GE30603 ISLAMIC ACCOUNTING

SYSTEM
AN OVERVIEW OF ISLAMIC BANKING

HANUDIN AMIN

WORDS OF THE DAY

Life, to some people considers as a FAIRY
TALE. As today is so certain but
tomorrow will be always raised many
questions. Whether the answers for the
questions are good or bad are
depending on what we have decided
today

CONTENTS
Today we would be of advantage to
define some sort of essential topics in
order to explore what is Islamic banking
explicitly?
I would segregate the slides into three
main clusters: please check them out

Concepts of Islamic banking

The development of Islamic banking
Banking account products

CONCEPTS OF ISLAMIC BANKING

AN ISLAMIC BANK

Banking and Financial Institutions Act (BAFIA)

1989 defined bank as;
(a) The business of;
i.

ii.

Receiving deposits on current account, deposit account,

saving account or other similar account;
Paying and collecting cheques drawn by or paid in by
customers; and;
iii.
Provision of finance; or

(b) Such other business as the bank (BNM),

with the approval of the Minister may prescribe

AN ISLAMIC BANK

Islamic Banking Act (1983)

Defining an Islamic bank as;
Banking business whose aims and
operation do not involve any element
which is not approved by the religion of
Islam

An Islamic bank is not only a financier

but also a partner in business

CHARACTERISTICS OF AN
ISLAMIC BANK
1.

2.

In Islamic banking system, the customer-bank

relationship is not that of debtor and creditor but
based on the concept of participation in terms of
risks as well as rewards
An Islamic bank offers financing through participation
or through some other form of Islamic instruments
like Murabaha, Ijarah and so on. The basis is can be
understood as follows;
an Islamic bank will purchase the good intended
by a customer. Then the bank will sell it back to the
same customer at an agreed profit on deferred
payment basis

CHARACTERISTICS OF ISLAMIC
BANK
3.
4.
5.
6.
7.

An Islamic bank is multipurpose

Pricing in Islamic banking is based on the concept
of fiqh maxim
An Islamic bank is primarily equity-based
It stresses on the value ethical among the human
being, and between man and Allah (Creator)
An Islamic bank subjects to additional reviews by
the religious supervisory boards to ensure that
funds are being raised and invested in ways that
conform to Islamic principles

PHILOSOPHY OF AN ISLAMIC
BANK
1.
2.
3.
4.
5.
6.

Trade-based transaction
Honesty and trustworthy manner
Earning-spending
Mutual consideration
An absolute ownership
No accumulation of wealth

SHARIAH PRINCIPLES
1.

2.
3.
4.
5.
6.
7.
8.
9.

Al-wadiah yad dhamanah~the depositors are not

entitled for profits but the Islamic banks may provide
returns as gift
Mudarabah~profit sharing
Musyarakah~profit and loss sharing
Murabahah~cost plus financing
Bay bithaman ajil~deferred payment sale
Ijarah-leasing
Ujrah~commision/fee
Qardhul hassan~benevolent funds
Ar-rahnu~collateralised financing

THE DISCREPANCIES
Conventional bank

Islamic bank

Depositors are paid interest

Depositors are entitled to profit

sharing

The customer has no say where

banker invest money

Under special investment account,

the customer can decide where
banker invest the money

Legal relationship:
1.
Debtor and creditor

Legal relationship:
1.
Seller and buyer
2.
Lessor and lessee
3.
Partner and partner

Loan repayment is not fixed

Financing repayment is fixed

It does not deal with zakat

It does deal with zakat

The investment area is broaden

The limited area of investment for the

existing funds

DUAL BANKING SYSTEM IN

MALAYSIA
BANKING SYSTEMS

Dual
Banking
Systems

Full
Fledge
Banking

Malaysia

Sudan

ISLAMIC BANKING OPERATIONS

IN MALAYSIA
SOURCES OF FUND

ISLAMIC BANKING
OPERATIONS

Current Accounts

Al-Wadiah (Guaranteed Custody)

Savings Accounts

Al-Wadiah (Guaranteed Custody)

General Investment Accounts

Al-Mudharabah (Trustee Profitsharing)

Special Investment Accounts

Al-Mudharabah (Trustee
Profit-sharing)

APPLICATIONS OF FUND

Equity Financing

Al-Musharakah (Joint-venture Profit-sharing)

Al-Mudharabah (Trustee Profit-sharing)

Term Financing

Al-Bai Bithaman Ajil (Deferred Instalment Sale)

Al-Ijarah (Leasing)

Trade Financing

L/C Al-Wakalah (Agency)

L/C Al-Murabahah (Deferred LumpSum Sale)

L/C Al-Musharakah (Joint-venture Profit-sharing)

Letter of guarantee (Al-Kafalah/Guarantee)

Al-Murabahah Working Capital Financing

(Deferred
LumpSum Sale/Cost-plus )

Islamic Accepted Bill (IAB)

Investment

Al-Musharakah (Joint-venture Profit-sharing)

IMPLEMENTATION PHASES OF MALAYSIAN

ISLAMIC BANKING SYSTEM
The process of implementing the Islamic Banking System in Malaysia

1st phase 1983-1992

2nd phase 1993-2003

Period of
Familiarisation

Period of increased
competition

Establishment of
1st full-fledged
Islamic bank (Bank
Islam);
Protection Bank
Islam from having
to compete with
others.

Emergence of
Islamic Windows;
Establishment of
2nd full-fledged
Islamic bank
(Bank Muamalat
Malaysia
Berhad).

3rd phase 2004NOW

Period of further
financial
liberalisation

Introduction of
three foreign
full-fledged
Islamic banks;
Creation of more
competition.

Source: Bank Negara Malaysia (various years).

End of An overview
of Islamic banking
End of day #2