2009 08 icp fundamentals of islamic finance and banking

7/31/2019 2009 08 ICP Fundamentals of Islamic Finance and Banking

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A G E N D AA G E N D A

Islamic Finance Concept

s am c nanc a ns u ons

Islamic Finance and Banking in Malaysia

Islamic Finance and Banking in Indonesia

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Conventional Economic Concept

WesternPremisesReligionandmoralityarenotreleventtosolveeconomicproblemsof

humankind.Economic

problems

would

better

be

solved

using

the

law

ofeconomicbehavior.

Secularismineconomy

Assumptions

Thereisnolifeafterdeath

There

is

no

accountability

before

AllahHappinesscanbeachievedwithmaterialmeans

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EconomicMansBehaviorSelfInterest

Consum tion

Maximizeincomeandsatisfywants

EconomicBehavior Competition

Freemarketsystem

Survival

of

the

fittest

SocialDarwinismhasspreadtotheeconomy

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Definition

Thesciencewhichstudieshumanbehaviorin

resources (factorofproductions).

choices.

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Islamic Economic Concept

Needs, Wants & Factor of Productions

Seeyounot(Omen)thatAllahhassubjectedforyouwhatsoeverisintheheavensandwhatsoeverisintheearth,andhascompletedandperfectedHisGracesupon

you,(Luqman

[31]:20).

Andthecattle,Hehascreatedthemforyou;inthemthereiswarmth(warmclothing),andnumerousbenefits,andofthemyoueat(AnNahl [16]:5).

With

it

He

causes

to

grow

for

you

the

crops,

the

olives,

the

date

palms,

the

grapes,

andevery

kind

of

fruit

(An

Nahl

[16]:11).

contentment)(AnNajm[53]:48).

Andgive

not

unto

the

foolish

your

property

which

Allah

has

made

a

means

of

supportforyou, (AnNisaa[4]:5).

Andverily,heisviolentintheloveofwealth(AlAadiyaat[100]:8).

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WahaihambaKuengkauberkeinginanAkupunmemiliki

keinginanaeng ausan ar anapayangeng au ng n anpa a u,ma aakanAkucukupkanapayangengkaubutuhkan

padaKu,

maka

akan

aku

berikan

keletihan

dan

kesengsaraan

(HaditsQudsi)

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Wants

Islamic

Norms

Zuhud&

anaah

Needs

Factorof

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Definition

Thesciencewhichstudieshumanbehaviorin

falah (successinthisworldandinthehereafter,

: ,

: ,

: ,

: ,

:

HumanbehaviorinIslamisrelatedtoshariah

humanfitrah.

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circulation

of

assets/wealth

among

people,

so

that

eycanmax m ze e rpurpose n eas a s

serventtoachievefalahinthisworldandinthe

hereafter.

Economy

in

Islam

is

a

COLLECTIVE activity.

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Principles of Islamic Economics

SovereigntybelongstoAllah(AlMalikalMulk)andHeistheAbsolute(Ash

Shamad .Ownerofallthatexist AlMaalik SAliImran 3 :26 SIbrahim 14 :2

QSAlMulk[67]:1);

Manis

His

viceroy

on

the

earth

but

not

the

real

owner

(QS

Al

Baqarah

[2]:30,

QS

WorldlythingsthatmanpossessesoracquiresareAllah'sblessings,thereforehis

lessfortunatebrothershaveadueshareinhisbrother'swealth(e.g.zakah);

Abstainfrom

wasteful

and

luxurious

living;

Wealthshouldnotbeaccumulated;Wealthshouldalwaysremainincirculation;

Economicexp oitationo every in as eene iminate ,suc asri a an maysir;

Removalofgravedisparitiesintheeconomicconditionsofindividuals,thus

eliminatin

classconflicts

b

dividin

one's

ossessions

after

his

death

amon

his

heirs;

Layingoutcertaincompulsoryandvoluntaryobligationsontheindividualshaving

, , ,

waqf,etc.).

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Islamic vs. Conventional Economics

(social man)

Unlimited LimitedResources,andreligious man)

Limited EnoughResources,Economic/Distribution

Problems

Distribution/EconomicProblems

Choicesamongalternatives (guidedChoicesamongalternatives (guidedby

Exchangesguided

by

market

Integratedexchanges&transfersun er s am ce cs, s or on

free,marketpowerSources :Mannan,1992;Sakti, 2007, modified

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The History of Economy in Islam

reactiontoconventionaleconomicandfinancephenomenon.

itself(15decadesago),sinceitisanintegratedpartofIslamasa

systemoflife.

Islamis

believed

to

be

away

or

concept

of

live

that

covers

economy

as

oneofhumanactivities.

Therefore,itcanbeconcludedthateconomyinIslamisconsideredas

religious

activity

or

ibadah

in

economic

activity.

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The Essence of Economic Activities in Islam

ACHIEVEFALAHATTITUDETOWARDS

WEALTH

ActivitiestoSeek,ManageGrow,DistributeandTrade

andSpend

Wealthof

Wealth

INVESTMENT TRADE SOCIAL REGULATION

Musyarakah

,

Ijarah,Istisna,&Salam

, ,Shadaqah&

Hadiah,

,Inheritance&

Kharaj,Jizyah

Hibah

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,,

,,

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Zakah

AtTaubah[9]:103,ArRuum[30]:39

ControlFunctions of Zakah

unc on

fundingfunding to distributeto distribute (socio(socio--economic function, [9]:60).economic function, [9]:60).

Sosio-EcMore importantly, zakah isMore importantly, zakah is

an effort ofan effort of controllingcontrollingunc on (control function) peoples(control function) peopleswealth to be circulated/wealth to be circulated/nves e n e economy.nves e n e economy.

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Zakah

The Implications of Zakah

X Fulfilltheneedofpoormembersofthecommunity.

X Narroweconomicdisparities.X Decreasesocialproblems;criminality,prostitution,homeless,

beggaretc.

XMaintainpeoplespurchasingpowerinordertomaintainbusinesssector.Inotherwords,zakahmaintainspeoplesm n ma consump ons o eepeconomyrunn ng .

XEncouragepeopletoinvest,nottotokeepthewealth/assets

.

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Zakah

The Implications of Zakah in the Economy

P

S0

S1

S2

P*

D0

D1

D2

Q0

Q0

Q1

Q2

X18


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Riba

[30]:39,[4]:161,[3]:130132,[2]:275279

DefinitionRiba literallymeansanexcess andinterpretedasany

unjustifiableincreaseofcapitalwhetherinloansorsales.

Everyincrease,whichiswithoutiwad(equaivalentcounter

value)isriba(IbnalArabi).

,

,

liability(daman).

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Riba

The Implications of Riba

thewaterflows

similarly

,

thefewerthecapitalor

sector

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Riba

Riba vs Trade

RIBARIBA TRADETRADE

Return Always Interest Not always Profits or Loss

Determination Ex ante Ex post

Assurance Yes No

Thatisbecausetheysay:"TradingisonlylikeRiba (usury),"whereas

.

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Riba

The Implications of Riba

Theworldvolumeoftransactioninfinancialmarket(currencyspeculation and

derivativemarket)

is

US$

1.5

trillion

in

one

day,

while

the

world

volume

of

ransac ono ra ng n erea sec or s r on noneyear .

During 19702007therehavebeen395episodesoffinancialcrises(bankingcrisis,currencycrisisandsovereigndebtcrisis),including42twincrisesand10triplecrises.

International Financial Institutions voting powers are in the hands of a fewdevelo ed countries such as: 24% in WTO 48% in IDB 60% in ADB 61% in WBand 62% in IMF.

Thedebtsofdevelopingcountrieshavealwaysbeenincreasing(morethanthree,

,

countries(accountedfor80%ofworldpopulation)incuredebtofUS$600,whereaverageincomeofthepoorestcountryislessthanONEDOLLARaday.

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Riba

The Implications of Riba Prohibition

X Optimalizetheflowofinvestmenttotherealsector;

thereis

no

barrier

of

interest/riba.

X Ensurefairnessandequality;thereisnopartyexploitorbeexploited.

X

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Riba

Riba Prohibition in the Real Sector

Theabsentofribaintheeconomy(realsector)preventsthe

concentrationof

wealth

in

the

hands

of

afew,

which

potentally

will

exploittheeconomy.

Theabsentofribapreventsdisturbancesintherealsector,suchas

inflationandinefficiencyinmacroeconomic.

Theabsentofribaencouragesfair,stableandsustainableeconomic

ac v es roug emec an smo pro uc vepro osss ar ng.

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Maysir

Game of Chance or Speculation

[2]:219,[5]:9091

Trade Gambling

TheneedofCa ital Yes Yes

Probability Yes Yes

Relationtothereal

Aggregate Supply?es No

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Interest System vs. PLS System

InterestSystem HinderEconomic

MoneyCreation&

Concentration Inflation

rowt

RealSector

PLS S stem Accelerate

Contraction

Wealth & Income Productivit & Job

Economic Growth

Distribution

Real Sector

Creation

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ExpansionSource: Sakti (2007)


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Maysir

The Implications of Maysir Prohibition

X Encoura e roductiveinvetmentactivitiesintherealsectorthatwillincreaseAgregatAgregat SupplySupply.

X Preventeconomicbubble,sothatitwill reventfinancial

crisis.

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Zakah, Riba, and Maysir

Islamic Economic System

Wealth

Wealth

AggregateSupplyAggregateSupply

flowsflows p map mainvestmentinvestment

owsows

investmentinvestment ConstantConstant

Byza aByza a Byantiri aByantiri a ByantiByantimaysirmaysir

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Conventional vs. Islamic Finance Ethics

ConventionalFinanceConventionalFinance IslamicFinanceIslamicFinance

(ShefrinandStatman,1992)(ShefrinandStatman,1992) (Obaidullah,2005)(Obaidullah,2005)Freedom from coercion Freedom to contract

Freedom from misrepresentation Freedom from al Riba

Right to equal information Freedom from Al Gharar (excessive uncertainty)

Right to equal information processing power Freedom from Al_Qimar (Gambling) dan AlMaysir

Freedom from impulse Freedom from price control and manipulation

Right to trade at efficient prices Entitlement to transact at fair prices

Freedom from Darar (Detriment)

Mutua Cooperation an So i arity

Maslahah Mursalah (Unrestricted Public Interest)

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Islamic Financial System Architecture

DeficitSur lusg

SectorSectorPLS Sukuk

Other Sukuk

StocktF

inanci

IslamicInvestment

Banks

Islamic FundsDire

s a m c

Insurance

Units

inancin

g

IslamicCommercialSurplus DeficitIn

direct

PLS FinancingOthers

PLS InvestmentOthers

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The Characteristics of Islamic Finance

BasicCharacteristics IntermediateImplication MacroImplication

Prohibitedfinancialactivities:

Riba(interestbased activities)

Maysir(speculative

motive)

No/lessmoneycreationNomoneywhirlpool/money

concentration/bubble

FinancialSystemStability

Gharar(unclearinformation)

Permissiblefinancialactivities

Nofinancialdetachment

Supportrealsector Jobcreation

TradeCustodyandServices

business&

partners

EncouragelessfortunatePoverty

alleviation

Halaland tha ib ob ects: No

social roblems Social

Stabilit

NokhamrNoporkNopornography

Noenvironmentdamage Environmentprotection

Nopollution

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Conventional Bank

SavingsInterest

Poolof

FundLoanCreditor Debitor

TimeDepInterest

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Islamic Bank

Mar in&

Fee

Savings Financingonus

Poolof

Fund

Fee

BasedInvestor Entrepreneur

TimeDep Investment

Financing

PLS

PLS

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Islamic Bank

Mudharib PLSReturn

Table

Wadiah Yad Dhamanah PLS FinancingUND

PLS Return

FUNDING FINANCING Income

Mudharabah Mutlaqah(Unrestricted Investment) Trade Financing

OLINGF

Margin

, , .P

CalculationShare of Depositors/Investors

Main Operational Income (PLS

Return Mar in Fee

PLS Ret urn Income Statement

Other Operational Income (fee

based income) Fin Services: Wakalah, Kafalah, etc.Agent: Mdh Muqayyadah/Restricted Investment

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Non-Fin Services: Wadiah Yad Amanah


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Takaful (Islamic Insurance)

Takafulasinsuranceisbasedontheconceptofhelpingeachotheringooddeedsand

taqwa

(wa

ta'awanu

alal

birri

wat

taqwa)

and

protection

(at

ta'min).

Each

member

is

.eliminationofuncertainty(gharar),gambling(maysir)andinterest(riba).

^MechanismMemberspooloffundwillbeinvestedincompliancewithShariah.Theprofitswillbeaddedtopooloffund,whileclaimsandpremiums(ofreinsurance)willbe

subtractedfromthepooloffund.ThenetsurpluswillbedistributedaccordingtoPLSsystem(mudharabah).Forexample,60%forthecompany(asmudharibor

entrepreneur

an

ormem ers

as

ra

u

maa

or

cap ta

owner .

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urp usurp us

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CAPITALMARKET

Amarketinwhichsurplusparties(rabbulmaalortheownerofcapital)directlymeetdeficitparties(mudharibortheentrepreneur).

urp uspart esare nvestorsw owantto nvestt e rcap ta me umtolongterm)inproductiveactivities.Deficitpartiesaregovernments,financialinstitutions com aniesetc.thatneedca italtorunthe

business,

expansion

etc.OperateincompliancewithShariah,especially,theprohibitionofriba,mays ran g arar,aswe ast e u mento ust cean equ ty.

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1. Therearenoelementsofriba,ghararandmaysir.

2. Free romunet ica an amora transactionssuchasmarketmanipulation,insidertradingetc.

3. Free

from

speculative

transactions.RuleandregulationofICMshouldbemadespeculationunattractive.

4. Pricedetermination.

Sharepriceshouldbeequivalenttoitsintrinsicvalue topreventpricedistortion.

5. Theschemeoftransactionisalhawalah (transferservice ortransferofreceivables).

6. Investigationof

account

books.

There

should

be

unscheduled

audit

and

investigation

ofcompanysbalancesheet.

7. Prohibitiontoprovideloanforspeculationpurposes.

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ThecriteriaofEmitten CoreBusiness ishalal.

Return isfreefrom ribaandoppression.

.

Providetimelytransparentinformation toavoidgharar.

Businessrisks arenormal(soundfinancialratios).

Management inaccordancewithShariah,notspeculative,respecthumanright

and

protect

the

environment.

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ICMinstrumentsincludefinancialinstrumentswithunderlyingShariahcompliantinvestmentsordebtsofmore

than

one

year

maturity. Examples:

Islamicstock;

IslamicbondorSukuk;

IslamicMediumTermNotes(IMTN)

IslamicAssetBackedSecurities(IABS)

TheseinstrumentscanbetradedintheBourseorOTC.

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G O A S AM C F NANC


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GLOBAL ISLAMIC FINANCE

Source: Aseambankers, June, 2007

Islamic funds in global financial institutions is said to be at US$1.3 trillion operated.

Islamic financial market is estimated to be US$524 billion in size (IDB, 2007), withan annual growth rate of 12%-15%.

ere are more an s am c un s wor w e manag ng asse s n excess oUS$5.0 billion, with estimated annual growth for ICM of 15%-20%.

Countries with the most advance Islamic finance are Malaysia, Kuwait, Saudi

45

Arabia, United Arab Emirates (UAE), Kingdom of Bahrain, and Qatar, followed by

Brunei, Indonesia, South Africa, Morocco, Turkey, and Pakistan.

ISLAMIC FINANCE IN MALAYSIA


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Characteristics

when the government passed several legislations on Islamic finance, such as theIslamic Banking Act and the Government Investment Act in 1983, Takaful Act in

1984.D The majority of Muslims in Malaysia adhere to Syafii madzhab(school of thought).

Cashflow = Debt = Property (can be traded at discount or premium).

,

Islamic windows of conventional banks are regulated under conventional bankingact. These two different regulations, make full fledged Islamic banks can operate.

D The highest Shariah authority on Islamic finance in Malaysia is National ShariahAdvisory Council (NSAC), established on May 1997 within the BNM, to streamline

,including Islamic banking business, Takaful business, Islamic financial business,Islamic development financial business, or any other business which is based on

46

.



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Strategy to Develop Islamic Finance

comprehensive Islamic financial system, with the long-term objective to create anIslamic financial system operating on a parallel basis with the conventional financial

.

D Stages:

1. to create enabling environment by setting up various infrastructures, especiallyega ramewor ;

2. to increase the size and create the market for Islamic financial institutions for faircompetition;

3. to create harmonization and convergence with international Islamic financialmarkets, so that Malaysian Islamic financial institutions can compete in

international arena.D With this strategy, Malaysia is strengthening its position as an international Islamic

financial hub - a centre of origination, issuance and trading of ICM and treasuryinstruments, Islamic fund and wealth mana ement, international currenc Islamic

47

financial services, and Takaful and re-Takaful businesses.



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1969 1984 1993 1996 2001 2004

Islamic

bankin

Islamic Banking Act

1st

Islamic Bank Bank

Pilgrimage Fund BoardPilgrimage Fund Board

Islamic Windows

2nd

Islamic Bank

Islamic Subsidiary

Foreign Islamic Bank

Takaful Takaful Act 1st Takaful Co. SyarikatTkf My Bhd

Four new licenses issued Takaful My Nat Sdn Bhd Maybank Takaful Bhd Takaful Ikhlas Sdn Bhd

FinancialMarkets

Govt Investment Act

1

st

Islamic Instruments GovtInvestment Issues

Islamic Money Market

Islamic Capital Market Securities Comm (1996) KLSE Shariah Index Islamic Capital Market Guidelines (2000)

1st Corporate Global Sukuk (Guthrie)st

1st Corporate Sukuk Shell

Islamic Securities Guidelines MIFC (2006)

Sukuk

1st Islamic MBS RM Sukuk by Foreign

RM Sukuk > RM Bond (2002)

48

1983 1990 1994 1999 2003 2006



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49

ISLAMIC FINANCE IN INDONESIA


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Characteristics

. ,dual banking system. The first Islamic bank was established at the same year,while the first Takaful was established in 1994. But, only after new Banking Act No.

.

D The majority of Muslims in Indonesia adhere to Syafii madzhab (school of thought).Cashflow = Debt = Money (cannot be traded at discount or premium).

D s am c an s n n ones a, w e er u e ge , u ranc or rura an , are

regulated under Banking Act No. 10 of 1998, where they can operate fully incompliance to the Shariah principles. The guidelines to issue corporate Islamic

. . . . . . ,regulations on other financial institutions, like Takaful Act, Government IslamicBond Act, Islamic Bank Act, have been drafted and waiting to be approved by the

.D The highest Shariah authority on Islamic finance in Indonesia is National Shariah

Board or Dewan Syariah Nasional (DSN-MUI), which is an independent body in

50

muamalah, including Islamic economics, finance, and banking.



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Strategy to Develop Islamic Finance

D Indonesia starts with the develo ment of Islamic bankin based on fourstrategies, namely: market driven, fair treatment, gradual and sustainabledevelopment, and compliance to Shariah principles.

,the most Shariah compliance systems in a country with dual financial system.

D Master Plan:

Source: Aseambankers, June, 2007

Toward theIntegration of IFIs

Meet Intl. Standard ofService and QualityStrengthen Industry

Structure

Set up Foundationfor Development

Phase 1

(2002 2004)

Phase 2

(2005 2009)

Phase 3

(2010 2012)

Phase 4

(2013 2015)

D e eve opmen o s am c an ng as a grea mpac n e eve opmen oother sectors, such as, Takaful, Islamic capital market, Islamic bond, Islamic unittrust, Islamic education, Islamic voluntary sectors, legal frameworks, etc.

51

D The development of Islamic bond or Sukuk started with the first issuance of

corporate Sukuk by Indosat in 2002 using Mudharabahstructure.



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1980 1994 2000 2002 2004 2007 2009

Islamic

bankin

Baitut Tamwil Salman Bdg, Koperasi Ridho Gusti Jkt. 3200 BMT Baitut Tamwil Salman Bdg, Koperasi Ridho Gusti Jkt. 3200 BMT

Office Channeling Islamic

1st Islamic Branch Bank IFI Syh

2nd Islamic Bank Bank Syh Mandiri

1st Islamic Bank

Bank Muamalat Ind

Takaful

Money

1st Takaful Company

Asuransi Takaful Keluarga

1st Takaful Branch

Assi Great Eastern

1st Islamic Re-insurance

ReINDO

Islamic Money Market

Market

CapitalMarket

IMA Certificate (Mudharabah)

Islamic Capital MarketJakarta Islamic Index

ICM Master Plan (2005)

Sukuk

1st Corporate Sukuk

Indosat (Mudharabah)

1st Govt Sukuk (Ijarah) 1st Govt RetailSukuk (Ijarah)

Govt. Islamic Bond Act

SBIS (Jualah) Central Bank Act SWBI (Wadiah)Monetary

Management

52

1992 1999 2001 2003 2006 2008



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5.3%3.0% 4.1%

2500

Perbankan Pasar Modal Obligasi

46.6%13.1%

.

1500

2000

23.1%

500

1000

Perbankan Pasar Modal Obligasi SBI/S

Asuransi PP Lain2

0

By

the

end

of

2008,

the

growth

of

banking

sector

has

been

stable

at

15

17%

yearly,and hasnotbeenaffectedbyglobalfinancialcrisis.Stockmarkethasreached

thepeakonDecember2007(IHSG=2745),butitcrashedduetotheglobalfinancial

=

53

beenstagnant.ThetotalassetsoffinancialsystemwasRp.4689trillion.



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FinancialSystemIslamic Konvensional

Deficit

Sector

Surplus

Sector FinancialMarket

Direct

Financial

Indirect

FinancialMoneyMarket Insurance

5%

Market Market

Commercial Unit47%

98%

BondMarket EquityMarketFinance

Company

Merchant

Bank

rus s23%13%

3%

97%

03%

99.9%

0.1% ThemaincomponentsofIndonesianfinancialsystemareBANKING(47% Islamic1%or

Rp.49.5tr),STOCKMARKET(23% Islamic0.02%or Rp.0.6tr)andBONDMARKET(13%

. . . . . . . . . , . .

tr,Gov.SUKUKRp.4.7tr,RetailGov.SukukRp.5.6tr.ShareofIslamicFinance 1.6%or Rp.74

tr.


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MACROMACRO

IMPLICATIONSIMPLICATIONS

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Perputaran Barang

(Produktif)

Aktifitas ekonomi non-produktif membuatperputaran barang dan jasa semakin hari

Aktifitas Keuangan

sema n er

(Non-Produktif)

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Real Sector Monetary Sector

korupsiudi

spekulasi

bunga

SSU/muzakki

Barang & jasa

57


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Monetary SectorReal Sector

judispekulasi

bunga

SSU/muzakki

Barang & jasa

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spekulasi

bunga

SSU/muzakki

Barang & jasa

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one ary ec or

bunga

SSU/muzakki

Barang & jasa

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2009 08 icp fundamentals of islamic finance and banking

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