Islamic Banking System and  Operation I

Prof. Saiful Azhar Rosly   saiful@incif.org International Center For Education in Islamic Finance (INCEIF)

Content
1. Introduction to Islamic Banking Operations 2. Shariah Framework g y 3. Regulatory Framework 4. Legal Framework 5. Financial Statements of Islamic banks 6. Islamic Banks in the Muslim World 7. Lessons from Subprime Crisis and Financial Turmoils

Islamic Financial Market Islamic Financial Market

Islamic Financial  Market

Direct Financial  Market (Capital Market)

Indirect Financial Indirect Financial  market

Sukuk 65% SC Screening

Equity 85% SC Screening

Bank 13%

Takaful Takaf l 5%

Unit Trust Mutual Funds 7%

Venture  Vent re Capital

Islamic Banking 2008 Islamic Banking 2008
• The Islamic banking assets have expanded by 23% to The Islamic banking assets have expanded by 23% to  RM234.9 billion compared with a year ago.  • The Islamic banking industry now accounts for 16.7%  g y of total assets in the industry.  g • Similar trends can be observed in the growth of  deposits that have reached RM180.4 billion, an  increase of 27.7% during this period • Total financing has also increased by 24.5% to  RM143.4 billion. 

The Teaching of Islamic Finance The Teaching of Islamic Finance
Two Approaches

1. Shari’ & Tabi’

General Framework of Islamic  Finance

Tabi’ Shariah
Legal + Ethical L l + Ethi l EQUITY Business Plan Operations O ti Performance EFFICIENCY

Shariah Framework Regulatory Framework Legal Framework Legal Framework Risk –Return Performance

Islamic Financial Market Islamic Financial Market
Shariah Framework
Fiqh Academy   Mekah M k h

Regulatory  Framework
Basel II Basel II

AAOIFI, Bahrain AAOIFI B h i

Islamic Financial  Service Board  S i B d (IFSB)

Bank Negara  Shariah Sh i h Supervisory Board,  Malaysia

Bank Negara  B kN Malaysia

Shariah Framework
Shariah

Aqidah

Akhlak

Muamalat

5 Pillars of Iman 5 Pillars of Iman

Man with Allah  swt 5 Pillars of Islam

Man among  Man

Shariah Framework Shariah Framework
5 Shariah Principles

3.Avoidance  4.Prohibition  1 Prohibition  2.Application  of Gharar in  of Gambling  of Riba of Al‐Bay ( (maisir) ) Contracts

5. Prohibition on  the production and  servicing of  prohibited  commodities

New Parameters in Shariah Compliance  F k C i i Cii l Framework: Consistency is Critical 
‘AQAD Principles

MAQASID
Benefits vs disbenefits Benefits vs disbenefits

LEGAL/CONTRACT  DOCUMENTATION Protection of Rights P t ti f Ri ht

FINANCIAL REPORTING
AAOIFI/IFSB/IFRS

Approved Islamic Finance Products Approved Islamic Finance Products
• • • • • • • • • • BBA Home Financing g Bay Inah Home Financing Bay Inah Personal Financing/Overdraft/credit card Tawaruk munazam personal financing Commodity murabaha Ijarah thumma al‐bay Ij h th lb Bai‐bithaman Ajil Islamic Debt Securities (BAIDS) Discounted Bay al‐dayn MuNif Discounted Bay al‐dayn MuNif Sukuk Ijarah Sukuk Musharakah

Challenging issues in AQAD‐based Islamic  Finance Products  Fi P d
• Benchmaking profit rate against interest rate (LIBOR,KLIBOR). • Profit Equalization Reserve (PER) – displaced commercial risk ( ) • Sale with condition to buyback at predetermined price  between two and three parties. • Profit generated o er installment pa ments time al e of Profit generated over installment payments – time value of  money • Penalties on delayed payments • Benchmaking sukuk rates against LIBOR Benchmaking sukuk rates against LIBOR • Musharakah with Purchase undertakings – fixed profit to  one party only. • Ijarah Sukuk ‐ Sale with repurchase agreement at par value Ijarah Sukuk  Sale with repurchase agreement at par value  and not mark‐to market • Ijarah Sukuk – Ownership of asset by SPV • Profit‐rate swaps – speculation or gambling? p p g g

Method #1: The AQAD BASED  Method #1: The AQAD‐BASED
Shariah compliance implies fulfilling the  Shariah compliance implies fulfilling the requirement of AQAD. 4 Requirement of Contracts 4 Requirement of Contracts 1. Agents of Contract 2. Objective of Contract 2 Objective of Contract 3. Subject Matter of Contract Price Pi 4. Offer and Acceptance •

Aqad q Agents of  Agents of Contract Objective  Objective of Contract Subject  Subject Matter Offer &  Offer & Acceptance

Sale (Al‐Bay’)

Buyer & Seller

Transfer of  Ownership from  Buyer to Seller

Property

Price set on the  Price set on the spot

Contract of Sale Contract of Sale
• Example: Murabaha/BBA Sale 1. Buyer and Seller eg. Seller owns asset/subject matter before making  S ll t/ bj t tt b f ki sale 2.  Subject matter j eg. Mal mutaqawim – property with usurfruct 3.  Price eg. Set on the spot S h 4.  Offer & Acceptance eg. Verbal or in writing eg Verbal or in writing

Method #2: Maqasid al‐Shariah/Objective  Method #2: Maqasid al Shariah/Objective of Shariah
To protect the interest of the public (society)‐ maslahah al‐ ammah by: 1. Removing the harm ( ibqa) 1 Removing the harm ( ibqa) 2. Securing of benefits (tahsil)

Maqasid Shariah

Protecting  Public Interest

Removing the  Removing the Harm

Securing the  Securing the Benefit

Objective of Shariah Objective of Shariah
Islamic financial products as defined by AQAD  p y Q methodology, should contain more benefits  (masalih) and less or no harm (madarah). “ in gambling (maisir) and liqour (qimar), there  are some sins and some profits. But the sins  are some sins and some profits But the sins are greater than the profits” (Al‐Baqarah:  168). )

Manfaat
“ in gambling (maisir) and liqour (qimar), there are some sins and some profits. But the sins are greater than the profits” (Alf ( Baqarah: 168).

Mudarat

Manfaat

Mudarat

Riba

“ in Gambling (maisir) and Liqour (qimar), there are some sins and some profits. But the sins are greater than the profits” (Alg p ( Baqarah: 168).

Mudarat Sins

Manfaat Profits

Mudarat

Manfaat

Riba

Mudarat

Manfaat

Mudarat > >  Manfaat HARAM

Mudarat < <  Manfaat HALAL

Downside (Madarrah) of Credit Financing Downside (Madarrah) of Credit‐Financing
MACRO Economic Bubbles Subprime Loans Financial Turmoil Financial Turmoil MICRO Bankruptcy Foreclosure Unemployment

The upside (Manfaat) of Credit‐ Financing
MACRO Allocation of Capital p Economic Growth MICRO Wealth creation Rich becoming richer Leisure, luxury and lifestyle Leisure luxury and lifestyle

Maqasid
• To analyse(theoretical) and measure(  To analyse(theoretical) and measure( empirical) impacts of financial  intermediation based on aqad‐based Shariah  compliant products. Efficiency studies Profitability studies Studies on Consumer welfare and protection Studies on Consumer welfare and protection Studies on Financial stability

1. 2. 3. 4.

Maqasid  protecting public interest. Maqasid – protecting public interest.
• Aqad‐based products (ABP) SHOULD contain more benefits and less  harm. • What if, it was proven than they (ABP) contain more harm than good? eg. Abandon projects – customer cannot make recourse against bank  eg Abandon projects customer cannot make recourse against bank as selling party? Defaulted BBA customer are required to make settlement based on the  selling price. gp Sale with no transfer of ownership. Giving away clean inah personal financing at high profit rates– a way  towards subprime inah? Conflict between Aqad and Maqasid?

Method #3: Financial Reporting Method #3: Financial Reporting
• Proper recording of transactions to evident TRUE SALE. • IFRS – Transparent, consistent and comparable  information • BBA – bank must put BBA asset on balance sheet prior to  sale. I week, 1 month it depends. l I k 1 th it d d • Once sold, it is recorded as BBA receivables. • AITAB assets should be on banking book as leasing assets  but now treated as “financing and advances”. b d “fi i d d ” • External auditors (PWC, KPMG etc.) are not required by  the authority to conduct Shariah audit. And they may not  be not capable to do so. be not capable to do so Conflict between AQAD and financial reporting?

Islamic Bank Average Balance Sheet Islamic Bank Average Balance Sheet
Assets Liabilities Murabaha/BBA Wadiah Dhamanah deposits

AITAB

Profit Sharing Investment Acct

Islamic Securities/Sukuk

Capital

1st October 2008 Assets FIXED ASSET 1. BBA asset   15 October 2008 Assets CURRENT ASSET 2. BBA Receivables Profit in‐Suspense Liabilities Liabilities

1. 1/9/2008 Bank purchases Property from Vendor for $200,000 1. 15/9/2008 Bank Sells Property to Customer for $280,000

Basel II and IFSB Basel II and IFSB
• High risk‐weights for Musharakah Financing to High risk weights for Musharakah Financing to  imply that bank bears business risk and the  general investment account holders (GIA) do  general investment account holders (GIA) do not. • Recent PSIA guidelines will test risk appetite of Recent PSIA guidelines will test risk appetite of  depositors.

Method #4: Legal Documentation Method #4: Legal Documentation
• BBA should be documented as a true sale and not as a  s ou d be docu e ed as a ue sa e a d o as a loan.  (Dato’ Nik vs. BIMB) • Ijarah should be documented as operating lease and not  a loan (Tinta Press vs. BIMB) • Islamic bank has not practice fairness compared with  conventional bank (Affin bank vs Zulkifli). Conflict between AQAD and documentation of AQAD?

‘Do not Sell what you don not Own” Do Own Hadith (Sahih Bukhari) High Court Judge Datuk Abdul Wahab Patail says that the sale element in BBA sale is not a bona fide sale

BBA Legal Documentation BBA Legal Documentation
1. 2. 3. 3 4. Sale and Purchase Agreement (SPA) Property Purchase Agreement (PPA) Property Sale Agreement (PSA) Property Sale Agreement (PSA) Deeds of assignment/Charge
2. Bank do not have legal + beneficial ownership of property to make a valid sale

1. No transfer of title from Customer to Bank

Regulatory Framework Regulatory Framework
Basel 2, IFSB, AAOIFI, Central Banking

Islamic Financial Market Islamic Financial Market
Shariah Framework
Fiqh Academy   Mekah M k h

Regulatory  Framework
Basel II Basel II

AAOIFI, Bahrain AAOIFI B h i

Islamic Financial  Service Board  S i B d (IFSB)

Bank Negara  Shariah Sh i h Supervisory Board,  Malaysia

Bank Negara  B kN Malaysia

Islamic  Islamic Banking Act  (IBA)1983

“Islamic bank” means any company which  carries on Islamic banking business and  holds a valid license; and all the offices  and branches of such a bank shall be  deemed to be a bank” deemed to be a bank

“Islamic banking business” means banking  business who aims and operations do not  involve any element which is not allowed by  involve any element which is not allowed by the Religion of Islam”

“Element which is not allowed by the Religion of Islam”   (IBA 1983) (IBA 1983)

5 Shariah 5 Shariah Principles
Prohibition  on the  Avoidance of  Prohibition  1 Prohibition  Application  production  Gharar in in  of Gambling of Gambling  of Riba of Al‐Bay and servicing  Contracts (maisir) of prohibited  commodities

Islamic Banking Act 1983 Islamic Banking Act 1983
4. Restriction on Business 2. Financial requirement and  duties of Islamic banks

1. Licensing of  Islamic banks l b k 3. Ownership, control and  3 Ownership control and management of Islamic  banks 5. Powers of supervision and  5 Powers of supervision and control over Islamic banks

Islamic Banking Under IBA 1983 Islamic Banking Under IBA 1983
Asset Financing Liabilities Wadiah  Dhamanah Savings PSIA

Financing
Financing Mortgage Hire‐Purchase Personal, enterprise ,

Deposit
Saving

Operation al Leasing JV Stocks Sukuks

Leasing

PSIA

Capital

Venture capital

Private Equity

Property

MORE OUTPUT IN THE BANKING BOOK

Anglo‐Saxon Islamic Banking
Wall between commercial and investment banking W ll b i l di b ki US : Glass ‐ Steagall Act 1938   Malaysia: BAFIA 1992 Financing Mortgage Personal Securities
Islamic  Banking

Deposit Saving

Hire‐Purchase PSIA

Leasing

Brokerage

Venture  Capital

Property

Unit Trust

Private  Equity

Conventional to Islamic Conventional to Islamic
Islamic Banking and BAFIA 1989
IBA 1983: No Wall between Commercial and Investment banking

Asset A t Mortgage Personal Sukuks

Liability Li bilit Saving

Asset A t Financing Mortgage HP Personal Operation al Leasing JV Stocks Sukuks

Liabilities Li biliti Wadiah  Dhamanah Savings

Hire‐Purchase PSIA

PSIA

Universal Banking: Economies of Scale and Scope g p

More Outputs

Less Cost  per Unit

Higher Profits

IBA 1983

Fund Management

Private Equity

Buy and sell assets and  properties ‐ BBA,  Murabahah, Salam,  Istisna’

Buy and Sell common  stocks ie Joint ventures – Musyarakah,mudarabah

Buy assets and leasing of  assets – Ijarah

Fee‐Based Financial  Services

Islamic Banking Act 1983 on Shariah advisory body
“that there is in the article of association of the bank concerned, provision for the establishment of a Syariah advisory body to advise the bank in the operation of its banking business in order to ensure that they do not involve any element which is not approved by the Religion of Islam” Islam

Role of Shariah Supervisory Board Role of Shariah Supervisory Board
To study fatwas previously issued by SSB of member banks and how these fatwas conform to Shariah rulings Supervise activities of member banks to ensure they are in conformity with Shariah li Sh i h rulings

To issue fatwas (religious legal opinions) on financial products and banking operations

Settlement of  litigation against  Islamic bank?

Role of Shariah Supervisory Board Role of Shariah Supervisory Board
Accounting policy A ti li adopted by banks Determination of profitprofit sharing ratio between banks and clients

Others Duties

Determining the calculation and payments of zakat

Determining the income distributed and expenses to be borne by depositors y p

Role of Shariah Committee (SC) in Islamic banking  subsidiaries/windows b idi i / i d
• • • • Interpretations and enforcement of the application of the Islamic laws,  principles and traditions on all of the business operations of Islamic banks. i i l d di i ll f h b i i fI l i b k To decide on the Shariah aspect of a new type of transaction envisaged and  also to explain the opinion given in light of Islamic principles To submit annually, a written report to the shareholders to the effect that they  To submit annually a written report to the shareholders to the effect that they have discharged their obligations. To ensure that zakat payment is correctly calculated and distributed.

Advisory

Banking Practisioners BNM officials

BNM Shariah S e i B d Supervisory Board

Muftis Sh i h Shariah Scholars

FATWA

Bank Negara g Malaysia – Islamic Banking Department

Usul-Fiqh Qawaid Fiqhiyyah Fiqh Muamalat

Proposals
ISLAMIC BANKING DIVISION - Commercial bank Finance company Merchant bank

Islamic Banking Consultants

New Islamic Instrument

Shariah Committee

Legal Framework Legal Framework

Tax
Tax Neutrality Tax on leasing,  murabahah,  murabahah assets

Law
Contract  Documentation

Litigation

Products and Services Products and Services
Islamic Banking

Simple Bank Organization Simple Bank Organization

Board of  Directors Di t
Shariah Advisory  Committee 

CEO Risk  Management

Corporate

Retail

Investment

ICBU

The Conventional Banking Business The Conventional Banking Business
Banking Firm  Banking Firm Asset $160b $20b Capital $20b Non Banking Firm Non‐Banking Firm Asset $20b Liability Capital $20b C i l $20b Liability $160b

Bank as Financial Intermediary Bank as Financial Intermediary
Banking  is a business based  on Leveraging g g 1. CAR  1a. Bank Capital 2. Borrowing 2 Borrowing 3. Lending 4.Revenue 5. Cost of deposits 6. Overhead 6. Overhead 7. Provisions 8. Profit 9. ROE 10. ROD It can borrow 8 times its  Capital  p 8% $20b $160m@5% $160@10% $160m x 0.1   =   $16b $160m x 0.05 =  $8b $3b $1b $16b – ($8b + 3B + $1b) = $4b $4b/$20b = 20% 5%

Islamic Banking Islamic Banking 
ISLAMIC BANKING OPERATIONS

ASSET-BASED

PROFIT-SHARING

FEE-BASED

Murabaha (deferred ) sale)

Qirad/Musharaka (partnership) Istisna’ Ijara (sale (leasing) by order)

Kafalah (guarantee)

Al Bay Al‐Bay’
Spot Deferred (Muajjal)

Cost-Price + C Pi

Mark-up M k
‘IWAD

=

Selling Price

Ghurmi (eg.ownership risk)

Kasb (Value-added)

Daman (Liability)

Al‐Bay Al Bay’
Spot (=$100) Discount (<$100) Mutlak Wadhiah Deferred (Muajjal) >$100

$1000

+

$100
‘IWAD

=

$1100

Ghurmi (eg.ownership risk)

Kasb
(Work &Effort)

Daman (Liability)

1.Al-Bay’ 2.Al-Ijarah j 3.Salam 4.Istisna’ 5.Mudarabah 6. Musyarakah

RISK
(Ghurmi)

ISLAMIC NORMATIVE THEORY OF PROFIT

PROFIT

=

‘IWAD
(Equivalent countervalue)

WORK & EFFORT
(Kasb)

LIABILITY
(Daman)

Risk (Ghurmi)

Profit
Work & Effort (Kasb) Responsibility p y (Daman)

Murabaha Financing :  Determination of Islamic Bank s  Determination of Islamic Bank’s Profit Rate
Time Value of Money Reconsidered

Murabaha Financing Murabaha Financing
Murabaha Selling Price Selling Price

Profit Margin g Cost Price Profit rate x  $Facility x tenor $ y

Murabaha Financing Murabaha Financing

Profit Rate Cost of Cost of  Deposit Overhead h d Risk‐ Risk Premium

Interest bearing Loan Interest‐bearing Loan
Interest  Rate Cost of Cost of  Deposit Overhead h d Risk‐ Risk Premium

Cost of Deposit

Risk Free rate True Time Value  of Money Risk Premium

Time Value of Money Time Value of Money
Islamic Perspective

TIME VALUE OF MONEY
Time Preference indicates the extent of a family’s preference  for current consumption  over future consumption 

1. Positive Time Preference 1 Positive Time Preference Money today is worth more than money tomorrow 2. Negative Time Preference Money today is worth less than money tomorrow 3. Neutral Time Preference Money today is equivalent to money tomorrow Money today is equivalent to money tomorrow

Positive  time  time preference Neutral  N t l time  preference Negative  time  time preference

$ $1now >  $1future $1now =  $1 future $1now <  $1future $

Time Value of  Ti V l f Money

Positive Time  Preference  (PTVM)

Neutral Time  Preference

Negative Time  Preference

Capitalism:  PTVM leads to  PTVM leads to interest

Islamic PTVM  leads to hibah l d hb h

Time Value of Money Time Value of Money
• • • • • • • • • Principle = Present value = $1000  p $ Interest = 10% per year = $100 y Tenure = 1 year Future value = Present value + interest $1000 = $1000 + $100 FVt = PV0 (1 + i)t i>0 ; FV > PV  i.e.Positive time preference i=0 ; FV = PV i.e. Neutral time preference i<0; FV < PV i.e. Negative time preference

Time Value of Money Time Value of Money
• • • • Positive Time Preference Positive Time Preference Dollar now worth more than dollar tomorrow. Why? Future is uncertain. Why? Future is uncertain Lenders stand to lose if loan is paid without  any fixed surplus any fixed surplus • Surplus paid due to delaying payments i.e. the  time factor rationalizes interest payments. time factor rationalizes interest payments • No other factor explains interest charges other  than time taken to pay up. than time taken to pay up

Increments in Islamic Loans Increments in Islamic Loans
• Islamic loan – the debtor sets the increment Islamic loan  the debtor sets the increment • The increment in lawful halal = hibah the best among you is he/she who pays a handsome  • “the best among you is he/she who pays a handsome debt” (Hadith Sahih) • “the best among you is he/she who upon settling the best among you is he/she who upon settling  his/her debt, pays more (Hadith Sahih) • The increment is set or declared on maturity y • The increment is not contractual or fixed upfront The increment is voluntary • The increment is voluntary

Islamic time value of money Islamic time value of money
• Delay in payment can allow seller to increase price • But increase in price must be accompanied with ‘iwad i.e. (an  equivalent countervalue) • Seller must own asset for making the sale g • Buyer owns the asset after sale eventhough payment is made  by installment • Seller holds no right to put the asset under charge. g p g • Under charge = buyer places the purchased asset as collateral  but enjoying the usurfruct at the same time • Buyer can place a colleteral (rahn) over the credit payment Buyer can place a colleteral (rahn) over the credit payment • Seller can sell the asset to a third party even before  completing payment.  • Seller must provide warranties on the asset sold Seller must provide warranties on the asset sold

Simple interest‐bearing loan i>0 Loan = $10,000 $ , Debt = $11,000 Debt > Loan

Total payment to Maybank  P + iP Total payment to Maybank = P + iP  0 Year 1

Ali receives $10,000 from Maybank

Ali repays Maybank $11,000

Total T l repayment to Maybank = P i i l + i M b k Principal interest = P + iP = P (1 +I ) I

Simple Loan  i>0 Simple Loan i>0
Total payment to Maybank = P + iP 

0

Year

1

Ali receives $10,000 from Maybank

Ali repays Maybank $11,000

Total T l repayment to Maybank = P i i l + i M b k Principal interest = P + iP = P (1 +I ) I

Discount Bond Discount Bond
Implicit interest rates = 10% Discount price = $10,000/1.10 = $9091 0 Year 1

Borrower receives $9091 i $ From discount bond

Borrower repays $10,000

Islamic Loan i=0  i 0 Loan = $10,000 ; Debt = $10,000 Loan = Debt L D b
Total payment to Maybank  P + 0P Total payment to Maybank = P + 0P  0 Year 1

Ali receives $10,000 from Maybank

Ali repays Maybank $10,000

Total T l repayment to Maybank = P i i l + 0 = P + 0P = P (1 +0 ) M b k Principal 0

Increments in Conventional Loans Increments in Conventional Loans
• Conventional loan – the creditor sets the Conventional loan  the creditor sets the  increment • The increment in unlawful haram = riba The increment in unlawful haram = riba • The increment is set upfront  • The increment is determined in the letter of  loan offer • The increment is contractual i.e. legal action  on borrower if he fails to pay up. p y p

Risk and Riba Risk and Riba
• Bank is compensated for the risks it Bank is compensated for the risks it  undertakes • Risk is the volatility of net cash flows of the Risk is the volatility of net cash flows of the  firm • B k Bank profitability  depends on the  fi bili d d h management of risks • Riba is profit acquired without holding risks in  sourcing capital. • Riba is the compensation for waiting and not  compensation for risking own capital.

The Prophet Muhammad (saw) enjoins debtor to pay more  Th P h M h d( ) j i d b but on voluntary basis because he (saw) foresees the  problem/uncertainties falling upon the creditor who has to  bear:

• Ri k f d f lt Risk of default • Risk of inflation • Opportunity cost of the loan
Since a creditor faces the above uncertainties, given an  option to spend the money today or in the future, he  p p y y will choose the former. In this way, he holds positive  time preference (PTP) outlook.

Why pay more on Qard Hasan? Wh Q dH ? To say “thank you” – expressing  y y p g one’s GRATITUDE
• Opportunity Cost: The creditor foregoes  opportunity of earning income from the  money given away as loan • Inflation risk: The creditor may lose out when  y the payments holds lower purchasing power  due to inflation

Islamic recognizes that $1 today  $ is worth more than $1  is worth more than $1 tomorrow

• B t But compensation for abstinence is not  ti f b ti i t contractual  ie not set when the loan contract is  made • Compensation is voluntary • Compensation known only when the debt Compensation known only when the debt  matures

Qard Hasan Qard Hasan
Why Pay  Why Pay More?
Gratitude

Inflation

Opportunity  cost

Asset
The Banking Business

Liability Deposits

Loans

Profit = (rL1 x L1) – (rd1 x D1) = (0 1 x 20m) – (0 05 x $20m) (0.1 (0.05 = $2m - $1m = $1 million

Market for Loan (Financing) r
rL1

Market for Deposit r Sd

SL

10%

rd1 5% DL L1 $20m Loan D1 $20m Dd Deposit

Average Balance Sheet: Islamic Banking g g
Asset Liability

Al-Bai-bithaman Ajil Al-Murabahah Al-Ijarah j Salam Istisna Al-Musharakah Al Musharakah Al-Mudarabah

Al-Wadiah Dhamanah Al-Mudarabah Investments

C. Deposits C. Deposits
• • • • Current Account Current Account Savings Account Investment Account Investment Account Islamic NICD • Wadiah Dhamanah Wadiah Dhamanah • Wadiah Dhamanah • Mudarabah • Bay al Dayn Bay al‐Dayn

D. Financing D. Financing
• Home financing Home‐financing • Auto‐financing • Personal financing • Trade financing • • • • • • • • Bai‐bithaman Ajil Bai bithaman Ajil Al‐Ijarah Thumma Al‐bay Bay’ al‐’inah Wakalah LC Murabahah LC Kafalah LG K f l h LG Islamic accepted bills. y Bay’ al‐’inah

• Credit card

Treasury
• • • • • Islamic money market Islamic money‐market Statutory reserve requirement Statutory liquidity requirement S li idi i Asset‐liability Management Risk Management

Islamic Bank s Average Balance Sheet Islamic Bank’s Average Balance Sheet
Asset Cash BBA Home Financing AITAB Car Financing Liability Wadiah Dhamanah Current  Account Wadiah Dhamanah Savings  Account Restricted Mudarabah  Account

Bay al‐Inah Personal Financing U B l I hP l Fi i Unrestricted Mudarabah  t i t dM d b h Enterprise Financing Account Government Islamic Securities Commodity Murabahah Negotiable Islamic Certificate  Negotiable Islamic Certificate of Deposits

Sukuk Fixed Assets Shareholders’ Capital

Income Statement ‘Reward comes with Risk” ‘R d i h Ri k”
Islamic Banking Profit and Loss Revenues Cost of Funds Gross Profit Overheads Provisions for NPF Profit Equalization Reserve Profit Before Tax and Zakat Tax and Zakat Net Profit $500m $200m $300m $80m $10m $5m $200m $ $60m $140m

BALANCE SHEET BALANCE SHEET
ASSETS
• • • • • • • • • • • Cash and short‐term funds Deposits and placements with banks other financial institutions Dealing securities Investment securities Financing , advances and other loans Other assets Bills receivable  Statutory deposits with Bank Negara Malaysia Investment in subsidiary companies Investment in associated company Property , plant and equipment TOTAL ASSETS

LIABILITIES AND SHAREHOLDERS’ FUNDS
• • • • • • • • • • Deposits from customers Deposits and placement of banks (PSIA,commodity murabaha,NICD) And other financial institutions Bills payable Other payables Subordinated financing g Zakat and taxation Deferred tax liabilities TOTAL LIABILITIES Share capital Reserves

• •
• • • • •

SHAREHOLDERS FUNDS SHAREHOLDERS’ FUNDS TOTAL LIABILITIES AND SHAREHOLDERS’ FUNDS COMMITMENTS AND SHAREHOLDERS’ FUND
Capital Adequacy Core capital ratio before proposed dividends Risk‐weighted capital ratio before proposed dividends Core capital ratio after proposed dividends  C it l ti ft d di id d Risk‐weighted capital ratio after proposed dividends

Islamic Bank as a Financial Intermediary 1. CAR  1a. Bank Capital 1a Bank Capital 2. Investment Deposit  (Partnership) Transaction Deposit p 3. Financing  (Trade) 4.Revenue 4 Revenue 5. Cost of deposits 6. Overhead 7. Provisions 8. Profit 9. ROE 10. ROD 8% $20b $160m@ex post

$160@10% $160m x 0.1   =   $16b $160m x 0 1 = $16b $160m x 0.05 =  $8b $3b $1b $16b – ($8b + 3B + $1b) = $4b $4b/$20b = 20% 5%

Asset
Asset‐based financing Murabahah/BBA AITAB Ijarah Istisna Salam Tawaruq Bay inah

Liability
Transaction Deposit

Partnership/Contract Financing Musharakah Mudarabah Fee‐based financing Wakalah Investment Sukuks Fixed Assets

Investment Deposit Restricted PSIA Unrestricted PSIA Commodity Murabaha

Tier 1 Capital  Common Stocks Tier 2  Capital Preference Shares Reserves

Murabaha: 1st November 2008: Bank Buys and  Holds Asset H ld A
Asset Current Asset Current Asset Fixed Asset Murabaha asset Liability

ISLAMIC BANKING  Income‐Statement I S
• • • • • • • • • • • • • Income derived from investments of depositors fund Allowance for losses on financing Profit equalization reserve TOTAL DISTRIBUTABLE INCOME Loss/income attributable to shareholder / Income derived from investment of shareholders’ fund TOTAL NET (LOSS)/INCOME Personal expenses P l Other overhead expenses (LOSS)/PROFIT BEFORE ZAKAT AND TAX EXPENSE Zakat Tax expense NET(LOSS)/PROFIT FOR FINANCIAL YEAR

P rc n g e e ta e r
C as h an d ca s

A dv an ce s to

10

20

30

40

50

60

0

ot he r fin an ci al

eq ui va le n

in M st ur itu ab tio ah a/ A l-B ai 'B ith am an A

In a S al am /Is tis na

Regional Balance Sheet Comparison

Consolidated Balance Sheets of Islamic Banks in GCC and Malaysia

In ve st m en t in

Ija M ra us ar ab a/ M uq ar ad a

M us ha se ra cu ka rit ie s/ co m pa ni e

O th er s

GCC

Malaysia y

International Outlook of Balance Sheet Items

Consolidated Balance Sheet Items of Islamic Banks in GCC and Malaysia combined C lid t d B l Sh t It fI l i B k i dM l i bi d

9% 17% 3%
Cash and cas equivalent Advances to other financial institutions Murabaha/ AlBai'Bithaman Ajil Ina Salam/Istisna Ijara

12%

Musaraba/Muqarada Musharaka Investment in securities/companies Others

1% 1%

6% 47% 4% 0%

International Outlook for Sources of funds

Sources of funds of Islamic Banks in GCC and Malaysia (combined)

Others 9%

Deposits from other financial Institutions 4%

Shareholders equity 11%

Current Accounts 28%

Investment/Savings accounts 48%

To Be Continued.. To Be Continued
Thank You