Innovation In Islamic Retail Products
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Innovation in Islamic Retail Products - A Comparative Update Between Malaysia and GCC Presented to The International Islamic Finance Forum 2008 Presented By Ruslena Ramli April 14, 2008 Presentation Outline The Malaysian Banking Scene 3-6 What is Islamic Retail Banking? 7-9 Types of Islamic Contracts Applied in Retail Products 10 - 33 Challenges and Sustainability 34 - 35 1 The Malaysian Retail Banking Scene Overview of Growth in Islamic Banking Assets Million 2007 2006 2005 2004 2003 2002 2001 2000 1999 1998 1997 1996 1995 1994 1993 1992 1991 1990 1899 1898 1897 1896 1895 Source: Central Bank of Malaysia USD45,230.77 USD37,538.46 USD34,407.39 USD29,226.48 USD25,297.49 USD20,944.75 USD18,262.52 USD14,465.72 USD11,118.92 USD6,517.87 USD5,501.94 USD3,117.68 USD1,906.90 USD1,503.09 USD618.18 USD515.76 USD430.89 USD438.75 USD421.03 USD348.91 USD286.87 USD336.31 USD158.27 “From a modest start of USD158.27 million in 1895, Islamic banking assets in Malaysia is increasing at an average rate of 33% to USD45.23 billion by 2007” Page 5 - Source: BNM, Annual Reports 2,513 294 1,003 1,505 1,075 1,613 521 1,550 2,967 2,348 3,163 505 3,012 3,648 3,909 Page 6 17,345 15,730 2006 Others Al Rajhi Bank - Standard Chartered Citi Group CIMB Islamic Alliance Bank 5,255 6,043 5,818 6,437 2005 KFH OCBC Affin Bank 9,406 7,649 8,093 6,331 4,283 5,130 5 ,0 0 0 EON Islamic HSBC Hong Leong Islamic RHB Islamic AmBank 8,067 10,228 1 0 ,0 0 0 Public Bank 10,271 13,456 1 5 ,0 0 0 Bank Muamalat 2 0 ,0 0 0 15,850 14,605 23,612 21,918 2 5 ,0 0 0 Bank Islam Maybank Growth of Islamic Assets by Malaysian Banks RM million Profile of EONCAP Islamic’s Banking Assets “Islamic banking today is no longer restricted to race or religion” Muslim 16.2% Non-Muslim 83.8% 2007 Muslim 61.8% Non-Muslim 38.2% Current Deposits Saving Deposits Muslim 70.3% Non-Muslim 29.7% 2007 Home Financing 2007 NonMuslim 25.6% Muslim 74.4% 2007 Motor Vehicle Financing Page 7 2 What is Islamic Retail Banking? Brief Summary Mass-market banking where products cater to individual needs of customers and is typically performed in local branches of larger commercial banks. Common products include deposit accounts, home financing, car financing, personal financing, charge cards, etc. Scope of services have evolved to address the entire financial solution of a customer, from growing and protecting customer’s assets to planning retirement and passing wealth on to future generation. Page 9 Types of Islamic Retail Products Home Financing Motor Vehicle Financing Deposits Islamic Retail Products Wealth Management Charge Cards Personal Financing Page 10 3 Types of Islamic Contracts Applied in Retail Products 3a Islamic Deposits Application of Islamic Contracts - Comparison Products Shariah Principles (Malaysia) Shariah Principles (International) Saving/Current Wadiah Yad Dhamanah/ Mudharabah Mudharabah Wadiah/Qard Hasan/ Mudharabah Mudharabah Tawarruq/Wakalah GIA/SIA Deposit In Saving Accounts, most Banks adopt the principle of Wadiah (guaranteed safe custody) and Mudharabah (joint venture) for Current Accounts. Other Islamic banks use the contract of Qard Hasan especially in Iran. Alternative principles are Tawarruq and Wakalah. Page 13 Mudharabah Based Deposits Makes a deposit and agree on profit sharing ratio 1 3 Distributed based on profit sharing ratio 2 Bank utilises the deposits in investment or financing BANK UTILISE CUSTOMER 4 Solely borne by customer PROFITS LOSSES Page 14 Innovation and Issues in Product Development Establishment of an effective rate of return framework, which provides a standard methodology for deriving the rate of return on deposits – “Profit Equilisation Reserve”. In a dual banking system, level of competitiveness is important in retaining customer and deposits. Page 15 Alternative : Tawarruq Based Deposits BROKER A 2 BROKER B Purchase Pays the commodity purchase price at 1 cost on spot CUSTOMER Pays purchase price at cost on spot Pays the purchase price at cost plus profit (deferred) 4 3 Sells commodity at cost plus profit (deferred) 6 5 Sells commodity at cost price BANK Page 16 Alternative : Wakalah Based Deposits INVEST CUSTOMER BANK 1 Makes a deposit Note: The Bank acts as an Agent to invest the money in specified investment portfolio 2 Invests Sukuk Commodity Murabahah LEVERAGE Buying and selling shares Islamic Call Option Page 17 3b Home Financing Application of Islamic Contracts - Comparison Products Shariah Principles (Malaysia) Shariah Principles (International) Home Financing /Refinancing Bai Bithaman Ajil (Bai Inah)/ Musyarakah Mutanaqisah/Istisna Musyarakah Mutanaqisah/ Murabahah/Ijarah Muntahiyah Al Tamlik/Istisna Almost all Malaysian Islamic Banks adopt the principles of Bai Bithaman Ajil (sale and purchase). Initiatives are underway to promote utilisation of Musyarakah Mutanaqisah (diminishing ownership). Page 19 Musyarakah Mutanaqisah Home Financing Over time the Customer purchases the Bank’s stake in the property until all ownership remain with the Customer 3 CUSTOMER BANK Co Ownership 10% 1 Customer identifies a property and invite the Bank to co-own 2 90% Note: Suitable for completed or houses under construction Page 20 Innovation and Issues in Product Development Waiver on double stamp duty for the transfer of Asset from the Bank to the Customer. Enhancing IT System and reducing legal documentation for Customer. Benchmark of sale price at the end of the Musyarakah Mutanaqisah period. Market value or a price that is agreed upfront? In Malaysia, the price is agreed upfront. How to recognise Musyarakah Mutanaqisah in the Bank’s books? - The Bank as owner of the Asset; or - The Customer (legal possession) as owner of the Asset but the Bank has charge over the Asset (actual possession) Page 21 Ijarah Home Financing Customer enters into a Lease Agreement (or Forward Lease Agreement) to lease the house for an agreed lease rental with a transfer of the asset to the Customer at the end of financing 2 5 Pays monthly lease CUSTOMER BANK rentals DEVELOPER Identify and pay downpayment 1 Deliver 4 3 The Developer enters into a Parallel Istisna Agreement with the Bank to construct and deliver the house in consideration for a Page 22 Istisna Purchase Price (principal) Parallel Istisna Home Financing Customer enters into 1st Istisna Sale Agreement where the Bank agree to construct and deliver the house to the Customer in consideration for a Istisna Sale Price (principal + profit margin) 2 5 Deliver CUSTOMER BANK DEVELOPER Identify and pay downpayment 1 Deliver 4 3 The Bank enters into 2nd Istisna Purchase Agreement where Developer agree to construct and deliver the house to the Bank Page 23 in consideration for a Istisna Purchase Price (principal) 3c Motor Vehicle Financing Application of Islamic Contracts - Comparison Products Shariah Principles (Malaysia) Motor Vehicle Financing Ijarah Thumma Al Bai/Bai Bithaman Ajil (Bai Inah)/Murabahah Shariah Principles (International) Musyarakah Mutanaqisah/ Murabahah/Ijarah Muntahiyah Al Tamlik/ Ijarah Wa Iqtina Various Islamic contracts are being practised by Islamic Banks in offering car financing. Ijarah Thumma Al Bai is widely adopted in Malaysia. Product innovation underway to utilise Murabahah. Standard Chartered Bank (Pakistan) adopts the Musyarakah Mutanaqisah principle for its car financing. Page 25 Murabahah Vehicle Financing Customer approaches the Bank and obtain Murabahah financing to buy the car based on a Purchase Price 2 5 Sells the car based on a CUSTOMER Selling Price (principal + BANK margin) with deferred payment CAR DEALER Customer identifies the car to be purchased 1 Deliver 3 4 Pays cash Page 26 Innovation and Issues in Product Development Under Murabahah ownership is with the Customer. In the event of default, the Bank would exercise its Power of Attorney or assignment to auction the car but this would involve the Bank going to Court which is tedious. In Malaysia, car financing under Ijarah Thumma Al Bai is govern under HP Act 1967. There is currently, no Islamic HP Act. Currently in the process of being developed. Page 27 Ijarah Vehicle Financing Customer approaches the Bank and obtain Ijarah financing 2 5 CUSTOMER The Bank leases the car based on an agreed lease rental with a transfer of the asset to the Customer at the end of the financing period BANK CAR DEALER Identifies the car and pay 10% deposit 1 Deliver 4 3 The Bank purchases the car and pays the 90% balance Page 28 3d Charge Cards Application of Islamic Contracts - Comparison Products Shariah Principles (Malaysia) Shariah Principles (International) Charge Cards Bai Bithaman Ajil (Bai Inah)/ Wadiah/Qardh Hasan Tawarruq/Ijarah Some Malaysian Islamic Banks use a combination of Bai Inah, Wadiah and Qardh Hasan (benevolent financing) in providing the service. Most International Islamic Banks uses the contract of Tawarruq. KFH adopts the contract of Ijarah Muntahiyah Bi Tamlik for its credit cards. However, purchases are confined to purchase of goods which are leaseable. Page 30 Innovation and Issues in Product Development Interest free. No charging of late payment is allowed. Some of the structures that have been adopted are debt free. Concept of debit card. Alternative principle is to base the card on “Ujra” or service charge. An annual service charge is levied depending on the credit size payable in installments (monthly/quarterly). The concept of Tawarruq is used to solve issues pertaining to purchases of intangibles such as services, cash withdrawals and consumables. Page 31 Alternative : Ujrah Based Credit Cards BANK MERCHANTS 4 Customer pays ujrah for the facility Customer pays for the goods with the 3 credit card 1 The Bank opens the account and determines the credit limit CREDIT CARD ACCOUNT CUSTOMER 2 Establish the credit card facility Page 32 Tawarruq Based Credit Cards BROKER A BROKER B The Bank purchases the commodity for a The Bank sells the 1 Purchase Price (principal) commodity for a Sale Price (principal + profit) BANK 2 4 Manage the facility CREDIT CARD ACCOUNT Customer sells 3 the commodity and receives cash CUSTOMER 5 Customer deposit the proceeds into the credit card account as its credit limit Page 33 Ijarah Based Credit Cards 1 BANK The Bank identify suitable merchants 4 The Bank leases the goods for an agreed rental with a purchase option 2 The Bank appoints the Customer as Agent to purchase the goods MERCHANTS CUSTOMER 3 Customer pays for the goods with the credit card as Agent of the Bank Page 34 4 Challengers and Sustainability Challenges and Sustainability What are the constraints and challenges faced by Islamic retail product providers and those who have successfully launched their products? Why is there a need to grow retail products? What are the critical success factors? Page 36 واﻟﺴﻼم & Thank You EONCAP Islamic Bank Berhad 17th Floor, Menara EON Bank 288 Jalan Raja Laut 50350 Kuala Lumpur Tel: +603-2694 1188 Fax: +603-2694 8688 www.eoncap-islamicbank.com.my Page 37
