Topic 1: Development and Overview of Legal and Regulatory Framework of Islamic Banking and Finance (Part 1) PDF

Development of the Malaysian Islamic Financial System  Why do we need financial system? Why do We Need a Financial System? Provide mechanism for Managing the payment saving and borrowing system...

Development of the Malaysian Islamic Financial System  Why do we need financial system? Why do We Need a Financial System? Provide mechanism for Managing the payment saving and borrowing system Bridge different portfolio preferences of supplies Mechanism of pooling of and demanders of funds funds and financing larger scale of individual projects Allocation of funds to the most efficient use Mechanism of transferring economic resources: time, agent, Managing uncertainty geography Enable risk to be transferred Offers facilities & markets between different portfolio enabling wealth holders to according to their abilities & change the structure of willingness to absorb them their portfolio of assets & liabilities Deal with asymmetric Offers specialist services information e.g. insurance Functions of an Efficient Financial System Facilitate Efficient Financial Intermediation Well-developed market for i.e. Reduce information risk trading, where economic and allocation costs agents can buy and sell protection against event risks as well as financial risks. Ensure stable payment system Offers efficient and liquid money and capital markets Why do we need Islamic financial system?  Salient Features of Islamic Financial System SHARIAH-COMPLIANCE Valid vs Permissible What Does it Mean By Shariah Compliance?  Validity & Permissibility Valid is the contract that meets its requirements and conditions. Permissible (Halal) is the contract that is used to obtain Halal (Permissible) ends. A valid contract is not necessarily Halal (permissible). Examples: – Initiating a marriage contract with a woman whereby all conditions are fulfilled but with the intention to divorce her the other day (just to obtain the sexual pleasure) is a valid contract, but it not Halal. – Selling guns to criminals is valid, but it is not Halal. Validity is based on the FORM of the contract while permissibility is based on the SUBSTANCE of the contract and the INTENTION of the contractors.  The Criterion of the Non-Shari’ah Compliant Transaction When a financing mode is structured in such a way that secures a guaranteed profit to the financier without taking any risks. Or, when the financier acts in reality as a creditor who provides money without being involved in the investment process; i.e. when the substance is interest-bearing debt. This will render the transaction impermissible regardless of its legal form, e.g. sale, lease…. Rationale: Money should not generate money by itself. Profit should be obtained by virtue of real economic activities not by lending. Understanding Roles & Responsibilities ALLAH 1 3 Concept of Khilafah Self Others Shariah Islamiah  What is Maqasid As-Syariah? It outlines the objectives & wisdom (hikmah) as prescribed by Syariah - in all its rulings to protect & preserve benefits & interests (maslahah) of society. What is Maslahah? – is the benefits or interests which are deemed necessary from Syariah perspectives to protect & preserve 5 darurah.  “And We have sent you (O Muhammad) not but a mercy to the whole universe” (Al-Ambiya:107) Alleviate Hardship Eliminate Prejudice Justice Maqasid as-Shariah (The Objectives of Shariah) Religion Wealth Intellect Life Posterity/lineage Preservation and Promotion Maqasid As-Syariah in Financial Transactions ‫االصل في المعامالت االلتفات الى المعاني‬ “The origin of Muamalat matters is by understanding its underlying wisdom” To facilitate the needs To promote transparency and of human being (Al- accountability (Al- Jumuah:10) Baqarah:282) Ar-Rawaj or to ensure wealth is circulated among To uphold and promote justice in as many as possible in a acquiring wealth fair way (Al-Hasyr:7) ‫ال يحل لمسلم باع من اخيه وفيه عيب اال بيًّنه له‬ “It is prohibited for a Muslim when he To avoid dispute and ensure sells something which has defects to stability his brother unless he informs his brother about it” (Al-Hakim) To promote maslahah and avoid harm  Free from Riba Free from Gharar Fahish Free from Qimar or Maysir (Gambling) Free from Ikrah Free from element of (coercion) exploitation of needs (bay’ al-mudtarr- ‫) بيع المضطر‬ Free from Ihtikar (hoarding) Free from jahl mufdi ila al-niza` (lack of Characteristics Free from Najsh information leading (Raising prices by to dispute) of Islamic making false bids) A system grounded on Financial - bay’ muzayadah moral and ethical System (auction) is allowed framework of Shariah Community oriented and Constructed upon the entrepreneur-friendly emphasising principle of on productivity and physical brotherhood and expansion of economic production cooperation and services  ISLAMIC FINANCE A financial system that is consistent with the fundamental principles of Shariah DIVERSIFICATION OF PROHIBITION OF PROHIBITION OF I II III ACTIVITIES HARAM ACTIVITIES UNMITIGATED RISKS Not limited to lending - Prohibition of riba Prohibition of maysir borrowing (payment & collection of (gambling) interest) Wider dimension e.g. Prohibition of gharar partnership, sale-based, Prohibition of (uncertainty) in lease-based, fee-based etc. manufacture of alcohol, transactions pork, etc. Requires greater transparency & disclosure with Shariah governance