tapping into islamic finance for non muslims

Tapping into Islamic FinancingTapping into Islamic FinancingBanking on Faith Based Products

Strictly Confidential Visit us at www.rma.com.my RM Applications Sdn. Bhd. 1

By Lokesh Gupta Head, Business & Technology Consulting

By

RM Applications Sdn. Bhd.

No.69-1 Medan Setia 1

Bukit Damansara

50490 Kuala Lumpur

Tel: +603-20932677

Fax: +603-20932607

Website : www.rma.com.my

Points to Share

1-. Islamic Banking Overview

2-. Benefits & Advantages

3-. Islamic Banking Evolution


3-. Islamic Banking Evolution

4-. Islamic Banking for Non Muslims

5-. Critical Factors for Islamic Banking Acceptance

6-. Islamic Financing & Welfare

What is Islamic Banking ?


What is Islamic Banking?

Isamic Banking is based on the principles of

‘Trade and Commerce’


Islamic Banking Principles

Riba Free

Isamic Isamic


Isamic Isamic

BankingBanking

Benefits & Advantages

� Based on Shariah Based Principles rather Manmade

Principles

Ethical and Equitable Banking

� It promotes risk sharing between provider of capital

(investor) and the user of funds (entrepreneur).Risk Ownership

� In the modern Islamic banking system, it has become one

of the service-oriented functions of the Islamic banks to Zakat (Religious Tax)


of the service-oriented functions of the Islamic banks to

be a Zakat Collection Centre

Zakat (Religious Tax)

� The Islamic banks can only charge 1% on the outstanding

installment in the event of defaultPenalty

� It gives due importance to the public interest. Its ultimate

aim is to ensure growth with equity.Social Welfare

� The Islamic banks give greater emphasis on the

economic development project rather profitability as sole

evaluation criteria

Economic Development

Benefits & Advantages

� There is no room for compounding of profit in Islamic

Banking Fixed Repayment

� The contracts are structured in a manner that the liability

is fixed and is known to customerTransparency

� Islamic Banking is not limited to Muslims and it is for Non

Muslims as wellBanking for All


Muslims as well

� Each Islamic Bank has Shariah Supervisory Board to

ensure that all business activities are in line with Shariah

requirement and BNM Statutory Requirement

Strict Governance

Evolution of Islamic Banking


Evolution of Islamic Finance in Malaysia

Phase I - 1983

− Wadiah Saving

− Wadiah Current

− Mudharabah Investment

− BBA Financing

Phase 2 - 1993

− Islamic Interbank Money Mkt

− Murabahah Working Capital

− Trade Financing

− Asset Securitization (Mudharabah)


Phase 2 - 1993

Phase 3 - 1998

− Istisna Financing

− Bai Innah Financing

− Rahnu

− Bai al Dayn

− Ijarah / AITAB

− Islamic Bonds / PDS

− Qardh Hassan

Current Stage

− Musharakah

− Diminishing Musharakah

− Bai Salam

− Mudharabah Financing

− Commodity Murabaha

− Istijrar

Evolution of Islamic Deposit Products in Malaysia

Islamic Deposit Products – Retail & Corporate

Saving Account - i

Wadiah Yad Dhamanah

Current Account - i

Wadiah Yad Dhamanah

Investment Account -i

Mudharabah Mutlaqah


Wadiah Yad Dhamanah

(Trustee With Guarantee)

Mudharabah (Profit

Sharing)

Qardh (Benevolent Loan)

Wadiah Yad Dhamanah

(Trustee With Guarantee)

Mudharabah (Profit

Sharing)

Qardh (Benevolent Loan)

Mudharabah Mutlaqah

(Unrestricted Investment)

Mudharabah

Muqayyadah (Restricted

Investment)

Source : www.bankislam.com.my / www.muamalat.com.my / www.kfh.com.my / www.ambg.com.my / www.rhbislamicbank.com.my / www.bnm.gov.my

Evolution of Islamic Financing Products in Malaysia

Islamic Financing Products - Retail

Auto

Financing - i

AITAB (Lease to

House

Financing - i

Bai Bithaman

Personal

Financing - i

Bai Innah (Sale

Islamic

Card - i

Bai Innah +

Pawn

Broking-i


AITAB (Lease to

Purchase )

Bai Bithaman

Ajil (Deferred

Payment Sale)

Bai Bithaman

Ajil (Deferred

Payment Sale)

Diminishing

Musharakah +

Ijarah

Istisna (Purchase Order)

Murabahah

(Cost Plus Sale)

Murabahah

(Cost Plus Sale)

Bai Innah (Sale

with immediate

repurchase)

Bai Bithaman

Ajil (Deferred

Payment Sale)

Bai Bithaman

Ajil (Deferred

Payment Sale)

Bai Innah +

Qardh

Hassan

Qard

Ar-Rahnu


Evolution of Islamic Financing Products in Malaysia

Islamic Financing Products – Corporate

Project

Financing - i

Al Istisna

(Purchase

Order)

Working Capital

Financing - i

Musharakah

(Partnership)

Asset

Financing - i

Ijarah (Leasing)

Trade Finance - i

Murabahah (Cost

Plus Sale)


Order)

Diminishing

Musharakah

Mudharabah

(Profit Sharing)

Murabahah

(Cost Plus Sale)

(Partnership)

Mudharabah

(Profit Sharing)

Murabahah

(Cost Plus Sale)

Bai Bithaman

Ajil (Deferred

Payment Sale)

AITAB (Lease to

Purchase )

Al Istisna

(Purchase

Order)

Plus Sale)

Wakalah (Agency)

Bai Dayn (Debt

Trading)

Kafalah

(Guarantee)


Key Statistics

Average Growth Rate in Islamic

Financing is +12.3%,


Source : www.bnm.gov.my / BNM Annual Report 2006

Interest of Non Muslims in Islamic Financing

� Interest is not only prohibited in Islam but is also

mentioned in Jewish Torah and Christian Bible Prohibition of Interest

� Repayment price is fixed and there is no element of

compounding profit is involvedFixed Repayment

� In the event of default, Penalty is limited to 1% of the

outstanding installment NOT on the total outstanding

amountPenalty


amount

� Non Muslims equate Islamic Finance with Ethical Living

and doesn’t want to get involved in anything they

perceive as unethical

Ethical Living

� Islamic Banks product range is No less then their

conventional counterpart and it offers a choice to the

customers

Product & Service Portfolio

� Islam recognizes money as a mean of exchange and not

as a commodity, where there should be a price for its useTransparency

Interest of Non Muslims in Islamic Financing

� Non-Muslims fed up with punitive interest payments are

more attracted to a system that imposes ethical practicesDebt Burden

� For a Business / Individual loan, the bank is not just the

financier but a co-owner of the business and has an

interest in its success as if they have equity.

� Bank also shares the Loss based on equity proportion

Profit Sharing


� Bank also shares the Loss based on equity proportion

“In Malaysia up to

25% of Islamic

accounts are opened

by non-Muslims”

“London has

become a major

trading centre for

Islamic funds”

“The Central Bank of

Malaysia sees non-Muslim

investment as the key to

further market growth”

Source : www.bnm.gov.my / www.ethicalcorp.com / http://news.bbc.co.uk

� Islamic financing is a preferred hedging device due to its

certaintyCertainty

Success Factor to Encourage Acceptance of Islamic

Financing

� Stress on Ethical Marketing

� Create Awareness via branding and promotion

� Offer convenience and easy access to information and banking online via e-

channels for SME & Corporate via Cash Management, EIPP etc.

� Introduce Sophisticated Islamic products & services such as Wealth

Management, Halal Supply Chain Financing etc


Management, Halal Supply Chain Financing etc

� Returns from Islamic instruments vs. conventional products

� Standardization of Terms / Contracts

� Transformation of traditional client service model for Islamic banks

� Key drivers will be Innovation NOT Migration, infrastructure and regulatory

improvement.

� Islamic Financing product with stress on economic development e.g.

Microfinance

� Variety and diversified options to Customers

� Quality services to match the desired expectation of the

investors/customers.

� Professionalism in dealing with investors.

To Fuel the Growth Islamic Banks will have to offer:

Success Factor to Encourage Acceptance of Islamic

Financing


� Professionalism in dealing with investors.

� Investors with adequate, timely and accurate information to support in their

decision making.

� Competitive structures, pricing and choice of funds.

� Adequate distribution channels.

Islamic Financing & Welfare

� Interest retards social and infrastructural development of a nation. The more

the debt is paid, the more it increases.

� Interest is sure gain without any possibility of loss, a reward without work; it

contributes to inflation and unemployment.

Interest Free Economy – Socio Economic Justice

Ethical & Moral Dimension


� Strong ethical and moral dimensions of doing the business and selecting the

activities/commodities to be financed by Islamic Banks are playing an

important role in promoting socially desirable investment and better

individual/corporate behaviour

� Islamic model is that it is based on profit sharing principle, whereby the risk is

share by the bank and the customer. This just system of financial

intermediation will contribute to a more equitable distribution of income and

wealth.

Justice & Fairness

Islamic Financing & Welfare

� Islam encourages that every man should give the needy a specified proportion

of his wealth. This contribution is called as Zakat, a levey on certain

categories if wealth.

� The principle of zakat is to take from those who have wealth and give it away

to those who do not. This rotation of wealth is a way to balance social

inequality.

Spirit of Cooperation & Brotherhood


Islamic Financing is Banking for All !!!

Thank YouThank You


Thank YouThank [email protected]@rma.com.my

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