Corporate Lecture Series
Key To Successful Development
of a Dual
Islamic Finance & Takaful Systems
Prof. Dr. Mohd. Ma’sum Billah
www.drmasumbillah.blogspot.com
Asian Business Forum
Key Issues
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Clear Picture on Dual System.
Is it a Combination Or Compromization Or
Harmonization Or Segregation?
Is It a Product Or a System?
The Road to Success.
The Mysterious Mechanisms.
The Global Update.
The Platinum Tips.
Leading Islamic Finance & Takaful Instruments.
Clear Picture on Dual System
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Islamic Financial System is Not By Name
But by Action
Misconception
A Clear Picture
The Global Reality
Is Dual Islamic Finance a Combination
Or Compromization Or Harmonization Or
Segregation?
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It is Neither Compromization Nor a
Combination.
But, A Segregation.
In Some Situations, It Is with
Harmonization by Shari’ah Compliance.
Is Islamic Finance Or Takaful
A Product Or A System?
It is Not A product .
 But A Sytem With Integration
By Shari’ah & Divine Spirit.
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The Road to Success
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Sincerity With Transparence.
Review (Products & Policies) Exercise
Considering the Socio-economic Sensitivity.
PR & Performance With Standard
Professionalism.
Sustainable Risk Assessment & Effective
Decision Making.
Wisdom, Tolerance & Mutual Respect.
Plan & Action.
Shari’ah Compliance With Divine Spirit.
The Mysterious Mechanisms
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Dynamic Marketing Strategies.
Sustainable Research & Rediscovery.
Ranks & Rewards.
Global Comparison.
Reasonable Less Liability with Added
Benefits & Rewards.
Mutual Corporate Care & Concern.
Punctuality with Smartness.
Settle Before Time.
The Global Update
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Middle Eastern Phenomena.
African Phenomena.
Malaysian & ASEAN Scenario.
Indian Sub-continent.
European Market.
US & Other World’ Condition.
The Platinum Tips
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Review Excercise With Innovation.
Unhealthy Competition.
Dynamic Offerings with Acceptable
Standard.
Foreseeable Plan & Acceptable
Performance.
Leading Islamic Finance &
Takaful Instruments
MUDHARABAH
MUSHARAKAH
MURABAHAH
Bai Bi Thaman Ajil
Wakalah
Tabarru’
Ujr
Mirath
MUDHARABAH
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Contract between two parties:
An Islamic bank as an investor (rab al-mal) who
provides a second party, the entrepreneur (mudarib)
with financial resources to finance a particular
project.
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Profits are shared between the parties in a proportion
agreed in advance.
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Losses are the liability of the Islamic bank and the
mudarib loses only its efforts and his expected share
in the profits
MUSYARAKAH
(JOINT PARTICIPATION)
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The two partners participate in the capital of the
venture
Profits are allocated according to an agreed
proportion, allowing for managerial skills to be
remunerated
Losses are borne by the partners in proportion to
their contribution to the capital
MURABAHA
(MARK UP ON SALE)
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Contract available for financing the purchase or
import of capital goods, consumable goods or raw
materials
Fundamental principles:
– Purchase price should be declared to the client
– Goods must be classified and clearly identified
according to international or commonly accepted
standards or classifications
Why more than 80% revenues
generated by most of Islamic
Banks are from the
Murabahah financing?
POTENTIAL ISSUES IN
MUSYARAKAH
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Third party guarantee
Shared liability
Restriction on joint-ownership of
capital
Classification of non-performing
financing
Source of funds
Staff competency and efficiency
Control mechanism
Third Party Guarantee
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No security / collateral is allowed
Negligence or misuse of funds
Jordan – Government guarantee
Sudanese Islamic Bank – Property as
collateral
To allow third-party guarantee on
Musyarakah financing
To assess Takaful role as third-party
guarantee
Both parties contribute to the appointment
Shared Liability
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JV – both parties share the liability
Indemnity Letter can be requested but
Syariah disallows financier to absolve
its liability to the project
To limit the liability under Syariah due
to the financier’s non-involvement in
the normal management of the project
is to be obtained
Restriction on JointOwnership of Capital
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Syariah: Capital contributed by the
partners will belong to the partnership
Title should be under the name of
partnership
Issues in JV-based Musyarakah
Section 66 of BAFIA, FIs are not
allowed to acquire or hold more
than 5% equity in any corporation
except by way of credit security
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Assets which are contributed by partners as
capital must be clearly differentiated from
assets which are lent for specific functions
and period by the partners
Appointment of trustee – economical for
small financing?
Alternative: Issue Trust Declaration – need
to be registered with ROC
A private caveat can also be lodged if the
assets is land
Still need to amendment BAFIA
Classification of NonPerforming Financing
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Does not have fixed payment schedule
Tenure can be specific or perpetual
It is difficult to classify Musyarakah as non
performing based on current Non
Performing Loan Guideline by BNM GP3
To amend the BNM GP3
Perpetual should be exempted from the NPF
classification
To divide it into 2 categories – Specific
Maturity Musyarakah and Perpetual
Musyarakah
Source of funds
 Where the funds should be tapped
from? Who are depositors? Specific
accounts holder – risk takers?
 Gapping issues – short term deposit
versus long term lending
 Limited shareholder’s fund – worst still risky
Staff Competency and
Efficiency
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To ensure that proper and structure
training and practical are given to the
parties involved
Control Mechanism
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Difficult to monitor and control
especially JV-type
Selective customers only
Recommendations
to promote
Musyarakah Financing
Other recommendations
BE SELECTIVE IN PROJECT SCALE: SMALL TO MEDIUM
In a project whereby capital investment is very huge, like
construction of dam, gas and oil production plant, musyarakah
and mudharabah structure may not be recommended due to
the shortfalls of this structure. In practice the financing
structure are more toward debt structure, ijarah, rahn and etc.
GO FOR MORE SECURED PROJECT CASH FLOW
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For relatively small project like a secured
infrastructure government award project, bank can
adapt the musyarakah and mudharabah structure
replacing the murabahah or BBA in trade financing
that are widely use in current practice
In practice Islamic Bank use Murabahah Working
Capital Financing facilities in order to facilitate trade
finance of particular company that being awarded
with government project. In Malaysia, infra project
are booming and the need for such financing is
huge
In MWCF bank will get profit out of mark up sale
that they charges to its clients of more less like 11.5% p.m. and if the bank can participate directly
into the project by way of mudharabah or
musyarakah the return is far beyond the current
margin.
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For example, government awarded a project to an
ABC Co. to construct a RM50 million hospital for a
period of 18 months in Gua Musang
Since the project is guaranteed by the government
in term of progressive cash flow payment, bank can
use Musyarakah or Mudharabah as a tool to
participate in the project for a better return
How this recommendation
can solve the shortfalls
GO FOR SHORT TERM PROJECT FINANCING
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Liquidity problem can be resolved as the project
undertake is only for short term period
Bank can use depositor’s fund instead of limited
shareholders’ to capitalize the project in order to
give better return to depositors
Problems of gaping can be eliminated, since cash in
flow will be paid in progress payment. In a typical
government project, payment made progressively
in monthly payment according to
Direct involvement from the agents
 Mudharib & Rabbul Maal are the board
of executives directors
 Risk scorecard must be in place and
reviewed periodically
 Appointed independent
project/account manager/consultant to
assess the performance and detect
warning signals for pre-emptive
measure
Thank You
Wassalam