1 car dealer financing product of amislamic bank murabahah floor stocking-i muhammad quraisy 1000424...

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Car Dealer Financing Product of AmIslamic Bank

MURABAHAH FLOOR STOCKING-i

Muhammad Quraisy 1000424OMAR ALAEDDIN 0900262

Nur Aziah Binti Che Abdul Aziz 0900323Issah Hamdu 1000419

Hansang JO 0900338

Product Structure AqadLegal Documentation Financial ReportingMaqasid al Shariah

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‘AqadPrinciples

Floor Stocking

Legal Application

FinancialReporting

MaqasidAl-Shariah

Evaluation

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ProductDescription

► Purpose of ProductTo finance the purchase and stock of new, used and importedunregistered passenger vehicles of popular makes and models.The vehicles should not exceed seven (7) years of age from the yearof manufacture.

► Product Concept• The product is using Murabahah to Purchase Or-

derer (MTPO)which is a credit sale contract with purchases settled by lumpsum payment or in stages up to 90 days.

• Limit of facility is RM 1,000,000

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ProductDescription

BANK

DISTRIBUTORDEALER

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1

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1) Dealer approaches AmBank for MFS-i facility(completion of Letter of Offer, Deben-ture &Power of Attorney).

2) After the facility granted by the Bank, Dealer then identifies the vehicles to be acquired from theDistributor.

3) Upon request by the Dealer then the Bank purchases the vehicles from the Distributor through theappointment of the Dealer as its agent.

4) The Bank pays the distributor the Purchase Price.

5) The Bank sells the vehicles to the Dealer atrespective Selling Price for the peri-ods up to 90days (disbursement tenure).

6) The dealer settles the Selling Price with the Bankafter 90 days.

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ProductPricing

► Profit Rate New Cars :

at IFR + 0.5% (If end-customer purchase the vehicles from theDealer through AITAB facility provided by AmBank)

at IFR + 1.5 % (without AITAB facility from the Bank)

Used Cars: at IFR + 1.5% (If end-customer purchase the vehicles

from theDealer through AITAB facility provided by AmBank)

at IFR + 2.5 % (without AITAB facility from the Bank)

► Mark Up ProfitDisbursement Principal X Profit Rate X Disbursement ten-uree.g.: RM 50,000 X 7.75% X 90/365 = RM 955.48

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ProductPricing

► Murabahah Selling PriceDisbursement Principal + Mark up profit for each dis-bursemente.g.: RM 50,000 + RM 955.48 = RM 50, 955.48

► Rebate (Ibra’) for Early Settlementa. As and when the bank’s effective rate is less than the

contracted rate offered to the Dealer; andb. Rebate/Ibra’ will be given, in accordance with the

method to be determined by the bank, for any difference between the ceiling profit rate and effective profit rate.

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ProductRisk

► From Dealer Point of View• If there is any defect to the vehicles (before the execution of

Murabaha sale) it is Dealer’s Liability and not the Bank ‘s re-sponsibility. However, Dealer can refer back to the Distributor.

► From Bank Point of View: NONE!!!► But according to Murabahah true sale:

• Bank should be liable for any defects to the vehicles. E.g.: In case the specification of the vehicles does not meet the earlier agreed requirements.

Bank mitigates this risk by appointed the Dealer as bank agent to purchase as well as taking the delivery of asset from Distributor.

• In transit, the vehicles are owned by the bank and all risks be-long to the Bank. E.g.: risk of destruction of the vehicles.

This risk can be mitigated through obtaining Takaful cov-erage.

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‘AqadPrinciples

- تعالى - الله الذين ”قال “آمنوا ياأيها بالعقود أوفوا

► ‘Aqad: “connection of an offer with an acceptance in lawful manner”.

► The ‘Aqad based on Shariah principles.

► The objective of ‘aqad of the sale is TO transfer the ownership fromthe seller to the buyer.

References:► AAOIFI Shariah Standards & BNM Murabahah

Parameter.

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Legitimacy ofMurabahah Contract

Definition of Murabahah is a particular kind of trust-sale where the seller discloses its cost and profit of a certain specified asset.

1) The QuranThe Quran generally allows the sales contract. Among others, the

Quran says to theeffect that “...and Allah permitted trade and prohibited usury”

(2:282).

2) The Sunnah of The Prophet Muhammad (SAW)It is deemed permissible based on the general permissibility of sale

in Islamic law. The Prophet Muhammad (SAW) was reported to have said: “The

best earning is whatman earns with his own hands and from a permissible trade” (Nar-

rated by Hakim).

3) The Consent of The Majority Muslim JuristsIslamic jurisprudence literatures indicate that the legitimacy of

Murabahah is based on the consent of the majority Muslim jurist.

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Legitimacy of Priceon Deferment

► “Price will possibly rise due to its deferred payment”(Badai’ as-Sonaie, Al-Kasani, 5/187).

► “The deferment for some period of time has a value in the price”(Bidayatul Mujtahid, Ibn Rush Al-Hafid, 2/108).

► “Five which is paid in cash is equal to six which is paid on deferred”(Al-Wajiz, Abu Hamid Al-Ghazali, 1/85).

► “The period is part of the price”(Fatawa Ibn Taimiya, 29/499).

► “This is the evidence that the period of time in sale and purchase has itsportion in the price and it is permissible for sale and pur-chase contracts”(Al-Mughni, Ibn-Qudamah, 6/385).

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Four Pillarsof ‘Aqad

1) Contracting parties (Buyer and seller)Both parties must have legal capacity.

2) Subject matterThe subject matter should be lawful and owned by the seller, it

should be deliverable and should be precisely determined at the time of contract.

3) PriceThe price must be known to the contracting parties.

4) Offer and acceptanceThe form of the contract must comprise an offer from one party and

an acceptance from the other and the acceptance must conform to the offer in all its details.

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‘Aqad:Application and Issues

Pillar

Twoparties

Principle Application Issues

Seller and buyer

• Distributor and bank

• Agency contractbetween Bank andDealer (on be-half)

• Customer as agent

• Separate agency andsale contract

• All the rights andliabilities will beassumed by theprincipal

1) Purchase on cash with agency from the Distributor

2) Sale by Murabahah on deferred payment

Seller and buyer Bank and dealer ---

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Pillar

Sub-ject

matter


• Specific quantity andquality of the as-set,halal and exis-tence

• Own to the seller andin his possession

The vehicles men-tioned

in the contract

• Liability to loss beborne by the owner

• بالضمان الخراج• Bai’ ‘Inah is not a

valid sale• Transfer owner-

ship


2) Sale by Murabahah on deferred payment• Specific quantity andquality of the as-set,halal and exis-tence

• Own to the seller andin his possession

The vehicles men-tioned

in the contract

• Liability to loss beborne by the owner

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Pillar

Price


CASH(Specific amount)

Mentionedin the contract ---



Cost+

ProfitMentioned

in the contract

• Trust-sale (Dis-closure)

• Fixed amount andNO adjustment

• Benchmark againstBLR

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Pillar

OfferAndAc-

cept-ance


• Can be on verbal or written• Consent• Connection of Acceptance with Offer

Should not have any

pre-agreement be-tween

dealer and distrib-utor



• Can be on verbal or written• Consent• Connection of Acceptance with Offer

---

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‘Aqad Issues

► Revolving for the same asset not allowed so the re-volving is shall befor new asset.

► Clause Recourse for defect to the supplier and Waiver clause on defect(Muslims are bound by the conditions they made, ex-cept a conditionthat renders permissible an impermissible act or pro-hibits a permissibleact).

► There is NO separate agency contract.

► Service feesAAOIFI (Murabahah standard No.8)2/4/1. It is not allowed for any commitment fees.

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‘Aqad Issues

► Late payment

BNM Murabahah Parameter 83The IFI may include a clause in the Murabahah con-tract, stipulating a “compensation for late payment”.AAOIFI (Murabaha standard No.8)5/6. Late payment penalty which must be channeled to charity.

► Rebate

BNM Murabahah Parameter 43 “Can be contractual OR non-contractual discount on early payment”.AAOIFI (Murabaha standard No.8)5/9. Must be non-contractual discount on early pay-ment.

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LO

NoD

MCS

Deben-ture

Power ofAttorney

Agency

Sign on Day X

(Everytimetransactionoccurs upon

Dealer’s request)

Sign on Day 1

(Upon facilitygranted to the

Dealer)

According toMurabahah Parameter,

agency contract shall be

independent.

It could be on 1 time

arrangement basis(Master

Agreement).

Upon submission of NoD, Bank is considered to purchase the vehicles from the Distributor as

Dealer has been appointed as the Bank’s

agent.

Legal Application

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1) Dealer will submit an application to be financed under the Murabahah FloorStocking-i (MFS-i) facility.

2) Once credit facility granted, dealer will be assigned with revolv-ing credit limit where he can use it anytime within the limit on recurring basis. The limit is subject toannual credit review.

3) Letter of Offer (LO) will be signed by both dealer and bank.4) Dealer to request for disbursement each time he would like to

purchase vehicles bypresenting Notice of Disbursement (NoD).

5) Bank is considered purchasing the vehicles from distributor at the point of NoDsubmitted as the Bank will pay full purchase price to the dis-tributor.

6) Bank will sell the vehicles to dealer on Murabahah and payment on deferred up to90 days. Dealer shall accept the sale as undertook in LO.

7) Bank will issue Murabahah Confirmation Sale (MCS) for both parties, dealer andbank’s reference.

Legal Application

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1) Upon request by the Customer through the Notice of Dis-bursement, theBank will purchase the Vehicles from Distributors through the customeras its agent and sell the same to the Customer at the Selling Price…

2) In effecting the purchase of the Vehicle by the Bank from the Dis-tributors,the Bank shall appoint the Customer as the Bank’s agent and thecustomer shall accept the appointment as the Bank’s agent…

3) The Customer irrevocably undertakes to purchase the Vehicles from theBank at the respective Selling Price contained in the Murabahah SaleConfirmation.

4) Facility amount, pricing (profit rate), rebate (ibra’), payment term,compensation on late payment (ta’widh), early settlement, secu-rity,guarantee, takaful coverage, termination and other conditions.

Legal Application

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Islamic Debenture and Power of Attorney

1) Islamic Debenture – rights of the Bank to charge over the com-pany’sassets in the event of default; (1) Vehicles, (2) Other assets.

2) Power of Attorney (PA) to be signed by the company’s Directors or aDirector and a Secretary and witnessed by an Advocate and Solic-itor.

3) 31 clauses in favor of the bank in the event of dealer’s defaulted.

Other Matters Related to Legal Documentations Execution

4) Stamp duty – incurred by the customer and not part of Selling Price.

5) Rescheduling – no fresh documentations needed, only tenure ad-justed.

6) Restructuring – involve changes in profit rate, execution of new legal docs.

7) Registration Card status – reflect true ownership?

Legal Application

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LO: Item 16.1

Upon payment to the Customer or any

arrangement acceptable to the

Bank, the Bank will hold in its custody

all the relevant original

documents necessary to effect the registration of the Vehicle. These documents will be

released upon settlement of the agreed amount for

the respective Vehicle redeemed

from the Bank.

Legal Application

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FinancialReporting

► Financial Reporting can be defined as the presentation of financial dataof a company's position, operating performance, and funds flow for anaccounting period.

► There is a consensus among scholars that the double-entry system issimply a record keeping technique and therefore a technol-ogy thatMuslims can safely adopt for their bookkeeping(Adnan, 1996, p.321; Baydoun and Willett, 1997a, p.10).

► Accounting (hence fiancial reporting) is clearly mentioned in the Quranin various forms. The Quran emphasized the importance of disclosurein Islam via Quranic instruction to Muslims to record in writing alltransactions that they are party to (Al-Quran 2: 282).

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► "Allah doth command you to render back your trusts to those to whom theyare due and when ye judge between people that ye judge with justice...“(Al-Quran 4:58).

► In an Islamic context, therefore, reporting should be a means whereby thecontrollers of an entity can discharge their trust to any relevant stakeholders.The means by which this information is to be provided should be able to"give full measure when you measure and weigh with a straight balance...“(Al-Quran 17:35).

► Further emphasis from the Quran:“...Never get bored with recording it,however small or large, up to its maturity date, for this is seen by Allah closer tojustice, more supportive to testimony and more resolving to doubt...”.

FinancialReporting

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Objectives of Financial Reporting in Islamic Accounting

► To determine the type and nature of information which should be included in financial reports in order to assist users of these reports in making decisions(AAOIFI SFA para 25).

► In terms of stewardship the objective of financial account-ing is to contributeto the safeguarding of the assets, and to the enhancement of the managerialand productive capabilities of the Islamic bank while en-couraging compliancewith its established goals and policies (AAOIFI SFA para 33 – 34).

► The provision of information to satisfy an accountability obligation to the realowner – Allah SWT (Adnan and Gaffikin, 1997).

FinancialReporting

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FinancialReporting

Illustration of a Murabahah Floor Stocking-I Facility (MFS-i)

Aziehan Sdn Bhd is a dealer of Lamborghini Kota Baru. On 1st July 2010 he approaches AmIslamic for a Murabaha to purchase orderer facility to enable the company to buy 3 cars from Lamborghini Asia.

Assuming the transaction is conducted under any of the 3 scenarios below:

Scenario 1: Aziehan S/B settle the selling price on maturity of Murabahah facility (lump sum payment) on the 90th day. End financing not with AmIslamic.

Scenario 2: Aziehan S/B makes an early settlement after 1 month (30 days) – giving that settlement is on 3 monthly installment basis.

Scenario 3: Aziehan S/B defaulted (terminates) the Murabahah contract on 1.9.2010 having settled two months installment.

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FinancialReporting

No. Subject Details

1 Purchase price/Cost/Principal 900,000 (RM300,000 per car)

2 Annual Profit Rate 10%

3 Tenure Ninety (90) Days

4 Total profit on transaction 22,192

5 Sale price (Contract price) 922,192

6 Date of disbursement to supplier/distributor/customer

1st July 2010

7 Date of maturity of Murabaha 90th day

8Aziehan S/B notified AmIslamic about their intention to settle full amount on the 30th day

AmIslamic offers rebate of two months for early settlement

9Aziehan S/B has terminated the Murabaha contract for unforseen reason on the 60th day

Computation of rebate and journal entries

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FinancialReporting

Scenario 1RM RM

Purchase of automobile by AmIslamic on cash:Dr Automobile 900,000

Cr Cash 900,000

Execution of a MFSi contract between AmIslamic and Aziehan:Dr Murabaha Financing 922,192

Cr Automobile 900,000Cr Deferred profit 22,192

On Maturity of Murabaha transaction:Dr Cash 922,192

Cr Murabaha financing 922,192

Realization of Murabaha profit:Dr Deferred profit 22,192

Cr Profit and Loss 22,192

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FinancialReporting

Scenario 2RM RM

Aziehan S/B settles the full selling price on the 30th day and obtains a rebate (90days - 21 days):Dr Cash 904,759Dr Deferred profit 17,433

Cr Murabaha financing 922,192

Realization of Murabaha profit: Dr Deferred profit 4,759

Cr Profit and Loss 4,759

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FinancialReporting

Scenario 3RM RM

Aziehan S/B defaults (terminate) the Murabaha contract due to unforeseen reasons on 2.9.2010:Dr Accounts receivable 307,397

Cr Murabaha financing 307,397(being the last installment due from Aziehan S/B assuming no compensation [penalty] is imposed for the default)

Dr Accounts Receivable XXXXCr Income statement XXXX

(being compensation charges payable by Aziehan recognized as income)

Where compensation is to be paid to charity by bank, the amount will be treated as an off balance sheet transaction.

[All journal entries as per Shahul Hameed, 2009, which is generally in line with AAOIFI]

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General Observation on the Financial Reporting

► Bank do not record the ‘purchase’ of vehicles in the finan-cial statement.Instead, the financing provided to the customer is lump un-der financing andadvances.

► The amount of rebate is clearly spelt out to the customer does making theprice of the Murabahah contract not fixed (subject to cus-tomer qualifying fora rebate).

► From Shariah point of view there is distortion of in income with the inclusion of compensation charges and service fees (not direct ex-penses).

► What happens if the agent customer’s (end user of the vehi-cles) agrees to endfinancing by AmIslamic? Is the selling price being adjusted by the ‘automaticrebate’?

FinancialReporting

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Maqasid alShariah Evaluation

Question 1

• What is the mission of Islamic Bank in terms of Maqasid al Shariah ? - Why do we need Islamic Bank ? - What is the Benefit the Islamic Bank is providing ?

Question 2

• What is the impediments to the mission of Islamic Bank ? - Rules and Regulations against Bank’s trading or less benefit to customer or something else ?

Question 3

• How to improve the achievement of the mission of Islamic Bank ? - Price competitiveness ? Or Something else ?

Maqasid al

Shariah

Dignity

Wealth

Faith

Intellect

Posterity

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• Does Maqasid al Shariah exist in Islamic Banking ?• Does Islamic banking product serve the interest of all human beings ?• What is wrong with Islamic banking ?

Issues

• Maqasid al Shariah is to serve the interest of all human beings and to save them from haram.

• Special emphasis on five values: faith, the human self, intellect, posterity and wealth.

Maqasid al Shariah


• Islamic banking products should contain more benefits (masalih) and less or no harm (madarah).

• To offer our customers a complete range of innovative Islamic financial products and services that conform to the Shariah without compromising on product acceptability and customers' satisfaction for both our local and regional markets.

Mission of Islamic Bank

• High Court Judge Datuk Abdul Wahab Patail says that the sale element in BBA sale is not a bona fide sale (Mayban Finance vs Taman Jaya)

Benefit of Islamic Bank• What is the mission of Islamic Bank in terms of Maqasid al Shariah ?

- Why do we need Islamic Bank ? - What is the Benefit the Islamic Bank is providing ?

Does Islamic Bank provide more Benefit than DisBenefit ?

• Abandon projects

- Customer cannot make recourse against bank as selling party?

- Defaulted BBA customer are required to make settlement based on the selling price. Sale with no transfer of ownership.

• Conflict between Aqad and Maqasid?

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• Product level Innovation for price competitiveness are limited in Current system• Islamic banking rules require ‘Trading basis / Ownership risk’

Issues


Conventional Banking

Producer CustomerConventional

BankProducer

Islamic Bank

Customer

• Stronger Price Competitiveness

- Less Transaction with Single counterparties

- Less Risk / Capital requirement / Tax

• Weaker Price Competitiveness

- More Transactions with Multiple counterparties

- More Risk / Capital requirement / Tax

Price Competitive

Business Practices

1 Rule / Loan Basis / Credit Risk 2 Rules / Trading Basis / Ownership Risk


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>>

Islamic Banking

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• Who approved this structure ? Is it FAIR in Islamic perspective ?• Any Issue of Aqad or Maqasid al Shariah?• What is the Contribution of Islamic Bank for the Human welfare in Price and Benefit ?

Issues



BankProducer

Islamic Bank

Customer

Customer > Conventional Bank > Producer

Producer > Islamic Bank > CustomerBenefit /Contribute

>>>

• Customer : - Claim for Compensation / Warranty - Stop Installment pmt / Borrowing

• Producer : Responsibility for Warranty as a Seller

• Conventional Bank : Stop Lending

• Producer : - Cash Sales !!! & No Direct contractual relationship with Customer

• Islamic Bank : Legal Enforcement on Installment Payment & Transferring Warranty Responsibility

• Customer : Hard to Sue the Bank & to Claim for Service

Business Practices

Defective Product



Islamic Banking


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• Ma’rifah : Knowledge of Allah through the Qalb• Kharifah : Man as God’s vicegerent (khalifa) has a task of establishing a moral social order on earth

Ideas

Shariah Framework : Akhlak : Theory of Ethics, the study of moral conducts & causes of behaviors

MakrifatWhy ?

Hakikat

Thariqat

Shariat2+2=4

‘AQL (INTELLECT) ACTION

KharifahNegative

Good


• How to improve the achievement of the mission of Islamic Bank ? - Price competition ? Or Something else ?

• Takhalli : Empty the self from vices by repentence (taubah)

• Tahalli : Furnish the self with good morals and virtues actions

• Tajalli : The opening of the Veil (Hijab) and the sight of Divine Light

Maqasid al Shariah : khiyar al’-ayb or option of defect to cancel or annul the contract as a legal right, No Need for a special stipulation. Mejelle, “any buyer in Islamic law has an automatic implied warranty against latent defects in the goods purchased”.

Legal Device : Designed by some Muslim jurists to achieve purposes in favor of legal standard rather than the moral or spiritual standards of the Shariah.

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Fair Contract & Community Trust



BankProducer

Islamic Bank

Customer

• Price Competitiveness in terms of Contracting parties, Risk, Capital & Tax - Long term approach : Improvement of Business Environment, Rules and System required - Investment Bank

• Provide Benefit as much as Cost - Stand for Customer’s benefit : Active involvement and enforcement - Fairness in Product Structure against Injustice, paying for nothing

Price Competitive

Benefit /Contribute

Business Practices

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Islamic Banking

• How to improve the achievement of the mission of Islamic Bank ? - Price competition ? Or Something else ?

1 car dealer financing product of amislamic bank murabahah floor stocking-i muhammad quraisy 1000424...

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