Islamic banks are closer to the universal banking model

An Islamic bank is a deposit-taking banking institution whose scope of activities includes all currently known banking activities, excluding borrowing and lending on the basis of interest. On the liabilities side, it mobilizes funds on the basis of a Mudarabah or Wakalah (agent) contract. It can also accept demand deposits which are treated as interest-free loans from the clients to the bank. and which are guaranteed. On the assets side, it advances funds on a profit-and–loss sharing or a debt-creating basis, in accordance with the principles of the Sharīah. It plays the role of an investment manager for the owners of time deposits, usually called investment deposits. In addition, equity holding as well as commodity and asset trading constitute an integral part of Islamic banking operations. An Islamic bank shares its net earnings with its depositors in a way that depends on the size and date-to-maturity of each deposit. Depositors must be informed beforehand of the formula used for sharing the net earnings with the bank.

An Islamic bank branch

Following the above logic, many economists have given their preference to universal banking, because of its being more efficient. Commercial banks are not allowed to trade, except within the narrow limits of their own net worth. As we have noticed, many Islamic finance modes involve trading. The same rule cannot, therefore, be applied to Islamic banks. It may be possible for Islamic banks to establish trading companies that finance the credit purchase of commodities as well as assets. Those companies would buy commodities and assets and sell them back to their customers on the basis of deferred payment. However, this involves equity participation. We may, therefore, say that Islamic banks are closer to the universal banking model. They are allowed to provide finance through a multitude of modes including the taking of equity. Islamic banks would benefit from this by using a combination of shareholding and other Islamic modes of finance. Even when they use trade-based, debt creating modes, the financing is closely linked to real sector activities. Credit worthiness remains relevant but the crucial role is played by the productivity/profitability of the project financed.

The non-Muslim perception on Islamic Finance in Malaysia

So I decided to share my thesis title ” The non-Muslim perception on Islamic Finance in Malaysia” to the public….

If you are interested,kindly email me at and I will attached it to you…

Thank you for reading my blog..

Fundamental forces of change in banking sector

Fundamental forces of change in banking are the changing behaviour that are effecting the banks in the world today. Many banks have moved to non-traditional banking services to earn fees that can offset the volatility in earnings from traditional loans and better help growth earnings. Such factors are:

a) Deregulation and re-regulation
Deregulation is the process of eliminating existing regulations. Example was the effort to removed interest rate ceilings on allowable rates paid depositors and charged on certain loans and also expanded the range of products & services that banks can offer. Interstate banking and branching restrictions have similarly been eliminated. Re-regulation is the process of implementing new restrictions on banking activities.

b) Financial innovation
Financial innovation represents the systematic process of change in which the financial institutions create new financial instruments, operating policies and financial markets. This enables them to circumvent restrictions and continue growth.

c) Securitization
Securitization is the process of converting assets into marketable securities. It enables banks to move assets off-balance sheet and increase fee income. It increases competition for the types of standardized products, such as mortgages and other credit-scored loans and eventually lowers the prices paid by consumers by increasing the supply and liquidity of these products.

d) Globalization
Financial markets and institutions are becoming increasingly global in scope. Firms must recognize that businesses in other countries as well as their own are competitors and that international events effect domestic operation. Geographic boundaries do not restrict financial transactions.

e) Technological advances
Technological advances relate to payment services and how customers conduct banking business; through debit and smartcards, telephone banking and the internet. With internet banking, mean that distance is no longer a limiting factor. Advances in technology also reduce the need for an intermediary by providing easy access to information.

Sime Bank existence in Malaysia banking sector from year 1996 to 1999

What is fractional-reserve banking?

Banks create money by practising fractional-reserve banking in which banks keep only a fraction of their deposits in required reserve (normally 10% of the deposits) and lend out the remainder, while maintaining the simultaneous obligation to redeem all these deposits upon demand. Example, for every amount of deposit, the bank will loan out 90% of the deposit as excess reserve and keeping the remaining 10% as required reserve. This process is called multiple deposit creation or chequebook money. Each of the process of money multiplier ended when all excess reserve have been absorbed into required reserve.

Fractional reserve banking benefits the economy by providing regulators with powerful tools for manipulating the money supply and interest rates, which many see as essential to a healthy economy. It also can help the government to finance its debt.

A case study on the non-Muslims perception on Islamic finance

It has been a hectic year 2009 for me but somehow it gonna finish in 3 more days. Anyhow, I have finally completed my thesis title “The non-Muslims perception on Islamic financial products: A case study in Taman Tun Dr. Ismail, Kuala Lumpur,Malaysia.”

Below is the abstract of my research:

This study is about the non-Muslims perception on Islamic financial products. These products have shown tremendous growth in the past 20 years. Islamic financial products are based on Shariah and Islamic accounting principles unlike conventional financial products that based on interest. Shariah applicable principles are Mudharabah, Musyarakah, Murabahah, Al-Bai Bithaman Ajil, Al-Ijrah etc.

Finding the non-Muslim perceptions are important in order to strategise effective solutions like marketing, services quality, finance returns etc. The main objective is to find out the non-Muslims opinions towards Islamic financial products. This study also tries to determine the non-Muslims preferences between Islamic and conventional financial products. The other element is to study the factors could influence the non-Muslims selection criteria about Islamic financial products in dual banking banks.

This study could benefit the non-Muslims customers as knowledge on Islamic finance and the banks to understand the non-Muslims customers’ perception; hence to improve on the areas needed and eventually lead to effective marketing.

This study had been conducted by choosing 100 customers of Maybank and CIMB Bank as the respondents. However, the limitation of this study is only concern to a small number of respondents. Personal interviews have taken place to get the primary data.

Findings show that the non-Muslims have moderate awareness about Islamic financial products. Many do believe that there is some benefit to use Islamic financial products but not doing so yet due to unfamiliarity. Generally, the non-Muslims have positive perceptions towards Islamic financial products but still lacking confidence at the moment.

What banks do?

Banks accept deposit from individuals and businesses and makes loan to individual and businesses for consumption and investments. The process begins when savers who have surplus spending decide to deposit their money into the banks. Then, the banks transfer those savings to the borrowers (deficit spending) as a form of individual or business loans. Hence, the borrowers can use the money for consumers spending like buying houses, cars, education, etc.

A high level of consumption market will eventually increase the standard of living of the population. These loans can also be used for investment purposes like investing in stocks, new projects, start up companies etc. More jobs will be created out from these new investments. It also could spur the economic growth of the country. Businesses and manufacturers will produce more of their goods.

However, the borrowers need to pay back the principal loan amounts plus interest to the banks. Interest rate is fluctuating and determined by the central bank. The consumers and government have inelastic demand towards the changes to interest rate. But, foreigners and business operators (local, foreign owned) have elastic demand in relations to interest rate changes.

When the economic is strong, more people will become savers and the process of banks giving loans continue to progress.

Customers leave a branch of Malaysia's Maybank in Putrajaya October 9, 2009. ~ Reuters/Bazuki Muhammad