CONVENTIONAL BANKING CONVERGENCE WITH ISLAMIC BANKING

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• CONVENTIONAL BANKING CONVERGENCE WITH ISLAMIC
  BANKING IMPACT IMPLICATIONS
• Prof. Dr. Mohd. Masum Billah
• www.drmasumbillah.blogspot.com

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• Areas of Convergence
• Regulatory Authorities
• Regulatory Bodies
• Management
• Financial Principles
• Instruments
• Products
• Marketing

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• PRINCIPLE OF MURABAHAH
• Sale contract between the bank and its customer
  for the sale of goods at a price which includes
  the banks profit margin
• Bank is the seller,
• Customer is the buyer.
• Murabahah Cost Plus
• Common Mechanism Deferred Lump Sum Sale

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PRINCIPLE OF BAI-BITHAMAN AJIL(BBA)
Bai-Bithaman Ajil (BBA) is known as Deferred
Instalment Sale. A contract of buying and
selling of an asset between a bank and a
customer. BBA Cost Plus Common Mechanism
Deferred Instalment Sale
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PRE-REQUISITE UNDER BBA

• i) Buyer
• ii) Seller
• iii) Merchandise
• iv) Price of the merchandise
• v) Aqad/Contract (Offer and Acceptance)

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MODES OF BAI-BITHAMAN AJIL FINANCING OPERATION

• Customer identifies the asset to be acquired.
• Bank purchases the asset from the vendor
• The bank resells the asset to the customer plus
  banks profit margin
• Customer repays by installments within agreed
  period

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• CONSUMER FINANCING PRODUCTS
• House Financing
• Study Financing
• Unit Trust Financing
• Other Consumer Financing
• e.g Share Financing

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• LETTER OF OFFER
• 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

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• BBA
• DOCUMENTATION

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• PROPERTY WITH TITLE
• Property Purchase Agreement
• Property Sale Agreement
• Charge Document (Form 16A
• Annexure)

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• PROPERTY WITHOUT TITLE
• Property Purchase Agreement
• Sale Agreement Cum Assignment
• Deed Of Assignment

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COMPARISON BETWEEN CONVENTIONAL LOAN AND BBA
FINANCING

• PRODUCT CONVENTIONAL BBA
• FEATURES LOAN FINANCING
• Concept Base 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

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• OTHER CONSUMER FINANCING
• Example
• Share Financing
• Apply the principle of BBA, Murabahah

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PRINCIPLE OF BAI ISTISNA 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
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• PRINCIPLE OF BAI ISTISNA
• 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

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PRINCIPLE OF BAI AL-DAYN 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
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• IJARAH (LEASING)
• This is IBDs 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

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• Financial lease
• 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

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• Operating lease
• 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

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• Other features
• 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

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• COMMERCIAL FINANCING PRODUCTS
• Asset/Working Capital/Other Financing
• Small Entrepreneur Fund (TUK)
• Small Medium Industries Financing (TIKS)
• Fund For Food (3F)
• Rehabilitation Fund For Small Medium Industries

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• ASSET/WORKING CAPITAL/OTHER FINANCING
• Concept
• This financing can apply the concept of Bai
  Bithaman Ajil or Murabahah
• Issues of collateral
• Secured by same property
• Different property
• Corporate guarantee

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SPI FUND FOR SMALL ENTREPRENEUR (TUK) 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.
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SMALL MEDIUM INDUSTRIES FINANCING (TIKS)

• 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

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Bank and customer 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, Banks profit margin is 2.5.
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• Pricing
• 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.

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SPI FINANCING UNDER FUND FOR FOOD (3F)

• This financing is similar to Fund For Food in
• Conventional Banking.
• It involves two relationship-
• Bank and customer
• Bank and Bank Negara

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Bank and customer 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, Banks profit margin is 3.0.
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• REHABILITATION FUND FOR SMALL AND MEDIUM
  INDUSTRIES
• 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
• .

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Bank and customer 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, Banks profit margin is 4.0.
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• CORPORATE FINANCING PRODUCTS
• Islamic Securitization
• Property Financing
• Asset Financing
• Equipment Financing

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• ISLAMIC SECURITIZATION
• Requirement Financing must be executed
  under any underlying financing contracts
  permitted under Syariah.

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• COMMON FINANCING CONTRACTS FOR ISLAMIC
  SECURITIZATION
• Murabahah Short-term Working Capital
  Financing
• BBA Long-term Financing
• Ijarah
• Common Feature Element of Profit Margin
  Built-in
• Trading Concept Bai Al-Dayn (Debt Trading)

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In Malaysia, the common Islamic Securities is
Debt Based Securitization. First
Example Year 1990 Company Shell MDS Sdn.
Bhd. Concept Used BBA Amount RM125 million
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• STATISTICS(30/6/99)
• 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

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Example RHB GROUP ISLAMIC FINANCE INITIATIVE
RHB Bank Facility Gas District Cooling (KLIA)
Sdn. Bhd. Murabahah Notes Issuing
Facility Year 1999 Function Arranger Am
ount RM 207 million
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RHB GROUP ISLAMIC FINANCE INITIATIVE RHB
Sakura Facility Sarawak Shell Berhad
Musyarakah Bond Year 1994 Function Le
ad Arranger Amount RM 560 million
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RHB GROUP ISLAMIC FINANCE INITIATIVE RHB
Sakura Facility Petronas Gas Berhad
Islamic Debt Securities Year
1995 Function Joint Lead
Manager Amount RM 800 million
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RHB GROUP ISLAMIC FINANCE INITIATIVE RHB
Sakura Facility KLIA BBA Bonds Year
1997 Function Co-Advisor Amount RM 2.2
billion
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RHB GROUP ISLAMIC FINANCE INITIATIVE RHB
Sakura Facility Petronas Gas Berhad
Murabahah Notes Issuing Facility Year
1997 Function Lead Arranger
Agent Amount RM 900 million
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RHB GROUP ISLAMIC FINANCE INITIATIVE RHB
Sakura Facility Petronas Gas Berhad BBA
Bonds Year 1999 Function Lead Arranger
Amount RM 500 million
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• PROPERTY FINANCING
• BBA based financing and Istisna based financing
  
• Common Tenors 5 years to 7 years
• Reasons For BBA/Istisna Lock in Cost

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• ASSET FINANCING
• Murabahah/BBA based financing
• Any form of tangible asset
• Receivables as a form of asset (Murabahah
  financing)

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• EQUIPMENT FINANCING
• 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

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Mechanisms For Conventional Convergence in to
Islamic Banking

• Regulatory Frameworks
• Harmonization of Existing Laws
• Shariah Guidelines

• Management
• Headed by Muslim
• Mixed Staff Allowed

• Operations
• Adapting Shariah Standard

• Shariah Compliance Authority
• Shariah Advisor / Consultant
• Shariah Advisory Body
• Shariah Compliance is Mandatory

• Product Innovations
• Screening the Existing
• Product with
• Shariah Standard
• Shariah Justified Product

• Harmonization
• Between Conventional Islamic is Encouraged so
  long not contrary to Shariah

• Fund Management
• Segregated Transparence A/C

• Marketing
• Composite Allowed
• Finance Knowledge with Shariah Guidelines

• Investment
• Shariah 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

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• THANK YOU
• WASSALAM