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IslamicBanking
System
and
OperationI
Prof.SaifulAzharRosly [email protected]
InternationalCenterForEducationinIslamicFinance(INCEIF)
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1.IntroductiontoIslamicBankingOperations
2.ShariahFramework3.Re ulator Framework
4.LegalFramework
5.FinancialStatementsofIslamicbanks
6.IslamicBanksintheMuslimWorld
7.LessonsfromSubprimeCrisisandFinancialTurmoils
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IslamicFinancialMarket
DirectFinancial
Market
(CapitalMarket)
Sukuk Equity
market
UnitTrust
65%
SCScreening
85%
SCScreening
an
13%
a a u
5% MutualFunds7%
en ure
Capital
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Two
Approaches
1.Shari&TabiGeneralFrameworkofIslamic
Finance
Shariah
Tabi
BusinessPlan
Shariah Framework
RegulatoryFramework
ega + ca
EQUITY
pera ons
Performance
EFFICIENCY
RiskReturn
Performance
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Shariah Regulatory
Fiqh AcademyBasel II
Me a
IslamicFinancial, a ra n
BankNegara
erv ce oar (IFSB)
ar aSupervisoryBoard,
Malaysia
an egaraMalaysia
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Shariah
Aqidah Akhlak Muamalat
ManwithAllahswt Manamong
5Pillars
of
Islam Man
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5
Shariah Principles5
Shariah Principles
1ProhibitionofRiba
1ProhibitionofRiba
2.ApplicationofAlBay
2.ApplicationofAlBay
3.AvoidanceofGharar in
Contracts
3.AvoidanceofGharar in
Contracts
4.ProhibitionofGambling
maisir
4.ProhibitionofGambling
maisir
5.Prohibitionontheproductionand
servicingofprohibited
5.Prohibitionontheproductionand
servicingofprohibited
commo escommo es
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NewParametersinShariahCompliance
ramewor :
ons stency
s
r t ca
AQAD
Principles
LEGAL/CONTRACT
DOCUMENTATIONMAQASIDro ec ono g s
FINANCIAL
REPORTINGAAOIFI/IFSB/IFRS
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BBAHomeFinancin
BayInah
Home
Financing
BayInahPersonalFinancing/Overdraft/creditcard
Tawarukmunazampersonalfinancing
Commodity
murabaha ara ummaa ay
BaibithamanAjilIslamicDebtSecurities(BAIDS)
SukukIjarah
SukukMusharakah
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ChallengingissuesinAQADbasedIslamic
nance
ro ucts
Benchmakingprofitrateagainstinterestrate(LIBOR,KLIBOR). ProfitEqualizationReserve(PER) displacedcommercialrisk Sale
with
condition
to
buyback
at
predetermined
price
betweentwoandthreeparties. ro genera e over ns a men paymen s meva ueo
money
Penalties
on
delayed
payments MusharakahwithPurchaseundertakings fixedprofitto
onepartyonly. I arah Sukuk Sale with re urchase a reement at ar value
andnot
mark
to
market
IjarahSukuk OwnershipofassetbySPV Profitrateswaps speculationorgambling?
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requirementof
AQAD.
1.AgentsofContract
.
3.SubjectMatterofContract
r ce4.OfferandAcceptance
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A ad
Contract
ofContract
Matter
Acceptance
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Sale(AlBay)
Transferof
Buyer&Seller OwnershipfromBuyertoSeller
Property
spot
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Example:Murabaha/BBASale
1. BuyerandSeller
eg. e erowns asse su ec ma er e orema ngsale
2.
Subjectmatter
eg.Malmutaqawim propertywithusurfruct
3. Price
eg.
eton
t e
spot
4. Offer&Acceptance
.
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ofShariah
Toprotecttheinterestofthepublic(society) maslahahalammahby:
.2.Securingofbenefits(tahsil)
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Shariah
Protecting
PublicInterest
Removin the Securin the
Harm
Benefit
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Islamicfinancial roductsasdefinedb A AD
methodology,
should
contain
more
benefits
(masalih)andlessornoharm(madarah).
in
gambling
(maisir)
and
liqour
(qimar),
there
.aregreaterthantheprofits(AlBaqarah:168 .
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in gambling (maisir) and liqour (qimar),there are some sins and some profits. Butthe sins are greater than the profits (Al-Baqarah: 168).
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in Gambling (maisir) and Liqour (qimar),there are some sins and some profits. But
the sins are greater than the profits (Al-
Mudarat Manfaat
Baqarah: 168).
Sins Profits
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Mudarat Manfaat
Riba
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Mudarat Manfaat
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Manfaat
HARAM
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Manfaat
HALAL
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MACRO MICRO
EconomicBubbles Bankruptcy
SubprimeLoans Foreclosure
nanc a urmo nemp oymen
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Theupside(Manfaat) ofCredit
Financing
MACRO MICRO
AllocationofCa ital Wealthcreation
EconomicGrowth Richbecomingricher
,
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empirical)impacts
of
financial
intermediationbasedonaqadbasedShariahcompliantproducts.
1. Efficiencystudies
2. Profitabilitystudies
3. Studies on Consumer welfare and rotection
4. Studieson
Financial
stability
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Aqadbasedproducts(ABP)SHOULDcontainmorebenefitsandlessarm.
Whatif,itwasproventhanthey(ABP)containmoreharmthangood?eg. an onpro ec s cus omercanno ma erecourseaga ns an assellingparty?
DefaultedBBAcustomerarerequiredtomakesettlementbasedonthesellin
rice.
Salewithnotransferofownership.
Givingawaycleaninah personalfinancingathighprofitrates awaytowardssubprimeinah?
ConflictbetweenAqadandMaqasid?
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ProperrecordingoftransactionstoevidentTRUESALE. IFRS Transparent,consistentandcomparable
information BBA bankmustputBBAassetonbalancesheetpriorto
sa e. wee , mont t epen s. Oncesold,itisrecordedasBBAreceivables.
AITABassets
should
be
on
banking
book
as
leasing
assets
utnowtreate as nanc ngan a vances . Externalauditors(PWC,KPMGetc.)arenotrequiredby
theauthoritytoconductShariahaudit.Andtheymaynot.
ConflictbetweenAQADandfinancialreporting?
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Assets Liabilities
Murabaha/BBA WadiahDhamanah
deposits
AITAB ProfitSharingInvestmentAcct
IslamicSecurities/Sukuk Capital
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Assets Liabilities
1st October 2008
FIXEDASSET
1.BBAasset
Assets Liabilities
15 October 2008
CURRENTASSET
2.BBAReceivables ProfitinSuspense
1. 1/9/2008 Bank purchases Property from Vendorfor $200,000
1. 15/9/2008 Bank Sells Property to Customer for
$280,000
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BBAshouldbedocumentedasatruesaleandnotasa
loan.
(Dato
Nik
vs.
BIMB)
Ijarahshouldbedocumentedasoperatingleaseandnot
a
loan
(Tinta
Press
vs.
BIMB) Islamicbankhasnotpracticefairnesscomparedwith
conventionalbank(AffinbankvsZulkifli).
ConflictbetweenAQADanddocumentationofAQAD?
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Hadith (Sahih Bukhari)
High Court Judge Datuk Abdul Wahab Patail says that thesale element in BBA sale is not a bona fide sale
1. SaleandPurchaseAgreement(SPA)
2. PropertyPurchaseAgreement(PPA)
.
4. Deedsofassignment/Charge2. Bank do not have
of property to make a valid sale1. No transfer of title from Customer to Bank
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Basel2,IFSB,AAOIFI,CentralBanking
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Shariah Regulatory
Fiqh AcademyBasel II
Me a
IslamicFinancial
, a ra n
BankNegara
erv ce oar (IFSB)
ar a
SupervisoryBoard,
Malaysia
an egara
Malaysia
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BankingAct
(IBA)1983
BankingAct
(IBA)1983
Islamicbankmeansanycompany whichcarriesonIslamicbankingbusiness andholdsavalidlicense;andalltheoffices
and
branches
of
such
a
bank
shall
be
deemed to be a bank
Islamicbankmeansanycompany whichcarriesonIslamicbankingbusiness andholdsavalidlicense;andalltheoffices
and
branches
of
such
a
bank
shall
be
deemed to be a bank
Islamicbankingbusinessmeansbankingbusinesswhoaimsandoperations donot
theReligion
of
Islam
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ElementwhichisnotallowedbytheReligionofIslam
1Prohibition
1Prohibition
Application
Application
AvoidanceofAvoidanceof ProhibitionProhibition
Prohibitiononthe
production
Prohibitiononthe
productionofRibaofRiba of AlBayofAlBay
Contracts
Contracts
(maisir)
(maisir)andservicingofprohibitedcommodities
andservicingofprohibitedcommodities
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4.Restriction
on
Business4.
Restriction
on
Business 2.
Financial
requirement
and
dutiesofIslamicbanks2.
Financial
requirement
and
dutiesofIslamicbanks
1.Licensing
of
1.
Licensing
of
IslamicbanksIslamicbanks
. ,management
of
Islamic
banks
. ,management
of
Islamic
banks
.
controlover
Islamic
banks
.
controlover
Islamic
banks
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FinancingFinancing DepositDepositAsset Liabilities
Financing
Mortgage
HirePurchase
Personal,enterprise
Saving
Financing Wadiah
DhamanahSavings
,
Leasing PSIA
Operation
alLeasing
PSIA
JV
Venturecapital PrivateEquityStocks
Sukuks Capital
Property
MOREOUTPUTINTHEBANKINGBOOK
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AngloSaxonIslamicBankingWa
etween
commercia
an
investment
an ing
US:Glass SteagallAct1938 Malaysia:BAFIA1992
Financing Deposit
Mortgage Saving
HirePurchase PSIA
Personal
Islamic
Securities
Leasing BrokerageVentureCapital
Property UnitTrustPrivateEquity
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IBA 1983: No Wall between Commercial andInvestment bankingIslamic Banking and BAFIA 1989
sset a ty
Mortgage SavingHirePurchase PSIA
sset a t es
FinancingMortgage
WadiahDhamanah
Personal
Sukuks
Personal
O eration PSIAalLeasing
JV
Sukuks
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UniversalBankin :EconomiesofScaleandSco e
MoreOutputsMoreOutputsLessCostperUnitLessCostperUnit
HigherProfitsHigherProfits
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IBA1983IBA1983
Buyandsellassetsandproperties BBA,
Murabahah,Salam,Istisna
Buyandsellassetsandproperties BBA,
Murabahah,Salam,Istisna
BuyandSellcommonstocksie JointventuresMusyarakah,mudarabah
BuyandSellcommonstocksie JointventuresMusyarakah,mudarabah
Buyassetsandleasingofassets Ijarah
Buyassetsandleasingofassets Ijarah
FeeBasedFinancialServices
FeeBasedFinancialServices FundManagementFundManagement
PrivateEquity PrivateEquity
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Islamic Banking Act 1983 on Shariahadvisory body
that there is in the article of association of the bank concerned, provision for theestablishment 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
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To study fatwaspreviously issued
by SSB ofmember banksand how these
To study fatwaspreviously issued
by SSB ofmember banksand how these
Superviseactivities of
member banks toensure they are in
conformity with
Superviseactivities of
member banks toensure they are in
conformity with
Shariah rulings
Shariah rulingsar a ru ngsar a ru ngs
To issue fatwasTo issue fatwas(religious legalopinions) on
financial productsand bankingoperations
(religious legalopinions) on
financial productsand bankingoperations
Settlementoflitigationagainst
Islamicbank?
Settlementoflitigationagainst
Islamicbank?
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--ccoun ng po cy
adopted by banksccoun ng po cy
adopted by banks
sharing ratio between
banks and clients
sharing ratio between
banks and clients
OthersDutiesOthersDuties
Determining thecalculation and payments
Determining thecalculation and payments
Determining the incomedistributed and expensesto be borne b de ositors
Determining the incomedistributed and expensesto be borne b de ositors
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RoleofShariahCommittee(SC)inIslamicbanking
su s ar es w n ows
InterpretationsandenforcementoftheapplicationoftheIslamiclaws,pr nc p esan tra t onsona o t e us nessoperat onso s am c an s.
To
decide
on
the
Shariah
aspect
of
a
new
type
of
transaction
envisaged
and
alsotoexplaintheopiniongiveninlightofIslamicprinciples
,havedischargedtheirobligations.
Toensurethatzakatpaymentiscorrectlycalculatedanddistributed.
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BNM Shariah MuftisBanking
PractisionersAdvisor
Bank Negara
uperv sory oar ShariahScholarsBNM officials
FATWA
Malaysia Islamic
Banking Department Usul-Fiqh
Qawaid
ISLAMIC BANKING DIVISION
Proposals FiqhiyyahFiqh
Muamalat
-
Finance company
Merchant bank
IslamicBanking
Consultants
ShariahCommittee
NewIslamic
Instrument
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TaxNeutralityContract
Documentation
Taxonleasing,,
assets
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IslamicBanking
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BoardofBoardofrec orsrec ors
ShariahAdvisory
Committee
RiskRiskManagementManagement
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BankingFirmBankingFirm
Asset Liability
$20bCapital$20b
NonBankin Firm
Asset Liability
ap ta
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Banking isabusinessbasedonLevera in Itcanborrow8timesitsCa ital1.CAR 8%
1a.BankCapital $20b
. orrow ng m
3.Lending $160@10%
4.Revenue $160mx0.1 = $16b
5.Costofdeposits $160mx0.05= $8b
6. Overhead 3b
7.Provisions $1b
8.Profit $16b ($8b+3B+$1b)=$4b
9.ROE $4b/$20b=20%
10.ROD 5%
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ISLAMIC BANKING
ASSET-BASED FEE-BASEDPROFIT-SHARING
Qirad/Musharaka
Murabaha(deferredsale
Ijara(leasing)
Istisna(saleby order)
Kafalah(guarantee)
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Spot
Deferred (Muajjal)
ost- r ce ar -up Selling Price
Ghurmi
(eg.ownership
risk)
Kasb
(Value-added)
Daman
(Liability)
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Spot (=$100) Discount ($100
$1100
Ghurmi
(eg.ownership risk)Kasb
(Work &Effort)
Daman
(Liability)
1 Al B
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RISK1.Al-Bay
2.Al-I arah
(Ghurmi) ISLAMIC NORMATIVETHEORY OF
PROFIT
3.Salam4.Istisna
5.Mudarabah
6. Musyarakah
IWAD(Equivalent countervalue)
WORK &
EFFORT
(Kasb)
PROFIT=
LIABILITY(Daman)
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Risk
(Ghurmi)
Res onsibilitWork&Effort
(Daman)(Kasb)
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Murabaha
ProfitMar in
CostPrice Profit
rate
x
Facilit xtenor
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ProfitRate
DepositOver ea
Premium
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Interest
a e
DepositOver ea
Premium
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Costof
Deposit
RiskFreerate
TrueTimeValue RiskPremium
of
Money
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TIMEVALUEOFMONEY
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TimePreferenceindicatestheextentofafamilyspreference
forcurrentconsumption overfutureconsumption
.
Moneytodayisworthmorethanmoneytomorrow
2.NegativeTimePreference
Moneytodayisworthlessthanmoneytomorrow
3.NeutralTimePreference
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Positive$1now>
preference
$1future
eutratime
reference
$1now=$1future
Negative$1now
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TimeVa ueoMoney
PositiveTimePreference
(PTVM)
NeutralTimePreference
NegativeTimePreference
Capitalism:IslamicPTVM
interestea sto i a
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Princi le=Presentvalue= 1000
Interest=10%peryear=$100
Tenure=1year
Futurevalue=Presentvalue+interest
$1000
=
$1000
+
$100 FVt =PV0 (1+i)t
i>0;FV>PV i.e.Positivetimepreference
i=0
;
FV
=
PV
i.e.
Neutral
time
preference i
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The
increment
in
lawful
halal
=
hibah
debt(HadithSahih)
his/herdebt,paysmore(HadithSahih)
Theincrementissetordeclaredonmaturit
Theincrement
is
not
contractual
or
fixed
upfront
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Delayinpaymentcanallowsellertoincreaseprice Butincreaseinpricemustbeaccompaniedwithiwadi.e.(an
equivalentcountervalue) Sellermustownassetformakingthesale
Buyerownstheassetaftersaleeventhoughpaymentismadebyinstallment
Sellerholds
no
ri ht
to
ut
the
asset
under
char e.
Undercharge=buyerplacesthepurchasedassetascollateralbutenjoyingtheusurfructatthesametime
Sellercan
sell
the
asset
to
athird
party
even
before
completingpayment.
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Simpleinterest
bearing
loan
i>0
Loan= 10 000
Debt=$11,000
Debt>Loan
=
0 1Year
Ali receives $10,000 Ali repays
$11,000
Total repayment to May an = Principal + interest = P + iP = P (1 +I )
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TotalpaymenttoMaybank=P+iP
0 1Year
Ali receives $10,000 Ali repays
$11,000
Total repayment to May an = Principal + interest = P + iP = P (1 +I )
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Implicit interest rates = 10%
Discount price = $10,000/1.10 = $9091
01Year
Borrower receives 9091
From discount bond
$10,000
IslamicLoan
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=Loan=$10,000;Debt=$10,000
oan= e t
=
0 1Year
Ali receives $10,000 Ali repays
$10,000
Total repayment to May an = Principal + 0 = P + 0P = P (1 +0 )
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increment =
Theincrementissetupfront
Theincrementisdeterminedintheletterofloanoffer
Theincrement
is
contractual
i.e.
legal
action
onborrowerifhefailsto a u .
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T e
Prop et
Mu amma
saw
en o ns
e tor
to
pay
more
butonvoluntarybasisbecausehe(saw)foreseesthe
problem/uncertaintiesfallinguponthecreditorwhohasto
bear:
s o e au t
Riskofinflation
Opportunitycostoftheloan
Sinceacreditorfacestheaboveuncertainties,givenanoptiontospendthemoneytodayorinthefuture,hewillchoosetheformer.Inthisway,heholdspositivetime
preference
(PTP)
outlook.
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ypay
more
on
ar
asan
Tosaythankyou expressing
ones
GRATITUDE OpportunityCost:Thecreditorforegoes
opportunityofearningincomefromthe
moneygivenawayasloan
Inflationrisk:Thecreditorma loseoutwhen
thepayments
holds
lower
purchasing
power
duetoinflation
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Islamicrecognizes
that
1today
tomorrow u compensa on ora s nence snocontractual ienotsetwhentheloancontractis
Compensationisvoluntary
matures
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More?
Gratitude
Inflation
Opportunitycost
LiabilityAsset
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The Banking Business
Profit = (rL1 x L1) (rd1 x D1)
=
Market for DepositMarket for Loan (Financing)
. .
= $2m - $1m = $1 million
rr Sd
SL
rd1
rL1
10%
5%
DdDL
DLoan epositD1L1$20m
$20m
Avera eBalanceSheet:IslamicBankin
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Al-Wadiah Dhamanah
Al-Mudarabah Investments
l-Bai-bithaman Ajil
Al-Murabahah
l-I arahSalam
Istisna
-
Al-Mudarabah
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SavingsAccount
WadiahDhamanah
IslamicNICD Mudarabah
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Autofinancing
AlIjarahThummaAlbay
Bayalinah
Personalfinancing
Tradefinancing
WakalahLC
MurabahahLC
a a a
Islamicacceptedbills.
Ba alinah
Credit
card
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Statutoryreserve
requirement
Statutory iqui ityrequirement
AssetliabilityManagement
RiskManagement
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Asset Liability
Cash WadiahDhamanahCurrent
Account
BBAHome
Financing Wadiah
Dhamanah
Savings
AITABCarFinancing RestrictedMudarabah
Account
aya
na
ersona
nanc ng
EnterpriseFinancingnres r c e
u ara a
Account
GovernmentIslamicSecurities CommodityMurabahah
ofDeposits
Sukuk
FixedAssets ShareholdersCapital
IncomeStatement
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ewar
comesw t
s
IslamicBankingProfitandLossRevenuesCostofFunds $500m$200m
GrossProfit $300mOverheads
ProvisionsforNPF
$80m
$10m
ProfitEqualization
Reserve $5m
ProfitBeforeTaxandZakat $200m
TaxandZakat $60mNetProfit $140m
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Islamic Bank as a Financial Intermediary
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IslamicBankasaFinancialIntermediary1.CAR 8%
.
2.InvestmentDeposit
(Partnership)TransactionDe osit
$160m@expost
3.Financing (Trade) $160@10%
.
.
5.Costofdeposits $160mx0.05= $8b
6.Overhead $3b
7.Provisions $1b
8.Profit $16b
($8b
+3B
+$1b)
=$4b
9.ROE $4b/$20b=20%
10.ROD 5%
Asset Liability
Assetbasedfinancing Transaction Deposit
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f g
Murabahah/BBA
AITAB
Ijarah
p
Salam
Tawaruq
Bayinah
Partnership/ContractFinancing
Musharakah
Mudarabah
InvestmentDeposit
RestrictedPSIA
UnrestrictedPSIA
Feebasedfinancing
Wakalah
CommodityMurabaha
Investment
Sukuks
FixedAssets
Tier1Capital CommonStocks
Tier2
CapitalPreferenceShares
Reserves
Murabaha:1st November2008:BankBuysand
o s sset
8/14/2019 Ibo Iiu2009
94/99
o s
ssetAsset Liability
FixedAsset
Murabahaasset
8/14/2019 Ibo Iiu2009
95/99
RegionalBalanceSheetComparison
8/14/2019 Ibo Iiu2009
96/99
Consolidated Balance Sheets of Islamic Banks in GCC and Malaysia
50
60
30
40
centage
GCC
Malaysia
10
20
Pe
0
sequiva
le
cialin
stitu
'Bitha
man
Ina
am/Istisna
Ijara
a/Muq
ara
usharak
a
es/co
mpa
Others
Cash
andc
Ad
vanc
estootherfina
Murab
aha/Al-Ba Sa
Musara
Investm
entin
securit
8/14/2019 Ibo Iiu2009
97/99
InternationalOutlookforSourcesoffunds
8/14/2019 Ibo Iiu2009
98/99
Sources of funds of Islamic Banks in GCC and Malaysia (combined)
Deposits from other financial
InstitutionsOthers
Shareholders equity
11%
9%
Current Accounts
28%
Investment/Savings accounts
48%
8/14/2019 Ibo Iiu2009
99/99
..
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