1. Introduction
A significant development in the Muslim World in the seventies and eighties was the pan-Islamic movement. This movement aimed to revive the glory of Islam and began to demand the application of Shariah in all aspects of life. The effort to establish in Islamic Banking is one manifestation of this movement. The Muslim countries began to rediscover Islam and wanted to mould their economic and financial activities in accordance with Islamic values.
The seventies and eighties of the present century has witnessed the emergence of a number of Islamic banks and financial institutions whose modes of operation are distinct from those of conventional banks. The establishment of these institutions is one of the several manifestations of the 'back to religion' movement which is fast gaining strength in present day muslim societies (quoted in Abulhasan et al. 1991: 155)
The Muslim world has been over-burdened for too long by western modes of social and economic thought. A large portion of the Muslim world had been subjugated culturally, economically and politically by the colonial powers. Even though they have achieved independence from their colonial masters, the colonial principles are still deep rooted in the social, economic, political and cultural life of Muslim communities. Thus, the emergence and expansion of an Islamic banking system is the starting point of a new path breaking change in the Muslim world. It is a process of liberating the Muslims from the yoke of domination by western thought, values and institutions and remodeling their social and economic life in accordance with shariah.
The issue of Riba has long been a problem for Muslims. Even what constituted Riba itself has been a subject under serious discussion. The existence of Riba has been argued to be a major factor for the low participation of the Malays in the economic activities of Malaysia. The establishment of BIMB is a major step towards an interest-free financial system in Malaysia. This marked the establishment of more Islamic commercial institutions under the new mode of the Islamization Policy of Dr. Mahathir Muhammad.
2. The Emergence of Islamic Banks
The elementary concepts of modern Islamic banking date back to the mid 1940s. Models for Islamic banking appeared in the mid-1950s, but comprehensive and detailed concepts for interest-free banking only appeared in the late 1960s. The political environment during that time almost all Muslim countries was hardly favorable for a change in the entire system of banking and finance. In fact, the first experiment in Islamic banking was set up undercover in Mit Ghamr, Egypt in 1963. The model for the experiment was the German Savings bank modified to comply with Islamic principles, i.e. it was barred from charging and paying interest. Nevertheless, the charter of the Bank did not refer to Shariah.
The second Islamic Conference of Foreign Ministers in 1973 adopted a document on the "Institution of an Islamic Bank, Economics and Islamic Doctrines". In 1974, the Islamic Development Bank (IDB) was established as a result of this conference. The member states of the OIC became members of the IDB. The IDB helped to establish a number of Islamic banks in various countries.
Beginning in 1974, several Islamic banks have been established which include: Dubai Islamic Bank in 1975, Faisal Islamic Bank of Sudan in 1977, Faisal Islamic Egyptian Bank and Islamic Bank of Jordan in 1978, Islamic Bank of Bahrain in 1979, the International Islamic Bank of Investment and Development, Luxembourg in 1980 and BIMB in 1983. Today, there are more than a hundred financial institutions which claim to be operating partially or fully on an interest-free basis in 34 countries.
Islamic banking has been adopted at the national level in Pakistan, Sudan, and Iran, and they have decided to Islamize the whole banking system. Iran enacted a new banking law in August 1983 requiring complete abolition of interest by March 1985 (M.N. Siddiqi 1988: 48). Sudan opted for a total change when a presidential decree was issued in 1984, directing all banks to stop dealing with interest. The Central Bank of Sudan, on 10 December 1984, directed all commercial banks to stop dealing with interest with immediate effect, and to negotiate conversion of existing deposit into investment deposits or any other kind of deposits in accordance with shariah. All outstanding interest bearing advances were either to be settled through repayment or they had to be converted into one of the Islamic modes of financing. Foreign transactions were to continue on the basis of interest till an alternative way as available.
3. The Theory of Islamic Banking
3.1 Economic Impact of Interest
At the outset, the most important departure of Islamic banking from conventional banking is the prohibition of Riba, and promoting Profit and Loss Sharing (PLS) as an alternative to Riba. The prohibition of interest is obvious in the Quran as well as in the Sunnah. Riba originally meant 'increase and growth'. This meaning is taken from the Quran (22:5). Increase means the increase over capital or nominal amount, the increase being either large or small. According to Islamic law, Riba technically refers to the premium that must be paid by the borrower to the lender along with the principal amount as a condition for an extension in its maturity. In 1992, the Pakistan Federal Shariah Court ruled that:
It makes no difference whether the loan is for consumption purpose or for commercial purposes. It does not matter if the rate of interest is low or high, simple or compound for short or long times, between the two Muslims or between a citizen and a state or between two states. Any excess which is pre-determined over the principal sum in a loan transaction will constitute Riba in all circumstances (quoted in K. Zaheed 1994: 83)
This immediately leads us to the essence of Islamic banking; an Islamic bank is a financial institution that conducts its operations in accordance with Shariah principles. If we have to contrast the Islamic bank to an existing conventional bank, we may say that while the latter earns the major portion of its revenues and expenses on the basis of interest, the former earns the same on the profits. In the operation of an Islamic bank, profits therefore assume the place of interest in a conventional bank. 'Usury', the original name for modern interest.
BANK ISLAM MALAYSIA BERHAD (BIMB)
BIMB was established after the enacting of the Islamic Banking Act (IBA) in 1983, the IBA permitted the establishment of the first Islamic Bank in Malaysia. BIMB with a paid up capital of RM 100 million and an authorised capital of RM 500 million is carrying out its activities on an interest free basis. Tengku Razaleigh , the then Finance Minister described the Islamic bank as the:
First step in the government's efforts to instill Islamic values into the country's economic and financial systems as a replacement for the current Western-base economic system (NST 6 July 1982)
Takaful Malaysia
Syarikat Takaful Malaysia Berhad was incorporated on 29 November 1984, has an authorised capital of RM 500 million and a paid up capital of RM 55 million. It has been converted into a public quoted company with the listing of its shares on the Main Board of the Kuala Lumpur Stock Exchange since 31 July 1996. As a subsidiary company of BIMB Holdings Berhad, 65.5% of its equity is held by the BIMB.
Other major shareholders are the State Islamic Religious Councils / Baitulmals of Terengganu, Pahang, Negeri Sembilan and Amanah Saham Bank Islam (ASBI).
The company objectives is to provide takaful services (Islamic Insurance) at the highest standard of efficiency and professionalism to all Muslims and the population in Malaysia.
Lembaga Tabung Haji (Pilgrims Fund Board)
In line with the concept of Islam as Ad-deen, a way of life in this world and the Hereafter, every ibadah commanded by Allah S.W.T. is of benefit in this and the next world. To fulfill this desire to perform the Hajj pilgrimage, Muslims have to find enough money for the journey to the Holy Land. To avoid riba' (usury), which is haram (forbidden) in Islam, Muslims resort to various traditional methods of saving. Of course, there are those who dispose their animals or inherited properties for cash to cover their Hajj expenses, a practice which ultimately imposes economic burden on themselves and their families while they are on the pilgrimage or when they return from the pilgrimage. Such practice also does not augur well for the rural economy, besides retarding the country’s economic growth.
Realising this as well as to help Muslims to save enough money without involving in activities deemed haram in Islam, Perbadanan Wang Simpanan Bakal-Bakal Haji was set up in November 1962, and began its operation on 30 September 1963. The corporation to manage the savings of Muslims, intending to perform the Hajj pilgrimage, was the result of a working paper entitled "Rancangan Membaiki Ekonomi Bakal-Bakal Haji" presented by Royal Professor Ungku Aziz in 1959 to improve the economy of intending pilgrims.
Objectives:
Enable Muslims to gradually save enough money to meet the cost of performing the Hajj or other beneficial expenses; Enable Muslims, through the use of their savings, to take active part in capital investment in a way, halal to Islam, and Provide protection, supervision and welfare to Hajj pilgrims.
Pusat Pungutan Zakat (Zakat Collection Center)
Established by The Federal Territory Islamic Council, Kuala Lumpur (known as MAIWP). It started its operations in 1991. PPZ uses a corporate style of management through the setting up by the Council of a company called Hartasuci Sdn. Bhd. which is placed under a foundation called Yayasan Taqwa Wilayah Persekutuan Berhad controlled by the Council. PPZ's basic responsibility is to collect zakat for the Council. It is not responsible for zakat distribution which is done by other agencies/sections of the Council.
Organization Structure Externally, PPZ is placed under the foundation which is responsible to the Council. Internally, PPZ has a Board of Directors which supervises management headed by a General Manager. There are two divisions, namely the Operations Division (headed by a Manager), and the Finance & Administration Division. Each division in turn has various functional units. Basic functions of PPZ :
To explain to the public about zakat and the responsibility of paying zakat. To help payers, both individuals and companies, calculate their zakat. To collect zakat and to increase the collection, both in terms of amount and payers.
All Collection is immediately bank-in into the Baitulmal account (of the Federal Territory Islamic Council). Apart from the above mentioned responsibilities PPZ is also responsible in producing daily, monthly, quarterly and yearly reports, both for the management and Council use.
Style of Operation: The guiding philosophy in doing work at PPZ is to make the zakat payers feel that zakat payment is an ibadah or duty that is easy to perform; that helps to purify their wealth and soul; and can give them a great feeling of satisfaction and relief. PPZ focuses on reaching out to the Muslim community and reminding them of their religious duty. Talks, pamphlets, posters, explanations and reminders through the media or through direct mailing to prospects are some of the methods being used by PPZ. PPZ relies more on educating the Muslim public as opposed to using force or the law. Self awareness is more effective and more appealing to the educated public.
Payer's Preference: Most of the payers prefer to pay zakat in the month of Ramadhan so that they can pay both their zakat mal (zakat on wealth) and zakat fitr (zakat on self); and in the month of January, since a person could get their rebate from income tax payment for that particular year. These 2 months constitute 65% of yearly collections. Normally prayers prefer to come to the zakat counter to pay zakat because they like the act of akad (solemnisation) even though it is not a must. Other would pay through the mail, salary deduction, sending a representative to the zakat center and paying at selected bank counters where major banks in the country have been appointed as agents by the Islamic Council.
Islamic Banking Concepts
Al-Wadiah Yad Dhamanah (savings with guarantee)
Al-Mudharabah (profit-sharing)
Al-Musyarakah (joint venture)
Al-Murabahah (cost plus)
Bai’ Bithaman Ajil (deferred payment sale)
Bai’ al-Dayn (debt trading)
Al-Ijarah Thumma al-Bai’ (leasing and subsequently purchase)
Al-Ijarah (leasing)
Al-Qardhul Hassan (benevolent loan)
Bai’ as-Salam (future delivery)
Bai’ Al-Istijrar (supply contract)
Al-Kafalah (guarantee)
Ar-Rahnu (collateralised borrowing)
Al-Wakalah (nominating another person to act)
Al-Hiwalah (remittance)
As-Sarf (foreign exchange)
Al-Ujr (fee)
Al-Hibah (gift)
List of Financial Institutions Offering Islamic Banking Services
Islamic Banks
1.Bank Islam Malaysia Berhad
2.Bank Muamalat Malaysia Berhad
Commercial Banks
1.Affin Bank Berhad
2.Alliance Bank Malaysia Berhad
3.Arab-Malaysian Bank Berhad
4.Bank Utama (Malaysia) Berhad
5.Citibank Berhad
6.EON Bank Berhad
7.Hong Leong Bank Berhad
8.HSBC Bank Malaysia Berhad
9.Malayan Banking Berhad
10.OCBC Bank (Malaysia) Berhad
11.Public Bank Berhad
12.RHB Bank Berhad
13.Southern Bank Berhad
14.Standard Chartered Bank Malaysia Berhad
Finance Companies
1.Affin-ACF Finance Berhad
2.Alliance Finance Berhad
3.Arab-Malaysian Finance Berhad
4.EON Finance Berhad
Merchant Banks
1.Affin Merchant Bank Berhad
2.Alliance Merchant Bank Berhad
3.Arab-Malaysian Merchant Bank Berhad
4.Aseambankers Malaysia Berhad
5.Malaysian International Merchant Bankers Berhad
1.Abrar Discounts Berhad
2.Affin Discount Berhad
3.Amanah Short Deposits Berhad
4.CIMB Discount House Berhad
5.KAF Discounts Berhad
6.Malaysia Discount Berhad
7.Mayban Discount Berhad
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