IB Product & Services

ISLAMIC BANKING PRODUCT AND SERVICES (IBO)
CHAPTER 1: FOUNDATIONS OF ISLAMIC BANKING
Islamic banking (Arabic: المصرفية الإسلامية‎, Persian: بانکداری اسلامی‎) is banking or banking activity that is consistent with the principles ofsharia and its practical application through the development of Islamic economics. As such, a more correct term for 'Islamic banking' is 'Sharia compliant finance'.
Sharia prohibits acceptance of specific interest or fees for loans of money (known asriba, or usury), whether the payment is fixed or floating. Investment in businesses that provide goods or services considered contrary to Islamic principles (e.g. pork or alcohol) is alsoharaam ("sinful and prohibited"). Although these prohibitions have been applied historically in varying degrees in Muslim countries/communities to prevent unIslamic practices, only in the late 20th century were a number of Islamic banks formed to apply these principles to private or semi-private commercialinstitutions within the Muslim community
The type of Islamic banking contracts
  • Bai' al Inah (sale and buy-back agreement)
- Bai' al Inah is a financing facility with the underlying buy and sell transactions between the financier and the customer.
- The financier buys an asset from the customer on spot basis. The price paid by the financier constitutes the disbursement under the facility.
-Subsequently the asset is sold to the customer on a deferred-payment basis and the price is payable in installments.
-The second sale serves to create the obligation on the part of the customer under the facility.
-There are differences of opinion amongst the scholars on the permissibility of Bai' al Inah, however this is practiced in Malaysia and the like jurisdictions.
  • Bai' bithaman ajil (deferred payment sale)
-This concept refers to the sale of goods on a deferred payment basis at a price, which includes a profit margin agreed to by both parties.
- Like Bai' al Inah, this concept is also used under an Islamic financing facility.
- Interest payment can be avoided as the customer is paying the sale price which is not the same as interest charged on a loan.
-The problem here is that this includes linking two transactions in one which is forbidden in Islam.
-The common perception is that this is simply straightforward charging of interest disguised as a sale.
Mudarabah
- "Mudarabah" is a special kind of partnership where one partner gives money to another for investing it in a commercial enterprise.
-The capital investment should normally come from both partners.
-The Mudarabah (Profit Sharing) is a contract, with ONE party providing 100% of the capital and the other party providing its specialized knowledge to invest the capital and manage the investment project.
- Profits generated are shared between the parties according to a pre-agreed ratio.
- If there is a loss, the first partner "rabb-ul-mal" will lose his capital, and the other party "mudarib" will lose the time and effort invested in the project The profit is usually shared 50%-50% or 60%-40% for rabb-ul-mal.
  • Murâbaḥah
-This concept refers to the sale of goods at a price. This includes a profit margin agreed to by both parties.
-The purchase and selling price, other costs, and the profit margin must be clearly stated at the time of the sale agreement.
-The bank is compensated for the time value of its money in the form of the profit margin.
-This is a fixed-income loan for the purchase of a real asset (such as real estate or a vehicle), with a fixed rate of profit determined by the profit margin.
- The bank is not compensated for the time value of money outside of the contracted term (i.e., the bank cannot charge additional profit on late payments); however, the asset remains as a mortgage with the bank until the default is settled.
  • Bai Salam
-Bai salam means a contract in which advance payment is made for goods to be delivered later on.
-The seller undertakes to supply some specific goods to the buyer at a future date in exchange of an advance price fully paid at the time of contract.
- It is necessary that the quality of the commodity intended to be purchased is fully specified leaving no ambiguity leading to dispute.
-The objects of this sale are goods and cannot be gold, silver, or currencies based on these metals.
- Barring this, Bai Salam covers almost everything that is capable of being definitely described as to quantity, quality, and workmanship.
- Basic features and conditions of Salam:
a)The transaction is considered Salam if the buyer has paid the purchase price to the seller in full at the time of sale. This is necessary so that the buyer can show that they are not entering into debt with a second party in order to eliminate the debt with the first party, an act prohibited under Sharia. The idea of Salam is normally different from the other either in its quality or in its size or weight and their exact specification is not generally possible.
b) Salam cannot be affected on a particular commodity or on a product of a particular field or farm. For example, if the seller undertakes to supply the wheat of a particular field, or the fruit of a particular tree, the salam will not be valid, because there is a possibility that the crop of that particular field or the fruit of that tree is destroyed before delivery, and, given such possibility, the delivery remains uncertain. The same rule is applicable to every commodity the supply of which is not certain.
c) It is necessary that the quality of the commodity (intended to be purchased through salam) is fully specified leaving no ambiguity which may lead to a dispute. All the possible details in this respect must be expressly mentioned.
d)It is also necessary that the quantity of the commodity is agreed upon in unequivocal terms. If the commodity is quantified in weights according to the usage of its traders, its weight must be determined, and if it is quantified through measures, its exact measure should be known. What is normally weighed cannot be quantified in measures and vice versa.
e)The exact date and place of delivery must be specified in the contract.
f)Salam cannot be affected in respect of things which must be delivered at spot. For example, if gold is purchased in exchange of silver, it is necessary, according to Shari'ah, that the delivery of both be simultaneous. Here, salam cannot work. Similarly, if wheat is bartered for barley, the simultaneous delivery of both is necessary for the validity of sale. Therefore the contract of salam in this case is not allowed.
g)This is the most preferred financing structure and carries higher order Shariah compliance.
  • Hibah
- This is a token given voluntarily by a debtor in return for a loan.
- Hibah usually arises in practice when Islamic banks voluntarily pay their customers a 'gift' on savings account balances, representing a portion of the profit made by using those savings account balances in other activities.
- It is important to note that while it appears similar to interest, and may, in effect, have the same outcome, Hibah is a voluntary payment made (or not made) at the bank's discretion, and cannot be 'guaranteed'(akin to Dividends earned by Shares, however it is not time bound but is at the bank's discretion).
- However, the opportunity of receiving high Hibah will draw in customers' savings, providing the bank with capital necessary to create its profits; if the ventures are profitable, then some of those profits may be gifted back to its customers as Hibah.
- It is important to note once again that although the preceding descriptions of Hibah do sound like interest payments, there is a fundamental difference beneath: Hibah is voluntary, and at the sole discretion of the giver, whereas payment of interest is contractual obligation that is made in advance between the parties.
Istisna
- Istisna (Manufacturing Finance) is a process where payments are made in stages to facilitate step wise progress in the Manufacturing/processing/construction works. Istisna enables any construction company get finance to construct slabs/sections of a building by availing finances in installments for each slab.
- Istisna also helps manufacturers to avail finance for manufacturing/processing cost for any large order for goods supposed to supply in stages. Istisna helps use of limited funds to develop higher value goods/assets in different stages/contracts.
Ijarah
- Ijarah means lease, rent or wage. Generally, the Ijarah concept refers to selling the benefit of use or service for a fixed price or wage.
- Under this concept, the Bank makes available to the customer the use of service of assets / equipment such as plant, office automation, motor vehicle for a fixed period and price.
- Musharakah is a relationship between two parties or more that contribute capital to a business and divide the net profit and loss pro rata.
-This is often used in investment projects, letters of credit, and the purchase or real estate or property. In the case of real estate or property, the banks assess an imputed rent and will share it as agreed in advance.
-All providers of capital are entitled to participate in management, but not necessarily required to do so.
-The profit is distributed among the partners in pre-agreed ratios, while the loss is borne by each partner strictly in proportion to respective capital contributions. This concept is distinct from fixed-income investing (i.e. issuance of loans).
Qard hassan/ Qardul hassan (good loan/benevolent loan)
- Qard hassan is a loan extended on a goodwill basis, with the debtor only required to repay the amount borrowed.
- However, the debtor may, at his or her discretion, pay an extra amount beyond the principal amount of the loan (without promising it) as a token of appreciation to the creditor.
- In the case that the debtor does not pay an extra amount to the creditor, this transaction is a true interest-free loan.
- Some Muslims consider this to be the only type of loan that does not violate the prohibition on 'riba, for it alone is a loan that truly does not compensate the creditor for the time value of money.
  • Wadiah (safekeeping)
  • In Wadiah, a bank is deemed as a keeper and trustee of funds.
  • A person deposits funds in the bank and the bank guarantees refund of the entire amount of the deposit, or any part of the outstanding amount, when the depositor demands it.
  • The depositor, at the bank's discretion, may be rewarded with Hibah (see above) as a form of appreciation for the use of funds by the bank.
  • Wakalah (power of attorney)
  • This occurs when a person appoints a representative to undertake transactions on his/her behalf, similar to a power of attorney.
Prohibition of Riba, Gharar and Maisir
  • Riba
-Can be roughly translated as "Usury".
- Riba is forbidden in Islamic economic jurisprudence (Fiqh) and considered as a major sin. Simply, unjust gains in trade or business, generally through exploitation.
- While the term "Riba" is often equalised as "Interest" by many, the Qur'an actually described "Riba" as a general term, that is not only limited to as a financial term.
-An excerpt from Surat Al-Baqarah from Ayah 275 stated:
ذَٰلِكَ بِأَنَّهُمْ قَالُوا إِنَّمَا الْبَيْعُ مِثْلُ الرِّبَا ۗ وَأَحَلَّ اللَّهُ الْبَيْعَ وَحَرَّمَ الرِّبَا
They say: 'buying and selling is but a kind of usury' - while God has made buying and selling lawful and usury unlawful.
- There are two types of riba discussed by Islamic jurists: an increase in capital without any services provided and speculation (Maisir), which is prohibited by the Qur'an, and commodity exchanges in unequal quantities, also prohibited in the Qur'an.
  • Gharar (Speculation)
- Gambling is another type of transaction condemned in the Quran.
-The Sunna takes this prohibition much further; it not only condemns gambling but also sales of gharar (peril, risk or hazard).
- Besides this, other transactions which are conditioned on uncertain events are also prohibited.
- Lack of knowledge about the existence or nonexistence of the subject matter, or concerning its quality, quantity, or date of performance, was held to trigger
  • Gharar.
-The ongoing refinement of the doctrine has been narrowed down to the presence or absence of uncertainty about future performance and not to the existence or non-existence of the subject matter at the time of contract.
- If the nonexistent article or subject matter is certain to be delivered or performed at a future date the prohibition of gharar does not apply.
  • Maisir
In Islam, maisir or gambling is forbidden (Arabic: harām‎).
They ask you about wine and gambling. Say: 'In them both lies grave sin, though some benefit, to mankind. But their sin is more grave than their benefit.'
It is stated in the Quran that intoxicants and games of chance, including maisir, were "abominations of Satan's handiwork," intended to turn people away from God and forget about prayer, thus Muslims were ordered to abstain from them.
O believers, wine and gambling, idols and divining arrows are abhorrence, the work of Satan. So keep away from it, that you may prevail. Satan only deserves to arouse discord and hatred among you with wine and gambling, and to deter you from the mention of God and from prayer. Will you desist?
Narrated Abu Huraira: The Prophet said, "Whoever swears saying in his oath. 'By Al-lātand al-‘Uzzá,' should say, 'None has the right to be worshipped but God; and whoever says to his friend, 'Come, let me gamble with you,' should give something in charity."
  • Sahih Bukhari, Book 78 (Oaths and Vows),

Difference between Conventional and Islamic banking

Money is a commodity besides medium of exchange and store of value. Therefore, it can be sold at a price higher than its face value and it can also be rented out.
Money is not a commodity though it is used as a medium of exchange and store of value. Therefore, it cannot be sold at a price higher than its face value or rented out.
Time value is the basis for charging interest on capital.
Profit on trade of goods or charging on providing service is the basis for earning profit.
Interest is charged even in case the organization suffers losses by using bank’s funds. Therefore, it is not based on profit and loss sharing.
Islamic bank operates on the basis of profit and loss sharing. In case, the businessman has suffered losses, the bank will share these losses based on the mode of finance used (Mudarabah, Musharakah).
While disbursing cash finance, running finance or working capital finance, no agreement for exchange of goods & services is made.
The execution of agreements for the exchange of goods & services is a must, while disbursing funds under Murabaha, Salam & Istisna contracts.
Conventional banks use money as a commodity which leads to inflation.
Islamic banking tends to create link with the real sectors of the economic system by using trade related activities. Since, the money is linked with the real assets therefore it contributes directly in the economic development.
CHAPTER 2: SOURCES OF FUNDS
TYPES OF SOURCES OF FUND
  1. Current Accounts
  2. Investment Account
  3. Special Investment Accounts
Current Accounts
  • Based on the principle of al-Wadiah where the depositors are guaranteed payment of their funds.
  • At the same time, the depositor does not receive remuneration for depositing funds in a current account.
  • The funds accumulating in these accounts can only be used to balance the liquidity needs of the bank and for short-term transactions on the banks responsibility.
Investment Account
  • An investment account operates under the Mudarabah al-Mutlaqa principle, which the mudarib (active partner) must have absolute freedom in the management of the investment subscribe d capital.
  • The conditions of this account differ from those of the savings account by virtue of :
  1. A higher fixed minimum amount
  2. A longer duration of deposits
  3. The depositor may lose some of or all his funds in the event of the bank making losses.
Special Investment Account
  • Special investment accounts also operate under the Mudharabah principle, and usually are directed towards larger investors and institutions.
  • The difference between these accounts and the investment account is that the special investment account is related to a specified project, and the investor has the choice to invest directly in a preferred project carried out by the bank.
OPERATION OF ISLAMIC DEPOSIT PRODUCT
ISLAMIC DEPOSIT CONCEPT
  • For the Islamic deposit products, “deposit” will involve the placement of funds in accordance with Shariah contract.
  • In other words, the receipt and repayment must be in accordance with the terms of any agreement in accordance with the Shariah for any basis, including care or profit sharing.
  • Legal obligation Malaysia Deposit Insurance Corporation (PIDM) with respect to the payment of deposit insurance will be subject to the terms of their respective Shariah contract.
  • Thus, for a contract in which depositors risk losing part or all of their deposits (capital), PIDM will make insurance payments subject to such loss.
TYPES OF ELIGIBLE ACCOUNT HOLDERS
  1. Individual account
  2. Joint account
  3. Partnerships account
  4. Sole proprietorship account
  5. Company account
  6. Minor account
  7. Societies , clubs and associations accounts
  8. Trustees account
TYPES OF NEGOTIABLE AND NON-NEGOTIABLE INSTRUMENTS
NEGOTIABLE ISLAMIC DEBT CERTIFICATE (NIDC)
  • NIDC refers to a sum of money deposited with the bank and repayable to the bearer on a specified future date at the nominal value.
APPLICABLE SHARIAH CONCEPT FOR CREATION OF CERTIFICATE
Bai’ Bithaman Ajil (deffered payment sale)
  • This refers to a method of sale with deferred payment basis at a price which includes a profit margin agreed by both the bank and the customer. The underlying sale is facilitated with an identifiable asset owned by Bank Islam.
ISLAMIC NEGOTIABLE INSTRUMENT OF DEPOSIT (INID)
  • INID refers to a sum of money deposited with the bank and repayable to the bearer on a specified future date at the nominal value of INID plus declared dividend.
APPLICABLE SHARIAH CONCEPT FOR CREATION OF CERTIFICATE
Mudharabah (Profit Sharing)
  • This refers to an agreement between the bank and the customer where the customer agrees to participate in the financial activities undertaken by the bank and shares the profit generated from financing andor investment activities based on an agreed profit sharing ratio.
NON-NEGOTIABLE DEPOSIT
SAVING DEPOSIT
  • Help open accounts from early age
  • Banking products used :
  1. Wadiah
  2. Mudharabah
  3. Wakalah
  • Example of saving account:
Discover the advantages and joy of saving with Wadiah Savings Account-i. This special Bank Islam account helps you to start saving early for your little ones.
CURRENT DEPOSIT ACCOUNT
  • More on money management without involving cash.
  • It is used for future
  • Banking product used :
  1. Wadiah
  2. Wakalah
  • Example of current account:
Bank Islam offers the current account facility for safe custody of your cash. This facility, which is based on the Wadiah contract, enables you to wisely plan your monthly expenditure and allows you to manage your financial needs without involving cash.
INVESTMENT DEPOSIT ACCOUNT
  • Focused on all types of investments.
  • Investors have to bear the risk.
  • Operation under :
  1. Mudharabah
  2. Musyarakah
BASIC COMPUTATION OF PROFIT ON DEPOSIT
Principal (P) x time (T) x rate (R) /1200
Where: P: capital by customer
T: period (month)
Rate: monthly rate of profit
EXAMINE THE FEATURES OF ISLAMIC INVESTMENT STRUCTURED
TREASURY PRODUCT
  • Treasury management or treasury operations include management of an enterprise’s holdings, with the ultimate goal of maximizing the firm’s liquidity and mitigating its operational, financial and reputational risk.
  • Treasury Management includes a firm’s collections, disbursements, concentrations, investment and funding activities.
UNIT TRUST
  • An organization which takes money from small investors and invests it in stocks and shares for them under a trust deed, the investment being in the form of shares or units in the trust.
TAKAFUL PRODUCT (BANCATAKAFUL)
  • Bancatakaful is defined as the delivery and distribution of a suitable range of tailored ‘bankable’ protection and long term savings and pension products designed to meet the lifecycle needs of the customer base of a bank or other financial institution.
  • Benefits of Bancatakaful:
  1. Banks have a very positive image to their customers.
  2. Enables banks to further increase their offering and ensure customers get all their financial needs.
  3. Further enhance customer loyalty as life takaful/insurance contracts are of a longer duration.
THE PROCESS OF CLEARING SYSTEM FOR CHEQUES
OPERATIONS OF CLEARING SYSTEM FOR CHEQUES
  • Cheques are paper items which are physically transferred between banks at the same as the electronic data is processed. Although the paying bank receives some of the data electronically, the physical cheques themselves must also be transferred so that they can be examined by the paying bank for security and fraud prevention purposes.
  • The clearing system works within a three working day period it does not operate on Saturday, Sunday or bank holidays.
  • When a cheque is paid into an account at the collecting bank it is sent to the bank’s clearing centre at the end of the working day.
  • All cheques received are sorted at the clearing centre and the sort code , account number and serial number on a bottom of the cheque, together with the amount of the cheque, are sent electronically to the banks on which they are drawn (the paying bank) by 11am. The physical cheque is then sent to the bank on which it is drawn.
  • The paying bank debits the payer’s bank account with the amount of the cheque on the morning of day 3. At the same time, all banks calculate the amount they must. Pay each other on the basis of the value of all the cheques exchanged on the previous day. The net balances are then settled across accounts held at the Bank of England.
DORMANT ACCOUNT
FEATURES OF DORMANT ACCOUNT
  • In general, a low-balance saving account which has shown no activity (deposits and/ or withdrawals) over a long period, other than posting of the interest and/ or service charges.
  • Statute of limitations usually does not apply to dormant accounts, and their funds can be claimed by their owner or beneficiary at any time.
  • When no transaction (whether money or entrance production) into account throughout the duration seven years, that account would be classified as money unclaimed.
  • Under Money Unclaimed Act 1965, that money will be transferred to money registrar unclaimed.
  • Before that money transferred, banking institution would be sent notice request customer to activate again or close that account.
UNCLAIMED MONEY
  • Unclaimed property is any financial asset, usually intangible, being held for a person or entity that cannot be found. It is not real estate, abandoned personal property, or lost and found items.
  • Unclaimed property includes savings accounts, checking account, unpaid wages or commissions, stocks, dividends proceeds refunds, money orders, paid-up life insurance policies, utility deposits and contents of safe deposit boxes.
  • Sums of money which are legally payable.
  • to the owner and have remain unpaid for a period of not less than one year after they have become payable.
  • All sums of money to the credit of an account that has not been operated in whatever manner by the owner for a period of not less than seven years.
  • All sums of money to the credit of a trade account which has remained dormant for a period of not less than two years.
TYPE OF UNCLAIMED MONEY
  1. Dividends and interest
  2. Estates
  3. Disbursements
  4. Unpresented
  5. Void or stolen cheque
  6. Wages and salaries
  7. Trusts
  8. Refunds
PROCESS OF UNCLAIMED MONEY
  • Key factors that cause such moneys turned over to the Register of Unclaimed Moneys are:
  1. Change of address without notifying business contracts.
  2. Forgetting about small deposits of money in bank.
  3. The owner dies and his or her legal heirs are unaware of the moneys.
  4. Leaving an account with low balance instead of closing it.
  5. Bank mergers resulting in name changes and branch closings and owner is unsure of which bank holds an account to which he or she has entitlement.
  6. Lack of financial understanding on the part of the owner.
  • Generally, unclaimed moneys are classified into the following categories:
  1. Salaries, wages, bonuses, commissions and other payments due to employees.
  2. Dividends and profits declared for distribution.
  3. Insurance claims which have been approved for payment.
  4. Bank drafts, cashier’s orders and other documents of similar nature which the validity period has elapsed.
  5. Fixed deposits (without automatic renewal instructions) which have matured.
  6. Tender deposits for which the intended purposes have been fulfilled.
SOURCES OF FUND
CURRENT ACCOUNTS
  • Current accounts are based on the principle of al-Wadiah, whereby the depositors are guaranteed repayment of their funds.
  • At the same time, the depositor does not receive remuneration for depositing funds in a current account, because the guaranteed funds will not be used for PLS ventures.
  • Rather, the funds accumulating in these accounts can only be used to balance the liquidity needs of the bank and for short-term transactions on the bank’s responsibility.
SAVING ACCOUNTS
  • Savings accounts also operate under the al-Wadiah principle.
  • Savings accounts differ from current deposits in that they earn the depositors income depending upon financial results, the Islamic Bank may decide to pay a premium, Hibah, at its discretion, to the holders of savings accounts.
INVESTMENT ACCOUNT
  • An investment account operates under the Mudaraba al-Mutlaqa principle, in which the mudarib (active partner) must have absolute freedom in the management of the investment of the subscribed capital. The conditions of this account differ from those of the savings accounts by virtue of:
  1. A higher fixed minimum amount.
  2. A longer duration of deposits.
  3. Most importantly, the depositor may lose some of or all his funds in the event of the bank making losses.
SPECIAL INVESTMENT ACCOUNTS
  • Special investment accounts also operate under the Mudaraba principle, and usually are directed towards larger investors and institutions.
  • The difference between these accounts and the investment account is that the special investment account is related to a specified project, and the investor has the choice to invest directly in a preferred project carried out by the bank.
CHAPTER 3: TREASURY OPERATION
TREASURY OPERATION
  • Includes management of an enterprise's holdings, with the ultimate goal of maximizing the firm's liquidity and mitigating its operational, financial and reputational risk.
  • Treasury Management includes a firm's collections, disbursements, concentration, investment and funding activities.
The Treasury’s Roles in Islamic Money Market
  1. Heart of the Bank
  2. Mobilization of fund between the bank’s branches
  3. Setting the borrowing/lending rates
  4. Product development
  5. Issuing of Negotiable Instruments of Deposits, Bankers Acceptances and Sell & Buy Back Agreement (SBBA)
  6. Funding (liquidity management)
  7. Proprietary trading
HEART OF THE BANK (BNM)
  • Promoting economic growth at a high level of employment.
  • Maintaining price stability & a reasonable balance in the country’s international payment position.
  • Eradicating poverty & restructuring society.
MOBILISATION OF FUND BETWEEN THE BANK’S BRANCHES
  • Treasury will maximize the fund.
  • Mobilize to other bank branches.
  • EXAMPLE: BIMB open new branches, the main(HQ) will maximize the fund & mobilize it to the new branches for business operation.
SETTING THE BORROWING/LENDING RATES
  • Ensure each bank branches have the same borrowing rates.
  • Follows Based Lending Rate (BLR) & Based Financing Rate (BFR).
  • Example: Treasury department of head quarters HSBC will ensure that each of their bank branches will have the same lending rate.
PRODUCT DEVELOPMENT
  • Ensure that the new products are certified to BNM.
ISSUING NEGOTIABLE INSTRUMENS OF DEPOSIS, BANKERS ACCEPTANCE, SELL & BUY BACK AGREEMENT
  • Negotiable instruments:
  • Written order/unconditional promises to pay fixed some of money on demand.
  • EXAMPLE: promissory note, bill of exchange & check.
  • Bankers acceptance:
  • Promise future payment of time draft, which is accepted and guaranteed by a bank and drawn on a deposit at the bank.
  • Specifics the amount of money, the date and the person to which the payment is due.
  • Sell & Buy Back Agreement (SBBA):
  • Introduced for the purpose of enhancing liquidity in the islamic interbank money market (IIMM).
  • Providing additional avenue for the IIMM participant to source their funding requirements.
  • The tenor must not exceed 1 year and the respective parties must enter into 2 separate management.
FUNDING (LIQUIDITY MANAGEMENT)
  • Essentially zero-one concept.
  • Example: Bank can either settle obligations or no.
  • Islamic transactions generally pass through the ownership of real estates.
  • Prohibited to invest in interest-bearing instrument. Can’t trade money as commodity.
PROPRIETARY TRADING
  • Usually sold by a particular firm.
  • Example: Bond and FOREX
THE IMPORTANT OF ISLAMIC MONEY MARKET
Market for the short terms fund
  • As an intermediary short term to provide ready sources of short-term investments stores based on Shariah principles.
  • Through IIMM, islamic banks and banks that join the islamic banking scheme (Ibs) will be in accordance with the requirements of effective and efficient financing.
Minimizing the risk exposure
  • Market risk
  • Credit risk
  • Liquidity risk
Channel for transmission of central bank’s monetary policies
  • Financial instrument and investment between the bank will allow banks to channel surplus funds to deficit banks.
  • Thus, maintaining liquidity and financing mechanisms need to promote stability in the system.
THE FOREIGN EXCHANGE (FOREX) OPERATIONS IN ISLAMIC BANKING
  • A marketplace where one currency (e.g. MYR) is exchanged with another currency (e.g. USD) at a price determined by market forces.
  • Operates in Over The Counter (OTC) market.
  • Global foreign exchange (FX) market is the biggest market in the world.
  • Average global daily turnover in foreign exchange transactions is more than USD1.5 trillion.
  • Operates in a 24 hour market.
SHARIAH REQUIREMENTS UNDER FOREX OPERATION
  • Taking possession before leaving another
  • Equal for equal transaction
  • Freedom from khiyar al-syarat
  • Non-repayment
PERMISSIBLE CONTRACTS UNDER CURRENCY TRADING
  • Bai Naqdi
  • The sale or purchase of foreign currency
  • Sale or purchase of travelers cheque
  • Bai Murabahah
  • A sale based on a cost plus profit
  • Cost prices or profits must be known to the buyer
  • Waad
  • Meaning promises.
  • Contract agreement and must be signed.
  • Sarf
  • Contract exchange for money.
THE PROHIBITIONS UNDER CURRENCY TRADING
  • PROHIBITIONS IN ISLAMIC LAW
  • Prohibited in Islam
  • Contain the elements of riba’
  • PROHIBITIONS IN THE LAW MALAYSIA
  • Prohibit foreign currency trading
TYPES OF FOREX CONTRACT
  • IMMEDIATE CONTRACT
  • VALUE TODAY: Involve same day delivery by the date or the transactions.
  • VALUE TOMORROW: Involve the submission within one working day after the transaction.
  • VALUE SPOT: Based on forex rate benchmarked according to the types of the transaction but the delivery the currency within two working days from the date of the transactions it made.
  • FORWARD CONTRACT
  • An agreement that gives legal effect to transactions between two parties.
CHAPTER 4: USES OF FUNDS
FEATURES OF ISLAMIC BANKING USES OF FUND
  1. Improve the economy for Muslims
  • Banks provide financing to a company to do business. Next, companies will need more workers to launch operations.
  • Therefore, job opportunities abound and unemployment can be overcome.
  • Finally, the economy of Muslims can be improved.
  1. Improve standard of living of Muslims
  • The Bank provides a variety of contracts for farmers, smallholders and fishermen. With this, they can improve use of technology in their respective fields.
  • Further, can improve their income and standard of living.
  1. Advancing Muslims
  • When banks have a lot of funds, the bank will provide scholarships to Muslim students to pursue higher.
  • Next, produce more educated Muslims.
  • With this, the Muslims will be thriving in line with other developed countries.
PRINCIPLES OF ISLAMIC FINANCING
  1. PROHIBITION OF INTEREST
  • The prohibition of usury or interest (riba) is the most significant principles of islamic finance.
  • Riba translates literally from Arabic as an increase, growth and accretion.
  • In Islam, lending money should not generate unjustified income.
  • As a Shariah term, it refers to the premium that the borrower must pay to the lender along with the principal amount, as a condition for the loan or for an extension in its maturity.
  1. PROFIT AND LOSS SHARING
  • Form of partnership, where partners share profits and losses of their capital and effort.
  • Unlike conventional finance, there is no guaranteed rate of return.
  • Islam supports the view that Muslims do not act as nominal creditors in any investment, but as partners in the business (essentially an equity-based financing).
  • The justification for the PLS financier’s share in profit is their effort and the risk they carry.
  1. GHARAR
  • Any transaction that involves gharar (uncertainty and speculation) is prohibited.
  • Parties to a contract must have knowledge of the subject matter of a contract and its implication.
TYPES OF ASSET FINANCING
  1. BAI’ BITHAMAN AJIL (DEFERRED PAYMENT SALE)
  • Defined as an instalment sale.
  • A safe contract in which the payment of the price is deferred and payable at a certain particular time in future
  • A contract whereby the commodity is delivered immediately and the price is paid.
  1. MURABAHAH (COST PLUS PROFIT CONTRACT)
  • A form of sale, where the seller expressly mentions the costs of the sold commodity he has incurred, and sells it to another person by adding some profit or mark-up thereon.
  • Mechanism has to be conducted with complete sincerity by the seller by stating the cost price of the purchase and the total profit incurred clearly and truthfully.
  • Hence, a sale based on trust (Amanah).
  1. IJARAH (LEASING)
  • Means the sale of usufruct.
  • A contract of proposed and known usufruct with a specified and lawful return or compensation for the effort or work which has been expended.
  • Classifications of Ijarah:
  1. Al Ijarah Muntahia bi al-Tamlik
  2. Al Ijarah Thumma al-Bai’
  1. ISTISNA
  • Order or request to manufacture something, whereby the requestor invited, induced or caused another to make or manufacture some goods for him.
  • Contract to purchase for a definite price something that may be manufactured later on according to agreed specifications between the parties.
TYPES OF EQUITY FINANCING
  1. MUSYARAKAH FINANCING (JOINT-VENTURE PROFIT-SHARING)
  • A form of partnership where two or more persons combine either capital or labour or credit worthiness together to carry on a business venture on condition that they will share the profits, enjoying similar rights and liabilities.
  • It is basically a profit and loss sharing partnership whereby the ratio for the distribution of profits must be determined and specified in advance
  1. MUDHARABAH FINANCING (TRUSTEE-PROFIT SHARING)
  • Increase or profit
  • 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.
  1. MUSYARAKAH MUTANAQISAH (DIMINISHING PARTNERSHIP)
  • A form of partnership, which ends with the complete ownership of a partner who purchases the share of another partner in that project by a redeeming mechanism agreed between both of them.
  • Used mostly when one party who wants to own an asset or a commercial business which does not adequate funds to pay the full price and takes the assistance of financing from another party.
THE FEATURES OF OTHER TYPES OF ISLAMIC BANKING
  1. QARDHUL HASSAN
  • Refers to an interest free loan.
  • The borrower is only required to repay the principal amount borrowed.
  • May pay an extra amount at his absolute discretion, as a token of appreciation.
  • Islamic banks lend Qardh well; also provide loans in the form Qardul Hasan.
  • In general, the use of funds in islamic banking Qarhul Hassan:
  1. For Venture Capital (Funding)
Qardul Hasan channel funds through the Economic Empowerment program as a social concern exists Shariah banking to the community and aims to help people who need help to grow our businesses better.
  1. To Finance School (Contribution)
The higher expenses of education funding have resulted in a society that does not go to school. Therefore, Islamic banking trough contracts Qardul Hasan help those who feel a lack of funds for school fees or education.
  1. AR RAHNU
  • Mortgage or collateral, is defined in the Islamic jurisprudence as ‘possessions offered as security for a debt so that the debt will be taken from it in case the debtor failed to pay back the due money”
  • Ar–Rahn is a permissible contract in Shari’ah.
  • Ar-Rahnu is sources of funding for those who need loan with immediate effect for a period of time.
  • The scheme is very approriate, as it provides the financial product to the small businesses that may sometimes have difficulty getting a loan facility from the conventional financial system
THE FEATURES OF SECURITIES FOR INVESTMENT
  1. ISLAMIC REPOS (SALE AND BUY BACK AGREEMENT)
  • “Islamic securities” refer to securities issued based on Islamic principles as approved by BNM or SC (securities commission)
  • SBBA is an Islamic financial instrument introduced for the purpose of enhancing liquidity in the Islamic Interbank Money Market (IIMM) and providing additional avenue for the IIMM participants to source their funding requirements.
  • SBBA is an Islamic repurchase agreement (Repo-i) transaction where by a party (SBBA Seller) sell Islamic securities at an agreed price to the other party.
  • (SBBA Buyer) and subsequently the SBBA buyer and SBBA seller enter into another agreement there on whereby the former promises to sell and the letter to buy back the securities on a specified future date and at an agreed price
  • “SBBA seller” refer to the party who initiates to sell Islamic securities for cash consideration
  • “SBBA buyer” refers to the party or investor who purchases the Islamic securities and pays cash.
  1. ISLAMIC NEGOTIABLE INSTRUMENTS OF DEBT CERTIFICATE
  • It is offered under the Shariah contract of BBA (deferred pay. sale) which is the sale of goods on a deferred payment basis.
  • Refers to a method of sale with deferred payment basis at a price which includes a profit margin agreed by both the Bank and the customer.
  • The underlying sale is facilitated with an identifiable asset owned by Bank Islam.
  1. BANK NEGARA NEGOTIABLE NOTES
  • Short-term instrument issued by the Central Bank.
  • Structured based on the concept of Bai Al-Inah and can be traded in the Islamic Money Market (IMM) secondary market based on the concept of Bai Al-Dayn.
  • A monetary policy instrument.
  • Traded on a discounted basis and pay able at face value on maturity.
  • Tenure up to 6 month.
  • High liquidity in secondary market.
  • No credit risk.
  1. GOVERNMENT INVESTMENT ISSUES
  • It is long term non-interest bearing securities issued by the Government of Malaysia based on Islamic principles.
  • It is a Domestic Ringgit Islamic Bond structured on the concept of Bai Al-Inah and can be traded in the secondary market.
  • Through this sale and purchase transaction. A debt has been created. This debt is then securitized through the issuance of GII.
  • GII is assigned with no credit risk as it is issued by the government.
  1. ISLAMIC ACCEPTANCE BILL
  • Was introduced in 1991.
  • The objective to encourage and promote both domestic and foreign trade through an Islamic financing mechanism.
  • The Shariah concepts of Murabahah (cost-profit) and Bai’ Dayn (debt trading)
  • 2 types of financing under the AB-I facility :
  1. Imports and local purchases
An applicable mechanism under this type of financing is the working capital financing under Murabahah. The bank appoints the customer as the purchasing agent for the bank. The customer is allowed a deferred payment. If the bank decides to sell the SB-i to a third party, AB-i will be sold under the concept of Bai’ Dayn.
  1. Exports and local sales
The applicable Shariah concept under this type of financing facility is Bai’ Dayn. The customer prepares the sale documents as required under the sales contract or letter of credit. The bank will purchase the AB-i at the mutually agreed price using the concept of Bai’ Dayn and the process will be credited to the customer’s account.
THE FEATURES OF INTERBANK PLACEMENT
  1. COVERED BY BANK NEGARA MALAYSIA (BNM)
  • Security body that would protect every transaction where is made by the interbank
  1. AMOUNT OF INVESTMENT FUNDS
  • The amount of funds that provided must known
  1. INVOLVE THE ISLAMIC BANKING INSTITUTIONS
  • Each activity or business conducted among the bank must included Islamic banking institutions
  1. ALL PLACEMENTS MUST FULFILL TERMS SET MATURITY SUBJECT TO AN AGREEMENT.
  1. LOANS ARE BORROWED MUST BE REPAID AT THE END OF THE PERIOD, WITH THE SHARE OF PROFITS ARISISNG FROM THE USE OF FUNDS BY BANKS.
CHAPTER5: ELECTRONIC BANKING AND OTHER SERVICE
ELECTRONIC BANKING
  • Banking transactions conducted through computerized systems, as electronic funds transfer by automated-teller machines, intended to speed operations, reduce costs.
TYPES OF ELECTRONIC BANKING
SELF SERVICE TERMINAL
  • Electronic devices that facilitate a wide range of banking transactions.
  • Accessible, easy to use, more cost-effective than branch transactions and help you to avoid unnecessary queues.
MOBILE BANKING
  • Mobile banking is a term used for performing balance checks , account transactions , payments, credit applications and other banking transactions through a mobile device such as a mobile phone or personal digital assistant(PDA).
INTERNET/PERSONAL COMPUTER BANKING
  • Personal computer banking lets you handle many banking transactions via your personal computer.
DEBIT CARD PURCHASE TRANSACTIONS
  • Debit card purchase transactions let you make purchases with a debit card, which also may be your ATM card.
  • A debit card purchase transfers money-fairly quickly-from your bank account to the company account.
TYPES OF CARD SERVICES IN REMITTANCE
CREDIT CARD
  • Enables its holder to buy goods and service with a credit line given by credit card issuer and the amount will be settled at a later date.
  • Cardholders are billed on a monthly basis and cardholders would have to bear finance charges (interest) on the outstanding amount if payment is not made by the due date.
  • For a hefty fee, a credit card can also be used for cash advances at automated teller machines (ATM) and at respective credit card issuers’ counters.
CHARGE CARD
  • The functionality of a charge card is similar to a credit card. However, charge card holders must settle their outstanding amount in full by the due date by month. Since charge cards are often associated with prestige, the fees are generally higher than credit cards.
  • This is compensated by the differences in terms of benefits, with charge cards generally offering more privileges. Its popularity has dropped in Malaysia.
DEBIT CARD
  • Is a payment card where the transaction amount is deducted directly from the cardholder’s bank account upon authorization.
  • Cardholders can manage their finances more effectively and need not worry about late payment penalties, finance charges, and snowballing card debts. There is also no income requirement to quality for one.
  • In Malaysia, anyone having a bank account with a domestic bank and has an ATM card can make payments using the card at any merchants displaying the bankcard logo, as it doubles as a debit card. There are also international brand debit cards under the Visa and MasterCard brands.
E-DEBIT
  • This can be used for making online payment for goods services and utilities at point-of-sale.
  • The transaction amount will be immediately deducted from your savings or current account directly into the retailer’s or merchants account upon system authorization of your PIN.
  • This provides consumers with better cash management and peace of mind as all transaction are cashless and PIN based.
PREPAID CARD
  • Prepaid card that acts just like a regular credit card, with a prepaid MasterCard.
  • Prepaid MasterCard are paid in advance and are easily reloadable, which makes it a great alternative to carrying cash.
  • Offering you the same safety and security as a regular MasterCard, prepaid.
DIFFERENTIATE BETWEEN CHARGE CARD, CREDIT CARD AND DEBIT CARD
CHARGE CARD
CREDIT CARD
DEBIT CARD
If you use a charge card, you must pay balance in full when you get your regular statement.
You can use a credit card to buy thing and pay for them overtime. But remember buying credit is a loan you have to pay the money back.
This card allows you to access the money in your checking or saving account electronically to make purchases.
ADVANTAGES OF E-DEBIT AND PREPAID CARD
E-DEBIT
PREPAID CARD
Convenient and safe way to pay for your purchases.
No debt.
Do not have to carry a large amount of cash.
No credit check.
Manage your expenses.
Paid in advance.
Accepted everywhere.
Easily reloadable (makes it a great alternative to carrying cash)
Very convenient substitute to checks when shopping online.
Purchase a automatically deducted directly from your card balance which can be easily topped up.
It takes a shorter time to complete a purchase.
Save and reliable alternative to traveler’ cheque.
OTHERS TYPES OF REMITTANCE SERVICE
BANKERS CHEQUES
  • Is a cheques issued buy the bank payable to the order of specified payee for payment within a local area.
  • Any variations of rate will be beside buy credit committee on remittances products.
  • Characteristics of bankers cheques:
  • Not negotiable
  • To be issued for use only within the clearing area of the issuing bank and if cleared outside the clearing area than the normal outstation cheque commission payable.
  • Should be accepted as goods buy the payee as it has been paid for buy the customer at time of issue. It cannot be returned except for technical reasons.
  • To be use buy customers who do not have a current accounts but which to make payments by cheque or in situation when a personal cheque is unaccepted.
  • Issued in Malaysian ringgit (RM).
DEMAND DRAFTS
  • A method used by individual to make transfer payments from one bank account to another.
  • Demand drafts are a cheque drawn by a bank on its Head Office on a branch or on another bank for payment outside the local area either domestically or abroad.
  • Characteristics of demand drafts:
  • Transferring funds within and outside the country.
  • If funds are to be send abroad, the draft is drawn on a bank in a foreign country in the appropriate currency.
  • Paid for by the customer at the time of issue.
  • Type of demand draft:
  1. RM
  2. Foreign currency
TELEGRAPHIC TRANSFER
  • The fastest mode of money transfer and is used for payments in or out of Malaysia.
  • Characteristics of telegraphic transfer:
  • Transfer of funds by telegraph, telex, cable, or swift from a bank to its branch or another bank. Authorizing the payments of funds to specified accounts.
  • Type of telegraphic transfer:
  1. Local telegraphic transfer
  2. Foreign telegraphic transfer
TRAVELERS CHEQUE
  • Issue by a financial institution which function as cash but is protected against lost theft.
  • Characteristic travelers cheque:
  • A safe and simple method of protecting your money when travelling abroad.
  • American express can be converted into cash in the pertinent local currency in bureau the change and bank.
  • They can frequently be use instead of cash In hotel, shop, or restaurants.
  • American express traveler cheques are issue in various denominations.
THE CHALLEGGES OF TECHNOLOGY IN ELECTRONIC BANKING
BILL PAYMENTS SYSTEM
  • Paying your bill promptly will help your avoid late fees and interest charge.
•EXAMPLE OF BILL PAYMENTS
•PAY CREDIT CARD
•ONLINE BILL PAY
•OUTOMATIC ONLINE BILL PAY
•PAY ELECTRICRTY
•OVER DUE BILL PAYMENT
•BUSINESS CONTRACT PAYMENT
FINANCIAL PROCESS EXCHANGES (FPX)
  • An online payment gateway system to facilitate payment between participating financial institutions.
  • Benefits of FPX for the buyer:
  • Convenient payment at any time and from any location.
  • Saves time travelling and eliminates cheque and cash payment.
  • Benefits of fpx for the sellers:
  • Direct credit of sale proceeds into seller account.
  • Guaranteed payment by buyer bank thus eliminating cheque returned or charge back in credit card.
CHIP BASED CARD
  • Different from the normal card in the way that this card contains a chip which contain all into location in an encrypted format which is under undecipherable by fraudsters.
SECURITY ON THE NET
  • Role based security
  • Role based security is a means of implementing an authorization mechanism which as the potential to substantially reduce administrative cost and reduce vulnerability. Enterprise role- based security address the problem of maintaining authorization within large IT environment it is perhaps more accurately describe has role based access control or RBAC
  • Code access security.
  • Code access security allows code to be trusted to varying degrees depending on where the code originates and on other aspects on the code’s identity.
  • Code access security also enforces the varying levels of trust on code, which minimizes the amount of code that must be fully trusted order to run.
  • Using code access security can reduce the likelihood that your code can be misused by malicious or error filled code.
  • It can reduce your liability u can specify the set of operation your code should never be allowed to perform as will as operation your code should never be allowed to performed.
  • Code access security can also help minimize the damage that can result from Security Vulnerabilities in your code.
OTHER RELEVENT CURRENT ISSUES
CONSUMER PROTECTION FOR ELECTRONIC BANKING
  • This notice is being issued to support the intentions of Bangkok Sentral ng Philippines (BSP) circular no.542 which is to provide consumer protection applicable to e-banking product and service of security bank.