Bala Shanmugam

Corporate Governance in Islamic Banks

Corporate governance (CG) refers to methods by which a corporation is directed, administered or controlled. CG is important to all corporations, and especially to Islamic banks, as these institutions have a moral dimension to their commercial transactions. The chapter discusses the challenges in CG implementation in Islamic banking using Malaysia as a case study. The chapter further proposes how standardization can be achieved in Islamic banking through better CG model.

Islamic Wealth Management

Wealth management motivate a person to work hard and earn his wealth and also give hope to the poor and needy. Managing wealth disciplines a person to save in order to help himself, his family, and his society financially. Islamic Wealth Management is explained by a system of interrelationships between the tenets of justice, equitable distribution and fairness, and limits of ownership, all governed by the tenets of the moral law. There is always demand for Islamic Wealth Management as there are high net worth individuals and corporates in GGC and globally for diversification of investment to balance the risk of equity swings. Shariah-compliant investment products offer an avenue for Muslims and non-Muslims to invest in ethical responsible funds with an underlying asset.

Comparative Analysis: Islamic Banking Products and Services in Different Countries

This chapter presents a comparative analysis of Islamic banking products and services across major Islamic banking jurisdiction in the world. The chapter further provides similarity and dissimilarity in functions, principles, products and services in Islamic banks across major Islamic banking hub. The chapter discusses Islamic Banking evolution in major jurisdictions in Asia, such as Malaysia, Indonesia, Thailand and Pakistan, and Australia. One key future of the chapter is the updated data and statistics for all countries under discussion.

The Religious Foundations of Islamic Banking

The ideology of an Islamic financial system is based on the Islamic faith and must stay within the limits of Syariah in all of its actions and practices. Syariah is an Islamic religious law which emphasizes on moral, social, ethical and religious factors to promote equality and fairness in the society. The common perception is that the Syariah is merely a collection of do’s and don’ts, or just a code of criminal laws prescribing punishments for certain crimes. Though it covers both, but the scope is much broader and deeper, encompassing the totality of man’s life. The need to understand the Syariah and its sources is very important as it is the foundation of Islamic financial system.

Prohibition of Riba and Gharar in Islamic Banking

Prohibition of Riba (interest), Gharar (uncertainty) and Maysir (gambling) are the fundamental principles of Islamic banking and key differentiators to differentiate it from conventional banking practices. Presence of these elements in financial transactions lead to excessive debt creation, speculation, negative growth and create large disparity between the wealthy and needy. This is against the principles of Islam; hence, there is a strict prohibition to protect the society from the impact of instability, unemployment, inflation, and it promotes economic efficiency and social justice. The economic rationale behind eliminating Riba (interest) is to establish a banking system based on the value of justice, social responsibility, equality, stability and growth. The Islamic banking system encourages risk and return sharing amongst the investor and entrepreneur to share equitable returns based on capital proportion and the services offered. It promotes the theme ‘Banking for Everyone’, whereby there is no discrimination in offering banking services to people of different social standings. The objective is to minimize the gap between rich and poor and to establish socio-economic justice and to achieve other ethical and religious goals.

IT in Islamic Banks

Key areas of discussion in the chapter focus on the role of technology and regulatory compliance as well as how technology intensity affects the performance of the Islamic banks. To capture the recent development of fintech in the banking sector, the chapter provides an insight on the role of fintech in Islamic finance.

Islamic Financing in Practice

Islamic financing is an emerging alternative to conventional banking to meet the specific needs of Muslims for financial products and services that conform to the Syariah (Islamic law) principles. The demand of such products is not only limited to Muslims but among Non-Muslims as well. Islamic financing products are based on risk-sharing, underlying asset-based transactions, involvement in the process of trading, leasing and project financing and so on. Profit and loss sharing (PLS) is viewed as a prominent feature to promote justice and equity in the economy. The financing under Islamic banking from consumer credit to long-term finance for big investment projects is done through the sale or lease of real goods and services via the sales- and lease-based modes of financing (murabaha, ijarah, salam and istisna).

Introduction to Islamic Banking

Islamic banking has emerged as one of the most important alternate forms of funding in the financial world. There has always been a growing demand amongst Muslims for financial products and services that conform to the Syariah (Islamic law). The basic principles underlying Islamic banking transactions are that it must not be tainted with elements of interest and that risk must be shared between banker and customer based on a profit and loss sharing (PLS) principle. Islamic banking is not a new phenomenon and its principle was practiced during the time of Prophet (Saw). Islamic principles merged with creativity and innovation have evolved into a guideline for Islamic banking institutions to meet the financing needs of Muslims and Non-Muslims.

Islamic Deposits in Practice

Deposits and Saving accounts are major source of funds and create financial strength for Islamic banks besides shareholders’ funds. The sources of funds are essential in supporting the liquidity requirements of Islamic banks and to provide financing services. The treatment of Deposits in Islamic bank is similar to conventional banks, that is, it acts as source of funds and is treated as liability in the balance sheet. Islamic banks raise funds generally based on Wadiah, Mudharabah and Wakalah contracts. Islamic banks offer products for savings, current (demand) and investment deposits, structured to comply with Syariah principles. The role of an Islamic bank is to accept deposits and employs some funds for financing purposes or in other profit-making activities. In Islam, savings is termed as a surplus income and it must be invested again in the economy and is facilitated through deposits by Islamic banks. Depositors in Islamic banking are considered as investor or shareholders, and they earn dividends when the investment makes a profit or lose part of their investment in the event there is a loss. There is no pre-determined rate of returns; the profit and loss sharing is based on the pre-agreed sharing ratio.

Islamic Capital Market

The Islamic Capital Market (ICM) is an integral part of Islamic Financial System where Syariah compliant financial assets are transacted. It plays a pivotal role in the growth of Islamic Financial Institutions. It is a market where people, companies, and governments with surplus funds transfer it to people, companies, or governments who have a shortage of funds. It acts as a financial intermediary by channeling money from surplus to deficit unit. The backbone of ICM is Shariah principles. The ICM functions as a parallel market to the conventional capital market for capital seekers and providers. The ICM attracts funds from domestic as well as international sources.