,

it gives little importance to developing

expertise in project appraisal and

evaluations.

10. The conventional banks give greater

emphasis on credit-worthiness of the

clients

11. The status of a conventional bank, in

relation to its clients, is that of creditor anddebtors.

12. A conventional bank has to guarantee

all its deposits.

9. Since it shares profit and loss, the

Islamic banks pay greater attention to

developing project appraisal and

evaluations.

10. The Islamic banks, on the other hand,

give greater emphasis on the viability of the

projects.

11. The status of Islamic bank in relation to

its clients is that of partners, investors andtrader, buyer and seller.

12. Islamic bank can only guarantee

deposits for deposit account, which is

based on the principle of al-wadiah, thus

the depositors are guaranteed repaymentof their funds, however if the account is

based on the mudarabah concept, client

have to share in a loss position..

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Types of contract

CONTRACT

PARTICIPATING SUPPORTING

SALES LEASING

TRADING

BBA MURABAHAH SALAM ISTISNA.etc

OPERATONAL FINANCIAL

MUSYARAKAH MUDHARABAH

KAFALAH RAHN HIWALAH JUALAH IBRA

etc

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TRADING CONTRACT

1. Trading Contracts with Immediate Payment

Sarf (foreign exchange)

Sale of gold and silver

Bai Dayn (debt trading)

2. Trading Contracts with Deferred Payment

Murabahah (cost plus)

Bai Tawliyah (novation)

Bai Bithaman Ajil (deferred payment sale)

Bai Salam (advance payment sale)

Bai Istisnaa (sale by order) Bai Istijrar (supply, wholesale financing)

Bai Inah

Ijarah (leasing)

Ijarah Thumma Bai (Islamic hire purchase, AITAB)

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PARTICIPATING CONTRACTS

There are three types of participating contracts which are possible inpractice.

Two are subdivisions of Musharakah as follows:

Musharakah

- Shirkah Aamal- Shirkah Inan

Mudharabah

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SUPPORTING CONTRACTS

Rahnu (mortgage) Kafalah (guarantee)

Wakalah (agency)

Wadiah (safe custody)

Qardh (loan)

Hiwalah(transfer of debt)

Tabarru (donation)

Hibah (gift)

Wakaf (endowment)

Ibraa(rebate)

Muqasah (set-off)

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2. Financial Market

The Islamic Inter bank Money Market (IIMM) was introduced on January 3,1994 as a short-term intermediary to provide a ready source of short-terminvestment outlets based on Syariah principle.

Through the IIMM, the Islamic banks and banks participating in the IslamicBanking Scheme (IBS) would be able to match the funding requirementseffectively and efficiently

Provide the Islamic financial institutions with the facility for funding andadjusting portfolios over the short-term

Serving as a channel for the transmission of monetary policy.

Financial instruments and interbank investment would allow surplus banks tochannel funds to deficit banks, thereby maintaining the funding and liquiditymechanism necessary to promote stability in the system

Types of Instruments in Islamic Interbank Money Market is MudarabahInterbank Investment (MII), Wadiah Acceptance, Government InvestmentIssue (GII), Bank Negara Monetary Notes-i (BNMN-i), Sell and Buy Back

Agreement (SBBA), Cagamas Mudharabah Bonds (SMC), When Issue (WI),Islamic Accepted Bills (IAB), Islamic Negotiable Instruments (INI), Islamic

Private Debt Securities, Ar Rahnu Agreement-I (RA-i) and Sukuk BNM Ijarah(SBNMI)

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3. Capital Market

Debt Financing

Debt market of conventional banking involve interest based lendingcontract

which are prohibited in Islam. Debt Financing in Islamic financialsystem are

based on syariah under this several instruments of debt financing suchas;

Bai Bithaman Ajil (deferred payment sale)

Murabahah (cost plus financing / deferred lump sum sale)

Ijarah (leasing / hire contract)

Bai Salam (advance payment sale)

Bai Istisnaa (sale by order)

Others

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Equity Financing

In the equity market, Islamic bank will finance individual or firm whopossess

business skills and ideas but without capital under the profit sharingbasis

contracts. This mode of financing encourages existing entrepreneurs to

undertake projects that involve high risk but are also highly profitableand

productive. Islam has its own laws in the form of Uqud al-Istirak (profitsharing

contract). The two major contracts in this category are:

Al-Musharakah (lost profit sharing) Al-Mudharabah (trustee profit sharing)

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The external factors include the establishment

of Islamic banks in the Middle East in the mid-1970s coupled with the establishment of the

Islamic Development Bank in Saudi Arabia

The internal factors developments including the

establishment of the Pilgrims Fund Board in

1963

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In Malaysia, separate Islamic legislation and banking

regulations exist side-by-side with those for theconventional banking system.

The legal basis for the establishment of Islamic bankswas the Islamic Banking Act (IBA) which came intoeffect on 7 April 1983.

The IBA provides BNM with powers to supervise andregulate Islamic banks, similar to the case of otherlicensed banks.

The Government Investment Act 1983 was alsoenacted at the same time to empower the Government

of Malaysia to issue Government Investment Issue(GII), which are government securities issued based onSyariah principles.

http://www.bnm.gov.my/index.php?ch=174&pg=467&ac=373http://www.bnm.gov.my/index.php?ch=174&pg=467&ac=373

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A large number of global player

A broad variety instruments

A comprehensive financial structure

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Th Sh i h Ad i C il

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The Shariah Advisory Council

of Bank Negara Malaysia

(SAC

Islamic banks and banking institutions thatoffer Islamic banking products and services

(IBS banks) are required to establish Shariahadvisory committees/consultants to advisethem and to ensure that the operations andactivities of the bank comply with Shariahprinciples.

In Malaysia, the National Shariah AdvisoryCouncil, which additionally set up at BankNegara Malaysia (BNM), advises BNM on theShariah aspects of the operations of these

institutions and on their products and services

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The Shariah Advisory Council of Bank NegaraMalaysia (SAC) was established on 1 May

1997 as the authority for the ascertainment of

Islamic law for the purposes of Islamic banking

business, takaful business, Islamic financialbusiness, Islamic development financial

business, or any other business which is based

on Shariah principles and is supervised and

regulated by Bank Negara Malaysia.

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One of the main regulatory provision peculiar to Islamic Law only isprovision relating to the establishment of Shariah Advisory Council.

There are four practices in this regard:

1) The establishment of Sharih Advisory Council at the countrieslevel and also Shariah Board at banks level. In this practice, SAC atthe countries level is accorded the final authority in determining theIslamicity of products. E.g. are Malaysia and Pakistan.

2) The establishment of SAC at the countries level as well as atbanks level, however, the SAC at the countries level has no finalauthority on the products offered. Their task is to investigate on theIslamicity of the products offered by the central bank. E.g are Bahrain

29

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3) No SAC at the countries level, but thereis a requirement that the bank which

operates IBF must have their own SSB,

and all the products are verified by thisboard, e.g Kuwait

4) In countries where IBF is still at the very

beginning, the banks are self regulated.E.g the Islamic Bank of Britain.

30

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The establishment of Shariah Advisory Council at Bank Negara

Malaysia by virtue of section 16B of the Central Bank of Malaysia Act

1958 (CBA)

The SAC is the final authority in matters relating toIslamic banking business,

takaful business,

Islamic financial business,

Islamic development financial business, or

any other business which is based on Shariah principles and is

supervised and regulated by Bank Negara Malaysia

31

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The SAC of BNM will be referred to by the court or arbitrator in

disputes involving Shariah issues in Islamic banking & finance and

takaful

In the case of the arbitrator, the SACs resolution shall be bindingon the arbitrator (obligatory)

In the case of the court, the SACs resolution shall be taken into

consideration on the court (advisory)

32

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BNM also issuedGuidelines of the Governance ofShariah Committees for Islamic Financial Institutions(BNM/GPS1) which provides that

A Shariah body which is to be known as a Shariah

Committee is to be established by each and every

Islamic banks, Islamic windows & takaful operators

Relationship all these Shariah Committees play a

complementary role to the SAC of BNM

33

Malaysia Model contd.

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Restrictions imposedMembers of SAC of BNM are not allowed to serve in

the Shariah Committee of any financial institutions (byvirtue of s. 16B (6) of the CBA 1958)

One Shariah advisor can only serve as a member of

Shariah Committee in one financial institution in thesame industry (Islamic banking and takaful areconsidered as different industries)

34

Malaysia Model contd.

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To advise the Board on Shariah matters in its

business operation to ensure compliance

To endorse Shariah compliance Manual To endorse and validate relevant

documentations to ensure the products of IFI

comply with shariah.

To advise on matters to be referred to the SAC.In case of conflict opinion of the SAC will

prevail

35

SAC Members

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SAC Members

Dr. Mohd Daud Bakar

-Chairman

Assoc. Prof. Dr. Abdul Halim

Muhammad- Deputy Chairman

Y.A.A. Datuk Sheikh GhazaliAbdul Rahman

Y.A. Dato' Abdul Hamid HajiMohamad

S.S. Dato' Haji Hassan HajiAhmad

Y. Bhg. Datuk Haji Md.Hashim Haji Yahaya

Y. Bhg. Dato' Dr. Abdul Halim

Ismail

Assoc. Prof. Dr. EngkuRabiah Adawiah Engku Ali

Dr. Mohd Parid Sheikh

Ahmad

Dr. Aznan Hasan

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Commercial banks

Commercial banks were brought under BNM supervision throughBanking Act, 1973, but this was subsequently replaced by the

BAFIA in 1989.The main functions of commercial banks are to provide:

Retail banking services such as the acceptance ofdeposit, granting of loans and advances, and financialguarantees;

Trade financing facilities such as letters of credit,discounting of trade bills, shipping guarantees, trustreceipts and Bankers Acceptances;

Treasury services;

Cross border payment services; and Custody services such as safe deposits and share

custody.

Commercial banks are also authorized to deal in foreignexchange and are the only financial institutions allowed toprovide current account facilities.

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COMMERCIAL BANKS

Full-fledged IslamicBanks

Participating banks inthe Islamic Banking

Scheme

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Full-fledge Islamic Banks

As an Islamic bank, we are expected to be clean of anykind of riba (usury) and gharar (uncertainty). No new

product can be adopted until it is cleared by Shariah

scholars.

Even after a new product is put into use, Shariah auditing

of the operations of financial institutions is very important to

ensure that the actual practice complies with the

requirements of Shariah.

A full-fledged Islamic bank can also offer investment

advisory and asset management-type services.

E l

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Examples:

Affin Islamic Bank Berhad

Al Rajhi Banking & Investment Corporation (Malaysia) Berhad

AmIslamic Bank Berhad

Maybank Islamic Berhad Bank Islam Malaysia Berhad

Bank Muamalat Malaysia Berhad

CIMB Islamic Bank Berhad

EONCAP Islamic Bank Berhad

Hong Leong Islamic Bank Berhad

RHB ISLAMIC Bank Berhad

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Participating banks in the Islamic

Banking Scheme

Under the Banking and FinancialInstitution Act 1989, a commercial bankis licensed to offer Islamic products andservices such as savings and currentaccounts, fixed deposits as well asconsumer and commercial financing.

In terms of products, all Islamic bankingentities are offering banking productsbased on the Islamic principles.

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Examples:

ABN Amro Bank Berhad

Alliance Bank Malaysia Berhad

Citibank Berhad

HSBC Bank Malaysia Berhad

Malayan Banking Berhad

OCBC Bank (Malaysia) Berhad

Public Bank Berhad

Standard Chartered Bank Malaysia Berhad