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Islamic Banking Essay

1714 words - 7 pages

Contents

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What is Islamic banking? Islamic banking in Malaysia Observing Shariah principles Shariah concepts in Islamic banking Frequently asked questions Glossary

This booklet tells you about the basic concepts and principles of Islamic banking.

What is Islamic banking?
Islamic banking is banking based on Islamic law (Shariah). It follows the Shariah, called fiqh muamalat (Islamic 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 in Malaysia ...view middle of the document...

The bank guarantees the safety of the items kept by it.

info perbankan

bankinginfo 2

Know the Shariah concept used and be clear of your rights and responsibilities

Here is how it works:
1 You 2

B A N K

1) You place money in a bank and the bank guarantees to return the money to you. 2) You are allowed to withdraw the money anytime. 3) Bank may charge you a fee for looking after your money and may pay hibah (gift) to you if it deems fit. 4) This concept is normally used in deposit-taking activities, custodial services and safe deposit boxes.

3 bankinginfo

info perbankan

Here is how it works:
You

Mudharabah (Profit sharing) Mudharabah is a profit sharing arrangement between two parties, that is, an investor and the entrepreneur. The investor will supply the entrepreneur with funds for his business venture and gets a return on the funds he puts into the business based on a profit sharing ratio that has been agreed earlier. The principle of Mudharabah can be applied to Islamic banking operations in 2 ways: between a bank (as the entrepreneur) and the capital provider, and between a bank (as capital provider) and the entrepreneur. Losses suffered shall be borne by the capital provider. 1) You supply funds to the bank after agreeing on the terms of the Mudharabah arrangement. 2) Bank invests funds in assets or in projects. 3) Business may make profit or incur loss. 4) Profit is shared between you and your bank based on a preagreed ratio. 5) Any loss will be borne by you. This will reduce the value of the assets/ investments and hence, the amount of funds you have supplied to the bank.
5

1

B A N K
2

bankinginfo

Investment / Asset

4 info perbankan

4

3

+
Profit / Loss

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Bai’ Bithaman Ajil – BBA (Deferred payment sale) This refers to the sale of goods where the buyer pays the seller after the sale together with an agreed profit margin, either in one lump sum or by instalment. Here is how it works:
Owner of Asset 1 2 3 4

You

5

6

B A N K
info perbankan

1) You pick an asset you would like to buy. 2) You then ask the bank for BBA and promise to buy the asset from the bank through a resale at a mark-up price. 3) Bank buys the asset from the owner on cash basis. 4) Ownership of the goods passes to the bank. 5) Bank sells the goods, passes ownership to you at the mark-up price. 6) You pay the bank the mark-up price in instalments over a period of time.

5 bankinginfo

Murabahah (Cost plus) As in BBA, a Murabahah transaction involves the sale of goods at a price which includes a profit margin agreed by both parties. However, in Murabahah, the seller must let the buyer know the actual cost for the asset and the profit margin at the time of the sale agreement. Musyarakah (Joint venture) In the context of business and trade, Musyarakah refers to a partnership or a joint business venture to make profit. Profits made will be shared by the partners based on an agreed ratio which may not be in...

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