fstep islamic financing-3rd day

8/2/2019 FSTEP Islamic Financing-3rd Day

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ISLAMIC FINANCING FACILITIESISLAMIC FINANCING FACILITIES

FINANCIAL SECTOR TALENT ENRICHMENT PROGRAMME


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ASH


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ISLAMIC EQUITY FINANCING

Al-Mudharabah

(Trustee Profit Sharing)

Al-Musharakah

(Joint-venture Profit Sharing)


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ASH


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DEFINITION:

AL-MUDHARABAH is atrustee profit sharing venturebetweenan owner of capital (e.g. bank / investor )&

an entrepreneur who provides theenterprise or expertise.

ASH


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OBJECTIVE:

To match

owner of capital ( investor )with no opportunity or expertise

to carry out business

withan entrepreneur who has theopportunity & skills but no capital

to carry out business.ASH


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OBJECTIVE..cont

The owner of capital( investor ) -- surplus unit

The entrepreneur -- deficit unit .

ASH


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AL-MUDHARABAHFINANCING

(TRUSTEE PROFIT SHARING)

The customer acts as the Entrepreneur

(Mudharib).The Bank acts as the provider of funds

(sahibulmal) and contributes 100% of thecapital.

Both parties will combine their resourcesfor the implementation of a certain project& agree on the proportion of profit sharing.


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AL-MUDHARABAHFINANCING

2.PROJECT

3.PROFIT

1. Bank provides capital tocustomer e.g. RM3 million. Both

parties agree on profit sharingratio (e.g. 60:40) i.e. 60% of grossprofit to be distributed to

customer 40% to bank.

LOSS

AL MUDHARABAH FINANCING


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AL-MUDHARABAHFINANCING(TRUSTEE PROFIT SHARING)...Cont..

The Bank acts as the provider of capital

100% financing. The client is the entrepreneur

who will manage the project.

The Bank does not interferein the management

of the project but has the right to follow-up andsupervise.

Both parties negotiate on the ratio of profitdistribution.

In the event of loss, the Bank bears all losses.


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Essentials (Rukun) ofMudharabah

Owner of Capital (Shahibul Mal)Entrepreneur (Al-Mudharib)

CapitalProject

ProfitContract (Offer & Acceptance)



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AL-MUDHARABAH FINANCING(TRUSTEE PROFIT SHARING) - Cont...

Contract Value - RM 3.5 millionCost of Purchase - RM 3.0 millionProfit - RM 0.5 million

Capital contribution100% by Bank - RM 3.0 million

0% by customer - RM 0 million

Profit sharing ratio40% to the Bank - RM 200,00060% to the customer - RM 300,000

Contract payment received within 3 months

Example:



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AL-MUDHARABAH FINANCING(TRUSTEE PROFIT SHARING) - Cont...

On a per annumbasis, the return:

@ to Bank - 27% ( 200k / 3m*100*4 )

@ to customer - 34% ( 300k / 3.5m*100*4 )

Should there be a loss, the Bank willbear all the loss .

Example:


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Necessary Conditions (Hukum) ofMudharabah

1. The Mudharabah capital must be in the form of

money.

2. The profit-sharing ratio shall be determined at the

point ofAkad(execution of contract)

3. The owner of capital contributes capital and the

entrepreneur the expertise. Therefore it is not

valid to set as condition that the owner of capital

must also do the work.


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4. If theMudharabah venture results in a loss,

the owner of capital bears the loss entirely

and the entrepreneur does not get anything

out of the venture UNLESS the loss arisesout of any of the following:

a) Negligence

b) Misappropriation

c) Misuse of fund, in which case the loss is

borne by the entrepreneur


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5. TheMudharabah project must beHALAL in

nature according to Syarak.

Eg. ofHaram Project

# Alcoholic Beverage# Gambling

# Non Islamic Financing

# Production or sale ofnajis# Production or sale of products or services

which areharam in the first place.


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ASH

AL-MUSHARAKAH FINANCING


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AL MUSHARAKAH FINANCING(JOINT-VENTURE PROFIT SHARING)

A partnership where both parties

combine resources, both capital &

labour, to undertake a certain project.


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DEFINITION

A partnership agreement betweentwo or more individuals or bodies,

each contributing capital,

and profit or loss is shared

between the partners accordingto the agreed ratios.

ASH


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Musharakah is better known as Syarikatwhich is described as a grouping of capital

by shareholders

to finance a particular project and

the profit from the project is divided according toagreed ratio.

If the project incur losses then

the losses are borne by the shareholders

according to their percentage share.

ASH

PROJECT FINANCING CONTRACT: TRUSTEE PROFIT SHARINGPROJECT FINANCING CONTRACT: TRUSTEE PROFIT SHARING


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ALAL--MUSHARAKAHMUSHARAKAH

The Bank and the Entrepreneur will providethe financing for the project.

Both parties have the right to participate inthe management of the project.

Both parties will negotiate on the ratio ofdistribution of profit.

In the event of loss, both parties will bear theloss proportionatelyto their share offinancing.


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Essentials (Rukun) ofMusharakah

Shareholders or partnersCapital

ProjectProfit

Contract (Offer & Acceptance)

AL-MUSYARAKAHFINANCING


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2.PROJECT

3.PROFIT

1. BANK AND CUSTOMER PROVIDE CAPITALFOR THE PROJECT E.G. RM 6 MILLION FROMBANK & RM 4 MILLION FROM CUSTOMER.

BOTH PARTIES AGREE ON PROFIT SHARINGRATIO (E.G. 70:30) I.E. 70% OF GROSSPROFIT TO BE DISTRIBUTED TO CUSTOMER ;30% TO BANK.

CAPITAL/LOSS

AL-MUSYARAKAH FINANCING


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(JOINT-VENTURE PROFIT SHARING) - Cont...

Contract Value - RM 12 millionCost of Purchase - RM 10 millionProfit - RM 2 million

Capital contribution60% by Bank - RM 6 million

40% by customer - RM 4 million

Profit sharing ratio30% to the Bank - RM 0.6 million

70% to the customer - RM 1.4 million

Contract payment received within 3 months

Example:

AL-MUSYARAKAH FINANCING


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(JOINT-VENTURE PROFIT SHARING) - Cont...

On a per annumbasis, the return:

@ to Bank - 40% ( 0.6/6 *100*4 )

@ to customer - 47% ( 1.4/12*100*4 )

Should there be a loss, both parties

will bear the loss in proportion to thecapital contribution.

Example:


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Necessary Conditions (Hukum) ofMusharakah

1. The Musharakah capital must comprise assets which is

either money or goodsthat can be valued in the terms money

2. The profit-sharing ratio (which need notbe the same as percentage shareholding) shall be

determined at the point of

Akad(execution of contract)


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3. Each shareholder is an owner

of the Syarikat and has a right to run

the project on his own behalf and

on behalf of other shareholders as Agent.


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4. Loss sharing except for those caused by deceit ornegligence, is according to percentage

shareholding.

5. AllMusharakah project must beHALAL

projects.

MAIN DIFFERENCES -- MUSHARAKAH & MUDHARABAH


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MAIN DIFFERENCES MUSHARAKAH & MUDHARABAH

Musharakah Mudharabah

Definition Partnership Trustee profit-

sharing

Capital-Contribution

-Form

Shared between

partners

Cash &/or asset

Investor

only

Cash onlyProfit Shared Shared

Loss ( genuine ) Shared Investor only

Management Shared Entrepreneur

only


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WORKING CAPITAL FINANCINGWORKING CAPITAL FINANCING -- iCan be structured using:

i- Murabahah Contract

ii- Hiwalah bil Wakalah Contract

Work Flow : Working Cap ita l Fina nc ingWork Flow : Working Cap ita l Fina nc ingi Murabahahi Murabahah


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Start Customer

Bank

Bank appoint thecustomer as agentTo purchase the

Parts/materials

Evidenced byPurchase invoices

Bank purchasethe said

merchandise/Mal

Bank SellThe said mal/merchandise

To the customer

Customer paythe Bank

As per the

agreement

End

Asset PurchaseAgreement

Asset SaleAgreement

Termination of

The Contract Full settlement orrevoked by eitherparty

Mode of Payment:i- Instalment

ii- Lump-sum payment

Work Flow : Working Cap ita l Fina nc ingWork Flow : Working Cap ita l Fina nc ingii HiwalahHiwalah BilBil WaakalahWaakalah


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Start Customer

Bank

Debt evidence byInvoices isassignment

To Bank

Bank act as agent tothe customer makefull settlement to thevendors/supplier

Or

Bank may credit into

the customeraccount and thecustomer is makingthe said purchasedsettlement.

Bank act as agentTo the customer

Make the billsettlement

As agent, BankEntitled for

The fee.

Customer paythe fee plus

the debt (invoice value)Upon maturity

End

Termination of

The Contract Full settlement orrevoked by eitherparty

FINANCIAL SECTOR TALENT ENRICHMENT PROGRAMME


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Thank you

fstep islamic financing-3rd day

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