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Introduction & Updating the Global Islamic Banking Operations

Introduction & Updating the Global Islamic Banking Operations. Prof. Dr. Mohd. Ma’sum Billah www.drmasumbillah.blogspot.com. Shangri-La- Hotel, Jakarta. BRIEFING ON ISLAMIC BANKING AND FINANCE SYSTEM. 1. Relationship Between Islam and Banking 2. Pre-requisite For SPI Implementation

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Introduction & Updating the Global Islamic Banking Operations

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  1. Introduction & Updating the Global Islamic Banking Operations Prof. Dr. Mohd. Ma’sum Billah www.drmasumbillah.blogspot.com Shangri-La- Hotel, Jakarta

  2. BRIEFING ON ISLAMIC BANKING AND FINANCE SYSTEM 1. Relationship Between Islam and Banking 2. Pre-requisite For SPI Implementation 3. Profit Sharing Operation 4. Deposit Products 5. Islamic Money Market Products 6. Electronic Banking 7. Product and Target Market

  3. WHY SPI? • If you are a Muslim. • Al Quran 2:275:“Allah permit trade, forbid riba”. • Al Quran 2:276:“Allah deprives the gains of all blessings through riba, whereas He blesses charitable deeds with manifold increase. And Allah bears no love for the ungrateful sinner” • Our duty to God • Man to man relationship in Islamic Banking System.

  4. WHY SPI? • If you are a non-Muslim. • Profit rate • Floating rate of deposit • A partnership - profit sharing • financing project of universally accepted values • SPI stresses on trade finance • RHB practises accrued profit • we finance infrastructure projects

  5. RELATIONSHIP BETWEEN ISLAM AND BANKING

  6. PRE- REQUISITE OF SPI IMPLEMENTATION • Separate working fund from conventional banking • IBS operations and accounting system separated from conventional • Syariah Panel members to oversee SPI operations and product development

  7. Members of Syariah Panel: • Could Be 3-5 Qualified Members. • With Reasonable Command of Shari’ah Knowledge. • With Just (‘Adl) Personality.

  8. COMPARISION BETWEEN ISLAMIC AND CONVENTIONAL BANKING INTEREST TO CUSTOMER DIVIDEND FOR INVESTOR CONVENTIONAL SPI FUNDS FROM INVESTOR/ ENTREPRENEUR FUND FROM CUSTOMER/ CAPITAL SPI FUND CONVENT. FUND INTEREST INCOME FROM CUSTOMER PROFIT FROM INVESTMENT INTEREST FROM MONEY MARKET OPERATION PROFIT FROM FINANCING

  9. PROFIT SHARING OPERATION APPLICATION OF FUND INCOME SOURCES OF FUND DISTRIBUTABLE INCOME ALLOWABLE COST PROFIT SHARING

  10. PROFIT SHARING OPERATION • Wadiah Savings Account • Wadiah Students Savings Account • Wadiah Current Account • Mudharabah Current Account • Mudharabah Gen. Investment Acct. • Mudharabah Special Invest. Acct. SOURCES OF FUND Interbank Investment Working Capital

  11. PROFIT SHARING OPERATION • BBA Financing • BBA Refinancing • Study Financing • RHB Unit Trust • Financing • Trade Financing • Interbank Investment • Malaysia Government • Investment Certificate • Islamic Acceptance Bill • Islamic Debt Securities APPLICATION OF FUND

  12. PROFIT SHARING OPERATION INCOME • Total Income = • Depositors’ Income + • Capital Income

  13. PROFIT SHARING OPERATION • minus : • General Provision • Interbank • Investment Cost • Reserve Cost • Working Capital • Income • Deposit cost ALLOWABLE COST

  14. PROFIT SHARING OPERATION DISTRIBUTABLE INCOME Income to be distributed to customer and bank

  15. PROFIT SHARING OPERATION Customer (75%) PROFIT SHARING Bank (25%)

  16. TERMS OF ACCEPTANCE OF DEPOSITS • GUARANTEED SAFEKEEPING ( WADIAH ) • PROFIT SHARING INVESTMENT (MUDHARABAH ) • TRADE ( MURABAHAH )

  17. SPI DEPOSIT PRODUCTS • WadiahSavings Account • Wadiah Student Savings Account • Wadiah Current Account • Mudharabah General Investment Account • Mudharabah Current Account • Mudharabah Special Investment Account • Unit Link Mudharabah

  18. CONCEPT OF WADIAH Al Wadiah is a contract (akad) between the owner of the asset and the custodian to safeguard the asset on behalf of the customer. • Types of Wadiah: • Wadiah Yad Amanah - Trustee Custody • Wadiah Yad Dhamanah - Guaranteed Custody

  19. THE CHANGING STATUS OF WADIAH CUSTOMER GIVES CONSENT TO THE BANK TO USE THE GOODS Wadiah Yad Amanah Wadiah Yad Dhamanah

  20. RATIONALE ON CHANGING OF STATUS TO WADIAH YAD DHAMANAH • The custodian is the trustee and guarantor of the asset/goods • The asset/goods can be used for business purposes • The asset/goods can be mixed with other asset/goods. • The Bank has to honour the claim on the asset/goods made by the customer in anytime

  21. WADIAH SAVINGS ACCOUNT A Wadiah Savings Account is a contract between the customer and the bank to deposit funds under ‘guaranteed custody’. The customer allows the bank to use the fund in accordance to the Syariah. Payment of Hibah is at the discretion of the Bank.

  22. WADIAH STUDENTS SAVINGS ACCOUNT • A Wadiah Student Savings Account is similar to Wadiah Savings Account.. This account is for children aged between 12-18 years old. Benefits of Wadiah Student Savings Account are as follows:- • RM 1 initial deposit • Hibah is credited monthly into account • No witholding tax on hibah earned

  23. WADIAH STUDENT SAVINGS ACCOUNT • Multi tier hibah rate i.e.. • Deposit up to RM 10,000 will enjoy prevailing WSA rate • Exceeding RM 10,000 will enjoy 0.5%plus prevailing WSA rate

  24. EXAMPLE OF HIBAH CALCULATION Daily Average Balance = RM 32,622.86/31 = RM 1,502.35

  25. THE CALCULATION OF HIBAH Hibah = Daily Average Balance x r % x n/365 which, r % = hibah rate , e.g 3.5% n = number of days in that particular month e.g. 31 days in March Example : RM1052.35 x 3.5% x 31/365 = RM 3.13

  26. WADIAH CURRENT ACCOUNT • A Wadiah Current Account is a contract between the customer and the bank to deposit funds under guaranteed custody. Minimum deposit is RM 500. Benefits of Wadiah Current Account are as follows:- • Hibah is paid to eligible customers - currently only government Wadiah Current Account subject to minimum balance of RM25,000-00 • Interbranch deposit/withdrawal services at more • than 200 branches.

  27. CONCEPT OF MUDHARABAH The Bank accepts deposits for investment under the Islamic principle of Mudharabah which is a contract between two parties i.e. the owner of capital & the entrepreneur. The profit derived from the business will be shared based on the agreed profit sharing ratio between the customer and the Bank.

  28. CHARACTERISTICS OF MUDHARABAH • Profit will be shared based on the agreed profit sharing ratio between the depositor and the entrepreneur.(e.g 75:25) • Depositor will not be allowed to involve in business transaction 75% 25% profit Business transaction depositor entrepreneur loss 100% 0%

  29. MUDHARABAH DEPOSIT PRODUCTS • Mudharabah Current Account • Mudharabah General Investment Account • Mudharabah Special Investment Account • Unit Link Mudharabah

  30. MUDHARABAH CURRENT ACCOUNT • Mudharabah Current Account is based on the • contract of profit sharing between the customer • and bank. The profits earned from investment will • be shared between the customer and the bank based • on pre-determined profit-sharing ratio (PSR). • Initial deposit amount is RM 2,000. • Benefits:- • Dividend paid monthly based on daily balance which exceeds RM2,000 based on PSR • Cheque books for withdrawals and payments

  31. MUDHARABAH CURRENT ACCOUNT • Free Takaful personal accident protection insurance up to RM100,000 • 25 % discount on commission for travelers cheques purchased at bank • Electronic banking services such as ATM, Phonebanking & RHB OnLine • Automatic transfer of funds from Wadiah Savings Account/Wadiah Current Account to Mudharabah Current Account • Gift (Nokia Handphone up to 31 December)

  32. MUDHARABAH GENERAL INVESTMENT ACCOUNT (MGIA) The Bank accepts deposits for investment under the Islamic principle of Mudharabah which is a contract between two parties i.e. the owner of capital & the entrepreneur. The owner of the fund places money for a stipulated period of time for the purpose of participating in the sharing of profits made from the Bank’s investment of their funds.

  33. MUDHARABAH GENERAL INVESTMENT ACCOUNT (MGIA) Features of MGIA • Tenure ranges from 1,3,6,9,12,15, 24, 36, 48 and 60 months • Minimum amount for 1 month investment is • RM 5,000 • Minimum amount for 3 months and above investment is RM 500 • Profit sharing • 70% customer : 30% bank (1 month) • 75% customer : 25% bank (3 mths & above) • Dividends are accrued on daily basis

  34. MUDHARABAH GENERAL INVESTMENT ACCOUNT (MGIA) • Withdrawal before maturity • Less than 1 mth - no dividend • 1 mth to 3 mth - 1 mth prevailing MGIA rate calculated on number of days completed • 3 mth and above - 75% of total dividend accrued

  35. DIVIDEND COMPUTATION FOR MGIA • Adopts a daily computation of dividend method rather than based on the average rate upon maturity of each tenor.

  36. UNIT LINK MUDHARABAH • Unit-Link Mudharabah is the first Islamic investment plan that combines the benefits of Mudharabah General Investment Account (MGIA) with Mudharabah Fund, which is an Islamic Unit Trust Fund. Under this product, customer can place funds in MGIA and at the same time purchase Mudharabah Unit Trust for the same amount. • Eligibility • Individual of 18 years old and above. • Maximum two joint account holders, one of whom • must be at least 18 years of age.

  37. OTHER SERVICES AVAILABLE UNDER SPI • ATM Services • Autocredit Services • Phonebanking Services • Online • CAMS

  38. ISLAMIC MONEY MARKET PRODUCTS • Full range of Islamic Money Market products • including :- • Mudharabah Special Investment Account (MSIA) • Islamic Accepted Bills (IAB) • Islamic Debt Securities (short/long term) • Islamic Negotiable Instrument (INI) • Government Investment Certificate (GIC) • Bond Mudharabah Cagamas

  39. MUDHARABAH SPECIAL INVESTMENT ACCOUNT • Unlike the Mudharabah GIA, the ratio of profit • sharing for Mudharabah SIA is negotiable • between the customer and the bank. • Minimum amount is RM 500,000 • Tenure 28 to 92 days (month to month) • Yield = 4.00% (after profit sharing) • PSR is negotiable based on “R” i.e 12 months gross profit rate • No profit is paid if withdrawals are made before maturity

  40. MUDHARABAH SPECIAL INVESTMENT ACCOUNT • We accept investment rollovers • Rollovers can be arranged upon maturity based on a new profit sharing ratio negotiated between customer and bank.

  41. ISLAMIC ACCEPTED BILLS(IAB) • Similar to BA’s formulated on Islamic principles • Bills of exchange created based on deferred lump sum payment or Murabahah principle • Customers can invest in IAB at prevailing market • rate or via Forward order *(REPO) • Minimum amount is RM 30,000 • Tenure of 21 days to 200 days • Maximum tenure is not more than 200 days • Yield of 2.50% to 3.00%

  42. ISLAMIC DEBT SECURITIES (IDS) • Short Term IDS • Issued by corporate under the principles of Murabahah • or Suk' Al-Ijarah. • Short term notes @ Murabahah known as MUNIF • Short term notes @ Suk' Al-Ijarah known as SARUF • Minimum tenure of 1 month up to maximum of 1 year • Minimum amount is 500,000 • Yield of 3.10% to 3.80% (indicative) • Depend on availability of ‘papers’ in the secondary market

  43. Long term IDS • Known as Islamic Corporate Bonds. • Issued via tender or offered by an Arranger • Issued under the principles of Bai Bithaman Ajil (cost plus profit margin) or Mudharabah (profit sharing) or Al Ijarah (leasing) • Tenure > 3 years • Minimum amount RM 1 mil • Yield of 5.25% to 6.50% (indicative) • Earn income semi annually or issued at a discount • The bonds are rated by Rating Agency of Malaysia (RAM) and Malaysia Rating Corporation (MARC)

  44. INDICATIVE RATES OF RETURN • Instruments Tenure Liquidity Rates (16/10/99) Risk • ---------------------------------------------------------------------------------- • Mudharabah 1,3,6,9 Average 1 m 3.30% Bank • General and 12 m 4.05% Risk • Investment 12months After profit • Account sharing • Mudharabah 28-92days Very 2.80% average Bank • Special Good Monthly revision Risk • Investment After profit • Account sharing

  45. BUDGET FOR DEPOSIT 30/6/2000 TYPES 30/6/99 GROWTH 30/6/2000 MIXED ('000) ('000) % ('000) % WADIAH SAVINGS 92,000 58,000 63.0% 150,000 8.1% ACCOUNT WADIAH CURRENT 278,700 41,300 14.8% 320,000* 17.3% ACCOUNT MUDHARABAH 12,600 87,400 693.7% 100,000 5.4% CURRENT ACCOUNT MUDHARABAH GIA 794,000 406,000 51.1% 1,200,000 64.9% MUDHARABAH SIA 12,000 68,000 566.7% 80,000 4.3% TOTAL 1,189,300 660,700 55.6% 1,850,000 100% * of which RM 250 mil. is from Government A/C.

  46. PRODUCTS & TARGET MARKET PRODUCT TYPES TARGET MARKET PRIMARY SECONDARY MUDHARABAH EXECUTIVES, PAYROLL ADULTS, CURRENT ACCOUNT A/Cs, PROFESSIONALS GOVERNMENT HIGH NET- WORTH SERVANTS & INDIVIDUALS, NON-PROFIT EMPLOYEES ORGANIZATIONS e.g. Mosques, Schools, Associations WADIAH CURRENT STATE/FEDERAL BUSINESS & ACCOUNT GOVERNMENT COMPANIES STATUTORY BODIES .e.g. LPN, EPF, Tabung Haji

  47. PRODUCTS & TARGET MARKET PRODUCT TYPES TARGET MARKET PRIMARY SECONDARY WADIAH SAVINGS ADULTS, WORKERS & NON- EMPLOYEES, ACCOUNT EXECUTIVES WADIAH STUDENT STUDENTS BELOW 18 SAVINGS ACCOUNT YEARS AGE MUDHARABAH GIA GOVERNMENT/STATUTORY, EMPLOYEES, BODIES, UNIT TRUST AND PROFESSIONALS CORPORATIONS & COMPANIES UNIT LINK INDIVIDUAL SAVERS AND MUDHARABAH INVESTORS

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