ASSIGNMENT 1

BUSINESS MATHEMATICS

(MAT 402)

NAME : FATIN NADIAH BINTI SAYPOL ANWAR

MATRIC NUMBER : 2019704597

PROGRAM CODE : AS246

GROUP : 2A1

LECTURER’S NAME : MADAM NOR ASHIKIN BINTI SAHROM

DATE OF ASSIGNMENT : 19TH SEPTEMBER 2019

DATE OF SUBMISSION : 24TH SEPTEMBER 2019

BASIC CONCEPT FOR ISLAMIC BANKING
A finance management system that is based on the Islamic rules of Sharia’ah is known as
Islamic banking. Sharia’ah principles, also known as Fiqh al-Muamalat are a set of regulations and
guidance that are derived from the Holy Qur’an, Hadith, Ijma and a few other sources that can be
trusted based on reasoning and comprehension.

Islamic banking is dominant in the Muslim world throughout the Middle Ages in terms of
doing trade and business activities. It is known that Malaysia has been long regarded as a country
that has been leading in Islamic Finance (IF) for a little over 30 years. 1980 was the year that
Malaysia has started the institutionalisation of Islamic financial players to develop a Sharia-
compliant ecosystem. Then, under the Islamic Banking Act 19833, Bank Islam Malaysia Bhd,
becomes the first ever bank with Shariah-compliant. As of now, there are a total of 16 Islamic banks
operating here with Maybank Islamic Bhd as the largest bank. Malaysia also has Bank Islam, First
Islamic Investment Bank and many others.

The concept that is practiced in Islamic Banking is the sharing, splitting of benefits and
misfortune, profit and loss. This profit and loss sharing are called as PLS (musharakah and
mudarabah).

Musharakah means sharing. It is a partnership between two or more parties in which all
parties involved will be contributing towards the capital. Not only that, the parties included have the
right to participate in terms of management, share loss-and-profit according to the pre-agreed ratio
of contribution. Musharakah is often used for large assets like houses and transportation. Example,
buying an asset requires a large sum of capital therefore, the clients will be providing a percentage
of the fund and the bank will provide a bigger percentage. Over a period of time, the client will be
paying back the bank’s percentage as instalments.

While mudarabah is a special kind of partnership where one partner will be giving the capital
(rabbulmal) to another for investment in a commercial enterprise (mudarib). In this case, the ratio
for profit is example (70:30). The mudarib are usually authorized to do anything in the time of
business however, they will need such permission from rabbulmal if there are some extraordinary
work that has to be done. Moreover, all the goods that are bought by the mudaribs are actually
owned by the rabbulmal. The profit that can be earn by the mudarib is when they sell the goods
profitably. They cannot claim their share in the assets even when the value has increased.

Interests taken after loaning a sum of money is strictly forbidden in Islamic Banking. These
interests taken are known as ‘riba’ which is not approved in Islamic practises. In an easier
description, ‘riba’ is the increase of money when one pays what they owe back to the loaner. It is to
ensure fairness in any exchange and meant to make sure that people can protect their wealth.
Besides, riba conflicts with the brotherhood of a community and could cause depression to the
never ending, mounting debts. Not only that, investments that involve alcohol, gambling and other
haram things by Islamic law are also strongly prohibited.

In short, Islamic banking has the same purpose as conventional banking with the exception
of it operating in accordance with the Sharia’ah principles as mentioned above. However, for Islamic
banking, it is more important to assess the clients’ acceptability and his willingness to comply with
Sharia’ah compliant contract.

For the conventional banking, it is a banking system in which loans are given to the clients at
a fixed interest rate. The downside of conventional banking is that the longer the time used to pay
back the loan, the higher the amount it becomes to repay back. There are a few differences on
Islamic banking and conventional banking which can be seen below:
COMPARISON BETWEEN CONVENTIONL BANKING AND ISLAMIC BANKING:

Conventional banking Islamic banking

 The functions and modus operandi  The functions and modus operandi are based
Are based on man-made principles on Sharia’ah principles

 The rate of interest is pre-arranged for the  Promotes the sharing of profit and loss
investors between provider of capital (investor) and the
user of funds (entrepreneur/clients)

 Aims at maximizing profit without any  Also aims at maximizing profit but following
restriction and minimize risks the Sharia’ah principles

 No dealing with Zakat collection  Zakat collection centre and a medium for
paying out Zakat

 Time plays a real deal for charging interest on  Earns profit by charging on the services
capitals given provided and trading of the goods

 If a project fails, the loan is written off as it  If a project fails, the management can be
becomes non-performing loan handed over to a better management to be
continued

 Solely on making profit and interest of the  Caters to the public interest first by ensuring
bank is the most important halal economic growth

 Money is the main product, used as a  Real asset is a product. Money unlike
commodity besides medium of exchange and conventional banking is just a medium of
store of value exchange

 The income that the bank gets is fixed thus,  For Islamic banking, it pays a greater
the developing process and expertise in importance on who is developing the project
project is not given importance as it shares profit together

 The status in a conventional bank is solely  The status in Islamic banking is that the clients
based on creditors and debtors, no more and are the partners, investors, traders and buyers
no less
REFERENCES:

Editors, W. (2019, January 8). Global Halal Investing Journal. Retrieved from
https://journal.wahedinvest.com/profit-and-loss-sharing-pls-modes-of-financing-in-islamic-
financial-institutions/
Dzul. (2017, August 21). Growing the Islamic banking business. Retrieved from
https://themalaysianreserve.com/2017/08/21/growing-islamic-banking-business/
Conventional Banking vs Islamic Banking. (n.d.). Retrieved from
https://ringgitplus.com/en/blog/Banking/Conventional-Banking-vs-Islamic-Banking.html
The Difference Between Islamic Banking Financing and Conventional Banking Loans. (2017, July 11).
Retrieved from https://islamicbankers.me/2015/07/11/the-difference-between-islamic-banking-
financing-and-conventional-banking-loans/

(n.d.). Retrieved from http://islamic-banking.com/explore/islamic-finance/islamic-banking#Profit-

and-Loss Sharing

(n.d.). Retrieved from http://islamicpamphlets.com/the-dangers-of-riba