BAF3009 Financial Institutions & Markets
TUTORIAL 4: ISLAMIC FINANCE, BANKING & CAPITAL MARKETS
Question 1
Refer to the article:
“Islamic banking on a roll” – Business Times dated 19 November 2004.
Summarize the key points of the article.
• IBF is one of the banking’s hottest sectors. Growth rate of 10% - 15% (i.e. higher
than that of conventional banking)
• IBF services must adhere to Shariah Law
o Ban on charging interest on loans
o Prohibits client’s money from being invested in companies linked to alcohol,
pork, weapons and pornography.
• Great potential for growth as most assets are invested in conventional products or
kept in hard cash.
• MAS aims for a bigger share as it feel that Singapore as an IFC, should have the
capability to provide the whole range of financial activities, including IBF.
• To operate IBF, need:
o A separate legal and regulatory framework because conventional banking is a
relationship between debtor(bank) and creditor (depositor) and
o In IBF, it is a relationship between investor (depositor) and manager (bank
acting as custodian of funds)
o To replicate banking infrastructure like the clearing systems as Islamic funds
and cheque cannot mixed with non-halal funds
o To amend banking law for Islamic banking or enact a separate Islamic
Banking Act
o To have critical mass for banks to operate IBF viably due to need for separate
infrastructure. Singapore may be better offering wholesale banking services
than retail banking services in IBF.
• IBF need not necessarily cater too only in the Muslim population
o Just one of the channels to deliver products and services
o Banks decide how best to serve the needs of clients – structure price and
yield.
Question 2
Refer to the article:
“Will the twain ever meet” – Business Times dated 8 October 2004.
(a) What is meant by 'riba'? What are the opposing views held regarding its meaning?
• Riba – an outlined in the article refers to the payment and receipt of interest which is
forbidden in Islamic banking
(b) What are some practical problems faced by a bank in developing and marketing
Islamic financial products?
Practical problem
• Divergent views and interpretation makes it impossible to set up a benchmark for
international reference (which in turn, slows innovation, because stunted markets
and increases business costs.)
For example:
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BAF3009 Financial Institutions & Markets
• Malaysia is a leading player in issuing sukuks (essentially bonds) which are
supposedly Shariah-compliant by Malaysian standards. However, these are not
recognized to be so by the Middle Eastern countries and such bond issues are
largely/actively traded but only among domestic investors.
(c) Briefly explain the following terms:
Murabahah: Cost plus contract where the customer requests the bank to buy an
asset on its behalf & in turn, sells it to him at cost plus a declared profit.
Mudarabah: Silent partnership where one provides the money and the other (the
mudarib) manages the business in exchange for a fee or share of its profit.
Musharakah: Full partnership where profits and losses are shared by all parties
equitably.
Question 3
Refer to the article:
“Singapore playing catch up in Islamic banking” – Reuters News dated 1 December
2006.
(a) Discuss the factors hindering Singapore's efforts to develop Islamic banking.
• Slow/late entry into Islamic compared to Malaysia. Has traditionally focused on
business opportunities in the Asia Pacific region rather than the Middle East and the
GCC) Gulf Cooperation Council) states.
• Offers few taxes incentives on Islamic products to attract investors.
• Lacks a Shariah regulatory board to say if products comply with Islamic law or not.
• Has yet to issue a single sukuk or Islamic bond.
(b) What are some major advantages Singapore has in its bid to attract Islamic funds?
• Already a major centre for wealth management/world’s 4 th biggest FX centre – high
credibility as an IFC
• Neighbors to Indonesia & Malaysia – both populous Muslim countries – huge
potential market among the wealthy?
• Already a centre for offshore funds and is a base for all major banks.
• Strong legal framework and a relatively widely traded currency. (Note: possible
conflicts between Western law vs. Shariah law in the event of disputes?)
Recommend Articles:
1. “Islamic finance needs more players: MAS” – The Business Times dated 24 June
2008
2. “A growing force in banking” – The Business Times dated 26 May 2008
3. “No sub-prime mess with Islamic banking” – The Business Times dated 9 October
2008
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