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This is my undergraduate thesis presentation. The presentation was taking place at TAZKIA University College of Islamic Economics, Oct 2nd 2014.
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Pricing Determinationfor PLS Products
in Islamic BankingA CASE STUDY ON PT ISLAMIC BANK XYZ
RD. Anggara Natura
S.1014.003
Supervisors:
Sugiyarti Fatma Laela, M.Buss(Acc),CMA / Ahmad Rifqi S.E.I
>>> Undergraduate Thesis (Final Hearing)
Final Hearing – Undergraduate Thesis“Pricing Determination for PLS Products in Islamic Banking”Oct 2nd 2014/Dzulhijjah 7th 1435 H
MOTIVATION
Islamic Accounting
Islamic Banking
Final Hearing – Undergraduate Thesis“Pricing Determination for PLS Products in Islamic Banking”Oct 2nd 2014/Dzulhijjah 7th 1435 H
OUTLINEI
Background
Problems, Objectives, and
Benefits
IILiteratures
Conceptual Framework
IIIType of Research
and Data
Data Collection & Analysis Method
Procedure Analysis
IVPricing
Determination for PLS Contracts
Policy
Cost of Fund Calculation
Practice
Risk Adjustment Practice
Spread Determination for
PLS Contracts
Competitiveness of PLS Contracts
VConclusions
Recommendation & Limitation
Final Hearing – Undergraduate Thesis“Pricing Determination for PLS Products in Islamic Banking”Oct 2nd 2014/Dzulhijjah 7th 1435 H
BACKGROUNDI
The Growth of IBs
PLS as a substitute for Interest System
Murabahah > Musyarakah/Mudharabah
Price of PLS Products
> The increase of Total Assets of Islamic Banks (BUS, UUS, BPRS) is 34%
> The new mechanism that offers by Islamic Bank in financing products.
> Islamic Bank products is dominated by Murabahah (59, 7%), then Musharakah and Mudharabah (26, 9%)
> One of many factors that affects the selling of product.
Final Hearing – Undergraduate Thesis“Pricing Determination for PLS Products in Islamic Banking”Oct 2nd 2014/Dzulhijjah 7th 1435 H
PROBLEMS & OBJECTIVES
PROBLEMS• How Islamic Bank determines the price of
PLS products?
• How the competitiveness of PLS products’ price in Islamic Bank XYZ?
OBJECTIVES• Describe how Islamic Bank determines the
price of PLS products.
• Analyze the competitiveness of PLS products’ price in Islamic Bank XYZ.
I
Final Hearing – Undergraduate Thesis“Pricing Determination for PLS Products in Islamic Banking”Oct 2nd 2014/Dzulhijjah 7th 1435 H
CONTRIBUTION
OF STUDYI
CONTRIBUTION OF STUDY
Islamic Bank
Development of Knowledge
Researcher
Final Hearing – Undergraduate Thesis“Pricing Determination for PLS Products in Islamic Banking”Oct 2nd 2014/Dzulhijjah 7th 1435 H
LITERATUREII
Final Hearing – Undergraduate Thesis“Pricing Determination for PLS Products in Islamic Banking”Oct 2nd 2014/Dzulhijjah 7th 1435 H
Focuses on The Nature of Contracts and MechanismPROFIT LOSS SHARING• Al Mudharaba (Usmani (2002), Syafii (2001), Iqbal (2001))• Al Musharakah (Usmani (2002), Syafii (2001), Iqbal (2001))
Focuses on Price Calculation and MeasurementPRICING DETERMINATION
• Nisbah (Rivai & Veithzal (2008), Sadique (2009), 5/7/PBI/2003)• Base Lending Rate (Rivai et al (2007))• Cost of Fund (Rivai et al (2007))• Risks (Febianto (2010), Sholihin (2010), BIMB (2010), Khan & Ahmed (2011))
Focuses on Islamic Literature which Discuss about PricingISLAMIC PERSPECTIVE• Al Qur’an (Al Baqarah: 275, Al Muzammil: 20, An Nisaa: 12, An Nisaa: 29) • Al Hadist
Start
Problem Identification:Describe how Islamic Bank determines the price of PLS products.
Analyze the competitiveness of PLS products’ price in Islamic Bank XYZ (compared with the similar competitors and products).
Data Collection1. Interviewed about the pricing policy of PLS products
in PT Islamic Bank XYZ2. Find the sample of PLS Contracts
Procedure Analyisis:1. Understand the mechanism of price determination
on PLS Contracts in PT Islamic Bank XYZ2. Analyze the Competitiveness of PLS contracts’ price in
PT Islamic Bank XYZ with other similar competitiors and products.
Literature Review
Data1. The result of
Interview2. PLS Contract
(Sample).
Data Collection Method
1. Interview2. Document
Analysis
Conclusion & Advices
End
IICONCEPTUALFRAMEWORK
Final Hearing – Undergraduate Thesis“Pricing Determination for PLS Products in Islamic Banking”Oct 2nd 2014/Dzulhijjah 7th 1435 H
TYPE OF RESEARCHIII
LOGIC OBJECTIVE
DATA OUTCOME
DESCRIPTIVEDescribe the existing phenomena concerning Price Determination for PLS products in IB
APPLIEDExpected to be applied by IB for empowering the PLS products as a new mechanism that offered by IB.
QUALITATIVEQualitative data is used by a non-statistical research and purposes to exclude an information from the data.
DEDUCTIVEProviding the information from a phenomena then comply the information with relevant theories.
TYPE & SOURCEOF DATA III
DATACOLLECTION METHODTYPESOURCE
TREASURY / BUSINESS UNIT
DIVISION
PRIMARY INTERVIEWPOLICY,
METHODS & MISC. FACTORS
SECONDARY DOCUMENT ANALYSIS
PRICE OF FINANCING, PLS
RATIO
Final Hearing – Undergraduate Thesis“Pricing Determination for PLS Products in Islamic Banking”Oct 2nd 2014/Dzulhijjah 7th 1435 H
DATA ANALYSIS METHODIII
DATA INFORMATION
CASE STUDYFinal Hearing – Undergraduate Thesis“Pricing Determination for PLS Products in Islamic Banking”Oct 2nd 2014/Dzulhijjah 7th 1435 H
PROCEDUREANALYSIS III
1. Understand the mechanism of price determination on PLS contracts or products in Islamic Bank XYZ
2. Analyze the competitiveness of PLS contracts’ price in Islamic Bank XYZ.
Final Hearing – Undergraduate Thesis“Pricing Determination for PLS Products in Islamic Banking”Oct 2nd 2014/Dzulhijjah 7th 1435 H
PRICING DETERMINATION FOR
PLS PRODUCTSIV
Final Hearing – Undergraduate Thesis“Pricing Determination for PLS Products in Islamic Banking”Oct 2nd 2014/Dzulhijjah 7th 1435 H
Cost of FundCost of
Loanable Fund
Cost of Money
Cost of Money Risk Spread Nisbah
Based on Bank and Financial Institution Management: Conventional & Sharia System Rival et al (2007)
Calculate the Cost of Fund Rate Adjust the Risk rate
Determine the Spread for PLS
products
Sum the Cost of Fund, Risk, and the
spread to obtain the Nisbah percentage
PRICING DETERMINATION FOR
PLS CONTRACTS POLICYIV
Final Hearing – Undergraduate Thesis“Pricing Determination for PLS Products in Islamic Banking”Oct 2nd 2014/Dzulhijjah 7th 1435 H
IV
Final Hearing – Undergraduate Thesis“Pricing Determination for PLS Products in Islamic Banking”Oct 2nd 2014/Dzulhijjah 7th 1435 H
Cost of Fund
Cost of Loanable Fund
Cost of Money
𝐶𝑜𝑠𝑡𝑜𝑓 𝐹𝑢𝑛𝑑= h𝑇 𝑖𝑟𝑑 𝑃𝑎𝑟𝑡𝑖𝑒𝑠 𝐹𝑢𝑛𝑑× h𝑁𝑖𝑠𝑏𝑎 𝐹𝑢𝑛𝑑𝑖𝑛𝑔𝑅𝑎𝑡𝑒
𝐶𝑜𝑠𝑡𝑜𝑓 𝑀𝑜𝑛𝑒𝑦=𝐶𝑜𝑠𝑡𝑜𝑓 𝐿𝑜𝑎𝑛𝑏𝑎𝑙𝑒𝐹𝑢𝑛𝑑× h𝑂𝑣𝑒𝑟 𝑒𝑎𝑑𝐶𝑜𝑠𝑡
Based on Bank and Financial Institution Management: Conventional & Sharia System Rival et al (2007)
COST OF FUND CALCULATIONPRACTICE AT PT ISLAMIC BANK XYZ
IV
Final Hearing – Undergraduate Thesis“Pricing Determination for PLS Products in Islamic Banking”Oct 2nd 2014/Dzulhijjah 7th 1435 H
Base Offer Rate
Overhead Cost
Cost of Fund
Analysis between Practice & Theory:• PT Islamic Bank XYZ did not use Cost of Loanable & Cost of Money as a form.• Nevertheless, essentially there is no contradictory between practice & theory.• This action is taken by PT Islamic Bank XYZ as a simplification from theory to the practice.
COST OF FUND CALCULATION (cont’d)PRACTICE AT PT ISLAMIC BANK XYZ
IV
Final Hearing – Undergraduate Thesis“Pricing Determination for PLS Products in Islamic Banking”Oct 2nd 2014/Dzulhijjah 7th 1435 H
RISK ADJUSTMENTPRACTICE AT PT ISLAMIC BANK XYZ
Credit RiskEquity
Investment Risk
Market Risk
Liquidity Risk Rate of Return Risk
Operational Risk
Based on Adapting Risk Management for Profit Loss Sharing Financing of Islamic Banks Febianto (2012)
IV
Final Hearing – Undergraduate Thesis“Pricing Determination for PLS Products in Islamic Banking”Oct 2nd 2014/Dzulhijjah 7th 1435 H
RISK ADJUSTMENT (cont’d)PRACTICE AT PT ISLAMIC BANK XYZ
Credit Risk
Affect in Spread Determination• Based on Customer
Performance
Market Risk
Currency Risk• Based on Currency
Fluctuations
Liquidity Risk
Liquidity Premium• Based on Tenors
FUND TRANSFER PRICING TABLEPT ISLAMIC BANK XYZ
TENOR COST OF FUND LIQUIDITY RISKCURRENCY RISK
(IDR/USD)BASE LENDING
RATEO/N 5,88% 0,65% 0,93%/0,23% 6,53%1W 6,31% 0,75% 0,93%/0,23% 7,06%2W 6,56% 0,87% 0,93%/0,23% 7,43%1M 7,86% 1,01% 0,93%/0,23% 8,87%2M 8,20% 1,06% 0,93%/0,23% 9,26%3M 8,36% 1,11% 0,93%/0,23% 9,47%4M 8,54% 1,15% 0,93%/0,23% 9,69%5M 8,55% 1,18% 0,93%/0,23% 9,73%6M 8,56% 1,21% 0,93%/0,23% 9,77%7M 8,57% 1,21% 0,93%/0,23% 9,78%8M 8,57% 1,21% 0,93%/0,23% 9,78%9M 8,59% 1,21% 0,93%/0,23% 9,80%
10M 8,60% 1,21% 0,93%/0,23% 9,81%11M 8,62% 1,21% 0,93%/0,23% 9,83%1Y 8,72% 1,21% 0,93%/0,23% 9,93%2Y 8,77% 1,21% 0,93%/0,23% 9,98%3Y 9,03% 1,21% 0,93%/0,23% 10,24%4Y 9,17% 1,21% 0,93%/0,23% 10,38%5Y 9,32% 1,21% 0,93%/0,23% 10,53%
Final Hearing – Undergraduate Thesis“Pricing Determination for PLS Products in Islamic Banking”
Oct 2nd 2014/Dzulhijjah 7th 1435 H
Source:Fund Transfer Pricing Table per July 4th 2014
PT Islamic Bank XYZ
IV
Final Hearing – Undergraduate Thesis“Pricing Determination for PLS Products in Islamic Banking”Oct 2nd 2014/Dzulhijjah 7th 1435 H
SPREAD DETERMINATION FOR PLS CONTRACTSPRACTICE AT PT ISLAMIC BANK XYZ
Financial Factors
• The Target of Financing• The Volume of
Financing• Profitability Target• Return on Risk Asset
Non – Financial Factors
• Performance of Customers (Track Record, Collectability, etc.)
Other Factor: Review Nisbah
• Avoid the possibility of Negative Spread
• Maintain the Competitiveness of Bank
• Increase the Profitability of Bank
IV
Final Hearing – Undergraduate Thesis“Pricing Determination for PLS Products in Islamic Banking”Oct 2nd 2014/Dzulhijjah 7th 1435 H
COMPETITIVENESS OF PLS CONTRACTSPRACTICE AT PT ISLAMIC BANK XYZ
Price Control
Product Innovation
Service Quality
IV
Final Hearing – Undergraduate Thesis“Pricing Determination for PLS Products in Islamic Banking”Oct 2nd 2014/Dzulhijjah 7th 1435 H
PROBLEMS OF PLS CONTRACTSIN PT ISLAMIC BANK XYZ
Monitoring Legal Risk
CONCLUDINGREMARKSV
Final Hearing – Undergraduate Thesis“Pricing Determination for PLS Products in Islamic Banking”Oct 2nd 2014/Dzulhijjah 7th 1435 H
• Pricing Determination for PLS products in PT Islamic Bank XYZ:o Nisbah: Spread + Base Lending Rate
o Base Lending Rate: Liquidity Premium + Currency Risk + Cost Of Fundo Cost of Fund: Base Offer Rate + Overhead Cost
• Competitiveness in PT Islamic Bank XYZ:o Competitive Strategy: Price Control, Product Innovation, & Service Qualityo Related Problems : Monitoring and Legal Risk
RECOMMENDATION& RESEARCH
LIMITATIONV
Final Hearing – Undergraduate Thesis“Pricing Determination for PLS Products in Islamic Banking”Oct 2nd 2014/Dzulhijjah 7th 1435 H
Recommendation• PT Islamic Bank XYZ should distinguish the
terms of Cost of Fund, Cost of Loanable Fund, and the Cost of Money. It’s easier to look the efficiency of Cost of Fund & Overhead Cost since the efficiency in Banking is an important issue which needs to be maintained.
Limitation• This research has a limited access to the
data. PT Islamic Bank XYX cannot clearly emphasize the calculation of cost of fund (method used and simulation) because the restriction to the data (confidential and only for internal user)
CRITICS&
ADVICES
THANK YOU
RD. Anggara NaturaS.1014.003
[email protected]+62-815-1318-1513
Final Hearing – Undergraduate Thesis“Pricing Determination for PLS Products in Islamic Banking”Oct 2nd 2014/Dzulhijjah 7th 1435 H