SCHOOL OF BUSINESS AND SOCIAL SCIENCES

BBF 3013: ISLAMIC FINANCIAL SYSTEM

INDIVIDUAL ASSIGNMENT
ISLAMIC FINANCIAL MARKETS: ACHIEVEMENT, PROSPECTS AND CHALLENGES

PREPARED BY:
ANDI NUR ELISYA SYAHIRA BINTI BAHRI
AIU18092007

PREPARED FOR:
LECTURE DR. SHAHRIZA OSMAN

SUBMISSION DATE:
26TH OCTOBER 2020
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Introduction

Islamic banking, also known as Islamic finance or sharia-compliant finance, refers to

the Shariah (Islamic law) adherent finance or banking activities. The sharing of gains and
expenses, and the prohibition of the collection and payment of interest by lenders and investors
are two basic concepts of Islamic banking. Islamic banking concepts are drawn from the
fundamental religious text of Islam, the Qur'an. In Islamic banking, all transactions must
comply (based on the teachings of the Qur'an) with Shariah, the legal code of Islam. The laws
regulating commercial transactions are referred to as Fiqh al-muamalat in Islamic banking.

With an expected annual growth rate of between 10 and 15 percent, the Islamic financial
services sector, including Islamic financial markets (IFMs), has expanded steadily and has a
presence in over 75 countries. It is founded on Islamic finance (IF) concepts, such as the
prohibition of Riba (interest), Gharar (excessive uncertainty), and compliance with the sharing
of benefit and loss, ethical investments, and backing of properties. It focuses primarily on the
issues and problems related to IFMs and Islamic financial products and services. Specifically,
four major issues are highlighted and discussed, namely the evolution of the Islamic finance
sector, the fundamental concepts of the IF, IFMs (structures and products), the International
Islamic Financial Market (IIFM), and the challenges facing the entire industry. Finally, the
Malaysian case is given special consideration, as Malaysia is undeniably the leader of Islamic
capital markets and of Islamic financial engineering.

Founded in Egypt in 1963, the Mit-Ghamr Savings Bank is widely referred to in the
modern world as the first example of Islamic banking. When Mit-Ghamr loaned cash to firms,
it did so on a model of profit-sharing. Due to political considerations, the Mit-Ghamr project
was closed in 1967, but the bank exercised a great deal of caution during its operating year,
only approving about 40 percent of its business loan applications. In economically good times,
however, the default ratio of the bank was said to be nil.

While an Islamic bank is completely run using Islamic principles, an Islamic window
refers to services offered by a traditional bank that are based on Islamic principles. Through
dedicated windows or parts, some commercial banks offer Islamic banking services. Islamic
banking institutions tend to be more averse to risk in their investment activities in general. As
a consequence, they usually avoid companies that may be connected to economic bubbles.
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Body / Content

Islamic finance windows are Islamic units established to provide Shariah-based

banking services by conventional banks and foreign financial institutions. The subject of
Islamic finance in general and Islamic financial markets in particular, on both theoretical and
practical sides, has been studied by a considerable body of study. It also analyses Shariah-
compliant financial products and services based on sukuk, as well as Islamic financial market
infrastructure. Islamic finance industry growth Islamic finance applies to financial transactions
that are in compliance with Islamic or Shariah values.

Modern Islamic finance has existed since the 1960s, driven mainly by: -the 1.6 billion
Muslims, as well as a large number of non-Muslim clients around the world seeking
diversification in Islamic financial products and services; -Western financial institutions
provide Islamic products and services through Islamic windows and subsidiaries;- Shariah-
compliant banking technology contributes to reducing the number of unbanked individuals in
the Muslim world, creating new goods, encouraging more effective operations and
strengthening prudential oversight and regulation; -increasing demand in many parts of the
world for Shariah-compliant financial goods.

Prohibition of Riba

In Islamic banking, Riba is a term which refers to charged interest. It has also been
called usury, or the charging of interest rates that are unreasonably high. There is also another
kind of riba that applies to the simultaneous exchange of products of unequal amounts, or
values, according to most Islamic jurists.

Applying the principle of Qard Hasan in a correct manner that fulfills the contracting
parties will certainly benefit from Shariah criteria. Qard al-Hasan, an Islamic word for finance,
refers to an interest-free loan. In the Qard al-Hasan deal, the borrower repays the principal
amount of the loan without interest, mark-up or a share in the business for which the loan was
used. This item is consistent with the prohibition against riba by Sharia because the borrower
does not pay the lender for the advanced money.
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Prohibition of Gharar

In Islamic finance, Gharar is an important term and is used to assess the validity of a
risky investment relating to short sales, gambling, the sale of products or properties of unknown
quality, or any contract that is not explicitly drawn up. In the modern lexicon, the word Gharar
has become more of a general expression. Sales or financial transactions known as Gharar are
measured in relation to the degree of confusion between the parties and the degree of ambiguity
that the goods or payments will be delivered. Under Islam, Gharar is usually banned because
Islamic finance has strict rules against transactions that are highly ambiguous or that may cause
some injustice or deceit against any of the parties.

Gharar is used in finance as part of derivative trades, such as forwards, futures and
options, as well as in short sales and other forms of speculation. In Islamic finance, because of
the ambiguity involved in the future delivery of the underlying asset, most derivative contracts
are prohibited and considered invalid.

Prohibition of Maysir

Literally, Maysir means gambling. Islam also categorically banned any of the gambling
types. Maysir refers to the simple acquisition by chance of capital, whether or not it is not that
it deprives the other person on the right. Maysir is also described as gambling, to any type of
business operation in which monetary benefits are extracted from mere opportunity, conjecture
or hypothesis.

In Islamic finance, Maysir is forbidden since it produces wealth from chance instead of
productive action. However, since commercial risk-taking is an integral part of Islamic finance
transactions, Sharia does not forbid the normal commercial speculation involved in a business
enterprise. Due to the prohibition against Maysir, such financial instruments are not commonly
used in Islamic finance, such as options, futures, and other derivatives.

Prohibition of other practices and unethical investments and products

In order to increase the availability of essential goods and services, retaining and withdrawing
prices, or attempting to manipulate prices by triggering new shortages of supply. A quick sale
is a selling in which the seller does not actually own the products sold at the time of sale
execution of the offer, in order to buy them back at a cheaper price later. Changes in costs an
investor with a short position prefers an investor, while an investor with a long position benefit
from rising from rates.
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Asset Backing

The idea of asset-backing is prevalent from an Islamic viewpoint, thus discouraging

financial speculation as it is not permissible in Islam. Ethical, sustainable and environmentally
friendly finance is also encouraged by Sharia law when encouraging financial inclusion.
Therefore, in line with Islam's key goals of stressing social justice and fostering financial
stability, these clear built-in strengths form the foundation of the Islamic financial system,
gaining even greater understanding of the distinct existence of Islamic finance.

Islam, on the other hand, does not, except in some special circumstances, accept money
as an object of exchange. Money has no inherent utility; it is just a means of exchange; each
unit of money is 100% equal to another unit of the same denomination, so there is no room for
profit to be made for the exchange of these units. Benefit is created when something is sold for
money with intrinsic utility or when various currencies are exchanged, one for another. Interest,
therefore, forbidden, is the profit gained by trading in money or the papers representing them.
Consequently, unlike traditional financial institutions, Islamic funding is often focused on
liquid assets that produce real assets and inventories.

Sanctity of contracts

Islamic law usually accepts the definition of contractual sanctity, which is based on the
premise that any contract must be fulfilled and that each contracting party is obliged to honour
what has been agreed accordingly. The teachings of Islam, maintain contractual duties and
information disclosure as a sacred responsibility. This function is designed to reduce the risk
of symmetrical data and the risk of moral hazard.
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Profit sharing, risk sharing and other shariah-compliant principles

(a) Musharakah

Musharakah is a partnership between two or more parties that adds to the partnership
between a corporation's resources and divides the net profit and loss pro rata. In the case of real
estate or land, Within the Bank sets an imputed rent and shares it as agreed in the Forward.
This is commonly used in investment projects, letters of credit, and the purchase of real estate
or assets.

(b) Murabahah

This description relates to the selling of goods at a price that entails a profit margin
accepted by both sides. The price of purchasing and selling, other expenses, and profit at the
time of the sale agreement, the margin must be explicitly specified. The bank is remunerated
in the form of the profit margin for the time value of its cash. This is a loan for fixed income,
with a fixed rate of profit for the purchase of a real asset (such as real estate or a vehicle) by
the profit margin, calculated.

(c) Ijarah

Ijarah means rent, lease or salary. Generally, the notion of Ijarah implies selling the
fixed price or salary, the profit of use or service. In accordance with this definition, the Bank
makes available to the customer, for a fixed time and at a fixed price, the use of the operation
of properties or facilities such as plants, office automation, motor vehicles.

(d) Istina

Istisna is the second form of selling where a good is transacted until it is transacted life
comes into being. It means ordering a product to produce for the customer a particular product.
If the manufacturer undertakes to produce the products, Istisna's transaction comes into being.

Finally, social and economic growth is the ideal of the new IF, which aims to improve
the connection between the real and financial sectors of the economy. Thus, capital must go
through the real productive sector in a Shariah-compliant environment before it comes back as
capital to investors. So both the associated costs and benefits are shared with parties involved
in a financial transaction.
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Islamic financial markets

Security transactions between investors, financial intermediaries, brokers, dealers and

other licenced financial agents also play a key role in coordinating security transactions, i.e.
getting buyers and sellers together and facilitating the execution of their orders, enabling
individual savers to diversify investments in return for a brokerage fee or commission payment.
Thus, while conventional and Islamic financial markets are very similar, the issue of Shariah
compliance with Shariah-compliant investors' practices, products and services remains a major
challenge, especially in such a rapid and changing financial environment. Islamic financial
markets (IFMs) are structured markets, similar to their conventional counterparts, where shares
and shariah-compliant financial products are bought and sold under fixed rules and are usually
governed by some sort of regulatory body. In the first place, shares and other financial
instruments are sold to investors in the primary or new issue market, since it is the market in
which businesses and governments raise capital.

Islamic financial products and services

To meet consumer needs and offer sharia-compliant alternatives to commonly available

traditional solutions, Islamic financial companies have produced several different products.
Debt-based loans are forbidden in Islamic economics (interest-based lending and borrowing).
If we have grown up in a society where debt finances every house, vehicle, and other big
purchase, we can wonder how individuals and companies would operate without it. But to do
so is, in truth, necessary. Contract goods are available as part of the Islamic finance system to
promote the selling or lease of a property (for example, a home or car).

"Islamic bonds" are sometimes referred to as Sukuk, but they are somewhat different
from traditional bonds that favor one group more than another and can therefore not promote
social justice. Sukuk are shares based on an asset; certificates (sold to investors) reflecting
ownership of a tangible asset, operation, project, undertaking or joint venture. Sharia-compliant
must be any commodity that supports a sukuk.
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Conclusion

Promoting social justice and economic prosperity is a primary reason for enforcing these laws
in Islam. Thus, the Islamic code of conduct plays a crucial role in preserving and fostering a
harmonious state in society, while trying to make the world a better place to live. In this sense,
Islam sees the world's natural resources, and indeed human life itself, as Allah 's trust. As we
step more and more into exponential growth, these laws also enable believers to efficiently
handle resources and possibilities for future generations to come. Ethics, from the perspective
of Sharia, dominates economics and not the other way around. Business ethics is an important
part of Sharia, which has some concepts and pillars on which ethical values are based. The
fundamental principles of business ethics can be summarized here as follows: honesty,
integrity, dignity, allegiance and justice.