Applied Shariah in Financial
Transactions
Assoc. Prof. Dr. Mohamad Akram Laldin
Executive Director, ISRA
Page  1
Presentation Outline
Page  2
1
Essential Shariah Guidelines
2
Islamic Contracts and Products
3
Islamic Investment Products
Details
• Essential Shari’ah Guidelines
• Islamic Contracts and Products:
 Deposit – taking Contracts
 Sale – based Contracts
 Lease – based Contracts
 Equity – based & Hybrid Contracts
 Fee – based Contracts
 Other Supporting Contracts
• Takaful
• Investments Products
3
Page  3
Transaction in Islam
Any transfer of wealth or property has to be
made through a valid contract or `aqad
Divine Sources
(Quran & Sunnah)
Mutual Consent
• Contracts in Islam is the linking of offer and acceptance,
resulting in legal effects on the subject matter of the
contract.
• In Islamic law, `contracts includes both bilateral as well as
unilateral
4
Page  4
Essentials of Valid Contract
CONTRACTUAL
EXPRESSION
Offer
Acceptance
• Clear
• Corresponding of
offer &
acceptance
5
Page  5
CONTRACTING
PARTIES
Offeror
Offeree
• Of full contractual
capacity
• Legal authority to contract
• As owner & in
possession of asset
• legal representative
(agent, guardian etc.)
SUBJECT
MATTER
Goods/
asset
Price/
consideration
• Something of value
• Ascertainable
• Legal
General Principles in Transaction
CONTRACT AS BASIS OF
TRANSACTIONS
Mutual consent
Interest
6
Page  6
Uncertainties
Lawful Contractual
Objective
AVOID
Gambling
Other prohibitions
Eg: liquor, pork
Freedom of Contract
7
Page  7
Islamic law of
transaction :
combination of
fixed & flexibility
Valid: Consent +
Non- violation of
Text
‫األصل في‬
‫األشياء االباحة‬
“The original
ruling is
permissible”
Hadith: Muslims
are bounds by
conditions they
make
Promote Maslahah
Freedom from
Riba
Entitlement to
Equal, Adequate,
Accurate Info.
Promote
Brotherhood
Freedom from
Gharar
A system grounded
on moral and
ethics
Freedom from
Dharar
Freedom to
Contract
Characteristics of Shariahcompliant Banking and
Financial System
Freedom from
Price control &
Manipulation
Page  8
Freedom from
Qimar & Maysir
Entitlement to
Transaction at
Fair Price
Various Forms of Islamic Contracts Used in Banking
Deposit-taking Contracts
Promise/Undertaking
Wa`ad
Sales-based Contracts
BBA – deferred sale;
Murabahah – cost-plus sale;
Bai al-Inah, Bai al-Tawarruq
Lease-based Contracts
Ijarah Wa Iqtina; Ijarah
Thumma Al-Bai’, Ijarah
Muntahia Bitamleek
Equity-based Contracts
Mudarabah, Musyarakah
Fee-based Contracts
Hybrid Contracts
9
Wadi’ah Yad Amanah; Wadiah
Yad Dhamanah, Mudarabah;
al-Qard
Kafalah/Dhaman (Guarantee);
Wakalah (agency)
Musyarakah Mutanaqisah
(Dimishing Partnership),
AITAB etc.
Page  9
9
Conceptual Balance Sheet of an IFI
Assets
Liabilities
Trade Finance
(Mudarabah/ BBA)
Custodial Services
(Amanah/Wadiah)
Asset-backed
Securities
(Ijarah/Salam/Istisna)
10Page  10
Deposits/Investments
(Mudarabah/ Wakalah)
Fund Management
(Mudarabah/ Special
Mudarabah/Musyarakah)
Fund Management/
Private Equity Venture
Capital
(Special Mudarabah/
Musyarakah)
Fee-based Services/
Advisory
(Wakalah/Jualah/Kafalah)
Capital Owners’ Equity
(Musyarakah)
11Page  11
DEPOSIT SERVICES PRODUCTS
Saving/ Current
Account
Qard
or
Wadi’ah Yad
Dhamanah
12Page  12
Investment
Account
Mudarabah
Negotiable
Islamic Deposit
Certificate
(NIDC)
Sale & Buy Back
Arrangement
(SBBA)
Bay’ al-`inah
Bay’ al-Dayn
Qardh (Loan)
Qardh means non-interest bearing loan or benevolent loan
The borrower is only obliged to pay the loan at its original amount to the lender
within the agreed stipulated period of time
In the Qard saving account, the bank will take deposit from the client and it is
considered as a loan to the bank
The bank is not allowed to promise any return as it will be constituted as riba
Since it is a loan, the bank is allowed to utilise the fund and
return back the deposit to the customer when they request them
Page  13
WADI’AH
Contract bet.
Depositor
and
Custodian
WADI’AH
Trust
Contract
Custodian
cannot
benefit from
the item
Page  14
To keep the
property of
another in a safe
custody by explicit
and implicit terms
How Bank
Can Benefit
From Wadiah
Contract?
The Wadi`ah Contract is
combined with
Guarantee contract
(Dhaman or Kafalah)
Page  15
Wadi`ah Yad Dhamanah
(Guaranteed Safe Custody)
DHAMAN / KAFALAH
Liability
Custodian
liable for
loss/
damage
Usage
Custodian
may utilize the
deposited
item
Profits
Profit arising
from the use is
sole right of
custodian
Page  16
DHAMAN /
KAFALAH
A guarantee
contract
Wadi`ah Yad Dhamanah
– The custodian is a trustee and guarantor to
safeguard the deposited asset.
– The deposited asset/property need not be
separated/segregated
– The deposited asset/property can be used for
trading etc.
– The custodian has a right to any income derived
from the utilisation of the deposited asset
– Depositor can take back the deposited asset at any
time
– Wadi`ah Yad Dhamanah is like Qard (loan);
therefore all principle of loan would be applicable
– Thus as a loan WYD cannot generate any preagreed benefit/income to the depositor, over and
above the principal amount of deposit, otherwise
tantamount to riba
17Page  17
Shariah Issues
Current Account
Overdraft
facility
Saving Account
Advertisement of
hibah prior or at
time of contract
Page  18
Deposits
from
Individual /
Companies
Minor
(Guardian)
Hibah
Insufficient
fund for
cheque
clearance
Mudarabah
19Page  19
A profit sharing
contract & a trust
contract
Parties:
Rabbul Mal
(Capital Provider)
Mudarib
(entrepreneur)
Profit will be
distributed based
on agreed ratio
Loss:
Rabbul Mal lose his
capital and Mudarib
lose his work
Issues To Be Considered
•
•
•
•
•
•
20Page  20
Investment from certain individuals
and companies
Investment of a minor
Advertisement of gift prior to the
contract
Guaranteeing profit/capital?
Variation of the ratio of profit and
loss sharing
Pre-mature withdrawal of capitalmudarabah investment
Other Deposit Products / Structures
Commodity Murabahah Deposit-i

Structured based on Tawarruq
Structured Deposit Products
Pure Al-Qard Structures

Absolutely no returns or benefits provided to
depositors

E.g., Al-Rajhi Malaysia’s savings and current
accounts
Combination Structures

Each deposit split into stipulated portions
(Mudarabah & Qard)

E.g., KFH Malaysia’s savings and current accounts
21Page  21
22Page  22
Murabahah &
Bay`
Bithaman Ajil
Bay`
Tawarruq
Bay` `Inah
Common Types of
Sale-based contract
Bay` Istisna’
23Page  23
Bay` Salam
Murabahah
24Page  24
Cost plus mark up
sale
Seller disclose the
actual cost and the
added profit
margin
Payment may be on
spot basis or
deferred
It is different prom
Musawamah (sale
based on bargain)
Basic Shari`ah Rules on Sales
25Page  25
1.
Subject of sale must be existing at time of sale
2.
Subject of sale must be owned by seller at time of sale
3.
Subject of sale must be in physical or constructive
possession of seller at time of sale
4.
Sale must be instant and absolute
5.
Subject of sale must be of value
6.
Subject of sale cannot be for haram use
7.
Subject of sale must be specifically known and identified
8.
Certainty of delivery
9.
Certainty of price
10.
Sale must be unconditional
Application of Murabahah in Finance
(Murabahah To The Purchase Orderer )
• It is a sale in which two parties or
more negotiate and promise each
other to execute an agreement
according to which the orderer asks
the purchaser to purchase an asset of
which the latter will take legal
possession.
• The orderer promises the purchaser to
purchase the asset from him and give
the ordered a profit thereon. The two
parties would conclude a sale after
the possession of the ordered to the
asset.
26Page  26
Murabahah Trade Financing
Customer buys commodity
via murabahah on
deferred payment terms
Trader transfers
Commodity to Bank
Customer identify the
commodity
Customer approaches
bank and promises to
buy commodity from bank
27Page  27
Bank buys commodity
on cash basis
Bay` al-Inah?
Sale and buy
back
Seller sell at
deferred
price and
buyer sell
back with
cash price
28Page  28
Profit
difference
between
deferred and
spot price
Bay’ al-Inah: Personal financing
How can I borrow
RM100,000 to get
married?
Bank sells
asset
RM 150,000
Customer
pays on
deferred
Banks Pays on
cash basis
RM 100,000
29Page  29
Customer
sells back
asset
Bay’ Al Inah
Legal
Sale and buy
back with
some time
interval
Page  30
Sale and buy
back
without any
intention to
do so Coincidence
Sale and buy
back with
similar price
Illegal
Sale and buy
back after
some
modification
to the object
30
Two
contracts
are tied
(conditione
d upon
another)
Two sales in
one
Tawarruq
Tripartite sale/
Cash
procurement
Buyer buys an
asset from a Seller
on deferred
payment and then,
sells the assets to
the Third party for
cash
31Page  31
Intent
Not sale
transaction
but to acquire
cash
Tawarruq Model of Home Financing
4.Property
4.RM200,000
Customer
Property
Owner/Developer
2.RM350,000
Deferred
3.RM200,000
2.Electrical
Appliances
1.RM200,000
Page  32
32
Electrical Appliances
Wholesaler
1.Electrical
Appliances worth
RM200,000
Commodity Murabahah Deposit-i
US$ 1 Million Cash
US$ 1.1
Million
deferred
Broker B
US$ 1 Million Cash
Broker A
33Page  33
Ruling on Tawarruq
Organized
Tawarruq
Classic
Tawarruq
Allowed by
many jurist
- condition:
object not
sold back to
Original Seller
Page  34
Prohibited by
some jurist
such as Ibn
Qayyim
Allowed by
some jurist
and applied in
some IFIs
34
Prohibited by
most jurists
- Similar to
‘Inah
Bai’ Bithaman Ajil (BBA)
35Page  35
Deferred sale
BBA is originally
not a kind of sale
Rather, it is a way
in which the
payment of the sale
price is made i.e.
Deferment.
In Malaysia, BBA
refers to long term
deferred sale,
while murabahah
refers to short
term deferred
sale.
BBA HOME FINANCING MODUS OPERANDI
5. Bank pay
developer
the 90%
balance
Developer/Vendor
Sales & Purchase
Agreement (S&P)
1. 10%
down
payment
1. Beneficial
ownership
Property Sale Agreement (PSA)
3. BBA price
(deferred payment)
3. House
2. House
2. Cash price
(90% balance)
BANK
Page  36
Property Purchase Agreement (PPA)
Customer
Financing Facility: Islamic Banking
vs. Conventional Banking
Fin. Amount
Tenure
: RM100K
: 25 yrs
(1981-2005)
Single Rate : BFR-0
Ceiling Rate : 9.90
Ta’widh
: 1%
Total Selling Price
Page  37
Loan Amount
Tenure
Single Rate
Ceiling Rate
Penalty
: RM100K
: 25 yrs
(1981-2005)
: BLR-0
: -no: 8% compounded
Total Repayment
MOVEMENT OF BASED LENDING RATE (BFR)
Page  38
39Page  39
Ijarah (Leasing)
•
40Page  40
Ijarah contract is a form of exchange contract (`aqd al
mu`awadah) – usufruct vs. rent.
•
Ijarah (Operating Lease) means leasing of asset
pursuant to a contract under which a specified
permissible benefit in the form of a usufruct is
obtained for a specified period in return for a
specified permissible consideration.
•
It is a manfaah (usufruct) type of contract whereby a
lessor (owner) leases out an asset to its customer at
an agreed rental fee and pre-determined lease period
upon the `aqad (contract). The ownership of the
leased equipment remains in the hands of the lessor.
Ijarah Muntahiah Bi Tamlik (Financial Lease)
•
41Page  41
Ijarah Muntahiah Bi Tamlik has
similar rules to the ordinary
Ijarah
except
that
it
is
associated with a promise by
the lessor to transfer ownership
at the end of the Ijarah period
via a separate sale agreement or
gift.
DIRECT LEASING
3. Bank pays airplane manufacturer
5. Bank lease
airplane to
airline
4. Airplane manufacturer delivers airplane to bank
6. Airline
pays rental
2. Airline approaches bank to
seek financing
42Page  42
7. At the end of
lease term
airline take
ownership
1. Airline places order with
airplane manufacturer
Ijarah Mausufah Fi Zimmah (Forward Lease)
•
•
•
•
43Page  43
Ijarah Mausufah Fi Zimmah means an ijarah contract
which is executed for an asset undertaken by the lessor
to be delivered to the lessee according to accurate
specifications, even if the asset is not owned by the
lessor.
During the period that the leased asset/property is
under construction, the lessor may ask the lessee to pay
a certain portion of pre agreed lease rental as a forward
lease.
The forward lease rental payment will be considered as
a debt to the lessor until the delivery of the leased asset
to the lessee.
Ijarah Mausufah Fi Zimmah can be in a form of Ijarah or
Ijarah Muntahiyah Bi Tamlik.
Salient feature of Ijarah
44Page  44
Asset: Valuable use
/ usufruct. Not
consumable
Ownership remain
with lessor;
usufruct transfer to
lessee
Liabilities and risks
incidental to
ownership will
reside with the
lessor
Liabilities, risks or
expenses refer to
the use of the
leased asset reside
with lessee
Cont’d…
45Page  45
•
The purpose and mode of usage should be agreed
upfront
•
The lessor could be the legal owner or the equivalent
(agent, natural or legal guardian)
•
The leased asset is a trust in the hands of the lessee.
•
The rental payment commences after the delivery of the
leased asset, actually or constructively.
•
The lease contract terminates upon the loss / nonexistence of the usufruct
•
Lease contract is a bilateral contract. Any termination, in
normal cases, must be mutually agreed.
46Page  46
Musharakah
47Page  47
Profit –Loss
Sharing contract
Technically it
refers to the
commingling of
capital provided by
the partners for the
purpose of sharing
in profit
Profit will be
distributed based
on agreed ratio
Loss will be
distributed based
on parties’ equity
ratio
Musharakah
(Profit Loss Sharing)
Venture
Profit
or Loss
Capital
Partners
Profit n Loss
Sharing
Page  48
Application:
• Home Financing:
Diminishing
Musharakah
• Sukuk
• Equity Shares
• Project Financing
• Letter of Credit
Musyarakah Mutanaqisah
(Diminishing Partnership)
• Musyarakah mutanaqisah is a form of Musyarakah
(partnership) in which one of the partner promises to
purchase the equity share of other partner gradually
until the title of the equity is completely transferred to
him.
• This transaction starts with the formation of
partnership, after which buying and selling of the equity
take place between the two partners.
• One partner may lease his share of the asset to the
other partner on Ijarah (lease) basis.
• The partnership will come to an end with one partner
being the sole owner of the asset or business venture.
Page  49
Musyarakah Mutanaqisah
(Modus Operandi)
Bank leases its 90% share of
property to customer
90%
10%
0%
100%
Customer pays rent for usage of Bank’s
90% share of property
Customer gradually buys share of
property from Bank
Page  50
Customer’s
monthly
installment
payments
ILLUSTRATION of
Musharakah Mutanaqisah
Customer’s Share
The asset is now
mine. Thanks to
Islamic Bank
MM
Bank’s Share
90%
100
90
80%
80
70%
70
Customer now
owns 100%
of the Assets
30
20
51
Page  51
50%
50
40
10%
60%
60
10
40%
30%
20%
10%
Bank’s
share
= “0”
Differences Between Murabahah & MM?
No
BBA
Musharakah Mutanaqisah
1
Involves a Sale Contract
Involves Partnership, Leasing and Sale
contracts
2
Contract – Buyer & Seller
Contract – Partnership
3
Require underlying assets to complete
Aqad (APA & ASA)
Underlying assets not required
4
With Selling Price – Fixed
No Selling Price – Flexible
5
Security documents
Asset Purchase Agreement
Asset Sale Agreement
Charge/Deed of Assignment
Security documents
MM Co-Ownership Agreement
Charge/Deed of Assignment
6
Property belongs to the customer
Property belongs to both the customer and the
bank according to the percentage of ownership
Page  52
53Page  53
Delegation (al-Wakalah)
•
•
•
54Page  54
Wakalah is a contract of agency which
gives the power to a person to nominate
another person to act on his behalf as
long as he is alive based on the agreed
terms and conditions.
Wakalah is commonly used in Letter of
Credit-i
Delegation Al-Wakalah has four pillars:
1. The Delegator Al-Muwakkil
2. The Delegatee Al-Wakeel
3. The wording of the Delegation
4. The subject of the Delegation
Letter of Credit (LC)- Wakalah
Seller
(Beneficiary)
Advice LC
Need to produce
Required documents
Eg. commercial invoice
BL (Bill of landing),
etc
Buyer
(Applicant)
Apply LC
Issue LC
55Page  55
Advising Bank
Issuing Bank
56Page  56
Wa`ad (Promise)
An
undertakin
g to do
something
in future
57Page  57
Involves
the
promisor
and
promisee
Waad is
not
contract
It is
unilateral
and
binding on
the maker
only
1st Group
2nd Group
(Hanafis, Shafi`is, Hambalis
(Samurah b. Jundub, Umar Abdul
Aziz,Hasan al-Basri, a;-Ashwa’,
Ishaq Rahwaih, Al-Bukhari & some
Malikis)
and some Maliki jurists)
Fulfilling a promise is
noble but it is neither
mandatory nor
enforceable through a
court of law
Fulfilling a promise is
mandatory & the promisor is
under a moral and legal
obligation to honor his
promise.
WA`AD
(PROMISE)
3rd Group
(Some Maliki Jurists)
Promise is not binding under
normal circumstances but
becomes binding where the
promisor has caused
promisee to incur certain
expenses or undertake work
or any
Page
 58 form of liability
4th Group
(Islamic Fiqh Academy –
Generally accepted view)
Fulfilling a promise is allowed
subject to certain conditions
as enumerated in the next
slides
58
Islamic Fiqh Academy
Position on Promise
Promise in commercial dealings are binding subject to the
following conditions:
1.
It should be one-sided promise
2.
The promise must have caused the promisee to incur
certain liabilities for the promisee to seek enforcement
on the promisor
3.
If the promise is to purchase something the actual sale
must take place at the appointed time by the exchange
of offer and acceptance. A mere promise itself should
not be taken as a concluded sale
4.
If the promisor bakes out of his promise, the court may
force him either to purchase the commodity or pay
actual damages to the seller. The actual damages
include the monetary loss suffered by the promisee, but
shall not include the opportunity cost.
Page  59
59
60Page  60
BASIC MECHANISM OF INSURANCE
Profit
No Claim
Premium
Policy holder
Insurance Company
Peace of mind
Calamity
Compensation
Page  61
Conventional Insurance: Not Shari’ah-compliant
•
Element of uncertainty (gharar)
–
There is uncertainty of what the insurance policy-holder is “buying” or
paying for
•
If no loss occurs  Policy-holder receives nothing
•
If loss occurs  Policy-holder gets compensation in varying
amounts
Premium
Insurance
Company
•
•
Page  62
Insurance
Policy-holder
Coverage
Element of gambling (maysir)
–
The insurance company is gambling that total premiums collected will
exceed total claims and thus producing underwriting surplus (profit)
–
Total claims is predominantly affected by chance (will of God)
Element of riba
–
Insurance fund commonly invested in interest-bearing securities
Page  63
SHARI`AH LEGITIMACY OF TAKAFUL
َ ‫و ُنو ْا‬
‫و ُنو ْا‬
َ ‫وال َ تَعَا‬
َ ‫وى‬
َ ‫وال َّت ْق‬
َ ‫بر‬
َ ‫وتَعَا‬
َ ِِّ
ِّ ‫علَى ا ْل‬
َ
‫وان‬
ُ ‫وا ْل‬
َ ‫ع ْد‬
َ ‫م‬
ِّ ‫اإل ْث‬
ِّ ‫علَى‬
“and help ye one another in righteousness and
piety, but help ye not one another in sin and
rancour” (5:2).
 Hadith
• “…tie the camel, then submit (tawakkal)
to the will of God.”
• Importance of risk mitigation
 Islamic Legal Maxim
‫الضرر يزال‬
Page  64
BASIC DESCRIPTION OF TAKAFUL INSDUSTRY
Takaful
Operator
Takaful Participants
Manages fund for a fee or share in
profits on investment
Takaful Fund
•
•
•
•
Page  65
Contribute via
unilateral
contract
(tabarru’at)
Takaful participants contribute to a takaful fund based on the concept of
mutual assistance
The contribution is done via reciprocal/mutual donation (tabarru’at) and
does not represent a commercial “sale of coverage”
Takaful entails a unilateral, charitable contract (tabarru’at) in contrast
with the conventional insurance contract which is a bilateral exchange
contract (mu’awadat)
Gharar is tolerated in a charitable unilateral contract
Takaful: Wakalah Model
Takaful
Participants
Wakalah
fee
Contribute
1st contract
Tabarru`
2nd Contract
Wakalah
Risk Fund
Manage
Takaful Operator
66
Page  66
Surplus
-retakaful
-reserves
-claims
-investment
income
-stabilization
reserves
Takaful: Mudarabah Model
Takaful
Participants
Contribute
1st contract
Tabarru`
2nd Contract
Mudarabah
1. Unilateral contract
2. Valid though no
acceptance and
consideration from
the recipient
Takaful Funds
Manage
Invest
Takaful Operator
Profit, if any, is shared between the two based on
certain ratio or percentage & loss, if any, will be
borne by the capital provider alone
Page  67
67
Pay Claims
Takaful vs. Insurance
Basis
68Page  68
Conventional
Insurance
Takaful
Principles
Non compliance with
Shari`ah principles
In compliance with
Shari`ah principles
Contract
Buying & Selling
Tabarru` , Wakalah &
Mudarabah
Obligation of
Company
Guarantor to insured
Fund Manager
Guarantee
Given By Company
Participants Mutually
guarantee each other
Page  69
Literal Meaning
Sukuk is the plural of
sak which means
certificates. Other
similar terms:
•Taskik – process of
dividing assets into
papers (sukuk)
•Tawriq – to render
something into cash
AAOIFI
“Investment sukuk are certificates
of equal value representing
undivided shares in ownership of
tangible assets, usufructs and
services (in the ownership of) the
assets of particular projects or
special investment activity”
Page  70
Technical Meaning
SUKUK
Sukuk refers to
securities, notes,
papers or certificates,
with features of
liquidity and tradability
(except for salam and
murabahah sukuk)
Malaysian Securities
Commission
“A document or certificate which
represents the value of an asset”
• Asset – may include financial asset
such as receivables and debts, as well
as non financial assets like tangible
assets, usufructs and services.
Obligor/Project
Developer
Proceeds from
Sukuk Sales
Issuer/Trustee
BASIC
STRUCTUR
E OF
SUKUK
Issue
Proceeds
Sukuk
Income from
project
Income Generating
Page  71
Project
Sukuk Investors
Comparing SUKUK to BONDS
Sukuk
Bonds
1. Holder owns assets
1. Holder owns cash flow only
2. Use a variety of contracts to create
financial obligations between issuer
and investors; e.g. Sale, lease, equity
partnership, joint-venture etc.
2. Simply use a loan contract to
create indebtedness
3. Return linked to profit elements inbuilt in the sale, lease or partnership
3. Return linked to interest charged
out of the loan contract
4. Instrument may be equity or debt
depending on underlying contract
4. It is a Debt instrument
5. Tradability of the sukuk depends on 5. No restriction on the tradability
the nature of the underlying asset
6. Investment in Shari`ah-compliant
activities
Page  72
6. Proceeds are invested in any
business without restrictions
Bases for Sukuk Classification
The Underlying
Contracts in the Sukuk
Structures
Sales-based
Lease-based
Partnership-based
Agency-based
The Nature and Type of
Asset represented by the
Sukuk
Debt-based
The Technical and
Commercial Features
of the Sukuk
Asset-based (normal)
Asset-Backed (ABS)
Hybrid Structure
(convertible &
exchangeble )
Page  73
Tangible assets
Usufructs
Rights in
investment
projects
Special
investment
activities
Types of Sukuk
Asset-Based
Sales-Based
Lease-Based
AssetBacked
PartnershipBased
BBA
Ijarah
Mudarabah
Murabaha
h
Ijarah
Muntahiya
bi Tamlik
Musharakah
Salam
Istisna
Page  74
Ijarah
Mawsufah
fi Zimmah
Hybrid
AgencyBased
Convertible
Exchangeable
Wakalah bil
Istithmar
2. Sell the
asset on
tendered basis
1. Issuer
identified asset
3. Subscriber
cum tender
panel member
provide
proceeds
TPM/Underwriter
s
4 Disburse the
purchase price
5. Subscriber
resale the asset
at selling price
(mark-up, i.e.
Murabahah)
Primary
Subscriber
Issuer
MUNIF
Debt (Selling price) is evidenced by issuance of MUNIFs
MUNIF Basic
Structure
Page  75
May sell MUNIF
in Secondary Market
(Bay al-Dayn)
BASIC STRUCTURE: IJARAH SUKUK
1. Sale of assets to the
primary subscribers
2. Lease back assets to issues in
return for ijarah rental (periodic
distribution)
Primary
Subscriber
Sukuk Issuer
3. Issue Sukuk Ijarah as
evidenced of undivided
proportionate ownership of
leased asset + right to ijarah
rental stream
Page  76
Secondary
Market
Trading
Investors
STRUCTURE OF MUDHARABAH SUKUK
Issues Mudarabah
Sukuk
Contract of Mudarabah
1
Investors
(Rabb al-Mal)
Profit shared
in accordance
to pre-agreed
proportions
(X,Y)
Y%
to rabb al
mal
Issuer
(Mudarib)
CAPITAL
X% to Mudarib
3
Loss?
borne totally
by rabb al-mal
Page  77
Outcome
Of
Project
2
Invests in project
Rental from
halal activities
Islamic REITs
Return from Islamic REITs
Rental from mixed activities
(halal + haram)
Method to calculate rental
From non halal activities
Instruments used in deposit,
investment and financing
i-REIT
Fund Management
Takaful Protection
Risk management issue
Page  78
Islamic REITs
Shariah advisors
Unit Holder
Advise on
Shariah
issues
Investment
Returns
Safeguard unit holder’s
interest
Management services
REITs
Management fees
Trustee fees
Ownership
Of Property
Manager
Trustee
Net Property
Income
Property
Page  79
Manager
Maintenance and
Management
Services
Rent
Maintenance and
management fees
Rental Payment
Properties
Tenant
Shariah Issues involving Rental from
Lessee who conduct Mixed Activities
The core activity is
halal but small portion
of the whole activity is
not- halal
Method of
calculation
Principle
The non halal ration must not
exceed 20% of the total
rental from Islamic REITS
`Umum Balwa
Maslahah
Benchmarking
Page  80
In calculating the ratio of nonhalal activity: usage of the
space, length of service and
others are applied
If the width of the supermarket is 10,000 sqf,
and the designated area for sale of liquor is
1000 sqft, namely 10%.
It is still within the acceptable ratio
Islamic Structured Products
Fund-Mobilization Stage
Investment Activities Stage
Wakalah bi al-istithmar-based structured investment
Client’s
investment
Invest 90%
Fixed Income
Investments
100%
Client
BANK
Bank acts as
agent (wakalah
contract) in
investing
depositor’s
money &
charges a fee for
the service
-Commodity murabahah
- Sukuk, Islamic ABS
(Asset-Backed Securities)
Invest 10%
Higher Return
Investments
-equity, derivatives e.g.
Options, swaps, futures
& forward
Expected Return x%
Page  81
Expected Return 10%
Principal Protection = (90% investment + 10% return)
Shariah Issues
Structuring
1. Identifying contract and principle
• Fund raising stage – Wakalah/Mudarabah
• Investment activities– Tawarruq, purchasing basket of
shares, embedded Islamic Option (wa`d or urbun etc)
• Wa’d, Wa’dan or Muwa`adah?
2. Underlying aset and investment activities
Implementation
1. Each contract has to be executed separately & follow the right
order
2. Capital protection objectives
• Efficient fund management
• Third party guarantee (subsidiary to principal/other
branch of an international IFI)
Usage
1. Replacement of securities (Shariah compliance status
changes)
2. Wa‘d to sell and buy equity based on ‘benchmark’ : Iqnorance
of price
3. Early settlement: Justification?
Page  82
THANK YOU
Page  83