Islamic Banking and Financial Services Chapter 1

Chapter 1: Banking System

• Course: MBFB 2043
• Topic: Islamic Banking and Financial Services
• Instructor: Dr. Wan Shahdila Shah Bt Shahar

Introduction to Islamic Banking

• Islamic banking is a system adhering to Islamic principles
• Based on risk-sharing and profit-sharing
• Prohibits interest ("riba"), uncertainty ("gharar"), and gambling ("maysir")

Historical Evolution of Islamic Financial System

• Roots trace back to Prophet Muhammad (approximately 1400 years ago)
• Adapted to changing needs while maintaining Islamic principles
• Modern Islamic finance combines traditional values and innovative financial products
• Serves Muslim and non-Muslim communities globally

The First Century of Islamic Finance

• Foundations are in the Qur'an and Sunnah
• Financial operations derived directly from the Holy Qur'an and the Sunnah of Prophet Muhammad
• Provided fundamental principles for Islamic finance
• Early Islamic contracts such as mudarabah (trading with Khadijah's capital) and musyarakah (partnerships) existed
• Prophet Muhammad's financial practices offered examples for Islamic finance methods

Evolution with the Spread of Islam

• Geographical expansion: Islam spread rapidly, reaching North Africa, Spain, and significant portions of Asia
• Juristic Reasoning: Islamic principles expanded to address changing needs through juristic reasoning (Ijtihad)
• Contract Improvements: Existing contracts were improved, introducing modern Islamic financial instruments

Historical Development of Islamic Banking

• Early Islamic Era: Risk-sharing and profit-sharing practiced by early Muslim traders
• Modern Era: Islamic banking system emerged in the mid-20th century, with the establishment of the first Islamic banks in Egypt and Sudan
• Global Growth: Significant growth in recent decades, establishment of Islamic banks and financial institutions worldwide

Modern-Day Islamic Finance

• Resurgence Factors: Rise of oil prices (1974), desire for an Islamic financial system, and rediscovering Islamic values.
• Private Initiatives: Early Islamic finance started with private and individual initiatives, establishing the foundation of the modern Islamic financial system.
• Global Spread: Islamic financial institutions expanded globally, from Egypt and Malaysia to Switzerland and the US, demonstrating global appeal.

Comparison of Islamic and Conventional Banking

• Interest ("riba"): Forbidden in Islamic banking, allowed in conventional banking
• Investment: Ethical and socially responsible in Islamic banking, may include investments across multiple industry types in conventional banking
• Profit-sharing/risk sharing: Common practice in Islamic banking; less emphasis on risk sharing in conventional banking
• Principle focus: Islam and conventional banking have different approaches to principle focus

Different Practices in the Formation of IFIs

• Full-fledged Islamic Banks: Newly established or converted conventional banks
• Islamic Banking Windows: Existing banks offering Islamic banking services
• Islamic Banking Subsidiaries: Subsidiaries of conventional banks
• Conversion Approaches: Methods of transitioning for conventional banks to become Shariah-compliant

Conversion from Conventional to Islamic Banking

• Approaches: Various conversion approaches, ranging from comprehensive and immediate, to organic and gradual
• Malaysia's Dual Banking System: System focuses on both conventional and Islamic banks, allowing a wide range of products and services

Window-Based Islamic Banking Model

• Cost Savings
• Shariah Compliance Concerns
• Regulatory Requirements
• IFSB Core Principles

Malaysian Experience on Dual Banking System

• Islamic Banking: Growth, range of products and services, focus on ethical investments, increasing importance in the Malaysian economy
• Conventional Banking: Wide range of financial products, well-established principles, strong market presence

Malaysia's Dual Banking System

• Key events timeline (1967-2002) like the establishment of Lembaga Tabung Haji, incorporation of Bank Islam Malaysia Berhad (BIMB), establishment of IIMM, call from Bank Negara for Muslim Banks
• Important landmark years in the development from 1967, 1983, 1993, 1994 and 2002

Supporting Infrastructure for Islamic Finance in Malaysia

• Regulatory Framework: Robust regulatory framework for stability and growth
• Payment Systems: Advanced payment systems for efficient transactions
• Talent Development: Pool of qualified professionals for long-term sustainability

Malaysia's Approach to Developing the Islamic Financial Industry

• Three Phase approach: 1980s focused on establishing foundations; 1990s focused on upgrading institutions and broadening options; and 2000s to present strengthening the industry, broadening access
• Phases: I (1980s), II (1990s), III (2000s)

Development of the Islamic Finance Industry

• Key initiatives (e.g., Central Bank of Malaysia Act, establishment of SAC-BNM, MoU, VBI, and institutions)

Milestones of Islamic Finance in Malaysia

• 1983 Islamic Banking Act, laying the foundation
• 1983: Establishment of Bank Islam Malaysia Berhad
• 1984: Takaful Act and establishment of Takaful Malaysia Berhad

Creating Impact Through Islamic Finance

• BNM aims to support socio-economic development aligning with sustainable goals
• Aims to enhance Islamic finance's role in supporting socio-economic development within Sustainable development goals (SDGs)
• Focuses on driving a societal impact through Value-Based Intermediation (VBI)

Value-Based Intermediation (VBI) in Islamic Finance

• Introduce VBI in July 2017 by Bank Negara Malaysia
• Strategy Paper in March 2018
• VBI definition that aims to provide positive and sustainable impacts to the economy, community, and environment
• Broader impact: Islamic concept of VBI encompassing other aspects like religion, life, intellect, progeny and wealth

Tripartite Linkage between Maqasid, VBI, TBL and 15 of SDGs

• 5 essentials (protection of religion, life, intellect, lineage, and wealth)
• Links to UN's 15 sustainable development goals

Ethical and Socially Responsible Aspects of Islamic Banking

• Environmental Responsibility
• Social Justice
• Charitable Giving
• Economic Development

Human Capital Development in Islamic Finance

• Higher Education and Specialized Training : Institution like INCEIF, and professional training
• Research
• Advisory Services: Organizations like ISRA Consulting provide expert advice
• Development of Human Capital in Islamic Finance covers numerous key area

The Growth of Islamic Banking Globally

• Global expansion covering new markets
• Product innovation and new services development
• Regulatory Frameworks to support growth and development
• Increased investment in the Islamic banking sector driven by demand for ethical and compliance financial solutions

Fintech and Innovation in Islamic Finance

• Increased adoption of digital banking platforms for accessibility and convenience
• Exploration of Blockchain technology for increased efficiency and security in financial transactions

Future Trends and Outlook for Islamic Banking

• Global Expansion into new markets
• Technological Innovation and Fintech
• Product Diversification to cater to diverse needs
• Support by Regulatory bodies.

Explore the foundations of Islamic banking in this quiz based on Chapter 1 of MBFB 2043. Learn about the principles, historical evolution, and the significance of Islamic finance in modern economics. This quiz is essential for understanding the balance between traditional values and contemporary financial practices.