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Islamic Banking and Finance


Islamic Banking and Finance (IBF) is an intermediary transaction that follows the rukun (pillars) and syarat (conditions) from Shariah perspectives. Since IBF is grounded in the tenets of the Islamic faith, all transactions must be compliant with shariah, based on the teachings of the Qur'an and Al-Sunnah and other secondary sources of Islamic law. The rules that govern commercial transactions in Islamic banking are referred to as fiqh al-muamalat. The basic concept of fiqh al-muamalat are as follows:

 “Wealth as a trust & Amanah from Allah swt

 “Promotion of honesty, transparency, justice and fairness

History of Islamic Banking

The practices of IBF can be traced back to the Medieval era in the Middle East where entrepreneurs started engaging in financial transactions with their European counterparts. Initially, they used the same financial principles as the Europeans. Over time, as trading systems developed and European countries started establishing local branches of their banks in the Middle East, some of the banks adopted the local customs of the region where they were newly established, primarily no-interest financial systems that worked on a profit and loss sharing method.

In the early 1960s, Islamic banking resurfaced in the modern world. Since 1975, many new interest-free banks have opened. While most of these institutions were founded in Muslim countries, Islamic banks also opened in Western Europe during the early 1980s. Today, there are more than 500 banks and 1500 mutual funds that comply with Islamic Principles all around the world.

Public Opinion towards IBF

Salient Features

Islamic Banking and Finance

Conventional Banking

  • An intermediary that provides funds on the basis of providing trading (buyer & seller/lessor & lessee) and investment (partner).

  • In trading, the client must pay the consideration/the price consisting of profit to the bank.

  • In investment, the bank and the client are partners who share the profit and the losses.

  • Avoidance of prohibited commodities such as riba (interest), gharar, fraud and deception.

  • A division of commercial banking and universal banking.

  • Commercial banking is based on pure financial intermediation model relating to lender and borrower relationship, with a prohibition from trading and owning equity.

  • A universal banking is based on financing client through a combination of shareholding/financing and lending, where trading and holding equity is allowed.

  • Both divisions of conventional banking are based on interest.

Table: Fundamental salient features that differ the two systems

Difference in Products




Conventional Banking


Savings/Current Account Savings/Current Account

Type of contract used

Wadi’ah Yad Dhamanah

Not applicable


At the discretion of the bank Returns (Interest) have been guaranteed

Islamic bank’s structure deposit products by using Wadi’ah Yad Dhamanah contracts i.e., savings with collateral. Grants or gifts may be given to depositors but subject to the banks’ discretion. As for conventional banks, each account holder is promised a return specific to the savings made. Consequently, usury would occur in the savings account. This is due to the reason that banks borrow money that is saved by customers to carry out their business activities. Any increase in the form of return on the customer’s savings is accounted for as usury from the loan transaction.




Conventional Banking

Financing product

Personal Financing Personal loan

Type of contract

Tawarruq or Bai 'Al-Inah Loans


Resulting from sales Resulting from interest/loan transactions
Amount to be paid The amount is fixed throughout financing period or reduced/given rebates if the customer pays overall more funding early The amount changes according to changes in the Base Lending Rate
Asset Ownership


Must be owned by the seller

Not applicable

Late payment


Compensation (ta’widh) will be imposed Penalty in the form of compounding will be imposed

Type of Insurance



IBF structures financing by using various Shariah contracts – murabahah, ijarah etc. In contrast to conventional banking where the customer will receive debt as a result of borrowing money from the bank and the profit received by the bank based on the interest rate.




Conventional Banking

Investment product

General investment account/accounts special investment Fixed deposit


Type of contract used


Not applicable


Profit-sharing according to an agreed percentage Interest/Dividends


IBF uses the concept of real profit and risk-sharing which does not impose a burden on any parties involved. For instance, clients as investors and banks as entrepreneurs share profits while losses will be borne by investors in Mudarabah. This coincides with fiqh, ‘every return is at risk’. In contrast with the conventional investment that promises a fixed return at the starting point of the investment contract, which does not involve an actual partnership between the parties involved. Such fixed return promised is usury/riba’ which is haram.

Islamic Banking and Finance in Malaysia:

Back in 1963, the Pilgrims Management Fund Board of Malaysia (now known as Tabung Haji) was the first Shariah-based institution in Malaysia. In 1983, the establishment of the first Islamic bank; the Bank Islam Malaysia Berhad (BIMB) bring about the development of Islamic banking in Malaysia.

Position of Islamic Banking in Malaysia:

  1. Federal Constitution (FC);
    • Islamic Banking and Finance are within Federal Legislation and are subject to the jurisdiction of civil courts.
    • List 1 of 9th Schedule of FC (reference to Items 7 and 8): jurisdiction of civil courts in matters related to banking and finance.
  2. Civil Law Act 1956;
    • Sections 3 and 5 state: banking matters and related transactions are within the jurisdictions of civil laws.
    • Thus, Islamic Banking and Finance is under the jurisdiction of civil laws as within the ambit of mercantile laws.
  3. Islamic Financial Services Act 2013;
  4. Financial Services Act 2013;
  5. Central Bank of Malaysia Act 2009;
  6. Securities Commission Act 1993;
  7. Development Financial Institution Act 2002;
  8. Government Funding Act 1983;
  9. Islamic Banking Act 1983.


  1. Bank Negara Malaysia (BNM).
  2. Securities Commission (Suruhanjaya Sekuriti Malaysia “SC”).

Bank Negara Malaysia (BNM) as the financial and Shariah regulator along with Securities Commission (Suruhanjaya Sekuriti Malaysia “SC”) have worked together to implement various policies to expedite the growth of Islamic banking and finance in Malaysia.

Judicial Body:

According to Practice Direction No 1/2003, the Muamalat Court will hear cases on Islamic Banking and Finance

Islamic Banking and Finance Products by Malaysian Banking Institutions:



  • Al-Wadiah Saving Account
  • Al-Wadiah current Account
  • Al-Wadiah Affin Plus-i
  • Al-Mudharabah Junior Saver-i
  • Al-Mudharabah Wealth Saver-i
  • Wadiah
  • Mudharabah

Affin Islamic Bank    


  • Mudharabah Saving Account-I
  • Mudharabah Children Saving Account-i
  • Mudharabah

Al-Rajhi Bank    


  • Leasing-I
  • Ijarah thumma bai’

Alliance Islamic Bank  


  • Basic Current Account-i
  • Afdhal Investment Account-I
  • Al-Taslif Card-I Features
  • Arif Hire Purchase-I
  • Home Financing-I
  • Industrial Hire Purchase-I
  • Project Financing-i
  • Wadiah Yad Dhamanah
  • Mudharabah
  • Bai Al-Inah
  • Ijarah Thumma Al-bai’
  • Bai Bithaman Ajil
  • Ijarah Thumma Al-Bai
  • Musyarakah

AmIslamic Bank    


  • Hire Purchase-I
  • Leasing-I
  • Project Financing/Bridging
  • Equipment & Commercial Property Financing-i
  • Letter Of Credit-i
  • Accepted Bills-I
  • Ijarah Thumma Al-Bai’
  • Ijarah
  • Istisna’
  • Bai’ Bithaman Ajil
  • Wakalah
  • Murabahah
  • Bai’ Dayn

Bank Islam


  • Al-Wadiah saving-I
  • Mudharabah General Investment Account-I (GIA)
  • Wadiah Yad Dhamanah
  • Mudharabah

Bank Muamalat  


  • Nuri Saving Account-i
  • Syabab Saving Account-I
  • Tawfir Saving Account-I
  • Qiradh Investment Account-I
  • Qiradh Investment Account-I (SPBR)
  • Qiradh Investment Account-I (senior Citizen)
  • Mudharabah
  • Bai’ Al-Inah

Bank Rakyat  


  • Pembiayaan Perumahan I
  • Pembiayaan Peribadi-I BSN-I BPA
  • Bai’ Bithaman Ajil
  • Bai’ Al-Inah

BSN Perbankan Islam    


  • Children Saving account-I
  • Wadiah
  • Mudharabah

CIMB Islamic    


  • Citibank Guard Savings Account-I
  • Citibank Checking Account-I
  • Citibank Time Deposit-I
  • Wakalah
  • Hibah
  • Wadiah Yad Dhamanah
  • Mudharabah

Citibank Islamic Banking    


  • Home/House Financing-i
  • Hire Purchase-i
  • Bai’ Bithaman Ajil

EONCap Islamic Bank  


  • Hong Leong Current Account-I
  • Hong Leong Current Account One-I
  • Hong Leong Savings Account-I
  • Hong Leong Multi-Tier Saving Account-I
  • Hong Leong Junior Saving Account-I
  • Wadiah
  • Mudharabah

Hong Leong Islamic Bank    


  • Akaun Business Vantage-I Amanah
  • Surat Kredit-I Amanah
  • Jaminan perkapalan-I Amanah
  • Wadiah Yad Dhamanah
  • Wakalah
  • Murabahah
  • Kafalah

HSBC Amanah    


  • Financing-i Home Financing-i
  • Musyarakah Mutanaqisah

Kuwait Finance House    


  • Murabahah Cash Line Facility-i
  • Mudharabah Investment account
  • Wadiah account
  • Primier Mudharabah account-i
  • Tamwil Cash Line Facility-i
  • Murabahah
  • Mudharabah
  • Wadiah

Maybank Islamic Banking        


  • Contract (Deferred Payment Sale)
  • Contract (Leasing)
  • Contract (Leasing and subsequently Purchase)
  • Corporate financing under
  • Cost  plus sale
  • Agency
  • Guarantee
  • Wadiah Yad Dhamanah
  • Bai Bithaman Ajil
  • Ijarah
  • Ijarah Thumma Al-Bai’
  • Bai’ Istisna’
  • Bai’ Murabahah
  • Wakalah
  • Kafalah

OCBC Islamic Banking    


  • Saving Account-i
  • Current Account-I
  • BASIC Wadiah Saving Account-i
  • BASIC Wadiah Current Account-i
  • General Investment Account-i
  • AITAB Hire Purchase-i
  • Wadiah
  • Mudharabah

Public Bank Islamic Banking  


  • Hire Purchase-i
  • Home Financing-I
  • Industrial Hire Purchase-i
  • Term Financing-I
  • Ijarah Thumma Al-Bai’
  • Musyarakah
  • Ijarah Thumma al-Bai’
  • Murabahah
  • Istisna’
  • Ijarah

RHB Islamic Bank  


  • Special General Investment Account-I (SGIA)
  • Current Account-I
  • Mudharabah
  • Al-Wadiah Yad Dhamanah

Standard Chartered Islamic Banking  


Islamic Banking and Finance in Indonesia:

Islamic Law was initially accepted as a philosophical theory in Pancasila (one of the nation’s Pillars). Since 1988, The Presidential Instruction No. 1 of 1991 provided that Islamic Law is accepted as a fundamental rule in Indonesia. Islamic Banking and Finance was first introduced to the nation in 1991 when Bank Muamalat Indonesia was established.

Position of Islamic Banking in Indonesia:

  1. Law No. 3 Year 2006 on Court of Religion concerning the scope of judicial authority of Courts of Religion pertaining to Shariah Economy;
  2. Law No. 10 Year 1998 (amending act to Law No. 3) concerning both conventional and Islamic Banking;
  3. Statute No 21 of 2008 concerning Islamic Banking;
  4. Statute No 23 of 2011 concerning Management of Zakat;
  5. Statute No 41 of 2004 concerning Wakaf; and
  6. Statute No 19 of 2008 concerning Shariah Obligation/Security.

Bodies responsible for Islamic Banking and Finance:

  1. Dewan Syariah Nasional-Majelis Ulama Indonesia (DSN-MUI)
    • Creates the form of aspiration concerning the economy
    • To encourage Islamic means in economy/financial implementation according to Islamic laws
    • To encourage the efficiency and coordination measures taken by scholars in addressing economy/financial related issues
    • To encourage Islamic means implementation regarding economy and financial life
  2. Dewan Syariah Nasional (DSN)
    • Supervises fatwa in shariah economy
    • Address out-of-court disputes
  3. Badan Arbitrase Syariah (Basyarnas)
    • An alternative dispute resolution other than Court for Religious Affairs

Judicial Body:

  • Court for Religious Affairs is responsible to hear cases on Islamic Banking and Finance


Islamic Banking and Finance in Brunei Darussalam:

The initial point of Islamic finance industry in Brunei started when His Majesty the Sultan of Brunei decreed in his royal speech of the importance of establishing Islamic banks as part of fardhu kifayah for a Muslim country such as Brunei itself. The royal speech was made during the meeting of Islamic Religious Council Meeting (Majlis Ugama Islam) on 25th September 1990. The industry was then initiated when Tabung Amanah Islam Brunei (TAIB) was established on 29th September 1991 as a trust fund to provide facilities for Muslims there to make pilgrimage to Mekah. TAIB was officially launched by His Majesty Sultan Haji Hassanal Bolkiah Mu’izzaddin Waddaullah ibni Al-Marhum Sultan Haji Omar ‘Ali Saifuddien Sa’adul Khairi Waddien, the current Sultan and Yang Di-Pertuan of Brunei. It was the first institution that conduct all its activities in accordance with Islamic beliefs.

Legal Position of Islamic Banking in Brunei Darussalam:

  1. Banking Order, 2006.
  2. Islamic Banking Act 1992 (Chapter 168).
  3. Islamic Banking Order, 2008.
  4. Pawnbrokers Order, 2002.
  5. Perbadanan Tabung Amanah Islam Brunei Act (Cap 163).
  6. Syariah Court Act (Chapter 184).
  7. Syariah Financial Supervisory Board Order, 2006.
  8. Securities Market Order, 2013.

Bodies responsible for Islamic Banking and Finance:

  1. Brunei Darussalam Central Bank (BDCB) or was known as Autoriti Monetori Brunei Darussalam
  2. Syariah Financial Supervisory Board
  3. Shariah Financial Services Board

Judicial Body:

Section 2(3) of Pawnbrokers Order, 2002 recognises the function of Syariah Courts to interpret and resolves any issues relating to Islamic banking. The Courts include Syariah Subordinate Court, Syariah High Court and Syariah Appeal Court, per Syariah Court Act (Ch 184).


Islamic Banking and Finance in Australia:

Islamic banking and finance in Australia are relatively new in the country. The initial attempt in introducing the system was made by the Muslim Community Co-operative Australia (MCCA). Nonetheless, the MCCA, the Muslim Community Credit Union Ltd (MCCU) and Hejaz Financial Services are now on the way to becoming full-fledged Islamic institutions. The establishment of these organizations was made in response to the growth of Muslims in the country while simultaneously catering to the needs of the community.

Fundamentally, the expansion of Islamic banking and finance there has been slow due to numerous reasons. However, several other organizations have been established to further strengthen the Islamic banking and financial system in the banking industry. For instance, Islamic Co-operative Finance Australia Limited (ICFAL) and Iskan Finance provide for Islamic finance facilities. There are also Crescent Investments and LM Investment offering Islamic fund management to the Islamic community there.

Bodies Responsible for Islamic Banking and Finance:

  1. Australian Prudential Regulation Authority (APRA);
  • The body is responsible to regulate legislation governing the interests of insurance policyholders, depositors and fund members.
  • The regulations shall govern every Islamic deposit-taking institution as well, especially banks that operate Islamic insurance (Takaful).
  • APRA acts as a supervisory body through the insertion of conditions and requirements that banks should comply with.
  1. Reserve Bank of Australia (RBA);
  • RBA is an independent institution that regulates and issues directives and guidelines to all Islamic finance service providers.
  • In addition, RBA is also responsible to supervise all financial institutions on monetary policies to ensure the stability of the financial system in the country.
  1. Australian Securities and Investment Commission (ASIC).
  • ASIC supervises matters in relation to financial securities, financial instruments and stock exchanges.
  • ASIC also imposes guidelines and conditions on financial institutions practicing the Islamic system.
  • Any breaches will be investigated by the commission.

Islamic Banking and Finance in the United Arab Emirates:

The establishment of the Dubai Islamic Bank (DIB) has become the initial point of the development of Islamic banking and finance all around the world. DIB being the world’s first Islamic commercial bank was established by the UAE’s government with the view to introduce full-fledged Islamic banking and finance into the financial system. The vision was successfully achieved when Sharjah Islamic Bank, or formerly known as National Bank of Sharjah, was the first bank in the world to be converted from a conventional bank to an Islamic bank in 2002. To date, the nation has triumphantly established more than five (5) full-fledged Islamic banks with 20 others practicing Islamic financial systems and products.

Position of Islamic Banking in UAE:

  1. Federal Law No. 6 of 1985;
    • The law regulates Islamic Banking, Financial Institutions and Investment Companies in the nation.
    • Article 3 states that Islamic institutions have the right to carry all or part of banking, commercial, financial as well as investment services.
  2. Federal Law No. 10 of 1980;
    • The law is pertaining to the method of operations that shall be practiced by financial institutions there.
    • Essentially, all financial institutions have the right to engage in all kinds of services and operations.
  1. Federal Law No. 8 of 1984;
    • The law is in relation to commercial companies practicing Islamic financial systems.
  1. Resolution No. 4 of 2010;
    • The law is concerning takaful regulations that are applicable to all takaful operators.
    • In essence, the regulations that are governing takaful operators are non-identical to the regulations governing conventional insurers.
  1. UAE Central Bank Resolution 164/A/94;
    • A regulating law that provides for regulations of financial institutions and investment consultation establishment.
  1. UAE Central Bank Resolution 89/3/2000;
    • A supplemental law relating to the amendments made to Central Bank Resolution 164/A/94.
  1. UAE Central Bank Resolution 21/2/88;
    • The law provides for the regulations for investment systems to financial institutions in the state.
  1. ESCA Resolution 48 of 2008;
    • The law is concerning financial advice and analysis given to financial institutions in the state.

Bodies Responsible for Islamic Banking and Finance:

  1. The Insurance Authority (IA);
    • IA is the regulating body for the insurance market in UAE.
    • The body introduced an extensive set of regulations to regulate local takaful industry in 2010.
  1. The Islamic Centre for Reconciliation and Commercial Arbitration (IICRCA);
    • IICRCA is the dispute resolution avenue that parties may resort to in resolving a dispute relating to the finance industry there.
    • IICRCA assists the parties to resolve any dispute through reconciliation or arbitration.
    • IICRCA is the only forum for parties to resolve Islamic financial disputes since the civil courts, as well as shariah courts, do not entertain issues relating to Islamic financial disputes.


  1. Bai Dayn
    A transaction involving a debt-trading contract.

  2. Bai Bithaman Ajil
    A sale where payment is deferred in installments or in full over a specified period and date.

  3. Bai 'Al-Inah
    A transaction of sale and buy-back contract.
    A seller sells an asset to the buyer and subsequently buys back the asset at a deferred price which is higher than the sale price or the seller sells an asset at a deferred price and later buys back the asset at a lower price than such deferred price.

  4. Bai ’Al-Sarf
    A contract that involves buying and selling a currency with points of money of the same kind or of different kinds.

  5. Gharar
    A form of uncertainty. A yet-to-be form of transaction.

  6. Hibah
    A gift or consideration that involves a party to transfer the ownership of his asset to another.

  7. Ijarah
    A rental contract involving interest/benefits from an asset with a certain payment within an agreed period.

  8. Ijarah Thumma Al Ba’i
    A transaction that is based on the principles of lease followed by sale. Here, the applicant should pay an agreed rental payment over a specific period during the leasing contract.

  9. Istisna'
    A transaction of sale and purchase by order for a product with specifications and by a method of delivery and payment either cash or deferred payment.

  10. Kafalah
    A transaction involving any form of guarantee provided by the guarantor to a third party on the obligations that must be fulfilled by the party insured/guarantee.

  11. Mudarabah
    A partnership contract that involves an agreement between investors and fund managers to share profits by ratio to a particular partnership where losses will be borne entirely by the investor.

  12. Murabahah
    A transaction of sale and purchase that involves the cost price of the asset and the rate profits which are clearly stated to the buyer.

  13. Musyarakah
    A partnership contract that involves an agreement jointly by a business partner to share any profits or the resulting losses.

  14. Musyarakah Mutanaqisah
    A transaction that allows the partner of the agreement to lease his share of musyarakah asset to other partners.

  15. Rahnu
    A transaction that involves the lien of an intended asset loan money by handing over goods as collateral for a certain period.

  16. Sukuk
    Sukuk is a trust certificate whereas a bond is a contractual debt obligation. Generally, Sukuk represents a beneficial ownership interest in the underlying asset. Returns on Sukuk are tied to the returns earned through the underlying assets. For bond, the issuer is contractually obliged to pay bondholders, on certain specified dates, interest and principal.

  17. Tawarruq
    A transaction that involves the purchase of an item with a deferred price, then selling it to a third party to earn cash.

  18. Ta’widh
    A compensation or fine imposed by banks due to late payment.

  19. Wadiah
    A contract that involves storing an item or property as a trust.

  20. Wadi’ah Yad Dhamanah
    Savings with collateral e.g., the property is being deposited based on trust

  21. Wakalah
    A transaction involving the appointment of a representative/agent to execute a transaction, and in return, the representative will receive wages for such services.

  22. Fardhu Kifayah
    A form of legal obligation that must be discharged by the Muslim community.