Key To Successful DevelopmentKey To Successful Development of a Dual of a Dual

Islamic Finance & Takaful Islamic Finance & Takaful SystemsSystems

Corporate Lecture Series

Prof. Dr. Mohd. Ma’sum Billahwww.drmasumbillah.blogspot.com

Asian Business Forum

Key IssuesKey Issues

Clear Picture on Dual System.Clear Picture on Dual System. Is it a Combination Or Compromization Or Is it a Combination Or Compromization Or

Harmonization Or Segregation?Harmonization Or Segregation? Is It a Product Or a System?Is It a Product Or a System? The Road to Success.The Road to Success. The Mysterious Mechanisms.The Mysterious Mechanisms. The Global Update.The Global Update. The Platinum Tips.The Platinum Tips. Leading Islamic Finance & Takaful Leading Islamic Finance & Takaful

Instruments.Instruments.

Clear Picture on Dual Clear Picture on Dual SystemSystem

Islamic Financial System is Not By Islamic Financial System is Not By Name But by Action Name But by Action

MisconceptionMisconception A Clear PictureA Clear Picture The Global RealityThe Global Reality

Is Dual Islamic Finance a Is Dual Islamic Finance a Combination Or Compromization Or Combination Or Compromization Or Harmonization Or Segregation?Harmonization Or Segregation?

It is Neither Compromization Nor It is Neither Compromization Nor a Combination.a Combination.

But, A Segregation.But, A Segregation. In Some Situations, It Is with In Some Situations, It Is with

Harmonization by Harmonization by Shari’ahShari’ah Compliance.Compliance.

Is Islamic Finance Or Takaful Is Islamic Finance Or Takaful A Product Or A System? A Product Or A System?

It is Not A product .It is Not A product . But A Sytem With But A Sytem With

Integration By ShariIntegration By Shari’’ah & ah & Divine Spirit.Divine Spirit.

The Road to SuccessThe Road to Success

Sincerity With Transparence.Sincerity With Transparence. Review (Products & Policies) Exercise Review (Products & Policies) Exercise

Considering the Socio-economic Considering the Socio-economic Sensitivity.Sensitivity.

PR & Performance With Standard PR & Performance With Standard Professionalism.Professionalism.

Sustainable Risk Assessment & Sustainable Risk Assessment & Effective Decision Making.Effective Decision Making.

Wisdom, Tolerance & Mutual Respect.Wisdom, Tolerance & Mutual Respect. Plan & Action.Plan & Action. Shari’ahShari’ah Compliance With Divine Spirit. Compliance With Divine Spirit.

The Mysterious The Mysterious MechanismsMechanisms

Dynamic Marketing Strategies.Dynamic Marketing Strategies. Sustainable Research & Rediscovery.Sustainable Research & Rediscovery. Ranks & Rewards.Ranks & Rewards. Global Comparison.Global Comparison. Reasonable Less Liability with Added Reasonable Less Liability with Added

Benefits & Rewards.Benefits & Rewards. Mutual Corporate Care & Concern.Mutual Corporate Care & Concern. Punctuality with Smartness.Punctuality with Smartness. Settle Before Time.Settle Before Time.

The Global UpdateThe Global Update

Middle Eastern Phenomena.Middle Eastern Phenomena. African Phenomena.African Phenomena. Malaysian & ASEAN Scenario.Malaysian & ASEAN Scenario. Indian Sub-continent.Indian Sub-continent. European Market.European Market. US & Other World’ Condition.US & Other World’ Condition.

Review Excercise With Innovation.Review Excercise With Innovation. Unhealthy Competition.Unhealthy Competition. Dynamic Offerings with Acceptable Dynamic Offerings with Acceptable

Standard.Standard. Foreseeable Plan & Acceptable Foreseeable Plan & Acceptable

Performance.Performance.

The Platinum TipsThe Platinum Tips

Leading Islamic Finance Leading Islamic Finance & Takaful Instruments& Takaful Instruments

MUDHARABAH MUSHARAKAH

MURABAHAH Bai Bi Thaman Ajil

Wakalah Tabarru’

Ujr Mirath

Contract betweenContract between two parties: two parties:

An Islamic bank as an An Islamic bank as an investor (rab al-mal)investor (rab al-mal) who who provides a second party, the provides a second party, the entrepreneur entrepreneur (mudarib)(mudarib) with financial resources to finance a with financial resources to finance a particular project.particular project.

ProfitsProfits are shared between the parties in a are shared between the parties in a proportion agreed in advance.proportion agreed in advance.

LossesLosses are the liability of the Islamic bank and are the liability of the Islamic bank and the mudarib loses only its efforts and his the mudarib loses only its efforts and his expected share in the profitsexpected share in the profits

MUDHARABAHMUDHARABAH

The The two partners participate in the capitaltwo partners participate in the capital of of the venturethe venture

Profits Profits are allocated according to an agreed are allocated according to an agreed proportion, allowing for managerial skills to be proportion, allowing for managerial skills to be remuneratedremunerated

LossesLosses are borne by the partners in proportion are borne by the partners in proportion to their contribution to the capitalto their contribution to the capital

MUSYARAKAHMUSYARAKAH(JOINT PARTICIPATION)(JOINT PARTICIPATION)

Contract available for Contract available for financing the purchase or financing the purchase or importimport of capital of capital goodsgoods, consumable goods or raw , consumable goods or raw materialsmaterials

Fundamental principlesFundamental principles::– Purchase price should be declared to the clientPurchase price should be declared to the client– Goods must be classified and clearly identified Goods must be classified and clearly identified

according to international or commonly according to international or commonly accepted standards or classificationsaccepted standards or classifications

MURABAHA MURABAHA (MARK UP ON SALE)(MARK UP ON SALE)

Why more than 80% revenues Why more than 80% revenues generated by most of Islamic generated by most of Islamic

Banks are from the Banks are from the Murabahah financing?Murabahah financing?

POTENTIAL ISSUES IN POTENTIAL ISSUES IN MUSYARAKAHMUSYARAKAH Third party guaranteeThird party guarantee Shared liabilityShared liability Restriction on joint-ownership of Restriction on joint-ownership of

capitalcapital Classification of non-performing Classification of non-performing

financingfinancing Source of fundsSource of funds Staff competency and efficiency Staff competency and efficiency Control mechanism Control mechanism

Third Party GuaranteeThird Party Guarantee

No security / collateral is allowedNo security / collateral is allowed Negligence or misuse of fundsNegligence or misuse of funds Jordan – Government guaranteeJordan – Government guarantee Sudanese Islamic Bank – Property as Sudanese Islamic Bank – Property as

collateralcollateral To allow third-party guarantee on To allow third-party guarantee on

Musyarakah financingMusyarakah financing To assess Takaful role as third-party To assess Takaful role as third-party

guaranteeguarantee Both parties contribute to the appointmentBoth parties contribute to the appointment

Shared LiabilityShared Liability

JV – both parties share the liability JV – both parties share the liability Indemnity Letter can be requested Indemnity Letter can be requested

but Syariah disallows financier to but Syariah disallows financier to absolve its liability to the projectabsolve its liability to the project

To limit the liability under Syariah To limit the liability under Syariah due to the financier’s non-due to the financier’s non-involvement in the normal involvement in the normal management of the project is to be management of the project is to be obtained obtained

Restriction on Joint-Restriction on Joint-Ownership of CapitalOwnership of Capital Syariah: Capital contributed by the Syariah: Capital contributed by the

partners will belong to the partnershippartners will belong to the partnership Title should be under the name of Title should be under the name of

partnership partnership Issues in JV-based Musyarakah Issues in JV-based Musyarakah Section 66 of BAFIA, FIs Section 66 of BAFIA, FIs are not are not

allowed to acquire or hold more allowed to acquire or hold more than 5% equitythan 5% equity in any corporation in any corporation except by way of credit security except by way of credit security

Assets which are contributed by partners Assets which are contributed by partners as capital must be clearly differentiated as capital must be clearly differentiated from assets which are lent for specific from assets which are lent for specific functions and period by the partnersfunctions and period by the partners

Appointment of trustee – economical for Appointment of trustee – economical for small financing?small financing?

Alternative: Issue Trust Declaration – Alternative: Issue Trust Declaration – need to be registered with ROCneed to be registered with ROC

A private caveat can also be lodged if the A private caveat can also be lodged if the assets is landassets is land

Still need to amendment BAFIAStill need to amendment BAFIA

Classification of Non-Classification of Non-Performing FinancingPerforming Financing Does not have fixed payment scheduleDoes not have fixed payment schedule Tenure can be specific or perpetual Tenure can be specific or perpetual It is difficult to classify Musyarakah as It is difficult to classify Musyarakah as

non performing based on current Non non performing based on current Non Performing Loan Guideline by BNM GP3Performing Loan Guideline by BNM GP3

To amend the BNM GP3To amend the BNM GP3 Perpetual should be exempted from the Perpetual should be exempted from the

NPF classification NPF classification To divide it into 2 categories – Specific To divide it into 2 categories – Specific

Maturity Musyarakah and Perpetual Maturity Musyarakah and Perpetual Musyarakah Musyarakah

Source of fundsSource of funds

Where the funds should be tapped Where the funds should be tapped from? Who are depositors? Specific from? Who are depositors? Specific accounts holder – risk takers?accounts holder – risk takers?

Gapping issues – short term Gapping issues – short term deposit versus long term lendingdeposit versus long term lending

Limited shareholder’s fund – worst Limited shareholder’s fund – worst still - riskystill - risky

Staff Competency and Staff Competency and Efficiency Efficiency To ensure that proper and To ensure that proper and

structure training and practical structure training and practical are given to the parties involved are given to the parties involved

Control MechanismControl Mechanism

Difficult to monitor and control Difficult to monitor and control especially JV-typeespecially JV-type

Selective customers only Selective customers only

Recommendations Recommendations

to promoteto promote

Musyarakah Musyarakah FinancingFinancing

Other Other recommendationsrecommendations

BE SELECTIVE IN PROJECT SCALE: SMALL TO MEDIUMBE SELECTIVE IN PROJECT SCALE: SMALL TO MEDIUM

In a project whereby capital investment is very huge, like In a project whereby capital investment is very huge, like

construction of dam, gas and oil production plant, construction of dam, gas and oil production plant, musyarakah musyarakah

and mudharabah structure may not be recommended due and mudharabah structure may not be recommended due to to

the shortfalls of this structure. In practice the financing the shortfalls of this structure. In practice the financing

structure are more toward debt structure, ijarah, rahn and structure are more toward debt structure, ijarah, rahn and etc.etc.

GO FOR MORE SECURED PROJECT CASH FLOWGO FOR MORE SECURED PROJECT CASH FLOW

For relatively small project like a secured For relatively small project like a secured infrastructure government award project, bank infrastructure government award project, bank can adapt the musyarakah and mudharabah can adapt the musyarakah and mudharabah structure replacing the murabahah or BBA in structure replacing the murabahah or BBA in trade financing that are widely use in current trade financing that are widely use in current practicepractice

In practice Islamic Bank use Murabahah Working In practice Islamic Bank use Murabahah Working Capital Financing facilities in order to facilitate Capital Financing facilities in order to facilitate trade finance of particular company that being trade finance of particular company that being awarded with government project. In Malaysia, awarded with government project. In Malaysia, infra project are booming and the need for such infra project are booming and the need for such financing is huge financing is huge

In MWCF bank will get profit out of mark up sale In MWCF bank will get profit out of mark up sale that they charges to its clients of more less like 1-that they charges to its clients of more less like 1-1.5% p.m. and if the bank can participate directly 1.5% p.m. and if the bank can participate directly into the project by way of mudharabah or into the project by way of mudharabah or musyarakah the return is far beyond the current musyarakah the return is far beyond the current margin.margin.

For example, government awarded a project For example, government awarded a project to an ABC Co. to construct a RM50 million to an ABC Co. to construct a RM50 million hospital for a period of 18 months in Gua hospital for a period of 18 months in Gua MusangMusang

Since the project is guaranteed by the Since the project is guaranteed by the government in term of progressive cash flow government in term of progressive cash flow payment, bank can use Musyarakah or payment, bank can use Musyarakah or Mudharabah as a tool to participate in the Mudharabah as a tool to participate in the project for a better returnproject for a better return

How this How this recommendation can recommendation can solve the shortfallssolve the shortfallsGO FOR SHORT TERM PROJECT FINANCINGGO FOR SHORT TERM PROJECT FINANCING

Liquidity problem can be resolved as the project undertake is only for short term period

Bank can use depositor’s fund instead of limited shareholders’ to capitalize the project in order to give better return to depositors

Problems of gaping can be eliminated, since cash in flow will be paid in progress payment. In a typical government project, payment made progressively in monthly payment according to

Direct involvement from the Direct involvement from the agentsagents

Mudharib & Rabbul Maal are the board of executives directors

Risk scorecard must be in place and reviewed periodically

Appointed independent project/account manager/consultant to assess the performance and detect warning signals for pre-emptive measure

Thank You Thank You

WassalamWassalam