Financing Options In Islamic Banking And Finance

Financing options in Islamic banking and finance

Malaysia has a robust and thriving Islamic Banking, Finance Services and Insurance industry that provides banking and financial services and products that comply with the Islamic law of Sharia (Islamic financing products are available to all, irrespective of religion). Here, we will take a brief look at some of the main categories of such products:

Islamic financing – There are a wide range of Islamic Financing options (not “loans” as understood in the traditional sense), both secured and unsecured, available including the equivalents of personal loans, car loans, business, commodity and trade financing. These operate under a number of Sharia principles including Tawarruq, Bai Inah, Mudharabah, Bai Murabahah, Wakalah, Ijarah etc.

Islamic home financing – In Malaysia, Islamic home financing takes two forms. We will take a look at the underlying concept and both the forms:

Murabahah – A cost plus profit mark-up agreement. Here, the bank buys an asset and sells it to the customer at a pre-agreed profit or mark-up. Generally, this term is used to describe financing agreements with tenors less than 12 months.

Bai’ Bithaman Ajil (BBA) or deferred payment sale – Here, the bank buys the property and sells it to the customer at an agreed mark-up. The customer makes installment payments (principal + mark-up) to the bank over an agreed tenor. After completion of all payments, property ownership is transferred to him.

Musharakah Mutanaqisah (MM) or diminishing mutanaqisah – The bank and the customer buy a property as partners with the bank usually holding most of the share. Over time, the customer makes installment payments (principal + mark-up) gradually acquiring more of the property till he becomes sole owner.

Islamic credit cards – I-credit cards operate on the principle of Ujrah (Fee) whereby the bank imposes a charge or fee on the customer for the use of the card and associated benefits, privileges and services. Credit cards could also be issued under the Bai Al-Inah principle. This is a salecontract with immediate repurchase. It takes place when a person sells an asset in credit andimmediately buys back the asset in cash at lower price.

Islamic hire-purchase – Islamic hire-purchase facilities in Malaysia operate under the concept of Al-Ijarah Thumma Al-Bai (AITAB) which is in turn comprised of two separate contracts; the first is Al-Ijarah (lease) under which the hirer hires the goods from the owner at an agreed rental over a specified period of time. The second is the addition of an option to purchase (Bai); upon the expiry of the hiring period, the hirer is given an option to enter into a second contract to purchase the goods from the owner at an agreed price.

Islamic insurance – Also known as Takaful this involves a group of participants who mutually guarantee (Taawun or mutual assistance) each other against loss or damage. Every participant makes a contribution (Tabarru) into a common fund pool which is managed by a Takaful operator who operates using either Mudharabah (profit sharing) or Wakalah (agency).

When a participant suffers damages, the Takaful operator makes appropriate payouts. Surplus remaining after making compensatory payments will be shared amongst the participants. Takaful is thus a protection and a profit sharing measure.

Best 5 Benefits Of Islamic Banking

Best 5 benefits of Islamic banking

Islamic banking refers to a system of banking that complies with Islamic law also known as Shariah law. The underlying principles that govern Islamic banking are mutual risk and profit sharing between parties, the assurance of fairness for all and that transactions are based on an underlying business activity or asset.

These principles are supported by Islamic banking’s core values whereby activities that cultivate entrepreneurship, trade and commerce and bring societal development or benefit is encouraged. Activities that involve interest (riba), gambling (maisir) and speculative trading (gharar) are prohibited. Moreover, Islamic banking is secular, it is open to everyone, not just Muslims. Here, we will try and examine some of the main benefits of Islamic benefits:

1. Islamic banking places an emphasis on the need for financial transactions to be supported by genuine trade or business related activities; this provides an active boost for economic activity and consequently, the economy.

2. Since Islamic banking prohibits transactions involving excessive uncertainty (Gharar) or speculation, it helps mitigate the effects of speculation on the economy.

3. Malaysia has a robust, shariah-compliant regulatory system, a 30 year track record of building a successful Islamic banking and financial industry (managing banking assets worth US$65.6 billion), the presence of an Islamic interbanking system, the world’s largest Sukuk (Islamic bonds) market accounting for 60% of the global total and a reputation as one of the leading innovators of Islamic financial products through the use of concepts like Wadiah, Hiba, Halal and Haram, Ijarah, Mudharabah, Murabahah, Wakalah, Musyarakah etc. This has helped attract institutions from across the world and an associated pool of cash.

4. Islamic agreements carry a 20% stamp duty discount. In case of refinancing from a conventional to an Islamic package there will be a 100% stamp duty waiver on the existing refinance loan balance (not applicable to amounts over the loan balance).

5. Islamic loans are subject to a ceiling rate, the maximum profit that they can earn. This may prove advantageous in case of floating rate loans that depend upon the Islamic Base Floating Rate (BFR) since the Base Lending Rate has historically gone up to 12.27%. Conventional loans, on the other hand do not have a ceiling on floating rates.

What is Islamic Banking?

Islamic Banking

Banking that follows Islamic law as laid down in the Shariah is called Islamic Banking.

Characteristics of Islamic Banking

* It follows Shariah or Islamic Law, particularly the Fiqh Muamalat, the rules on transactions. The rules and practices of Fiqh Muamalat came from the Quran and the Sunnah, and other secondary sources of Islamic law such as opinions collectively agreed among Shariah scholars (ijma’), analogy (qiyas) and personal reasoning (ijtihad).

* Islamic Banking avoids Riba (or Interest), Gharar (or excessive uncertainity) and Haram (activities that do not conform to the Shariah).

* Islamic Banking is not exclusive to Muslims. It is open to people of all faiths.

Islamic Banking in Malaysia

Islamic Banking in Malaysia

Islamic Banking took off in Malaysia with the enactment of the Islamic Banking Act, 1983. The subsequent liberalisation of the Islamic Banking system has seen a tremendous growth not only in the number of financial institutions involved in Islamic Banking, but also in product innovation that has turned Malaysia one of the most developed Islamic Banking markets in the world.

Today, Malaysia has 19 Islamic Banks (including two International Islamic Banks) managing assets worth USD65.6 billion and accounting for nearly 23% of the banking ecosystem. Almost all the conventional banks in Malaysia also have Islamic Banking operations.

Other highlights of Malaysia’s Islamic Banking system

* Malaysia was the first country in the world to have a dual banking system, an Islamic Banking system operating in tandem with a conventional banking system.

* Malaysia is a pioneer in setting up an Islamic interbank system.

* First country in the world to issue sovereign Sukuk or Islamic Bonds in 2002. Today, Malaysia accounts for more than 60% of the global issuance of Sukuks.

* The Islamic Financial Services Board, an organization that issues and promotes prudential standards for the global Islamic Financial industry is headquartered in Kuala Lumpur.

* Malaysia was the first country in the world to set up a Shariah Advisory in the form of the the Shariah Advisory Council to ensure a country-level approach to regulating the Islamic Financial industry and Islamic products.

Islamic Products

Malaysia is recognized as one of the global pioneers in innovatively adopting various Shariah prinicples like Wadiah, Hibah, Halal and Haram, Bai Bithamin Aji, Mudharabah, Murabahah, Wakalah, Musyarakah etc, to creation of Banking and Islamic Financial products.

These products include Islamic versions of Savings Accounts, Home Finance, Fixed Deposits, Securities, Bonds, Unit Trusts, REITs, Insurance, Leasing, Brokerage, sophisticated products for high-end customers and an Islamic Index comprising halal stocks.