CONVENTIONAL BANKING CONVERGENCE WITH ISLAMIC BANKING – IMPACT & IMPLICATIONS Prof. Dr. Mohd....

CONVENTIONAL BANKING CONVERGENCE WITH ISLAMIC

BANKING – IMPACT & IMPLICATIONS

Prof. Dr. Mohd. Ma’sum Billahwww.drmasumbillah.blogspot.com

Areas of Convergence

1. Regulatory Authorities2. Regulatory Bodies3. Management4. Financial Principles5. Instruments6. Products7. Marketing

PRINCIPLE OF MURABAHAH

“Sale contract between the bank and its customer for the sale of goods at a price which includes the bank’s profit margin”

Bank is the seller, Customer is the buyer.

Murabahah = Cost PlusCommon Mechanism = Deferred Lump Sum Sale

PRINCIPLE OF BAI-BITHAMAN AJIL(BBA)

Bai-Bithaman Ajil (BBA) is known as Deferred Instalment Sale.

A contract of “buying and selling” of an asset between a bank and a customer.

BBA = Cost PlusCommon Mechanism = Deferred Instalment Sale

PRE-REQUISITE UNDER BBA

i) Buyer

ii) Seller

iii) Merchandise

iv) Price of the merchandise

v) Aqad/Contract (Offer and Acceptance)

MODES OF BAI-BITHAMAN AJIL FINANCING OPERATION

Customer identifies the asset to be acquired.

Bank purchases the asset from the vendor

The bank resells the asset to the customer plus bank’s profit margin

Customer repays by installments within agreed period

CONSUMER FINANCING PRODUCTS

House Financing

Study Financing

Unit Trust Financing

Other Consumer Financing e.g Share Financing

LETTER OF OFFER

Similar to Conventional Letter of Offer. The difference are:-

Pricing - Bank Purchase Price- Bank Selling Price

Repayment Grace Payment Period Security Documentation Takaful Penalty (compensation clause) Opening of Wadiah Savings Account

BBADOCUMENTATION

PROPERTY WITH TITLE

Property Purchase Agreement Property Sale Agreement Charge Document (Form 16A &Annexure)

PROPERTY WITHOUT TITLE

Property Purchase Agreement Sale Agreement Cum Assignment Deed Of Assignment

COMPARISON BETWEEN CONVENTIONAL LOAN AND BBA FINANCING

PRODUCT CONVENTIONAL BBA

FEATURES LOAN FINANCING

Concept Base on loan principle Base on buy and sale (borrowing and lending) principle

Pricing Pegged against BLR Fixed profit rate applied Repayment Varies as BLR Repayment is fixed

fluctuates

Total Amount Known only at the end Known upfront

Payable of the period

OTHER CONSUMER FINANCING

ExampleShare Financing

Apply the principle of BBA, Murabahah

PRINCIPLE OF BAI ISTISNA’

Bai Istisna is a contract on acquisition of goods by specification or order by the financier, where the price is paid progressively to the seller in accordance with the progress of a job completion.

It is a buy and sale contract whereby a buyer (financier) purchases a contract or order from a seller (customer) and subsequently appoints the seller as an agent to make an asset or goods that he requested.

Istisna = Cost Plus

PRINCIPLE OF BAI ISTISNA’

The seller must complete the asset/good within a period of time. The buyer and seller will fix the price of the asset/goods and method of payment.

When the goods is delivered/completed, the financier will sell the completed goods to the customer.

Applicable to : Bridging FinancingContract Financing

Project FinancingMade to Order

PRINCIPLE OF BAI AL-DAYN

Bai Al-Dayn is a “Debt Trading”

The Bank purchases the customer's rights to the debt at a discounted price (i.e invoice price minus bank's profit margin) which is normally securitised by a Bill of Exchange.

Upon maturity customer purchases back his debt from the Bank at full invoice price.

Bai Al-Dayn = Discounting of Debt

IJARAH (LEASING)

This is IBD’s new product and still under developmentOnly one case (pilot case ) so far Apply the concept of leasing

Type of leasing

Financial leaseOperating lease

Financial lease

Maintenance is borne by lessee

Lessee will acquire the asset at the end of the tenor

Lessee will enjoy capital allowance

Lessee will not enjoy tax exemption on rental paid

Operating lease

Maintenance is borne by lessor

Lessee has no right to purchase the asset at the end of the tenor

Lessor will enjoy capital allowance

Lessee will enjoy tax exemption on rental paid

Other features

This product is offered on selective basis

This product is offered for new equipment or equipment that enjoy capital allowance in Malaysia.

The bank will ensure the profit rate charge on customer will commensurate with capital allowance enjoyed by the Bank

IBD to assist on computation aspects

COMMERCIAL FINANCING PRODUCTS

Asset/Working Capital/Other Financing

Small Entrepreneur Fund (TUK)

Small Medium Industries Financing (TIKS)

Fund For Food (3F)

Rehabilitation Fund For Small Medium Industries

ASSET/WORKING CAPITAL/OTHER FINANCING

ConceptThis financing can apply the concept of Bai Bithaman Ajil or Murabahah

Issues of collateralSecured by same propertyDifferent propertyCorporate guarantee

SPI FUND FOR SMALL ENTREPRENEUR (TUK)

SPI Fund for Small Entrepreneurs or widely known as Tabung Usahawan Kecil (TUK) is aimed at providing an efficient and systematic delivery system to channel financing ranging from RM2,000 to RM50,000 for the benefit of the small entrepreneurs in the country.

This financing is similar to Tabung Industri Kecil dan Sederhana (TIKS) in Conventional Banking. It involves two relationship:-Bank and customerBank and Bank Negara

SMALL MEDIUM INDUSTRIES FINANCING (TIKS)

Bank and customer

Bank gives financing to customer by using principle of BBA or Istisna’ or Murabahah. For example Bank gives financing 6.5% to customer.

Bank and Bank Negara

Bank sells the loan to Bank Negara at 4.0% (current BNM funding rate) using the concept of Bai Al-Dayn. Therefore, Bank’s profit margin is 2.5%.

Pricing

In Letter of Offer, bank gives financing rate of 10.5% tocustomer.In actual payment, customer makes repayment to thebank base on financing rate of 6.5%The difference 4.0% is a rebate to the customer.

This financing is similar to Fund For Food inConventional Banking.

It involves two relationship:-Bank and customerBank and Bank Negara

SPI FINANCING UNDER FUND FOR FOOD (3F)

Bank and customer




REHABILITATION FUND FOR SMALL AND MEDIUM INDUSTRIES

This financing is similar to Rehabilitation Fund for Small and Medium Industries in Conventional Banking.

It involves two relationship:-Bank and customerBank and Bank Negara.

Bank and customer




CORPORATE FINANCING PRODUCTS

Islamic Securitization

Property Financing

Asset Financing

Equipment Financing

ISLAMIC SECURITIZATION

Requirement = Financing must be executed under any underlying financing contracts permitted under Syariah.

COMMON FINANCING CONTRACTS FOR ISLAMIC SECURITIZATION

Murabahah = Short-term Working Capital Financing

BBA = Long-term Financing Ijarah

Common Feature : Element of Profit Margin Built-inTrading Concept : Bai Al-Dayn (Debt Trading)

In Malaysia, the common Islamic Securities is

Debt Based Securitization.

First Example

Year 1990

Company Shell MDS Sdn. Bhd.

Concept Used BBA

Amount RM125 million

STATISTICS(30/6/99)

22 issues amounting to RM 8.071 billion (excluding Malaysian Government/Government Agencies issuance)

15 issues of Islamic Commercial Paper amount RM 6.181 billion

7 issues of Islamic Corporate Bondsamount RM 1.890 billion

Example……RHB GROUP ISLAMIC FINANCE INITIATIVE

RHB Bank

Facility Gas District Cooling (KLIA) Sdn. Bhd.Murabahah Notes Issuing Facility

Year 1999

Function Arranger

Amount RM 207 million

RHB GROUP ISLAMIC FINANCE INITIATIVE

RHB Sakura

Facility Sarawak Shell Berhad Musyarakah Bond

Year 1994

Function Lead Arranger



RHB Sakura

Facility Petronas Gas Berhad Islamic Debt Securities

Year 1995

Function Joint Lead Manager



RHB Sakura

Facility KLIA BBA Bonds

Year 1997

Function Co-Advisor

Amount RM 2.2 billion


RHB Sakura

Facility Petronas Gas Berhad Murabahah Notes Issuing Facility

Year 1997

Function Lead Arranger & Agent



RHB Sakura

Facility Petronas Gas Berhad BBA Bonds

Year 1999

Function Lead Arranger


PROPERTY FINANCING

BBA based financing and Istisna’ based financing

Common Tenors = 5 years to 7 years

Reasons For BBA/Istisna’ = Lock in Cost

ASSET FINANCING

Murabahah/BBA based financing

Any form of tangible asset

Receivables as a form of asset (Murabahah financing)

EQUIPMENT FINANCING

Ijarah based financing

No system support at this point of time

Big ticket items on an ad-hoc basis

Expect to launch in early 2000

Mechanisms For Conventional Convergence in to Islamic BankingMechanisms For Conventional Convergence in to Islamic Banking

Regulatory Frameworks

• Harmonization of Existing Laws

• Shari’ah Guidelines

Regulatory Frameworks

• Harmonization of Existing Laws

• Shari’ah Guidelines

Management• Headed by

Muslim• Mixed Staff

Allowed

Management• Headed by

Muslim• Mixed Staff

Allowed

Product Innovations•Screening the Existing

Product with

Shari’ah Standard•Shari’ah Justified Product

Product Innovations•Screening the Existing

Product with

Shari’ah Standard•Shari’ah Justified Product

Marketing• Composite Allowed• Finance Knowledge with

Shari’ah Guidelines

Marketing• Composite Allowed• Finance Knowledge with

Shari’ah Guidelines

Operations• Adapting

Shari’ah Standard

Operations• Adapting

Shari’ah Standard

Shari’ah Compliance Authority

• Shari’ah Advisor / Consultant• Shari’ah Advisory Body• Shari’ah Compliance is

Mandatory

Shari’ah Compliance Authority

• Shari’ah Advisor / Consultant• Shari’ah Advisory Body• Shari’ah Compliance is

Mandatory

Harmonization • Between Conventional

& Islamic is Encouraged so long not contrary to Shari’ah

Harmonization • Between Conventional

& Islamic is Encouraged so long not contrary to Shari’ah

Fund Management

• Segregated & Transparence A/C

Fund Management

• Segregated & Transparence A/C

Investment• Shari’ah Justified Avenues• Halal Counters• Halal Returns

Investment• Shari’ah Justified Avenues• Halal Counters• Halal Returns

Benefits• Service Charge• Investment A/C• Ihsan A/C

Benefits• Service Charge• Investment A/C• Ihsan A/C

Claims & Distributions• In Accordance with the Terms & Conditions• Unjustified / Unreasonable Claim & Distributions

are not Allowed

Claims & Distributions• In Accordance with the Terms & Conditions• Unjustified / Unreasonable Claim & Distributions

are not Allowed

THANK YOUWASSALAM

CONVENTIONAL BANKING CONVERGENCE WITH ISLAMIC BANKING – IMPACT & IMPLICATIONS Prof. Dr. Mohd....

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