FEM 3204 : 3 (2+1)FEM 3204 : 3 (2+1)Perancangan Kewangan Dalam Perancangan Kewangan Dalam

Pasaran GlobalPasaran GlobalFinancial Planning in a Global Financial Planning in a Global

MarketMarketHUSNIYAH BT. ABD. RAHIMHUSNIYAH BT. ABD. RAHIM

BILIK A2-14BILIK A2-14Jabatan Pengurusan Sumber & Pengajian Jabatan Pengurusan Sumber & Pengajian

PenggunaPenggunaFakulti Ekologi ManusiaFakulti Ekologi Manusia

Chapter 4Chapter 4Financial Information Financial Information

Searching and ServicesSearching and Services

Secured Financial Secured Financial InstitutionsInstitutions

Conventional bankingConventional banking Involves deposits by clients, offer loan to Involves deposits by clients, offer loan to

individuals and businesses, offer individuals and businesses, offer investment in equities and unit trustinvestment in equities and unit trust

Give out return in terms of interest – the Give out return in terms of interest – the rate depending on the types of accounts rate depending on the types of accounts (savings/deposit/ current account)(savings/deposit/ current account)

Secured Financial Secured Financial InstitutionsInstitutions

Islamic banking Islamic banking refers to a system of

banking or banking activity that is consistent with Islamic law (Sharia) principles and guided by Islamic economics

Islamic banking has the same purpose as conventional banking except that it operates in accordance with the rules of Shariah, known as Fiqh al-Muamalat (Islamic rules on transactions)

Secured Financial Secured Financial InstitutionsInstitutions

The basic principle of Islamic banking is the The basic principle of Islamic banking is the sharing of profit and loss and the prohibition of sharing of profit and loss and the prohibition of riba (usury)riba (usury)

Islamic law prohibits usury, the collection and Islamic law prohibits usury, the collection and payment of interest, also commonly called payment of interest, also commonly called riba riba in in Islamic discourseIslamic discourse

Amongst the common Islamic concepts used in Amongst the common Islamic concepts used in Islamic banking are profit sharing (Islamic banking are profit sharing (MudharabahMudharabah), ), safekeeping (safekeeping (WadiahWadiah), joint venture ), joint venture ((MusharakahMusharakah), cost plus ), cost plus (Murabahah) (Murabahah) and leasing and leasing ((IjarahIjarah))

Secured Financial Secured Financial ProductsProducts

Islamic Banking (cont.)Islamic Banking (cont.) To attract depositors, it needs to pay To attract depositors, it needs to pay

interest interest But since the interest is prohibited under But since the interest is prohibited under

the shariah rule, it introduce a profit the shariah rule, it introduce a profit sharing principlesharing principle

The return on savings accounts in The return on savings accounts in Malaysia’s Islamic banks comes from a Malaysia’s Islamic banks comes from a profit-sharing contract with the bank profit-sharing contract with the bank

Secured Financial Secured Financial ProductsProducts

However, this could cause big fluctuations However, this could cause big fluctuations if the bank posts a loss or higher-than-if the bank posts a loss or higher-than-expected profits expected profits

To overcome this problem, Malaysian To overcome this problem, Malaysian banks use a special profit reserve that banks use a special profit reserve that allows them to keep these payouts allows them to keep these payouts relatively steady and similar to relatively steady and similar to conventional interest ratesconventional interest rates

Secured Financial Secured Financial ProductsProducts

Conventional banking

Islamic banking

Rate of return

Interest Wadiah (token/appreciation/ hibah) Mudharabah(Indicative profit rate)

Both have the same rate

Secured Financial Secured Financial ProductsProducts

Wadiah (Safekeeping) In Wadiah, a bank is deemed as a keeper

and trustee of funds A person deposits funds in the bank and person deposits funds in the bank and

the bank guarantees refund of the entire the bank guarantees refund of the entire amount of the deposit, or any part of the amount of the deposit, or any part of the outstanding amount, when the depositor outstanding amount, when the depositor demands it demands it

Secured Financial Secured Financial ProductsProducts

The depositor, at the bank's discretion, may The depositor, at the bank's discretion, may be rewarded with a be rewarded with a hibahhibah (gift) as a form of (gift) as a form of appreciation for the use of funds by the bankappreciation for the use of funds by the bank

The bank compensates depositors for the The bank compensates depositors for the time-value of their money (i.e. pays returns) time-value of their money (i.e. pays returns) but refers to it as a gift because it does not but refers to it as a gift because it does not officially guarantee payment of the giftofficially guarantee payment of the gift

The depositors are not entitled to any share of the

profits

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Mudharabah :

Saving account or fixed deposit account with ‘profit sharing’

An agreement between a capital provider (depositor) & another

party (bank/ entrepreneur), to enable the bank/entrepreneur to

carry out business projects, based on a profit sharing basis, of a

pre-agreed ratio

The losses if any, are borne by the provider of the funds

Secured Financial Secured Financial ProductsProducts

Conventional Banking

IslamicBanking

Deposit Account

Savings account

Wadiah account(safe-keeping)

Mudharabah account(profit sharing)

Return Interest Hibah (token or gift in monetary term)

Profit sharing based on IPR (indicative profit rate)

All have similar return

Investment from the Investment from the Islamic PerspectiveIslamic Perspective

Shares and bonds results from Shares and bonds results from development in wealth accumulation & development in wealth accumulation & security companiessecurity companies

Islam urged its followers to work for a Islam urged its followers to work for a living and not to expect others to living and not to expect others to contribute/donate to them onlycontribute/donate to them only

Muslims have to use their effort to earn Muslims have to use their effort to earn for their living & not doing nothingfor their living & not doing nothing

Investment is part of a business that Investment is part of a business that needs skills and principal to earn returnsneeds skills and principal to earn returns

Investment from the Investment from the Islamic PerspectiveIslamic Perspective

Basic Principles Prohibition of interest (riba) Requirement of possession (qabd) to

transact

Investment from the Investment from the Islamic PerspectiveIslamic Perspective

Prohibition of interest (riba) In Islam, money is not viewed as

commodity but as a measure of value and a vehicle for acquiring tangible assets

The shares contributed by individuals are in the form of money

Since money is not viewed as commodity, earning money from money is prohibited, thus interest is prohibited either for the payor or payee

Investment from the Investment from the Islamic PerspectiveIslamic Perspective

The prohibition of riba constraints its ability to enter into leverage (financing) on behalf of the fund

Interest-bearing investments, such as fixed income funds are not allowable for Islamic investor

Islamic bond –’sukuk’

Investment from the Investment from the Islamic PerspectiveIslamic Perspective

Requirement of possession (qabd) to transact Syaria’ requires seller to have possession of the

asset that is the subject of the transaction, then only they have the right to sell

This constrains its ability to enter into conventional futures, derivatives contracts and short sales

To comply for Syaria’, commodities that are being sold must be owned by the seller

If the investment is in funds that does not employ any leverage, it complies for Syaria’principles

Investment from the Investment from the Islamic PerspectiveIslamic Perspective

A syaria’ compliant strategy ( eg. Unit trust, equity) must also comply with syaria’

Eg in equity fund, the manager must ensure that the companies in which the fund invests do not engage in any activities prohibited by syaria’

Eg. For unit trust, the companies the fund manager chose to invest must also comply with syaria’

Investment from the Investment from the Islamic PerspectiveIslamic Perspective

In Malaysia, an Islamic Stockbroking had been set-up that allows investors to invest in securities that are Syaria’ compliance

A list of securities had been identified from time to time as ‘halal syariah’ approved and reviewed periodically by the Syariah Advisory Council of the Securities Commission (SC)

Halal securities are investments in companies listed on the Bursa Securities whose activities comply with Syaria’ principle

Investment from the Investment from the Islamic PerspectiveIslamic Perspective

Non-halal activities include; Manufacturing non-halal goods Trading of non-halal goods Banking and financing involving interest

or usury Hotels and resorts involving sale of liquor

or alcoholic beverages Gambling, gaming or related activities Activities involving uncertainties (‘gharar’)

Investment from the Investment from the Islamic PerspectiveIslamic Perspective

Bursa Securities has launched the Kuala Lumpur Stock Exchange Syariah Index (KLSE SI) – a weighted average index with components comprising 684 companies (as at 16 Jan 2009) identified as Syariah-approved securities by the Syariah Advisory Council (SAC)

Refer to updates by Securities Commission (www.sc.com.my)

Islamic Stockbroking (ISB) is open to corporate and individuals, Muslim and non-Muslim, for individuals the minimum age is 18 years old

Risk Management Risk Management (Insurance/Takaful)(Insurance/Takaful)

The conventional insurance, in its presence form, The conventional insurance, in its presence form, does not conform to the rules and requirements of does not conform to the rules and requirements of Syari'ahSyari'ah due to the following three elements: due to the following three elements:

(i) (i) GhararGharar

The unknown or uncertain factors in operation of a The unknown or uncertain factors in operation of a contract in life insurance contracts. contract in life insurance contracts.

(ii) (ii) MaisirMaisir

Gambling arises as the consequence of the presence Gambling arises as the consequence of the presence of Gharar, particularly in the case of life insurance. of Gharar, particularly in the case of life insurance.

(iii) (iii) RibaRiba

Interest and other related practices that do not Interest and other related practices that do not conform to the conform to the Syari'ahSyari'ah in the investment activities. in the investment activities.

Risk ManagementRisk Management

An alternative form of cover a Muslim can An alternative form of cover a Muslim can avail himself against the consequences of avail himself against the consequences of catastrophe and disaster is by participating in catastrophe and disaster is by participating in TakafulTakaful schemes. schemes.

It is a scheme based on solidarity, shared It is a scheme based on solidarity, shared responsibility and brotherhood among responsibility and brotherhood among members. Participants of this scheme all members. Participants of this scheme all agree to mutually help each other by agree to mutually help each other by contributing financially on the basis of contributing financially on the basis of tabarru'tabarru' (donation). (donation).

Islamic Principles in Risk Islamic Principles in Risk ManagementManagement

(i) Al-(i) Al-TakafulTakaful The pact among a group of people called participants, The pact among a group of people called participants,

reciprocally guaranteeing each other against loss or reciprocally guaranteeing each other against loss or damage that may befall any one of them. damage that may befall any one of them.

(ii) Tabarru'(ii) Tabarru' The agreement by a participant to relinquish as The agreement by a participant to relinquish as

tabarru’ (donation), a certain proportion of the tabarru’ (donation), a certain proportion of the TakafulTakaful contribution that he agrees or undertakes to contribution that he agrees or undertakes to pay, thus, enabling him to fulfill his obligation of pay, thus, enabling him to fulfill his obligation of mutual help and joint guarantee should any of his mutual help and joint guarantee should any of his fellow participants suffer a defined loss. fellow participants suffer a defined loss.

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