Chapter 1

An Introduction to Conventional and Islamic Financial Systems

Learning outcomes

At the end of this chapter, you should be able to:

1 Define a financial system.

2 List the functions and roles of the financial market.

3 Distinguish between debt instruments and equity instruments.

4 Classify financial markets.

5 Distinguish between financial instruments in financial markets.

6 Distinguish between financial intermediaries in the financial system.

7 Identify characteristics of the Islamic financial system and the conventional financial system.

8 List the salient features of the Islamic financial system.


Hasan, a researcher in a Halal food technology unit at an Islamic university in Malaysia, has invented a machine to detect whether a chicken has been properly slaughtered or beaten to death. He and his team are interested in selling their machine. Unfortunately, they do not have sufficient funds to produce the machine. Tuan Bakri, on the other hand, has plenty of savings, which he and his wife have accumulated over the years. If they could meet, do you think something could happen? If Tuan Bakri could provide funds to Hasan, the future of Hasan’s halal detector machine would be brighter and the ummah, the Islamic society, would benefit from this machine.

However, before we conclude Hasan’s story, one might have to ask the following questions:

  • Do they know each other before they engage in the contract?
  • How do Hasan and Tuan Bakri meet?
  • Who will control the transfer ...

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