ISLAMIC BANKING OPERATION

Mohammad Taqiuddin Mohamad

Academy of Islamic Studies
Universiti of Malaya
INTRODUCTION
 This chapter reviews relevant Islamic banking scope of operation in
the present day.
 It highlights the essential needs, requirements and expectations of
bank towards customers and vice versa.
 Discusses the Islamic banks’ asset and liability management as
reflected in the banks’ balance sheet.
 Discussion on Islamic banking channel and payment services.
BANKS CUSTOMERS-NEEDS, REQUIREMENTS
AND EXPECTATION
 Naturally as a business dealing with human expectation and
satisfaction,service quality is considered a critical success factor that
affects a bank’s competitiveness and its long-term standing.
 WHY service quality is important?
 Many empirical studies especially focusing on banking patronage
factors, found that service quality is the most important factor for
customers patronising the islamic bank.
 Another factors include the competence and courtesy of
employees and their ability to convey trust and confidence upon
their customers ,for example friendliness of staff, efficiency and
effectiveness in handling transactions ; knowledgeable and
experience of the bank personnel; convenience; and positive
appearance of physical facilities ,equipment personnel and
communication materials.
 So that, Islamic banks should cultivate a high quality customer
service culture into their practice along with the offering of
Shariah compliant financial products.
 Indeed, sufficient knowledge in various Islamic banking
instruments compounded with other relevant aspects such as
ethics, professionalism,duties and responsibilities.
Public Education
 Need to intensify public education and awareness towards the
distinctive characteristics of Islamic banks and how it may profitably
suit the interest of customers in their financial dealings.
 Consumer education programme is therefore crucial to increase the
level of consumer awareness on the unique characteristics of Islamic
banking and its wide-range of financial products offered.
ASSET AND LIABILITY MANAGEMENT-BALANCE SHEET
 The quality of asset and liability management promotes confidence in
the banking operations.
 Asset and liability management covers a wide spectrum of areas
including strategic planning and implementation and control process
that affect the volume ,mix, maturity ,profit rate sensitivity ,quality
and liquidity of a bank’s assets and liabilities.
LIQUIDITY
 A perfectly liquid asset is defined as one whose full present value can
be realized. Cash is a perfectly liquid, and so for practical purposes are
demand deposits, and other deposits transferable to third parties by
cheque or wire and investment in short term liquid government
securities.
 The primary goal of asset and liability management of a bank is to
produce a high-quality stable, large and growing flow of net
profit/interest income .
 This goal is accomplished by achieving the optimum combination and
level of assets and liabilities as well as financial risk.
BANKING CHANNELS (FRONTLINE COUNTERS)
 Frontline counters are the most important banking channels that
interact directly and actively with its customers .
 This is the traditional way of doing banking business whereby the
Banks's personnel known as tellers act as banks’ representatives in
explaining, promoting and selling various banking products to
different clienteles.
 In fact many studies have indicated the importance of enhancing the
Islamic banking customers’ service quality since it is one of the main
reasons why customers patronize banks.
 PAYMENT SERVICES

ATM Cash Deposit Machine

MEPS E-Debit

Interbank GIRO FPX

Phone and Mobile Banking Internet Banking

SMS Banking RENTAS/SWIFT

 1) ATM

 Automated Teller Machine or better known for its acronym as ATM is

a modern computerized telecommunications device.
 It allows customers to benefits from banking facilities without the
need to interact with cashier or bank’s teller.
 A customer who opens his account with a bank is normally supplied
with an ATM card.
 Customers normally use ATM to access their bank account either to
make cash withdrawals or credit card cash advances,check account
balance ,or even made payment for their utilities .
 2) Cash Deposit Machine

 Enables customers to make deposits and payment

transactions by cash using machine.
 All successful transactions are immediately credited and
customers will be issued an advice slip confirming the
transaction.
 Customers need to have his/her ATM Card or sometime Credit
Card or simply use his/her card number.
 3) E-Debit

 It’s an electronic payment facility which enables customer to

make payment for any commercial transaction without using
cash.
 Instead of just using ATM card, payment via e-debit will
enable the purchase amount to be immediately debited or
deducted from the customer’s saving or current account.
 The transaction using e-debit is facilitated by MEPS.
 4) MEPS

 Malaysian Electronic Payment System is the only interbank

payment network service provider in Malaysia that function to
support domestic, development, Islamic and Foreign banks.
 It is managed and operated by MEPS Sdn Bhd is wholly owned
by the local financial institution.
 5) Interbank GIRO

 It enables payments to be made without the need to raise physical

supporting vouchers or documents such as cheques.
 Allows funds to be transferred from a customer's savings or current
account to an account at another bank.
 It offers secure interbank fund transfer system for all sort of payment
through direct debiting of the customer’s account and crediting into
the beneficiaries account;with any IBG participating banks.
 For corporations, it is ideal for high volume inter-bank payments up to
a maximum of RM100,000 per transaction such as payroll and loan
repayments.
 As for individuals, MEPS IBG interbank fund transfer is ideal for
transactions such as credit card payments and dividend/warrant
payments.
 6) FPX

 Financial Process Exchange.

 It is an alternative payment channel for customers to make

payment at e-market places such as websites and online
stores as well as for corporation to collect bulk payment from
their customers.
 FPX provides a complete end-to-end business transaction,
resourful payment records, simplified reconciliation and
reduced risk .
 7) Internet Banking

 Known as Online Banking services.

 Among the services include fund transfer facility, online bill payment
facilities within the same islamic banking institution and account
enquiries.
 8) Phone and Mobile Banking

Modern banking service offered by many financial

institution
It’s allow their client to perform banking transactions
such as latest account balance inquiry, latest
transactions request, bill payments, fund transfers
between customer’s account etc. over phone.
 9) SMS Banking

Modern mobile technology that enables

customers to request and receive banking
information from their bank on the
handphone or mobile phone via SMS.
SMS banking provides several sevices which
allow customers to manage their bank
accounts, check their account balances,
perform check requests, money transfer, pay
some bills and perform other banking
transactions using their handphone.
 10) RENTAS/SWIFT

 RENTAS :Real Time Electronic Transfer of Fund and Securities

 It’s a real time gross settlement system (RTGS) for the transfer
and settlement of high value ringgit denominated interbank
funds and transactions of securities by electronic means.
 SWIFT :Society for worldwide interbank telecommunication

 Allows exchange message between banks and other financial

institutions across the globe
 Sekian, terima Kasih