FEM 3204 : 3 (2+1) Perancangan Kewangan Dalam Pasaran Global Financial Planning in a Global Market HUSNIYAH BT. ABD. RAHIM BILIK A2-14 Jabatan Pengurusan Sumber & Pengajian Pengguna Fakulti Ekologi Manusia

Chapter 4 Financial Information Searching and Services

Secured Financial Institutions Conventional banking Involves deposits by clients, offer loan to individuals and businesses, offer investment in equities and unit trust Involves deposits by clients, offer loan to individuals and businesses, offer investment in equities and unit trust Give out return in terms of interest – the rate depending on the types of accounts (savings/deposit/ current account) Give out return in terms of interest – the rate depending on the types of accounts (savings/deposit/ current account)

Secured Financial Institutions Islamic banking Islamic banking refers to a system of banking or banking activity that is consistent with Islamic law (Sharia) principles and guided by Islamic economics Islamic banking has the same purpose as conventional banking except that it operates in accordance with the rules of Shariah, known as Fiqh al-Muamalat (Islamic rules on transactions)

Secured Financial Institutions The basic principle of Islamic banking is the sharing of profit and loss and the prohibition of riba (usury) The basic principle of Islamic banking is the sharing of profit and loss and the prohibition of riba (usury) Islamic law prohibits usury, the collection and payment of interest, also commonly called riba in Islamic discourse Islamic law prohibits usury, the collection and payment of interest, also commonly called riba in Islamic discourse Amongst the common Islamic concepts used in Islamic banking are profit sharing (Mudharabah), safekeeping (Wadiah), joint venture (Musharakah), cost plus (Murabahah) and leasing (Ijarah) Amongst the common Islamic concepts used in Islamic banking are profit sharing (Mudharabah), safekeeping (Wadiah), joint venture (Musharakah), cost plus (Murabahah) and leasing (Ijarah)

Secured Financial Products Islamic Banking (cont.) To attract depositors, it needs to pay interest To attract depositors, it needs to pay interest But since the interest is prohibited under the shariah rule, it introduce a profit sharing principle But since the interest is prohibited under the shariah rule, it introduce a profit sharing principle The return on savings accounts in Malaysia’s Islamic banks comes from a profit-sharing contract with the bank The return on savings accounts in Malaysia’s Islamic banks comes from a profit-sharing contract with the bank

Secured Financial Products However, this could cause big fluctuations if the bank posts a loss or higher-than-expected profits However, this could cause big fluctuations if the bank posts a loss or higher-than-expected profits To overcome this problem, Malaysian banks use a special profit reserve that allows them to keep these payouts relatively steady and similar to conventional interest rates To overcome this problem, Malaysian banks use a special profit reserve that allows them to keep these payouts relatively steady and similar to conventional interest rates

Secured Financial Products Conventional banking Islamic banking Rate of returnInterestWadiah (token/appreciation/ hibah) Mudharabah (Indicative profit rate) Both have thesame rate

Secured Financial Products Wadiah (Safekeeping) In Wadiah, a bank is deemed as a keeper and trustee of funds person deposits funds in the bank and the bank guarantees refund of the entire amount of the deposit, or any part of the outstanding amount, when the depositor demands it A person deposits funds in the bank and the bank guarantees refund of the entire amount of the deposit, or any part of the outstanding amount, when the depositor demands it

Secured Financial Products The depositor, at the bank's discretion, may be rewarded with a hibah (gift) as a form of appreciation for the use of funds by the bank The depositor, at the bank's discretion, may be rewarded with a hibah (gift) as a form of appreciation for the use of funds by the bank The bank compensates depositors for the time-value of their money (i.e. pays returns) but refers to it as a gift because it does not officially guarantee payment of the gift The bank compensates depositors for the time-value of their money (i.e. pays returns) but refers to it as a gift because it does not officially guarantee payment of the gift The depositors are not entitled to any share of the profits

Secured Financial Products Mudharabah : Saving account or fixed deposit account with ‘profit sharing’ An agreement between a capital provider (depositor) & another party (bank/ entrepreneur), to enable the bank/entrepreneur to carry out business projects, based on a profit sharing basis, of a pre-agreed ratio The losses if any, are borne by the provider of the funds

Secured Financial Products Conventional Banking Islamic Banking Deposit AccountSavings accountWadiah account (safe-keeping) Mudharabah account (profit sharing) ReturnInterestHibah (token or gift in monetary term) Profit sharing based on IPR (indicative profit rate) All have similarreturn

Investment from the Islamic Perspective Shares and bonds results from development in wealth accumulation & security companies Shares and bonds results from development in wealth accumulation & security companies Islam urged its followers to work for a living and not to expect others to contribute/donate to them only Islam urged its followers to work for a living and not to expect others to contribute/donate to them only Muslims have to use their effort to earn for their living & not doing nothing Muslims have to use their effort to earn for their living & not doing nothing Investment is part of a business that needs skills and principal to earn returns Investment is part of a business that needs skills and principal to earn returns

Investment from the Islamic Perspective Basic Principles Prohibition of interest (riba) Requirement of possession (qabd) to transact

Investment from the Islamic Perspective Prohibition of interest (riba) In Islam, money is not viewed as commodity but as a measure of value and a vehicle for acquiring tangible assets The shares contributed by individuals are in the form of money Since money is not viewed as commodity, earning money from money is prohibited, thus interest is prohibited either for the payor or payee

Investment from the Islamic Perspective The prohibition of riba constraints its ability to enter into leverage (financing) on behalf of the fund Interest-bearing investments, such as fixed income funds are not allowable for Islamic investor Islamic bond –’sukuk’

Investment from the Islamic Perspective Requirement of possession (qabd) to transact Syaria’ requires seller to have possession of the asset that is the subject of the transaction, then only they have the right to sell This constrains its ability to enter into conventional futures, derivatives contracts and short sales To comply for Syaria’, commodities that are being sold must be owned by the seller If the investment is in funds that does not employ any leverage, it complies for Syaria’principles

Investment from the Islamic Perspective A syaria’ compliant strategy ( eg. Unit trust, equity) must also comply with syaria’ Eg in equity fund, the manager must ensure that the companies in which the fund invests do not engage in any activities prohibited by syaria’ Eg. For unit trust, the companies the fund manager chose to invest must also comply with syaria’

Investment from the Islamic Perspective In Malaysia, an Islamic Stockbroking had been set-up that allows investors to invest in securities that are Syaria’ compliance A list of securities had been identified from time to time as ‘halal syariah’ approved and reviewed periodically by the Syariah Advisory Council of the Securities Commission (SC) Halal securities are investments in companies listed on the Bursa Securities whose activities comply with Syaria’ principle

Investment from the Islamic Perspective Non-halal activities include; Manufacturing non-halal goods Trading of non-halal goods Banking and financing involving interest or usury Hotels and resorts involving sale of liquor or alcoholic beverages Gambling, gaming or related activities Activities involving uncertainties (‘gharar’)

Investment from the Islamic Perspective Bursa Securities has launched the Kuala Lumpur Stock Exchange Syariah Index (KLSE SI) – a weighted average index with components comprising 684 companies (as at 16 Jan 2009) identified as Syariah- approved securities by the Syariah Advisory Council (SAC) Refer to updates by Securities Commission ( Islamic Stockbroking (ISB) is open to corporate and individuals, Muslim and non-Muslim, for individuals the minimum age is 18 years old

Risk Management (Insurance/Takaful) The conventional insurance, in its presence form, does not conform to the rules and requirements of Syari'ah due to the following three elements: The conventional insurance, in its presence form, does not conform to the rules and requirements of Syari'ah due to the following three elements: (i) Gharar The unknown or uncertain factors in operation of a contract in life insurance contracts. (ii) Maisir Gambling arises as the consequence of the presence of Gharar, particularly in the case of life insurance. (iii) Riba Interest and other related practices that do not conform to the Syari'ah in the investment activities.

Risk Management An alternative form of cover a Muslim can avail himself against the consequences of catastrophe and disaster is by participating in Takaful schemes. An alternative form of cover a Muslim can avail himself against the consequences of catastrophe and disaster is by participating in Takaful schemes. It is a scheme based on solidarity, shared responsibility and brotherhood among members. Participants of this scheme all agree to mutually help each other by contributing financially on the basis of tabarru' (donation). It is a scheme based on solidarity, shared responsibility and brotherhood among members. Participants of this scheme all agree to mutually help each other by contributing financially on the basis of tabarru' (donation).

Islamic Principles in Risk Management (i) Al-Takaful The pact among a group of people called participants, reciprocally guaranteeing each other against loss or damage that may befall any one of them. The pact among a group of people called participants, reciprocally guaranteeing each other against loss or damage that may befall any one of them. (ii) Tabarru' The agreement by a participant to relinquish as tabarru’ (donation), a certain proportion of the Takaful contribution that he agrees or undertakes to pay, thus, enabling him to fulfill his obligation of mutual help and joint guarantee should any of his fellow participants suffer a defined loss. The agreement by a participant to relinquish as tabarru’ (donation), a certain proportion of the Takaful contribution that he agrees or undertakes to pay, thus, enabling him to fulfill his obligation of mutual help and joint guarantee should any of his fellow participants suffer a defined loss.

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