Islamic Investment Accounts (IA) - Prospects and Challenges
Assalamualaikum and hi :)
This is my first essay writing as a fresh graduate and yaa sure it might have lack something somewhere. So, I humbly open to any comment and improvement if necessary since it's also another process of learning. May it benefit us all even a little. Peace. Enjoy!
😁😚😉😎😊
Q: The Islamic Financial Services Act 2013 (IFSA) distinguishes investment account from Islamic deposit is defined by the application of Shariah contracts with non-principal guarantee feature for the purpose of investment. With the new classification, elaborate on the prospects of introducing Islamic Investment Accounts (IA) and its challenges in Malaysia’s banking landscape.
...
The enacted new rules governing Malaysian’s Islamic finance sector, the Islamic Financial Service Act (IFSA) that came into force on 30 June 2013, replacing the repealed Payment System Act 2003 (PSA) is an act to provide for the regulation and supervision of Islamic financial institutions, payment systems and other relevant entities and the oversight of the Islamic money market and Islamic foreign exchange market to promote financial stability and compliance with Shariah and for related, consequential or incidental matters. In the rules, one provision is that it requires Islamic banks to distinguish deposits made for saving – where the principal is guarantee from those made for investments with non-principal guarantee feature.
In my understanding, with this new classification, the prospect of introducing Islamic Investment Account (IA) is very bright. The clear distinction between investment and deposit accounts under the IFSA provides the way for the rapid growth of investment account as a Shariah-compliant asset and funding for Islamic banks themselves. Furthermore, this segregation that took place in July 2015 also prompting the Islamic banks to diversify the financial products offered to customers. Based on an article, the proportion of investment accounts to total funding for Islamic banks has risen up to 10 percent as of December2015, from 7 percent in August 2015, former central bank governor Dr Zeti Akhtar Aziz said at launch ceremony of the Investment Account Platform (IAP). This was a positive start for the Islamic banks to pursue their role as investment intermediaries.
Besides, investment account as a new product attracts customers with higher risk appetites to channel their surplus funds into this account and be able to retain funds for a long period of time hence enjoying the opportunity of more returns they targeted by the end of the promised period but with some restrictions regarding withdrawal. Unlike Islamic deposits which can be withdrawn anytime on demand and also guaranteed by Perbadanan Insurans Deposit Malaysia (PIDM). Since keeping surplus without being invested is an opportunity cost to the returns they can produce out of it, customers would better invest regardless the restrictive withdrawal. The Islamic banks as intermediaries will then repackage the funds and channel it to the shortage party. It eventually reduces the transaction cost and risk of these two parties hence promotes the economic growth in the country.
On the other hand, since majority of Malaysian are Muslims, I believe most of them are looking out for the Shariah-compliant investment models rather than using the conventional one. Thus, the Islamic investment account is what they need, came to satisfy their cravings as the form of returns is all governed by the types of Shariah contract adopted such as Musharakah – profit and loss sharing contracts, Mudharabah – profit sharing and loss bearing contracts and also Wakalah contracts which enables Islamic banks to use an agency as another party involved in the agreement. These ensure all the transactions made within the Islamic banks, Islamic investment account specifically are accordance to Shariah and appoint to interest-free basis. In addition, the application of these contracts helped to diverse the banks’ form of financing that bring it beyond debt-based financing to include equity-based financing, as well as viable ventures.
After going through some writings and explanations regarding the practical of Islamic investment account in Malaysia, literally there are some challenges being faced in Malaysia’s banking landscape itself. The first challenge I would like to state is the unfamiliarity with the Islamic banking system and the misconception against it. Despite the well-growth in Islamic banking over the years many people including Muslim and non-Muslim still do not understand what Islamic banking really is. They claim conventional and Islamic banks are both the same. When we mention about Islamic investment bank they would say it was the same application like those conventional, nothing different because all they can see is only banks are intermediate institutions that connect the surplus with the shortage parties and then make profit out of it. Regardless the contracts they are actually in. It is an added burden to Islamic banks to educate the customers or else this misconception may lead to decreasing number of customers banking with them.
Another point of view to highlight is related to profit and loss sharing financing in Islamic banking institutions which comes as one of the challenges they currently facing. The ideal contracts of Musharakah and Mudharabah as a backbone in Islamic investment account somehow bring to a problem they have to solve. Musharakah contract involves contribution of capital and labor by both investor and the entrepreneur while Mudharabah contract allows the investor to provide the capital and only entrepreneur will carry out the investment. In terms of return on the investment, both partner share profit and loss based on pre-agreed ratio for Musharakah, but only the capital provider bears the loss in Mudharabah as the entrepreneur already forgone their effort in it. The problems arise when there is lack committed entrepreneur that operates the business well so it creates difficulty in selecting appropriate partners, secondly, most of the demand of financing comes from the low credit worthiness customers that requires a thorough screening process and also these contracts open up to high risk investment and lack security unless a regular follow up is carried out on the customers after financing.
Obviously then, investment account is a big source of funds of Islamic banks compared to Islamic deposit. While they make no profit from their Islamic deposits by lending out money to the borrowers then gain interest like other conventional banks do, they have to efficiently utilize the investment accounts in order to be more profitable. The depositors do not receive interest instead they entitled for a share in actual profit from the investment operations. The challenge begins when Islamic banks’ investment chances become narrower as central bank imposed a reserve requirement to lose some potential profits as they are unable to invest the funds. Reserve requirement is a minimum amount certain institutions must maintain as liquid funds. However it is only affected the deposits in conventional banks and not their investment accounts. Indeed it is necessary to have such reserve in their vault as a back up during an emergency or any economic crisis but it should be decreased to a very minimum ratio or may be applied a different reserve ratio Islamic banks. As a fact of matter, Bank Negara Malaysia (BNM) has lowered the reserve requirement from 4 percent to 3.5 percent this year which can enhance the investment operations.
In conclusion, Islamic investment accounts in Malaysia are real treasures Malaysian has really to be exposed with as a medium of investment. The position may not be the same in all countries but I believe with the strong desire from the Islamic banks themselves to offer this product and the eagerness of customers to attain more knowledge in this Shariah-compliant investment account together will bring this product forward and trending in Malaysia. In order to achieve at such level, education has to come after because introduction without education is nothing. Although all the challenges mentioned above might discourage the position of Islamic investment accounts, yet most of them can still be solved with research and dedicated efforts from the team. This means the Islamic banking should have first be well-managed so that people will have faith in this system and strive to fully Shariah-compliant banking.
Thank you for spending your time!
Sources:
 |
| Happy Fasting and Salam Eid Mubarak! |
Comments
Post a Comment