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Applied Shariah in Financial Transactions

Assoc. Prof. Dr. Mohamad Akram LaldinExecutive Director, ISRA

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2

3

Islamic Contracts and Products

Islamic Investment Products

Presentation Outline

1 Essential Shariah Guidelines

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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

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Divine Sources (Quran & Sunnah) Mutual Consent

4

Transaction in Islam

Any transfer of wealth or property has to be made through a valid contract or

`aqad

• 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

Page 55

Essentials of Valid Contract

CONTRACTING PARTIES

Offeror Offeree

• Of full contractual capacity

• Legal authority to contract

• As owner & in possession of asset

• legal representative (agent, guardian etc.)

CONTRACTUAL EXPRESSION

Offer Acceptance

• Clear• Corresponding

of offer & acceptance

SUBJECT MATTER

Goods/asset

Price/consideration

• Something of value• Ascertainable • Legal

Page 6

Mutual consent AVOID

Interest Gambling

Lawful Contractual Objective

CONTRACT AS BASIS OF TRANSACTIONS

Other prohibitionsEg: liquor, pork

Uncertainties

General Principles in Transaction

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Page 77

Freedom of Contract

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

Page 8

Freedom from Qimar & Maysir

Freedom fromGharar

Entitlement toEqual, Adequate,

Accurate Info.

Freedom fromDharar

Freedom from Riba

Promote Maslahah

Freedom fromPrice control &

Manipulation

Freedom to Contract

Entitlement toTransaction at

Fair Price

Characteristics of Shariah-compliant Banking

and Financial System

Promote Brotherhood

A system grounded on moral and

ethics

Page 99

Sales-based Contracts

Lease-based Contracts

Equity-based Contracts

Fee-based Contracts

Hybrid Contracts

BBA – deferred sale; Murabahah – cost-plus sale; Bai al-Inah, Bai al-Tawarruq

Ijarah Wa Iqtina; Ijarah Thumma Al-Bai’, Ijarah Muntahia Bitamleek

Mudarabah, Musyarakah

Kafalah/Dhaman (Guarantee); Wakalah (agency)

Musyarakah Mutanaqisah (Dimishing Partnership), AITAB etc.

Deposit-taking ContractsWadi’ah Yad Amanah; Wadiah Yad Dhamanah, Mudarabah; al-Qard

Promise/UndertakingWa`ad

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Various Forms of Islamic Contracts Used in Banking

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Conceptual Balance Sheet of an IFI

10

Assets Liabilities

Trade Finance(Mudarabah/ BBA)

Custodial Services(Amanah/Wadiah)

Asset-backedSecurities

(Ijarah/Salam/Istisna)

Deposits/Investments(Mudarabah/ Wakalah)

Fund Management/Private Equity Venture

Capital(Special Mudarabah/

Musyarakah)

Fund Management(Mudarabah/ Special

Mudarabah/Musyarakah)

Fee-based Services/Advisory

(Wakalah/Jualah/Kafalah)

Capital Owners’ Equity(Musyarakah)

Page 1111

Deposit-

taking

Contracts

Page 12

DEPOSIT SERVICES PRODUCTS

Saving/ CurrentAccount

InvestmentAccount

NegotiableIslamic Deposit

Certificate(NIDC)

Sale & Buy BackArrangement

(SBBA)

Qardor

Wadi’ah YadDhamanah

Mudarabah Bay’ al-`inah Bay’ al-Dayn

12

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Qardh (Loan)

The bank is not allowed to promise any return as it will be constituted as ribaThe 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 themSince it is a loan, the bank is allowed to utilise the fund and return back the deposit to the customer when they request them

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 isconsidered as a loan to the bank

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WADI’AH

Contract bet.

Depositor and

Custodian

Trust Contract

Custodian cannot

benefit from the item

WADI’AHTo keep the property of another in a

safe custody by explicit and

implicit terms

Types:1. Wadi`ah Yad Amahah2. Wadi`ah Yad Dhamanah

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How Bank Can Benefit

From Wadiah

Contract?

The Wadi`ah Contract is combined with

Guarantee contract (Dhaman or Kafalah)

Wadi`ah Yad Dhamanah(Guaranteed Safe Custody)

Page 16

DHAMAN / KAFALAH

Liability

Custodian liable for

loss/ damage

UsageCustodian

may utilize the deposited

item

ProfitsProfit arising

from the use is sole right of custodian

DHAMAN / KAFALAH

A guarantee contract

Wadia’ah + Dhaman:it converts the whole concept of wadi`ah to ‘guaranteed safe custody

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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 pre-agreed benefit/income to

the depositor, over and above the principal amount of deposit, otherwise tantamount to riba

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Saving Account

Current Account

Shariah Issues

Advertisement of hibah prior or at time of contract

Deposits from

Individual / Companies

Minor (Guardian) Hibah

Overdraft facility

Insufficient fund for cheque

clearance

Page 1919

Mudarabah

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

Mudarib is only lia

ble

for negligence or

transgression or

violation of

contract te

rms

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Issues To Be Considered

• 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 capital-mudarabah investment

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Other Deposit Products / Structures

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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

Page 2222

Sales-based

Contract

(Al-Bay`)

Page 23

Common Types of Sale-based

contract

Murabahah & Bay`

Bithaman Ajil

Bay` SalamBay` Istisna’

Bay` `Inah Bay` Tawarruq

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Page 2424

Murabahah

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)

A sale; all sale

conditions apply

Page 2525

Basic Shari`ah Rules on Sales

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

Page 2626

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.

Page 2727

Murabahah Trade Financing

Customer approaches bank and promises to buy commodity from bank

Customer buys commodity via murabahah on deferred payment terms

Bank buys commodity on cash basis

Trader transfersCommodity to Bank

Customer identify the commodity

Page 2828

Bay` al-Inah?

Sale and buy back

Profit difference between

deferred and spot price

Seller sell at deferred price and buyer sell back with cash price

Page 2929

Bay’ al-Inah: Personal financing

RM 100,000

RM 150,000

How can I borrow RM100,000 to get

married? Bank sells asset

Customer pays on deferred

Customer sells back

asset

Banks Pays on cash basis

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Bay’ Al Inah

Legal

Sale and buy back

with some time

interval

Sale and buy back without

any intention to do so - Coincide

nce

Sale and buy back

with similar price

Sale and buy back

after some

modification to the

object

Illegal

Two contracts are tied (conditioned upon another)

Two sales in one

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Page 3131

Tawarruq

Tripartite sale/ Cash

procurement

Intent Not sale

transaction but to acquire

cash

Buyer buys an asset from a Seller

on deferred payment and then, sells the assets to the Third party for

cash

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Tawarruq Model of Home Financing

Customer

Electrical Appliances Wholesaler

2.Electrical Appliances

2.RM350,000 Deferred

4.RM200,000

4.Property

1.RM200,000

1.Electrical Appliances worth

RM200,000

3.Electrical

Appliances3.RM200,000

Property Owner/Developer

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US$ 1 Million Cash

US$ 1.1 Million deferred

US$ 1 Million Cash

Broker B

Broker A

Commodity Murabahah Deposit-i

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Page 34 34

Ruling on Tawarruq

Classic Tawarru

qAllowed by

many jurist

- condition: object not sold back to Original Seller

Prohibited by some

jurist such as Ibn

Qayyim

Organized

Tawarruq

Allowed by some

jurist and applied in some IFIs

Prohibited by most jurists

- Similar to ‘Inah

Page 3535

Bai’ Bithaman Ajil (BBA)

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.

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Property Sale Agreement (PSA)

Sales & Purchase Agreement (S&P)

1. Beneficial ownership

1. 10% down

payment

3. BBA price (deferred payment)

Property Purchase Agreement (PPA)

2. House

2. Cash price (90% balance)

3. House

BANK Customer

5. Bank pay developer the 90% balance

BBA HOME FINANCING MODUS OPERANDI

Developer/Vendor

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Financing Facility: Islamic Banking vs. Conventional Banking

Fin. Amount : RM100KTenure : 25 yrs

(1981-2005)Single Rate : BFR-0Ceiling Rate: 9.90Ta’widh : 1%

Total Selling Price

Loan Amount : RM100K

Tenure : 25 yrs

(1981-2005)

Single Rate : BLR-0

Ceiling Rate : -no-

Penalty : 8% compounded

Total Repayment

Page 38

MOVEMENT OF BASED LENDING RATE (BFR)

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Lease-based

Contract

(al-Ijarah)

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Ijarah (Leasing)

• 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.

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Ijarah Muntahiah Bi Tamlik (Financial Lease)  

• 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.

Page 42

1. Airline places order with airplane manufacturer

2. Airline approaches bank to seek financing

3. Bank pays airplane manufacturer

4. Airplane manufacturer delivers airplane to bank

5. Bank lease airplane to

airline

6. Airline pays rental

7. At the end of lease term

airline take ownership

DIRECT LEASING

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Page 4343

Ijarah Mausufah Fi Zimmah (Forward Lease)

• 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.

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Salient feature of Ijarah

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

Page 4545

Cont’d…

• 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 / non-existence of the usufruct

• Lease contract is a bilateral contract. Any termination, in normal cases, must be mutually agreed.

Page 4646

Equity-based

& Hybrid

Contract

Page 4747

Musharakah

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

Page 48

Musharakah (Profit Loss Sharing)

Venture

Partners

Capital

Profit n Loss Sharing

Profit or Loss

Application:

• Home Financing: Diminishing Musharakah • Sukuk• Equity Shares• Project Financing• Letter of Credit

Page 49

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 50

90% 10%

Bank leases its 90% share of property to customer

Customer pays rent for usage of Bank’s 90% share of property

Customer gradually buys share of property from Bank

Customer’s monthly

installment payments

Musyarakah Mutanaqisah (Modus Operandi)

100%0%

Page 51

51

100

90

80

70

60

50

40

30

20

10

ILLUSTRATION of Musharakah Mutanaqisah

10%

90%

80%

70%

60%

50%

40%

Customer nowowns 100%

of the Assets

Bank’s ShareCustomer’s Share

30%

20%

10%Bank’s share= “0”

MM

The asset is now mine. Thanks to Islamic Bank

Page 52

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 documentsAsset Purchase AgreementAsset Sale AgreementCharge/Deed of Assignment

Security documentsMM Co-Ownership AgreementCharge/Deed of Assignment

6 Property belongs to the customer Property belongs to both the customer and the bank according to the percentage of ownership

Differences Between Murabahah & MM?

Page 5353

Fee-Based

Contract

Page 5454

Delegation (al-Wakalah)

• 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-Muwakkil2. The Delegatee Al-Wakeel3. The wording of the Delegation4. The subject of the Delegation

Page 55Advising Bank Issuing Bank

Seller(Beneficiary)

Buyer(Applicant)

Apply LC

Issue LC

Advice LC

Need to produceRequired documentsEg. commercial invoice BL (Bill of landing), etc

Letter of Credit (LC)- Wakalah

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Page 5656

Other Supporting

Contract

(Wa`ad)

Page 5757

Wa`ad (Promise)

An undertakin

g to do something in future

Involves the

promisor and

promisee

Waad is not

contract

It is unilateral

and binding on the maker

only

Page 58

WA`AD (PROMISE)

1st Group(Hanafis, Shafi`is, Hambalis and some Maliki jurists)Fulfilling a promise is noble but it is neither mandatory nor enforceable through a court of law

2nd Group (Samurah b. Jundub, Umar Abdul Aziz,Hasan al-Basri, a;-Ashwa’, Ishaq Rahwaih, Al-Bukhari & some Malikis)

Fulfilling a promise is mandatory & the promisor is under a moral and legal obligation to honor his promise.

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 form of liability

3rd Group (Some Maliki Jurists)

4th Group (Islamic Fiqh Academy –Generally accepted view)

Fulfilling a promise is allowed subject to certain conditions as enumerated in the next slides

58

Page 59

Promise in commercial dealings are binding subject to the following conditions:1. It should be one-sided promise2. 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.59

Islamic Fiqh Academy Position on Promise

Page 6060

Takaful

Page 61

Premium

Peace of mind

Compensation

Insurance CompanyPolicy holder

BASIC MECHANISM OF INSURANCE

No Claim

Profit

Calamity

Page 62

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

Insurance Company

Insurance Policy-holder

Premium

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

ISLAMIC

ALTERNATIVE TO

INSURANCE

Page 64

SHARI`AH LEGITIMACY OF TAKAFUL

g مiى اإلثmلmع iواqن mاوmعmت mالmى وmو iقxالت mبر} وiى الmلmع iواqن mاوmعmت mوالiعqدiوmان mو

“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 65

Takaful Participants

Contribute via unilateral contract

(tabarru’at)

Manages fund for a fee or share in profits on investment

Takaful Fund

Takaful Operator

BASIC DESCRIPTION OF TAKAFUL INSDUSTRY

• 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

Page 66

Takaful: Wakalah Model

66

-retakaful-reserves-claims-investment

income-stabilization reserves

Takaful Participants

Contribute

Risk Fund

Manage

Takaful Operator

Wakalah fee

1st contract Tabarru`

2nd Contract

Wakalah

Surplus

Page 6767

1. Unilateral contract

2. Valid though no acceptance and consideration from the recipient

Takaful Participants

Contribute

Takaful Funds

Manage

Takaful OperatorInvestPay

Claims

2nd Contract

Mudarabah

1st contract Tabarru`

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

Takaful: Mudarabah Model

Page 6868

Takaful vs. Insurance

Basis 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

Islamic

Investment

Page 70

Technical Meaning Sukuk refers to

securities, notes, papers or

certificates, with features of liquidity

and tradability (except for salam and murabahah

sukuk)

Literal MeaningSukuk 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

SUKUK

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”

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.

Page 71

Income Generating Project

Sukuk Investors

Obligor/Project Developer Issuer/Trustee

Sukuk Issue Proceeds

Proceeds fromSukuk Sales

Income from project

BASIC STRUCTUR

E OF SUKUK

Page 72

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 in-built 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 the nature of the underlying asset

5. No restriction on the tradability

6. Investment in Shari`ah-compliant activities

6. Proceeds are invested in any business without restrictions

Page 73

The Nature and Type of Asset represented

by the SukukThe Underlying Contracts in the

Sukuk StructuresThe Technical and

Commercial Features of the

Sukuk

Debt-based

Tangible assets

Usufructs

Rights in investment

projects

Special investment activities

Asset-based (normal)

Asset-Backed (ABS)

Hybrid Structure(convertible & exchangeble )

Sales-based

Lease-based

Partnership-based

Agency-based

Bases for Sukuk Classification

Page 74

Types of Sukuk

Asset-Based

Asset-Backed

Hybrid

Sales-Based

Lease-Based

Partnership-Based

Agency-Based

Salam

Istisna

Ijarah Muntahiy

a bi Tamlik

Ijarah Mawsufah fi Zimmah

Musharakah

Wakalah bil

Istithmar

Exchangeable

Convertible

BBA

Murabahah

IjarahMudaraba

h

Page 75MUNIF Basic Structure

MUNIF

Debt (Selling price) is evidenced by issuance of MUNIFs

May sell MUNIFin Secondary Market

(Bay al-Dayn)

Primary SubscriberIssuer

1. Issuer identified asset

3. Subscriber cum tender panel member provide proceeds

5. Subscriber resale the asset at selling price (mark-up, i.e. Murabahah)

2. Sell the asset on tendered basis

TPM/Underwriters

4 Disburse the purchase

price

Page 76

Primary Subscriber

Sukuk Issuer

Investors

3. Issue Sukuk Ijarah as evidenced of undivided

proportionate ownership of leased asset + right to

ijarah rental stream

1. Sale of assets to the primary subscribers

2. Lease back assets to issues in return for ijarah

rental (periodic distribution)

Secondary Market Trading

BASIC STRUCTURE: IJARAH SUKUK

Page 77

STRUCTURE OF MUDHARABAH SUKUK

CAPITAL

Investors(Rabb al-Mal)

Issuer(Mudarib)

Outcome Of

Project

Issues Mudarabah Sukuk

Contract of Mudarabah

Profit shared in

accordance to pre-agreed

proportions(X,Y)

Loss? borne totally by rabb al-

mal

Y% to rabb al

mal

X% to Mudarib

1

3

Invests in project2

Page 78

Islamic REITs

Rental from mixed activities (halal + haram)

Rental fromhalal activities

Return from Islamic REITs

Fund Management

Method to calculate rental From non halal activities

Instruments used in deposit, investment and financing

i-REIT

Takaful Protection

Risk management issue

Page 79

REITs

Net Property Income

OwnershipOf Property

Returns

Investment

Unit Holder

Management services

Management fees

Safeguard unit holder’s interest

Trustee fees

Properties

Maintenance and Management

Services

Maintenance and management fees Rental

Payment

Rent

TrusteeManager

TenantProperty Manager

Shariah advisors

Advise on Shariah issues

Islamic REITs

Page 80

Shariah Issues involving Rental from Lessee who conduct Mixed Activities

PrincipleMethod of calculation

The core activity is halal but small portion of the whole activity is not- halal

The non halal ration must not exceed 20% of the total rental from Islamic REITS

`Umum Balwa Maslahah

Benchmarking

In calculating the ratio of non-halal 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

Page 81

Client’s investmen

t

100%

BANKClient

Higher ReturnInvestments

- equity, derivatives e.g.Options, swaps, futures

& forward

Fixed IncomeInvestments

- Commodity murabahah- Sukuk, Islamic ABS

(Asset-Backed Securities)

Invest 90%

Invest 10%

Expected Return 10%

Expected Return x%

Bank acts as agent

(wakalah contract) in investing

depositor’s money & charges a fee for the

service

Wakalah bi al-istithmar-based structured investment

Principal Protection = (90% investment + 10% return)

Islamic Structured ProductsFund-Mobilization Stage

Investment Activities Stage

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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

Usage

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)

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?

Shariah Issues

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