http://www.scribd.

com/doc/26805571/Chapter-01
Question 1 Direct transfer of funds from supply of funds to users of find result in low
level of funds. Why ?
Question 2 : Foreign listing affect cost of capital of company. Banking interest free
transaction. How it works. Differences Islamic and conventional banking ?
Differences Islamic and conventional banking
One must refrain from making a direct comparison between Islamic banking and
conventional banking (apple to apple comparison). This is because they are extremely
different in many ways. The key difference is that Islamic Banking is based on Shariah
foundation. Thus, all dealing, transaction, business approach, product feature, investment
focus, responsibility are derived from the Shariah law, which lead to the significant
difference in many part of the operations with as of the conventional
The foundation of Islamic bank is based on the Islamic faith and must stay within the limits
of Islamic Law or the Shariah in all of its actions and deeds. The original meaning of the
Arabic word Shariah is the way to the source of life and is now used to refer to legal system
in keeping with the code of behaviour called for by the Holly Quran (Koran). Amongst the
governing principles of an Islamic bank are :
* The absence of interest-based (riba) transactions;
* The avoidance of economic activities involving oppression (zulm)
* The avoidance of economic activities involving speculation (gharar);
* The introduction of an Islamic tax, zakat;
* The discouragement of the production of goods and services which contradict the Islamic
value (haram)
On the other hand, conventional banking is essentially based on the debtor-creditor
relationship between the depositors and the bank on one hand, and between the borrowers
and the bank on the other. Interest is considered to be the price of credit, reflecting the
opportunity cost of money.
Islamic law considers a loan to be given or taken, free of charge, to meet any contingency.
Thus in Islamic Banking, the creditor should not take advantage of the borrower. When
money is lent out on the basis of interest, more often that it leads to some kind of injustice.
The first Islamic principle underlying for such kind of transactions is deal not unjustly, and
ye shall not be dealt with unjustly [2:279] which explain why commercial banking in an
Islamic framework is not based on the debtor-creditor relationship.
The other principle pertaining to financial transactions in Islam is that there should not be any
reward without taking a risk. This principle is applicable to both labor and capital. As no
payment is allowed for labor, unless it is applied to work, there is no reward for capital unless
it is exposed to business risk.
Thus, financial intermediation in an Islamic framework has been developed on the basis of
the above-mentioned principles. Consequently financial relationships in Islam have been
participatory in nature.
Lastly, for the interest of the readers, the unique features of the conventional banking and
Islamic banking are shown in terms of a box diagram as shown below:-
Conventional Banks Islamic Banks
1. The functions and operating modes of
conventional banks are based on fully
manmade principles.
1. The functions and operating modes of
Islamic banks are based on the principles of
Islamic Shariah.
2. The investor is assured of a
predetermined rate of interest.
2. In contrast, it promotes risk sharing
between provider of capital (investor) and
the user of funds (entrepreneur).
3. It aims at maximizing profit without any
restriction.
3. It also aims at maximizing profit but
subject to Shariah restrictions.
4. It does not deal with Zakat. 4. In the modern Islamic banking system, it
has become one of the service-oriented
functions of the Islamic banks to be a Zakat
Collection Centre and they also pay out
their Zakat.
5. Lending money and getting it back with
compounding interest is the fundamental
function of the conventional banks.
5. Participation in partnership business is
the fundamental function of the Islamic
banks. So we have to understand our
customers business very well.
6. It can charge additional money (penalty
and compounded interest) in case of
defaulters.
6. The Islamic banks have no provision to
charge any extra money from the
defaulters. Only small amount of
compensation and these proceeds is given
to charity. Rebates are give for early
settlement at the Banks discretion.
7. Very often it results in the banks own
interest becoming prominent. It makes no
effort to ensure growth with equity.
7. It gives due importance to the public
interest. Its ultimate aim is to ensure
growth with equity.
8. For interest-based commercial banks,
borrowing from the money market is
relatively easier.
8. For the Islamic banks, it must be based
on a Shariah approved underlying
transaction.
9. Since income from the advances is
fixed, it gives little importance to
developing expertise in project appraisal
and evaluations.
9. Since it shares profit and loss, the
Islamic banks pay greater attention to
developing project appraisal and
evaluations.












Question 3 : Monetary stability BNM. Compart M2, controllability measurability liquidity.
How control ?
Monetary stability BNM :
The Bank Negara Malaysia is obliged to promoting monetary stability and sound
financial structure and ensure that the supply of money and the volume of credit are
sufficiently elastic to the demands is the domestic economy, without undue pressure on
resources.
As the country's monetary authority, Bank Negara Malaysia is responsible to maintain
monetary stability. Monetary stability refers to the stability of the value of the Malaysian
currency, the ringgit. The best way to ensure that the value of the ringgit is preserved is by
ensuring price stability, that is, to ensure that inflation in the country remains low and stable.
By maintaining monetary stability through appropriate changes in monetary policy, Bank
Negara Malaysia ensures that inflation is kept low and that the purchasing power of the
ringgit is not diminished.
Compart M2,
As the main component of money, deposits play significant roles in the economy. The
components of money supply in the economy can be classsifeled as M1, M2 and M3.
- M1 is currency (coins and bills) plus demand deposits (such as checking accounts).
- M2 is M1 plus savings accounts and time deposits under $100,000.
10. The conventional banks give greater
emphasis on credit-worthiness of the
clients.
10. The Islamic banks, on the other hand,
give greater emphasis on the viability of
the projects.
11. The status of a conventional bank, in
relation to its clients, is that of creditor and
debtors.
11. The status of Islamic bank in relation to
its clients is that of partners, investors and
trader, buyer and seller.
12. A conventional bank has to guarantee
all its deposits.
12. Islamic bank can only guarantee
deposits for deposit account, which is
based on the principle of al-wadiah, thus
the depositors are guaranteed repayment of
their funds, however if the account is based
on the mudarabah concept, client have to
share in a loss position..
M2 = M1 + quasi money
Quasi money = (savings deposits + fixed deposits + NIDs issued + Repurchase Agreements)
of the private sector at commercial banks.
- M3 is M2 plus larger time deposits and similar institutional accounts.
M1 includes only the most liquid financial instruments, and M3 relatively illiquid
instruments.
controllability measurability liquidity. How control ?

Question 4 : Islamic concept of money
The free market principle is an Islamic principle. Islam considers commodities with
intrinsic value as currency. Following are some examples of commodities used as currency:
Gold, Silver, Rice, Dates, Wheat, Barley and Salt. Paper money or electronic money can be
used as long as it is backed by one of these commodities at a fixed exchange rate (in other
words the paper is just a contract stipulating that the bearer can redeem the paper for a fixed
measure (weight) of that particular commodity).
Money in the Islamic economy is a mean to facilitate transactions. In Islam, the role
of money is to serve as a medium of exchange and unit of account, but not as a store of value
(accumulating wealth).
In Islam, Money is an instrument of wealth. However, money belongs only to Allah.
But, its utilization is entrusted to human beings to manager so as to fulfil needs. Our needs
include the acquisition of shares in exchange in exchange for money that is to store the value
of wealth.
Money is the lubrication which enables the efficient transfer of resources. Islam
encourages Muslims to invest their money and to become partners on orther to share profits
and risks in business instead of becoming creditors.
Question 5 : Interest? Price? Riba? Why is Riba prohibited ? Different between Riba and
trade ?
- Interest is a fee paid by a borrower of assets to the owner as a form of compensation
for the use of the assets. It is most commonly the price paid for the use of :
Borrowed money
Money earned by deposited funds.
When money is borrowed, interest is typically paid to the lender as a percentage of the
principal, the amount owed to the lender. The percentage of the principal that is paid as a fee
over a certain period of time (typically one month or year) is called the interest rate. A bank
deposit will earn interest because the bank is paying for the use of the deposited funds.
Interest is compensation to the lender, for a) risk of principal loss, called credit risk;
and b) forgoing other investments that could have been made with the loaned asset. These
forgone investments are known as the opportunity cost. Instead of the lender using the assets
directly, they are advanced to the borrower. The borrower then enjoys the benefit of using the
assets ahead of the effort required to pay for them, while the lender enjoys the benefit of the
fee paid by the borrower for the privilege. In economics, interest is considered the price of
credit.
Interest is often compounded, which means that interest is earned on prior interest in
addition to the principal. The total amount of debt grows exponentially, most notably when
compounded at infinitesimally small intervals, and its mathematical study led to the
discovery of the number e.[3] However, in practice, interest is most often calculated on a
daily, monthly, or yearly basis, and its impact is influenced greatly by its compounding rate
Price : In ordinary usage, price is the quantity of payment or compensation given by one
party to another in return for goods or services.
In modern economies, prices are generally expressed in units of some form of
currency. (For commodities, they are expressed as currency per unit weight of the
commodity, e.g. euros per kilogram.) Although prices could be quoted as quantities of other
goods or services this sort of barter exchange is rarely seen. Prices are sometimes quoted in
terms of vouchers such as trading stamps and air miles. In some circumstances, cigarettes
have been used as currency, for example in prisons, in times of hyperinflation, and in some
places during World War 2. In a black market economy, barter is also relatively common.
Price sometimes refers to the quantity of payment requested by a seller of goods or
services, rather than the eventual payment amount. This requested amount is often called the
asking price or selling price, while the actual payment may be called the transaction price or
traded price. Likewise, the bid price or buying price is the quantity of payment offered by a
buyer of goods or services, although this meaning is more common in asset or financial
markets than in consumer markets.
Economists sometimes define price more generally as the ratio of the quantities of
goods that are exchanged for each other.
Riba can be roughly translated as "Usury". Riba is forbidden in Islamic economic
jurisprudence (fiqh) and considered as a major sin. Simply, unjust gains in trade or business,
generally through exploitation.
While the term "Riba" is often equalised as "Interest" by many, the Qur'an actually described
"Riba" as a general term, that is not only limited to as a financial term. An excerpt from Surat
Al-Baqarah from Ayah 275 stated:
They say: 'buying and selling is but a kind of usury' - while God has made buying and
selling lawful and usury unlawful.
"Riba is pronounced and written similary to "Rabbi" that means
"Lord"/"Caretaker"/"Master". Implying that an unwilling Debt Bondage is a form of Riba.
There are two types of riba discussed by Islamic jurists: an increase in capital without
any services provided and speculation (Maisir), which is prohibited by the Qur'an, and
commodity exchanges in unequal quantities, also prohibited in the Qur'an.
Riba is prohibited just to prevent the creation of "extra liability/demand" because
that is fake and "does not exist" physically, this artificial "extra liability/demand" creates
scarcity of the produce in the society and unjustly accumulation of the produce in few hands.
Riba (interest, usury) is a mechanism and dangerous weapon that has a power to get hold of
assets/properties of individuals, enterprises, and nations deceitfully. This is unfair and against
the nature, so ALLAH (SWT) banned Riba (interest, usury) very strictly to stop this criminal
action.
Nature is the Limit in Islam; any thing not natural is prohibited, stopped, and declared
illegal. The above economic reasons are the only base for the prohibition of Riba, ALLAH
(SWT) has allowed everything that is natural but given its strict judgment to stop any
behavior, agreement, and practice that is not natural.
Different between Riba and trade
There is a clear distinction between trade and riba under Syariah whereby trading is
welcomed rida is prohibited. Trade leads to profit and is totally different from riba as
explained in the following table.
Riba Trade (profit)
Riba : is return on capital or fund
borrowed.
Profit : is return from doing busineww and
profit. Return on profit = net profit + sharing
rate
Riba is the premium paid by the borrower
to the lender along with principal amount
as a condition for the loan
Profit is the diffirence between the value of
production and the cost of production
Riba is prefixed and hence, there is no
uncertainty on the part of either the givers
or the takers of the loan
Profit is post-determined, and hence, its amount
is not known until the activity is done
Riba cannot be negative, it can at best be
very low or zero
Profit can be postive, zero or even negative
From the Syariah point of view, it is
haram (forbidden) in Islam
From the Syariah point of view, it is haram
(forbidden) if all the Syariah rules are followed
for trade in Islam

Question 6 : purpose of motivaty repulars to improve interet casing bank saveing treasuracy
bill?
Interest rate regulations were second competitive obstacles for banks. The
basic principle of the banking regulations was to reduce competitive advantage
among banks. With less competition the chance of failure of banks will be
less.The cost to consumer of the great profits to bank earned because of the lack
of f r ee mar ket compet i t i on was j us t i f i ed by t he gr eat er economi c
s t abi l i t y. I t eventually results that the investors pulled their money out of the banks and
put it into the money market security accounts offered by many brokerage firms.
Question 7 : Constast investors use of capital and money market Eslamic unit trust.
Question 8 : reason for resticting the degree to which bank can engafe in securities
BBA issue arise in disputes cases between costomers and barket.
BBA : bai bjil bitahman