PRINCIPLE OF MURABAHAH “Sale contract between the bank and its customer for the sale of goods at a price which includes the bank’s profit margin” Bank is the seller, Customer is the buyer. Murabahah = Cost Plus Common Mechanism = Deferred Lump Sum Sale
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
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 bank’s profit margin Customer repays by installments within agreed period
CONSUMER FINANCING PRODUCTS House Financing Study Financing Unit Trust Financing Other Consumer Financing Ü e.g Share Financing
LETTER OF OFFER Similar to Conventional Letter of Offer. The difference are:- Ü Pricing- Bank Purchase Price - Bank Selling Price Ü Repayment Ü Grace Payment Period Ü Security Documentation Ü Takaful Ü Penalty (compensation clause) Ü Opening of Wadiah Savings Account
PROPERTY WITH TITLE Property Purchase Agreement Property Sale Agreement Charge Document (Form 16A & Annexure)
PROPERTY WITHOUT TITLE Property Purchase Agreement Sale Agreement Cum Assignment Deed Of Assignment
COMPARISON BETWEEN CONVENTIONAL LOAN AND BBA FINANCING PRODUCTCONVENTIONAL BBA FEATURES LOAN FINANCING ConceptBase on loan principleBase on buy and sale (borrowing and lending)principle PricingPegged against BLRFixed profit rate applied RepaymentVaries as BLR Repayment is fixed fluctuates Total Amount Known only at the end Known upfront Payable of the period
OTHER CONSUMER FINANCING Example Share Financing Apply the principle of BBA, Murabahah
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
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
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
IJARAH (LEASING) This is IBD’s 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
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
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
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
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
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
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.
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 SMALL MEDIUM INDUSTRIES FINANCING (TIKS)
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, Bank’s profit margin is 2.5%.
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.
This financing is similar to Fund For Food in Conventional Banking. It involves two relationship:- Bank and customer Bank and Bank Negara SPI FINANCING UNDER FUND FOR FOOD (3F)
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, Bank’s profit margin is 3.0%.
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.
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, Bank’s profit margin is 4.0%.
ISLAMIC SECURITIZATION Requirement = Financing must be executed under any underlying financing contracts permitted under Syariah.
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)
In Malaysia, the common Islamic Securities is Debt Based Securitization. First Example Year 1990 Company Shell MDS Sdn. Bhd. Concept UsedBBA AmountRM125 million
STATISTICS(30/6/99) an Example of RHB 22 issues amounting to RM billion (excluding Malaysian Government/Government Agencies issuance) 15 issues of Islamic Commercial Paper Üamount RM billion 7 issues of Islamic Corporate Bonds Üamount RM billion
RHB GROUP ISLAMIC FINANCE INITIATIVE RHB Bank FacilityGas District Cooling (KLIA) Sdn. Bhd. Murabahah Notes Issuing Facility Year 1999 FunctionArranger AmountRM 207 million
RHB GROUP ISLAMIC FINANCE INITIATIVE RHB Sakura FacilitySarawak Shell Berhad Musyarakah Bond Year 1994 FunctionLead Arranger AmountRM 560 million
RHB GROUP ISLAMIC FINANCE INITIATIVE RHB Sakura FacilityPetronas Gas Berhad Islamic Debt Securities Year 1995 FunctionJoint Lead Manager AmountRM 800 million
RHB GROUP ISLAMIC FINANCE INITIATIVE RHB Sakura FacilityKLIA BBA Bonds Year 1997 FunctionCo-Advisor AmountRM 2.2 billion
RHB GROUP ISLAMIC FINANCE INITIATIVE RHB Sakura FacilityPetronas Gas Berhad Murabahah Notes Issuing Facility Year 1997 FunctionLead Arranger & Agent AmountRM 900 million
RHB GROUP ISLAMIC FINANCE INITIATIVE RHB Sakura FacilityPetronas Gas Berhad BBA Bonds Year 1999 FunctionLead Arranger AmountRM 500 million
PROPERTY FINANCING BBA based financing and Istisna’ based financing Common Tenors = 5 years to 7 years Reasons For BBA/Istisna’ = Lock in Cost
ASSET FINANCING Murabahah/BBA based financing Any form of tangible asset Receivables as a form of asset (Murabahah financing)
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
Internet allows businesses to reduce costs, increase efficiency and improve network of suppliers and customers. Online services have problems such as authorized access, user and system identification, data integrity and confidentiality - as well as e- mail virus, and hacking. Online services are allowed in Islam as long as they do not violate the rules and limitation that Allah (s.w.t) has laid down. Online Financial Services under Shari’ah
Smart Authorization Credit card processing with built-in fraud screening. Helps online merchants easily combat credit card fraud and process more valid orders automatically.
Credit Card Processing This solution enables secure, reliable, real-time card processing in multiple currencies. Major cards and card types are supported across multiple processors, worldwide.
Electronic Check Processing Businesses, academic institutions and government organizations can accept personal or business checks online, in real-time.
E-dinar E-dinar is the real gold dinar circulated electronically. It is 100% backed at all times by the physical gold dinars held securely in the internationally renowned repository.
Benefits of Online Financial Services: Availability (from anywhere and anytime) Convenience (of using the service) Efficiency (saves time and cost of communication)
Issues of Security in Online Services: Confidentiality (not been spoofed or viewed by third party) Authenticity (the dealing party is whom they claim to be and not fraud) Non-repudiation (not been able to undo what agreed upon)
Using a digital signature to validate data integrity
Digital timestamping Anyone who wants to verify the signing time then uses the certificate (along with an algorithm appropriate to and specified by the particular certificate) to verify that the time claimed is correct.
Certificate authorities (CAs) Certificate authorities (CAs) are entities that validate identities and issue certificates. They can be either independent third parties or organizations running their own certificate-issuing server software (such as Netscape Certificate Server).
Using a certificate to authenticate a client to a server
Secure Electronic Transmission (SET) The Secure Electronic Transmission (SET) protocol has been developed by the VISA and MasterCard banking consortia as a method for secure bank card transactions over open networks. It supports DES and triple DES for bulk data encryption and RSA for the public-key encryption of the secret keys and the bank card numbers. Although SET is considered extremely secure, this very security leads to its being relatively slow.
Shari’ah Aspects on Online Financial Services Reference to the Al-Quran and As-Sunnah Al-Ijma’, Al-Qiyas, Al-Istehsan and Masaleh al-Mursalah
Al-Quran Regarding the choice of infrastructure Ramadhan is the (month) in which was sent down the Qur'an, as a guide to mankind, also clear (Signs) for guidance and judgment (Between right and wrong). So every one of you who is present (at his home) during that month should spend it in fasting, but if any one is ill, or on a journey, the prescribed period (Should be made up) by days later. Allah intends every facility for you; He does not want to put to difficulties. (He wants you) to complete the prescribed period, and to glorify Him in that He has guided you; and perchance ye shall be grateful. (Al-Baqarah 2:185)
Regarding freedom of contract O ye who believe! fulfil (all) obligations. Lawful unto you (for food) are all four-footed animals, with the exceptions named: But animals of the chase are forbidden while ye are in the sacred precincts or in pilgrim garb: for Allah doth command according to His will and plan. (Al-Maidah 5:1)
Regarding protection of IP, data protection, digital signature and certificate O ye who believe! Eat not up your property among yourselves in vanities: But let there be amongst you Traffic and trade by mutual good-will: Nor kill (or destroy) yourselves: for verily Allah hath been to you Most Merciful! (An-Nisa 4:29)
As-Sunnah Regarding prevention from violation, computer crimes and privacy “Muslim is brother of Muslim. He does not betray him, he does not lie to him and he does not insult him” Regarding fraud in business dealings "It is not permissible to sell an article without making everything clear nor is it permissible for anyone who knows (about its defects) to refrain from mentioning them" (Baihaqi).
Conclusion Whatever that is good for human being, whatever that bring more benefits, are encouraged and permissible in Islam. Any regulation regarding the halal and haram in Islam is for the goodness for human beings themselves. Therefore, any deal or transaction is permissible in Islam as long as it does not contradict the rules and limitations imposed by Al-Quran and As-Sunnah.