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29/4/2011

AIBIM FORUM ON MUSHARAKAH MUTANAQISAH HOME FINANCING - i

Presentation by: y Nor Alida Yahaya


28th April 2011 Nirwana Ballroom 2, Lower Lobby Crowne Plaza Mutiara Kuala Lumpur
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AIBIM FORUM ON MUSHARAKAH MUTANAQISAH HOME FINANCING - i

CONTENTS 1. Overview of Product Structure

2. Modus Operandi

3. Product Features (sample) ( p )

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Musharakah Mutanaqisah Home Financing - i


Overview of Product Structure
Completed Properties Customer & Partner Bank jointly acquired and owned the k l d d d h house/property under the Musharakah Mutanaqisah Agreement. Upon acquisition, the house/property will be rented out to the Customer under Ijarah contract. Monthly payment paid by customer will be apportioned between y p y p y pp Customer and Partner Bank, whereby the Customers payment portion will be used to buy over shareholding of Partner Bank. Customer will also agree to buy over additional shares from Partner Bank on a monthly basis to ensure that Partner Bank shareholding is zerorised by the end of the Musharakah Mutanaqisah tenor.
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Musharakah Mutanaqisah Home Financing - i


Overview of Product Structure (continue)
Under Construction Properties Ijarah Mawsufah Fi Zimmah will be executed between Partner Bank and Customer, whereby Partner Bank will undertake to deliver the asset to the customer; a) Partner Bank & Customer Partner Bank taking the risk of the contractor/developer b) Partner Bank & Contractor/Developer Partner Bank taking the risk of a purchaser p Upon completion of the house/property, Mutanaqisah arrangement will take over. the Musharakah

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Musharakah Mutanaqisah Home Financing - i


IJARAH MAWSUFAH FI ZIMMAH is a form of Ijarah where the house/property is not available at the time of the contract. The house/property must be delivered on a future agreed date date. Also known as Forward Ijarah; whereby specified future usufruct to be leased out Rental payable (Advance Rental) may be fixed or varied according to an agreed benchmark for a specified period . Rental payment for Forward Ijarah may be in a single or on a staggered basis as agreed by both parties. Rental amount received by Partner Bank shall be earned only upon y y p effective delivery of the house/property of the leased asset to the lessee/customer.

Musharakah Mutanaqisah Home Financing - i


Modus Operandi Step 1
Partner Bank
Provide most of the capital to acquire the property Eg. 90%

Customer

Provide some capital to acquire the property Eg. 10%

Property to be acquired

Both Partner Bank + customer become partners in the ownership of the acquired property

STEP ONE
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Musharakah Mutanaqisah Home Financing - i


Modus Operandi Step 2

Partner Bank
Partner Bank will leased out its respective portion of the property to the Customer throughout the Ijarah Rental period Customer will pay monthly rental to Partner Bank throughout the Ijarah Rental period Property acquired jointly under q the Musharakah Mutanaqisah

Customer STEP TWO


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Musharakah Mutanaqisah Home Financing - i


Modus Operandi Step 3

Partner Bank
90% Partner Banks Shareholding reduce to 0% upon expiry of rental period

Customer
Monthly installment consist of rental payment for Banks leased portion of the property and gradual purchase of the Partner Banks equity in the property.
10% Customers Shareholding increase to 100% upon expiry of rental period i d

Asset

STEP THREE
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Musharakah Mutanaqisah Mechanics for Completed Property

Masharakah Mutanaqisah
Shariah Advisory Council (SAC) Resolutions The Th SAC i it 56th meeting in its ti held on 6 February 2006 has recognized the application of Musharakah mutanaqisah as a permissible contract in Islamic muamalat which inculcates the element of sharing in terms of capital and liability between the financier and customer.

% of share ownership of the banking Institution in property

(100-x)%, where x = customers share

Periodic rental payment (Rental is calculated based on banking Institutions prevailing share)

Lease rental & gradual transfer of banking institutions ownership


To Tn

Banking Institution

CUSTOMER
0%
Tm

Acquisition date

Maturity Date

Musharakah Mutanaqisah Home Financing - i


STAGE OF TRANSACTION Acquisition of property by both parties. Lease rental and gradual Transfer of banks ownership Full transfer of banks ownership to customers

CONTRACTUAL RELATIONSHIP

Partner Bank and customer enter into partnership contract to jointly purchase the property based on an agreed share ownership between them in the property.

Diminishing partnership and Ijarah (lease).

Transfer of full ownership of the property to the customers

KEY FEATURES

They are partners/joint owners of the property based on the preagreed ratio, e.g 10% will be paid by customer and the bank will pay the remaining 90%. The parties also agree on profit sharing ratios and the loss will be based on the proportion of each partys capital contribution.

Under Ijarah, customer pays the lease rental and gradually reduces the Partner Banks ownership (rental payment is inclusive of the use of asset and purchase of the Patner Banks share of the asset).The rental rate may be fixed or floating.

Full settlement of the agreed rental Allows early settlement of acquiring banks share of ownership.

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Application For Musharakah Mutanaqisah Home Financing - i

House Selection Stage

Application Stage

Customer select the house at RM500,000.

Option 1: 1. To sign the S&P and pay RM50,000 to seller/developer. 2. To apply for Musharakah Mutanaqisah facility of RM450,000 for 20 years. 3. The seller/developer need to sign the Supplementary Agreement with Partner Bank. Option 2: 1. To apply for Musharakah Mutanaqisah H M t i h Home Fi Financing f ilit i facility of RM450,000 for 20 years. 2. To pay RM50,000 to Partner Bank. 3. Partner Bank to sign the S&P and pay RM50,000 to the seller / developer.

Signs the financing documents: 1. 2. 3. Letter of Offer Musharakah Mutanaqisah Agreement Ijarah Agreement (for completed property) or Ijarah Mausufah Fi Zimmah Agreement (for house under construction) Agency Service Agreement Trust Deed

4. 5.

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Application For Musharakah Mutanaqisah Home Financing - i


Title Transfer Stage Disbursement Stage Leasing Stage

Upon approval of the MM Home Financing Facility, Partner Bank to submit the following documents to Pejabat Tanah & Galian, either: a) For Acquired House/Property to be held via a Legal Charge: 1) Form 16 A (Legal Charge) or b) For Acquired House/Property to be owned jointly via Transfer of Title 1. Application for Exemption of Section 433B, NLC (only applicable for a foreign Bank as the Partner Bank) Form 14A (In the name of the Bank as a trustee to the customers) The title will be registered under Partner Bank as a trustee to the MM Partnership as to protect the banks interest as the initial major Capital contributor.

Partner Bank will pay to the seller / developer for amount of RM450,000 as 90% of the banks contribution.

Partner Bank leases its 90% ownership to the customer under Ijarah for certain number of tenure. The total monthly rental that customer is to pay for renting the whole property will be apportion into 2 in accordance to the ratio of shareholding at any one point of time i.e. Customer portion which is used to purchase the Banks shareholding and the other portion is the Banks th B k portion which i paid t ti hi h is id to the bank as the banks income. The customer will also agree to purchase additional shares from Partner Bank on a monthly basis (if any required).

2.

Once the transfer has been completed, the amount of RM450,000 will be paid to the seller /developer.

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Rental Payment & Purchase of Musharakah Mutanaqisah Shares


Leasing Stage Musharakah Mutanaqisah Share Purchase

Partner Bank leases its 90% ownership to the customer under the Ijarah Agreement for certain number of tenure. Lease Rental calculated as follows: P x R% x T Where: P The banks remaining equities on the last day of the month preceding the Ijarah rental p g j payment date. R Financing rate. T 1/12 (monthly rest).

Customer purchases the Musharakah Mutanaqisah equities owned by Partner Bank on a monthly basis. This makes the customers share increase and Partner Banks share decrease. Thus the monthly installment payment by customer comprises of the following components: 1. Rental amount 2. Additional share purchase amount 3. Any other fees or charges

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MUSHARAKAH MUTANAQISAH HOME FINANCING - i


Product Features (SAMPLE)
Product Features Purpose Profit Sharing Ratio MUSHARAKAH MUTANAQISAH HOME FINANCING - i
For financing the purchase of landed property / strata property for both consumer and commercial (co p eted property a d u de co st uct o ) (completed p ope ty and under construction)

Specifying the profit sharing ratio for each partner together with the definition of profit of which will be in proportion to the capital contribution ratio at any one time. For Home Financing, the PSR will always be the same with the capital cntribution. All financial losses shall be borne by Partner Bank and customer at the percentage of capital contribution of each partner at the point the loss being recognize, unless it is due to negligence on the customers part. 1. Lease payment amount is fixed during the agreed Lease period. 2. The initial monthly lease payment amount (completed property) will be benchmarked against current payment of similar property in the same locality and/or also computed at an acceptable Internal Rate of Return (IRR) against the investment contributed by Partner Bank in the Musharakah arrangement. 3. Partner Bank reserves the right to revise the Lease payment amount in the future subject to the frequency of revisions, minimum and maximum revisable lease payment amount (quantum) is made known to the customer upfront during the execution of Ijarah Contract. 4. In the event there is an upward revision of the Lease payment, the customer will be notified of the revised rental amount and revised monthly installment so as to complete the equity purchase agreement payment within the earlier agreed duration.

Loss Sharing Ratio

Lease Payment

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MUSHARAKAH MUTANAQISAH HOME FINANCING - i


Product Features (SAMPLE)
Product Features Monthly Payment MUSHARAKAH MUTANAQISAH HOME & PROPERTY FINANCING - i Total monthly payment that Customer will pays to Partner Bank will consists of; Monthly lease payment (Banks portion) Payment sum to purchase additional equity/shares from Partner Banks shareholding. Any other fees, charges or Qardh repayment portion of the MRTA. The total monthly payment received will be apportioned respectively. For under construction property, the Advance Lease Rental will be charged based on total Percentage of completion against the period of under construction of the offered property and acceptable IRR to Partner Bank 1.Customer is allowed to purchase additional shares/equity in the proffered property anytime during the tenor of the Musharakah Mutanaqisah, in the quantum of thousands of Ringgit, in order to complete the financing tenor or early terminate the Musharakah Mutanaqisah Agreement. 2. 2 Partner Bank is also allowed to buy back the shares/equity from the Customer under a Customer, specific shares/equity buy back scheme during the Musharakah Mutanaqisah tenor, in order to provide cash flow assistance/refinancing to the customer. 3.Partner Bank reserves the right to revise the subsequent Lease payment amount in after the share buy back scheme subject to the revisable lease payment amount (quantum) be made known to the customer upfront during the execution of Ijarah Contract. The Customer will grant Partner Bank with a Purchase Undertaking whereby the Customer undertake to purchase the Asset at the Early Termination Lease amount in the event of any Event of Default and/or Event of Total Loss. Triggering the Purchase Undertaking will automatically transfer the ownership of the Asset back to the Customer. 15

Advance Lease Rental

Additional Purchase of Shares under the Musharakah Mutanaqisah Agreement

Purchase Undertaking

MUSHARAKAH MUTANAQISAH HOME FINANCING - I


Product Features (SAMPLE)
Product Features Sales Undertaking/ Prepayment MUSHARAKAH MUTANAQISAH HOME & PROPERTY FINANCING - i 1. Partner Bank will grant the Customer with a Sale Undertaking pursuant to which the Customer can purchase the Asset from the Partner Bank during the Lease Period subject to an agreed number of days of prior written notice to the Partner Bank or Bank, upon the Lease Maturity, by paying the Early Termination Lease amount, subject to the Customer meeting all of the terms and conditions of the Documentation. 2. Legal and beneficial title to the Asset shall immediately pass to the Customer upon the payment by the Customer of the Early Termination Lease amount. 1. Dispose the property and share the profit/loss arising from the sale of the property. 2. Manage the property and sell it at time when the market conditions improve. 3. Convert Partner Banks equity into debt by transferring all its remaining equity to the customer, of which in the event of default, the Bank will recover the indebtedness amount from the customer.

Options for Partner Bank If Monthly Payment Is Not Up To Date

Settlement of Liquidation of the Partner Banks contribution

1. The partnership will end with the intended purchaser owning 100% equity of the acquired asset.

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Product Features (SAMPLE)
Product Features Revolving Facility MUSHARAKAH MUTANAQISAH HOME & PROPERTY FINANCING - i Revolving Facility is allowed under this product (in order to provide cash flow assistance/refinancing to the customer) Under this arrangement, Partner Bank will buy back the shares/equity from the Customer and Partner Bank reserves the right to revise the subsequent lease rental amount. Beneficially held jointly by the Customer and Partner Bank However, the property shall be registered in the Partner Banks sole name on trust for the benefit of the Bank and the customer. Legal & beneficial title to the Property shall immediately pass to the customer upon full payment/acquisition of Partner Banks shares/equity by the customer.

Ownership of the Property

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MUSHARAKAH MUTANAQISAH HOME FINANCING - i


Credit Policies (SAMPLE)
Items Margin of Financing (MOF) Tenor Descriptions To be determined by Partner Bank in accordance to its respective risk apetite>

Same as above

Type of Properties

Completed properties & under construction properties New/subsale of residential unit comprises of - Landed properties such as terrace/link house, semi-detached house, bungalow - Non-landed properties such as apartments/condominiums New/subsale of commercial properties such as shoplot, factory lot Floating / Variable as Rental rate is pegged to a benchmark

Pricing Income Recognition Method of Disbursement

Based on scheduled principal balance (Monthly Rest) Progressive Release Lump Sum

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CREDIT POLICIES (SAMPLE)
Items Takaful (Insurance) g Coverage Descriptions MRTA Takaful is required (applicable for individual/joint application) y y Fire/Houseowner Takaful will be on a yearly basis Panel of Takaful operators : Takaful Nasional, Takaful Ikhlas, Takaful Malaysia

Eligibility

1.

Individual - Residence / Non Residence - Age 18 years old & above Non Individual - Sole Proprietor / Partnership - Private Limited / Public Companies - Other such as professional bodies

2.

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MUSHARAKAH MUTANAQISAH HOME FINANCING - i


Credit Policies (SAMPLE)
Items Documentations Installment Descriptions Letter of Offer Musharakah Mutanaqisah Agreement Lease/Ijarah Agreement Trust Deed (as Partner Bank will be appointed as a trustee to the asset to be purchased) (where applicable) Legal Charge Service Agency Agreement between Lessor and Lessee Monthly payment starts upon full release of the facility / completion of the property Consists of Monthly lease payment & Payment sum to purchase additional equity/shares from Partner Banks shareholding.

Under Construction period Processing Fee

Equivalent to the S&P duration, i.e 24 months for landed properties or 36 months for non-landed properties Home Financing-i A flat fee of RM200 per application

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Credit Policies (SAMPLE)

Items Principal P P i i l Prepayment t

Descriptions Allowed (Notice is not required) Subject to minimum amount of RM1,000 or the installment amount, whichever is higher. For lease rental, Partner Bank may collect advance payment (shall not exceed 3 rental payment) Any surplus installment paid by the customer after deducting the installment due will be considered as advance payment 1% LPC will be imposed if the installment is paid after the installment due date (grace period given is 14 days) LPC is not compounded.

Advance Payment

Compensation (Late Payment Charge)

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