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COMMODITY MURĀBAHAH And TAWARRUQ . ASSOC. PROF. DR. AZMAN MOHD NOOR ( azzmannor@gmail.com ). Intro.

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COMMODITY MURĀBAHAH And TAWARRUQ


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    1. COMMODITY MURĀBAHAH And TAWARRUQ ASSOC. PROF. DR. AZMAN MOHD NOOR (azzmannor@gmail.com)

    2. Intro • Commodity Murabahahis an example of product innovation in Islamic banking and finance, which is based on Murabahahand Tawarruq transactions. This presentation will shed light on the structure of Commodities Murabaha Transaction offered by Bursa Malaysia

    3. Definitions • Murabahah: A sale with a mark up price • Tawarruq: (Monetization) refers to the process of purchasing a commodity for a deferred price determind through Musawamah (bargaining) or Murabahah (mark-up sale), and selling it to a third party for a spot price so as to obtain cash. • ‘Inah: refers to the process of purchasing the commodity for a deferred price, and selling it back for a lower price to the same party. • (See AAOIFI standard no 30, pg.525)

    4. Operation Flow of BURSA SUQ AL-SILA’ Commodity Market 1 Bank A Supplier 1 2 Supplier 2 Bank B Eloctronic System for trading and sttlement Supplier 3 Commodity Cash Payment 3 4 Differed Payment Supplier 4

    5. SUPPLIERS COMMODITY SELLERS (1)Sells RM10 million worth of Crude Palm Oil (CPO) warrants “commodity” to the Islamic Bank A on spot basis. (3)Delivers the commodity on the same day and the ownership is transferred to the Islamic Bank A. ISLAMIC BANK A (2) Buys/Pays RM10 million worth of Crude Palm Oil (CPO) warrants “commodity” from supplier, on a spot basis. (4)Sells the commodity to the Client/Islamic Bank B at Rm10 million plus a profit margin (MurābaÍah) on deferred payment. ISLAMIC BANK B (5) Purchases the commodity from the Islamic Bank A at RM10 million plus a profit margin (MurābaÍah) on deferred payment. (6) Sells the commodity to Bursa Suq Al-Sila' for RM10 million on a spot basis, on the same day. BURSA SUQ AL-SILA' (7) Purchases the commodity from the Islamic Bank B at RM10 million (purchase price) on a spot basis. (8) BSAS is a trading and Clearing Engine. (9) Sells the commodity to the Suppliers back randomly for RM10 million on a spot basis.

    6. Reverse Tawarruq for Deposit Taking 6 ABC settles amount due to Customer on deferred payment basis based on terms ABC sells commodity to BSASon spot for cash 5 a 4 b Customers sells commodities to ABC at profit on deferred payment basis 5 b Proceeds delivery ABC Islamic Bank Customer/ Counter Bank Commodity Murabahah House (BSAS) 4 a Onward delivery of commodity ownership 3 b Ownership delivery on behalf of Customer 2 Customer requests ABC to act as agent (wakalah) to buy the commodity from the market 3 a As an Agent, ABC buys commodity from Broker 1 1 Customer wants to make fixed deposit with ABC, with a fixed return

    7. DEBT FACTORING MODEL 1 APPLICANT /Customer ABC BANK 2 2 PAYMASTER ISLAMIC BOURSES (Bursa Suq Al-Sila’) Customer has RM100K Immature receivable. ABC gives ordinary financing to the customer. Ex. Receivable is 100k, the financing is only RM90K, and total sale price is RM100K. 2. Customer assigns (as security) the receivables (RM100K) to ABC. 1 1

    8. DEBT FACTORING MODEL 2 APPLICANT /Customer ABC BANK Receivables RM100K 1 2 PAYMASTER ISLAMIC BOURSES (Bursa Suq Al-Sila’) ABC sells a set of identified commodity (with immediate delivery) worth RM90K with a mark up price od RM100K against RM100K customer’s receivables. 2. Customer will sell the commodity to Bursa for cash at RM 90K 1 Commodity worth RM90k Customer Sells commodity for RM90k

    9. Among the common mistakes 1. Tripartite ‘Inah 2. Fourpartite ‘Inah 3. The purchase of the wakil for himself

    10. Three Partite ‘Inah(violation of AAOIFI Standard 30/4/5) 1 ABC Islamic Bank Broker A 2 3 Customer 1. ABC buys RM10,000 worth of commodity from Broker A on credit. 2. ABC sells the commodity to Customer with mark up price (RM 15,000) on deferred payment basis. 3. Customer sells the commodity to Broker A for cash (RM10,000)

    11. Three Partite ‘Inah with Hawalah (violation of AAOIFI Standard 30/4/5) 1 ABC Islamic Bank Broker A 2 3 Customer 1. ABC buys RM10,000 worth of commodity from Broker A on credit. 2. ABC sells the commodity to Customer with mark up price (RM 15,000) on deferred payment basis 3. Customer sells the commodity to Broker A for cash (RM10,000) 4. Broker A transfers (Hawalah) its right of the sale price (RM10,000) from ABC to Customer. 5.ABC pays RM10,000 to Customer. 6. Customer owes ABC RM15,000. 4 5

    12. ABC Islamic Bank Broker A 1 2 Customer 3 Four Partite ‘Inah. (violation of AAOIFI Standard 30/4/5) Broker B

    13. Four Partite Inah with Hawalah(violation of AAOIFI Standard 30/4/5) ABC buys commodity from Broker A RM 10K on credit ABC Islamic Bank Broker A 1 ABC sells the commodity to customer on deferred payment (mark up price), 15K 2 Customer 3 Broker A transfers (hawalah) its rights (sale price) from ABC to Customer. This cannot be imagined except that Broker B and A are one entity or its proxy Hawalah 10k ABC pa Y s 10k Broker B Customer sells the commodity for cash to broker B, 10K

    14. AAOFI Standard 30/4/5 • 30/4/5.The commodity (object of monetization) must be sold to a party other than the one from whom it was purchased on deferred payment basis (third party), so as to avoid ‘inah which is strictly prohibited. Moreover, the commodity should not return back to the seller by virtue of prior agreement or collusion between the two parties, or according to tradition. AAOIFI standar 30 on Tawaruq, pg. 526

    15. The sale of wakil to himself/a combination between agency to purchase in the first leg and the purchase contract in the second leg (with the absence of 4a and 4b). Violation of AAOIFI Standard 30/4/7 6 ABC settles amount due to Customer on deferred payment basis based on terms ABC sells commodity to BSASon spot for cash 5 a 4 b Customers sells the commodities to ABC at profit on deferred payment basis 5 b Proceeds delivery ABC Islamic Bank Customer/ Counter Bank Commodity Murabahah House (BSAS) 4 a Onward delivery of commodity ownership certificate 3 b Ownership delivery on behalf of Customer 2 Customer requests ABC to act as agent (wakalah) to buy the commodity from the market and subsequently sells the commodity to the Bank 3 a As an Agent, ABC buys commodity from Broker 1 1 Customer wants to make fixed deposit with ABC, with a fixed return

    16. Violation of AAOFI standar 30/4/6 • 4/6. The contract for purchasing the commodity on deferred payment basis and the contract for selling it for a spot price should not be linked together in such a way that the client looses his right to receive the commodity. Such linking of the two contracts is prohibited whether it is made through stipulation in the documents, acceptance as a normal tradition, or incorporation in the procedures. AAOIFI pg. 256

    17. Cont’: Mistakes 4. Unnecessary Delegation (tawkil) to dispose or to purchase the commodity 5.Concluding both the purchase of commodity and delegation to dispose contract at once

    18. Violation of AAOFI Standard no 30/4/7 • 4/7: The client should not delegate the institution or its agent to sell, on his behalf, a commodity that he purchased from the same institution and, similarly, the institution should not accept such delegation. If however, the regulations do not permit the client to sell the commodity except through the same institution, he may delegate the institution to do so after he, actually or impliedly, receives the commodity. See AAOFI standards, pg. 526.

    19. Cont’.Among the common mistakes 6. The debt obligation is established via customer’s undertaking, not sale contract 7. Non existence of the commodity 8. No real transfer of ownership over the commodity 9. No proper recording, identification and tagging of the commodity 10. Selling price is not known

    20. Conclusion • Among the other Sharīahissues are no identifications of the commodity, no taking ownership prior to sell, charging expensive fee for delivery of the commodity and no observation of the conditions and sequences of the sale transaction which may make it being artificial fancy contract to get liquidity, similar to conventional bank.