CONVENTIONAL BANKING CONVERGENCE WITH ISLAMIC BANKING – IMPACT & IMPLICATIONS
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CONVENTIONAL BANKING CONVERGENCE WITH ISLAMIC BANKING – IMPACT & IMPLICATIONS Prof. Dr. Mohd . Ma’sum Billah www.drmasumbillah.blogspot.com. Areas of Convergence Regulatory Authorities Regulatory Bodies Management Financial Principles Instruments Products Marketing.

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CONVENTIONAL BANKING CONVERGENCE WITH ISLAMIC BANKING – IMPACT & IMPLICATIONS

Prof. Dr. Mohd. Ma’sumBillah

www.drmasumbillah.blogspot.com


Areas of Convergence IMPACT & IMPLICATIONS

Regulatory Authorities

Regulatory Bodies

Management

Financial Principles

Instruments

Products

Marketing


PRINCIPLE OF MURABAHAH IMPACT & IMPLICATIONS

“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 theseller,

Customer is the buyer.

Murabahah = Cost Plus

Common Mechanism = Deferred Lump Sum Sale


Principle of bai bithaman ajil bba
PRINCIPLE OF BAI-BITHAMAN AJIL(BBA) IMPACT & IMPLICATIONS

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

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

BBA = Cost Plus

Common Mechanism = Deferred Instalment Sale


Pre requisite under bba
PRE-REQUISITE UNDER BBA IMPACT & IMPLICATIONS

i) Buyer

ii) Seller

iii) Merchandise

iv) Price of the merchandise

v) Aqad/Contract (Offer and Acceptance)


MODES OF BAI-BITHAMAN AJIL FINANCING OPERATION IMPACT & IMPLICATIONS

  • 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 IMPACT & IMPLICATIONS

  • House Financing

  • Study Financing

  • Unit Trust Financing

  • Other Consumer Financing

    • e.g Share Financing


  • LETTER OF OFFER IMPACT & IMPLICATIONS

  • 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


  • BBA IMPACT & IMPLICATIONS

  • DOCUMENTATION


  • PROPERTY WITH TITLE IMPACT & IMPLICATIONS

  • Property Purchase Agreement

  • Property Sale Agreement

  • Charge Document (Form 16A &

  • Annexure)


  • PROPERTY WITHOUT TITLE IMPACT & IMPLICATIONS

  • Property Purchase Agreement

  • Sale Agreement Cum Assignment

  • Deed Of Assignment


Comparison between conventional loan and bba financing

PRODUCT IMPACT & IMPLICATIONS CONVENTIONAL BBA

FEATURES LOAN FINANCING

ConceptBase 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

COMPARISON BETWEEN CONVENTIONAL LOAN AND BBA FINANCING



PRINCIPLE OF BAI ISTISNA’ IMPACT & IMPLICATIONS

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’ IMPACT & IMPLICATIONS

  • 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 Financing

    Contract Financing

    Project Financing

    Made to Order


PRINCIPLE OF BAI AL-DAYN IMPACT & IMPLICATIONS

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) IMPACT & IMPLICATIONS

  • This is IBD’s new product and still under development

  • Only one case (pilot case ) so far

  • Apply the concept of leasing

    Type of leasing

  • Financial lease

  • Operating lease


Financial lease IMPACT & IMPLICATIONS

  • 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 IMPACT & IMPLICATIONS

  • 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 IMPACT & IMPLICATIONS

  • 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 IMPACT & IMPLICATIONS

  • 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 IMPACT & IMPLICATIONS

  • Concept

  • This financing can apply the concept of Bai Bithaman Ajil or Murabahah

  • Issues of collateral

  • Secured by same property

  • Different property

  • Corporate guarantee


SPI FUND FOR SMALL ENTREPRENEUR (TUK) IMPACT & IMPLICATIONS

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.


SMALL MEDIUM INDUSTRIES FINANCING (TIKS) IMPACT & IMPLICATIONS

  • This financing is similar to Tabung Industri Kecil dan Sederhana (TIKS) in Conventional Banking.

  • It involves two relationship:-

  • Bank and customer

  • Bank and Bank Negara


Bank and customer IMPACT & IMPLICATIONS

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 IMPACT & IMPLICATIONS

  • In Letter of Offer, bank gives financing rate of 10.5% to

  • customer.

  • In actual payment, customer makes repayment to the

  • bank base on financing rate of 6.5%

  • The difference 4.0% is a rebate to the customer.


SPI FINANCING UNDER FUND FOR FOOD (3F) IMPACT & IMPLICATIONS

  • This financing is similar to Fund For Food in

  • Conventional Banking.

  • It involves two relationship:-

  • Bank and customer

  • Bank and Bank Negara


Bank and customer IMPACT & IMPLICATIONS

Bank gives financing to customer by using principle of BBA or Istisna’ or Murabahah. For example Bank gives financing 4.0% to customer.

Bank and Bank Negara

Bank sells the loan to Bank Negara at 1.0% (current BNM funding rate) using the concept of Bai Al-Dayn. Therefore, Bank’s profit margin is 3.0%.


REHABILITATION FUND FOR SMALL AND MEDIUM INDUSTRIES IMPACT & IMPLICATIONS

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

  • It involves two relationship:-

  • Bank and customer

  • Bank and Bank Negara

  • .


Bank and customer IMPACT & IMPLICATIONS

Bank gives financing to customer by using principle of BBA or Istisna’ or Murabahah. For example Bank gives financing 5.0% to customer.

Bank and Bank Negara

Bank sells the loan to Bank Negara at 1.0% (current BNM funding rate) using the concept of Bai Al-Dayn. Therefore, Bank’s profit margin is 4.0%.



ISLAMIC SECURITIZATION IMPACT & IMPLICATIONS

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



In Malaysia, the common Islamic Securities is IMPACT & IMPLICATIONS

Debt Based Securitization.

First Example

Year 1990

Company Shell MDS Sdn. Bhd.

Concept Used BBA

Amount RM125 million


  • STATISTICS(30/6/99) IMPACT & IMPLICATIONS

    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 Bonds

    • amount RM 1.890 billion


  • Example…… IMPACT & IMPLICATIONS

    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 IMPACT & IMPLICATIONS

    RHB Sakura

    Facility Sarawak Shell Berhad

    Musyarakah Bond

    Year 1994

    Function Lead Arranger

    Amount RM 560 million


    RHB GROUP ISLAMIC FINANCE INITIATIVE IMPACT & IMPLICATIONS

    RHB Sakura

    Facility Petronas Gas Berhad Islamic Debt Securities

    Year 1995

    Function Joint Lead Manager

    Amount RM 800 million


    RHB GROUP ISLAMIC FINANCE INITIATIVE IMPACT & IMPLICATIONS

    RHB Sakura

    Facility KLIA

    BBA Bonds

    Year 1997

    Function Co-Advisor

    Amount RM 2.2 billion


    RHB GROUP ISLAMIC FINANCE INITIATIVE IMPACT & IMPLICATIONS

    RHB Sakura

    Facility Petronas Gas Berhad Murabahah Notes Issuing Facility

    Year 1997

    Function Lead Arranger & Agent

    Amount RM 900 million


    RHB GROUP ISLAMIC FINANCE INITIATIVE IMPACT & IMPLICATIONS

    RHB Sakura

    Facility Petronas Gas Berhad BBA Bonds

    Year 1999

    Function Lead Arranger

    Amount RM 500 million


    • PROPERTY FINANCING IMPACT & IMPLICATIONS

    • BBA based financing and Istisna’ based financing

    • Common Tenors = 5 years to 7 years

    • Reasons For BBA/Istisna’ = Lock in Cost


    • ASSET FINANCING IMPACT & IMPLICATIONS

    • Murabahah/BBA based financing

    • Any form of tangible asset

    • Receivables as a form of asset (Murabahah financing)


    • EQUIPMENT FINANCING IMPACT & IMPLICATIONS

    • 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 Banking

    • Regulatory Frameworks

    • Harmonization of Existing Laws

    • Shari’ah Guidelines

    • Shari’ah Compliance Authority

    • Shari’ah Advisor / Consultant

    • Shari’ah Advisory Body

    • Shari’ah Compliance is Mandatory

    • Management

    • Headed by Muslim

    • Mixed Staff Allowed

    • Operations

    • Adapting Shari’ah Standard

    • Product Innovations

    • Screening the Existing

    • Product with

    • Shari’ah Standard

    • Shari’ah Justified Product

    • Harmonization

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

    • Fund Management

    • Segregated & Transparence A/C

    • Marketing

    • Composite Allowed

    • Finance Knowledge with Shari’ah Guidelines

    • Investment

    • Shari’ah Justified Avenues

    • Halal Counters

    • Halal Returns

    • Benefits

    • Service Charge

    • Investment A/C

    • Ihsan A/C

    • Claims & Distributions

    • In Accordance with the Terms & Conditions

    • Unjustified / Unreasonable Claim & Distributions are not Allowed


    THANK YOU Banking

    WASSALAM


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