Nota Ringkas Kut

House Financing

Modus Operandi of BBA House Financing

Bank Financing Customer

Owner of Asset i.e. House

4) The bank then sells the house to the customer at a marked-up price.

2) Customer pays the deposit and approaches the bank for financing of the remaining balance

3) Bank, as agreed by the customer,

purchases the qualified asset from the owner on cash

basis

1) Customer identifies the asset to be purchased

5) The customer will pay the sale price on an installment basis.

Calculation of Total Selling Price under BBA

Alternative 1 Alternative 2

Financing details Single-Tier Rate Multi Tier Rate

Period 1 Period 2

a) Profit Rate 7.00% 3.00% 8.00%

b) Financing Amount RM80,000 RM80,000 RM80,000

c) Period (Year) 20 5 15

d) No. of Month Due 240 60 180

e) Monthly Payment RM620 RM444 RM670

Calculation of Total Selling Price under BBA

Alternative Period Payment (RM)

No. of months

No. of years Selling Price (RM)

1 (Single-tier profit rate)

1st – 20th year 620 12 20

2(Multi-tier profit rate)

1st – 5th year 444 12 5

6th – 20th year 670 12 15

Home Financing: Musharakah Mutanaqisah

• Refers to diminishing ‘musyarakah’, which is co-ownership agreement between the Islamic bank and the financing customer.

• One of the partner promises to purchase the equity share of the other partner gradually until the title of the equity is completely transferred to him.

• The transaction starts with the formation of partnership after which buying and selling of the equity takes place between two partners.

• One partner leases 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.

Modus Operandi of Musharakah Mutanaqisah House Financing

Bank Customer

Musharakah Venture

Seller/ Owner

1

234

5

10%90%

1. Customer identifies the property, signs the S & P agreement, pays deposit, and applies for the financing. 2. Once the application is approved, Bank enters into a Musharakah Arrangement with the customer. 3. Customer leases the Bank’s share in the house. 4. Customer will pay an amount in addition to the rental to buy the Bank’s units in the property. 5. The partnership will be terminated with the customer owning 100% of the house and the title will be transferred to him/

her.

Home Financing: Tawarruq

Bank Customer

House Developer

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2

Broker A Broker B

3

1

6

1. The customer identifies a house from the developer or house owner rand pays 10% down payment. 2. The customer approaches a bank to apply for financing and the bank will assess his credit worthiness. 3. The bank will buy a commodity from broker A, costing say RM100,000. 4. The bank sells the commodity to the customer for RM140,000. The customer will pay the amount of

RM140,000 to the bank by instalment throughout the financing period.5. The customer sells the commodity to broker B and gets cash. 6. The customer pays the remaining 90% balance to the house developer.

MASB

MASB

• Suggests the nature and form of disclosure on the nature of immaterial info if it necessary for shariah compliance.

• In case of off-setting, balances may be made in respect of unearned profit for– Murabahah, BBA and ijarah finaning– Vs Murabahah, BBA and rental receivables

MASB

• Form of financial statement – a true and fair view

• Assets and liabilities need not be classified between current and non current, instead it will broadly presented in the order of liquidity in balance sheet

• Encouraged to put Muslim calendar date at the end of the reporting period

MASB

Assets• Cash

– in short term funds– Placement at other FI

• Investment securities• Financing of customers• SRR to BNM• Fixed Assets

– Property– Plant– equipment

Liabilities• Deposits from customers

– Mudarabah (investment)– Non mudarabah (savings,

current acount)• Deposits from other FI• Istisna’ payable• Salam payable• Dividend payable• Zakat• tax

MASB

Equity• Paid up capital• Distributable reserves• Non-distributable reserves

Income• Investment from depositors

funds• Investment from

shareholders funds• Income from Attributable to

shareholder• Other income

MASB

Expenses• Allowances for loans and

financing• Investment of depositors &

shareholders / capital• Personnel expenses• Other expenses

– SC remuneration– admin

Issues in AAOIFI

Issues in Accounting• The influence of AAOIFI Accounting Standards in

Reporting Islamic Financial Institutions in Malaysia– Why they did not use AAOIFI?

• The issue of the comparability• The different of Islamic schools of thought in understanding

the Islamic principles.

• The Assumption of Profit Maximization• Objectives and Information for Payment of Zakat• Accountability and Disclosure• The recognition of profit in sales with mark-up price• The valuation of sukuk

Shariah Governance

SHARIAH GOVERNANCE

• OBJECTIVES– Provide the expectations – Provide a comprehensive guidance– Sets out the functions that related to Shariah

review, Shariah audit, Shariah risk management and Shariah research

Shariah Governance Framework

• Section 1: General Requirements

• Section 2: Oversight, Accountability & Responsibility

• Section 3: Independence

• Section 4: Competency

• Section 5: Confidentiality & Consistency

• Section 6: Shariah Compliance

ISSUES IN SHARIAH GOVERNANCE

• Disclosure, transparency and consistency• Shariah Committee (SC) position within the

Governance Structure• Capacity of SC to ensure that shariah is

observed• Competency, and conflict of interest

Tax Neutrality & Incentives

Tax Neutrality

• Malaysia was among the first country to accord tax neutrality to Islamic finance instruments and transactions to reduce cost of transferring assets in Islamic finance.

• This measure has promoted a level playing field between conventional and Islamic financial products.

Tax Neutrality

• Approval for the Islamic financing has to be granted by the relevant authorities namely Bank Negara Malaysia, Securities Commission and the Labuan Financial Services Authority.

Tax Neutrality

• Disposal of assets• Double stamp duty for the sale and leaseback

of assets/ properties• Profit element will be treated as “interest” for

tax purposes. Tax deductibility on expenses incurred available so long as tests of tax deductibility has been met.

Tax Incentives

• Undoubtedly, tax incentives are clearly an important aspect in developing and promoting the Islamic financial market.

– Tax exemption of Islamic banks and takaful companies transacted in international currencies

– Exemption from withholding tax– Exemption of Real Property Gains Tax (RPGT)– Personal tax relief– Issuance of Islamic securities– 100% stamp duty exemption up to 31 December 2016

SC Screening

SAC’s Approach in Screening Listed Securities

• Determine income contribution from Shariah prohibited activities of listed companies using Shariah methodology and criteria set out by the SAC.

• Classify the securities as Shariah-compliant if income contribution from the prohibited activities is within Shariah tolerable level.

Shariah Compliance Review Process: 2 Phases

SC SAC

Compliance Review Process

1. Quantitative 2. Qualitative

1. Business Activity Benchmarks2. Financial Ratio Benchmarks

1) Business Activity Benchmarks

5%

• Conventional banking;• Conventional insurance;• Gambling;• Liquor and liquor-related activities;• Pork and pork-related activities;• Non-halal food and beverages;• Shariah non-compliant entertainment;• Interest income from conventional accounts

and instruments (including dividends from investment in shariah non-compliant instruments and interest income awarded arising from a judgment by a court or arbitrator);• Tobacco and tobacco-related activities; and• Other activities deemed non-compliant

according to shariah.

20%

• Hotel and resort operations;• Share trading;• Stockbroking business;• Rental received from shariah non-compliant

activities; and• Other activities deemed non-compliant

according to shariah.

For the above-mentioned businesses/activities, the contribution of Shariah non-compliant businesses/activities

to the overall revenue and profit before taxation of the company must be less than five per cent.

For the above-mentioned businesses/activities, the contribution of Shariah non-compliant businesses/activities

to the overall revenue and profit before taxation of the company must be less than 20 per cent.

2) Financial Ratio Benchmarks

Cash over total assets

• Cash only includes cash placed in conventional accounts and instruments, whereas cash placed in Islamic accounts and instruments is excluded from the calculation.

Debt over total assets

• Debt only includes interest-bearing debt whereas Islamic financing or sukuk is excluded from the calculation.

Each ratio, which is intended to measure riba and riba-based elements withina company’s statements of financial position, must be less than 33 per cent.

Phase 2: Qualitative Analysis• SAC will consider other factor or criteria before making a final

decision. • Company that is considered as Shariah compliant based on

Quantitative analysis may change its status to non-Shariah company because of this qualitative analysis and also image of the company.

Qualitative

Public perception or image of the company must be good. In addition, other elements

such as ‘uruf (custom) and maslahah (‘benefit’ in general) to the Muslim ummah (nation) and

the country should also be considered.

Qualitative Approach

• The primary reason why some of the ordinary shares is being classified as Shariah non-compliant is due to the involvement of the company into the following core activites:

Financial services based on Riba (interest);Gambling and gaming;Manufacture or sale of non-halal or related products;Conventional insuranceEntertainment activities that is non permissible according to the Shariah;

Manufacture or sale of tobacco-based products or related products;Stock broking or share trading in Shariah non-compliant securities; andOther activities deemed non-permissible according to Shariah

Example Investment Cost

(2 January)5.50

Announcement Date(25 April)

6.00

Disposal Price(3 June)

7.50

Profit kept by investor (RM0.50) Profit to be channeled to charitable bodies

Investment cost = RM5.50 per share.Closing price on the announcement date = RM6.00 per share. Disposal Price = RM7.50 per share

If investor disposes security on 3rd June, the capital gain is RM2 per share. He is only eligible to keep the profit of RM0.50 per share while RM1.50 should be channeled to charitable bodies).

Case 1: Investment in compliant securities subsequently reclassified as non-compliant

Shariah Guidance on Investment in Non-Compliant Securities

• Investors to dispose their non-compliant securities within a month of knowing the status of the securities.

• Any gain made in the form of capital gain or dividend received during or after the disposal of the securities to be channeled to charitable bodies.

• Investors are entitled to keep their original investment cost.

Case 2: Investment in (existing) non-compliant securities

Ijarah Sukuk

01/05/2023

Malaysian Global Sovereign Sukuk Ijarah : Transaction Structure

Government of Malaysia

Federal LandsCommissioner

SPV : Malaysia Global Sukuk Inc.

Sukuk Holders(Investors)

Lease of land parcels

Sale at dissolution

Sale & Transfer of Beneficial Title

Payment of rentals

Exercise price at dissolution

Sukuk issuance

Periodic rental payments

Dissolution Amount

ProceedsPayment of Proceeds from sale of sukuk4

5

1

8

2 6

9

10

7

3

01/05/2023

Malaysian Global Sovereign Sukuk Ijarah (2)

• 1) In this transaction, the issuer, Malaysia Global Sukuk Inc, was a special purpose vehicle (SPV) which had been incorporated for the sole purpose of the sukuk issuance.

• The SPV cum issuer first purchased a number of identified land parcels from the Federal Lands Comissioner.

• Due to some legal restrictions in Malaysia, the Federal Land Comissioner still retained the legal titles on the land parcels and only transferred the beneficial titles to the SPV.

• 2) The SPV then leased out the land parcels through a series of ijarah arrangement to the Malaysian Government for periodic rental payments.

• 3) After that, the SPV issued the sukuk ijarah to the investors.

01/05/2023

Malaysian Global Sovereign Sukuk Ijarah (2)• 4) The investors paid the sukuk proceeds amounting to

USD600 million.• The sukuk represent undivided proportionate ownership over

the land parcels. • The sukuk proceeds were actually the purchase price for the

land parcels that the investors bought from the SPV who had earlier bought from the Federal Lands Commissoner.

• 5) The SPV then paid the sukuk proceeds to the Federal Lands Commissioner as the purchase price of the land parcels .

• The Malaysian government made an irrevocable promise to buy back the land parcels from the SPV/investors upon maturity of the ijarah arrangement (after five years) at an agreed price based on an agreed formula.

01/05/2023

Malaysian Global Sovereign Sukuk Ijarah (3)

• 6) Since the sukuk represent undivided proportionate ownership over the land parcels, the sukuk holders would be entitled to receive the lease rentals as their periodic profit distribution.

• 7) In this transaction, the lease rentals solely represented the profits (coupons) to the sukuk investors.

• 8/9/10)The principal investment would only be redeemed at maturity of the ijarah arrangement when the Malaysian government purchased back the land parcels from the sukuk investors.

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TAKAFUL

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Takaful• Takaful - Islamic insurance. - means joint guarantee.

It is founded on the cooperative principle and on the principle of separation between the funds and operations of shareholders, thus passing the ownership of the Takaful (Insurance) fund and operations to the policyholders.)

In other words, it is the provision of shared contributions to help those who are in need.

• Takaful concept which is grounded in Islamic Muamalat (rules and regulations of Shariah).

• In principle, Takaful system is based on mutual cooperation, responsibility, assurance, protection and assistance between groups of participants.

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TAKAFUL OPERATORS

• 1. CIMB Aviva Takaful Berhad• 2. Etiqa Takaful Berhad• 3. Hong Leong Tokio Marine Takaful Berhad• 4. HSBC Amanah Takaful (M) Sdn Bhd• 5. MAA Takaful Berhad• 6. Prudential BSN Takaful Berhad• 7. Syarikat Takaful Malaysia Berhad• 8. Takaful Ikhlas Sdn Bhd

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1.Takaful Based on Mudarabah Model• 1. Participants pay takaful contributions which form a

takaful fund.• 2. The fund will be invested in shariah compliant

investments.• 3. The profit, if any will be shared among participants and

the takaful operator on the basis of the agreed ratio.• 4. At year end, the surplus (after deducting claims, re-

takaful, reserve and management expenses) will be distributed to the participants (shared with the operator in modified mudarabah).

• Syarikat Takaful Malaysia Berhad was operated based on this model since its establishment. However, it has changed it to the wakalah model recently.

• Another company is Takaful International (Bahrain).

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2.Takaful Based on Wakalah Model• 1. Participants pay takaful contributions under the

takaful scheme.• 2. The contributions are divided into:• A) Agency fee• B) Takaful fund• The division is made based on the agreed ratio

between the takaful operator and the participants in the contract.

• 3. Agency fee which consists of agents remuneration and administration expenses will be channeled to the takaful operator.

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2.Takaful Based on Wakalah Model (2)

• 4. The group takaful fund will be invested and any income or profit will be returned to the group fund.

• 5. Takaful operator will be entitled to a performance fee (as commission) for managing the investment on behalf of the participants.

• 6. End of year surplus (after deducting claims, re-takaful and reserve) will be distributed to the participants (shared with the operator in modified wakalah).

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2.Takaful Based on Wakalah Model (3)

• This model is widely used currently, for example, by Bank Aljazira in Saudi Arabia (2001) and Takaful Ikhlas in Malaysia (2003).

• In pure wakalah model, the management and shareholders of a takaful operator cannot share in the profits because they merely act as an agent to the participants.

• Thus, many takaful operators today attempt to adopt a combination of wakalah and mudarabah or modified wakalah model.

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3.Takaful Based on Hybrid of Wakalah and Mudarabah Model

• 1. Participants pay takaful contributions under the takaful scheme.

• 2. The contributions are divided into:• A) Agency fee• B) Takaful fund• The division is made based on the agreed ratio

between the takaful operator and the participants in the contract.

• 3. Agency fee, which consists of agency commission and administration expenses will be channeled to the takaful operator’s fund.

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3.Takaful Based on Hybrid of Wakalah and Mudarabah Model (2)

• 4. The fund will be invested in shariah compliant investments. The profit, if any will be shared among participants and the takaful operators on the basis of the agreed ratio.

• 5. At year end, the surplus (after deducting claims, re-takaful and reserve) will be distributed to the participants and takaful operator on the agreed ratio in the contract.

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TYPES OF BUSINESS TAKAFUL

MALAYSIAN TAKAFUL

Family takaful business•Health/Medical takaful•Takaful plans for education•Individual family takaful plans

General takaful business•Fire Takaful Scheme•Motor Takaful Scheme•Accident Takaful Scheme•Marine Takaful Scheme

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Differences between Takaful and Conventional Insurance

Takaful Conventional Insurance

•Based on mutual co-operation and Tabarru’

•Based solely on commercial factors

•Free from riba, gharar’ and maisir

•Abundant with riba, gharar and maisir’

•Syariah Advisory Council (SAC).

•No Syariah Advisory Council (SAC).

•Profit will be shared among operator (company) and participant on Mudarabah basis or Performance Investment Fee.

•Interest practice.