What is Islamic Banking?
Islamic banking refers to a system of banking that complies with Islamic law, also known as Shariah law, which is derived from the Quran and As-Sunnah. Shariah law is Islamic religious law that governs the day-to-day lives of Muslims.
What are the bodies that regulate Islamic Banking in Malaysia?
All Islamic Financial Institutions (IFIs) in Malaysia are guided by three main regulatory bodies;
- Islamic Financial Services Act 2013 (IFSA 2013)
- Bank Negara Malaysia (BNM)
- Securities Commission Malaysia (SC)
These three bodies work together to ensure that IFIs operate in a stable and efficient manner while assuring that Islamic products and services are in accordance with Shariah law.
What are the advantages of Islamic Banking?
Ethical banking: Islamic banking operates on the principles of Islamic law, which prohibits any involvement in businesses that are considered unethical or harmful to society, such as gambling, charging interest (Riba), etc.
Misconceptions about Islamic Banking
- Islamic banking is just a replica of conventional banking.
Islamic Banking differs from Conventional Banking in several ways. Conventional banks operate on the basis of lending money for both deposit and loan contracts.
Islamic banking operates based on Shariah-compliant contracts which are called Islamic financial instruments, such as Commodity Murabahah (sales at a profit margin) for Islamic deposit and financing, Ijarah (leasing) for purchasing of vehicles, Mudarabah (profit-sharing and loss-bearing) for investment products, etc.
- Will I Make Less Money with Islamic Banking?
Some sceptics believe that Islamic Banking might yield lower returns, but this is a wrong perception as banks that have Islamic and conventional products offer similar product packages and services while applying the same risk-return tradeoff to calculate dividend or profit for investment products.
To a certain extent, Islamic financing products provide extra benefits to customers, such as rebates (Ibra’), no compounding charges in the monthly instalment, capping of Ceiling Profit Rate (CPR), and no imposition of charges for early financing settlement.
- I am limited on what I can purchase if my account is Islamic.
Basically, there is no limitation for the purchase of goods and services using Islamic deposit account, as the majority of Shariah jurists have agreed that money is just a medium of exchange for all types of payment transactions.