The document discusses Islamic financing and banking. It begins with an overview of Islamic banking principles, which are based on prohibiting interest and promoting risk sharing. It then outlines the evolution of Islamic banking products in Malaysia from the 1980s to present day, including deposit accounts, financing for individuals and corporations. The document notes the average growth rate of Islamic financing in Malaysia is 12.3% annually. It also discusses factors that encourage non-Muslims to use Islamic financial services and the importance of ethical and welfare-oriented aspects of Islamic financing.

1. Tapping into Islamic Financing
Banking on Faith Based Products
By Lokesh Gupta
Head, Business & Technology Consulting
By
RM Applications Sdn. Bhd.
No.69-1 Medan Setia 1
Bukit Damansara
50490 Kuala Lumpur
Tel: +603-20932677
Fax: +603-20932607
Website : www.rma.com.my
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2. Points to Share
1-. Islamic Banking Overview
2-. Benefits & Advantages
3-. Islamic Banking Evolution
4-. Islamic Banking for Non Muslims
5-. Critical Factors for Islamic Banking Acceptance
6-. Islamic Financing & Welfare
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3. What is Islamic Banking ?
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4. What is Islamic Banking?
Isamic Banking is based on the principles of
‘Trade and Commerce’
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5. Islamic Banking Principles
Riba Free
Isamic
Banking
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6. Benefits & Advantages
Ethical and Equitable Based on Shariah Based Principles rather Manmade
Banking Principles
It promotes risk sharing between provider of capital
Risk Ownership
(investor) and the user of funds (entrepreneur).
In the modern Islamic banking system, it has become one
Zakat (Religious Tax) of the service-oriented functions of the Islamic banks to
be a Zakat Collection Centre
The Islamic banks can only charge 1% on the outstanding
Penalty
installment in the event of default
It gives due importance to the public interest. Its ultimate
Social Welfare
aim is to ensure growth with equity.
The Islamic banks give greater emphasis on the
Economic Development economic development project rather profitability as sole
evaluation criteria
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7. Benefits & Advantages
There is no room for compounding of profit in Islamic
Fixed Repayment
Banking
The contracts are structured in a manner that the liability
Transparency
is fixed and is known to customer
Islamic Banking is not limited to Muslims and it is for Non
Banking for All
Muslims as well
Each Islamic Bank has Shariah Supervisory Board to
Strict Governance ensure that all business activities are in line with Shariah
requirement and BNM Statutory Requirement
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8. Evolution of Islamic Banking
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9. Evolution of Islamic Finance in Malaysia
− Wadiah Saving − Mudharabah Investment
− Wadiah Current − BBA Financing
Phase I - 1983
− Islamic Interbank Money Mkt − Trade Financing
− Murabahah Working Capital − Asset Securitization
(Mudharabah)
Phase 2 - 1993
− Istisna Financing
− Ijarah / AITAB
− Bai Innah Financing
− Islamic Bonds / PDS
− Rahnu
Phase 3 - 1998 − Bai al Dayn
− Qardh Hassan
− Musharakah − Mudharabah Financing
− Diminishing Musharakah − Commodity Murabaha
Current Stage − Bai Salam − Istijrar
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10. Evolution of Islamic Deposit Products in Malaysia
Islamic Deposit Products – Retail & Corporate
Saving Account - i Current Account - i Investment Account -i
Wadiah Yad Dhamanah Wadiah Yad Dhamanah Mudharabah Mutlaqah
(Trustee With Guarantee) (Trustee With Guarantee) (Unrestricted Investment)
Mudharabah
Mudharabah (Profit Mudharabah (Profit
Muqayyadah (Restricted
Sharing) Sharing)
Investment)
Qardh (Benevolent Loan) Qardh (Benevolent Loan)
Source : www.bankislam.com.my / www.muamalat.com.my / www.kfh.com.my / www.ambg.com.my / www.rhbislamicbank.com.my / www.bnm.gov.my
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11. Evolution of Islamic Financing Products in Malaysia
Islamic Financing Products - Retail
House Auto Personal Islamic Pawn
Financing - i Financing - i Financing - i Card - i Broking-i
Bai Bithaman Bai Innah (Sale Bai Innah +
AITAB (Lease to
Ajil (Deferred with immediate Qardh Ar-Rahnu
Purchase )
Payment Sale) repurchase) Hassan
Diminishing Bai Bithaman Bai Bithaman
Musharakah + Ajil (Deferred Ajil (Deferred Qard
Ijarah Payment Sale) Payment Sale)
Istisna (Purchase Bai Bithaman
Order) Ajil (Deferred
Murabahah Payment Sale)
(Cost Plus Sale)
Source : www.bankislam.com.my / www.muamalat.com.my / www.kfh.com.my / www.ambg.com.my / www.rhbislamicbank.com.my / www.bnm.gov.my
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12. Evolution of Islamic Financing Products in Malaysia
Islamic Financing Products – Corporate
Project Working Capital Asset
Financing - i
Trade Finance - i
Financing - i Financing - i
Al Istisna
Musharakah Murabahah (Cost
(Purchase Ijarah (Leasing)
(Partnership) Plus Sale)
Order)
Diminishing Bai Bithaman
Mudharabah
Musharakah Ajil (Deferred Wakalah (Agency)
(Profit Sharing)
Payment Sale)
Mudharabah Murabahah
(Profit Sharing) AITAB (Lease to Bai Dayn (Debt
(Cost Plus Sale)
Purchase ) Trading)
Murabahah
(Cost Plus Sale) Al Istisna
Kafalah
(Purchase
(Guarantee)
Order)
Source : www.bankislam.com.my / www.muamalat.com.my / www.kfh.com.my / www.ambg.com.my / www.rhbislamicbank.com.my / www.bnm.gov.my
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13. Key Statistics
Average Growth Rate in Islamic
Financing is +12.3%,
Source : www.bnm.gov.my / BNM Annual Report 2006
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14. Interest of Non Muslims in Islamic Financing
Interest is not only prohibited in Islam but is also
Prohibition of Interest
mentioned in Jewish Torah and Christian Bible
Repayment price is fixed and there is no element of
Fixed Repayment
compounding profit is involved
In the event of default, Penalty is limited to 1% of the
Penalty outstanding installment NOT on the total outstanding
amount
Non Muslims equate Islamic Finance with Ethical Living
Ethical Living and doesn’t want to get involved in anything they
perceive as unethical
Islamic Banks product range is No less then their
Product & Service
conventional counterpart and it offers a choice to the
Portfolio
customers
Islam recognizes money as a mean of exchange and not
Transparency
as a commodity, where there should be a price for its use
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15. Interest of Non Muslims in Islamic Financing
Non-Muslims fed up with punitive interest payments are
Debt Burden
more attracted to a system that imposes ethical practices
For a Business / Individual loan, the bank is not just the
financier but a co-owner of the business and has an
Profit Sharing
interest in its success as if they have equity.
Bank also shares the Loss based on equity proportion
Certainty Islamic financing is a preferred hedging device due to its
certainty
“In Malaysia up to “London has “The Central Bank of
25% of Islamic become a major Malaysia sees non-Muslim
accounts are opened trading centre for investment as the key to
by non-Muslims” Islamic funds” further market growth”
Source : www.bnm.gov.my / www.ethicalcorp.com / http://news.bbc.co.uk
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16. Success Factor to Encourage Acceptance of Islamic
Financing
Stress on Ethical Marketing
Create Awareness via branding and promotion
Offer convenience and easy access to information and banking online via e-
channels for SME & Corporate via Cash Management, EIPP etc.
Introduce Sophisticated Islamic products & services such as Wealth
Management, Halal Supply Chain Financing etc
Returns from Islamic instruments vs. conventional products
Standardization of Terms / Contracts
Transformation of traditional client service model for Islamic banks
Key drivers will be Innovation NOT Migration, infrastructure and regulatory
improvement.
Islamic Financing product with stress on economic development e.g.
Microfinance
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17. Success Factor to Encourage Acceptance of Islamic
Financing
To Fuel the Growth Islamic Banks will have to offer:
Variety and diversified options to Customers
Quality services to match the desired expectation of the
investors/customers.
Professionalism in dealing with investors.
Investors with adequate, timely and accurate information to support in their
decision making.
Competitive structures, pricing and choice of funds.
Adequate distribution channels.
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18. Islamic Financing & Welfare
Interest Free Economy – Socio Economic Justice
Interest retards social and infrastructural development of a nation. The more
the debt is paid, the more it increases.
Interest is sure gain without any possibility of loss, a reward without work; it
contributes to inflation and unemployment.
Ethical & Moral Dimension
Strong ethical and moral dimensions of doing the business and selecting the
activities/commodities to be financed by Islamic Banks are playing an
important role in promoting socially desirable investment and better
individual/corporate behaviour
Justice & Fairness
Islamic model is that it is based on profit sharing principle, whereby the risk is
share by the bank and the customer. This just system of financial
intermediation will contribute to a more equitable distribution of income and
wealth.
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19. Islamic Financing & Welfare
Spirit of Cooperation & Brotherhood
Islam encourages that every man should give the needy a specified proportion
of his wealth. This contribution is called as Zakat, a levey on certain
categories if wealth.
The principle of zakat is to take from those who have wealth and give it away
to those who do not. This rotation of wealth is a way to balance social
inequality.
Islamic Financing is Banking for All !!!
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20. Thank You
lokesh@rma.com.my
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