ISLAMIC

BANKING
MPU3313 ISLAMIC INSTITUTIONS IN MALAYSIA

Group Members
Name

Student ID

Topics

Mohamad Syahmi bin Mohd

Sakri

1161303285

Musharakah

Muhammad Hazwan bin

Hussin

1161303546

Mudharabah

Deden Muhamad Sapei bin

Ismail

1161303464

Ar-Rahnu

Muhammad Asfahanee bin

Sharbani

1161303071

Islamic and
Conventional
Banking

MUSHARAK
AH

Definition
Musharakah is also known as al-sharikah ()
Literally:
Intermingling of properties whereby one cannot
be differentiated from the other.
Mixing of two properties so that they could not
be distinguished from each other.
Technically:
An agreement between two or more parties to
combine their assets, labor or liabilities for the
purpose of making a profit.

Nature of Musharakah
It is basically a profit and loss sharing partnership
whereby the ratio for the distribution of profits
must be determined and specified in advance.
If one partner is to be paid a fixed remuneration
he will not be deemed a partner.
Each partner may dissolve the partnership at
his/her pleasure provided he gives ample notice
for the others.

Evidence
Al-Quran :

Pillars of Musharakah
1. Shuraka
Shareholders
2. Rasul Mal
Capital
3. Mashru
Project or business venture
4. Ribh
Pre-determined profit allocation
5. Sighah
Ijab (Offer)
Qabul (Acceptance )

Flows of Musharakah
Profit

Shuraka
(Shareholder
s)
Ijab &
Qabul

Ribh

(Predete
rmined
profit
rate)

Rasul-Mal

(Capital)

Shuraka
(Shareholders
)

Profit

Mashru

(Project)

Musharakah

Types of Musharakah
Sharikah al-Milk
(ownership
partnership)

Sharikah Ikhtiar

Sharikah Jabr

Sharikah al-Amwal
(capital)

Sharikah al-Aqd
(contractual
partnership)

Sharikah al-Amal
(labour)
Sharikah al-Wujuh
(goodwill/ credit)
Sharikah alMudharabah (profitsharing)

Sharikah alMufawadhah (equal

share)
Sharikah al-Inan
(general)

Types of Musharakah
SYIRKAH AL MILK
Joint ownership of two or more persons in a
particular property (non-profit)
Optional ownership (Ikhtiar) based on own
option
Compulsory ownership (Jabr) automatically
exists
SYIRKAH AL UQUD
A partnership effected by a mutual contract or
a joint commercial enterprise (profit)
Partnership in capital (al-Amwal)
Partnership in labour (al-Amal)
Partnership in goodwill/credit (al-Wujuh)
Profit sharing partnership (al-Mudharabah)

Types of Musharakah
Sharikat
al-Inan
Sharikat
alMufawadah
Sharikat
al-Amal
Sharikat
al-Wujuh

A partnership of two or more to contribute

the capital to finance a project and to share
the profit between them.
An equal partnership between two or more,
where each contributes the same amount
of capital and to share the same amount of
profit and work.

A partnership of two or more to contribute

their skill or craft.

A partnership of two or more without

contributing capital.

Dissolution of Musharakah
When a partnership fulfills its obligation or
when its duration is expired.
By mutual consent of the parties.
By a request made by one of the parties which
is subsequently approved by other parties.
By death or incapacity of one of the parties
whose heirs or their guardian decide to
discontinue the partnership.
The bankruptcy of the partners.

MUDHARABAH

Definition
Definition :
Derived from the phrase dharaba fi al-ard
which means to make a journey and it is called
this because the agent (entrepreneur) gets
profit by virtue of his hard work and efforts in
performing long journeys.
A contract or a partnership where one provides
the capital and the other the entrepreneurship
with the profit being shared among them with
a predetermined condition.
Partnership in profit whereby one party (rabb
al-mal) provides capital and the other party
(mudharib) provides labor.

Flows of Mudharabah

Roles of Mudharib
(Entrepenuer)
Ameen
(Trustee)

The money given by Rab al-mal (investor) and

the assets required therewith are held by him as
a trust.

Wakeel
(Agent)

In purchasing goods for trade, he is an agent of

Rab al-mal.

Sharik
(Partner)

In case the enterprise earns a profit, he is a

partner of Rab al-mal who shares the profit in
agreed ratio.

Dhamin
(Liable)

If the enterprise suffers a loss due to his

negligence or misconduct, he is liable to
compensate the loss.

Ajeer
(Employee)

If the Mudarabah becomes Void due to any

reason, the Mudarib is entitled to get a fee for
his services.

Types of Mudharabah
Mudharabah

Mudharabah
Mutlaqah

Mudharabah
Muqayyadah

Unlimited
Mudharabah

Limited
Mudharabah

Profit sharing
contract
unrestricted by a
stipulation

Profit sharing
contract
restricted by
stipulation

Types of Mudharabah
Al Mudarabah Al Muqayyadah (restricted Mudarabah)
The capital provider (rabb al-mal) makes certain
limitations to the activities to be conducted by the
entrepreneur (mudharib) with regards to the capital
given .
The business is subject to capital providers (rabb almal) instruction in term of type, location, time etc.
Al Mudarabah Al Mutlaqah: (unrestricted Mudarabah)
The entrepreneur (mudharib) may buy and/or sell all
types of merchandise as he sees fit, hire helpers as
needed, rent equipment and travel with the equipment
etc.
The business is run according to entrepreneur
(mudharib) expertise and experience based on his
discretion

Conditions of Mudharabah
Conditions of Capital
Must be in the form of money and not commodities since
commodities fluctuate in price and cause uncertainty
and ignorance.
The capital must be clearly specified, determined and
known at the time of the contract.
Must be available cash-present during the conclusion of
contract.
Must be delivered to the possession of the mudharib
entirely.
Conditions Of Profit
The distribution of profit must be determined
proportionally between the capital provider and the
entrepreneur.
The pre-determined profit must be in ratio form or

Termination of Mudharabah Contract

Unilateral termination.
On the date of maturity if the two parties had earlier agreed
to set the time limit.
When the fund of mudharabah has been exhausted or have
suffered losses.
The death of the mudharib or liquidation of institution that
acts as mudharib.
Insanity of any parties to the mudharabah contract.

Difference between Mudharabah and

Musyarakah
MUDHARABAH

MUSHARAKAH

The capital is financed by one

party, which is the capital provider
or the owner of the business.

The capital is financed by all the

shareholders according to the proportion
agreed upon by all parties.

The capital must be in the form of

cash money.

Any type of property that could normally

be assessed and have certain commercial
value could be considered as an
acceptable source of capital. Example;
intellectual capital.

The entrepreneur will be the only

one that will conduct the actual
business. The capital provider is
not allowed to jointly work with the
entrepreneur.

All the shareholders have the right to

work and contribute their skills,
knowledge, experience e and expertise in
the company.

The monetary loss will be solely

borne by the capital provider while
the entrepreneur will only suffer
from a fruitless effort without
having to bear all the capital

The monetary loss will be jointly borne by

all the shareholders according to the ratio
and proportion of their respective share
in the partnership.

Ar-Rahnu

Definition
Definition :
Literally Constancy and continuity, or holding and
binding.
Literally :
Taking a property as a security against a debt, whereby
the secured property can be utilized to repay the debt in
the case of non payment.
Also termed as pawning, mortgage, collateral, charge,
lien and pledge.
Rahn literally means to detain a thing. Legally, it is the
detention of a corporeal property on account of a claim
such as a debt which may be satisfied out of that
property.

Evidence

The Quran refers to the idea of pawning as mortgage with

possession (rihanun maqbudha). Quran also supports the
idea of furnishing a pledge against a debt.

According to Quran verses, every soul is in pledge (rahina)

for its deeds. {Quran, 74:38}.

Pillars of Ar-Rahnu
1. Rahin Pledgor
a person who gives rahn/ the debtor
2. Murtahin Pledgee
a person who takes rahn/ the creditor
3. Marhun Pledged asset
a property to be pledged
4. Marhun Bih
The liability of rahn/ the debt
5. Sighah
Ijab (Offer)
Qabul (Acceptance)

Flows of Ar-Rahnu

Concept of Ar-Rahnu
Benevolent Loan (Qardhul Hasan)
It is a loan agreement between a lender and a borrower.
The lender is forbidden to ask for extra payment but the
borrower is encouraged to give a token of appreciation.
Trustworthiness (Wadiah Yad-Amanah)
The borrower is required to produce a returnable
collateral to ensure repayment of the loan.
The borrower entrusted the lender to look after her
belongings during the loan period. If something happens
to the collateral item but not due to the lenders
negligence, the lender is not required to replace the
item.
The fee for safekeeping (Al-Ujrah)
The lender is allowed to charge a reasonable fee for
keeping the pawned items safe and in good condition.
Safekeeping with guarantee (Wadiah Yadhomanah)
The lender will be responsible to replace the missing or
stolen items to the owner if he/she fails to keep the

Benefits of Ar-Rahnu
Gender Sensitivity
Gold jewelries are womens asset.
According to Islam, women have rights to their
belongings.
A lot of women involve in small scale businesses.
Therefore, co-operatives offering the Ar- Rahnu scheme
are sensitive to womens need and welfare.
Interest free.
Transparent and customer friendly counters.
All transactions are recorded clearly.
Secured safekeeping with insurance coverage for the
pawned items.
Issuance of notices to customers.
Excess from the auction will be returned to the customer.

Comparison of Ar-Rahnu with

Conventional Pawning

Comparison of Ar-Rahnu with

Conventional Pawning (Continued..)

Modern Application
Rahn in the contemporary application may take either a
form papers such as :
Property documents
Vehicle papers
Sukuk
Or object like :
Ornaments
Jewellery
Other valuables

Islamic and
Conventional
Banking

Governing Principles of Islamic

Banking
The prohibition of interest or riba based transactions
Avoidance of speculations (gharar)
Avoidance of oppression (zulm)
Introduction of Islamic tax (zakat)
Financing of Sharia Approved activities and discouraging the
production of goods and services which are not allowed in
Islamic values (haram)

The Prohibition of Interest Based

Transactions
Riba literally means increase or excess. An increase in
a loan transaction or exchange of commodity accrues to the
owner without giving an equivalent compensation in return.
For example :
Exchanging 1kg of grapes with 1.5kg of grapes that are
of the same type, quality and value.
Exchanging RM1000 for RM1100.
For the same items any difference in their exchange value
is interest whereas pricing of different items while
exchanging is allowed.

Avoidance of Speculations
(Gharar)
Definition :
An Islamic finance term describing a risky or hazardous
sale, where details concerning the sale item are
unknown or uncertain.
Gharar is generally prohibited under Islam, which
explicitly forbids trades that are considered to have
excessive risk due to uncertainty.
Most of the Islamic scholars view Gharar as both ignorance
of the material attributes of the subject matter of a sale and
also uncertainty regarding its availability and existence.
Majority of derivative contracts are forbidden and
considered invalid because of the uncertainty involved in
the future delivery of the underlying asset such as forwards,
futures and options, short selling, and speculation.

Avoidance of Oppression
(Zulm)
Zulm refers to all form of inequity, injustice, exploitation,
oppression and wrong doing.
A person either deprives others of their rights or does not
fulfill his obligations towards them.
Zulm also refers to trading in matters which are prohibited
(haram) under Sharia such as :
Alcoholic drinks/beverages
Non-halal poultry/meat, pork

Introduction of Islamic Tax

(Zakat)
Islamic banks perform as their obligatory duty to take care
of the whole system of Zakat as its principal religious
liability, and they pay Zakat themselves as well.
Naturally Islamic banks will be trusted more than the
conventional banks to perform this job.

Financing of Sharia Approved

Activities
Islamic banks will make sure that funds are used only in
Sharia approved economic activities, e.g. businesses of
alcoholic goods, narcotics, haram meat, pork, casinos, and
prostitutions, etc.

Comparison of Islamic with

Conventional Banking
Islamic Banks
The functions and
operating modes of
Islamic banks are
based on the
principles of Islamic
Sharia.
It promotes risk
sharing between
provider of capital
(investor) and the
user of funds
(entrepreneur).
It also aims at
maximizing profit but
subject to Sharia
restrictions.

Principles
Operating Modes

Conventional Banks
The functions and
operating modes of
conventional banks
are based on fully
manmade principles
(capitalism theory).

Risk Sharing

The investor/lender is
guaranteed of a
predetermined rate of
interest or returns.

Profit

Unrestricted profit
maximization
illustrated by
derivatives trading,
deposit multiplication,
etc.

Comparison of Islamic with

Conventional Banking (Continued..)
Islamic Banks

Principles

Conventional Banks

In the modern Islamic

banking system, it
has become one of
the service-oriented
functions of the
Islamic banks to be a
Zakat collection
center and they also
pay out their Zakat.

Zakat

Conventional banks
do offer the service of
Zakat deduction but
the depositors are
reluctant to pay Zakat
from their accounts in
conventional banks.

Participation in
Fundamental Function Lending money and
partnership business
getting it back with
is the fundamental
compounding interest
function of the Islamic
is the fundamental
banks.
function of the
conventional banks.
Money is a
commodity and the
motivation.

Comparison of Islamic with

Conventional Banking (Continued..)
Islamic Banks

Principles

Conventional Banks

Islamic banks have no

provision to charge
any extra money from
the defaulters except
for compensation and
is used for charitable
purposes.

Penalty

It can charge
additional money
(penalty and
compounded interest)
in case of defaults.

Importance is given
to the public interest
or maslahah. Its
ultimate aim is to
ensure growth with
fairness.

Person of interest

Banks interest is the

main objective. It
makes no effort to
ensure growth with
equity.

For the Islamic banks,

it must be based on a
Shariah approved
underlying
transaction.

Economic Activities

Interest-based
commercial banks
dont care about the
activities being
performed with their