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CHAPTER 4: JSLAMIC BANKING OPE RATIONS AN

D IN STRUMENTS

. tation of the following strategies: (I) Assisting the prod .

,mp emen . uction f
1 aoods for export and promotong the backward linkages in ind ?
. 'bl
e ,g1 e i:, • 1·
• h . ustria\
I t (ii) Extend mg the fac1 1ty sc eme to a wide range of d'
eve Iop men · . 1rect
d indirect
and exporters especial I~ th~ small and new exporters. This facility
is made available to direct and mdir~ct exporter~ (manufacturers) by way
of financing the working capital reqwrement and input purchases under the
principle of murabahah.
Islamic Trust Receipt (ITR) is a financing facility to finance domestic
or international trade documents drawn against ILC or wakalah inward bills
for collection. This facility is approved only to customers who have been
approved the wakalah letter of credit facility. Islamic banks issue the ITR
facility to the customer based on the murabahah principle for financing
the purchase of goods. It is a document of trust signed by the customer
(importer), the strength of which the Islamic bank releases the shipping
documents to the purchaser/importer who undertakes to land, store, insure,
hold and deliver to his buyers the said goods or merchandise. The Islamic
bank holds the customer's ITR, executed by him, to signify his holding of
goods in trust pending the sale of the goods. In other words, the bank retains
the legal title of the shipping or transport documents/goods, but relinquishes
physical possession of the goods to the purchaser/importer who acts as agent
of the bank. T~e cus~omer disposes the goods profitably and pays the bank
the agreed sell mg pnce on or before the maturity or due date.

For ~xample, a customer, who is involved in trading or manufacturing

may require
business to purchase goo ds or raw matenals
I th' . during the course of his
· n financin,
together with is case the
f: custome
T · the wakalah letter of credit
r may require
offer the customer wf;;r;;ty over a certain period of time. The bank would
urabahah Trust Receipt facilities.

The bank, having made the

sell the goods to the purcha ;· payment to the negotiating bank will then
and profit . ser importer at I • '
deferred margin under the principle of a sa e pnce comprising its cost
custome/~rm. :he deferred payment te':::ta:ahah where settlement is on
a Bill ofEx~~st,tutes the creation of a debt ;h. s~le of g??ds granted to the
and payable ange drawn by the Islamic b .nk is is secunt1sed in the form of
on matu ·t a and ac t db
customer must fi n y. 8 efore the Isla . b . cep e Ythe customer
rst have an approved ITrnR,cl' ank issue the ITR facility the
me. Req ues t "'ior fi nancmg. must
'

135
 /51.AMIC FINANCE: P RINCIPLES AND PRACTICES

include _submission of the relevant documents evidencing the underlying

transaction and also compliance to the terms of the facility. The Islamic
bank holds the ITR executed by the customer to signify that the customer
holds the goods in trust pending the sale of the goods.

The discussions in this Chapter make it clear that Islamic banking is

not a negligible or merely temporary phenomenon. Islamic banks are here
to stay and there are signs that they will continue to grow and expand. Even
if one does not subscribe to the Islamic injunction against the institution
of interest, one may find in Islamic banking some innovative ideas which
could add more variety to the existing financial network.

One of the main selling points of Islamic banking, at least in theory,

is that, unlike conventional banking, it is concerned about the viability
of the project and the profitability of the operation but not the size of the
collateral. Good projects which might be turned down by conventional banks
for lack of collateral would be financed by Islamic banks on a profit-sharing
basis. It is especially in this sense that Islamic banks can play a catalytic
role in stimulating economic development. In many developing countries,
of course, development banks are supposed to perform this function.
Islamic banks are expected to be more enterprising than their conventional
counterparts. In practice, however, Islamic banks have been concentrating
on short-term trade finance which is the least risky.

. P~rt of the explana~ion is that long-term financing requires expertise

:"h1~h 1_s not always available. Another reason is that there are no backup
mst1tu_t1o~al structures such as secondary capital markets for Islamic
financial mstruments. It is possible also that the tendency to concentrate
on short-term
. . financing
. reflects the earIy years of operat10n:
· It· IS
· easier
· to
adm1mster, less _nsky, and_the returns are quicker. The banks may learn to
pay more attention to equity financing as they grow older.

ltt isdstombethimes suggested that Islamic banks are rather complacent.

Th ey en o e ave as though tl h .
masses that will come t th iey a captive market in the Muslim
o em on rel1g1ous grou d Th' I
seems more pronounced · . . n s. 1s comp acency
m countries with onl II .
Muslims find it more convenient to d
qualms about shifting their deposits
•
1 1th
::tw:
Y one s am1c bank. Many
conve_ntional banks and have no
en Islamic banks and conventional

136
 CHAPTE R 4: ISLAMI C BANKING 0PE AAT Io N S AND INSTRUM E NTS

ones depending on which bank ~ffers a better r~turn. ~his might suggest
case for more Islamic banks m those countries as 1t would force the
~anks to be more innovative and competitive. Ano!her solut!on would be
to allow the conventional banks to undertake equity financing and/or to
erate Islamic 'counters' or 'windows', subject to strict compliance with
tte
0 Shariah rules. It is perhaps not too wild a proposition to suggest that there
is a need for specialised Islamic financial institutions such as mudharabah
banks, murabahah banks and Musharakah banks which would compete
with one another to provide the best possible services.

Come June 30, 2015, all Islamic banks and commercial banks with Islamic
banking subsidiaries offering Islamic deposits must classify them either as
principal guaranteed or investment accounts which are not principal guaranteed
under Shariah contracts in line with the Islamic Financial Services Act (IFSA).
This means that products with mudharabah (profit sharing) or wakalah (agency)
features are considered investment accounts which are non-principal guaranteed.
Islamic deposits, on the other hand, like wadiah (custodian), qard (loan)
and tawarruq (sale) are principal guaranteed. Currently, all Islamic deposits
are_protected by the Malaysia Deposit Insurance Corporation (PIDM). It is
estimated that about 50 per cent of Islamic deposits in the banking system
falls under the investment account category.

. Based o~ PIDM's statistics for the assessment year in 2012 t t I

insured depo_s1ts for the Islamic banking business totalled RM50 2 b' ·11~ a
compared with RM40 b"II" , ion m . the previous year A BNM ffi• . II 10n "d
that such J ·fi · · o eta sat
c ass, cation was necessary as it would .
clarity on the various types of Shariah fi . provide greater legal
end-to-end compliance in full c cle onancial ~ontract~ and to ensure
From a market standpoint he s .dY ·t f Islamic banking operations.
, ai I would not ca · •
customers as they would h . use mconvemence to
between products that now• ave . a choice and b e a bl e to differentiate
·
th are prmc1pal guarant d d h
at provide potentially h • h . k ee an t ose which are not
whose Islamic deposit a ig er ns returns like mudharabah. Customers
w,·th non-principal guaranteed
ccounts are struct d b
fi . ure ased on syariah contract
products and provided "th . eat_ure ':Ill be informed of the alternative
an miormed
· c decision Th WI sufficient
. I fi ·
n ormatlon/transparency to make
fund s with
. Islamic d· ey. w1 1I have a cl101·ce t o e1t • 11er ma111ta111
. . their
.
depen d.mg on the c epos1t
t ,or . change t 0 111vestment
• account product
us omers nsk appe t·1te. Customers would be given

137
ISLAMIC FINANCE: PRINCIPLES AND PRACTICES

sufficient time to inform the banks of their decision, adding that during
this process they would be ensured that their rights and deposits are
protected. The Financial Services Act (FSA) and the IFSA, which
came into effect July last year, has repealed the Banking and Financial
Institutions Act 1989 the IBA the Insurance Act 1996, the Takaful Act
1984, the Payment Systems' Act' 2003 and the Exchange Control Act 1953.
On the possible impact of the move to banks, he said banks were required
to make available alternative Islamic deposit products based on shariah
contracts with principal guaranteed feature as a substitute to the Islamic
deposit products with non-principal guaranteed feature. The official said
some Islamic banks have already started to provide alternative Islamic
deposit products. It is learnt that some banks are looking into the possibility
of transferring these deposits to takaful or Islamic insurers for insurance
protecti~n: Ban~s o_n the whole were studying the matter carefully
before_ ~1vmg thetr views to the central bank, an industry observer said
To fac1htate a smooth implementation of the reclass1·fic at·1on process an d.
ensure re 1evant stakeholders' interest are protected the BNM h
a transition plan to aJiow banks to complete the' b as ormulated
year (i.e., 2015). process Y June 30 next