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IB1005 DEPOSITS AND FINANCING PRACTICES OF ISLAMIC FINANCIAL INSTITUTIONS CHAPTER 4 : COMMODITY MURABAHAH PowerPoint Presentation
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IB1005 DEPOSITS AND FINANCING PRACTICES OF ISLAMIC FINANCIAL INSTITUTIONS CHAPTER 4 : COMMODITY MURABAHAH - PowerPoint PPT Presentation


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COMPILED BY HAMDAN HJ IDRIS, BSc Econs, MBA (Islamic Banking & Finance) Certified Professional Trainer (MIM) Industry Expert INCEIF. PRESENTED BY HJ MAHMUD HJ BUNTAT, MBA (AUOL, UK), DBM (Swansea Inst., UK), CIL (UIA) Part-time Lecturer (INCEIF)

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Presentation Transcript
slide1
COMPILED BY

HAMDAN HJ IDRIS, BSc Econs, MBA (Islamic Banking & Finance)

Certified Professional Trainer (MIM)

Industry Expert

INCEIF

PRESENTED BY

HJ MAHMUD HJ BUNTAT, MBA (AUOL, UK), DBM (Swansea Inst., UK), CIL (UIA)

Part-time Lecturer (INCEIF)

Former Head of Islamic Banking Division, OCBC Bank (Malaysia) Bhd

IB1005DEPOSITS AND FINANCING PRACTICES OF ISLAMIC FINANCIAL INSTITUTIONSCHAPTER 4 : COMMODITY MURABAHAH

chapter 4 commodity murabahah

Buy & Sell

The tenets and perequisities

1. Seller

  • Able to carry out his/her responsibilities.
  • Not restricted from dealing in business

transactions.

  • Not being forced to enter contract

2. Buyer

  • Able to carry out his/her responsibilities.
  • Not restricted from dealing in business

transactions.

  • Not being forced to enter contract
Chapter 4: Commodity Murabahah
slide3

The parallel back-to-back transactions involving the commodities takes place simultaneously and therefore, does not expose the parties to the price risk associated with the underlying commodity.

commodity murabaha deposits cmd

Commodity murabaha serves as a deposit placement facility as well as an instrument to mop up surplus cash in the banking sector.

  • In the latter, the central bank takes up the role of the deposit taker, while in the former the role is taken up by commercial banks.
  • To accommodate depositors with lower risk

appetites, some Islamic banks offer a commodity murabaha deposits (CMD).

Commodity Murabaha Deposits (CMD)
slide5

To the deposit-taking bank, CMD is a fixed

rate liability (FRL).

  • By locking the murabaha price, the total profit can be known upfront.
  • The CMD is based on the contract of murabaha with a promise to repurchase. By doing so, CMD guarantees capital preservation and fixed return.
workflow cmb

6.DTB sells CPO to Supplier

2.DTB pays Cash

Supplier

Deposit-Taking

Bank (DTB)

Supplier

3.Supply CPO

7. Supplier pays cash

5.DTB pays DPB

By lump-sum

Deferred payment

4.DBP sells

CPO to DTB

1.DBP

Credited

$20 million

with Agent

Deposit-Placing

Bank (DBP)

$20 million

Asset Liability

$20m @ 7%

$20m @ 3%

WORKFLOW CMB

DTB’s t-account

slide7

The structure of CMD is explained below:-

  • Deposit-placing Bank (DPB) appoints the deposit-taking bank (DTB) as an Agent to purchase a commodity (crude palm oil or CPO) from a Supplier.
  • DTB = Agent
slide8

The DTB receives the money for the payment of CPO from DPB.

  • DTB purchases CPO from Supplier on cash basis.
  • Agent holds legal ownership and DPB holds beneficial ownership.
  • DPB sells CPO to DTB at murabaha price, based on the placement value, annual profit rate and tenor. No physical delivery taking place. DTB hold beneficial ownership of CPO.
slide9

DTB will make full settlement to DPB in bullet payment at the end of tenor.

DTB sells CPO to Supplier in exchange for cash payment.

DTB invest the cash proceeds into its financial operations.

slide10

There are many types of CMD. A CMD structure will change based on the following circumstances:-

1. Types of commodities utilized in the product.

In Malaysia, crude palm oil is common while in

the GCC and Europe copper is usually a

popularchoice.

slide11

2. Some DTBs prefer to purchase the commodity

through a broker. Brokers usually earn $50

per $1 million transactions. When DTBs acted

as an Agent, they earn a commission around

25 basis points (0.25%)

3. In some structures, the DTBs purchase the

commodity directly from the Supplier.

slide12

There are many types of CMD. A CMD structure will change based on the following circumstances:-

Types of commodities utilized in the product. In Malaysia, crude palm oil is common while in the GCC and Europe copper is usually a popular choice.

slide13

Some DTBs prefer to purchase the commodity through a broker. Brokers usually earn $50 per $1 million transactions. When DTBs acted as an Agent, they earn a commission around 25 basis points (0.25%)

  • In some structures, the DTBs purchase the commodity directly from the Supplier.
variables in cmd master agreement
VARIABLES IN CMD MASTER AGREEMENT
  • DTB and DPB
  • Agent
  • Supplier
  • Cost price and Murabaha price
  • Yield and tenor
  • Settlement date
  • Commodity
  • Prepayment
  • Rebate
  • Late payment
  • Governing Law
  • Tax and Stamp duty
  • Event of Default
slide15

Have a good day 

May God bless you

Thank you and Wassalam