Chapter 1: Introduction to Islamic Finance Products and Services
ISLAMIC FINANCE PRODUCTS AND SERVICES
SUMMARY - Chapter 1: Introduction to Islamic Finance Products and Services
Chapter 1 : Introduction
1.1 What is financial system/ explain environment of financial system:
Overview of 1. Allows the exchange of funds between lenders, investors, and borrowers, operating at nationally and internationally.
Financial 2. contains advanced, closely connected services, markets, and institutions intended to supply an efficient and regular linkage between
(Fin.) System investors and depositors.
3. Money, credit, and finance are used as medium of exchange in financial systems, serving as a medium of known price of products and
services.
4. includes banks, financial markets, financial instruments, and financial services.
5. allocation of funds for investment & economics growth: allows funds to be allotted, invested, or moved between economic sectors.
6 components of Fin. System:
1. Fin. Market : 4 sub market in Malaysia : i- money & foreign exchange market, ii- capital market : equity and bond market; iii- derivaties
market : commodities features, KLSE; iv- offshore market.
2. Fin. Institutions : 2 categories : banking systems, non-bank fin intermediaries e.g unit trust. Provident pension funds, insurance co. E.g:
banks that offers products/services e.g mortgage, insurance etc.
3. Money is the start of financial systems and means for purchase and defining factor of wealth.
4. Fin. Instruments knowns as securities (stocks/bonds/mortgage/insurance)
5. regulatory agencies: monitor activities of fin institutions [2] and fin. Market [1].
6. central bank that integral with each country’s government
1.2 What is Fin. Institutions?
Structure & Fin inst. Provides access to fin market,
Functions of intermediaries between saver and borrower
Financial responsible for money supply to market through investors’ funds to borrower interm of loan/deposits/ investments.
Institutions
2 categories of fin. Intermediaries:
1. depository institutions (take deposits, make loan) vs. non depository institutions (insurance, securities, mutual funds companies etc.)
2. insurance companies (invest in securities, real estate for compensation to policyholders)
3. pension funds (invest contributions to provide payments to retired workers)
4. securities firms (brokers/ investment banks, mutual funds – pool resources and invest in portfolio).
5. finance companies raise funds directly in fin market to make loan
Functions of fin institutions.
1. to facilitate the allocation and deployment of economic resources
2. as intermediaries that facilitate flow of funds
1
, Chapter 1: Introduction to Islamic Finance Products and Services
Special functions of fin institutions
1. Clearing and settling of payments
2. Providing mechanisms for pooling resources (large scale indivisible enterprise)
3. Providing ways to transfer economic resources through time and across distances
4. Managing risks and uncertainty
5. Giving price information in coordinating decentralized decisionmaking
1.3 Bank Negara Malaysia
Islamic 1. promoting economic growth with price stability and maintaining monetary and financials stability
Banking & 2. supervise and regulate fin institutions and deposit taking institution.
Finance
Industry Fundamentals of banking
1. deals with credit facilities, storage for cash, investments, and other financial transactions. accepts customer deposits and offers loans to
individuals and corporate clients.
2. one of the key drivers of most economies because it channels funds to borrowers with productive investments.
3. Banks make money by charging higher interest on loans than the interest they pay on customer deposits. In the United States, banks are
required to retain10% (M’sia-3.0%) of the customer deposits as reserves, while using the other 90% (M’sia-97%) to provide loans.
2 types of Depository Institutions (M’sia)
1. Conventional banks
2. Islamic banks
Development of Islamic financial system in Malaysia
1. Islamic Money Market
2. Islamic Banks & takaful companies
3. Islamic Capital Market.
1.4 Islamic principles of contracts
Salient Islamic finance is fundamentally based on transaction contracts,executed in due consideration of the existing laws of a particular
Features of jurisdiction.
Islamic
Finance 5 to avoid:
1. riba free – any predetermined payment over and above principal = prohibited. Occur in interest-based lending activities, fixed return on
deposits in conventional banking, forward forex contracts.
2. no value – activities must be of value to parties.
3. gambling – have highest level of speculation
4. gharar – all contract have essential elements tht meets necessary conditions. E.g: asset used in sale/ lease contracts is uncertain/
vaguely identify, selling price/ lease rental not known to parties upon enter contract.
5. impure goods : non-halal products, non-permissible entertainment, riba based assets. Eg. Invest in non shariah/ conventional bonds.
2
ISLAMIC FINANCE PRODUCTS AND SERVICES
SUMMARY - Chapter 1: Introduction to Islamic Finance Products and Services
Chapter 1 : Introduction
1.1 What is financial system/ explain environment of financial system:
Overview of 1. Allows the exchange of funds between lenders, investors, and borrowers, operating at nationally and internationally.
Financial 2. contains advanced, closely connected services, markets, and institutions intended to supply an efficient and regular linkage between
(Fin.) System investors and depositors.
3. Money, credit, and finance are used as medium of exchange in financial systems, serving as a medium of known price of products and
services.
4. includes banks, financial markets, financial instruments, and financial services.
5. allocation of funds for investment & economics growth: allows funds to be allotted, invested, or moved between economic sectors.
6 components of Fin. System:
1. Fin. Market : 4 sub market in Malaysia : i- money & foreign exchange market, ii- capital market : equity and bond market; iii- derivaties
market : commodities features, KLSE; iv- offshore market.
2. Fin. Institutions : 2 categories : banking systems, non-bank fin intermediaries e.g unit trust. Provident pension funds, insurance co. E.g:
banks that offers products/services e.g mortgage, insurance etc.
3. Money is the start of financial systems and means for purchase and defining factor of wealth.
4. Fin. Instruments knowns as securities (stocks/bonds/mortgage/insurance)
5. regulatory agencies: monitor activities of fin institutions [2] and fin. Market [1].
6. central bank that integral with each country’s government
1.2 What is Fin. Institutions?
Structure & Fin inst. Provides access to fin market,
Functions of intermediaries between saver and borrower
Financial responsible for money supply to market through investors’ funds to borrower interm of loan/deposits/ investments.
Institutions
2 categories of fin. Intermediaries:
1. depository institutions (take deposits, make loan) vs. non depository institutions (insurance, securities, mutual funds companies etc.)
2. insurance companies (invest in securities, real estate for compensation to policyholders)
3. pension funds (invest contributions to provide payments to retired workers)
4. securities firms (brokers/ investment banks, mutual funds – pool resources and invest in portfolio).
5. finance companies raise funds directly in fin market to make loan
Functions of fin institutions.
1. to facilitate the allocation and deployment of economic resources
2. as intermediaries that facilitate flow of funds
1
, Chapter 1: Introduction to Islamic Finance Products and Services
Special functions of fin institutions
1. Clearing and settling of payments
2. Providing mechanisms for pooling resources (large scale indivisible enterprise)
3. Providing ways to transfer economic resources through time and across distances
4. Managing risks and uncertainty
5. Giving price information in coordinating decentralized decisionmaking
1.3 Bank Negara Malaysia
Islamic 1. promoting economic growth with price stability and maintaining monetary and financials stability
Banking & 2. supervise and regulate fin institutions and deposit taking institution.
Finance
Industry Fundamentals of banking
1. deals with credit facilities, storage for cash, investments, and other financial transactions. accepts customer deposits and offers loans to
individuals and corporate clients.
2. one of the key drivers of most economies because it channels funds to borrowers with productive investments.
3. Banks make money by charging higher interest on loans than the interest they pay on customer deposits. In the United States, banks are
required to retain10% (M’sia-3.0%) of the customer deposits as reserves, while using the other 90% (M’sia-97%) to provide loans.
2 types of Depository Institutions (M’sia)
1. Conventional banks
2. Islamic banks
Development of Islamic financial system in Malaysia
1. Islamic Money Market
2. Islamic Banks & takaful companies
3. Islamic Capital Market.
1.4 Islamic principles of contracts
Salient Islamic finance is fundamentally based on transaction contracts,executed in due consideration of the existing laws of a particular
Features of jurisdiction.
Islamic
Finance 5 to avoid:
1. riba free – any predetermined payment over and above principal = prohibited. Occur in interest-based lending activities, fixed return on
deposits in conventional banking, forward forex contracts.
2. no value – activities must be of value to parties.
3. gambling – have highest level of speculation
4. gharar – all contract have essential elements tht meets necessary conditions. E.g: asset used in sale/ lease contracts is uncertain/
vaguely identify, selling price/ lease rental not known to parties upon enter contract.
5. impure goods : non-halal products, non-permissible entertainment, riba based assets. Eg. Invest in non shariah/ conventional bonds.
2
