objectives, philosophy and principles of islamic banking

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Objectives, Philosophy and Principles of Islamic Banking by Sudin Haron, W. Nursofiza, (2009). Islamic Finance and Banking System : Philosophies, Principles & Practices. Selangor, Malaysia. McGraw-Hill (Malaysia) Sdn. Bhd.

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  • 1. Chapter 2 Objectives, Philosophy and Principles of Islamic Banking FAB 1233 Islamic Banking Made by: Nor Izzuddin Bin Norrahman, BBA. Lecturer of Management, Banking & Islamic Finance Astin College, Puchong
  • 2. Reference: Sudin Haron, W. Nursofiza, (2009). Islamic Finance and Banking System : Philosophies, Principles & Practices. Selangor, Malaysia. McGraw-Hill (Malaysia) Sdn. Bhd.
  • 3. Contents Introduction Objectives of Establishment and Business Philosophy of Islamic Banks Factors that influence the formation of the philosophy of Islamic Banks Sources of Islamic Banking Philosophy Operational Principles Priorities in the use of Syariah Principles
  • 4. Introduction The process of Islamize the economic system raised several theoretical and conceptual considerations in order to implement it in the new economic system. At the time, only three system existed socialist, socio-capitalist and capitalist system. At that time also, there were no appropriate model encouraged the Muslim country to start the Islamization from the Banking Sector.
  • 5. Continue The Islamization in the economy involved one principal point : the ELIMINATION of INTEREST in all deposits and financing transactions. However, some people may questioned, is it appropriate to call it an Islamic bank when the transaction is similar to the conventional bank except for the matter of interest?
  • 6. Continue The objectives of the Islamic Banks establishment is to offer banking needs to Muslims And, these Islamic Banks run alongside conventional bank. Thus, there are some similarities showed in the transactions.
  • 7. Conventional Banks Transaction Conventional Banks Primary Function Savings Deposit Savings Account Current Account Fixed Deposit Account Negotiable savings certificate Loans Individuals, Businesses, Public Sector, Other Group Secondary Function Facilities Letters of Credit, Letters of guarantee, others Service Money order transactions, money exchange, advisory services
  • 8. Islamic Banks Transaction Islamic Banks Primary Function Savings Deposit Savings Account Current Account Fixed Deposit Account Negotiable savings certificate Loans Individuals, Businesses, Public Sector, Other Group Secondary Function Facilities Letters of Credit, Letters of guarantee, others Service Money order transactions, money exchange, advisory services FREE FROM RIBA / ACCORDING TO SHARIAH
  • 9. Objectives of establishment & Business Philosophy of Islamic Banks (IB) In principle, business institutions aim for PROFIT MAXIMIZATION More-over for the Private Companies Indicators: Large Profit Organization is running effectively Shareholders Shareholders would want high return from their shares. Is Islamic banks the same?
  • 10. Islamic Banks objectives Founded on 2 key factors: Religion The organization must internalize the teachings Islam. So, Islamic banks would have to CONFORM and COMPLY with Islamic principles. It will involve moral elements by virtue of the factor of Iman (faith and believe) in the business operations. Profit If the moral factors alone is given importance, there is possibility that the bank would experience losses and forced to ceased operations. And this would deny the objectives of Islamic banks that is to fulfill the needs of Muslim. So, Islamic banks also given importance to the business dimension.
  • 11. Continue Khan (1983) stated that: The objectives of Islamic Banks is to DEVELOP, FOSTER and PROMOTE the use of ISLAMIC PRINCIPLES, LAWS, and traditions in all BANKING TRANSACTIONS, financial, business and other related areas. Another objectives is to promote the establishment of investment companies or other business enterprises which according to Shariah laws. Different Islamic banks have different goals and objectives, but it is always includes the moral and business dimension.
  • 12. Factors that influence the formation of the philosophy of Islamic Banks Internal Factors from the organization itself External Factors beyond the control of organization Islamic Banks
  • 13. Continue The philosophy of the Islamic banks will be influenced by external and internal factors. Internal factors play important role in the initial stage of the banks establishment. Example: Investor use their money to set up the bank As the result, the investor would want high returns : resulting profit maximization. In reality, the owner and the manager consist of different types of group. This will influenced the philosophy of the Islamic bank : the owner vs. the management.
  • 14. Continue The management would be influenced by three conceptions: Demand of high returns from the shareholders. Rewards received by the management. The depositors demand. All the conception would influence the Islamic bank to look within the business dimension only and disregard the moral dimension.
  • 15. Class of Islamic Banking Institution 1st Class A financial institution merely offers services which is not prohibited in Islam 2nd Class The financial institution that claimed that they are Islamic Financial institution, but the products and services that they offer is similar to conventional bank. 3rd Class The best in category Offer Islamic Financial Services and all of the aspect is based on Islamic business principles. View the profit is important, but it must be balanced with the requirement of social justice.
  • 16. IB vs. CB IB CB Must comply fully with the requirements of akidah by avoiding prohibited elements. Does not comply with akidah and contain prohibited elements as long as it is profitable. IB must be caring and more understanding to their customer. Did not include moral factors in their operations. Have goals on socio-economic development and poverty eradication, not only profit. Only focus on profit. The operations is according to shariah. The operation is freely done. Charges on customers in accordance with the actual cost incurred. Could charge their customer with cost that incurred in the future.
  • 17. Sources of Islamic Banking Philosophy Primary Sources Al-Quran As-Sunnah Secondary Sources Qiyas Ijam Others Islamic Banking
  • 18. Operational Principles of Islamic Banks Operational Principles Musyarakah Mudharabah Murabahah Ijarah Qard Hassan Wadiah Rahn Other Principles
  • 19. Continue Other Principles Bai Bithaman Ajil Bai al-Dayn Bai al-inah Bai istijar Bai salam Hiwalah Istisna Joalah Musawamah Sarf Ujr Urbun Wakalah Tawarruq
  • 20. Musyarakah Means partnership in English. (Profit and loss sharing) Two categories: Syirkat al-mulk Involves joint ownership of certain properties and it does not involve any joint venture to DEVELOP the properties. Syirkat al-aqd The concept of joint exploitation of capital and the joint participation in profits and losses (Saleh, 1986). There are three methods in establishing Syirkat al-aqd: Syirkat mal (Involve money in create partnership) Syirkat amal (Depends on the expertise, experience and skills from the partnership) Syirkat Wujuh (Partnership based on asset of the credit or investment made in the company)