THE BASIC PRINCIPLES OF ISLAMIC FINANCIAL INSTITUTIONS

PRESENTED BY MOHD YUNUS HAJI MOHD YASSIN

M.A , ISLAMIC FINANCETHE NATIONALITY OF UNIVERSITY MALAYSIA(CANDIDATE)

FOREWORD• IFI (ISLAMIC FINANCIAL INSTITUTIONS)must operate within

the framework of the religion, based on Quran and Sunnah.

• The most important is the prohibition of interest. IFI activity must comply with Syariah principles and avoid prohibited activities such as gharar (excessive uncertainty). For example, instead of lending with interest, Islamic banks provide financing based on various different types of Shariah principles.

• This compliance Syariah covers not only religious worship but also business practices. Obviously ambition in order to please Allah (SWT)

THE BASIC

PRINCIPLES IFI

MUST FOLLOW

ARE :Business Framework1• Islamic Financial System is based on

Syariah laws. Syariah scholars ensure adhenrence to Islamic laws and provide guidance

VS• Conventional Financial System is based

only on man-made laws and no religious laws or guidelines

2 Interest (Riba)• Riba in Islam is forbidden. Instead of interest, the IFI

earns profit (mark – up) and fees on financing facilities it extends to customers.

• IFI must trade in real assets or services.VS• Whereas CFI “trade” in money (buying money from

depositors and selling money in the form of loans

• Most of the CFI activities are interest-based financing

3Prohibited Activities / Commodities• IFI must encourage and develop the application of

Islamic principles.

• Only HALAL activities are allowed which is unlawful in Islam or harmful to mankind. e.g Does not finance liquor manufacturing, transportation, storage or distribution companies.

• Syariah scholars screen the suitability of investments on an ongoing basis and provide guidance.

4 Uncertainty (Gharar)IFI : any contract base on a future uncertain event is not

allowable e.g hedging, dealing in derivativesVSCFI : allows trading and dealing in derivatives of various form is allowed

5Contractual RelationshipContractual relationship in IFI depends upon the nature of transaction e.g :Seller-buyer relationship(Murabaha) lessor-lessee relationship(Ijara)Partnership(Musharaka)Creditor-debtor relationship(Qard Hassan)VSCFI only a creditor-debtor relationship

The Islamic Ethics&Behavior6Staff IFI must behave act within the framework of Islamic teachings. Any person approaching an IFI they will get distinguished in the way the customer TCW (treated-with care) respect and the eagerness to help them.

7Participation & Risk SharingIFI offer investor / depositor participation in risk sharing rather than fixed interest on deposits. Any risk-bearing instruments reflecting a real asset and earning a variable rate of return tied to the performance. The Islamic System is based on equityVS (whereas)The Conventional System is loan based.

Goals of the Islamic Society8IFI : contribute to achieving the major socio-economic goalsVSCFI : focuses solely on economic transactions and markets

Different IFI : • Stresses the ethical, social and moral• Socially responsible towards the poor and needy with

creating social funds.• Usually, providing education scholarships to students.• Remind his customers of Zakat payments on the

client assets.

IF YOU CAN’T FEED 100 PEOPLE THEN FEED JUST ONE

Accounting Standards9IFI abides by the accounting standards of Accounting and Auditing Organization for Islamic Financial. VSCFI follows the accounting standards of the British Practices, American Financial accounting Standards and International Accounting Standards

Balance Sheet

10The equity capital base of IFI may be larger than that of a Conventional depositor institution.

Different IFI:• The balance sheet of Islamic Banking

will not show the interest earning assets and Interest bearing liabilities.

• More detailed than of the Conventional banks e.g Investments in Murabaha, Istina’ etc VS Loans and Advances.

Shariah Supervisor Board11The transaction structured and supporting documetation approved by a SSB with their FATWA. There is no existence of such Board in the CFI which aiming to attain profit without considering Shariah precepts.