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Applied Shariah in Financial Transactions. Assoc. Prof. Dr. Mohamad Akram Laldin Executive Director, ISRA. Presentation Outline. 1. Essential Shariah Guidelines. 2. Islamic Contracts and Products. 3. Islamic Investment Products. Details. Essential Shari’ah Guidelines - PowerPoint PPT Presentation
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Page 1
Applied Shariah in Financial Transactions
Assoc. Prof. Dr. Mohamad Akram LaldinExecutive Director, ISRA
Page 2
2
3
Islamic Contracts and Products
Islamic Investment Products
Presentation Outline
1 Essential Shariah Guidelines
Page 3
Details
• Essential Shari’ah Guidelines• Islamic Contracts and Products:
Deposit – taking Contracts Sale – based Contracts Lease – based Contracts Equity – based & Hybrid Contracts Fee – based Contracts Other Supporting Contracts
• Takaful
• Investments Products
3
Page 4
Divine Sources (Quran & Sunnah) Mutual Consent
4
Transaction in Islam
Any transfer of wealth or property has to be made through a valid contract or
`aqad
• Contracts in Islam is the linking of offer and acceptance, resulting in legal effects on the subject matter of the contract.
• In Islamic law, `contracts includes both bilateral as well as unilateral
Page 55
Essentials of Valid Contract
CONTRACTING PARTIES
Offeror Offeree
• Of full contractual capacity
• Legal authority to contract
• As owner & in possession of asset
• legal representative (agent, guardian etc.)
CONTRACTUAL EXPRESSION
Offer Acceptance
• Clear• Corresponding
of offer & acceptance
SUBJECT MATTER
Goods/asset
Price/consideration
• Something of value• Ascertainable • Legal
Page 6
Mutual consent AVOID
Interest Gambling
Lawful Contractual Objective
CONTRACT AS BASIS OF TRANSACTIONS
Other prohibitionsEg: liquor, pork
Uncertainties
General Principles in Transaction
6
Page 77
Freedom of Contract
Islamic law of transaction :
combination of fixed & flexibility
Valid: Consent + Non- violation of
Text
األصل في األشياء االباحة“The original
ruling is permissible”
Hadith: Muslims are bounds by
conditions they make
Page 8
Freedom from Qimar & Maysir
Freedom fromGharar
Entitlement toEqual, Adequate,
Accurate Info.
Freedom fromDharar
Freedom from Riba
Promote Maslahah
Freedom fromPrice control &
Manipulation
Freedom to Contract
Entitlement toTransaction at
Fair Price
Characteristics of Shariah-compliant Banking
and Financial System
Promote Brotherhood
A system grounded on moral and
ethics
Page 99
Sales-based Contracts
Lease-based Contracts
Equity-based Contracts
Fee-based Contracts
Hybrid Contracts
BBA – deferred sale; Murabahah – cost-plus sale; Bai al-Inah, Bai al-Tawarruq
Ijarah Wa Iqtina; Ijarah Thumma Al-Bai’, Ijarah Muntahia Bitamleek
Mudarabah, Musyarakah
Kafalah/Dhaman (Guarantee); Wakalah (agency)
Musyarakah Mutanaqisah (Dimishing Partnership), AITAB etc.
Deposit-taking ContractsWadi’ah Yad Amanah; Wadiah Yad Dhamanah, Mudarabah; al-Qard
Promise/UndertakingWa`ad
9
Various Forms of Islamic Contracts Used in Banking
Page 10
Conceptual Balance Sheet of an IFI
10
Assets Liabilities
Trade Finance(Mudarabah/ BBA)
Custodial Services(Amanah/Wadiah)
Asset-backedSecurities
(Ijarah/Salam/Istisna)
Deposits/Investments(Mudarabah/ Wakalah)
Fund Management/Private Equity Venture
Capital(Special Mudarabah/
Musyarakah)
Fund Management(Mudarabah/ Special
Mudarabah/Musyarakah)
Fee-based Services/Advisory
(Wakalah/Jualah/Kafalah)
Capital Owners’ Equity(Musyarakah)
Page 1111
Deposit-
taking
Contracts
Page 12
DEPOSIT SERVICES PRODUCTS
Saving/ CurrentAccount
InvestmentAccount
NegotiableIslamic Deposit
Certificate(NIDC)
Sale & Buy BackArrangement
(SBBA)
Qardor
Wadi’ah YadDhamanah
Mudarabah Bay’ al-`inah Bay’ al-Dayn
12
Page 13
Qardh (Loan)
The bank is not allowed to promise any return as it will be constituted as ribaThe bank is not allowed to promise any return as it will be constituted as riba
Since it is a loan, the bank is allowed to utilise the fund and return back the deposit to the customer when they request themSince it is a loan, the bank is allowed to utilise the fund and return back the deposit to the customer when they request them
Qardh means non-interest bearing loan or benevolent loan
The borrower is only obliged to pay the loan at its original amount to the lender within the agreed stipulated period of time
In the Qard saving account, the bank will take deposit from the client and it isconsidered as a loan to the bank
Page 14
WADI’AH
Contract bet.
Depositor and
Custodian
Trust Contract
Custodian cannot
benefit from the item
WADI’AHTo keep the property of another in a
safe custody by explicit and
implicit terms
Types:1. Wadi`ah Yad Amahah2. Wadi`ah Yad Dhamanah
Page 15
How Bank Can Benefit
From Wadiah
Contract?
The Wadi`ah Contract is combined with
Guarantee contract (Dhaman or Kafalah)
Wadi`ah Yad Dhamanah(Guaranteed Safe Custody)
Page 16
DHAMAN / KAFALAH
Liability
Custodian liable for
loss/ damage
UsageCustodian
may utilize the deposited
item
ProfitsProfit arising
from the use is sole right of custodian
DHAMAN / KAFALAH
A guarantee contract
Wadia’ah + Dhaman:it converts the whole concept of wadi`ah to ‘guaranteed safe custody
Page 17
Wadi`ah Yad Dhamanah– The custodian is a trustee and guarantor to safeguard the deposited asset.– The deposited asset/property need not be separated/segregated– The deposited asset/property can be used for trading etc.– The custodian has a right to any income derived from the utilisation of the
deposited asset– Depositor can take back the deposited asset at any time– Wadi`ah Yad Dhamanah is like Qard (loan); therefore all principle of loan
would be applicable– Thus as a loan WYD cannot generate any pre-agreed benefit/income to
the depositor, over and above the principal amount of deposit, otherwise tantamount to riba
17
Page 18
Saving Account
Current Account
Shariah Issues
Advertisement of hibah prior or at time of contract
Deposits from
Individual / Companies
Minor (Guardian) Hibah
Overdraft facility
Insufficient fund for cheque
clearance
Page 1919
Mudarabah
A profit sharing contract & a trust
contract
Parties:
Rabbul Mal (Capital Provider)
Mudarib (entrepreneur)
Profit will be distributed based on agreed ratio
Loss:
Rabbul Mal lose his capital and Mudarib
lose his work
Mudarib is only lia
ble
for negligence or
transgression or
violation of
contract te
rms
Page 2020
Issues To Be Considered
• Investment from certain individuals and companies
• Investment of a minor
• Advertisement of gift prior to the contract
• Guaranteeing profit/capital?
• Variation of the ratio of profit and loss sharing
• Pre-mature withdrawal of capital-mudarabah investment
Page 21
Other Deposit Products / Structures
21
Commodity Murabahah Deposit-i Structured based on Tawarruq
Structured Deposit Products
Pure Al-Qard Structures Absolutely no returns or benefits provided to
depositors E.g., Al-Rajhi Malaysia’s savings and current
accounts
Combination Structures Each deposit split into stipulated portions
(Mudarabah & Qard) E.g., KFH Malaysia’s savings and current accounts
Page 2222
Sales-based
Contract
(Al-Bay`)
Page 23
Common Types of Sale-based
contract
Murabahah & Bay`
Bithaman Ajil
Bay` SalamBay` Istisna’
Bay` `Inah Bay` Tawarruq
23
Page 2424
Murabahah
Cost plus mark up sale
Seller disclose the actual cost and the
added profit margin
Payment may be on spot basis or
deferred
It is different prom Musawamah (sale based on bargain)
A sale; all sale
conditions apply
Page 2525
Basic Shari`ah Rules on Sales
1. Subject of sale must be existing at time of sale
2. Subject of sale must be owned by seller at time of sale
3. Subject of sale must be in physical or constructive possession of seller at time of sale
4. Sale must be instant and absolute
5. Subject of sale must be of value
6. Subject of sale cannot be for haram use
7. Subject of sale must be specifically known and identified
8. Certainty of delivery
9. Certainty of price
10. Sale must be unconditional
Page 2626
Application of Murabahah in Finance(Murabahah To The Purchase Orderer )
• It is a sale in which two parties or more negotiate and promise each other to execute an agreement according to which the orderer asks the purchaser to purchase an asset of which the latter will take legal possession.
• The orderer promises the purchaser to purchase the asset from him and give the ordered a profit thereon. The two parties would conclude a sale after the possession of the ordered to the asset.
Page 2727
Murabahah Trade Financing
Customer approaches bank and promises to buy commodity from bank
Customer buys commodity via murabahah on deferred payment terms
Bank buys commodity on cash basis
Trader transfersCommodity to Bank
Customer identify the commodity
Page 2828
Bay` al-Inah?
Sale and buy back
Profit difference between
deferred and spot price
Seller sell at deferred price and buyer sell back with cash price
Page 2929
Bay’ al-Inah: Personal financing
RM 100,000
RM 150,000
How can I borrow RM100,000 to get
married? Bank sells asset
Customer pays on deferred
Customer sells back
asset
Banks Pays on cash basis
Page 30
Bay’ Al Inah
Legal
Sale and buy back
with some time
interval
Sale and buy back without
any intention to do so - Coincide
nce
Sale and buy back
with similar price
Sale and buy back
after some
modification to the
object
Illegal
Two contracts are tied (conditioned upon another)
Two sales in one
30
Page 3131
Tawarruq
Tripartite sale/ Cash
procurement
Intent Not sale
transaction but to acquire
cash
Buyer buys an asset from a Seller
on deferred payment and then, sells the assets to the Third party for
cash
Page 32
32
Tawarruq Model of Home Financing
Customer
Electrical Appliances Wholesaler
2.Electrical Appliances
2.RM350,000 Deferred
4.RM200,000
4.Property
1.RM200,000
1.Electrical Appliances worth
RM200,000
3.Electrical
Appliances3.RM200,000
Property Owner/Developer
Page 33
US$ 1 Million Cash
US$ 1.1 Million deferred
US$ 1 Million Cash
Broker B
Broker A
Commodity Murabahah Deposit-i
33
Page 34 34
Ruling on Tawarruq
Classic Tawarru
qAllowed by
many jurist
- condition: object not sold back to Original Seller
Prohibited by some
jurist such as Ibn
Qayyim
Organized
Tawarruq
Allowed by some
jurist and applied in some IFIs
Prohibited by most jurists
- Similar to ‘Inah
Page 3535
Bai’ Bithaman Ajil (BBA)
Deferred sale BBA is originally not a kind of sale
Rather, it is a way in which the
payment of the sale price is made i.e.
Deferment.
In Malaysia, BBA refers to long term
deferred sale, while murabahah
refers to short term deferred
sale.
Page 36
Property Sale Agreement (PSA)
Sales & Purchase Agreement (S&P)
1. Beneficial ownership
1. 10% down
payment
3. BBA price (deferred payment)
Property Purchase Agreement (PPA)
2. House
2. Cash price (90% balance)
3. House
BANK Customer
5. Bank pay developer the 90% balance
BBA HOME FINANCING MODUS OPERANDI
Developer/Vendor
Page 37
Financing Facility: Islamic Banking vs. Conventional Banking
Fin. Amount : RM100KTenure : 25 yrs
(1981-2005)Single Rate : BFR-0Ceiling Rate: 9.90Ta’widh : 1%
Total Selling Price
Loan Amount : RM100K
Tenure : 25 yrs
(1981-2005)
Single Rate : BLR-0
Ceiling Rate : -no-
Penalty : 8% compounded
Total Repayment
Page 38
MOVEMENT OF BASED LENDING RATE (BFR)
Page 3939
Lease-based
Contract
(al-Ijarah)
Page 4040
Ijarah (Leasing)
• Ijarah contract is a form of exchange contract (`aqd al mu`awadah) – usufruct vs. rent.
• Ijarah (Operating Lease) means leasing of asset pursuant to a contract under which a specified permissible benefit in the form of a usufruct is obtained for a specified period in return for a specified permissible consideration.
• It is a manfaah (usufruct) type of contract whereby a lessor (owner) leases out an asset to its customer at an agreed rental fee and pre-determined lease period upon the `aqad (contract). The ownership of the leased equipment remains in the hands of the lessor.
Page 4141
Ijarah Muntahiah Bi Tamlik (Financial Lease)
• Ijarah Muntahiah Bi Tamlik has similar rules to the ordinary Ijarah except that it is associated with a promise by the lessor to transfer ownership at the end of the Ijarah period via a separate sale agreement or gift.
Page 42
1. Airline places order with airplane manufacturer
2. Airline approaches bank to seek financing
3. Bank pays airplane manufacturer
4. Airplane manufacturer delivers airplane to bank
5. Bank lease airplane to
airline
6. Airline pays rental
7. At the end of lease term
airline take ownership
DIRECT LEASING
42
Page 4343
Ijarah Mausufah Fi Zimmah (Forward Lease)
• Ijarah Mausufah Fi Zimmah means an ijarah contract which is executed for an asset undertaken by the lessor to be delivered to the lessee according to accurate specifications, even if the asset is not owned by the lessor.
• During the period that the leased asset/property is under construction, the lessor may ask the lessee to pay a certain portion of pre agreed lease rental as a forward lease.
• The forward lease rental payment will be considered as a debt to the lessor until the delivery of the leased asset to the lessee.
• Ijarah Mausufah Fi Zimmah can be in a form of Ijarah or Ijarah Muntahiyah Bi Tamlik.
Page 4444
Salient feature of Ijarah
Asset: Valuable use / usufruct. Not consumable
Ownership remain with lessor;
usufruct transfer to lessee
Liabilities and risks incidental to
ownership will reside with the
lessor
Liabilities, risks or expenses refer to
the use of the leased asset reside
with lessee
Page 4545
Cont’d…
• The purpose and mode of usage should be agreed upfront
• The lessor could be the legal owner or the equivalent (agent, natural or legal guardian)
• The leased asset is a trust in the hands of the lessee.
• The rental payment commences after the delivery of the leased asset, actually or constructively.
• The lease contract terminates upon the loss / non-existence of the usufruct
• Lease contract is a bilateral contract. Any termination, in normal cases, must be mutually agreed.
Page 4646
Equity-based
& Hybrid
Contract
Page 4747
Musharakah
Profit –Loss Sharing contract
Technically it refers to the
commingling of capital provided by the partners for the purpose of sharing
in profit
Profit will be distributed based on agreed ratio
Loss will be distributed based on parties’ equity
ratio
Page 48
Musharakah (Profit Loss Sharing)
Venture
Partners
Capital
Profit n Loss Sharing
Profit or Loss
Application:
• Home Financing: Diminishing Musharakah • Sukuk• Equity Shares• Project Financing• Letter of Credit
Page 49
Musyarakah Mutanaqisah(Diminishing Partnership)
• Musyarakah mutanaqisah is a form of Musyarakah (partnership) in which one of the partner promises to purchase the equity share of other partner gradually until the title of the equity is completely transferred to him.
• This transaction starts with the formation of partnership, after which buying and selling of the equity take place between the two partners.
• One partner may lease his share of the asset to the other partner on Ijarah (lease) basis.
• The partnership will come to an end with one partner being the sole owner of the asset or business venture.
Page 50
90% 10%
Bank leases its 90% share of property to customer
Customer pays rent for usage of Bank’s 90% share of property
Customer gradually buys share of property from Bank
Customer’s monthly
installment payments
Musyarakah Mutanaqisah (Modus Operandi)
100%0%
Page 51
51
100
90
80
70
60
50
40
30
20
10
ILLUSTRATION of Musharakah Mutanaqisah
10%
90%
80%
70%
60%
50%
40%
Customer nowowns 100%
of the Assets
Bank’s ShareCustomer’s Share
30%
20%
10%Bank’s share= “0”
MM
The asset is now mine. Thanks to Islamic Bank
Page 52
No BBA Musharakah Mutanaqisah
1 Involves a Sale Contract Involves Partnership, Leasing and Sale contracts
2 Contract – Buyer & Seller Contract – Partnership
3 Require underlying assets to complete Aqad (APA & ASA)
Underlying assets not required
4 With Selling Price – Fixed No Selling Price – Flexible
5 Security documentsAsset Purchase AgreementAsset Sale AgreementCharge/Deed of Assignment
Security documentsMM Co-Ownership AgreementCharge/Deed of Assignment
6 Property belongs to the customer Property belongs to both the customer and the bank according to the percentage of ownership
Differences Between Murabahah & MM?
Page 5353
Fee-Based
Contract
Page 5454
Delegation (al-Wakalah)
• Wakalah is a contract of agency which gives the power to a person to nominate another person to act on his behalf as long as he is alive based on the agreed terms and conditions.
• Wakalah is commonly used in Letter of Credit-i
• Delegation Al-Wakalah has four pillars:1. The Delegator Al-Muwakkil2. The Delegatee Al-Wakeel3. The wording of the Delegation4. The subject of the Delegation
Page 55Advising Bank Issuing Bank
Seller(Beneficiary)
Buyer(Applicant)
Apply LC
Issue LC
Advice LC
Need to produceRequired documentsEg. commercial invoice BL (Bill of landing), etc
Letter of Credit (LC)- Wakalah
55
Page 5656
Other Supporting
Contract
(Wa`ad)
Page 5757
Wa`ad (Promise)
An undertakin
g to do something in future
Involves the
promisor and
promisee
Waad is not
contract
It is unilateral
and binding on the maker
only
Page 58
WA`AD (PROMISE)
1st Group(Hanafis, Shafi`is, Hambalis and some Maliki jurists)Fulfilling a promise is noble but it is neither mandatory nor enforceable through a court of law
2nd Group (Samurah b. Jundub, Umar Abdul Aziz,Hasan al-Basri, a;-Ashwa’, Ishaq Rahwaih, Al-Bukhari & some Malikis)
Fulfilling a promise is mandatory & the promisor is under a moral and legal obligation to honor his promise.
Promise is not binding under normal circumstances but becomes binding where the promisor has caused promisee to incur certain expenses or undertake work or any form of liability
3rd Group (Some Maliki Jurists)
4th Group (Islamic Fiqh Academy –Generally accepted view)
Fulfilling a promise is allowed subject to certain conditions as enumerated in the next slides
58
Page 59
Promise in commercial dealings are binding subject to the following conditions:1. It should be one-sided promise2. The promise must have caused the promisee to
incur certain liabilities for the promisee to seek enforcement on the promisor
3. If the promise is to purchase something the actual sale must take place at the appointed time by the exchange of offer and acceptance. A mere promise itself should not be taken as a concluded sale
4. If the promisor bakes out of his promise, the court may force him either to purchase the commodity or pay actual damages to the seller. The actual damages include the monetary loss suffered by the promisee, but shall not include the opportunity cost.59
Islamic Fiqh Academy Position on Promise
Page 6060
Takaful
Page 61
Premium
Peace of mind
Compensation
Insurance CompanyPolicy holder
BASIC MECHANISM OF INSURANCE
No Claim
Profit
Calamity
Page 62
Conventional Insurance: Not Shari’ah-compliant
• Element of uncertainty (gharar)– There is uncertainty of what the insurance policy-holder is
“buying” or paying for• If no loss occurs Policy-holder receives nothing• If loss occurs Policy-holder gets compensation in varying
amounts
Insurance Company
Insurance Policy-holder
Premium
Coverage
• Element of gambling (maysir)– The insurance company is gambling that total premiums
collected will exceed total claims and thus producing underwriting surplus (profit)
– Total claims is predominantly affected by chance (will of God)• Element of riba
– Insurance fund commonly invested in interest-bearing securities
Page 63
ISLAMIC
ALTERNATIVE TO
INSURANCE
Page 64
SHARI`AH LEGITIMACY OF TAKAFUL
g مiى اإلثmلmع iواqن mاوmعmت mالmى وmو iقxالت mبر} وiى الmلmع iواqن mاوmعmت mوالiعqدiوmان mو
“and help ye one another in righteousness and piety, but help ye not one another in sin and rancour” (5:2).
Hadith• “…tie the camel, then submit (tawakkal) to the will of
God.”• Importance of risk mitigation
Islamic Legal Maxim
الضرر يزال
Page 65
Takaful Participants
Contribute via unilateral contract
(tabarru’at)
Manages fund for a fee or share in profits on investment
Takaful Fund
Takaful Operator
BASIC DESCRIPTION OF TAKAFUL INSDUSTRY
• Takaful participants contribute to a takaful fund based on the concept of mutual assistance
• The contribution is done via reciprocal/mutual donation (tabarru’at) and does not represent a commercial “sale of coverage”
• Takaful entails a unilateral, charitable contract (tabarru’at) in contrast with the conventional insurance contract which is a bilateral exchange contract (mu’awadat)
• Gharar is tolerated in a charitable unilateral contract
Page 66
Takaful: Wakalah Model
66
-retakaful-reserves-claims-investment
income-stabilization reserves
Takaful Participants
Contribute
Risk Fund
Manage
Takaful Operator
Wakalah fee
1st contract Tabarru`
2nd Contract
Wakalah
Surplus
Page 6767
1. Unilateral contract
2. Valid though no acceptance and consideration from the recipient
Takaful Participants
Contribute
Takaful Funds
Manage
Takaful OperatorInvestPay
Claims
2nd Contract
Mudarabah
1st contract Tabarru`
Profit, if any, is shared between the two based on certain ratio or percentage & loss, if any, will be borne by the capital provider alone
Takaful: Mudarabah Model
Page 6868
Takaful vs. Insurance
Basis Conventional Insurance
Takaful
Principles Non compliance with Shari`ah principles
In compliance with Shari`ah principles
Contract Buying & Selling Tabarru` , Wakalah & Mudarabah
Obligation of Company
Guarantor to insured
Fund Manager
Guarantee Given By Company Participants Mutually guarantee each other
Page 69
Islamic
Investment
Page 70
Technical Meaning Sukuk refers to
securities, notes, papers or
certificates, with features of liquidity
and tradability (except for salam and murabahah
sukuk)
Literal MeaningSukuk is the plural of sak which means certificates. Other
similar terms:• Taskik – process of
dividing assets into papers
(sukuk)• Tawriq – to render
something into cash
SUKUK
AAOIFI“Investment sukuk are
certificates of equal value representing undivided shares
in ownership of tangible assets, usufructs and services (in the
ownership of) the assets of particular projects or special
investment activity”
Malaysian Securities Commission
“A document or certificate which represents the value of an asset”
• Asset – may include financial asset such as receivables and debts, as well as non financial
assets like tangible assets, usufructs and services.
Page 71
Income Generating Project
Sukuk Investors
Obligor/Project Developer Issuer/Trustee
Sukuk Issue Proceeds
Proceeds fromSukuk Sales
Income from project
BASIC STRUCTUR
E OF SUKUK
Page 72
Comparing SUKUK to BONDS
Sukuk Bonds
1. Holder owns assets 1. Holder owns cash flow only
2. Use a variety of contracts to create financial obligations between issuer and investors; e.g. Sale, lease, equity partnership, joint-venture etc.
2. Simply use a loan contract to create indebtedness
3. Return linked to profit elements in-built in the sale, lease or partnership
3. Return linked to interest charged out of the loan contract
4. Instrument may be equity or debt depending on underlying contract
4. It is a Debt instrument
5. Tradability of the sukuk depends on the nature of the underlying asset
5. No restriction on the tradability
6. Investment in Shari`ah-compliant activities
6. Proceeds are invested in any business without restrictions
Page 73
The Nature and Type of Asset represented
by the SukukThe Underlying Contracts in the
Sukuk StructuresThe Technical and
Commercial Features of the
Sukuk
Debt-based
Tangible assets
Usufructs
Rights in investment
projects
Special investment activities
Asset-based (normal)
Asset-Backed (ABS)
Hybrid Structure(convertible & exchangeble )
Sales-based
Lease-based
Partnership-based
Agency-based
Bases for Sukuk Classification
Page 74
Types of Sukuk
Asset-Based
Asset-Backed
Hybrid
Sales-Based
Lease-Based
Partnership-Based
Agency-Based
Salam
Istisna
Ijarah Muntahiy
a bi Tamlik
Ijarah Mawsufah fi Zimmah
Musharakah
Wakalah bil
Istithmar
Exchangeable
Convertible
BBA
Murabahah
IjarahMudaraba
h
Page 75MUNIF Basic Structure
MUNIF
Debt (Selling price) is evidenced by issuance of MUNIFs
May sell MUNIFin Secondary Market
(Bay al-Dayn)
Primary SubscriberIssuer
1. Issuer identified asset
3. Subscriber cum tender panel member provide proceeds
5. Subscriber resale the asset at selling price (mark-up, i.e. Murabahah)
2. Sell the asset on tendered basis
TPM/Underwriters
4 Disburse the purchase
price
Page 76
Primary Subscriber
Sukuk Issuer
Investors
3. Issue Sukuk Ijarah as evidenced of undivided
proportionate ownership of leased asset + right to
ijarah rental stream
1. Sale of assets to the primary subscribers
2. Lease back assets to issues in return for ijarah
rental (periodic distribution)
Secondary Market Trading
BASIC STRUCTURE: IJARAH SUKUK
Page 77
STRUCTURE OF MUDHARABAH SUKUK
CAPITAL
Investors(Rabb al-Mal)
Issuer(Mudarib)
Outcome Of
Project
Issues Mudarabah Sukuk
Contract of Mudarabah
Profit shared in
accordance to pre-agreed
proportions(X,Y)
Loss? borne totally by rabb al-
mal
Y% to rabb al
mal
X% to Mudarib
1
3
Invests in project2
Page 78
Islamic REITs
Rental from mixed activities (halal + haram)
Rental fromhalal activities
Return from Islamic REITs
Fund Management
Method to calculate rental From non halal activities
Instruments used in deposit, investment and financing
i-REIT
Takaful Protection
Risk management issue
Page 79
REITs
Net Property Income
OwnershipOf Property
Returns
Investment
Unit Holder
Management services
Management fees
Safeguard unit holder’s interest
Trustee fees
Properties
Maintenance and Management
Services
Maintenance and management fees Rental
Payment
Rent
TrusteeManager
TenantProperty Manager
Shariah advisors
Advise on Shariah issues
Islamic REITs
Page 80
Shariah Issues involving Rental from Lessee who conduct Mixed Activities
PrincipleMethod of calculation
The core activity is halal but small portion of the whole activity is not- halal
The non halal ration must not exceed 20% of the total rental from Islamic REITS
`Umum Balwa Maslahah
Benchmarking
In calculating the ratio of non-halal activity: usage of the space, length of service and others are applied
If the width of the supermarket is 10,000 sqf,and the designated area for sale of liquor is
1000 sqft, namely 10%. It is still within the acceptable ratio
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Client’s investmen
t
100%
BANKClient
Higher ReturnInvestments
- equity, derivatives e.g.Options, swaps, futures
& forward
Fixed IncomeInvestments
- Commodity murabahah- Sukuk, Islamic ABS
(Asset-Backed Securities)
Invest 90%
Invest 10%
Expected Return 10%
Expected Return x%
Bank acts as agent
(wakalah contract) in investing
depositor’s money & charges a fee for the
service
Wakalah bi al-istithmar-based structured investment
Principal Protection = (90% investment + 10% return)
Islamic Structured ProductsFund-Mobilization Stage
Investment Activities Stage
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Structuring
1. Identifying contract and principle• Fund raising stage – Wakalah/Mudarabah• Investment activities– Tawarruq, purchasing basket of
shares, embedded Islamic Option (wa`d or urbun etc)• Wa’d, Wa’dan or Muwa`adah?
2. Underlying aset and investment activities
Implementation
Usage
1. Each contract has to be executed separately & follow the right order
2. Capital protection objectives• Efficient fund management• Third party guarantee (subsidiary to principal/other
branch of an international IFI)
1. Replacement of securities (Shariah compliance status changes)
2. Wa‘d to sell and buy equity based on ‘benchmark’ : Iqnorance of price
3. Early settlement: Justification?
Shariah Issues
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THANK YOU