543 historical development

8/8/2019 543 Historical Development

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ISB543ISB543BANKING BUSINESSBANKING BUSINESS

PAST & PRESENTPAST & PRESENT

HISTORICAL DEVELOPMENT OF ISLAMIC FINANCIALSYSTEM IN MALAYSIA

ESTABLISHMENT OF ISLAMIC BANK IN MALAYSIA


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y The development of modern banking in the west hassynchronised with the emergence of industrialcivilisation.

y The commercial revolution was a prelude to theIndustrial Revolution impact on the production of wealth and the expansion of trade .

y

This tremendous expansion faced a problem of inadequacy of financial resources need a methodto provide access of finance users to the finances of others (financial intermediation)


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y Ensued to the establishment of commercial banking the backbone of modern commercial andindustrial system.

y W estern influence began from European expansion incommerce.

y The rivalry over oversea market caused all needed ra w materials and sought ne w markets for their products.

y Mid-19th century : all Islamic countries were underW estern-political control.

y European legal system was then gradually replaced Islamic legal system .


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ISLAMIC FINANCIAL SYSTEM INISLAMIC FINANCIAL SYSTEM INMALAYSIAMALAYSIA

y The Islamic resurgence (1960s-1970s) has initiated theeffort.

y In Malaysia : first step was LUTH (1963) for thespecial purpose of performing H ajj a majorimpetus


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y The institution was established to invest the savings of the local Muslims in interest free places, who intend to

perform pilgrim (Hajj).

y Tabung Haji utilizes Mudarabah (profit and loss sharing),Musharikah (joint venture) and Ijara (leasing) modes of

financing for investment under the guidance of NationalFatawah Committee of Malaysia.


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y Successful growth in Malaysia, because of :

i) The support and encouragement from the government in Malaysia; its fully driven by thegovernment and implemented by private institutions.

ii) The favourable economic environment and thecreativity in designing new products MalaysiaIBS as a model for other Southeast Asia countries.


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ESTABLISHMENT OF ISLAMICESTABLISHMENT OF ISLAMICBANK IN MALAYSIABANK IN MALAYSIA

y Malay Muslim society is very cautious about involvingin riba transactions.

y

Objections toward riba became a reason for the lowparticipation of the Malays in banking and financeactivities.

y

Led the practice of conditional sale

y Similar to bay bil wafa which been recognised inMazhab Hanafi.


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y Islamic resurgence in the Middle east has initiatedthe call for setting up IFS.

y W

ith successful move to establish IDB in Jeddah in1974 and DIB in 1975 and many other Islamicbanks in many other Islamic countries.

y The resurgence also affected the Muslim in Malaysiaand like others, the establishment in Malaysia wasinitiated by various private parties.


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y The first formal proposal at the national level wasduring the K ongres Ekonomi Bumiputera in 1980 .

y A resolution passed calling on the Govt to allo w

LUTH to establish an Islamic bank in Malaysia inorder to mobilize and invest the funds of Malays and theMuslims in the country.

y The proposal again raised in a seminar held at theN ational U niversity of Malaysia in March 1981 .The participants passed a resolution requesting thegovernment to pass a special la w to setup an Islamic bank in the country.


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y Responding to the request, the government set up aN ational Steering C ommittee in 1981 to studylegal, religious and operational aspects of setting up anIslamic bank.

y The NSCs tasks :i. To study and identify various critical aspects of

Islamic banking.ii. To examine the suitability of Islamic banking in the

Malaysian context.iii. To present the recommendations to the Govt. in a

complete and comprehensive report.


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y NSC submitted its report on 5 July 1982 . y Some recommendations :

1. Operation according to Shariah & able to provide

services also on profitable basis.2. Only one to be established initially.3. Incorporated as a limited company4. An Act styled the IBA need to be legislated &

amendments to existing Act5. The Central Bank should administer IBA6. The IB should set up a Religious Supervisory Council7. The IB should be named 'Bank Islam Malaysia'


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y The Islamic Banking Bill was tabled in the P arliament on 7 D ecember 1982 .

y The bill was passed and the Islamic Banking A ctcame into force on 7 A pril 1983 .

y The Islamic bank was incorporated as a limitedcompany under the Companies Act 1965 on 1 March1983.

y The establishment of Bank Islam Malaysia Berhad (BIMB) in 1 July 1983 marked a milestone for thedevelopment of the Islamic financial system in Malaysia.


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y The important phases in Malaysia:

i) 1983-1992 : setting up the BIMB, it

developmental stage and expansion.

ii) 1993-2000 : setting up the full-fledged IBS.

iii) 2001-2010 : an efficient, comprehensive andcompetitive banking system globally


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1980 - Bumiputera Economic Congress proposed the resolution toallow LUTH to establish an Islamic bank.

1981 - proposed again at the National Seminar UKM to legislate anAct for setting up of banks based on Islamic principles

- various parties showed interest and agreed to jointly for theestablishment of IB

- discussion of LUTH & the Study Group agreed that theSteering Committee at National level should be formed.

30 th July 1981 - Government accepted the proposal & the National SteeringCommittee (NSC) been appointed by Prime Minister

- NSC's tasks :To study & identify various critical aspects of IBTo examine the suitability in the Malaysian context.To present the recommendations & comprehensive reportto Government


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5th July 1982 - NSC submitted its report & was accepted by Government

- some recommendations :Operation according to Shariah & able to provide servicesalso on profitable basis.Only one to be established initially.Incorporated as a limited companyAn Act styled the IBA need to be legislated & amendmentsto existing ActThe Central Bank should administer IBAThe IB should set up a Religious Supervisory CouncilThe IB should be named 'Bank Islam Malaysia'

7th Dec 1982 - Islamic Banking Bill was tabled in the Parliament

1st Mar 1983 - IB was incorporated as a limited company

7th Apr 1983 - IBB was passed and IBA came into force

1st July 1983 - BIMB's operation was officially launched by the PM


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y The long-term objective of the Central Bank of Malaysiawas to create an Islamic banking system operate parallel to the conventional banking system.

y A single Islamic bank (BIMB) did not represent thewhole financial system. It required large number of pro-active players, w ide range of products and innovative instruments, and a vibrant Islamic money market.

y Realizing the situation, the Central Bank introducedInterest Free Banking Scheme (now replaced w ith Islamic banking scheme (IBS) in March 1993.


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y The scheme allowed conventional banking institutionsto offer Islamic banking products and services usingtheir existing infrastructure , including staff andbranches.

y The Central bank of Malaysia in its annual report (1993,page no 57) stated: With the implementation of the interest freebanking scheme , Malay sia has emer g ed as the f ir st

c ountry to implement a dual banking system , w hereb y an Islamic banking s y stem functions on a parallel basis w ith the c onv entional banking s y stem.


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y The aspiration to establish a comprehensive Islamicfinancial system has created a spill-over effect to thenon-bank Islamic financial intermediaries whichalso started to offer Islamic financial products andservices under Islamic banking scheme.

y Such institutions include the Takaful Companies, thesavings institutions (i.e. Bank Simpanan Nasional & Bank

Rakyat) and the developmental financial institutions (i.e.Bank Pembangunan dan Infrastruktur Malaysia and Bank Pertanian.


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y The Central Bank also setup a N ational Shariah Advisory C ouncil on Islamic Banking and Takaful (NSAC) on 1 May 1997.

y The council considers as the highest Shariah authorityon Islamic banking and Takaful businesses in Malaysia.

y On 1 October 1999, the Central Bank issued license forsecond Islamic bank, Bank Muamalat Malaysia Berhad .


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y The country also introduced Islamic debt securities market has made its debut in 1990 with the issuanceof RM 125 million Islamic bonds.

y Islamic Inter-bank Money Market (IIMM) on 4 January 1994 to link institutions and Islamic investmentbased instruments.

y Today, Malaysia has a full-fledged Islamic financial systemoperating parallel to conventional financial system.


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Bank Islam Malaysia Berhady P rimary objective

to carry on the Islamic banking business in all itsbranches and departments and to transact and do allmatters and things incidental thereto, or which may at

any time hereafter at any place where the company shallcarry on business be usual in connection with theIslamic banking business

y C orporate objectiveto provide banking facilities and services to Malaysiansin general, and Malaysian Muslims in particular, inaccordance with Islamic commercial law


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BIMB Milestones1983y Officially launched on 1 July 1983 by former Prime

Minister Tun Dr Mahathir Mohamad, Bank Islam wasincorporated with an authorized capital of RM500

million and a paid-up capital of RM79.9 milliony First Islamic bank in Malaysia to cater to the specific

financial needs of Muslims

1990y Lead arranger for Shell MDS Sdn. Bhd., Malaysias first

ringgit-denominated Islamic corporate bond issuance


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1992y The first Islamic financial institution to be listed on

Bursa Malaysia Securities Berhady The first bank in Malaysia to introduce the chip-based

ATM card (S mart C ard )

1997y Launched its website: www .bankislam.com.my

2001y Lead arranger for First Global Sukuk Inc, the worlds

first Islamic global corporate Sukuk y Rated A by Malaysia Rating Corporation (MARC)


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2002y First bank in the Asia-Pacific region to introduce EMV-

compliant credit cards with chip-based systemfollowing the launch of Bank Islam Master C ard

y Co-manager for Malaysia Global Sukuk Inc, the worldsfirst Islamic sovereign Sukuk

2003y

Launched its Internet bankingy First bank to offer z akat payment facilities via ATM and credit card


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2004y First bank in Malaysia to offer SMS banking service

(bankislam.sms) using any mobile operators

2005y Awarded ISO BS7799 Certification by SIRIM

2006y First bank in South East Asia to introduce an Islamic

P latinum Master C ard y Introduced W iqa For w ard Rate Agreement , a

Shariah-based financial hedging tool to facilitate in-house risk management


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2007y Entered into its first Islamic cross-currency s w ap

agreement y Signing of a strategic collaboration deal with the

European Islamic Investment Bank plc (EIIB)

2008y Recorded highest profit of RM308.27 million in 25 years

2009y Bank Islam is the sole Islamic bank and the only non-

investment bank that the Securities Commissionapproved under its list of P rincipal Advisers forspecific corporate proposals in Malaysia


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Central Bank Act 2009PART VII

ISLAMIC FINANCIAL BUSINESS

Chapter 1

Shariah Advisory Council

51. Establishment of Shariah Advisory Council

52. Functions of Shariah Advisory Council

53. Appointment of members to Shariah Advisory Council

54. Secretariat to Shariah Advisory Council

55. The Bank and Islamic financial institutions to consult Shariah Advisory Council

56. Reference to Shariah Advisory Council for ruling from court or arbitrator

57. Effect of Shariah rulings

58. Shariah Advisory Cuncil ruling prevails


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y 56 . (1) W here in any proceedings relating to Islamic financial business before any court or arbitrator any question arises concerning a Shariah matter, the court or the arbitrator, as the case maybe, shall

(a) take into consideration any published rulings of the Shariah Advisory

Council; or(b) refer such question to the Shariah Advisory Council for its ruling.

y 58 . W here the ruling given by a Shariah body or committee constituted in Malaysia by an Islamic financial institution is different from the ruling given by the Shariah A dvisory C ouncil, the ruling of the Shariah A dvisory C ouncil shall prevail.


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