Concept of On-line Islamic Banking & Financial Services

By:
Prof. Dr. Mohd. Ma’sum Billah
masum@applied-islamicfinance.com
masum2001@yahoo.com
+6019-3699542

INTRODUCTION

What is money? Money is a form of value generally accepted in payments of goods and services. In general, technological development affects our life completely by giving new opportunities and making our day to day operations very much easier. Today, electronic money flows has become one of the most dynamic change in banking systems after Islamic Banking. Electronic money flows also describe the present changes in payments and capital markets. Online banking is an effect of fast development of information technology. Consequently, it changed the way the business is conducted. Commercial revolution already stared by giving variety of products where customers at any time and anywhere can reach millions of products just in seconds.

Online banking is virtually binding together people, money, markets and nations. Electronic banking is the combination of money, technology and telecommunications and mainly there are two reasons why electronic money suddenly surround today’s transactions. Firstly on the supply side; during 1980’s showed high U.S corporate spending in communications and communications equipment. Now, computer systems are widely used in everyday lives and especially business. Bar code, scanning and computerized stock management systems are now able to be seen to retail consumers compared to few years back. Secondly on the demand side, there are changes that lead to an increasingly computer-literate population. Many women now move in general workforce and they find something that satisfies their time measure by ‘teleshopping’ (widely accepted in France). It is so convenient that they can just order groceries via internet and get orders delivered on the doorstep.

According to historical data, banks in US had a privilege to first star doing business on line. In fact, they are the ones who started the revolution moving from traditional brick and mortar to click economy.

In line with global trends, Malaysian banking sector started utilizing the benefits of online banking firstly by introducing AMT in 1980.This was followed by introduction of telebanking and latter PC banking in 1990’s. With wise use of World Wide Web and its use as a base for online banking, in 1998, as ABJ reported five banks in Malaysia have invested millions of RM in Internet technology to be further developed and adjusted to their need accordingly .

Today when mentioning on line banking there are three ways to execute it :

In the case of internet banking there are at present 500,000 internet account holders in Malaysia and this is assumed to imply at least 1.5 million effective internet users in country which is about 7.5% of the Malaysian population.

Currently, only banking institutions licensed under the Banking and Financial Institutions Act 1989 and the Islamic Banking Act 1983 are allowed to offer Internet Banking services in Malaysia.

ONLINE BANKING PRACTICES IN MALAYSIA

Islamic banking is not something new for it is embedded from Al-Quran and Sunnah hundred years ago. It is been one of the most successful development in banking of the Islamic legal system. The growth of Islamic banking is hard to measure but a comparison of the balance sheet footings for the leading Islamic banks shows a growth of more than 15 percent per year for the past five years. Now, many banking companies offers Islamic banking and participate in the latest technology of banking, on-line Islamic banking.

Since we are referring to Islamic online banking in Malaysia, there are two full Islamic banks, Bank Muamalat and Bank Islam and a number of other conventional banks serving Islamic banking through the “Islamic Banking Scheme”.

In Malaysia most banks offer these basic services:

Some additional services offered include interest rates calculator as well as foreign currency converters.

We referred to the industries of Islamic Banking in Malaysia specifically to Bank Muamalat Malaysia where they introduced us with their products and services offered online. They are as follows:

Automatic Teller Machine (ATM)

ATM is a common acceptable machine for fast and convenience method of cash withdrawals and balance inquiries.

Cash Deposit Terminal (CDT)

CDT provides a fast and convenience option for customers to deposit cash to his own or to another BMMB account during and outside banking hours. The customer account would be debited on real time. The CDT also allows account balance inquiry by using BMMB ATM card.

Cheque Deposit Machine (CDM)

CDM provides a quick option for customers to deposit cheque without having to queue at the counter. The cheques will be collected twice a day and depositing of cheque after 2.00pm will be treated as the next working day deposit.

Auto Remit/Direct Debit

Auto Remit is an Automated Payment System for BMMB account holders to effect payments to a specified payee organization by way of debiting their accounts and crediting of payee organization’s account automatically via tape/diskette/cartridge. The system is popular for debiting customer’s account for insurance payment and credit payment.

Autopay

Autopay is an automated payment system employed to credit salary, overtime, commissions, dividends, and bonuses, ex-gratis and other monetary benefits of individual staff, agents, supplier, and contractor of corporate or commercial entities on-line during the Bank’s batch processing. The salary crediting can also be affected to other Banks participating in MEPS Inter Bank GIRO (MEPS-IBG). It provides easy, faster, secure, cheap, convenient and reliable mode of crediting of accounts compared to conventional over-the-counter crediting.

Muamalat online

Muamalat online is an electronic banking service that offers the convenience of banking at customers’ desk (PC Electronic Banking). With Muamalat online a comprehensive range of services both inquiries and transactions (except cash deposits and withdrawals) are available without customers’ leaving their office. Muamalat on-line (MOL) promotes convenience of banking from their premise. These are some features MOL provides for its customers:

Touch ‘n go loading

As their valued customers, they can now enjoy a facility of loading and inquire their Touch ‘n Go card balance through our Automated Teller Machines (ATMs). This facility is especially provided for bank Bankcard holders only.

SERVICES MOST WIDLY USED

The officer in charged identified most widely and most popular on line services provide by Bank Muamalat, they are: managing accounts on line and account aggregation. Following describes how they actually work.

Managing accounts online

When you sign up for online banking, you designate which accounts you wish to access online. Then you will be issued a user ID and temporary password via regular mail, e-mail or both, with instructions on how to use them to access the secure online banking portion of your bank's site where your account information is available 24/7.

Many banks require you to change your password during your initial visit for added security. These site "keys" are the only way to access your accounts online, so keep them in a safe place.

Once inside your private site, you will have access to all of the accounts that you have registered for online banking. You can easily view your current balances, recent deposits and payments, complete account history, and, in the case of securities, how your stocks, bonds and mutual funds performed over a given period, as well as current market value.

Most sites have a financial summary page that lists all registered accounts, so you can quickly glimpse your total assets and net worth. You may also sort your holdings by asset class, a feature that often comes with handy asset allocation pie charts that give you a quick snapshot of your current portfolio diversification.

Account aggregation: Managing all your finances in one spot

Account aggregation enables you to use your private online banking site to access financial accounts held at other institutions: deposit accounts, securities, credit cards, rewards programs and individual retirement accounts. Any personal account information that can be viewed or managed through the Web can be aggregated into your online bank site.

Once you've entered your user name and password to log on to your secure online bank site, you select the accounts you wish to view, and then enter the URL, user name and password for each. Your banking site automatically links, or aggregates, them into your banking site.

Transactions initiated through your bank site aggregator are automatically entered into the appropriate online accounts just as if you were logged on to them directly. No more flipping between Web sites, each with its own user name and password requirements, to manage your finances. With account aggregation, you can view the status of all your accounts, including payment history and recent charges, all from one secure Web site, making bill payment faster and easier than ever. It's also great if you need to check the status of your accounts or pay your bills on the road. Most banks that provide account aggregation do so free of charge as a relatively inexpensive online enhancement to attract and keep new banking customer.

ADVANTAGES AND DRAWBACKS OF ONLINE BANKING

Many people are now working and they can hardly find time to do settlements of any payments, bills or shopping for household needs. On-line banking is so convenient and time saving. People can avoid traffic jams and parking woes. Besides that, it is an efficient financial management and people can manage faster and easier. Many people who is working and facing a time constrain prefers clicking the mice to log in to auto-payment or electronic bill payment than doing all the tedious paperwork.

Internet Banking provides fast and convenient way to undertake various banking transactions from the comfort of our home, office or wherever we may be, during and after banking hours. Most banking institutions offer the service 24 hours a day, 7 days a week. We avoid traveling time and the need to wait in queues to access banking services or to pay bills. This advantage serves all banking customers: other banks, retail customers and corporate customers.

As mentioned before if we have a computer with Internet access, a modem and telephone line, and an Internet browser and have registered for an Internet Banking service with banking institution, then we can conduct Internet Banking from virtually anywhere in the world.

Despite the advantages, there are a few drawbacks. Setting up the account and to get used to an online account will take some time. Also, some banks only offer online banking in a limited area. Online-only banks have a few additional drawbacks: an account holder has to mail in deposits (other than direct deposits), and some services that traditional banks offer are difficult or impossible for online-only banks to offer, such as traveler's checks and cashier's checks. Online banking is designed to save time and money but a mistake in entering account number and a misplaced decimal point could lead to delay of payment and losing hundred of dollar.  

As in any other system, there is a risk involved in Internet Banking. Bank Muamalat has certain policies by which any potential risk could be minimized with banking institutions’ continuous check on the security of the system and the care taken by customers when using Internet Banking services.

Actions taken by Banking Institutions to ensure security before starting out on Internet Banking, banking institutions have spent a lot of time and effort to ensure that their Internet Banking set up is safe for consumers. In addition, banking institutions offering Internet Banking are also required to comply with the minimum guidelines issued by Bank Negara Malaysia.

Amongst the safety measures taken by the banking institutions are:

Also customers have an obligation to take certain action to ensure security.
Some of the recommended actions that a bank customer, should practice are:

Both banking institutions and customers have a role in ensuring privacy. Protection of personal and financial information is an extremely important matter when banking via the Internet. Bank Negara Malaysia considers the privacy of consumer personal information to be an important element of public trust and confidence in the Malaysian Banking System

Responsibilities of banking institutions in ensuring privacy

All banking institutions offering Internet Banking services have to adopt responsible privacy policies and information practices. Therefore, banking institutions are required to prompt with a message to inform that customer will be leaving the banking institutions' websites and hence he/she will not be protected by the privacy policies and security measures of the banking institutions when you hyperlink to third parties from their websites.

Customer responsibilities in ensuring privacy

Customers are advised to read the privacy policy statement of the banking institutions posted at their websites prior to providing personal information. By reviewing this policy, customer will know the type of information banking institutions collect and maintain about them. Banking institutions may want to share information about them with a related entity to market specific products that meet their needs and interests. If customer does not want banking institution to share their personal information with others without permission, they should request their banking institution for the "opt out" option.

SHARIAH ASSPECT

Of course, there is not any proving in Quran or Sunnah that on line banking implicitly is allowed. But, both Quran and Sunnah proved us guidelines for our everyday life that are applicable at any time and any where. Therefore, Islam had provided some basic law that should govern any transaction, including the one online. Main features of Islamic ethics are: trustworthiness, honesty, equality, mutual consent, respect, sacrifice, caring and sharing, concern on legality. These features must be respect and always keep in mind.

Also, it has to be emphasized that Islam has never come as an obstacle for any kind of development in any field. But, Islam forbids any kind of violence, exploration or unfair use of any resource.

Some of orders by Allah to us to follow ethical values can be found in following ayah:

i) Sincerity (Al-Ikhlas)

“To worship Allah, offering Him sincere devotion”

(Al Bayyinah: 5)

ii) God consciousness (Al-Taqwa)

“But fear Allah and know that Allah is with those who restrain themselves”

(Al-Baqarah: 194)

Since, we are referring to Islamic online Banking; we will refer to few Quranic ayahs where Allah strictly forbids any kind of usury or interest (Riba) but allows free trade.

Just to recall, Islamic banking differs from conventional main because it course of bushiness is conducted in a way to avoid interest involved as much as possible. Islamic banking in general, and online in particular is actual an alternative to our Ummah and a way in which our Ummah can prosper on Shariah allowed way.

This Quranic ayah indicates clearly that usury of doubling an multiplying is not allowed:

“O ye who believe! Devour not usury doubled and multiplied; but fear Allah; that ye may (really) prosper.” (Al Imran: 130)

In this verse, Allah again reminds us that interest isn’t allowed but the trade is:

“Those who devour usury will not stand except as stands one whom the Evil One by his

touch hath driven to madness. That is because they say: "Trade is like usury but Allah

hath permitted trade and forbidden usury. Those who after receiving direction from

their Lord desist shall be pardoned for the past; their case is for Allah (to judge); but

those who repeat (the offence) are companions of the fire: they will abide therein

(forever).” (Al-Baqara: 275)

As long as other non Shariah law regarding the one that direct and controls the use and abuse of internet usage in general, concerned in Malaysia, there is not specific provision on the right to privacy in the Constitutional of Malaysia. The Bill for Personal Data Protection was reportedly drafted by the Ministry of Energy, Communications and Multimedia in the light of the OECD Guidelines and similar laws in the EU, Hong Kong and New Zealand was to be tabled in the Parliament and not be passed yet. Some of the law that has added direct bearing is:

CONCLUSION

On-line banking using electronic links, make money transactions and settlements at the speed of light, are exponentially growing. It makes life simpler and time constrain is no more a problem. People just need to access to internet from desktop or laptop, anytime and anywhere to avoid any hassle of transportation.

Now that Islamic banking participates on-line, it shows that Islam grows with technology thus reflects the nature of Islam; Islam is for everyone and the teachings of Islam is applicable anytime and anywhere be it in the past, present and the future. There is no exact ayah in the Quran allowing on-line banking but humans are given brain and knowledge so that they can fully utilize all the resources given by Allah in this world.

On-line banking, be it Islamic or conventional, are opened to major possibilities regarding societal, privacy and security issues. Computerized information is opened to violation if it falls to the wrong hand. But companies providing online banking are aware of this situation and have been taking many safety precautions to protect the right of its customers.

Islam permits any developments, innovations and creation as long as it does not go outside the loop of Islamic Shariah. So, anything that man designed and created to make life easier is acceptable as long as it does not contradict with the teachings of Islam. But, of all the people who created good things to make life easier, there are some people who just like destroying good things.

There are many problems occurred due to creation and so called ‘development’ of money that is fiat money. The creation of money leads to many destruction in the world where the people who created money has the power over others; taking innocent lives and take control of one’s nation. Al-Quran already stated the commodity of exchange is gold for gold, silver for silver, barley and barley, wheat for wheat and etc. People witnessed all these phenomena but no serious actions are taken to overcome this matter. Muslims countries around the world should gather and be brave to change fiat money to the commodity of exchange stated in the Quran. By implementing gold dinar, it is believe that the world will be a better place to live.

APPENDIX A

Islamic Banks

Participating banks in the Islamic Banking Scheme
Commercial Banks

Finance Companies

Merchant Banks

Discount Houses