Institution Affiliation

Saiful Azhar binRosly is a world-renowned financial expert. He is a Professor ofEconomics and currently works at the International Center forEducation in Islamic Finance (ICEIF) as the head of the BankingDepartment (Rosly, 2005). In addition to this, he has published hisworks in various international journals such as the Journal ofManagerial Finance, International Journal of Social Economics, andthe Arab Law Quarterly. One of his latest books, Critical Issueson Islamic Banking and Financial Markets, covers a broad analysisof the state of the financial sector in Malaysia and the principlesthat define the economic activities based on the Islamic laws. Thebook integrates various variables such as investments, takafuland financial planning, Islamic economics, and financial planning(Rosly, 2005).

Islamic Banking Principles

Numerousprinciples and practices of Islamic banking define the financialmarkets. When analyzing the Islamic capital markets, it is necessaryto note that the primary reasons for such systems are to facilitatethe flow of funds from sectors that have a surplus to those that areexperiencing deficits (Hassan &amp Lewis, 2007). This process isnecessitated by the Islamic teaching of promoting justice (‘adalah)and equality. Additionally, the Islamic financial markets incorporatethe Shari’ah principles that highlight the importance of achievingefficiency- doing the right thing and doing it right.Through such values, both the public and private interests areprotected in the long run (Rosly, 2005).

Additionally, thefinancial systems ensure that halal status does not discountthe ways in which the Islamic products are likely to impact on theeconomic activities. This framework of operations provides that theShari’ah advisors not only approve Shari’ah-compliant products byjuristic plane but also ensure that such products do not lead topoverty, economic instability, income disparities, and the stagnationof economic growth (Rosly, 2005).

Discussions onIslamic banks and investments massively depend on Shari’ah laws.Such regulations determine practices that are permissible (halal)and those that have been prohibited (haram) according to theteachings of Allah swt (Rosly, 2005). One factor that featuresextensively in this case, is the Islamic law of contracts (fiqhmuamalat). Shari’ principles are integrated into all theaspects of transactions being conducted in Islamic banks, takaful,investment banks, and mutual funds. The universality can beattributed to the fact that the principles are derived from both theQuran and Sunnah. The law of tabi’ on the other handadvocates for efficiency in the financial system. As such, despitethe Shari’ah laws advocating for an equitable aspect of the Islamicfinancial market activities, the principle of tabi’indicates that the other dimensions of the market activities do notrely on explicit divine guidance (Rosly, 2005). Tabi’ inthis case, refers to nature since such values are universal and areused by individuals across the globe irrespective of their faiths. Inthis case, the market players are encouraged to apply the knowledgebased on reason and experience to understand how the market operates(Hassan &amp Lewis, 2007).

There are variousprinciples that must be taken into consideration when determining theShari’ah legitimacy of the revenues derived from Islamic financialtransactions. Some of the principles include that of risk taking(ghorm) and the principle of work (kasb) (Rosly, 2005).In addition to this, the system also advocates for the inclusion ofthe principle of liability, accountability and responsibility (daman)in determining the compliance of transactions to the Shari’ah law(Kettell, 2011). Therefore, the three essential components of tradingand commerce (al-bay’) as enjoined by the Holy Quran overusury (riba) include responsibility (daman), risk(ghorm) and work (kasb) (Lewis &amp Algaoud, 2001).

Ghorminvolves the concept of allowing capital to appreciate and depreciateaccording to the market forces (Rosly, 2005). This means that allforms of manipulation of the economic variables, so as to unethicallybenefit from the market fluctuations are prohibited. Kasb onthe other hand, refers to the value-addition that can be imparted inthe process of knowledge and skills that are essential to thebusiness process (Rosly, 2005). Daman identifies theresponsibility that each party to a contract is meant to fulfill. Itmay involve the provision of warranties on the products sold toclients.

In addition tothese values, the principle of equivalence counter value (‘iwad)is also introduced into the discussion (Hassan &amp Lewis, 2007).‘Iwad advocates for the inclusion of ethics and morals whenengaging in Islamic financial transactions. It promotes a sense ofjustice as contained in the Holy Book of Quran (Rosly, 2005). It alsoplays an important role in ensuring that only quality products areavailable in the market. This is because the principle of Iwadassists individuals in taking a second look at the products that areregarded as Shari’ah compliant thereby playing a significant rolein controlling the potential duplication of interest-bearing productsthat have an Islamic label (Kettell, 2011).

Numerous financial practices are condemned by Islam. One suchprinciple is Riba (Rosly, 2005). It is defined as theunjustified increment in money borrowed or lent to an individual oran institution. It is the amount paid in kind above the loan and canalso be used to refer to the unwarranted increment gained by eitherthe seller or buyer in case the goods exchanged in kind were ofdifferent quantities (Rosly, 2005). According to Islamic teachings,exchanging goods of the same kind may lead to riba (Kettell,2011). As such, the Prophet (p.b.u.h.) advised all traders to usemoney during transactions involving the exchange of goods as a meansof avoiding riba.

Islamic Banking Products

The study of thefundamentals issues in Islamic banking and the financial markets alsoinclude the analysis of the Islamic banking products (Rosly, 2005).As a result of the expanding economic activities in the Malaysianeconomy, additional products have been created to meet the increasingconsumer demand. However, the creation of such products must bewithin the Shari’ah laws and guidelines as well as be in strictadherence to the three principles of risk (ghorm), work(kasb), and responsibility (daman) (Kettell, 2011).

Some of thefinancial products available in the Islamic banking and capitalmarkets include Al-Bai-bithaman Ajil financing (Rosly, 2005). It is aform of Islamic financing product involving the sale of goods. Itincorporates the concept of deferred payments. In other words, thisfinancial product means the sale of goods on credit and haspre-agreed payment dates (Lewis &amp Algaoud, 2001). Other includethe Al-Bai-Bithaman Ajil and the risk of ownership concepts alsoknown as daman milkiya. Bay’ Salam Financing product isfocused on the revival of the agriculture sector. Others include theIslamic Hire Purchase, Al-Ijarah and Leveraging Leasing, and both thePassive and Active BBA (Rosly, 2005). Bay’ al-‘Inah overdraft isa term that refers to the sale of an asset that can be purchased foranother price in the future. However, in this case, the current priceis significantly lower than the deferred price (Rosly, 2005).

Over the years,there has been the growth of a financial product known as the Salamand Istisna Financing. However, there are differences between Istisnaand Salam (Rosly, 2005). The former can be attached to subjects thatneed manufacturing whereas the latter can be applied to any itemunder consideration (Kettell, 2011). For Salam, there is a priorpayment of the price whereas that is not the case of Istisna. TheAl-Rahn Islamic Pawn Booking Financial product is based on threeconcepts namely:

  • Qardhul Hasan states that the borrower is only required to pay the amount borrowed (Hassan &amp Lewis, 2007).

  • Ar Rahnu and Al-Wadi’ah on the other requires the use of collateral to ensure repayment of the sum borrowed.

  • Al-Ujrah is whereby the lender charges a fee for safekeeping of the pawned items.

Additionally, other financial products in the Islamic banking andfinancial system include the following:

  • Musyarak Mutanaqisah Home Financing, and

  • Al-Ijara Thumma Al-Bai’ (AITAB) Car Financing (Rosly, 2005).

Macroeconomic Issues

Another criticalissue on Islamic banking and financial markets relates to theanalysis of the macroeconomic factors. They include Idle-Balances inIslamic banking as well as Islamic Universal Banking. Others includeBank Run and Islamic Banking, Islamic and foreign investment inMalaysia, moral hazard and adverse selection in periods followingeconomic turmoil, and gap management (Kettell, 2011). Since thebanking sector has a massive role to play in the growth of theeconomy, it is necessary to highlight other factors such as internalrate volatility, inflation risk, economic development and stabilityand the business cycle in Malaysian Islamic banking system (Rosly,2005).

Various uniqueissues must be taken into consideration in the analysis of Islamicbanking. They include matters relating to the Islamic debtsecuritization and the Islamic currency, Dinar (Lewis &amp Algaoud,2001). Moreover, several studies have been conducted on the Islamiclaw of inheritance, otherwise known as Fara’id. It is alsoimportant to establish whether the financial profits earned from theAl-Bai-Bithaman financing products contain any form of ‘iwad.The product pricing of the financial products must be within theShari’ah laws. As such, there shall be no extortion and extracharges on customers as a means of earning additional revenue.Marketing of the Islamic banking services must also not be based onlies to attract other customers. Rather, the information contained inthe commercialization platforms must be genuine and in strictaccordance with various Islamic teachings on justice and equality(Kettell, 2011).

Islamic Deposits Sources of Funds

Islamic bankssystems do not accept interest on deposits, unlike other types ofbanks. These banks operate deposits in different ways. Islamic banks,therefore, use different financing techniques in ensuring that thebank has the required funds for efficient operations. Deposits fromsavers are an essential source of finance in the Islamic banks. Thebanks use deposits to increase their capacities to fund operations.Consequently, the use of deposits increases the profits that thebanks make for the shareholders (Ali &amp Ahmad, 2004). Wadiahor Amanah arrangements or Mudarabah or Wakalahare the methods through which Islamic banks raise funds to formdeposits. Current account deposits and saving account deposits arethe two most important fundamentals of mobilization deposits by theIslamic banks.

Mudarabahis one of the primary methods and procedure that Islamic Banksutilize when it comes to the raising of funds. In mudarabah,people or accounts that deposits are the source of the funds for thebank to invest in the profitable, legal and Shari’ah compliantbusiness ventures. Consequently, the bank manages the affairs of themudarabah and additionally takes the benefits associated withthe mudarabah. Moreover, Islamic banks have the power topurchase different types of mudarabah Sukuk and certificates.Due to a mutual agreement, mudarabah has a proportionate shareof profit (Ali &amp Ahmad, 2004). If there is a loss, the Islamicbank shares the loss as the bank is the owner of the finance.

Depositorsaccepted by the Islamic banks can be insured against the possibilityof making losses if there is not an element of interest involved inthe Takaful contribution. The Islamic banks have come up withprocedures for the protection do the deposition and investment. Thesesystems include risk management processes which tend to limitedexcessive risk-taking (Ali &amp Ahmad, 2004).

Islamic Partnerships

Musharakahis a not only a form of partnership in Islamic banking butt also afinancing technique. In musharakah, two or more finances cometogether and provide funds for a particular project. Sharing ofprofits is entitled to all partners by the ratios agreed upon. Thereare permanent and diminishing musharakah. In stablemusharakah, the bank involves itself in equity and relieves ashare of profit annually founded on a pro rata basis. Diminishingpartnership, on the other hand, has penalties associated with thebusiness venture (Mughai, 2011).

The company ofequal (Al-‘lnan) is a type of partnership where two bodies,also known as abdan associate with their properties. Theassociation is called the company of ‘Inan as all of thepartners have equal rights in the business. The company of bodies(Al-Abdan) is a type of business in which one or more personsdo not participate with their capital but rather with their bodies.The people in their type of venture share the resources of thefinances they gain from their labors. The member of the partnershipscan as well develop different roles in the company to ensure theymaximize the minimum personnel they have in the partnership. Thecompany of body and capital (Mudharaba) on the other hand iscalled loaning (qiradh) (Mughai, 2011). This is a partnershipthat involves both the body and the property for the functioning ofthe form venture. In simple terms, this type of business just impliesthat one individual compensates his possessions to another person.The person trades with the property, and the subsequent profit isdivided amongst the people rendering what they specified. However,the loss in the mudharaba is not the topic of the arrangementof the partners but quite to that which came in the Shari`a.

Legal Aspects of Islamic Banking

During the pastdecades, there has been substantial growth in the Islamic banking.Islamic finance varies rather significantly from conventionalbanking. The Islamic banking uses very different mechanisms apartfrom functioning according to a different theory as it is grounded onIslamic law. The continued, and rapid evolution witnessed in theIslamic banking systems due to the development of a comprehensivelegislative structure which governs the takaful operations,the regime for Islamic banks and the Shari’ah Council of Islamicbanking (Aldohni, 2011).

In the context ofthe Islamic Banking system, the legal aspect tackles all theframeworks that deal with the relevant legislative and regulatorystructures. Islamic law also known as Shari’ah has to be added tothe Islamic banking to govern all the actions and procedures thattake place in the business systems. The Islamic legislative systemprohibits interest, and this is the distinctive feature that makesIslamic unique in comparison to other business systems (Aldohni,2011). The transactions in the Islamic banks are built on the valuesof profit and loss sharing (PLS) instead of interest.

The applicationof the Islamic law in the Islamic banking system creates a systemthat has diverse financial products that are unique according to thebanking system. Islamic banks cannot operate outside the legislativesystem in the financial markets. The legal rules of Islamic bankingsystems do not only restrict to banking regulations but also includeother different laws that are of relevance to business scenarios.These rules include the contract law, company law amongst many otherlaws. However, the legislative laws in the Islamic banking have beenfaced by different types of difficulties as these laws presentcomplexities in the Islamic banks (Aldohni, 2011).

Islamic Insurance

Takaful issimilar to the conventional insurance in other systems. Takafulexists in both family and general forms. A verdict delivered by theIslamic Jurisprudence Council recognized and considered CooperativeInsurance (Takaful) as a legitimate substitute to CommercialInsurance. Consequently, it has been essential to advance diverseways to deal with Cooperative Insurance. This has the potential ofpermitting the launch of Islamic insurance companies. In thesecompanies, Cooperative Insurance will be the basis for their businessas well as transactions. There are two types of cooperativeinsurance. The first one is the old pure type insurance that takesthe method of a Cooperative Society encompassing a precise group ofindividuals to prevent risks resultant from a particular occurrence.Every member contributes an amount of money with the purpose ofcompensating any member exposed to a danger insured against. TheSimple Cooperative Insurance is the second type of CooperativeInsurance (Mulhim &amp Sabbagh, 2011).

Takaful prohibitscertain concepts present in the conventional banking systems. Ribaor usury is forbidden, gharar is as well prohibited, maisirand haram are prohibited too. Takaful focuses on theimportance of moral values and ethics around the surrounding ofbusiness. Takaful is based on mutuality hence the risk is sharedrather than getting transferred. Uncertainty is brought down inTakaful under Shari’ah when contributions are characterized asdonations. Participants pay Tabarru in the spirit ofbrotherhood and need to cover mutual losses. In Takaful, funds aremerely invested in the scope of non-interest. And finally, inTakaful, the surplus is for the participants and is hence returned tothe members (Mulhim &amp Sabbagh, 2011). Takaful is therefore not atype of insurance but rather an alternative to insurance in theIslamic world.

Other variablesincluded in this analysis are the Islamic trust units, the limits ofprofits to Islam and Khiyar al-‘Aib (Rosly, 2005). Thelatter refers to an option to cancel a contract. The Islamicfinancial system has also focused on the role of currency trading andcorporate governance requirements (Rosly, 2005). Financial planninghas been given utmost importance to facilitate efficient trading. Theissue of bad loans has also been tackled effectively by the Islamicscholars in addition to identifying the impact of a low-interestregime on the Al-Bai-Bithaman Ajil Housing Finance in the long run(Rosly, 2005). Finally, Islamic interbank money market is also animportant concept in the Islamic banking system.


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Aldohni, A. K. (2011). TheLegal and Regulatory Aspects of Islamic Banking a comparative look atthe United Kingdom and Malaysia. Retrievedon 12 July2016 from

Ali, S. S. &amp Ahmad, A. (2004). Islamic Banking and Finance:Fundamental and Contemporary Issues. Retrievedon 12 July2016 from

Hassan, K., &amp Lewis, M. (2007).&nbspHandbook of Islamicbanking. Cheltenham, UK: Edward Elgar.

Kettell, B. (2011).&nbspIntroduction to Islamic banking andfinance. Chichester, U.K: Wiley.

Lewis, M., &amp Algaoud, L. M. (2001).&nbspIslamic banking.Cheltenham [u.a.: Elgar.

Mughai, M. A. (2011). IslamicConcepts of Partnership.Punjab University Law Collage. Retrieved on 12July 2016 from

Mulhim, A. S. &amp Sabbagh, A. M. (2011). The Islamic InsuranceTheory and Practice. Retrievedon 12 July2016 from

Rosly, S. A. (2005).&nbspCritical issues on Islamic banking andfinancial markets: Islamic economics, banking, and finance,investments, takaful, and financial planning. Bloomington, Ind:AuthorHouse.