key to successful development of a dual islamic finance & takaful systems corporate lecture...
TRANSCRIPT
Key To Successful DevelopmentKey To Successful Development of a Dual of a Dual
Islamic Finance & Takaful Islamic Finance & Takaful SystemsSystems
Corporate Lecture Series
Prof. Dr. Mohd. Ma’sum Billahwww.drmasumbillah.blogspot.com
Asian Business Forum
Key IssuesKey Issues
Clear Picture on Dual System.Clear Picture on Dual System. Is it a Combination Or Compromization Or Is it a Combination Or Compromization Or
Harmonization Or Segregation?Harmonization Or Segregation? Is It a Product Or a System?Is It a Product Or a System? The Road to Success.The Road to Success. The Mysterious Mechanisms.The Mysterious Mechanisms. The Global Update.The Global Update. The Platinum Tips.The Platinum Tips. Leading Islamic Finance & Takaful Leading Islamic Finance & Takaful
Instruments.Instruments.
Clear Picture on Dual Clear Picture on Dual SystemSystem
Islamic Financial System is Not By Islamic Financial System is Not By Name But by Action Name But by Action
MisconceptionMisconception A Clear PictureA Clear Picture The Global RealityThe Global Reality
Is Dual Islamic Finance a Is Dual Islamic Finance a Combination Or Compromization Or Combination Or Compromization Or Harmonization Or Segregation?Harmonization Or Segregation?
It is Neither Compromization Nor It is Neither Compromization Nor a Combination.a Combination.
But, A Segregation.But, A Segregation. In Some Situations, It Is with In Some Situations, It Is with
Harmonization by Harmonization by Shari’ahShari’ah Compliance.Compliance.
Is Islamic Finance Or Takaful Is Islamic Finance Or Takaful A Product Or A System? A Product Or A System?
It is Not A product .It is Not A product . But A Sytem With But A Sytem With
Integration By ShariIntegration By Shari’’ah & ah & Divine Spirit.Divine Spirit.
The Road to SuccessThe Road to Success
Sincerity With Transparence.Sincerity With Transparence. Review (Products & Policies) Exercise Review (Products & Policies) Exercise
Considering the Socio-economic Considering the Socio-economic Sensitivity.Sensitivity.
PR & Performance With Standard PR & Performance With Standard Professionalism.Professionalism.
Sustainable Risk Assessment & Sustainable Risk Assessment & Effective Decision Making.Effective Decision Making.
Wisdom, Tolerance & Mutual Respect.Wisdom, Tolerance & Mutual Respect. Plan & Action.Plan & Action. Shari’ahShari’ah Compliance With Divine Spirit. Compliance With Divine Spirit.
The Mysterious The Mysterious MechanismsMechanisms
Dynamic Marketing Strategies.Dynamic Marketing Strategies. Sustainable Research & Rediscovery.Sustainable Research & Rediscovery. Ranks & Rewards.Ranks & Rewards. Global Comparison.Global Comparison. Reasonable Less Liability with Added Reasonable Less Liability with Added
Benefits & Rewards.Benefits & Rewards. Mutual Corporate Care & Concern.Mutual Corporate Care & Concern. Punctuality with Smartness.Punctuality with Smartness. Settle Before Time.Settle Before Time.
The Global UpdateThe Global Update
Middle Eastern Phenomena.Middle Eastern Phenomena. African Phenomena.African Phenomena. Malaysian & ASEAN Scenario.Malaysian & ASEAN Scenario. Indian Sub-continent.Indian Sub-continent. European Market.European Market. US & Other World’ Condition.US & Other World’ Condition.
Review Excercise With Innovation.Review Excercise With Innovation. Unhealthy Competition.Unhealthy Competition. Dynamic Offerings with Acceptable Dynamic Offerings with Acceptable
Standard.Standard. Foreseeable Plan & Acceptable Foreseeable Plan & Acceptable
Performance.Performance.
The Platinum TipsThe Platinum Tips
Leading Islamic Finance Leading Islamic Finance & Takaful Instruments& Takaful Instruments
MUDHARABAH MUSHARAKAH
MURABAHAH Bai Bi Thaman Ajil
Wakalah Tabarru’
Ujr Mirath
Contract betweenContract between two parties: two parties:
An Islamic bank as an An Islamic bank as an investor (rab al-mal)investor (rab al-mal) who who provides a second party, the provides a second party, the entrepreneur entrepreneur (mudarib)(mudarib) with financial resources to finance a with financial resources to finance a particular project.particular project.
ProfitsProfits are shared between the parties in a are shared between the parties in a proportion agreed in advance.proportion agreed in advance.
LossesLosses are the liability of the Islamic bank and are the liability of the Islamic bank and the mudarib loses only its efforts and his the mudarib loses only its efforts and his expected share in the profitsexpected share in the profits
MUDHARABAHMUDHARABAH
The The two partners participate in the capitaltwo partners participate in the capital of of the venturethe venture
Profits Profits are allocated according to an agreed are allocated according to an agreed proportion, allowing for managerial skills to be proportion, allowing for managerial skills to be remuneratedremunerated
LossesLosses are borne by the partners in proportion are borne by the partners in proportion to their contribution to the capitalto their contribution to the capital
MUSYARAKAHMUSYARAKAH(JOINT PARTICIPATION)(JOINT PARTICIPATION)
Contract available for Contract available for financing the purchase or financing the purchase or importimport of capital of capital goodsgoods, consumable goods or raw , consumable goods or raw materialsmaterials
Fundamental principlesFundamental principles::– Purchase price should be declared to the clientPurchase price should be declared to the client– Goods must be classified and clearly identified Goods must be classified and clearly identified
according to international or commonly according to international or commonly accepted standards or classificationsaccepted standards or classifications
MURABAHA MURABAHA (MARK UP ON SALE)(MARK UP ON SALE)
Why more than 80% revenues Why more than 80% revenues generated by most of Islamic generated by most of Islamic
Banks are from the Banks are from the Murabahah financing?Murabahah financing?
POTENTIAL ISSUES IN POTENTIAL ISSUES IN MUSYARAKAHMUSYARAKAH Third party guaranteeThird party guarantee Shared liabilityShared liability Restriction on joint-ownership of Restriction on joint-ownership of
capitalcapital Classification of non-performing Classification of non-performing
financingfinancing Source of fundsSource of funds Staff competency and efficiency Staff competency and efficiency Control mechanism Control mechanism
Third Party GuaranteeThird Party Guarantee
No security / collateral is allowedNo security / collateral is allowed Negligence or misuse of fundsNegligence or misuse of funds Jordan – Government guaranteeJordan – Government guarantee Sudanese Islamic Bank – Property as Sudanese Islamic Bank – Property as
collateralcollateral To allow third-party guarantee on To allow third-party guarantee on
Musyarakah financingMusyarakah financing To assess Takaful role as third-party To assess Takaful role as third-party
guaranteeguarantee Both parties contribute to the appointmentBoth parties contribute to the appointment
Shared LiabilityShared Liability
JV – both parties share the liability JV – both parties share the liability Indemnity Letter can be requested Indemnity Letter can be requested
but Syariah disallows financier to but Syariah disallows financier to absolve its liability to the projectabsolve its liability to the project
To limit the liability under Syariah To limit the liability under Syariah due to the financier’s non-due to the financier’s non-involvement in the normal involvement in the normal management of the project is to be management of the project is to be obtained obtained
Restriction on Joint-Restriction on Joint-Ownership of CapitalOwnership of Capital Syariah: Capital contributed by the Syariah: Capital contributed by the
partners will belong to the partnershippartners will belong to the partnership Title should be under the name of Title should be under the name of
partnership partnership Issues in JV-based Musyarakah Issues in JV-based Musyarakah Section 66 of BAFIA, FIs Section 66 of BAFIA, FIs are not are not
allowed to acquire or hold more allowed to acquire or hold more than 5% equitythan 5% equity in any corporation in any corporation except by way of credit security except by way of credit security
Assets which are contributed by partners Assets which are contributed by partners as capital must be clearly differentiated as capital must be clearly differentiated from assets which are lent for specific from assets which are lent for specific functions and period by the partnersfunctions and period by the partners
Appointment of trustee – economical for Appointment of trustee – economical for small financing?small financing?
Alternative: Issue Trust Declaration – Alternative: Issue Trust Declaration – need to be registered with ROCneed to be registered with ROC
A private caveat can also be lodged if the A private caveat can also be lodged if the assets is landassets is land
Still need to amendment BAFIAStill need to amendment BAFIA
Classification of Non-Classification of Non-Performing FinancingPerforming Financing Does not have fixed payment scheduleDoes not have fixed payment schedule Tenure can be specific or perpetual Tenure can be specific or perpetual It is difficult to classify Musyarakah as It is difficult to classify Musyarakah as
non performing based on current Non non performing based on current Non Performing Loan Guideline by BNM GP3Performing Loan Guideline by BNM GP3
To amend the BNM GP3To amend the BNM GP3 Perpetual should be exempted from the Perpetual should be exempted from the
NPF classification NPF classification To divide it into 2 categories – Specific To divide it into 2 categories – Specific
Maturity Musyarakah and Perpetual Maturity Musyarakah and Perpetual Musyarakah Musyarakah
Source of fundsSource of funds
Where the funds should be tapped Where the funds should be tapped from? Who are depositors? Specific from? Who are depositors? Specific accounts holder – risk takers?accounts holder – risk takers?
Gapping issues – short term Gapping issues – short term deposit versus long term lendingdeposit versus long term lending
Limited shareholder’s fund – worst Limited shareholder’s fund – worst still - riskystill - risky
Staff Competency and Staff Competency and Efficiency Efficiency To ensure that proper and To ensure that proper and
structure training and practical structure training and practical are given to the parties involved are given to the parties involved
Control MechanismControl Mechanism
Difficult to monitor and control Difficult to monitor and control especially JV-typeespecially JV-type
Selective customers only Selective customers only
Recommendations Recommendations
to promoteto promote
Musyarakah Musyarakah FinancingFinancing
Other Other recommendationsrecommendations
BE SELECTIVE IN PROJECT SCALE: SMALL TO MEDIUMBE SELECTIVE IN PROJECT SCALE: SMALL TO MEDIUM
In a project whereby capital investment is very huge, like In a project whereby capital investment is very huge, like
construction of dam, gas and oil production plant, construction of dam, gas and oil production plant, musyarakah musyarakah
and mudharabah structure may not be recommended due and mudharabah structure may not be recommended due to to
the shortfalls of this structure. In practice the financing the shortfalls of this structure. In practice the financing
structure are more toward debt structure, ijarah, rahn and structure are more toward debt structure, ijarah, rahn and etc.etc.
GO FOR MORE SECURED PROJECT CASH FLOWGO FOR MORE SECURED PROJECT CASH FLOW
For relatively small project like a secured For relatively small project like a secured infrastructure government award project, bank infrastructure government award project, bank can adapt the musyarakah and mudharabah can adapt the musyarakah and mudharabah structure replacing the murabahah or BBA in structure replacing the murabahah or BBA in trade financing that are widely use in current trade financing that are widely use in current practicepractice
In practice Islamic Bank use Murabahah Working In practice Islamic Bank use Murabahah Working Capital Financing facilities in order to facilitate Capital Financing facilities in order to facilitate trade finance of particular company that being trade finance of particular company that being awarded with government project. In Malaysia, awarded with government project. In Malaysia, infra project are booming and the need for such infra project are booming and the need for such financing is huge financing is huge
In MWCF bank will get profit out of mark up sale In MWCF bank will get profit out of mark up sale that they charges to its clients of more less like 1-that they charges to its clients of more less like 1-1.5% p.m. and if the bank can participate directly 1.5% p.m. and if the bank can participate directly into the project by way of mudharabah or into the project by way of mudharabah or musyarakah the return is far beyond the current musyarakah the return is far beyond the current margin.margin.
For example, government awarded a project For example, government awarded a project to an ABC Co. to construct a RM50 million to an ABC Co. to construct a RM50 million hospital for a period of 18 months in Gua hospital for a period of 18 months in Gua MusangMusang
Since the project is guaranteed by the Since the project is guaranteed by the government in term of progressive cash flow government in term of progressive cash flow payment, bank can use Musyarakah or payment, bank can use Musyarakah or Mudharabah as a tool to participate in the Mudharabah as a tool to participate in the project for a better returnproject for a better return
How this How this recommendation can recommendation can solve the shortfallssolve the shortfallsGO FOR SHORT TERM PROJECT FINANCINGGO FOR SHORT TERM PROJECT FINANCING
Liquidity problem can be resolved as the project undertake is only for short term period
Bank can use depositor’s fund instead of limited shareholders’ to capitalize the project in order to give better return to depositors
Problems of gaping can be eliminated, since cash in flow will be paid in progress payment. In a typical government project, payment made progressively in monthly payment according to
Direct involvement from the Direct involvement from the agentsagents
Mudharib & Rabbul Maal are the board of executives directors
Risk scorecard must be in place and reviewed periodically
Appointed independent project/account manager/consultant to assess the performance and detect warning signals for pre-emptive measure
Thank You Thank You
WassalamWassalam