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THE SIGNIFICANCE OF ADOPTING
THE ISLAMIC CALENDAR IN ISLAMIC
HOUSING FINANCE. CASE STUDY: BANK
MUAMALAT MALAYSIA BERHAD
PARIT RAJA BRANCH
KUNTHI HERMA DWIDAYATI
UNIVERSITI TUN HUSSEIN ONN MALAYSIA
This thesis has been examined on date 5 January 2016, and is sufficient in fulfilling the scope and quality for the purpose of awarding the Degree of Master of Real
Estate and Facilities Management
Chairperson:
Prof. Sr Dr. David Martin @ Daud Juanil
Faculty of Technology Management and Business Universiti Tun Hussein Onn Malaysia
External Examiners: Dr. Hawa bte Ahmad @ Abdul Mutalib
Department of Accunting International Islamic University Malaysia
Internal Examiner
Prof. Madya Sr Dr. Wan Zahari bin Wan Yusoff Faculty of Technology Management and Business Universiti Tun Hussein Onn Malaysia
THE SIGNIFICANCE OF ADOPTING THE ISLAMIC CALENDAR IN ISLAMIC HOUSING FINANCE.
CASE STUDY: BANK MUAMALAT MALAYSIA BERHAD
PARIT RAJA BRANCH
KUNTHI HERMA DWIDAYATI
A thesis submitted in fulfillment of the requirements for the award of the Degree of Master of Real Estate and Facilities Management
Faculty of Technology Management and Business
Universiti Tun Hussein Onn Malaysia
SEPTEMBER 2016
iii
DEDICATION
For my beloved late father and late mother
Susilo Hermanto & Suyati
My lovely sister, supervisor, and friends
Thank you for the encouragement, guidance and support for me
iv
ACKNOWLEDGEMENT
First of all, praise is due to the AlMighty Allah SWT for His compassion and
mercifulness for granting me in completing this thesis. I also would like to extend my
appreciation to my supervisor, Dr. Noralfishah Sulaiman for her support, patience,
time and guidance during my study. My sincerely thanks also due to Prof. Madya
Tono Saksono, who lets me experience researching the area of Real Estate Finance. I
would also like to thank Dr. Bana Handaga and Dr. Madi Hermadi, who always
around supporting me during my research process.
The cooperation given by Bank Muamalat Malaysia Berhad (UTHM) also
highly appreciated. Their contribution and participation in providing data and
interview are very important in my research. Appreciation also goes to all my friends
(Hamimatul Akmam, Shafiqah, Wong Lai Yoong, Wendy Wenxin, Woon Hei Ling,
Jouvan, Firda, Saiful, and Miftahuddin) and others who involved directly or
indirectly towards the completion of my thesis.
Special thanks is also dedicated to my beloved late mother, sister, brother in
law, and also my late father for their warm support, encouragement, and
understanding throughout my study. Last but not least my appreciation goes to my
late father who inspired me a lot to make my dreams come true.
v
ABSTRACT
Malaysia is considered to be one of the most advance developed Muslim
countries among Muslim countries that employ Islamic Banking system. In this
context, Islamic Housing Finance has grown rapidly and becomes popular as a
common solution for Muslims who desire to own home base on shariah principles.
In Malaysia, banks which have Islamic Banking products employ Gregorian
Calendar as the basis for their accounting system even though Surah At-Tawbah: 36-
37 in Al-Quran has clearly depicted that there is a straight guidance for Muslims to
use the Islamic Calendar for their mundane and spiritual lives. Factually, Gregorian
Calendar is 11.5 days longer than the Islamic Calendar, thus using it will affect the
calculation of loan repayment for every Muslim borrower. In previous research,
discovered that Gregorian Calendar has caused the shortage of zakat payments by the
Muslim customers, due to the shorter period of days calculated. This study was
conducted to determine a reliable Islamic Calendar according hisab criteria (wujudul
hilal) using Accurate Times. To identify the difference calculation between two
calendars system and to calculate Islamic Housing Finance repayment in Islamic
Calendar and Gregorian Calendar. Quantitative and Qualitative approach were
employed in this research. Respondents are all customers at the Bank Muamalat
Malaysia Berhad (Parit Raja) who chose Bai Bithamin Ajil (BBA) concept as their
housing finance scheme. The calculation shows that total repayment in Islamic
Calendar is lower than the Gregorian Calendar. Expert interview were used to
identify the effect of employing Islamic Calendar in Islamic Banking system
especially for Islamic Housing Finance. Finding indicates that the differences of total
repayment between two calendar system reach average 1.04 per cent and most of the
banks agree that Islamic Calendar can be employed as the basis of accounting system
although many challenges appeared.
vi
ABSTRAK
Malaysia dianggap sebagai salah satu negara muslim yang berkembang pesat
dikalangan negara-negara muslim yang lain dalam mengaplikasikan perbankan
Islam. Sehubungan itu, skim pembiayaan perumahan Islam turut berkembang pesat
dan menjadi penyelesaian popular untuk orang-orang muslim yang menginginkan
pemilikan rumah berdasarkan prinsip syariah. Di Malaysia, bank memiliki produk
perbankan Islam dan menggunakan kalendar Gregorian sebagai dasar sistem
perakaunan. Telah dijelaskan dalam Quran Surat At-Tawbah ayat 36-37 bahawa
Muslim diharuskan menggunakan kalendar Islam untuk kehidupan duniawi dan
spiritual. Kalendar Gregorian mempunyai 11.5 hari lebih panjang daripada kalendar
Islam, ini mempengaruhi perkiraan bayaran balik untuk setiap peminjam. Dalam
kajian sebelumnya, mendapati bahawa kalendar Gregorian telah menyebabkan
kekurangan pembayaran zakat oleh pelanggan muslim, kerana tempoh yang lebih
singkat. Kajian ini dijalankan untuk menentukan kebolehgunaan kalendar Islam
berdasarkan kriteria hisab (wujudul hilal) menggunakan perisian Accurate Times.
Untuk menentukan perbezaan perkiraan antara dua sistem kalendar dan pengiraan
skim pembiayaan perumahan dalam kalendar Islam dan kalendar Gregorian. Kajian
ini menggunakan pendekatan kuantitatif dan kualitatif. Responden adalah dari
pelanggan di Bank Muamalat Malaysia Berhad (Parit Raja) dan memilih Bai
Bithamin Ajil (BBA) sebagai skim pembiayaan perumahan mereka. Perkiraan
menunjukkan jumlah pembayaran dalam kalendar Islam lebih rendah berbanding
perkiraan dalam kalendar Gregorian. Temubual dengan pakar telah digunakan bagi
mengenal pasti kesan penggunaan kalendar Islam dalam perbankan Islam
terutamanya pembiayaan perumahan. Penemuan daripada hasil kajian menunjukan
perbezaan keseluruhan bayaran balik antara kalendar Islam dan Gregorian mencapai
1.04 peratus dan sebahagian besar penggunaan kalendar Islam sebagai asas pada
sistem perbankan Islam walaupun banyak cabaran dalam pelaksanaannya.
vii
CONTENTS
THESIS TITLE i
DECLARATION ii
DEDICATION iii
ACKNOWLEDGEMENTS iv
ABSTRACT v
ABSTRAK vi
CONTENTS vii
LIST OF TABLES xi
LIST OF FIGURES xiii
LIST OF ABBREVIATIONS xv
LIST OF APPENDICES xvii
CHAPTER 1 INTRODUCTION 1
1.0 Introduction 1
1.1 Problem Statement 3
1.2 Research Question 6
1.3 Research Aim 6
1.4 Research Objectives 6
1.5 Scope and Limitation of the Study 7
1.6 Significance of the Research 7
1.7 Organisation of the Thesis 8
CHAPTER 2 LITERATURE REVIEW 11
2.0 Introduction 11
2.1 Introduction to Islamic Finance (IF) 11
2.1.1 Definition of Islamic Finance 11
2.1.2 Prohibited Elements in Islamic Finance 14
2.1.3 Practice of Islamic Finance in Malaysia 15
viii
2.1.4 Governing Bodies for Islamic Finance in
Malaysia 18
2.1.5 The Framework of Islamic Finance in
Malaysia 21
2.1.6 Islamic Banking System in Malaysia 23
2.2 Islamic Housing Finance (IHF) in Malaysia 24
2.2.1 Definition of Islamic Housing Finance 25
2.2.2 Contracts in Islamic Housing Finance in
Malaysia 27
2.2.2.1 Bai Bithamin Ajil 29
2.2.2.2 Murabahah 30
2.2.2.3 Musharakah 31
2.2.2.4 Musharakah Mutanaqisah 31
2.2.2.5 Ijarah 33
2.2.2.6 Istishna 34
2.2.2.7 Tawarruq 34
2.2.3 Conventional Housing Finance (HF)
in Malaysia 35
2.2.3.1 Definition of Housing
Mortgage 35
2.2.3.2 Characteristic of Housing
Mortgage 36
2.2.3.3 Mortgage Products 37
2.2.4 Utility Theory in Housing Finance 40
2.3 Calendar Systems and Its Calculation 40
2.3.1 Definition of Calendar and It’s System 40
2.3.2 Function of Calendar 41
2.3.3 Types of Calendar 41
2.3.4 Gregorian Calendar (GC) 41
2.3.4.1 History 42
2.3.4.2 Criteria 41
2.3.4.3 Calculation 43
2.3.5 Islamic Calendar (IC) 43
2.3.5.1 History 45
ix
2.3.5.2 Criteria 45
2.3.5.3 Calculation using Time Series
Calendar System (TSCS) 48
2.3.5.4 The Benefit of Islamic Calendar 53
2.3.6 Islamic Calendar (IC) vs. Gregorian
Calendar (GC) 54
2.4 Conceptual Framework for the Research 55
2.5 Summary of the Chapter 57
CHAPTER 3 RESEARCH METHODOLOGY 59
3.0 Introduction 59
3.1 Research Philosophy 60
3.2 Research Methodology 61
3.3 Research Framework 64
3.4 Data Collection 65
3.4.1 Primary Data 65
3.3.2 Secondary Data 70
3.5 Population and Sample 71
3.6 Research Instrument 73
3.7 Protocol of Data Analysis 75
3.8 Phases of Data Analysis 77
3.9 Summary of the Chapter 78
CHAPTER 4 DATA ANALYSIS AND RESULTS 79
4.0 Introduction 79
4.1 Profile of Bank Muamalat Malaysia Berhad
at Universiti Tun Hussein Onn Malaysia (UTHM) 80
4.1.1 Vision and Mission of Islamic Bank
In Malaysia 80
4.1.2 Structure of the Organisation 80
4.1.3 The Practice of Islamic Housing Finance at
Bank Muamalat Malaysia Berhad 81
x
4.2 Data Presentation 84
4.2.1 Bai Bithamin Ajil practice at Bank
Muamalat Malaysia Berhad UTHM 84
4.2.2 Respondent’s or customers of Bai’
Bithamin Ajil in Bank Muamalat
Malaysia Berhad UTHM 84
4.3 Calculation of Islamic Calendar (IC) using
Time Series Calendar System (TSCS):
Accurate Times 86
4.3.1 The Application of Time Series
Calendar Software: Accurate Times 87
4.4 Result Obtained for Research Question (1) 91
4.5 Discussion for Research Question (2) 100
4.6 Discussion for Research Question (3) 102
4.6 Conclusion 106
CHAPTER 5 CONCLUSION AND RECOMMENDATIONS 108
5.0 Introduction 108
5.1 The Arrival of Fact: Research Findings 108
5.2 Summary of Chapter 113
5.3 Limitation and Problem of the Research 118
5.4 The Novelty of the Research 119
5.5 Recommendation for the Future Research 120
5.6 Conclusion of Study 120
REFERENCES 123
APPENDICES 133
xi
LIST OF TABLES
1.1 Previous Studies, Islamic Calendar in Shariah Economy 4
2.1 Three Stages in the Contemporary History of Financial
Institutions
16
2.2 Malaysia’s Islamic Finance (IF) Sector 17
2.3 Financial Institutions in Malaysia 17
2.4 The Development of Islamic Banking Globally 23
2.5 History of Islamic Banking in Malaysia 24
2.6 Islamic Banks and its Financial Products in Malaysia 29
2.7 The Advantage and Disadvantage of Fixed Rate Mortgage 37
2.8 The Advantage and Disadvantage of Adjustable Rate Mortgage 38
2.9 Differences between Islamic Housing Finance and Conventional
Housing Finance
39
2.10 Gregorian Month and Day Each Month 42
2.11 Islamic Month in Islamic Calendar 43
2.12 Criteria Islamic Calendar and Gregorian Calendar 55
3.1 Comparison between Qualitative and Quantitative Approaches
Variable Indicator in Research Instrument
63
3.2 Type of Interview 65
3.3 Sources of Respondents for Expert Interview 69
3.4 Structure of the Interview Schedule for the Expert Interview 70
3.5 Variable Indicator Framed to Establish both Quantitative and
Qualitative Research Instrument
74
3.6 Islamic Bank Profile 75
3.7 Table Instrument for Customer and Islamic Housing Finance
Repayment
75
4.1 Financing Product Offered by Bank Muamalat Malaysia Berhad 82
4.2 Table Customer Data BBA in BMMB UTHM 85
xii
4.3 Development of Accurate Times 86
4.4 Period of Samples in Gregorian Calendar 93
4.5 The Length of Financing using Gregorian Calendar 93
4.6 Period of Samples in Islamic Calendar 94
4.7 The Length of Financing using Islamic Calendar 95
4.8 Calculation of Repayment Using Gregorian Calendar 95
4.9 Calculation of Repayment Using Islamic Calendar 96
4.10 Comparison Repayment between Gregorian Calendar and
Islamic Calendar
97
4.11 Profit Calculation of Bai Bithamin Ajil 101
4.12 Challenges for Implementing Islamic Calendar in Malaysia
Banking System
105
5.1 Summary of Findings 118
xiii
LIST OF FIGURES
1.1 Research Design 10
2.1 Branches of Islam 12
2.3 Shariah Governance Framework Model for Islamic
Financial Institutions 22
2.4 Shariah Contracts in Islamic Banking 28
2.5 The Concept of Bai Bithamin Ajil 30
2.6 The Structure of Musharakah 31
2.7 The Concept of Musharakah Mutanaqisah (MM) 33
2.8 The Concept of Ijarah 33
2.9 The Concept of Istishna’ 34
2.10 The Concept of Tawarruq’ 35
2.11 Adjustable Rate Mortgage 38
2.12 Fixed Rate Mortgage and Adjustable Rate Mortgage 39
2.13 The Phases of Moon 46
2.14 Accurate times 50
2.15 Mooncalc 6.0 51
2.16 Islamic Finder Athan (Azan) 52
2.17 Timeanddate.com 53
2.18 Differences between Two Calendar Systems 55
2.19 Conceptual Framework 57
3.1 Philosophical Research Background of the Research 61
3.2 Research Design 64
3.3 Sampling 73
3.4 Comparative Analysis for Time Series Calendar System (TSCS)
and Analysis Phases 76
3.5 The Relationship between Islamic Calendar; Gregorian Calendar
and Islamic Housing Finance Product Repayment 77
xiv
4.1 Organisation Structure of Bank Muamalat Malaysia Berhad
(BMMB) UTHM Branch 81
4.2 Location in Accurate Times 87
4.3 Crescent Visibility on Main Menu 88
4.4 Crescent Visibility 88
4.5 Crescent Visibility after Preview 89
4.6 Crescent Visibility after Calculation 1 90
4.7 Crescent Visibility after Calculation 2 90
4.8 Differences between Two Calendars 91
4.9 Financing Calculator for Bank Muamalat Malaysia Berhad 92
4.10 The Comparison of Total Repayment between Gregorian
Calendar and Islamic Calendar 100
5.1 Summary of Research Findings 122
xv
LIST OF ABBREVIATIONS
ARM - Adjustable Rate Mortgage
BBA - Bai’ Bithamin Ajil
BIMB - Bank Islam Malaysia Berhad
BMMB - Bank Muamalat Malaysia Berhad
BNM - Bank Negara Malaysia
CEO - Chief Executive Officer
DOS - Disk Operating System
FA - Facility Amount
FRM - Fixed Rate Mortgage
GC - Gregorian Calendar
HSC - Hilal Sighting Committee
IFI - Islamic Financial Industry
IFIs - Islamic Financial Institutions
IF - Islamic Finance
IHF - Islamic Housing Finance
IC - Islamic Calendar
IOFC - International Offshore Financial Centre
ISNA - Islamic Society of North America
KLSE CI - Kuala Lumpur Stock Exchange Composite Index
KLIBOR - Kuala Lumpur Interbank Offered Rate
Labuan FSA - Labuan Financial Services Authority
LOFSA - Labuan Offshore
MM - Musharakah Mutanaqisah
NSAC - National Shariah Advisory Council
SC - Shariah Advisory
SAC - Shariah Advisory Council
SSC - Shariah Supervisory Council
xvi
SAB - Shariah Advisory Board
TSCS - Times Series Calendar System
UTHM - Universiti Tun Hussein Onn Malaysia
xvii
LIST OF APPENDICES
APPENDIX TITLE PAGE
A Islamic Calendar Period 2012-2052 133
B Interview Schedule 144
CHAPTER 1
INTRODUCTION TO RESEARCH
1.0 Introduction
Islamic Financial Industry (IFI) has become a global phenomenon. In the last 20
years, Islamic Finance (IF) has been growing and gaining popularity, not only among
Muslims but also among non-Muslims. Many financial players from the Middle East
(Muslim countries including Iran, Saudi Arabia, Kuwait and Qatar) and also
investors in some countries around the world (United Kingdom, Spain, Turkey,
Canada, North Africa) have introduced the shariah compliant products in banking
system (Hesse & Sole, 2008). In view of that development, many non-Muslims
countries such as Singapore, Hong Kong, and England, also began to offer Islamic
Financial System (IFS) (Aziz, 2008). In fact, Islamic Financial Industry was seen
growing globally at a pace of 15-20 per cent per annum (BNM, 2010). According to
the Asian Banker Research Group, Islamic Banks (IBs) have set an annual asset
growth rate of 26.7 per cent. Based on this statement, it indicated that the
development of Islamic Finance is growing consistently. Thus, this phenomenon
allowed the growth of various other banking products, such as housing financial aid
scheme which is based on the Islamic principles or usually perceives as shariah
compliant products (Biswas, 2013).
Islamic Housing Finance is becoming more popular and as common solutions
for Muslims who desired to easily purchase or possessed own a home base on
shariah principles (Amrillah, 2011). The system is appreciated particularly when
people have difficulties in buying properties in cash due to high property value. As
customers of this system they will find a way to buy property through deferred
payments which is free from riba. Aris et al. (2012) stated that Islamic Housing
Finance is a popular alternative financial product to substitute conventional interest-
based housing finance.
2
Islamic Banking (IBg) provides a range of Islamic Housing Finance based on
Islamic principles. Some of its products follow Bai’ Bithamin Ajil (BBA),
Musharakah Mutanasiqah (MM), ijarah, tawaruq, istishna, etc. However, all of
these products are still causing some problems, the problem arises from the necessity
in dealing with interest free on financing, as in line with Quran Surah Al-Baqarah:
275,“and Allah permits the trade but prohibits usury”(Ahmad, 2003).
Most of the Muslims scholars, practitioners, and academicians are debating
about the implementation of Islamic shariah in the banking system. Their focus is
merely in classical issues namely riba, maisyir, and gharar, which are commonly
being practiced in the trades and conventional banking (Saksono, 2014). However,
there is an overlook in the aspect of the calendar system that is used as basis for the
accounting system as an important issue that governs the calculation of the Islamic
Housing Finance all over the world. In Quran, Surah At-Tawbah: 36-37 has depicted
a clear guidance for Muslims to employ the Islamic calendar for their mundane and
spiritual lives. Due to the inexistence of credible Islamic Calendar that can be well
determined in advance, Islamic Banks are now using the Gregorian Calendar as the
basis of their accounting system (Saksono, 2009). Interestingly, as the Gregorian
Calendar is having 11.5 days longer than Islamic Calendar, the practice of Islamic
Finance is seemingly flaws including its application in the operation of Islamic
Housing Finance. In previous research (Saksono, 2012), a comprehensive study on
the application of Gregorian Calendar and how it would simulate ownership of assets
and the provision of corporate financial statements. He discovered that Gregorian
Calendar has caused the shortage of zakat payments by the Muslim customers, due to
the shorter period of days calculated. His study is in the development a robust
estimation model of the potential loss of the payable zakat from the collective
possession of five different assets from stock market (Saksono, 2011).
Therefore, it is necessary for the researcher to scrutinise the employment of
Gregorian Calendar in Islamic Housing Finance. Simultaneously, it will be also of
paramount important to the researcher to prove that the application of Islamic
Calendar is a better approach to be employed with many Islamic Housing Products
(IHP) that have been widely used in Malaysia.
3
1.1 Problem Statement
Islamic Calendar is a lunar calendar that has 12 months in a year. Currently, only
Saudi Arabia uses the Islamic Calendar as their official calendar. Most of the
Muslims countries use Islamic Calendar merely for the calculation of religious
festivities particularly for the Eid Fitri and Eid al-Adha (Saksono, 2009). However,
it can be seen that many Muslims scholars still have an ambiguous stance while
defining the beginning of the month in Islamic Calendar. In addition, different
criteria to command an Islamic month are the major problems to unite Islamic
Calendar across the globe. This is due to different criteria to confirm the presence of
the crescent (hilal), to mark the beginning of Islamic month. Essentially, there are
some schools of thought (mahzab), namely: the first group will only confirm the
presence of the crescent when it is visible to the eyes because this was practiced by
the Rasul and His companions, known as rukyatul hilal. Thousand years ago it is
impossible to construct Islamic Calendar through this method because the beginning
of Islamic month can only be determined minutes or even hours after it started
through the visibility of the eyes. In line with the occurrence of imaging
technologies, the second group appeared by confirming the presence of Islamic
month through astronomical calculation (wujud hilal). Meanwhile the third group
claims to have combined the above (mahzab), which is called Imkan Rukyat
(Saksono, 2009).
Saksono (2009) indicated that Muslims believe that they have been wasting
their energy in defining the presence of the crescent as the sign of the beginning of
Islamic month (hilal). Most of the scholars have been focusing on determining the
beginning of Islamic month and this has arises problem that is not realised by most
Muslims. The problem is they have not utilised the benefit of Islamic Calendar to the
Muslim society. The impacts emerged both social and economic development, which
at certain degree it can actually become a very important part in human life,
particularly Muslims.
Due to the inconsistent calculation Islamic Calendar; and deficiencies in
practising accounting systems in Muslims countries prefer to apply Gregorian
Calendar as a basis of calculation. As the majority are applying this approach, it can
be seen that Islamic Bank and Islamic Finance System (IFS) also used the same
approach in its operation. In terms of the days of the calendars, it was said earlier that
4
the number of days in the Gregorian Calendar is 11.5 days longer than the Islamic
Calendar. According to Saksono (2009, 2011 & 2012); Feinberg & Alwan (2008) &
Slotznick (2000). Gregorian calendar is approximately 365 or 366 days and Islamic
Calendar is 354 days. If it difference accumulated during some periods, consequently
there will be the significant differences between these calendars. This difference has
not been fully realised, until found some cases that revealed the potential of the haul
in calculating zakat (Saksono, 2012; Ilyas, 1994 &Laila, 2011). In the previous
studies, Saksono (2009, 2011 & 2012) have shown that the practice of Islamic
Finance nowadays is actually flawed, because it ignored Islamic Calendar as a basis
of the accounting system and several findings was found as shown in Table 1.1:
Table 1.1: Previous Studies, Islamic Calendar in Shariah Economy
(Saksono, 2009:2011)
Author Study Case study Finding
Saksono, T (2009)a
An Effort to Develop A Proleptic Islamic Calendar
Syawal 1428H, case study in Indonesia
The use of a proleptic, accurate, and reliable Islamic calendar is mandatory, otherwise the future generation of Muslims will increasingly heavily indebted to Allah should a proper calculation of obligatory tithe are not calculated using the Islamic calendar
Saksono, T (2009)b
An Accurate Islamic Calendar for A Flawless Islamic Capital Market
Microsoft stock market in twenty years
Gold price in twenty years
The use of an Islamic Calendar is mandatory for flawless Islamic capital market, especially if it correspondences with the obligation according to shariah
Saksono, T., Martin, D.,& Sharipah, N (2011)
Undisclosed Potential of Muslim’s Contribution to Global Economy Development
Potential loss of the payable zakat from the collective possession of five different assets from stock market
Develop algorithmic model to estimate the potential loss of the payable zakat
5
Table 1.1: Previous Studies, Islamic Calendar in Shariah Economy
(Saksono, 2009:2011)
…continued
Table 1.1 above has compiled previous studies conducted on Islamic Calendar in
shariah economy. Saksono (2009) stressed that a reliable Islamic Calendar is a must
in order for Muslims to carry out their mandatory of using Islamic Calendar as a God
command. Afterwards, Saksono (2009) continually discovered the effect of an
accurate Islamic Calendar in a flawless Islamic capital market. In 2011 and 2012, due
to the application of Gregorian Calendar, Saksono (2012) said that “there is a high
potential that Muslims business falls short of about 3.2 per cent in their zakat
payment”. In addition, if it is calculated cumulatively by all Islamic business that
have made over the years, there will be a huge deficit payment to the Muslims
society. Saksono (2012) claimed the issues of deficit zakat payment have become a
serious problem to many Muslims and this actually contributes a spiritual debt to the
Al Mighty. These previous studies prove that employing Gregorian Calendar affect
some components in shariah economy.
Undoubtedly, Islamic Housing Finance is one of the financial products in
shariah economy. Interestingly, Islamic Housing Finance also employs Gregorian
Calendar in their accounting system. Therefore, this research is undertaken with a
view to look into the Islamic Housing Finance practices using Islamic Calendar. The
similar calculation would be compared between the two calendar systems in the
practice of Islamic Housing Finance, particularly in the calculation of the amount of
the total loan repayment made by the Muslim customers.
Author Study Case study Finding
Saksono & Martin (2012)
Undisclosed Potential of Zakat Payment Deficit
Potential loss of the payable zakat from three simulated possession of assets from an open capital market
Hypothetical assumption to find zakat loss of the above assets can be at the tune of US$ 9 million. Robust estimation procedure to rectify any inadvertent past mistakes and transform them into a shariah compliant payable zakat for Muslims‟ business in the future
6
1.2 Research Question
Based on the problem discussed above, the lines of inquiries for this research are:
(1) What are the differences between Islamic Housing Finance (IHF) calculation
in Gregorian Calendar and Islamic Calendar?
(2) How does the difference in the calendar affect loan repayment on Islamic
Housing Finance (IHF) and how is the profit calculated?
(3) What are the challenges of employing Gregorian Calendar and Islamic
Calendar in Islamic Housing Finance (IHF) in Malaysia?
1.3 Research Aim
Generally, this study is an attempt for the researcher to restoring the role of Islamic
Calendar in Muslims financial activities particularly in Islamic Bank. Furthermore, it
is expected that this research can be a starting point for the unification effort of the
Islamic Calendar application comprehensively in the Malaysia banking sector.
1.4 Research Objectives
The objectives of this study are as below:
(1) To examine differences between Islamic Housing Finance (IHF) calculation
in Gregorian Calendar (GC) and Islamic Calendar (IC);
(2) To analyse the effect of the differences in the calendar on loan repayment and
profit calculation of the Islamic Housing Finance (IHF);
(3) To identify the challenges of employing Gregorian Calendar (GC) and
Islamic Calendar (IC) in Islamic Housing Finance (IHF) in Malaysia; and
(4) To suggest and justify the importance of Islamic Calendar (IC) as the basis of
calculation in Malaysia banking system.
7
1.5 Scope and Limitation of the Study
The research scope and limitation for this study are described as below:
(1) Focusing on one type of Islamic Housing Finance (IHF) product known Bai
Bithamin Ajil (BBA) offered by Bank Muamalat Malaysia Berhad (BMMB).
This commercial bank is located in the main campus Universiti Tun Hussein
Onn Malaysia (UTHM);
(2) Employing Islamic Calendar (IC) as a comparison model with Gregorian
Calendar;
(3) Primary data is obtained from expert interview conducted with several
commercial banks practitioner’s; and
(4) Secondary data is obtained from Times Series Calendar System (TSCS).
1.6 Significance of the Study
The significance of this study cannot be over emphasised as it stand to benefit the
following audience:
(1) Academic/ Scholars
The result of this study will contribute to the body of knowledge in the sphere
of Islamic Finance. It also provides a better understanding of Islamic Housing
Finance and the impact of the selected calendars being studied. The findings
will be able to contribute to the Islamic Housing Finance literature
particularly the calculation of loan repayment.
(2) Bank
This study can be used as a guideline for a better product development in
Islamic Housing Finance. By employing Islamic Calendar in Islamic Housing
Finance the amount counted for zakat can also be much higher.
(3) Bank’s Customer
Results and findings from this study can be used as evidence to show that
Islamic Calendar is more profitable as compare with Gregorian Calendar in
Islamic banks in Malaysia. The customer will get more financial benefit in the
long term.
8
1.7 Organisation of the Thesis
This thesis has been divided into six (6) chapters; each chapter consists of different
area of discussion. The diagram of the whole study will be portrayed in Figure 1.1.
(1) Chapter 1: Introduction to Research
The purpose of this chapter is to introduce the purpose of undertaking this
study based on identified research problem. Chapter 1 provides general
introduction to the research works for this particular topic. The whole process
of this study is elaborated in this chapter especially the major components of
a research work such as Research Problem, Research Questions, Research
Aim, Research Objectives, Scope and Limitation of the research as well as
significance of the research and how the whole thesis is organised.
(2) Chapter 2: Literature Review
Chapter 2 provides an important insight of the study. It describes previous
critical review on literature made by scholars within the studied area. The
literature review are based on theoretical perspectives related to Calendar
Systems, (Gregorian Calendar and Islamic Calendar), Islamic Banking (IBg)
Systems and its products of Islamic Housing Finance (IHF). Sources of the
literature reviews made are obtained from secondary sources such as journals,
books, website available, conference proceedings and many other secondary
inputs. Only by undertaking the mentioned activities then the researcher can
establish her conceptual framework for this study.
(3) Chapter 3: Research Methodology
Chapter 3 elucidates the structure of methodology for this study. It covers
the selection of research methodology, the methods of research chosen, the
creation of research instruments, research techniques sampling made as well
as the identification of research setting and its participants. Plainly, the
method used for this research is Expert interview. Expert interview was made
by interviewing 5 practitioners from 5 selected commercial banks in
Malaysia.
9
(4) Chapter 4: Data Analysis and Results
Chapter 4 explains the process of the analysis made for this study. The
process of analysis for this study is divided into three phases. First is the
analysis of Islamic Calendar prototype, whereby four website-based softwares
were used in order to analyse Islamic Calendar supported with mathematical
(quantitative) computer calculation. Phase 2 involves the calculation of loan
repayment made using selected Islamic Calendar prototype. Then the final
phase involves analysis of EI schedule conducted with 5 commercial banks
personnel.
(5) Chapter 5: Discussion, Conclusion and Recommendation
Chapter 5 discusses results and findings derived from this study. The
purpose of this chapter mainly to show and discuss evidences found in order
to answer the established Research Questions as stated in Section 1-2 earlier
on. Apart from that this chapter also explains how the Research Aim and
Research Objectives of this study being addressed. This chapter summarised
the conclusion made from this study. The implication of this study towards
the existing Body of Knowledge (BOK) and current Islamic Housing
Finance’s practices will be explained. The suggestions of the further research
inquiries will also be proposed to enhance the identified research findings
10
Figure 1.1 Research Design (The Researcher, 2015)
The Significance of Adopting the Islamic Calendar in Islamic Housing Finance.
Case Study: Bank Muamalat Malaysia Berhad (BMMB) Parit Raja Branch
PRIMARY DATA Method 2:
Expert Interview
Five (5) practitioner’s
from selected
commercial banks
What are the differences
between Islamic Housing
Finance (IHF) calculation
in Gregorian Calendar and
Islamic Calendar?
RESEARCH QUESTION 2
2 How does the difference in
the calendar affect loan
repayment on Islamic
Housing Finance (IHF) and
how is the profit
calculated?
RESEARCH O BJECTIVE 1
To examine
differences between
Islamic Housing
Finance (IHF)
calculation in
Gregorian Calendar
(GC) and Islamic
Calendar (IC)
RESEARCH O BJECTIVE 2
To analyse the effect of
the differences in the
calendar on loan
repayment and profit
calculation of the
Islamic Housing Finance
(IHF)
RESEARCH O BJECTIVE 4
To suggest and
justify the
importance of
Islamic Calendar
(IC) as the basis
of calculation in
Malaysia
banking system.
What are the challenges of
employing Gregorian
Calendar and Islamic
Calendar on Islamic
Housing Finance (IHF) in
Malaysia?
RESEARCH QUESTION 3
RESEARCH SCOPE
Bank Muamalat Malaysia Berhad (Parit Raja)
RESEARCH METHODOLOGY
Mixed Methods
SECONDARY DATA Method 1:
Time Series Calendar
Software (TSCS)
Islamic Finder
Mooncalc Accurate Times
Timeanddate.com
DATA COLLECTION
DATA ANALYSIS
RESULTS AND FINDING
OF RESEARCH
CONCLUSION AND
RECOMMENDATIONS
RESEARCH QUESTION 1
RESEARCH
O BJECTIVE 3
To identify the
challenges of
employing Gregorian
Calendar (GC) and
Islamic Calendar (IC)
in Islamic Housing
Finance (IHF) in
Malaysia.
11
CHAPTER 2
LITERATURE REVIEW
2.0 Introduction
Chapter 2 reviews the literature theories relating to the topic of this research.
Islamic Housing Finance (IHF) and calendar system are the focus of attention being
reviewed theoretically in this study. Yam (2006) said that literature review is the
important elements that have to be involved in any research work through a thorough
understanding on research issues and theoretical perspectives in order to achieve the
objectives established for the research. Conducting literature review will help the
researcher to understand and study of their research interest further with a good
supporting evidence through previous validated studies. By doing this, therefore this
chapter consists of two parts; first is the introduction of Islamic Finance and Islamic
Housing Finance, and the second part is the review of Islamic Calendar based on its
historical background, criteria and how it is calculated and how possible it can be
used in banking institutions.
2.1 Introduction to Islamic Finance (IF)
Islam is a divine religion which holds a man as a vicegerent on earth and given a
mandate to exploit the earth and everything in it for the common good (Antonio,
2001). Islam is a universal religion widely accepted and Islam can be applied in a
flexible way and in a broad time and any places. This is apparent in the field of
muamalah, which Islamic principles do not discriminate between Muslims and non-
Muslims. One of it is in the economic sector as the application of Islamic principles
will continue to be accepted, developed and adapted over time even by the non-
Muslims believers indeed. That is why Islam is accepted as the way of life of human
12
beings, wherever on the earth they are, particularly in the context of economy and
Islamic welfare. Figure 2.1 below shows branches of Islam, perceive as a
comprehensive way of life to its believers.
Figure 2.1 Branches of Islam (Antonio, 2001)
Islamic Finance has become an integral part in the global economy. This is
evidenced by many Islamic institutions in more than 105 countries and about 500
institutions all over the world (El Qorchi, 2005 & Asutay, 2011). Aksay & Asutay
(2011) stated that Islamic Finance has been growing about 15-55 per cent per annum
and the total assets of Islamic Finance had reached $950 billion globally. Moreover
in 2013, researchers from Ernst & Young explained that the growth of Islamic
Finance was at a pace of 15-20 per cent per annum and the global Islamic assets
industry is expected to increase 40 per cent and reach to $1.8 trillion in 2013
(Hancock, 2013). These evidences indicated that Islamic Finance was growing
rapidly and will be continuing to evolve in the near future of global economy.
Islam
Aqidah Shariah Akhlaq
Muamalah Ibadah
Special Rights Public Rights
Criminal Law Civil Law Interior Affairs Exterior
Affairs
International Relation
Economy Administrative Constituency
Finance
Leasing Insurance Banking Mortgage Venture Cap
13
2.1.1 Definition of Islamic Finance (IF)
Usmani (2002); El-Gamal (2006) and Gait & Worthington (2007) define Islamic
Finance as a financial service principally implemented to comply with the main
tenets of Shariah (interest- free basis). Shariah or law of Islam originates from two
principles, there are based on Al-Quran (the Holly of the Muslims) and Sunnah
which is the way of life based on the practices and teachings of Prophet Muhammad
SAW. Jobst (2007) defines Islamic Finance as follows:
“Islamic Finance is limited to financial relationships involving entrepreneurial investment subject to the moral prohibition of interest earnings or usury (riba) and money lending, and haram (sinful activity). speculation, betting, and gambling, including the speculative trade or exchange of money for debt without an underlying asset transfer, the trading of the same object between buyer and seller (bay’ al inah), as well as preventable uncertainty (gharar) such as all financial derivative instruments, forwarding contracts, and future agreements.”
Basically, there are two relevant principles of Islam as stated by Ranjbar &
Pahlevan (2008), known as shariah and muamalah. Shariah according to Joshi
(2012) “literally means a waterway which leads to a mainstream, a drinking place,
and also a road or the right path“. Meanwhile Jobst (2007) defines shariah as
“Islamic religious law, which is binding upon Muslims as a matter of religio us
mandate and also may be incorporated into the secular law of a given jurisdiction.”
Muamalah according to Ahmed (1990) is civil contract and can be used in Islamic
banking and finance.
In Malaysia, shariah principles according Bank Negara Malaysia (2010) are
the foundation for the practice of Islamic Finance through the observance of the
tenets, conditions and principles espoused by shariah. Muamalah is referred to in
term of Islamic Bank, includes buying and selling activities (bai’), receivables
(qara'ah), pledge (rahn), transferring debt (hawalah), for profit in the trade (ijarah),
assurance (dhaman), fellowship (syirkah), and others (Ensiklopedi Hukum Islam,
2013).
Interestingly, Islamic Finance is the application of different contractual and
financial techniques to mobilise funds in the economy according to the principles of
Islamic law (Hegazy, 1999). Additionally, Samad et al. (2005) stated the principles
of sharia law in Islamic Finance are as below:
14
(1) Transaction must be free of interest (riba);
(2) Goods and services that are illegal (haram) from the Islamic point of a view
cannot be produced or consumed;
(3) Activities or transactions involving speculation (gharar) must be avoided;
and
(4) Zakat (the compulsory Islamic tax) must be paid.
Combining all the definitions, Islamic finance can be defined as the application of
financial services and techniques which comply with shariah principals or free from
the prohibition such as riba, gharar, maysir and gambling. Most of definitions stated
that the application must free from the prohibition elements, however there are no
mentioned regarding the period of time, specifically the use of calendar.
2.1.2 Prohibited Elements in Islamic Finance
Based on the context of Islamic Finance as discussed earlier, there are rules that
bring some prohibitions in transaction of Islamic Finance such as riba, gharar and
maysir (gambling) (Samad et.al., 2005). The prohibition matters in Islamic Finance
and it is very important to be taken into account while involving shariah muamalah
as below:
(1) Riba
Riba literally (Arabic) means the excess or increase. Khan (2008) adopted riba
definition “an excess which, in an exchange or sale, accrues to the lender without the
return of any equivalent counter value, substitute or recompense to the other party.”
In Quran, Al Baqarah 275 riba has been described as below:
“Those who consume interest cannot stand (on the Day of Resurrection)
except as one stands that is being beaten by Satan into insanity. That is because they say, “Trade is (just) like interest. “But Allah has permitted trade and has forbidden interest. So whoever has received an admonition from his
Lord and desists may have what is past, and his affair rests with Allah. But whoever returns to (dealing in interest or usury) those are the companions of
the fire; they will abide eternally therein.”
15
In fact, on top of the above verse Quran Al-Baqarah: 276 explained that:
“Allah will destroy Riba (usury) and will give increase for Sadaqat (deeds of charity, alms, etc.) And Allâh likes not the disbelievers, sinners.”
(2) Gharar
Gharar means uncertainty, cheat, or have excessive risk and harm to others
(Ensiklopedi Hukum Islam, 2013). Gharar is prohibited in Islam, as it is clearly
depicted in Quran Surah Al-Baqarah:188 as:
“And do not eat up your property among yourselves for vanities, nor use it as
bait for the judges, with intent that ye may eat up wrongfully and knowingly a little of (other) people’s property.”
(3) Maysir
Maysir or gambling means a game of chance which was played by the Arab before
Islam. Maysir is also often used as the grounds for criticism of conventional financial
practices such as conventional insurance, derivatives and speculation (Islamic
Banker Online, 2013). The prohibition of maysir is stated in Quran Surah Al-
Ma’idah: 90-91 as below,
“O believers, wine and gambling, idols and divining arrows are abhorrence,
the work of Satan. So keep away from it, that you may prevail. Satan only deserves to arouse discord and hatred among you with wine and gambling,
and to deter you from the mention of God and from prayer. Will you desist?
2.1.3 Practice of Islamic Finance in Malaysia
Retrospectively, Hegazy (1999) in his study distinguishes that there are three stages
of the contemporary history of financial institutions in most Muslims countries. The
stages were known as (1) Imitation, (2) Disguise and (3) Renaissance. Table 2.1
below shows the explanation of those stages according to Hegazy (1999):
16
Table 2.1: Three Stages in the Contemporary History of Financial Institutions (Hegazy, 1999)
Stages Retrospect Explanation
First stage
(Imitation)
Began after the demise of the Ottoman and then continued into the colonial
period. Muslim societies effort to mimic Western financial techniques
without any consideration for the pre-existing social, economic and
cultural institutions is observed
Second stage
(Disguise)
IFI emerged after the post-independence movements tended to cloak
unchanged western financial instruments in Islamic garb by Islamic names.
Third stage
(Renaissance)
Still in its formative course. There exists a sincere effort to return to true
Islamic economic practices through new exploration of traditional Islamic
financial doctrines, and efforts to probe into modern and sophisticated
financial techniques that used by western institutions *Note: IFI – Islamic Finance Institution
The first stage as mentioned in Table 2.1 is imitation, Islamic financial
institutions only imitate western financial institutions operation in general. Second
stage is disguise, which Islamic Financial Institution emerged only after the post-
independence era, this stage has begun the improvement although there are still a lot
of western financial instrument influenced the system. Last stage is renaissance,
Islamic financial institutions has effort to return the true Islamic economy practices
which comply with shariah principals.
With regards to the previous depicted Table 2.1, Malaysia as one of Muslims
countries and considered to be in transition between two stages, second and third
stage. Malaysia is in that position due to the growing of Islamic Finance in Malaysia
seems rapidly and the economic growth has set the Malaysian as one of the world’s
most attractive markets for Islamic Finance. Malaysia also effort to return the true
Islamic economy practices and audited by the shariah council (Hegazy, 1999).
As one of the best key players in Islamic Finance, the total asset Malaysia
banks in Malaysia has reached RM525.63 billion, financing RM330.59 billion and
deposit RM406.8 billion (Malaysia International Islamic Finance Centre, 2013). The
total amount bank in 2013 was RM1,263.02 billion.
Earlier on, in 2012, according to BNM (2012) in the year 2012 the
contribution of Islamic Finance in Malaysia can be seen as depicted in Table 2.2.
From the Table 2.2 it shows the amount of total bank in 2012 was amounted up to
$44,763 billon.
17
Table 2.2: Malaysia’s Islamic Finance Sector (Bank Negara Malaysia, 2012)
Total Bank Amount
Assets (May 31st 2012) M$1,769bn (19.3%)
Loans (May 31st 2012) M$1,042bn (20.1%)
Deposits (May 31st 2012) M$1,310bn (20.6%)
Insurance premiums (2011) M$26,498m (14%)
Non-life insurance premiums (2011) M$12,018m (9.6%)
Stock market capitalization (end 2011) M$1,285bn (62.8%)
Bond market (end 2011) M$841bn (41.6%)
TOTAL M$44,763bn
In a decade long ago, BNM, Securities Commission (SC) and government of
Malaysia have collaborated extensively in promoting the development of finance and
its Islamic market nationally. The collaboration between many either stakeholders
from government sectors, diversified players, infrastructure, providers, professional
practitioners and financial markets has created a healthy marketplace for Islamic
Finance in Malaysia’s comprehensive Islamic Financial Eco-System (Malaysia
International Islamic Finance Centre, 2013).
In general, according to Malaysia Investment Development Authority (2012)
there are many financial institutions operating in Malaysia. These financial
institutions are shown in Table 2.3.
Table 2.3: Financial Institutions in Malaysia (Malaysian Investment Development Authority (mida.gov.my), 2012)
No Financial Institutions Total Malaysian-Controlled
Institution
Foreign
Controlled
Institution
1 Commercial banks 25 8 17
2 Islamic Banks 16 10 6
3 International Islamic Banks 5 0 5
4 Investment Banks 15 15 0
5 Insurers 36 19 17
6 Takaful Operators (Islamic Insurers) 12 9 3
7 International; Takaful Operators 1 0 1
8 Reinsurers 7 3 4
9 Retakaful Operators (Islamic Reinsurers) 4 1 3
10 Development Financial Institutions 6 6 0
18
Table 2.3 above shows an overview of the number of financial institutions
under the preview of Bank Negara Malaysia as at the end February 2012.
Furthermore, when the practices of Islamic Finance grow in large scale, the
Islamic financial instruments also exist. Islamic financia l instruments today were
developed in the daily practices of Islamic financing and banking. According to
Jamaldeen (2010) , Islamic financial instrument can be divided into two, there are:
(1) Instruments for Mobilising Fund
This instrument is similar to conventional dealings, but different in principal,
it has no interest and also has a predetermined return of savings for current
accounts, savings accounts, investment accounts and sukuk or Islamic bonds.
(2) Instruments for Utilising Fund
This instrument is a new concept and similar to the entrepreneurship factor in
banking system such as mudaraba, musharaka, murabaha and ijara.
Jamaldeen (2010) added that other several of financial instruments are also
available such as short term transaction between Islamic Bank, lines for financing
working capital and redeemable participation.
2.1.4 Governing Bodies for Islamic Finance in Malaysia
It has been said earlier that Islamic Finance Institutions (IFI) must comply with
shariah principles, hence corporate governance in banking sector is established in
order to control the process, policies and law that affects it (Sulaiman et al., 2011).
Sulaiman et al. (2011) also added more specifically about the interrelation between
Corporate Governance and Islamic Finance Institutions (IFs) as it should include the
components as below:
(1) Safeguarding interests of Investment Account Holders;
(2) Compliance with the Shariah;
(3) Governance and risk management of Mudaraba and Musharaka contracts;
and
(4) Establishment of a comprehensive Corporate Governance framework
articulating the fiduciary responsibilities of the board and senior management.
19
In Malaysia’s financial system, there are three main regulators for Islamic
Finance operation. There are Bank Negara Malaysia (BNM), Suruhanjaya
Sekuriti (SC), and the Labuan Offshore (LOFSA). These three regulators will
oversee and monitor the activities and operation being practiced by players in Islamic
Finance banking sector, such as the markets, the institutions, the payments and its
settlement systems. Furthermore, the government of Malaysia will also adjust,
modify and ensure that policies made by the aforesaid regulators are followed by all
the players involved in the financial market (Hussin, 2010).
(1) Bank Negara Malaysia
Bank Negara Malaysia (BNM) has to ensure that all IFs operate in accordance with
shariah law or principles. BNM has to indeed do its primary functions in order to set
out it function as stated in the newly enacted Central Bank of Malaysia Act 2009.
According to Central Bank of Malaysia Act 2009 the function of BNM are as below:
(a) Formulate and conduct monetary policy in Malaysia;
(b) Issue currency in Malaysia;
(c) Regulate and supervise financial institutions which are subject to the laws
enforced by the Bank;
(d) Provide oversight over money and foreign exchange markets;
(e) Exercise oversight over payment systems;
(f) Promote a sound, progressive and inclusive financial system;
(g) Hold and manage the foreign reserves of Malaysia;
(h) Promote an exchange rate regime consistent with the fundamentals of the
economy; and
(i) Act as financial adviser, banker and financial agent of the Government.
In addition, to the above mentioned general function of BNM, there are two-
tier shariah governance infrastructures structured by BNM internally. These
governance infrastructures are the vital components in BNM known as Shariah
Advisory Council (SAC) body at the BNM and an Internal Shariah Committee (SA)
was formed in BNM to monitor the operation of Islamic Banking in each respective
IFI (BNM, 2010).
Plainly, The Shariah Advisory Council of Bank Negara Malaysia (SAC) is a
body established under section 51 of the Central Bank of Malaysia Act 2009, that
20
also has positioned the SAC as the apex authority for the determination of Islamic
law (shariah principles) for the purposes of Islamic Finance such as IBg business,
takaful business, Islamic financial business, Islamic development financial business
and any other business which based on shariah principles. SAC was established in
May 1997 and as the highest shariah authority in monitoring Islamic Finance
Malaysia operation (BNM, 2010). The roles of SAC according Ismail & Tohirin
(2010) are:
(a) Has authority to scrutinise and approve any documents used by IBs and
ensure all transactions (including products and services) not involve any
element which is not approved by Islamic principles; and
(b) To proactively develop and innovate new products and services hand- in-hand
with the bank management.
(2) Suruhanjaya Security
Suruhanjaya Security or Securities Commission (SC) Malaysia established on 1
March 1993 under the Securities Commission Act 1993. SC is a self- funding
statutory body with investigative and enforcement powers in the area within its
jurisdiction. SC has many regulatory functions (Suruhanjaya Sekuriti, 2014), as
stated:
(1) Supervising exchanges, clearing houses and central depositories;
(2) Registering authority to prospectuses of corporations other than unlisted
recreational clubs;
(3) Approving authority for corporate bond issues;
(4) Regulating all matters relating to securities and futures contracts;
(5) Regulating the take over and mergers of companies;
(6) Regulating all matters relating to unit trust schemes;
(7) Licensing and supervising all licensed persons;
(8) Encouraging self-regulation; and
(9) Ensuring proper conduct of market institutions and licensed persons.
21
(3) Labuan Financial Services Authority (Labuan FSA)
Labuan Financial Services Authority (Labuan FSA) was established on 15 February
1996 under section 3 of the Labuan Financial Services Authority Act 1996. Labuan
FSA was established with some objectives as below (Labuan FSA, 2010):
(1) To promote and develop Labuan as an international center for business and
financial services;
(2) To develop national objectives, policies and priorities for the orderly
development and administration of the international business and financial
services in Labuan; and
(3) To act as the central regulatory, supervisory and enforcement authority of the
international business and financial services industry in Labuan.
2.1.5 The Framework of Islamic Finance in Malaysia
According to Bank Negara Malaysia (2010), the framework of Islamic Finance in
Malaysia based on approach is divided into six sections. Certainly, it is distinguished
into 6 sections to ensure that Islamic finance is comply with shariah principals
relatively. The explanations of the framework are as below:
Section (1)
Outlines the general requirements of the Shariah governance framework which
describes the essential key functions.
Section (2)
Oversight, accountability and responsibility expected of the board of directors,
Shariah Committee and also management. Board director oversight on shariah
governance structure & shariah compliance, Shariah Committee oversight
accountability on shariah related matters and management is ensuring executions of
business & operations are in accordance with Shariah principles and also provide
necessary support to the Shariah Committee.
Section (3)
This section aims to safeguard the independence of the Shariah Committee in
ensuring sound Shariah decision-making and emphasis on the role of the board of
directors in recognising the independence of the Shariah Committee.
22
Section (4) Highlights requirements and expected competencies to ensure key
functions are capable with shariah governance implementation.
Section (5)
Confidentially and consistency in decision-making by Shariah Committee.
Section (6)
Prescribes the functions of the Internal Shariah review, Shariah audit, Shariah risk
management and Shariah research (BNM, 2010).
The Figure 2.3 show six sections, model structure, functions and reporting
relationships of key organs in Islamic Financial Institutions Malaysia.
Section 2
Section 1
Section 3
Section 5
Section 6
Figure 2.3: Shariah Governance Framework Model for Islamic Financial Institutions (Bank Negara Malaysia, 2010)
BOARD RISK
MANAGEMENT
COMMITTEE
BOARD
Overall oversight on shariah
governance structure &
shariah compliance
SHARIAH
COMMITTEE
Oversight accountability
on shariah related matters
BOARD
AUDIT
COMMITTEE
MANAGEMENT
- Ensure executions of business & operations are in accordance with
Shariah principles
- Provide necessary support to the
Shariah Commitee
Shariah Risk
Management Control
Function
Identify, measure, monitor,
report & control Shariah
non-compliance risk
Shariah Review
Function
Review business
operations on regular
basis to ensure Shariah
compliance
Shariah
Research
Function
Conduct in-depth
Shariah research
prior to submission
to the Shariah Commitee
Shariah Audit
Function
Provide independent
assessment and
objective assurances
designed to value add
& improve IFI’s
compliance with
Shariah
Shariah Compliance and Research Functions
Shariah
As overarching principle in Islamic Finance
Section 4
23
2.1.6 Islamic Banking System in Malaysia
According Saikh (2010) Islamic banking refers to a system of banking activity that
consistent with Islamic principles and the practical application through the
development of Islamic economics. Islam classified Islamic banking into two types
(Ensiklopedi Hukum Islam, 2013), namely:
(1) In Respect of Ownership
Islamic Bank divided into three owners there are owned by government,
private sector and internationally
(2) In Respect of Business Motive
Islamic Bank divided into two classifications: commercial bank and
development bank
The development of Islamic banking globally started in 1920s and has been growing
significantly. Table 2.4 below shows the history of Islamic Banking:
Table 2.4: The Development of Islamic Banking Globally (Joshi, 2012)
Year History
1920s-1930s The first Muslim-owned banks were established, they still adopted similar
practices to conventional banks
1940s-1950s Several experiments with small Islamic Banks were undertaken in Malaysia and
Pakistan
1963 Egyptian village of Mit Ghamr set up a bank that conducted business according to
Islamic principles
1975 Inter-Government Islamic Development Bank in Jeddah were established
1970s-1980s Commercial Islamic Banks such as the Dubai Islamic Bank, the Kuwait Finance
House and the Bahrain Islamic Bank
1990s-2000s Commercial Islamic Banks were established in almost all countries (Muslim/non -
Muslims countries)
Malaysia Islamic banking industry has been existed for over 30 years from
1980s and it has a successful long track in the development of domestic Islamic
Finance, mainly in financial bedrock of stability that adds to the richness, diversity
and maturity of the financial system (BNM, 2010). Islamic banking is merely another
form of conventional banking minus the interest element, or a mere play of semantics
by replacing the word "interest" with "profit" (Ranjbar & Pahlevan, 2008). Islamic
banking as one of financial industry players also seen as the fastest growing of credit
24
market in Muslim countries. Geographically, the effect has grown has grown from
Middle East to Europe and in South East Asian market as well (Shaikh, 2010).
Malaysia has a significant number of full-pledged Islamic Banks, including
some foreign owned entities (BNM, 2010). Islamic banking and the takaful market in
Malaysia are reasonably concentrated. There are some major banks are going global
such as Maybank Islamic, Bank Islam Malaysia, Am Islamic Bank, Public Islamic
Bank, CIMB Islamic (BNM, 2015).
Table 2.5 below shows the history of Islamic banking in Malaysia Islamic
banking in Malaysia has existed almost 30 years ago
Table 2.5: History of Islamic Banking in Malaysia (Bank Islam, 2010)
Year History
1980s 1st Islamic Bank was established under Islamic Banking Act 1983
1993 Introduction of Interest Free Banking & Islamic Banking Window
1999 Arrival of new competitor, namely Bank Muamalat (2nd IB)
2004 Establishment of Islamic Banking subsidiary for conventional bank
2005 Entrance of Kuwait Finance House, Al Rajhi & Asian Finance
2008
International Islamic Banking licenses were issued to Unicorn International Islamic
Bank, 1st Islamic Investment Bank Ltd, Deutsche Bank, and allow the bank to provide
Islamic commercial and investment services denominated in foreign currencies
2010 Mega Islamic Bank
2.2 Islamic Housing Finance (IHF) in Malaysia
As stated above, Islamic Housing Finance (IHF) in Malaysia has been running for
almost 30 years, began when Bank Islam Malaysia Berhad (BIMB) established in
1983. Before the year 1983, people who have difficulties in buying real estate in cash
prefer to choose House Financing products offered by conventional banks. So they
have to engage with the practice of usury at the time. Until the end, BIMB was
established and offers a number of House Financing products in accordance with the
principles of Islam, and at the same time BIMB was a pioneer in Islamic Housing
Finance in Malaysia (Ahmad, 2003).
BIMB success in attracting the attention of the Malaysian government to
apply the principles of Islam to other Islamic Banks nationally. The implementation
of the sharia practice in Malaysia is also marked with the establishment of laws, such
as the enactment of Islamic Banks Act, 1983, if the elements are not suitable or not
in accordance with the principles of Islam it would be prohibited in Islamic banking
operations. In addition, Shariah Advisory Council was established to oversee and
123
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