Islamic Funds in Malaysia : Marifa Academy Islamic Finance

The Islamic Financial Services Industry, comprising Islamic Banking, Islamic Insurance (Takaful) and the Islamic Capital Market are areas that have become an important segment within the global financial markets. Malaysia's objectives are to develop a viable Islamic Financial Services Industry.

As globalisation and liberalisation of financial markets accelerates, it becomes more imperative to have a financial market with diverse and innovative products. The challenge is to therefore evolve strategies that will promote a competitive, dynamic and sustainable Islamic Financial Services Industry. Central to this common vision is the creation of a comprehensive Islamic Financial System that will be able to respond to the requirements of the domestic economy and also to become an integral component of the International Financial Systems.

The principles of Islamic financial instruments in Malaysia

The Islamic Financial System broadly refers to financial market transactions, operations and services that comply with Islamic rules, principles and codes of practices. These laws and rules require certain types of activities, risks or rewards to be either prohibited or promoted.

Islamic laws and rules are known as Shariah or Islamic jurisprudence.

Shariah governs all aspects of Islamic matters including worship, economic, social, political and cultural aspects of Islamic societies.

The Shariah is derived from three important sources, namely the Holy Quran (the holy book of the religion of Islam), Sunnah (the practices of the Prophet Muhammad) and Ijtihad (the reasoning of a group of qualified scholars).

There are two different approaches to developing modern Islamic financial products and services. The first approach identifies existing conventional products and services that are generally acceptable to Islam, and modifies as well, as removes any prohibited elements so that they comply with Shariah principles. The second approach involves the application of various Shariah principles to facilitate the origination and innovation of new products and services.

Prohibited elements of a commercial transaction must first be removed for it to be Shariah compliant. Among the major elements prohibited under Shariah, in summary, are:

riba (interest);
gharar (uncertainty);
maisir (gambling) ; and
non-halal (prohibited food and drinks and immoral activities).
With the fundamental prohibitions identified, products were then developed in Malaysia using a combination of approaches and have evolved over time to meet the needs of the local population.

The Islamic principles underlying the products available in Malaysia are:

Mudharabah (profit-sharing) - loss borne by capital provider
Mudharabah offers the owner of capital the opportunity to invest his capital in a certain project without becoming involved in managing that capital, and limits his liabilities to the capital committed.

The salient features of Mudharabah is that the capital provider cannot claim a fixed amount of profit and an assured return on his capital if the project is profitable, as the profit will be distributed based on a pre-agreed ratio between the capital provider and the entrepreneur, in this case, who solely manages the projects.

In the event the project is making losses, it shall be borne solely by the capital provider and none on the part of the entrepreneur, unless the loss is due to negligence of the entrepreneur.