9 - Prospects of Islamic Banking

It is envisaged that the relative market share of the Islamic banks will increase and that the industry will continue to grow nationally, regionally and internationally. At the international level, The “Ten-Year Framework and Strategies” a joint initiative by IRTI, IDB and IFSB provides that the expected future outlook of the industry in the next ten years, among others will be as follows:-

# The Islamic Financial Services Industry (IFSI) could grow to US$1.4 trillion by 2010 and US$2.8 trillion by 2015;

# More to transform into full-fledged Islamic financial system;

# Mergers and acquisitions among Islamic banking players regionally and internationally;

# Growth of Islamic capital market;

# Strengthening demand and supply of Islamic Financial services due to pubic awareness;

# Shari’ah compliance and credibility of the services to maintain to ensure growth sustainability;

# Shari’ah compliant services will continue to attract customers of other faiths due to its transparency;

# Increase research and development investment to accelerate product development for resource mobilisation, liquidity and risk management.

International bodies involves in the development of Islamic banking:-

IIFM (International Islamic Financial Market);

IIRA – International Islamic Rating Agency

LMC – Liquidity Management Centre

IRTI – Islamic Research and Training Institute

GCIBFI – General Council For Islamic Banks and Financial Institutions

AAOIFI – Accounting and Auditing Organisation for Islamic Financial Institution

IFSB – Islamic Financial Service Board.


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8-Brief Development on Islamic Banking in Malaysia (1983-2007)

Malaysia is the first country in the world to have a dual system of banking and finance. When BNM BAFIA was amended in 1993, most conventional banks in Malaysia set-up full-fledged Islamic subsidiary. BNM Financial Sector Master Plan (FSMP) and the MIFC initiatives help spur further the development of Islamic Banking. Development of Islamic banking in Malaysia from 1983-2007 can be traced as follows:-

# Year 1983 - Islamic Banking Act was gazetted with the formation of Bank Islam Malaysia Bhd.

# 4 March 1993 - the Finance Minister allowed BBMB, UMBC and Maybank to open Islamic Banking window (known as SPTF - Skim Perbankan Tanpa Faedah)

# June 1995 – Formation of the Association of Islamic Banking Institute Malaysia (AIBIM)

# 1997 – Establishment of BNM Syariah Advisory Council

# 1 Dec 1998 - the term “Skim Perbankan Tanpa Faedah-SPTF” was changed to “Skim Perbankan Islam-SPI” couple with the issuance of the new Islamic Banking framework (a bank within a bank concept) to take effect on 2nd January, 2001.

# Oct 1999 - Bank Muamalat, as 2nd Islamic Bank in Malaysia was formed due to merger between BBMB and BOC to form Bumiputra-Commerce Bank.

# 31 Dec 2001 - BNM compliance date where SPI players to achieve at least 8% of the bank’s total assets.

# 25 March 2002 - BNM launched Financial Sector Master Plan (FSMP)

# September 2002 - Islamic Banking & Finance Institute Malaysia (IBFIM) was established as the industry owned training and research centre and .

# November 2002 - the Islamic Financial Services Board (IFSB) was established (function like Basel) to ensure soundness and stability of the Islamic financial system as well as paving the way for its global integration.

# 31 Dec 2002 - Total SPI assets recorded 8.9% (RM 68 billion) of total banking assets, while financing stood at 8.1% and deposit at 10.2% respectively.

# 8 Jan 2003 - BNM introduced the generic names for Islamic Banking products where SPI players shall be allowed to use English term without the Arabic term but the product name shall be hyphenated with the letter “ i “ at end of each generic product name.

# March 2004 - Application deadline for application of 3 full-fledged Islamic banking license by foreign parties

# March 2004 – Talk about existing bank need to establish an Islamic subsidiary (IS) by 3 January 2004. This IS will be licensed under Islamic Banking Act (IBA)

# April 2004 - BNM talk about change in the governance of Shariah Consultant.

# June 2004 - BNM announced they have issued Islamic full-fledged banking license to Kuwait Finance House (KFH), Al-Rajhi Investment Bank, Saudi Arabia and Qatar Investment Group.

# July 2004 – BNM announced Islamic banking license approved in principle to Bumiputra Commerce Group and RHB Capital.

# March 2005 – RHB launched RHB Islamic Bank

# May 2005 – Commence Tijari commenced business.

# June 2005 – BNM announced approval of two more Islamic subsidiaries to AmBank and Affin Bank.

# June 2005 - New BNM GP8-i for Islamic Banks issued.

# July 2005 – HLB launched Hong Leong Islamic Bank.

# July 2005 – RHB Capital launched RHB Dow Jones Islamic Index

# Aug 2005 – KFH commenced business.

# Sept 2005 - Deposit Insurance (launched on 1st Sept 05’)

# Sept 2005 - Product Approval Repository System (PARS) introduced by Bank Negara.

#Jan 2006 – BNM issued 4 takaful licences

#Feb 2006 – Inaugral issuance of Sukuk Negara Malaysia Ijarah (SBNMI)

#April 2006 – Affin Islamic bank & EONCAP Islamic Bank commenced operations

#Sept 2006 – Establishement of International Currency Business Unit (ICBU)

#Jan 2007 – Asian Finance Bank (Islamic bank) commenced operations.

For more news, visit http://aibim.com/content/category/8/64/129/

Development of Islamic Banking in global front

# 1996 – Citibank established Citi Islamic Investment Bank (CIIB) to handle Islamic finance deals. Others over the years also followed suits – Standard Chartered Bank, ABM Emro, BNP Paribas, Deutsche Bank, JP Morgan Case, The America La Riba Bank etc.

# February 1999 – Dow Jones launched its Islamic Market Index.

# November 1999 – Financial Times launched the FTSE Global Islamic Index.

# 2002 – HSBC Islamic banking arm, Amanah Finance involved in Malaysia Global Sukuk worth US$600 Million.

# July 2005 – RHB Dow Jones Index launched.

# November 2005 – Lloyds Bank London introduced Islamic products at 22 branches.

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7 - Islamic Banking is a Phenomenon

Islamic banking is a phenomenon that has taken many observers by surprise as it is an alternative interest-free banking option available to the consumer and it makes a lot of business sense at affordable costs. In addition, there are some thirty Islamic banks in operation globally, including the Jeddah-based Islamic Development Bank (IDB) but excluding numerous non-bank Islamic financial institutions.

The first modern experiment with Islamic banking was undertaken in Egypt under cover, without projecting an Islamic image, for fear of being seen as a manifestation of Islamic fundamentalism, which was not acceptable to the ruling political party. This first effort, led by Ahmad El Najjar, took the form of a savings bank based on profit-sharing in 1963. This experiment lasted until 1967 (Ready 1981), by which time there were nine such banks in the country. These banks (which neither charged nor paid interest) invested mostly by engaging in trade and industry, directly or in partnership with others, and shared the profits with their depositors (Siddiqi 1988). Thus, they functioned essentially as saving investment institutions rather than as commercial banks.

The Nasir Social Bank, established in Egypt in 1971, was declared an interest-free commercial bank, although its charter made no reference to Islam or Shari’ah (Islamic law).

The Islamic Development Bank (IDB) was established during 1974, but it was primarily an intergovernmental bank aimed at providing funds for development projects in member countries. The IDB provides fee based financial services and profit-sharing financial assistance to member countries. The IDB operations are free of interest and are explicitly based on Shari’ah principles.

In the seventies, changes took place in the political climate of many Muslim countries so that there was no longer any strong need to establish Islamic financial institutions under cover. A number of Islamic banks, both in letter and spirit, came into existence in the Middle East, e.g., the Dubai Islamic Bank (1975), the Faisal Islamic Bank of Sudan (1977), the Faisal Islamic Bank of Egypt (1977) nd the Bahrain Islamic Bank (1979), to mention a few.

The first Islamic financial institution in Malaysia was the Muslim Pilgrims Savings Corporation set up in 1963 to help people save for performing hajj (pilgrimage to Mecca and Medina). In l969, this body evolved into the Pilgrims Management and Fund Board or the Tabung Haji as it is now popularly known. The Tabung Haji has been acting as a finance company that invests the savings of would-be pilgrims in accordance with Shari’ah, but its role is rather limited, as it is a non-bank financial institution.

The success of the Tabung Haji, however, provided the main impetus for establishing Bank Islam Malaysia Berhad (BIMB), which represents a fully-fledged Islamic commercial bank in Malaysia.

The Bank Islam Malaysia (Bank Islam Malaysia Berhad or BIMB) started operations on July 1, 1983 and was established to assist the financial need of the country’s Muslims and to further extend its services to the population at large.

In 1993, commercial banks, merchant banks and finance companies were allowed to offer Islamic banking products and services under the Islamic Banking Scheme (IBS). These institutions however, are required to separate the funds and activities of Islamic banking transactions from that of the conventional banking business to ensure that there would not be any co-mingling of funds.

In Malaysia, the National Shari’ah Advisory Council additionally set up at Bank Negara Malaysia (BNM) advises BNM on the Shari’ah aspects of the operations of these institutions, as well as on their products and services.

In June 2005, Dow Jones and Company of New York and RHB Securities of Kuala Lumpur, teamed up to launch a new “Islamic Malaysia Index” — a collection of 45 stocks representing Malaysian companies that comply with a variety of Shari’ah based criteria. Three variables (the total debt of an indexed company, its total cash plus interest-bearing securities and its accounts receivables) must each be less than 33% of the trailing 12-month average capitalization, for example.

Reference should also be made to some Islamic financial institutions established in countries where Muslims are a minority. There was a proliferation of interest-free savings and loan societies in India during the seventies (Siddiqi l988).

The Islamic Banking System (now called Islamic Finance House), established in Luxembourg in l978, represents the first attempt at Islamic banking in the Western world. There is also an Islamic Bank International of Denmark, in Copenhagen, and the Islamic Investment Company has been set up in Melbourne, Australia

News on Islamic banking development in the world other than Malaysia.

• The combined assets of Islamic banks jumped by nearly 66 per cent at the end of 2008 despite massive losses suffered by the global banking sector because of the economic crisis, according to a an Arab banking group. From around $350 billion (Dh1.2 trillion) at the end of 2007, the total assets of the world's largest full-fledged Islamic banks surged to around $580bn at the end of 2008, an increase of nearly 66 per cent, the Beirut-based Union of Arab Banks (UAB) said in its monthly magazine, the Arab Banker. Bank Melli Iran remained on the top of the list at the largest Islamic bank at the end of 2008, followed by Al Rajhi Group of Saudi Arabia.

• Sept 29, 2009 - The Korean government submitted a tax proposal to the National Assembly to exempt companies from paying tax on distributions from Ijara and Murabaha, the most common types of sukuk, to help companies sell the notes, the finance ministry said today.

• 23 Sept 2009 - London has become one of the biggest centres for Islamic finance in the world, with five Islamic banks, and many others in the high street offering Islamic financial products, or "windows" as they are known (BBC News)

• Switzerland became the latest Western country to join the booming Islamic finance system, offering a full range of Shari`ah-compliant banking products and services, reported Qatari daily The Peninsula on Friday, November 13. “We are proud to be the first Swiss private bank to offer such a holistic range of opportunities in Islamic finance to the (Middle East) region and on a global scale,” Fidelis M Goetz, Head of Banking Division at Bank Sarasin, told a press conference in the Museum of Islamic Art in Doha.

• CHINA, the new economic powerhouse and one of the world’s fastest growing economies, has set its sights on Islamic banking and finance. The US$3.43 trillion (RM11.11 trillion) economy plans to woo Islamic banking and finance institutions to the country by establishing an Islamic finance hub.Islamic finance, with global assets worth over US$1 trillion (RM3.24 trillion), is now among the fastest growing sectors in international finance.Shenyang, the largest city in northeast China, has started the ball rolling by seeking Malaysia’s expertise in Islamic banking and finance to help establish an Islamic finance centre in the region.If the plan materialises, Shenyang will become the first Islamic banking and financial hub in the country of 1.3 billion people.The plan to establish Islamic finance centre would complement Shenyang Finance Development Target 2010.

• Islamic banking has been on the rise in the Asia-Pacific region, accounting for 60% of the global Islamic banking market. However, despite its rise in the rest of the region, the penetration of Islamic banking in India has been low. This is especially surprising with India having approximately 154 million Muslims and being the second largest Muslim population of the world. As mentioned in the Celent report Rise of Islamic Banking in the Asia-Pacific Region, this is primarily due to a regulatory block which allows Islamic banking to operate only in the form of a Non-Banking Financial Corporation. An amendment in the Banking Regulation Act of India, 1949 is required to allow the Islamic banking system to operate in banks in India.

• According to the quarterly report of De Nederlandsche Bank (DNB) Islamic banking in the Netherlands is on the rise. More and more Dutch financial institutions have an interest in offering Islamic banking. In the Netherlands the potential demand for Islamic banking will rise in the coming years "as a result of a growth in population, the educational and income level of Dutch Muslims," according to DNB. The central bank says that the risk profile of banks deviates from that of traditional banks but the supervision framework is effective, according to the organization.

• 11 June 2009 - Australia could have its first Islamic bank within five years and become an Islamic banking hub if regulatory hurdles can be addressed, government and business leaders say. Assistant Treasurer Nick Sherry said yesterday the Federal Government was committed to making the regulatory framework governing banks flexible enough to accommodate Islamic banking products and services while still protecting consumers.

• France's recently-announced readiness to clear hurdles to Islamic finance reflects a desire to jump on the wagon of the globally-booming industry, analysts believe."It's a strong signal and the players are listening," analyst Emmanuel Volland of the ratings agency Standard and Poor's told Agence France Presse (AFP) on Tuesday, July 22, 2009. France has recently announced plans to adjust its economic and legal frameworks to accommodate Islamic banking activities. Economy Minister Christine Lagarde has briefed Gulf investors on steps "to make (their) activities as welcome in Paris as they are in London and elsewhere." The government is expected to announce fiscal and legal adjustments to accommodate the Shari`ah-compliant industry before the end of July. The modifications will facilitate the issuance of Islamic bonds (Sukuk) and structured real estate transactions

• (MENAFN - Arab News) While the United Kingdom and London in particular may have the pole position in facilitating Islamic finance in Europe, Germany potentially could emerge as an even bigger market for Islamic finance on condition that it gets its act together in several areas especially on introducing enabling legislation and increasing government support. At the first major Islamic finance conference held in Germany and organized by IIR Deutschland in Frankfurt last week, the message was clear that despite the lack of government involvement in the sector, the number of Islamic finance transactions is increasing especially in the real estate and capital markets sectors. "The politicians for their own reasons simply appear not to be interested in facilitating Islamic finance as in the UK," explained Dr. Simon Grieser of the law firm Mayer Brown LLP in Frankfurt.

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6 - Historical view on usury ("riba")

Is Usury (“riba”) and Bank Interest synonymous? Usury is banned among the biggest religions of the world? Can we live in a world without interest? Is there a distinction to be drawn between the term “usury” and “interest” or are they just one and the same thing? What alternatives to interest and usury are opened to the Muslims ….? Let’s look at some historical views on usury.

Usury during Ancient Greek

• Usury existed at all levels of Babylonian Society. Interest rates then varied from 200-500% per annum. If debtor was unable to repay his loan within the time prescribed, the lender has the right to become the master or partial owner of his debtor and family. Debtor will be obliged to work (under bondage) for the lender until debt fully paid off. Usury or “interest” was roundly condemned by ancient Greek philosophers such as Plato and Aristotle. According to them, usury splits society into two distinct classes of wealthy lenders and the poor borrowers.
• During 451-450 BC, Law of the Twelve Tables was established, fixing the rate of interest at about 12 per cent. The 12 per cent rate remained in force until the code of Justinian (AD 533) according to which, the rate of interest had to be agreed upon in consonance with the status of the borrower. According to Roman Law interest was considered as compensation to the lender in the event that the borrower, failed to repay his debt by the agreed due date.

Usury in Hinduism and Buddhism

• Oldest Indian manuscripts against usury found in the Vedic texts of Ancient India (2000-1400 BC) in which the “usurer” (kusidin) is mentioned several times and interpreted as any lender at interest. More frequent and detailed references to usury found in the later Sutra texts (700-100 BC), as well as the Buddhist Jatakas (600-400 BC).
• Sentiments of contempt for usury found:- Vasishtha, a well known Hindu law-maker of that time, made a special law which forbade the higher castes of Brahmanas (priests) and Kshatriyas (warriors) from being usurers or lenders at interest. Also, in the Jatakas, usury is referred to in a demeaning manner: “hypocritical ascetics are accused of practising it”. By the second century AD, however, usury had become a more relative term, as is implied in the Laws of Manu of that time. “Stipulated interest beyond the legal rate being against (the law), cannot be recovered: they call that a usurious way (of lending)” (Jain, 1929: 3-10). This dilution of the concept of usury seems to have continued through the remaining course of Indian history so that today, while it is still condemned in principle, usury refers only to interest charged above the prevailing socially accepted range and is no longer prohibited or controlled in any significant way.
  

Usury in Judaism

• The Law of Moses “Thou shall not give him the money upon Usury nor lend for increase (Lev.25:37). According to the Old Testament, the distress experienced by an individual that forced him to borrow money was a term of Judgment on his past sins. In addition; if a man borrowed money and subsequently failed to repay the debt, he would be considered a wicked man. However, the Old Testament usually sympathized with the poor and the rich were expected to hold their more unfortunate neighbours with benevolent loans (al-Qhad Hassan).
• Criticism of usury in Judaism has its roots in several Biblical passages in which the taking of interest is either forbidden, discouraged or scorned. The Hebrew word for interest is neshekh, literally meaning "a bite" and is believed to refer to the exaction of interest from the point of view of the debtor. In the associated Exodus and Leviticus texts, the word almost certainly applies only to lending to the poor and destitute, while in Deuteronomy, the prohibition is extended to include all money lending, excluding only business dealings with foreigners. In the Leviticus text, the words tarbit or marbit are also used to refer to the recovery of interest by the creditor.
• The Old Testament taught that the charging of interest between Israelites was unlawful. In contrast however, interest was permitted if the transaction involved an Israelite and a foreigner (Ex-JEDT-23). The basic assumption for this distinction between the Jew and the non-Jew was that the Jewish borrower was poor and it was therefore an obligation on his Jewish brother to provide him with an interest free (benevolent) loan. In addition, it also forbids the Jew from being involved in any usurious transaction between Jews in the capacity of witness, agent, mediator or surety. As result of the interpretation, the Jews persisted in charging high interest in their dealings with non-Jews e.g. story of the Merchant of Venice.
  

Usury in New Testament

• Luke 35 ‘But love ye enemies, and do good, and lend hoping for nothing again; and your reward shall be great and ye shall be the children of the Highest for he is kind unto the unthankful and to the evil.” Exodus 22:25 “If thou lend money to any of my people that is poor by thee, thou shalt not be to him as a usurer, neither shalt thou lay upon him usury” Psalm 15 “ He that putteth not out his money to usury, nor taketh reward against the innocent. He that doeth these things shall never be moved”.
• In 1179, a canon of the Third Lateran Council ordained that “Manifest usurers shall not be admitted communion, nor if they die in their sin, receive Christian burial.”From this it is apparent that usury per se and usury under any circumstances were considered as a violation of justice. With passing of time, however, Popes and Council had to deal with new practices (adopted practices introduced by Jews e.g. banking system).
• The position on Usury has remained pervasive through to present-day thinking in the Church, as the indicative views of the Church of Scotland (1988) suggest when it declares in its study report on the ethics of investment and banking: “We accept that the practice of charging interest for business and personal loans is not, in itself, incompatible with Christian ethics. What is more difficult to determine is whether the interest rate charged is fair or excessive.”

Pre-Islamic Arabia

It was customary for one to borrow from another at usurious (high) rates of interest. If the lender did not receive his principal and interest by the agreed due date, he would increase the amount of the debt and the rate of interest payable on it.

Usury in Islam

• When Islam was revealed, among its teachings was the prohibition of usury.
• It was reported that the Prophet Mohammad (PBUH) cursed i) those who took and (ii) paid usury and (iii) those who were witnesses and (iv) writers of usurious contracts. It was also reported that the Prophet said that all of the four types of people mentioned were equal in their sin due to their involvement in usury. Issue on usury, had exhaustively discussed by Muslim Jurists. They had arrived at the view that “Usury occurs when there is surplus on a debt you pay”. In other words, if a borrower repays even one Ringgit more than the principal, this one Ringgit is considered as usury. It should be pointed out that, in Islam not every “surplus” in transaction is prohibited. Surplus which arises from buying and selling is considered legitimate and lawful.
• Important verses of the Quran (muslim holy book) THAT RESULTED in the development of Islamic Banking is noted in article 2- Prohibition of Usury ("Riba") in Islam.

For more details about usury in Christianity and Judaism, please view : http://www.lariba.com/default.htm

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5 - The concept of "Halal"

Every religion has its own set of rules and beliefs. The concept of Halal is one such aspect of food preparation which is quite stringent and strictly followed. Halal is an Arabic word meaning lawful or permitted. It is what Sharia allows, and based on the General Guidelines for Use of the Term Halal - ( CAC/ GL 24-1997 1 ) issued by the Secretariat of the Joint Food and Agriculture Organisation of the United Nations ( FAO )/ World Health Organisation Food Standard Programme, halal food is defined as food fulfiling the following conditions:

• Does not consist of or contain anything which is considered to be unlawful;
• Has not been prepared, processed, transported or stored using any appliance or facility that was not free from anything unlawful;
• Has not in the course of preparation, processing, transportation or storage been in direct contact with any food that fails to satisfy the above two conditions;
• In addition, Halal food can be prepared, processed or stored in different sections or lines within the same premises where non-Halal foods are produced, provided that necessary measures are taken to prevent any contact between Halal and non-Halal foods.

Halal foods can also be prepared, processed, transported or stored using facilities that have been previously used for non Halal foods provided that proper cleaning procedures have been observed.

Food of plant origin
• Intoxicating and hazardous plants except where the toxin or hazard can be eliminated during processing

Alcoholic drinks• All forms of intoxicating and hazardous drinks

Food additives
• All food additives derived from the above.

Slaughter

Slaughtering of lawful animals is also regulated. This is explained by the guideline that all lawful land animals should be slaughtered in compliance with the rules laid down in the recommended Code of Hygienic Practice for fresh meat ( CAC/ RCP 11, Rev. 1-1993) and the following requirements:

• The person should be a Muslim who is mentally sound and knowledgeable of slaughtering procedures;
• The animal to be slaughtered should be lawful according to Islamic law;
• Both animal and the slaughterer must face the qibla (or qiblat), the direction in which the Holy Kaaba is located, when slaughtering;
• The animal to be slaughtered should be alive or deemed to be alive at the time of slaughtering;
• The slaughtering device should be sharp and should not be lifted off the animal during the slaughter act;
• The slaughter act should sever the trachea, esophagus and main arteries and veins of the neck region;
• All food should be prepared, processed, packaged, transported and stored in such a manner that it complies with Halal definition mentioned above. In short, production of halal products requires certain raw materials, additives, process, handling and transportation to meet the term of Halal as mentioned. In addition, the food industry should have a good system in order to assure that the products meet this requirement forever and no mistake can be made during the production period.

Interesting article on "Response of Muslim Council of Britain to the Farm Animal Welfare Council (FAWC) of UK"
FAWC of UK has came-up with a statement that slaughtering without pre-stunning is unacceptable and that the Government should repeal the current legislation” is misleading and is not based on objective evidence (Para 194 states, it is difficult to measure pain and distress during slaughter process in an objective matter. FAWC ignored the work of Grandin and Prof. Schulze, which can be summarized as follows:-

Grandin finding:

a) Features that keep the animals calm and reduce stress

Applicable to both religious as well as mainstream slaughter after stunning:
• Design features in the slaughter house (lair age, non-slippery flooring, solid walls, non-reflective surfaces, lowering of noise);
• Use of Upright Body and head restraint systems;
• Automated conveyor track;
• If handled gently and calmly, cattle enter voluntarily into the box;
• Cattle will place their heads in a well-designed head restraint.
• Device that is properly operated by a trained operator.

b) Pain perception during incision:

• Use of very sharp knife, at least twice as long as width of the neck;
• Adequately trained, experienced operator;
• Swift cut, avoiding see saw movement;
• Severance of carotid arteries on both sides;
• Reaction ‘no more than a flinch’ when the throat is cut;
• No further reaction of the animal’s body or legs during the throat cut;
• It appears that the animal is not aware that its throat has been cut.

c) Time to loss of sensitivity:

• Calm cattle collapsed quickly (often within 10 to 15s) and have a more rapid onset of insensibility;
• severing both carotid arteries and jugular veins (required by WASK Religious slaughter Regulation significantly reduces the time to loss of sensitivity;
• Using rapid cutting stroke (95%) of calves collapse almost immediately;
• Conversely, a slow knife stroke retained consciousness for up to 30 seconds in up to 30% cattle.

It is clear therefore, that provided attention is given to the design, construction and operation of the slaughterhouse, appropriately trained personnel are employed to handle animals appropriately, religious method is the least painful and most humane method of slaughter. That this evidence is based on work with cattle is further proof that on balance cattle slaughtered without pre-stunning DO NOT experience very significant pain and distress’. It is only appropriate, therefore that the Government rescind their statement that animals (especially cattle) slaughtered without prestunning are likely to experience very significant pain and distress.


Prof. Schulze statement “Islamic method of slaughter is most humane and least painful”

A study carried out by Prof Schulze and colleagues at the School of Veterinary Medicine, University of Hanover, Germany has shown that EEG recordings in animals slaughtered by the Islamic ‘halal’ method did not show any change from the graph before slaughter during the first 3 seconds - indicating thereby that the animal did not feel any pain. The EEG recordings of the following 3 seconds showed a condition of deep sleep – unconsciousness; due to large quantity of blood gushing out of the body. Following these 6 seconds, the EEG recorded zero level while the ECG showed heart beating and body convulsing – a reflex action of the spinal cord); simultaneous ECG recordings showed rapid pulse. EEG recordings of animals that were subjected to stunning by the captive bolt method were apparently unconscious soon after stunning but the EEG showed severe pain immediately after stunning followed by cardiac arrest.


Mercy Halal Islamic Slaughter Part 1

Mercy Halal Islamic Slaughter Part 2A

Mercy Halal Islamic Slaughter Part 2B

Mercy Halal Islamic Slaughter Part 3

Criteria for use of the term Halal

Under the Islamic Law, all sources of food are lawful except the following sources, including their products and derivatives which are considered unlawful :-

Food of animal origin
• Pigs and boars;
• Dogs, snakes and monkeys;
• Carnivorous animals with claws and fangs such as lion, tiger, bears, similar animals;
• Birds of prey with claws such as eagles, vultures, and other similar birds;
• Pests such as rats, centipedes, scorpions and other similar animals;
• Animals forbidden to be killed in Islam, like ants, bees, and woodpecker birds;
• Animals which are considered generally repulsive such as lice, flies, maggots and other similar animals;
• Animals that live both on land and in water such as frogs, crocodiles and other similar animals;
• Mules and domestic donkeys;
• All poisonous and hazardous aquatic animals;
• Any other animals not slaughtered according to Islamic Law;



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4-Topics for discussion

As a guide, the following topics will be discussed. Although some of the topics are a bit technical, we shall try to explain and express the same with simple examples.

1.0 INTRODUCTION

 Why Islamic Banking?
 Islamic Banking in Malaysia
 Doctrine of Usury (Riba)
 Usury - Historical Overview
 Sources of Syariah Law
 Syariah Requirement & Prohibitions
 Essential Elements and Necessary Conditions in Contract
 Types of securities allowed under Syariah Law
 Why the need of separate Banking System for Muslim?
 Common questions raised by those who do not understand Islamic Banking!
 Is Islamic Banking for Muslim Only?
 Syariah Qualification (how to determine whether a company is doing “halal” business)

2.0 SOURCE OF FUNDS

 Shareholders’ Equity
 Customers Deposits (detailed comparison between conventional and Islamic account deposits, inclusive brief outline on deposits offered by commercial banks)
 Al-Wadiah savings
 Al-Mudharabah – General Investment Account
 Al-Mudharabah – Specific Investment Account
 How Islamic banks fund its operation via Islamic Interbank Money Market (IIMM)
 IIMM mechanism and types of IIMM products

3.0 APPLICATION OF FUNDS

(Types of financing facilities – comparative approach between conventional & Islamic banking and practical application)

 Murabahah/Al-Bai Bithaman Ajil/Commodity Murabahah (Tawarruq transaction?)
 Cash line facility (Overdraft)
 Al-Murabahah (inclusive revolving credit/Vehicle Floor Stocking)
 Al-Mudharabah (Trustee Joint Venture Financing)
 Al-Musyarakah (Joint Venture Financing)
 Al-Ijarah Thumma Al-Bai' (AITAB-Islamic Hire Purchase)
 Al-Kafalah (Bank Guarantee)
 Al-Qhardul Hassan (Benevolent loan)
 Istisna Ijarah Mawsufah Fi Zimah (Order Sale and Forward Leasing)
 Al-Ijarah Muntahiya Bitamlik (Leasing ending with ownership)
 Al Rahnu (pawn broking)
 Brief overview on Islamic Structured products & Islamic Capital Market (including Islamic REITS)

4.0 HOW IS PROFIT CALCULATED AND SHARED BETWEEN BANK AND CUSTOMERS?

 Income recognition method and formula use by Islamic banks;
 Understand profit distribution table (common format for profit distribution between Bank and the Customer);
 Transfer pricing via inter-branch profit distribution/incentive.

5.0 ISLAMIC BANKING ACCOUNTING

 Examples of Accounting entries;
 Islamic banking treatment on General Provision (GP)
 Islamic banking treatment Non-Performing Accounts (BNM GP3 guidelines)
 Loss Write-Off

6.0 OPERATIONS

 Price structure e.g. multi-tier profit rate, step-up/step-down profit rate.
 Types of progressive disbursement – average method, lump sum and scheduled method.
 Reschedule of payment and treatment on partial payments;

7.0 BRIEF OVERVIEW ON ISLAMIC LEGAL DOCUMENTATION

 Types of Agreements (market practice)
 Common flaws in legal documentation(to detect usual flaws in legal documents drafted by lawyers)
 Court Jurisdiction – Shariah or Civil Court
 Some past legal cases and legal precedence (focus on Zulkifli Vs Affin Bank)
 Special Courts & Tribunal

8.0 WHICH IS CHEAPER & PROFITABLE – COMPARATIVE STUDY BETWEEN CONVENTIONAL AND ISLAMIC BANKING BUSINESS
 Consumer point of view! (to prove Islamic Banking facility is cheaper than conventional facility)
 BLR trend for last 24 years – fixed versus variable interest rates (as benchmark for Islamic banking pricing?!)
 Impact of 1997 currency crisis in banking industry i.e. on conventional and Islamic banking system and customers.
 Bankers point of view (to prove some of the Islamic Banking products are more profitable than conventional banking products although technically cheaper???)
 Effective Return comparison between Islamic and conventional banking

9.0 CHALLENGES

 Challenges, Future direction and industry trend
 Past Performance & Industry Statistics on Islamic banking.

10. TRUE ISLAMIC BANKING

 What are the true Islamic banking products? The writer point of view
 Why Muslim scholars continue arguing this and that product is non-Islamic or more Islamic?
 Why are we moving backward i.e. trying to emulate conventional products like derivatives and name the product as Islamic derivative?

Other topics that the writer will examine are Takaful and Capital Market Product (including sukuk, structured products).
Please take note that some of the topics that will be discussed above, may not be the general view of Islamic bankers, regulators or even Islamic banking scholars. In addition, the writer may also write his own view based on the writer's own experience on the operation and practical aspects of the Islamic banking business.


IslamicBankingWay.Com
ALLAH KNOWS BEST

3-Buy and sell transaction

Salaam, before we go into Islamic banking concept proper, I would like to remind all visitors on various wrong terminologies or choice of words used by the media, writers, some Islamic scholars and also some Islamic bankers (especially those with conventional background and just joined Islamic banks). To ensure everything to do with Islamic banking is shariah compliant, we must ensure correct terminologies and words are used to avoid gharar' (ambiguity). Let's examine the various terminologies commonly used now in describing Islamic banking products:-

Buy and Sell transaction

1. Islamic banking loan - financing concept which are sale related (under contract of buy and sell) like Murabahah (deferred payment sale) or Al-Bai Bithaman Ajil (actually murabahah but was given special product name by Bank Islam to denote deferred payment sale facility with payment tenor of above 12 months), Al-Mua'jjal (or any other names given by Islamic banks) is NOT A LOAN. The only Islamic loan product available is Al-Qhadhul Hassan or benevolent loan which is 100% profit free. If bank grant a customer a RM100,000 loan payable over say, 1 year, the maximum amount that the customer need to pay-back to the bank is RM100,000. "Trade is like riba but Allah permitted trade and prohibited riba". Thus, due to the fine line between trade and riba, the correct word to describe Islamic banking sale contract such as Murabahah should be "financing or pembiayaan" instead of "loan or pinjaman";
2. The word "borrower" which is meant for an Al-Qhadhul Hassan borrower, should be termed as "customer" under a sale transaction. When the word borrower is used, technically it means someone that need to repay a loan and since Murabahah is not a loan but a sale contract, customer is the right word to describe the transactors i.e. seller (the bank) and customer (buyer).
3. Term like "repayment" means, to repay a loan. To avoid gharar', the best choice of word should be "payment" for example, "payment of monthly installment" or "payment of sale price".
4. The word "interest" is also commonly used?! In a sale transaction, one need to sell higher than the original purchase price to make profit. Without profit, nobody in this right mind would engage in business transaction. Likewise, when a bank purchase a property (with intention to resell at a profit) at RM100,000 and sold it for RM120,000 to the customer (buyer), it means the Bank makes profit of RM20,000. Under the contract of buy and sell, the sale price is the ceiling price that the customer will pay or the bank will charge! This mean, if the customer defaults, the maximum amount that the bank can claim from the customer is only RM120,000. Under conventional bank, the bank shall continue to charge interest on compounding basis i.e. interest upon interest, until the loan is repaid. However, in reality, to avoid customers taking advantage on Islamic banks, National Shariah Advisory Council of Bank Negara Malaysia (BNM-NSAC) allowed Islamic banks do charge compensation charges (or penalty fee) on late payment but whatever compensation charges collected by the bank, are normally given to charitable organisation. Compensation charges should not be a source of income to the bank but as an attempt by the Bank to avoid customer from delaying payment. It is interesting to note that Banks in South Korea charge penalty interest at 12% per annum (much higher than the normal lending rate of between 6-8% per annum) to ensure borrowers pay promptly. If we examine this practise, in Korea paying promptly is cheaper than delaying payment. To think about it, it is good if this system can be implemented in Malaysia to avoid overdue payments.
5. Another term wrongly used is "repayable on demand or to recall the facility". This term is commonly use by Islamic banks to take action on defauting customers i.e. to recall the loan. Islamic Bank cannot use similar term for a deferred payment sale contract. To avoid gharar', the correct term that the bank should use is, for example, "the bank reserve the rights to accelerate the monthly installments or accelerate the payment of the sale price" instead of recalling the facility.

The wrong terminologies used by Islamic bank may not be a concern now but we never know when it comes to recovery through the process of Shariah law, the wrong choice of words may render the sale transaction as non-Shariah compliant.
We'll learn more about the proper terminology to be used for other products as we engage the various Islamic banking topics in this blog.

IslamicBankingWay.Com
ALLAH KNOWS BEST