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Mohd Johan Lee J. Lee & Associates For Kowloon Mosque & Islamic Centre.

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Presentation on theme: "Mohd Johan Lee J. Lee & Associates For Kowloon Mosque & Islamic Centre."— Presentation transcript:

1 Mohd Johan Lee J. Lee & Associates For Kowloon Mosque & Islamic Centre

2  Sources of the Shariah  Framework of Islamic Finance  Shariah, Fiqh & Mu’amalat  Necessary Requirements of Islamic Finance  Riba, Gharar, Maysir & Others  Essential Contracts in Islamic Finance  Products and Instruments 3/17/2012 2 (c) Mohd Johan Lee 2012

3  Primary Sources  The Holy Quran  Sunnah (the sayings, deeds and endorsements of Prophet Muhammad PBUH) 3/17/2012 3 (c) Mohd Johan Lee 2012

4 Secondary Sources (mostly by the exercise of Ijtihad (reasoning by the learned))  Ijma (Unanimous decision of the Ulama)  Qiyas (analogy)  Istishan/ Istihab (equity in Islamic law)  Maslahah (necessity of the people)  Surdul Dara’ih (Blocking the means)  U’ruf (custom) 3/17/2012 4 (c) Mohd Johan Lee 2012

5  In general, the framework of Islamic finance is the same framework used by the conventional finance practices.  These frameworks are, inter alia legal and regulatory framework, taxation framework, accounting and auditing standards, etc.  Might have different or additional framework, such as accounting and auditing standard, etc, due to its peculiarity.  In certain jurisdiction, Islamic banking and finance might be regulated by different sets of regulations, either separate or additional, e.g. IBA 1983 3/17/2012 5 (c) Mohd Johan Lee 2012

6  However, Islamic Finance, as the name suggests, has another framework, which is considered the major element that differentiates IBF from the conventional banking and finance.  Any violation of this framework will definitely effect the validity of Islamic finance itself.  Shariah Compliance Framework 3/17/2012 6 (c) Mohd Johan Lee 2012

7  Three main interrelated terminologies: Shariah, Fiqh & Muamalat  Shariah, when viewed from legal perspective is the fixed elements of Islamic law, i.e. what has been clearly stipulated and mentioned in the text. E.g. five time prayers, prohibition of riba’, etc.  As such, it is revealed in nature 3/17/2012 7 (c) Mohd Johan Lee 2012

8  Shariah, in this sense, is wide and encompassing various branches of Islam  Normally, it comes in its generality and it emphasizes only on the principles and not the detailed rules (not all the time)  It is the duty of the judge (qadi), mufti and jurisconsult (ulama’) to exert their intellectual efforts in deriving and applying these principles on certain given scenarios.  The result of human reasoning and understanding to the shariah is known as fiqh  Fixed v. Flexible  Agreements v. Differences 3/17/2012 8 (c) Mohd Johan Lee 2012

9  However, in its general usage, it is called al-syariat al-Islamiyyah (Islamic law).  Islamic commercial law is one of the components of Islamic law  Other components of Islamic law include:  Islamic law of purification and worship  Islamic family law  Islamic criminal law  Islamic law of evidence and procedure  Islamic law of inheritance, etc  The main subjects of Islamic commercial law are commercial contracts and the rules governing them 3/17/2012 9 (c) Mohd Johan Lee 2012

10  Original rule of permissibility: - Initial legal ruling in commercial contract is permissibility - Contrary to acts of devotion (Ibadat) - No legal injunction is needed in sanctioning new contract - Every contract is considered lawful and acceptable if no principle of shari’ah is violated - Open a very wide door for further innovations  Real Economic Activities  Transactions-oriented not loan-based. 3/17/2012 10 (c) Mohd Johan Lee 2012

11 WHAT AMOUNTS TO SHARI`AH COMPLIANCE?  In Islamic jurisprudence, the main source of law is the Shari`ah or Islamic law as contained in the Quran and Sunnah  Underlying rule: all contracts are deemed permissible except when there is contravention of any established principles of Islamic law / Shari`ah  Legal maxim (qa`idah fiqhiyyah): “Al Asl fi al `Uqud al Ibahah” - “the original rule in contracts is permissibility”  The parameter: Avoidance of any contravention of the established principles and prohibitions in Islamic law 3/17/2012 11 (c) Mohd Johan Lee 2012

12  Conclusion of contract by mutual consent  The avoidance of riba’  The avoidance of gharar  The avoidance of transactions involving maysir (gambling)  The avoidance of transactions involving prohibited commodities 3/17/2012 12 (c) Mohd Johan Lee 2012

13 WHAT TO BE AVOIDED  Riba – prohibited in many Quranic verses and sayings of the Prophet s.a.w.  Meaning: riba is every excess in return of which no reward or equivalent counter value is paid, in short, every unjust enrichment is riba 3/17/2012 13 (c) Mohd Johan Lee 2012

14  Literally: excess, expand, increase, growth  Any unjustified excess above and over the capital, whether in loans (between creditor and debtor) or in trade (with similar commodities) 3/17/2012 14 (c) Mohd Johan Lee 2012

15 PROHIBITION OF RIBA IN THE QURAN First Stage (30:39) (30:39) First Stage (30:39) (30:39) Second Stage (4:160-161) (4:160-161) Third Stage (3:130) (3:130) Fourth Stage (2:275-281) (2:275-281) Compare riba with zakat & charity Praising zakat & charity, not riba Attaching the practice of riba with the Jews Consider the practice as an iniquity (zulm) Prohibiting the practice of charging double and multiple riba Conclusively prohibiting all forms of riba Any excess over the capital is disallowed 4 STAGES 3/17/2012 15 (c) Mohd Johan Lee 2012

16  “and that which you give in gift (to others), in order that it may increase (your wealth by expecting to get a better one in return) from other people’s property, has no increase with Allah…” 3/17/2012 16 (c) Mohd Johan Lee 2012

17  “… and their taking of Riba though they were forbidden from taking it and their devouring of men’s substance wrongfully…. and we have prepared... a painful torment.” 3/17/2012 17 (c) Mohd Johan Lee 2012

18  “O you who believe, Eat not Riba doubled or multiplied, but fear Allah that you may be successful.” 3/17/2012 18 (c) Mohd Johan Lee 2012

19  “those who eat riba will not stand (on the Day of Resurrection) except like the standing of a person beaten by Shaitan leading him to insanity. That is because they say: trading is only like Riba,” whereas Allah has permitted trading and forbidden Riba. So whosoever receives an admonition from his Lord and stops eating Riba, shall not be punished for the passt; his case is for Allah (to judge); but whoever returns (to riba), such are the dwellers of the Fire – they will abide therein forever. 3/17/2012 19 (c) Mohd Johan Lee 2012

20  Allah will destroy riba and will give increase for sadaqat (deeds of charity, alms).  ….  O you who believe, be afraid of Allah and give up what remains (due to you) from Riba (from now onward), if you are really believers 3/17/2012 20 (c) Mohd Johan Lee 2012

21  And if you do not do it, then take a notice of war from Allah and hiss Messenger but if you repent, you shall have your capital sums. Deal not unjustly (by asking more than our capital sums), and you shall not be dealt with unjustly (by receiving less than your capital sums). 3/17/2012 21 (c) Mohd Johan Lee 2012

22  And if the debtor is in a hard time (has no money), then grant him time till it is easy for him to repay; but if you remit it by way of charity, that is better for you if you did but know.  And be afraid of the Day when you shall be brought back to Allah. Then every person shall be paid what he earned, and they shall not be dealt with unjustly. 3/17/2012 22 (c) Mohd Johan Lee 2012

23 CONT’D…  There are also a number of narrations from the Sunnah on the prohibition of riba  Some of the narrations give general prohibitions of riba, e.g.: “The Prophet of Allah s.a.w. cursed the receiver and the payer of riba, the one who records it and the two witnesses to the transaction and said: they are alike (in guilt)”. 3/17/2012 23 (c) Mohd Johan Lee 2012

24  Under Islamic law, riba can occur in two main situations, i.e.:  riba al duyun (loan): the riba or excess which occurs in debt and loan transactions because of extension/delay in repayment  riba al buyu` (exchange): the riba or excess which occurs in trading transactions involving the exchange of riba-bearing commodities without observing the required rules 3/17/2012 24 (c) Mohd Johan Lee 2012

25 PROHIBITION OF RIBA (LOAN) Interpretative Efforts What amounts to TradeTradeUsuryUsury Criteria ■ Oppressive / unfair distribution of risk & return ■ Unjustified enrichment at expense of othersCriteria ■ Fair exchange of goods or value ■ Fair distribution of risk & return Surah al-Baqarah, ayat 275 “ … But Allah hath permitted trade and forbidden usury Surah al-Baqarah, ayat 275 “ … But Allah hath permitted trade and forbidden usury 3/17/2012 25 (c) Mohd Johan Lee 2012

26 PROHIBITION OF RIBA (EXCHANGE) Interpretative Efforts Application Staple Food Rules ■ Same Type ■ At Par ■ Spot ■ Different Type ■ SpotRules ■ Same denomination ■ At Par ■ Spot ■ Different denomination ■ Spot CurrencyCurrency Sunnah of the Prophet: Gold for gold, silver for silver, wheat for wheat, barley for barley, dates for dates, salt for salt - like for like, equal for equal, and hand-to-hand (spot); if the commodities differ, then you may sell as you wish, provided that the exchange is hand-to-hand or spot transaction.” Sunnah of the Prophet: Gold for gold, silver for silver, wheat for wheat, barley for barley, dates for dates, salt for salt - like for like, equal for equal, and hand-to-hand (spot); if the commodities differ, then you may sell as you wish, provided that the exchange is hand-to-hand or spot transaction.” 3/17/2012 26 (c) Mohd Johan Lee 2012

27 SUMMARY OF RULES UNDER THE HADITH money 1 + money 1money 1 + money 1 = 2 conditions: –Equality –Hand-to-hand food 1 + food 1food 1 + food 1 = 2 conditions: –Equality –Hand-to-hand money 1 + money 2money 1 + money 2 = 1 condition: –Hand-to-hand food 1 + food 2food 1 + food 2 = 1 condition: –Hand-to-hand money + foodmoney + food =No condition – free trading others + othersothers + others =No condition – free trading 3/17/2012 27 (c) Mohd Johan Lee 2012

28 CONT’D…  In contemporary finance, riba can occur in:  All interest-based lending activities (e.g. all conventional bonds)  Fixed return on deposits in conventional banking (e.g. designated accounts for receivables of the bonds)  In the secondary trading of debt securities – if the transaction is not spot & if there is discounting (according to global Shari`ah standard)  Thus, to be Shari`ah compliant, all contracts in Islamic finance cannot be involved in any of the usurious activities mentioned above 3/17/2012 28 (c) Mohd Johan Lee 2012

29  Literally: excess, expand, increase, growth  Any unjustified excess above and over the capital, whether in loans (between creditor and debtor) or in trade (with similar commodities) 3/17/2012 29 (c) Mohd Johan Lee 2012

30 Riba’ al-Duyun (RIba’ in Loan Contract) Riba’ al-buyu’ Riba in exchange (Riba in exchange contracts contracts ) 3/17/2012 30 (c) Mohd Johan Lee 2012

31  The debtor borrowed money to be paid in certain time, and the amount is more than the amount borrowed  A creditor gives a periodic loan and takes monthly interest. The capital sum lasts until the expiration of the period. Upon expiry, if the debtor cannot pay, the period to pay back the capital will be extended and interest will be charged  Arising out of exchange contract, a buyer must pay a consideration. If he failed to settle on time, the period will be extended by increasing the amount (principle + interest). 3/17/2012 31 (c) Mohd Johan Lee 2012

32  Mainly based on the saying of the Prophet: “Gold for gold, silver for silver, wheat for wheat, barley for barley, dates for dates, and salt for salt; like for like, hand to hand, in equal amounts; and any increase is riba’”. 3/17/2012 32 (c) Mohd Johan Lee 2012

33  These commodities can be classified under two main categories which make the illah (ratio decidendi) for their prohibition: - i- medium of exchange (currency): Gold and Silver -ii- Staple foods: Wheat, barley, dates and salt  Any other items, even though not mentioned in the hadith but serve the same purpose will be considered as having the same illah by way of qiyas (analogy) 3/17/2012 33 (c) Mohd Johan Lee 2012

34  Riba’ al-duyun in loans and certain controversial contracts (bay’ al-’inah, bay’ al- dayn, etc)  Riba’ al-buyu’ mainly in bay’ al-sarf (exchange of currencies) 3/17/2012 34 (c) Mohd Johan Lee 2012

35  Meaning of gharar: - Literally: risk, uncertainty, hazard - The sale of probable item whose existence or characteristics are not certain, due to the risky nature which makes the trade similar to gambling 3/17/2012 35 (c) Mohd Johan Lee 2012

36  Sale of fish in the sea, birds in the sky  Sale of unborn calf in its mother’s womb  Sale of runaway animal, slave  Involve item which may or may not exist  However, the Prophet did not lay down the principles (qawa’id) for the prohibition of gharar.  Examples given in the hadith were some of the manifestations of the doctrine, but not principles.  This has led to the dispute among jurists on the area and coverage of gharar. 3/17/2012 36 (c) Mohd Johan Lee 2012

37 GHARAR  Meaning: has a range of negative connotations, such as, uncertainty, deception, risk, hazard, ignorance etc.  If there is gharar, the contracting party/ies do not really understand the attributes / consequence of the contract  Under Islamic law, gharar is prohibited because its existence in the contract may deny the parties of equal bargaining power and they cannot make informed decisions; or if there is risks on deliverability of the object of the contract 3/17/2012 37 (c) Mohd Johan Lee 2012

38 PROHIBITION OF GHARAR Interpretative Efforts What amounts to Trade by Mutual Consent Criteria ■ Offer & Acceptance, indicating consent ■ Elimination of mistake, fraud etcCriteria ■ All illegal & defective elements in contracts including gharar & uncertainty Unjust (batil) Surah an- Nisa’: ayat 29 “ … squander not your property amongst yourself unjustly (batil) except it be a trade among you by mutual consent…” Surah an- Nisa’: ayat 29 “ … squander not your property amongst yourself unjustly (batil) except it be a trade among you by mutual consent…” 3/17/2012 38 (c) Mohd Johan Lee 2012

39 PROHIBITION OF GHARAR IN THE SUNNAH  The sunnah uses the word gharar and its derivatives much more extensively than the Qur`an in the sense that several new meanings are added  In relation to commercial transactions, the Prophet s.a.w. in many of his sayings directly prohibited the sale involving gharar (uncertainty) and jahalah (ignorance)  Thus, the prohibition of gharar is made conclusive by the sunnah / hadith of the Prophet s.a.w.  Examples: the prohibition of gharar sale (i.e., the sale contract affected by gharar), the prohibition of the sale of fish in the sea, bird in the air, unborn animals, lost items, etc. 3/17/2012 39 (c) Mohd Johan Lee 2012

40 CONT’D…  In Islamic law, gharar can be of two degrees:  Excessive or major (gharar fahish)  Minor and tolerable (gharar yasir)  Only major /excessive gharar will affect the validity of contracts, where it will render the contract void / voidable, depending on the degree of uncertainty  Gharar affects trading and exchange contracts (mu`awadat); not charitable and unilateral contracts  In banking & finance – gharar can be triggered e.g. – in the sale contract to create the indebtedness if the asset used is uncertain / vaguely identified; the trading of a securitised debt which is unconfirmed / not established, sale of insurance policy 3/17/2012 40 (c) Mohd Johan Lee 2012

41  Broadly speaking, gharar will effect the validity of contract if it occurs in these areas: - gharar in kind / type / attribute / quantity of the object - gharar due to delivery time - gharar due to the price/ mode of payment - doubt over the ability to deliver 3/17/2012 41 (c) Mohd Johan Lee 2012

42  Gharar which is excessive (gharar fahish) occurs in exchange contracts (‘uqud al- mu’awadat)  To prevent gharar, the parties to contract must have adequate knowledge and information on the subject matter: i- Their existence and deliverability ii- Its quality, quantity and attributes are known iii- Time –frame for payment and delivery 3/17/2012 42 (c) Mohd Johan Lee 2012

43  However, gharar is tolerable if: - i) it is trivial (gharar yasir) - ii) It occurs in other than exchange contracts, such as in gratuitous contracts. -iii) It happens to the ancillary object (appendages) only (not the principal and main subject matter of contract) - iv) the economic need for the contract embodying the risk is substantial 3/17/2012 43 (c) Mohd Johan Lee 2012

44 OTHER THINGS TO BE AVOIDED…  Transactions involving the prohibited commodities, e.g., pork and liquor  Surah al Maidah (5:3)  Surah al Maidah (5:90)  Transactions involving gambling or maysir/qimar  Surah al Maidah (5:90) 3/17/2012 44 (c) Mohd Johan Lee 2012

45  Involves the creation of risk for the sake of risk  A combative relationship between two contracting parties, each of whom undertakes the risk of loss and the loss of one means gain for the other  Apply to all games of pure chance  No economic activities are gained in the practice. The gambler will simply seek to amass wealth without efforts.  Gambling is gharar in its worst scenario.  Prohibited by al-Qur’an in Surah al-Maidah (5:90) 3/17/2012 45 (c) Mohd Johan Lee 2012

46  It is also not allowed to conclude contract on illegal commodities such as pork, liquor etc.  Illegality of certain commodities has been spelt out clearly in the texts of al-Qur’an and Sunnah of the Prophet.  E.g. : - Surah al-Maidah (5:3) - Surah al-Maidah (5: 90) 3/17/2012 46 (c) Mohd Johan Lee 2012

47  Underlying principles utilised in devising products of IBF is very important as they separate IBF from conventional products.  Contrary to conventional finance, which is specification driven product, Islamic finance is more structure and principle based product  Rules and regulations will differ from one product to another, depending on the structure employed  In general, various underlying Shariah principles have been utilised in devising products of Islamic Banking and Finance.  They can be summarised as below: - Sale based products - Lease based products - Participatory products - Fee based products 3/17/2012 47 (c) Mohd Johan Lee 2012

48  Banking products  IIMM products  Capital Market Products 3/17/2012 48 (c) Mohd Johan Lee 2012

49 SHARI`AH COMPLIANCE: MAIN PRINCIPLES Mutual consent AvoidAvoid Interest (riba) Uncertainty (gharar) Gambling (maysir/qimar) Other prohibitions e.g. Liquor, pork Lawful Contractual Objective Objective CONTRACTSCONTRACTS 3/17/2012 49 (c) Mohd Johan Lee 2012

50 ENCOURAGEMENT OF TRADE BY MUTUAL CONSENT  The Quran encourages work and trade  The Prophet (s.a.w.) himself was a trader  The encouragement of trade is evidenced by the many instruments of trade available during the Prophet's lifetime and in Islamic history thereafter 3/17/2012 50 (c) Mohd Johan Lee 2012

51 BUSINESS CONTRACTS RECOGNISED IN ISLAM  Contracts of sale and purchase (bay`), including all its subdivisions, like:  normal or spot sale  mark-up sale (murabahah)  deferred payment sale (BBA)  sale with advance payment but deferred delivery (bay` al salam)  sale for future delivery of goods with flexible payment of the price or manufacturing contracts (bay` al istisna`)  sale of currency (sarf), etc. 3/17/2012 51 (c) Mohd Johan Lee 2012

52 CONT’D…  Some controversial sales:  Sell and buy back (bay’ al `inah)  Sale of Sale of debt (bay` al dayn)  Islam recognises partnership contracts which are mainly based on profit and loss sharing (PLS), e.g.:  mudharabah  musharakah  A relatively new invention in this regard is:  Musharakah mutanaqisah 3/17/2012 52 (c) Mohd Johan Lee 2012

53 CONT’D…  Islam recognises public and private project financing, e.g.:  Leasing (ijarah) - private;  Endowment (waqf) – private/public;  State treasury (bayt al mal) – public.  Modern forms of private project financing:  Operational lease  Financial lease – AITAB (hybrid contract) 3/17/2012 53 (c) Mohd Johan Lee 2012

54 CONT’D…  Islam recognises other additional contracts to provide security to the parties in a contract, i.e., the contracts of security (`uqud al tawthiqat), e.g.:  suretyship/guarantee (kafalah): involves three parties  mortgage (rahn): involves two parties  These security contracts are normally combined with other types of contracts, e.g.:  the contract of BBA may be secured by a contract of security involving collateral (rahn)  Other contracts recognised in Islamic law:  contracts of trusts (al amanat), e.g.: safe-keeping (wadi`ah)  contracts to do a specified task, e.g.: commision (ju`alah); agency (wakalah) 3/17/2012 54 (c) Mohd Johan Lee 2012

55 Gratuitous Contracts Trading Contracts Investment Contracts Supporting Contracts Leasing Sale Bay` Bithaman Ajil (BBA) Operational Lease Financial Lease Murabahah Salam Waqf Loan Mudarabah Musharakah Kafalah Rahn Hiwalah Wadiah Wakalah Jualah Muqasah Ibra’ Gift Istisna’ etc. 3/17/2012 55 (c) Mohd Johan Lee 2012

56 Islamic Banking SOURCES OF FUND APPLICATIONS OF FUND 3/17/2012 56 (c) Mohd Johan Lee 2012

57 3/17/2012(c) Mohd Johan Lee 2012 57 EQUITY FINANCING DEBT FINANCING Fee Based Services Wakalah Kafalah Sale based financing BBA / Murabahah ‘Inah/Tawaruq/dayn Salam Istisna Lease Based Financing -Ijarah -AITAB Comsumer Banking Mudharabah Musharakah Corporate Banking

58 ISLAMIC CAPITAL MARKET Equity Market Bond Market Derivatives Market? Musyarakah Mudarabah -Debt Based -ABS -Equity Based -Future Contract -Options -Swap Mutual Fund / Islamic REITs Wakalah / mudarabah / musharakah Islamic Hedge Fund 3/17/2012 58 (c) Mohd Johan Lee 2012

59  Besides various frameworks applied to banking practices (be it Islamic or conventional), Shariah framework is a framework which is peculiar to Islamic finance alone  Yet, it forms the very substance of Islamic finance, without which Islamic finance will loss its Islamicity  As such, in practicing Islamic finance, the do’s and don’ts must be clearly observed  Islamic commercial law, from the fact that it subjects to human interpretation and understanding admits differences of opinion, as long as these differences are grounded by valid evidence, produced by capable personnel, done according to the right methodology 3/17/2012 59 (c) Mohd Johan Lee 2012

60  Derives from the word Kafalah, a verb, which means to bail, guarantee, warrant or to secure ones need.  Means Joint Guarantee.  An arrangement between members of community to jointly guarantee each other should mishaps befall to any of them 3/17/2012(c) Mohd Johan Lee 2012 60 FOR MORE INFO... Al Mawrid: A Modern Arabic-English Dictionary, Dar-el-Ilm Lilmalayin, Beirut, Lebanon, 1991

61  National Fatwa Committee in Malaysia resolved that the present-day life insurance business provided by the conventional insurance companies was not in line with the principles of Shariah as it contains elements which are against Islam such as Riba (Usury), Gharar (uncertainty) and Maisir (Gambling). ~~~ June 1972 3/17/2012(c) Mohd Johan Lee 2012 61

62  Perak Fatwa Committee subsequently also declared that: “life insurance is not permissible as it is based on riba from which the profits of policyholders are derived. The policyholders must pay premiums for an indeterminate period which lead to the element of gharar (uncertainty)”. 3/17/2012(c) Mohd Johan Lee 2012 62

63  Takaful started some 30 years ago in the Middle East with the launching of two companies in 1979:  The Islamic Arab Insurance Co. (IAIC) in the UAE and  The Islamic Insurance Co. of Sudan  But it took some time for the movement to take shape.  Later in 1984, Malaysia played a pioneering role in setting the first Legal framework specific to Takaful (Takaful Act Malaysia).  This was instrumental in the successful launching of the Takaful movement in Malaysia and in other countries of South East Asia. 3/17/2012(c) Mohd Johan Lee 2012 63

64  Other markets such as the Sudan and Iran have Islamic regulatory environments and became naturally Takaful markets.  In Pakistan Takaful Act is enacted in 2005.  In the Gulf countries specific Takaful legislations are coming through in Bahrain and in Saudi Arabia 3/17/2012(c) Mohd Johan Lee 2012 64

65 From a handful of operators two decades ago the Takaful movement has blossomed into a fast growing phenomenon in many Muslim countries with very promising prospects in other countries with a large Muslim community. 3/17/2012(c) Mohd Johan Lee 2012 65

66 This movement is driven by  a strong demand from a public who would not insure otherwise (because of religious beliefs); and  The successful development of Islamic banking institutions providing capital and Islamic financial instruments for asset management and investment. 3/17/2012(c) Mohd Johan Lee 2012 66

67  Islamic banks and financial institutions play a strategic and important role in the distribution of Takaful products (especially Life Takaful Products).  Just as Bancassurance played an important role in the distribution of personal lines insurance products Bancatakaful is an important driver for Takaful. 3/17/2012(c) Mohd Johan Lee 2012 67

68 The number of Takaful operators worldwide is now estimated at:  150 Takaful companies operating in 40 countries  10 Retakaful companies and 6 Conventional Reinsurance companies have established Islamic windows.  Takaful is one of the fastest growing segments in insurance (at around 20% pa. on average)  World Takaful contributions are conservatively estimated at around US$ 3billions, of which:  60% General Takaful  40% Family Takaful 3/17/2012(c) Mohd Johan Lee 2012 68

69  South& East Asia :56%  Middle East :36%  Africa:7%  Europe, USA & Others:1% 3/17/2012(c) Mohd Johan Lee 2012 69

70  Takaful Business is based on the concepts of Mudarabah and Tabarru. Involvement of these two Islamic forms of business eliminates the elements of Riba from insurance contract and convert Gharar into tolerable form.  In Family Takaful each Takaful installment is divided and credited into two separate Accounts namely, the Participants' Account(PA) and the Participants’ Special Account(PSA). A substantial proportion of the installments is credited into the PA solely for the purpose of savings and investment. 3/17/2012(c) Mohd Johan Lee 2012 70

71  The balance of the installments is credited into the PSA as `tabarru' for Sharikah Takaful Malaysia to pay the Takaful benefits to the heir(s) of any participant who may die before the maturity of the contract.  The amount accumulated in the PA is invested in various business according to Islamic financing techniques, and the resultant profits are divided between the company and the participants according to the agreed upon ratio, e.g., 30-70.  The participant's share is calculated according to their individual share in the PA, and credited into their respective accounts, the PA and the PSA. 3/17/2012(c) Mohd Johan Lee 2012 71

72 Company’s Admin & Manag. Expenses Profit Attributed To Shareholders PA PSA FTF InvestmentProfit PA PSA Participant Company Takaful Contract based on Mudarabah 30% 70% Payment from PA Payment from PSA Mudarabah Model Family Takaful 3/17/2012(c) Mohd Johan Lee 2012 72

73 Should the Participant die or suffer Permanent and Total Disability in the fifth year of participation, Takaful benefit will be paid in the following manner:-  i. From Participant's Account =RM 4,890 (RM978 x 5) profit if any, say RM 400  ii. From Participants Special RM 5,000 Accounts (RM1000 x 5)  Total Takaful Benefit PayableRM 10,290 3/17/2012(c) Mohd Johan Lee 2012 73

74 Should the Participant survive until the maturity of his FTP, payment of Takaful benefit will be made to him as follows:- i.From his Participant's Account = RM 9,780 (RM978 x 10) profit from investment RM 1,800 ii. From Participants Special RM XXXX Account Total Takaful Benefit = RM 11,580 + surplus determined by Sharikah Takaful. 3/17/2012(c) Mohd Johan Lee 2012 74

75 3/17/2012(c) Mohd Johan Lee 2012 75 General Takaful

76 3/17/2012(c) Mohd Johan Lee 2012 76

77 Waqf Model 3/17/2012(c) Mohd Johan Lee 2012 77

78  Waqf is an Arabic word and it means to stop to withhold and not to let go.  In technical meaning Waqf means to allocate or donate some property or cash for a specific purpose to get pleasure of Allah and not to let it go through consumption or sale.  The Waqf property comes into ownership of Allah (SWT) and Waqif will have no property rights on it. 3/17/2012(c) Mohd Johan Lee 2012 78

79  Waqif has right to set the rules for Waqf and manage the Waqf.  Waqf may be general purpose or specific purpose, like Waqf ‘Ala al Aulad or Waqf ‘Ala al Aqarib.  In Islamic Law Waqf is a legal entity 3/17/2012(c) Mohd Johan Lee 2012 79

80 3/17/2012(c) Mohd Johan Lee 2012 80

81  A Waqf Fund would basically be a separate legal entity to which the Shareholders would initially make a donation to establish the Waqf Fund.  The donation can be of any reasonable amount (Shariah Board may specify such an amount).  The objectives of the Waqf fund would be to provide relief to participants against defined losses as per the rules of the Waqf fund. 3/17/2012(c) Mohd Johan Lee 2012 81

82 In this modified Wakala Model with Waqf, the relationship of the participants and of the operator is directly with the Waqf fund. The Operator is the Wakeel of the Waqf Fund and the participants pay one sided donation to the WAQF fund (not conditional) which also eliminates the issue of Gharar. The WAQF fund rules may define the sharing of surplus and other rules under which it would operate but there is no obligation to distribute surplus. Further the Qard would be given by the shareholders to the WAQF entity and not to individuals as in the typical Wakalah model. 3/17/2012(c) Mohd Johan Lee 2012 82

83  Despite the remarkable growth rate recorded by Islamic finance and Takaful industry, penetration is still far below the enormous market potential offered by the Muslim community worldwide (23% of the total world population). 3/17/2012(c) Mohd Johan Lee 2012 83

84  World Muslim population is estimated at 1.5 billions, of which around 97% are based in Asia and Africa.  A two-digit growth in the range of 15% to 20% can be reasonably sustained for at least the next 10 years in the existing markets (Far and Middle East). 3/17/2012(c) Mohd Johan Lee 2012 84

85  Markets like Europe, North and Latin America, Central Asia, Australia where large Muslim communities live are huge untapped reservoirs;  The recent opening towards “Islamic windows” in the banking sector in Europe is likely to be followed by “Takaful windows” initiatives. 3/17/2012(c) Mohd Johan Lee 2012 85

86  Islamic Finance and Takaful Products are not exclusive to Muslims.  Competitively priced and sold through the right channel it could attract any consumer irrespective of their origin or faith. 3/17/2012(c) Mohd Johan Lee 2012 86

87  Despite the challenges facing this “new” industry, exciting times are ahead once the latent potential is unleashed.  The success of Takaful largely depends on that of Islamic Financial institutions on a global basis. 3/17/2012(c) Mohd Johan Lee 2012 87

88 Mohd Johan Lee J. Lee & Associates  A-16-13, Tower A, Menara UOA Bangsar  59000 Kuala Lumpur  Tel:03-22881699 Fax:03-22881799   Also at: Kuala Terengganu & Penang 3/17/2012(c) Mohd Johan Lee 2012 88

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