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Islamic Capital Markets

Islamic Capital Markets. Global Financial Turmoil. Islamic Banking Challanges. Subprime Crises: Lessons for Islamic Finance. Islamic Financial Market. 5 Basic Shariah Principles in Financial Transactions. #1 Prohibition of Riba. Islamic Bonds. Role of Sukuk in Economic Development.

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Islamic Capital Markets

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  1. Islamic Capital Markets

  2. Global Financial Turmoil

  3. Islamic Banking Challanges

  4. Subprime Crises: Lessons for Islamic Finance

  5. Islamic Financial Market

  6. 5 Basic Shariah Principles in Financial Transactions #1 Prohibition of Riba

  7. Islamic Bonds

  8. Role of Sukuk in Economic Development

  9. Corporate Finance – Demand for Capital

  10. Cost of Capital

  11. Capital Structure

  12. Sukuk – Moving Forward

  13. Shariah Compliance: Consistency is Critical ‘AQAD Principles MAQASID Benefits vsdisbenefits LEGAL/CONTRACT DOCUMENTATION Protection of Rights FINANCIAL REPORTING AAOIFI/IFSB/IFRS

  14. Shariah Compliant Parameters • Aqad-based– Contract-based • Maqasid al-Shariah(purpose of the Law) – impact on society • Financial Reporting – actual strength and performance of companies • Legal documentation – identification and recognition of rights and obligations of contracting parties.

  15. Approved Islamic Finance Products • BBA Home Financing • Bay InahHome Financing • Bay InahPersonal Financing/Overdraft/credit card • Tawarukmunazampersonal financing • Commodity murabaha • Ijarahthummaal-bay • Bai-bithamanAjil Islamic Debt Securities (BAIDS) • Discounted Bay al-daynMuNif • SukukIjarah • SukukMusharakah Islamic Bonds

  16. Challenging issues in AQAD-based Islamic Finance Products • Benchmaking profit rate against interest rate (LIBOR,KLIBOR). • Profit Equalization Reserve (PER) – displaced commercial risk • Sale with condition to buyback at predetermined price between two and three parties. • Profit generated over installment payments – time value of money • Penalties on delayed payments • Benchmakingsukuk rates against LIBOR • Musharakah with Purchase undertakings – fixed profit to one party only. • IjarahSukuk - Sale with repurchase agreement at par value and not mark-to market • IjarahSukuk – Ownership of asset by SPV • Profit-rate swaps – speculation or gambling?

  17. #1 AQAD Method

  18. Contract of Sale • Example: Murabaha/BBA Sale • Buyer and Seller eg. Seller owns asset/subject matter before making sale 2. Subject matter eg. Mal mutaqawim – property with usurfruct 3. Price eg. Set on the spot 4. Offer & Acceptance eg. Verbal or in writing

  19. Method #2: Maqasid al-Shariah/Objective of Shariah To protect the interest of the public (society)- maslahah al-ammah by: 1. removing the harm ( ibqa) 2. securing of benefits (tahsil)

  20. #2 Maqasid Method

  21. Objective of Shariah Islamic financial products as defined by AQAD methodology, should contain more benefits (masalih) and less or no harm (madarah). “ in gambling (maisir) and liqour (qimar), there are some sins and some profits. But the sins are greater than the profits” (Al-Baqarah: 168).

  22. “ in Gambling (maisir) and Liqour (qimar), there are some sins and some profits. But the sins are greater than the profits” (Al-Baqarah: 168). Gambling & Liqour

  23. Riba

  24. Al-Bay

  25. Financing BBA

  26. Plain BBA

  27. Downside (Madarrah) of Credit-Financing

  28. The upside (Manfaat) of Credit-Financing

  29. Maqasid • To analyse(theoretical) and measure( empirical) impacts of financial intermediation based on aqad-based Shariah compliant products. • Efficiency studies • Profitability studies • Studies on Consumer welfare and protection • Studies on Financial stability

  30. Maqasid – protecting public interest. • Aqad-based products (ABP) SHOULD contain more benefits and less harm. • What if, it was proven than they (ABP) contain more harm than good? eg. 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. Giving away clean inah personal financing at high profit rates– a way towards subprime inah? Conflict between Aqad and Maqasid?

  31. Method #3: Financial Reporting • Proper recording of transactions to evident TRUE SALE. • BBA – bank must put BBA asset on balance sheet prior to sale. I week, 1 month it depends. • Once sold, it is recorded as BBA receivables. • AITAB assets should be on banking book as leasing assets but now treated as “financing and advances”. • External auditors (PWC, KPMG etc.) are not required by the authority to conduct Shariah audit. And they may not be not capable to do so. Conflict between AQAD and financial reporting?

  32. Islamic Bank Average Balance Sheet

  33. 1st October 2008 15 October 2008 • 1/9/2008 Bank purchases Property from Vendor for $200,000 • 15/9/2008 Bank Sells Property to Customer for $280,000

  34. ‘Do not Sell what you don not Own” Hadith (Sahih Bukhari) High Court Judge Datuk Abdul Wahab Patail says that the sale element in BBA sale is not a bona fide sale BBA Legal Documentation Sale and Purchase Agreement (SPA) Property Purchase Agreement (PPA) Property Sale Agreement (PSA) Deeds of assignment/Charge 2. Bank do not have legal + beneficial ownership of property to make a valid sale 1. No transfer of title from Customer to Bank

  35. Basel II and IFSB • High risk-weights for Musharakah Financing to imply that bank bears business risk and the general investment account holders (GIA) do not. • Recent PSIA guidelines will test risk appetite of depositors.

  36. Method #4: Legal Documentation • BBA should be documented as a true sale and not as a loan. (Dato’ Nik vs. BIMB) • Ijarah should be documented as operating lease and not a loan (Tinta Press vs. BIMB) • Islamic bank has not practice fairness compared with conventional bank (Affin bank vs Zulkifli). Conflict between AQAD and documentation of AQAD?

  37. ‘Do not Sell what you don not Own” Hadith (Sahih Bukhari) High Court Judge Datuk Abdul Wahab Patail says that the sale element in BBA sale is not a bona fide sale BBA Legal Documentation Sale and Purchase Agreement (SPA) Property Purchase Agreement (PPA) Property Sale Agreement (PSA) Deeds of assignment/Charge 2. Bank do not have legal + beneficial ownership of property to make a valid sale 1. No transfer of title from Customer to Bank

  38. Shariah Compliance: Consistency is Critical ‘AQAD Principles MAQASID Benefits vsdisbenefits LEGAL/CONTRACT DOCUMENTATION Protection of Rights FINANCIAL REPORTING AAOIFI/IFSB/IFRS

  39. Islamic Finance

  40. Islamic Way of Life in Business

  41. Islamic Way of Life in Business

  42. Against Islamic Norms

  43. Islamic Bonds and Sukuk

  44. Why Islamic bonds? • Muslim Faith • Project finance, refinancing • Economic growth. • Reduce dependency on bank loans • Mopping up excess liquidity in Islamic banks and other IFIs. • All markets can buy – Muslim and non-Muslim markets

  45. Conventional Securitization • Securitization is the conversion of assets in marketable securities. • Involving a true sale • Asset – financial assets such as loan receivables. • Fixed income and capital protection

  46. Islamic securitization • IPDS - conversion of physical asset into marketable securities. • No true sale • Fixed income and capital protection • Contract – bay al-inah • Redemption – bay al-dayn at par value • Trading bay al-dayn at discount

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