Key issues on challenges of Organisation

Bank Islam is the first islamic banking organization in Malaysia. They have come
from way in the 1983. During the development till it evoleves to modern bank, They have
encountered several issues on challenges of organization.
Issues pertaining to Shariah and legal
When considering issues on Shariah, it is essential for the person so entrusted with
the task to be well versed in the knowledge of Shariah or at the very least seek the opinions
and advice of those in possession of Shariah knowledge. It is indeed a great responsibility that
one undertakes in presenting Shariah issues and in the dispensation of decisions which
should reflect an equitable solution. In Surah al-Nisa:59, Allah exhorts man to obey Him, His
Messenger and those charged with authority. The people charged with authority in the
present context, are those who are recognised as experts and knowledgeable in Shariah
including issues on Islamic banking and finance.
Religious dimension of Islamic banking and finance has playing the main role in
introducing new produt, no new product can be adopted until it is cleared by shariah scholars.
Even after a new product is put into use, shariah auditing of the operations of financial
institutions is very important to ensure that the actual practicecomplies with the requirements
of shariah. This is important not only for religious reasons but also for purely business
considerations because theclients of Islamic banks will not have confidence in their operations
unless shariah scholars clear their activities. In this background, the expertise of fiqhscholars
in understanding the pre-requisites of modern financial products and in evaluating these
products becomes very important.Almost all Islamic banks have their own shariah boards
or shariah advisers.
Arised issues is to be discussed in a meetings and workshops attended by both present
shariah scholars and financial experts.Institutions working in the field of Islamic economics,
banking and financeare playing an active role in organizing such workshops. However, these
workshops have no mandate to issue a fatwa. For that purpose, the meetingsof the Fiqh
Academies, the most prominent among which is the OIC.
In the absence of the required expertise in the field of finance among shariah scholars,
this approach of group ijtehad is playing an important role in safeguarding against serious
mistakes in adopting doubtful instruments.
.1 The Legal
The central bank, Bank Negara Malaysia (BNM), regulates the activities of BIMB
through the Islamic Banking Act 1983 (IBA). Conventional banks come under the purview of
the Banking and Financial Institutions Act 1989. Apart from the usual rules pertaining to
licensing, financial requirements (capital and reserve funds, liquid assets maintenance,etc) and
business restrictions, the IBA provides that BIMB as well as other Islamic banks to seek and
comply with the Syariah Advisory Council (SAC) (para 13A Islamic Banking Act 1983).
The following describes the status of the SAC:
The SAC has been given the authority for the ascertainment of Islamic law for the purposes
of Islamic banking business, takaful (insurance) business, Islamic financial business, Islamic
development financial business, or any other business, which is based on shariah principles
and is supervised and regulated by Bank Negara Malaysia. As the reference body and advisor
to Bank Negara Malaysia on shariah matters, the SAC is also responsible for validating all
Islamic banking and takaful products to ensure their compatibility with the shariah principles.
In addition, it advises Bank Negara Malaysia on any shariah issue relating to Islamic
financial business or transactions of Bank Negara Malaysia as well as other related entities. In
the recent Central Bank of Malaysia Act 2009, the role and functions of the SAC was further
reinforced whereby the SAC was accorded the status of the sole authoritative body on
shariah matters pertaining to Islamic banking, takaful and Islamic finance. While the rulings
of the SAC shall prevail over any contradictory ruling given by a shariah body or committee
constituted in Malaysia, the court and arbitrator are also required to refer to the rulings of the
SAC for any proceedings relating to Islamic financial business, and such rulings shall be
binding(reference 1). As such even though BIMB has its own Syariah Supervisory
Council, decisions on the permissibility of new products or conduct must have the final
approval of the SAC.
a. Ba al-Inah (BAI) based products
One of the product that has issue pertaining its permission is ba al-Inah (BAI) based
products. The ruling of the SAC related to ba al-Inah (BAI) based products especially for
providing cash financing has drawn critisms locally and abroad. BAI is a transaction where
one party (the bank) sells an item to another party (customer) where the settlement is through
deferred payments. The customer then sells back the item at a lower price giving the
seller/bank a margin in return for cash. The sole purpose is to provide cash to the customer.
BIMB utilises this concept as a basis to provide personal financing and credit card facilities.
The SAC has ruled BAI as permissible for two reasons; that there is no clear prohibition in the
Quran or the Sunnah and that it is for the good of the people - masalih. To the sceptics, this
just provides BIMB with hilah that is a way to circumvent what would have been prohibited.
b. Ijarah
Another contentious product is ijarah or the Islamic lease. The conservative ruling
only accept ijarah as an operating lease and that is as a pure rental arrangement and does not
accept ijarah as a finance lease (Ijarah Muntahia Bittamleek- IMB), which is permissible in
Malaysia.
With the existence of BAI transactions, IMB and other products that are more or less
replications of conventional financial products, reporting on the form would not provide users
with a true and fair information to assist them in decision making.

.2 Shariah Bodies
The past record shows that shariah bodies have done acommendable job in evaluating
the applications of classical contracts. However, when it comes to evaluating modern
financial contracts or Islamic substitutes for them, shariah bodies have found it quite difficult
to issue verdicts. This is basically due to an acute shortage of scholars with dual specialization
or at least having working knowledge of modern finance and shariah at the same time.
Thus, an important issue relating to the shari'ah boards is to determine their exact role.
questions have been raised about the autonomy and powers of these boards. Supervision by
definition impliesautonomy and independence in decision-making. This does not seem to be
the case. Furthermore, shariah boards of different banks could issue different rulings on
similar practices which may raise doubts in the minds of clients. Minimum shariah standards
for each type of contract issued by anautonomous body will go a long way to assure
customers of the shariah compatibility of those contracts as well as actual operations. This
need becomes more important in the wake of the entry of several Western banksin Islamic
banking.


Discussion and Conclusion
BIMB was established as a government initiative and thus has a strong support. BIMB
operation has the mandate of the SAC, the highest Shariah authority in the country. So their
conduct and products are legitimate even though some principles of Islamic financing may
appear to have been compromised.

Table :Balance sheet

Table : Income statement 1

Table: income statement 2
According to the balance sheet and income statements, note that BIMB does not
record the sales from BAI transactions nor purchase price (cost plus mark-up) for financing
assets. The margin is recorded as income/expense whilst in conventional banks the margin is
interest income/expense. However BIMB does not compund the profit as a conventional bank
compound interest in the case of default payment.
Deposits in BIMB are recorded as liabilities even though they are profit and loss
sharing bases (mudharabah or musharakah). Arguably they are not liabilities as BIMB has no
obligation to return the deposits in the case where utilisation of the funds result in losses.
BIMB has obligation to return deposits (savings and current) that are based on al-wadiah yad
dhamanah principle where customers place their cash at BIMB for safe keeping and in return
the customers allow BIMB to utilise the deposits. There is no profit in terms of dividends on
such deposits. BIMB may provide hiba (gifts) to make the deposits more competitive.
Even though the mudharabah/musyarakah depositors have potential to lose their
deposits, this is most unlikely to happen and thus they are in substance liabilities of BIMB
and reported as such (Exhibit 3). This is evident in year 2006 where the depositors were
allocated profits even though there was total distributable loss. Thus shareholders bear the
brunt of the losses.
Throughout the loss making period, there has always been a transfer to Profit
Equalisation Reserve (PER) (reference 3)which borne by both depositors and the
bank or shareholders (income statement 1 and income statement 2). The creation of PER has
drawn many criticisms to the point of questioning the shariah permissibility of it in the first
place. to support the depositors return. Why are not the losses being shared (under
musharakah) or borne by depositors (under mudharabah)?
Two legitimate reasons can be deduced. The first is that the depositors fund are not
used for the defaulted financing which appear to unlikely. The second reason is that the
losses do not fall under the category to be shared with or borne by depositors as the capital
provider. The loan loss provision is due to poor credit management which is the responsibility
of management. Thus shareholders bear the loss as management is employed by shareholders.
For further understanding, below provided a table showing the products and its coressponding
shariah principles.

Table : Financial products and its correspondence Shariah principles. (Adapted from Nor Mohamed
Yakcop (1996) Teori, Amalan dan Prospek Sistem Kewangan Islam di Malaysia. Utusan Publication)

References
1. Bank Negara Malaysia website.
http://www.bnm.gov.my/index.php?ch=7&pg=715&ac=802)
2. Hamzah Ismail and Radziah Abdul Latiff. 1999. Reporting Islamic Based
Transactions Question Of Substance. The Malaysian Accountant February 1999. p
2-4.
3. Bank islam website.
https://www.bankislam.com.my%2Fen%2FDocuments%2Fcinfo%2FKeyIssuesChalle
ngesinDevelopingIslamicBankingOperations.pdf