Workshop Sc3

8/2/2019 Workshop Sc3

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1

Mohd Nasiruddin bin Mohd Kamaruddin

Standard Chartered Saadiq

Operational Details in MudharabahContract for Islamic Liquidity

Management


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Objectives

1. Definition of Mudharabah

2. Banking Products Using Mudharabah3. Managing Rate of Return in Mudharabah

4. Treasury Products Using Mudharabah

5. Managing Risk in Mudharabah

6. Suitability as Liquidity Management Instrument


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Definition of Mudharabah

It is a partnership whereby one partyprovides the capital (rab al-maal) and

the other party as the entrepreneurprovides professional services (mudharib)


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Profit will be shared between Raab Al Maaland Mudharib at a pre agreed ratio.


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Loss if any will be treated as follows;

1. Raab Al Maal will bear capital loss.

2. Mudharib will bear labor related loss(staff salary, use of computer system,use of office furnitures and premises andetc).


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Banking Products Using Mudharabah

1. Mudharabah Term Deposit

2. Mudharabah Interbank Deposit andPlacement

3. Mudharabah Corporate Deposit and

Placement4. Mudharabah Savings

5. Mudharabah Financing?


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Mudharabah Term Deposit


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Mudharabah Deposit Modus Operandi

Investment activities

Profit

Financial Institution(Raab Al Maal)

2. Invest

1. Enter into Mudharabah transaction atpre-agreed profit sharing ration andtenure

Loss 3a. Profitdistribution basedon pre-agreedratio

Customer(Mudharaib)

3b. Distribution ofcapital loss toRaab Al Maal andlabor loss toMudharib


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How profit is distributed?

Pre agreed profit Sharing ratio C:B

where C is customer and B is Bank

Portfolio yield determined

Portfolio Profit/Deposit Base = R%

Customer profit = Deposit Amount x R% x 0.C


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Example

Customer place a RM1 million Mudharabah deposit for 12 months

Pre agreed profit Sharing ratio between customer and Bank is

55:45

Portfolio yield is 10%

Customer profit = RM1 mio x 10% x 0.55 x 12/12

= RM55,000


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How portfolio yield is determined?

Portfolio Profit/Deposit Base = R% (R rate)

Portfolio Profit Deposit Base

1. Profit from Home Financing 1. Retail Mudharabah

2. Profit from Interbank Placement 2. Treasury Mudharabah

3. Profit from Corporate Financing4. Other Profits


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Managing Rate of Return in Mudharabah

1. Inherent feature of Mudharabah arrangement -

profit varies and is not certain

2. Profit Equalization Reserve

3. Hibah from Bank to Customer

4. Issues in Managing Rate of Return in Mudharabah


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Inherent feature of Mudharabah arrangement -profit varies and is not certain

1. Profit on Investment Fluctuates

2. Deposit Base Fluctuates


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Profit Equalization Reserve (PER)

1. Stabilizes Profit from Mudharabah portfolio

2. Allocate Profit from Mudharabah portfolio to PERwhen R rate exceeds expected payout rate (CreditPER)

3. Draw Profit from Mudharabah portfolio from PERwhen R rate is below expected payout rate (DebitPER)


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Hibah from Bank to Customer

1. PER may dry up and may not be sufficient to

support expected return

2. Bank may give Hibah to Customer to the level ofExpected Return if R rate is lower than expected.


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Issues in Managing Rate of Return in Mudharabah

1.Amount allocated to PER is govern by certain rulesnot to exceed 15% of gross monthly income.

2.Total amount in PER must not exceed 30% of capital.3.Hibah is only 1 way Hibah from Customer to Bank

will require Customer consent.

4. Items such as Collective Impairment Provision(General Provisions) and Individual ImpairmentProvision (Specific Provisions) both Additions as wellas Releases will affect PER calculation.

5.Market pressure, including from conventional banks.


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General Investment Deposit Account

1. Portfolio Yield Derived from Common InvestmentPool

2. Profit Sharing Ratio non-negotiable

3. Profit Sharing Ratio applies board rate


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Special General Investment Deposit Account

1. Portfolio Yield Derived from Common InvestmentPool

2. Profit Sharing Ratio negotiable

3. Profit Sharing Ratio does not apply board rate


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Specific Investment Deposit Account

1. Portfolio Yield Derived from Specific Investment Poolie. Home Financing Portfolio

2. Profit Sharing Ratio negotiable

3. Profit Sharing Ratio does not apply board rate


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How portfolio yield for SIA is determined?

Portfolio Profit/SIA Deposit Base = S% (S rate)

Specific Portfolio Profit SIA Deposit Base

Only Include Specific Portfolio Only include SIA deposit

Ex: Sukuk Investments in Real Estate


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Early Termination

1. Original feature of Mudharabah Mudharib canwithdraw fund at any time.

2. However, for term deposit since tenor arrangementhas agreed upfront, Customer will only be entitled tooriginal investment amount (principal amount).

3. Bank may grant Ehsan Profit for cases of earlytermination.


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Treasury Products Using Mudharabah

1. Mudharabah Interbank Deposit and

Placement2. Mudharabah Corporate Deposit and

Placement


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Features

1. Mostly on are Special General

Investment Account where;

Investment is in general pool

PSR is negotiated


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Sample

Confirmation


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Managing Risk in Mudharabah

Predominantly Market Risk

1. Rate of Return Risk

2. Systemic Risk


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Fluctuating R Rate


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Rate Risk and Islamic Banks

Given extensive linkage between the two

systems, when interest rates change in the

conventional systems, profit rates must change

within the Islamic banking system

This is inevitable since, the absence of

corresponding changes in Islamic bank deposit

rates, rate differentials will prevail leading to easy

arbitrage opportunity


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Systemic Risk Issue in Mudharabah

Mudharabah accounts are non-principalprotected accounts

- can the industry sustain the confidence if 1institution fails to return the principal amount on

maturity of the deposit?


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Suitability as Liquidity Management Instrument

1. R rate cannot be Guaranteed

2. R rate Fluctuates

3. Principal cannot be Guaranteed


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R rate cannot be GuaranteedR rate Fluctuates

- how do we mitigate?

tenure less than 1 monthdo not transact on R Rate revision date

- how to maintain a more stable R Rate?


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Profit cannot be Guaranteed

- how do we mitigate?


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Interbank Mudharabah Transaction

0.00

50.00

100.00

150.00

200.00

250.00

300.00

2005 2006 2007 2008 2009

RMb

illion


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END

Workshop Sc3

Documents

Transcript of Workshop Sc3