BIB 3114

ISLAMIC BANKING
NORIZATON AZMIN MOHD NORDIN
FOM: 2023

CHAPTER 1: INTRODUCTION
Financial
development

Commodity
Money
~metals (gold,
silver &
copper)
~cowrie shells
~sheep and
cattle

Barter system
~change of
goods with
other goods
~problem in
matching the
demand and
supply

Gold Standard
~Currencies
based on gold
or also known
as gold-backed
currencies
~Replaced by
Fiat Money
(Currencies
that is backed
by a basket of
other

FURTHER DEVELOPMENT

Sav
ing
s

Borr
owin
gs

Mark
et
Prim
ary
and
Seco
ndar
y
Mark
et

Busi
ness
Entit
ies
Part
ners
hip
and
Com
pani
es

FINANCIAL MARKET AS INTERMEDIARY OF

FUNDS

Surplus Unit

Financial
Intermediaries
~Monetary
~Non-monetary

Deficit Unit

FACTORS CONTRIBUTING TO ECONOMIC

GROWTH
Capital Formation

Funds to Finance
Capital Formation
Finance
~Self finance
~ Direct finance
~Indirect finance

BANKS ARE EFFICIENT AT ALLOCATING SCARCE

RESOURCES (FUNDS) FOR INVESTMENT PURPOSES:

through their expertise in assessing the creditworthiness of the borrower and in

appraising the viability of the business venture, banks succeed in eliminating
the riskier or less productive investments;

due to the large scale of their operations, economies of scale are realized, the
administration cost per unit loan is reduced, thus resulting in a reduction in the
overall cost of finance;

being able to mobilise large amount of resources, banks enlarge the scope of
lending. The availability of finance from banks allow entrepreneurs to 'think big'
and thereby undertake larger investments;

by lending the pool of saving to diverse sectors and regions the aggregate risk
of investment for the economy as a whole is diminished;

being profit motivated banks tend to lend to borrowers who are able to pay the
highest price thus ensuring the migration of funds to the users with the highest
yields.

THE RELATIONSHIP BETWEEN ISLAM AND

THE ISLAMIC BANKING SYSTEM

SHARIAH AND RATIONALE FOR ISLAMIC

BANKING

Shariah or shar ~ 'the path or the road leading to the water'

Verb sharaa ~ 'to chalk out or mark out a clear road to water.'
Religious perspective ~ meant 'the highway of good life.'
Shariah ~ is the way which directs a man's life to the right
path. The path not only leading to Allah, but also the path
shown by Allah, the Creator Himself through His Messenger,
Prophet Muhammad (pbuh).

Shariah also has its correlation with the word din which literally
means 'submission' or 'following'. Shariah is the ordaining of
the Way and its proper subject is God, whereas din is the
following of that Way and its subject is man. Therefore, as far

SHARIAH
Governs man in conducting his life in order to realise the Divine
Will.

It includes all forms of behaviour spiritual, mental and physical.

Shariah principles are more than law, not only covering the total
way of life that includes both faith and practices, but also all
personal behaviour, legal and social transactions.

Shariah is a comprehensive principle of the total way of life.

Shariah comprises all that might be positively called law and

occupies the central place in the Islamic system of final authority.
It is an ideal as well as a reality and unites and guides Muslims in
both time and space, down through the generations and across
the diverse and widespread regions of Islam. It gives Muslims a
profound sense of security and stability.

SOURCES OF SHARIAH
AlQuran

Qiyas

Shari
ah
Ijma

Hadith
/Sunn
ah

WHAT IS ISLAMIC FINANCE?

Is a form of finance that is based on Shariah

or the body of Islamic Law.

It is common to use the term Shariahcompliant to describe anything that is

permissible under Islamic Law.

Halal anything that is Shariah-compliant. It

includes aspects of human behaviour, speech,
clothing and diet.

KEY PRINCIPLES OF ISLAMIC FINANCE

Belief in
No haram
No
divine
investmen
interest
guidance
ts
Risk
Financing
sharing is
is based
encourage
on real
d
assets

BELIEVE IN DIVINE GUIDANCE

The universe was created by Allah (swt) and

He created human on earth to fulfil certain
objectives through obeying His commands.

Human is imperfect and sometimes confused

reasons with desires.

Commands given by Allah are through the

last messenger Rasulullah (Prophet
Muhammad)

NO INTEREST
You cannot earn interest on a loan or be required to
pay interest on a loan.

NO HARAM INVESTMENT
Money is to be invested in worthy causes.
Companies that manufacture or participate in haram products like
alcohol, tobacco, prostitution, pork, pornography are to be avoided.

RISK SHARING IS ENCOURAGED

Favoured in business dealings with its customers.

Fosters the equitable distribution of risk, profits
and losses.

Enhanced transparency, promote mutual trusts

and fairness in dealings among business partners,
institutions and consumers.

FINANCING IS BASED ON REAL ASSETS

Transactions are tied to real assets.

Able to curb excessive speculation and credit
expansion.

TRADING AND TRANSACTIONS IN ALQURAN

(AL-NISA: 29)
O ye who believe! Eat not up your property among
yourselves in vanities; but let there be amongst you
traffic and trade by mutual good-will; nor kill (or
destroy) yourselves; for verily Allah hath been to you
Most Merciful.

Wahai orang yang beriman! Janganlah kamu saling

memakan harta sesamamu dengan jalan yang batil
(tidak bernar); kecuali dalam perdagangan yang
berlaku diatas dasar redha meredhai diantara kamu;
dan janganlah kamu membunuh dirimu.

HISTORY AND DEVELOPMENT OF ISLAMIC

BANK IN THE WORLD AND MALAYSIA
18th, 19th and first half of 20th century, nearly all
Islamic world was colonised by European nations that
managed the economies and finances of Muslim
countries.

After WW2, most countries achieved independence

and want to manage their own financial affairs.

TIMELINE
196
3

First modern Islamic Financial institutions in Egypt Mit Ghamr

(a savings bank)
Lembaga Urusan Tabung Haji (LUTH)-Muslim Pilgrims Savings
Corporation

197
5

Islamic Development Bank (IDB) Jeddah, Saudi Arabia

Dubai Islamic Bank

198
3

Bank Islam Malaysia Berhad (BIMB)

Banks, Takaful Insurance (1984), IFSB and IIFM (2002)

TUTORIAL
Form a group of 2 persons.
Presents and write a minimum 10 pages report on the following:
a) The difference between Al-Quran, Sunnah, Hadith, Ijma and Qiyas.
b) Analyse what is halal and haram from Al-Quran, Sunnah, Hadith, Ijma
and Qiyas in terms of trading, transactions, savings and economy.

c) History and development of LUTH, BIMB and Bank Muamalat.

)Spacing 1.5, provide footnote, minimum 10 references.
)For presentation only 6 slides is allowed, duration 5 minutes and max 3
minutes video. Presentation is based on alternate members. Each group
need to prepare at least 1 question to the presenter. Presenter is not
allowed to bring small notes or reading card when presenting.