Professional Documents
Culture Documents
OPPORTUNITIES
Lecture Outline
1.
2.
3.
4.
5.
6.
7.
8.
9.
Aqidah
(Faith & Belief)
Ibadah
(Man-to-God worship)
Muamalat
(Man-to-man activities)
Political
Activities
Economic
Activities
Other Economic
Activities
Akhlaq
(Moralities & Ethics
Shariaa
(Practices & activities)
Social
Activities
Islamic Worldview
The
Has
many implications
Allah
Humans
Resources
Humans
Humans
have free-will
Muslimsubmission
Will
of Godexpressed in revelation
5
Revealed
knowledge (Shariah)
Quran
Hadith/Sunnah
Derived
Al-Qiyas
Ijma
(analogy)
(consensus)
Etc.
ShariahRevealed knowledge
Quran Recited
Hadith/SunnahUn-recited
Ijma (consensus)
Al-Qiyas (analogy)
7
10
Contracts-Islamic Nature
Freedom of contractsprovide the prohibited
elements are avoided
Some aspects of the contractual relationship
determined by Shariah/Fiqh to avoid
Injustice
Conflicts
Exploitation
Riba
Gharar
11
RIBA
1. Riba
Literally means extra
Two types: Al-Nasiah & Al-Fadl
Prohibition in 4 stages. Final verse:
Oh you who believe! Be afraid of Allah and give up
what remains from Riba if you are believers. And if
you do no do it, then take a notice of war form Allah
and His messenger (2: 278-279)
Types of Riba
Riba al Fadl:
Riba al Nasiah
Riba Al-Nasiah
Riba in loan contracts:
Give out loan (principal sum)
Repayment include additional amount because of
delay in payment
Riba Al-Fadl
Riba in exchange contracts
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, equal for equal and hand to
hand. If the commodities differ, then you may
sell as you wish, provided that the exchange is
hand to hand (Muslim, Kitab al-Musaqat)
Same
Equal amount
Spot
Gold gold
Dates dates
Quality does not play a role
Different
Same
Spot
Gold silver
Barley dates
USD RM
Different
Different
Free to trade
Gold wheat
RM - goods
Riba Al-Fadl
Currency exchange must be spot transaction
No forward currency transactions
Usage of Money
Loan
Saving
Invest
To help
Guarantee
Extra
Guarantee,
No extra
No extra
No
guarantee
Extra
Gua.
Riba
What is Gharar?
GhararExcessive risk, hazard, or ambiguity
Rulings from hadith
Four conditions should exist in a transaction for
gharar to have legal consequences
20
Types of Gharar
Gharar can exist in the essence or terms of
the contract
Uncertainty of whether something will take
place or not and the consequences of a
transaction are not clear
Two Sales in One
The Toss Sale
Suspended/conditional Sale
The Future Sale
21
Types of Gharar
Gharar can exist in the object of the
contract
Subject matter of sale
Ignorance of the Attributes/Properties of the Object
Ignorance of the Quantity sold
Existence of the Object and the Ability to Deliver
22
Implications of Islamic
Principles
1. Selling debt (at discount)riba
2. Futures/Optionsgharar
23
24
25
Murabahah
1. The financial institution buys and then sells
the good to the client at a mark-up
2. Price paid at a later date
3. The bank must own and posses the good
4. The profit rate and other terms should be
clearly specified in the contract
5. The bank can ask for guarantees or collateral
6. Murabahah bills of trade cannot be traded
(at discount)
26
Salam
1. A pre-production sale of goodsselling
goods in advance
2. Can be used for homogenous goods
3. Used to finance the agricultural sector
4. The price has to be fixed and paid when the
contract is concluded
5. Goods delivered at a later date
6. The delivery time should be fixed
7. Parallel salam
27
Istisna
1.
28
Ijarah
1.
2.
3.
4.
5.
Ijarah wa Iqtina
1. A hire-purchase leasing contractownership
is transferred to lessee at the end of the
contract period
2. Fiqhi objectionstwo contracts in one;
purchase contract cannot be binding
3. Banks give away the asset at nominal value
or as a gift at the end of the lease period
(Similar to financial lease)
30
Mudarabah
1. A form of partnershipone party supplies
the capital (rab-ul mal) other manages
(mudarib)
2. Profit shared among parties at an agreed
upon ratio
3. Loss borne by financier only
4. Financier cannot ask for a guarantee of
capital or return
5. Mudarabah can be restricted or unrestricted
31
Musharakah
1. A partnership contract in which all partners
contribute capital and labor
2. Like a mudarahah, but all partners manage
the project
3. The profit share among the partners at an
agreed upon ratio
4. Loss shared according to share of capital
32
Murabahah
Traditional Murabahah/Bai al-Muajjal
Productspot
Pricefuture
The financial institution buys and then sells a good to the client at a
mark-up
The profit rate and other terms should be clearly specified in the contract
Salam
Traditional Salam
Pricespot
Commoditiesfuture
34
Istisna
Traditional Istisna
Paymentinstallments
Assetfuture
The price of the asset should be known and time of payment can
be negotiated among the parties
35
Ijarah
Traditional Ijarah
Asset (for rent)fixed period
Rental Payments
Banks give away the asset at nominal value or as a gift at the end
of the lease period
36
Mudarabah
Traditional Mudarabah
Fundsspot
Service/labour
Profit sharefuture
Profit sharefuture
Musharakah
Traditional Musharakah
Funds & labour
Profit sharefuture
Profit sharefuture
39
40
The General Council for Islamic Banks and Financial Institutions (GCIBFI)
43
44
46
Penalties
Penalties charged on late payments and defaults
Most Shariah scholars do not approve this, but used to discipline
delinquencies
Funds collected given to charities
47
Tawarruq
C
A
2
3
B
Tawarruqmonetization
1. A buys a commodity on deferred payment from B
2. A then sells the commodity to C spot to get cash
Organized Tawarruq
Broker
Client
Bank
2.
Bank sells the commodity to client payable at a future date (for 110)
3.
At the end of the transaction, the client walks away with 100 and owes the bank 110
payable in the future
[Bai alInah: No third party involvedbank and client do the selling and buy-back]
17th
(2003)
Financier
*Permissible:
*Condition:
-The customer
not sell the
commodity to
its original seller
Tawarruq Fiqhi/
Haqiqi
(Real Tawarruq)
Tawarruq Munazzam/
Masrafi
(Organized Tawarruq)
Transaction
Explicitly?
Mustawriq
Implicitly?
Common practice?
50
49
AL-ZUHAYLI:
The subject matter must meet all
the specifications & conditions of
good commodities
VALID
AL-QURADAGHI:
Spoiled commodities are used in modern
organized tawarruq
Broker
Bank
Junk
(10 years stored)
Nett off
Seller 1
Buyer
Buyer 1
Seller
US $10,000
Netting
arrangement
INVALID SALE
(Bay fasid)
US $ 8,000
Customer
(constructive
possession)
53
Sell
Seller
Buyer
Sell
Buy
3rd party
54
Buy
Sell
Bank/Agent
Client
Sell
Market
3rd Party
Requirement:
1) The bank or its agent
should not sell the
commodity on the
customers behalf if the
customer initially bought
that commodity from the
bank; neither should the
bank arrange a proxy
third party to sell this
commodity
2) Instead, the client should
sell the commodity either
himself or through his
own agent. At the most,
the bank should provide
the client the information
needed to sell the
commodity.
55
Implications of Tawarruq
Tawarruq and Greshams Law (bad money drives away good money)
Tawarruq is driving all other modes away
Tawarruq replicates a loan transaction
The resultthird best model of Islamic banking
56
57
Assets side
Initially different modes used for different purposes
Durablesmurabahah, ijarah
Agriculturesalam
Real estate construction-istisna
Liability side
Fixed-income investment accounts replaced PSIA
58
Modes
Sudan
Pakistan
Bahrain
UAE
Murabahah
42.45
50.96
51.73
49.29
Musharakah
17.77
2.52
0.89
2.59
Mudarabah
3.10
1.96
4.36
Ijarah
0.87
20.41
5.56
18.90
Istisna
0.95
0.63
3.22
Salam
0.55
0.23
34.31
25.88
39.23
21.65
muajjal, Invest.,
etc,)
Source: 2007 Islamic Finance Directory, Gen. Council for Islamic Banks & Fin. Institutions
59
Modes
Iran
Malaysia
Jordan
Saudi
Arabia
Murabahah
21.02
41.04
15.41
15.81
Musharakah
0.97
0.24
2.99
0.65
Mudarabah
1.51
0.27
11.36
0.05
Ijarah
2.18
9.40
13.80
0.04
Istisna
0.07
1.72
1.20
3.74
Salam
0.03
74.22
47.33
55.25
79.71
muajjal, Invest.,
etc,)
Source: 2007 Islamic Finance Directory, Gen. Council for Islamic Banks & Fin. Institutions
60
61
Interesting Facts
62
Interesting Fact
In the 1980s, only two states (Nevada and New Jersey) had casinos,
now 12 states has casinos and 48 states legalized betting
63
64
65
Regulatory Environment
Financial Institutions operated in a deregulated environment
FedEmphasis on self-regulation
1999Gramm-Leach-Bliley Act (repeal of Glass-Steagall Act)
2004SEC loosened capital requirements for 5 large investment banks
(MerL, LehB, GolS, MorS, BeaS)
Increased leverage (BeaS had debt/equity ratio of 33:1)
66
Organizational Failures
67
Product Level
Innovations:
Securitization and sale of debt
Creation of complex and opaque financial instruments (derivatives)
Hedging (risk transfer)
Speculation
Changed financial structure
Sources of funds of banks moved from depositors to capital markets
(securitization)
A complex network of inter-relationships
Created systemic risks not well-understood
68
2.
3.
69
70
71
72
73
Islamic principles:
74
Conventional
Banks/financial institutions
engaged in sub-prime lending
Loans packaged as MBS/CDO
Rating Agencies gave positive
ratings to these securities
Investors/speculators bought
securities
Credit Default Swaps (CDS) to
hedge/speculate on credit risks
Islamic
1. [Risksharing modes preferred]
[Excessive greed discouraged]
3. [Dishonesty discouraged]
4. -
5. Derivatives prohibited
[Speculation discouraged]
75
76
Return-swap
Returns on assets can be swapped with return on any class of assets (including sub-prime
CDOs)
Capital efficient solutions?
77
78
79
81
Product Regulation
Products determine the nature and direction of industry
Shariah Boards play a key role in approving the appropriate
products
Products approved at organizational level taking the industry closer
to conventional
Shariah Board at the national level
Approve and monitor Islamic products
Provide Shariah governance guidelines
Reduce Shariah compliance and reputational risks
82
83
84
MURABAHA:
Islamic Classical Standard
2. purchase
BANK
3rd party
deliver
1. order
3. sell
4. pay
Client/customer
85
MURABAHA:
Modern standard
2. purchase
BANK
3rd party
deliver
1. order
3. sell
Client/customer
86
4. pay
MURABAHA:
Islamic Banking practice
BANK
3rd party
1. Order
1a. authorize
4. sell
5. Pay installment
2. purchase
3. delivery
Client/customer
87
Financial Murabahah
88
Murabahah-basic features
89
90
Financial Murabahah
Points to note
92
Pre-Sale Risks
Loss/damage of the good before delivery
Refusal of the buyer to take delivery
Market (price) risk
94
95
96
1.
97
2.
3.
99
100
101
102
Inah
Tawarruq
Sukuk
103
A
RM105 (deferred payment)
104
Baiul Innah
RM100 Cash
105
RM100
Cash
RM105
(deferred
payment)
106
RM105
(deferred
payment)
Tawarruq
Resells metal on credit
B
105 Cash (deferred payment)
C
Metal
Trader
107
Issues
108
Degrees of Separation
109
The Danger
110
111
IBN TAIMIYYAH
Like other major scholars, Ibn Taimiyyah considers bay
al-inah a legal device in order to overcome the
prohibition of riba, and is not deemed to be an act of
sale, as there is clear evidence that such act amounts,
in effect, to a contract of loan.
112
IBN TAIMIYYAH
Ibn Taimiyyah divides sales into three groups according to the buyers
intentions, namely:
that he purchases the goods in order to use or consume them such as food,
drink and the like, in which case this is sale, which God has permitted
that he purchases the goods in order to trade with them; then this is trade,
which God has permitted
that the reason for purchasing the goods is neither the first nor the second,
then the reason must be dirhams (money) which he needs, and it was
difficult for them to borrow, so he purchases the goods on credit (with an
increased dirhams) in order to sell it and takes its price. This, then, is inah
which is Haram according to the most eminent of the jurists.
113
114
SukukEconomics of Growth
Demand side
Supply Side
Regulatory
Basel IImarketable securities need less capital than direct credit exposures
115
Sukuk al-Salam
Undertaking
Obligor
(undertakes
future sale
of commodity
for the investors)
Sukuk Certificates
2a
Sukuk Certificates
Salam Proceeds
3
SPV
2b
Commodity
4
6
5
Commodity Sale
Commodity
Buyer
116
Proceeds
Investors
Sukuk base
Aluminium
Obligor
Government of Bahrain
Issuer
Purpose of Offering
Short-term liquidity
Tenor
91 days
Issue size
BD 6 million
Expected rate of
return
5.06%
Credit enhancers
Governing Law
Bahraini Law
Redemption/
Principal repayment
Rating
117
None
Sukuk al-Ijarah
Sale/Transfer of Assets
Sukuk Certificates
2a
Sukuk Certificates
3
Lease of Assets
4a
Investors
Proceeds
2b
SPV
Periodic Rental
Payments
Rental Payment
4b
118
Sukuk base
Obligor
Issuer
Purpose of Offering
Tenor
7 Years
Issue size
Expected rate of
return
Credit enhancers
Governing Law
Redemption/
Principal repayment
119
Rating
A+ (S&P)
World Bank raised funds worth 918% its capital (total borrowing $ 96
billion)
ADB raised 777% of its capital (capital $3.6 billion)
120
Sukuk Certificates
3a
Sukuk Certificates
Sells
Proceeds
3b
Delegates
1
assets
bundle
worth
agency
role
SPV
$400 m.
Investors
Assets
7
1. IDB bundled ijarah assets (65.8%), along with murabahah (30.7%) and istisna (3.5%) receivables
121
Sukuk base
Obligor
Issuer
Purpose of Offering
Tenor
5 Years
Issue size
Expected rate of
return
Credit enhancers
Guaranteed by IDB
Governing Law
English Law
AAA (S&P)
Sukuk al-Murabahah
Master Agreement
Sukuk Certificates
Commodity
Corporate/
Borrower
5b
2a
Issuer
Sukuk Proceeds
SPV
2b
Commodity
Price
6
5a Commodity
3a
Commodities
3b
Price
Commodity
Price
Commodity
Commodity
Commodity
Buyer
Supplier
123
Sukuk al-Murabahah-Example
Sukuk name/date
Sukuk base
Commodity (purchase/sale)
Obligor
Purpose of Offering
Investment in assets
Tenor
5 Years
Issue size
Expected rate of
return
Credit enhancers
Investors
Sukuk al-Musharakah
Physical Asset Contribution
1
Musharakah
Periodic profit 5
Corporate
3 Sukuk proceeds
Sukuk Certificates
Corporate undertakes to
2a
Investors
Sukuk Proceeds
2b
SPV
Periodic profit
6
Sukuk base
Obligor
Emirates Airlines
Issuer
Wings FZCO
Purpose of Offering
Tenor
7 Years
Issue size
Expected rate of
return
Credit enhancers
Governing Law
Shariah-related issues
127
Shariah-related issues
128
Shariah-related issues
Ijarah sukuk, Obligor buys back assets at maturity at sale price (face value)
In musharakah sukuk, one musharakah partner buying shares of another at
face value
129
Economic IssuesLiquidity
Possible solutions
130
Economic IssuesRisks
Credit/Counter-party risks
Risks related to obligor (default, coupon payment, and asset redemption risks)
Market risks
Liquidity risks
131
Legal risks
A Shariah contract originating in civil law countries using English law as the
governing law
Different components of the transaction has different applicable laws (ijarah and
musharakah vs. trust)
133
134
135
136
Shariah scholars
Shariah scholars questioning the acceptability of some products
137
Comprehensive Shariah
Governance & Audit *
Challenges
Risk Management*
Replication v. Authenticity
Willingness to invest in Human
Capital Development
Wealth Management
138
RISK MANAGEMENT IS
Embedded within the conventional
business risk management framework
Credit Risk
Market Risk
Insurance Risk
Sustainability Risk
Liquidity Risk
Pension Fund Risk
Residual Value Risk
Reputation Risk
Operational Risk
Accounting
Business Continuity
Fiduciary
Fraud
Information
Legal
Compliance
Operations
People
Tax
Technology
139
Major Risks
ACTIONS
Identification of new brokers required
and find alternative to existing
commodity (eg. Bursa Al Sila)
140
2)
3)
141
LIABILITIES
AssetBacked / Trade
Financing
Segment A
Minimal Risk
Depositors
Segment B
LowMed Risk
Depositors
MusharakaMudaraba
Segment C
Vc-Private Equity
Depositors
142