CHAPTER 6: Application of funds Financing Facilities and the underlying Shariah Concept Prepared by: Mohammad Sall

1. CHAPTER 6: Application of funds Financing Facilities and the underlying Shariah Concept Prepared by:Mohammad SallehAbdSahaRazizi bin tarmuji razizi.uitm.edu.my

2. 6.1 PROPERTY FINANCING (BAI’ BITHAMAN AJIL) DEFINITION A normal sale with the payment of the selling price deferred to an agreed later date @ installment payment. PRACTICE • The item to be sold exists at the time of contract. • The Shariah does not require that the cost price be known to the buyer. razizi.uitm.edu.my

3. EBB sells the assets to the customer at RM100,00 + profit margin /mark up (SP) 3 EON BANK GROUP CUSTOMER 4 Customer repay the Selling Price by installments. 1 EBB purchase the asset from the owner / vendor (ex: RM100,000) Customer identifies the assets to be acquired. OWNER/VENDOR OF ASSET Customer identify the property to acquired EBB will purchase the property chosen by customer after determining their needs , based on their financial status. The properties will then be sold to customer (by EBB) at a pre-agreed price , which includes EBB’s purchased price and profit margin. Once complete , customer will allowed to pay the selling price(SP) in monthly installment over a specified period of time. razizi.uitm.edu.my

4. 6.2 PROPERTY FINANCING ( MUSYARAKAH ) • DEFINITION: • Musharakah (joint venture) is an agreement between two or more partners, whereby each partner provides funds to be used in a venture. • Profits made are shared between the partners according to the invested capital. In case of loss, no partner loses capital in the same ratio. razizi.uitm.edu.my

5. 1. BANK AND CUSTOMER PROVIDE CAPITAL FOR THE PROJECT E.G RM6 MILLION FROM CUSTOMER.BOTH PARTIES AGREE ON PROFIT SHARING RATIO (E.G 70:30) 70% OF GROSS PROFIT TO BE DISTRIBUTED TO CUSTOMER.30% TO BANK. 2. PROJECT 3. PROFIT 4. CAPITAL/LOSS razizi.uitm.edu.my

6. CONDITIONS OF MUSYARAKAH • The musyarakah capital must comprise assets which is either money or goods that can be valued in the terms money. • The profit-sharing ratio (which need not be the same as % shareholding ) shall be determined at the point of akad (execution of contract) • Each shareholder is ownwer of the Syarikat and has a right to run the project on his own behalf an on behalf of other shareholder as Agent. • Loss sharing except for those caused by deceit or negligence,isaccording to % shareholding. • All Musharakah project must be HALAL projects. razizi.uitm.edu.my

7. 6.3 MOTOR VEHICLE FINANCING( AL-IJARAH/AL-IJARAH THUMMA AL-BAI’) • Ijarah DEFINITION Ijarah means lease, rent or wage. Generally, Ijarah concept means selling the benefit of use or service for a fixed price or wage. Under this concept, the Bank makes available to the customer the use of service of assets / equipments such as plant, office automation, motor vehicle for a fixed period and price. PRACTICE • The property to be leased belongs to the lessor. • The lessor has the right to repossess the property on a default of the lessee razizi.uitm.edu.my

8. ESSENTIAL ELEMENT OF CONTRACTS ( IJARAH) • Lessor ( condition of lessor) • Capable of taking responsibility. They must to : -be a sound mind -have reached the age of puberty ( baligh) -have reached majority (able to manage their own affair) • Not prohibited from dealing with their properties -not declared bankrupts -not declared prodigals iii. No coercion is exerted on either of them. razizi.uitm.edu.my

9. 2. Property The four necessary conditions of property are:- • It must be owned by the lessor • It must be ready for use • It must be delivered to lessee • It must be specific by address, description or specification. razizi.uitm.edu.my

10. 3. Benefit (use usufruct) • It must be permissible • It can be fixed in value • The lessor has the power and capability to provide the benefit and allow the lessee to use the property. • It must be specified:- a)for a single purpose property the period of leasing must be known . b)for multi purpose property the type of use must also be stated clearly. razizi.uitm.edu.my

11. 4. Rental • Known currency • Absolute amount 5.Contract • Acceptance must agree with the offer • The offer and acceptance must be made at the same meeting. razizi.uitm.edu.my

12. b)Al-IjarahThummal al-Bai DEFINITION: Simple leasing for leasing period with an option for the lessee to purchase the property at the end of the leasing period through a contract of purchase. razizi.uitm.edu.my

13. DEALER 2 Lease car to hirer 1 Purchase to car 3 Pay lessor the rental OWNER/LESSOR HIRER/LESSEE 4 Transfer to the owner razizi.uitm.edu.my

14. CONDITION IN AL-IJARAH THUMMA AL-BAI • 3 party • Not a loan but a hiring arrangement • Ownership does not pass to hirer until all installments paid • Hirer has right to return asset. • Hirer has a right to early termination or early settlement of hiring arrangement. razizi.uitm.edu.my

15. BENEFITS OF HIRE PURCHASE • 90% financing • Payments are made towards eventual ownership • Early settlement • Termination via return of goods. razizi.uitm.edu.my

16. PERSONAL FINANCING ( BAI’ AL-INAH) razizi.uitm.edu.my

17. PERSONAL FINANCING ( BAI’ AL-INAH) • Sale of an asset or property by first party(bank) to a second party(customer) for immediate or spot payments followed with immediate sale of the same asset by an immediate sale of the same asset by the second party to the first party for a higher unit of differed payment. • Selling of an asset by the Bank to the customer through deffered payments. At a later date, the Bank will repurchase the asset and pay the customer in cash terms. razizi.uitm.edu.my

18. MODUS OPERANDI 1. BANK SELLS AN ASSET FOR RM 15,600 1.1 Customer pays RM15,600 by 60 equal monthly instalment of RM260 2. BANK BUYS THE ASSET FOR RM 10,000 2.1 Bank pays the customer RM10,000 (Cash Basis) razizi.uitm.edu.my

19. Terms and conditions. razizi.uitm.edu.my

20. razizi.uitm.edu.my

21. razizi.uitm.edu.my

22. razizi.uitm.edu.my

23. CREDIT CARDS(Bank Islam Card) (AL-WADIAH)(BAI’ AL INAH) (QARD AL-HASAN) razizi.uitm.edu.my

24. CREDIT CARDS (AL-WADIAH,BAI’ AL INAH, TAWARRUQ, QARD AL-HASAN) • A credit card is a system of payment named after the small plastic card issued to users of a system. • The difference between Islamic credit card and a conventional credit card:- • In Islamic Banking, the profit rate is non-compounding as compared to a conventional credit card • it cannot be used for transactions prohibited by Shariah such as gambling, liquor, etc. razizi.uitm.edu.my

25. Bai-Al’Inah (immediate cash)Bai-Al’Inah refers to the selling of an asset by the Bank to the customer through defferred payments. At a later date, the Bank will repurchase the asset and pay the customer in cash terms. razizi.uitm.edu.my

26. Qardhul Hassan (benevolent loan)Qardhul Hassan refers to an interest-free loan. The borrower is only required to repay the principal amount borrowed, but he may pay an additional amount at his absolute discretion, as a token of appreciation. • Al-Wadiah (savings with trust/guarantee)Al-Wadiah refers to agreement where customers deposit money in the Bank, and the Bank becomes wholly responsible and liable for its safekeeping razizi.uitm.edu.my

27. BASIC ISLAMIC CREDIT CARD STRUCTURE 1 BANK 2 3 CUSTOMER CUSTOMER Bai’ Inah Contract Wadiah Wadiah 4 5 Islamic credit card razizi.uitm.edu.my

28. BAI INAH (SELL AND BUY BACK TRANSACTION) 1 Customer 2 3 Wadiah / Safekeeping 4 razizi.uitm.edu.my

29. Process Flow of Bai’ Inah Transactions (Bank Islam Card) • The bank sells an identified assets of the Bank to the customer on deferred basis at cost plus profit which is equivalent to the maximum amount to be paid by the customer • The customer then sells the same asset to the Bank on cash basis which is equivalent to the limit of the card. • The proceeds are disbursed into a Wadi`ah saving account designated to the customer. The amount becomes the card limit that may be utilised by the customer as and when he desires. • The customer pays the Bank the amount he utilises either on monthly basis (by paying a specified minimum amount) or the full amount. razizi.uitm.edu.my

30. STRUCTURES OF ISLAMIC CREDIT CARDS. 1. Periodic service charge • The card issuer charges the card holder a monthly or annual charge (fixed fee period) • Additional charges for any forward credit balance. 2. Deferred payment sale • The card issuer allows the customer to use his card to pay for a good or service under murabaha type transaction. razizi.uitm.edu.my

31. 3. Lease purchase agreement. • The card provider is the owner of the asset until the card holder makes the final payment. • The client can be charged a rental fee. 4. Pre paid credit card. • The client deposits an amount of money on their card to pay for goods and services. • Due to the nature of the card, client can not pay for goods in excess of their debit balance and credit balances do not occur. razizi.uitm.edu.my

32. Thus, any type of interest charges are easily avoided. • The card issuer can invest the excess balances to generate a return and must be in shariah compliant. razizi.uitm.edu.my

33. 1.Syariah Concept • Tawarruq (Reverse Murabahah / Monetization) • 2.Applicant's Requirement • Applicant's age: • 21 years old and above for Principal Cardholders • 18 years old and above for Supplementary Cardholders razizi.uitm.edu.my

34. Process Flow of Tawarruq Transactions (Bank Islam Card) • The customer enter into an arrangement with the Bank where customer promises to buy a specified commodity from the Bank. The customer also appoints the Bank as his agent to sell the said commodity. • The Bank buys a specified commodity from Trader 1 on spot basis. • The Bank sells the same commodity to the customer on deferred basis at cost plus profit. • As agent, the Bank sells the same commodity to Trader 2 on spot basis. • The Bank pays the selling proceeds to the customer by crediting his designated Wadiah account and the amount becomes his card limit. • The customer pays the Bank the amount he utilises either on monthly basis (by paying a specified minimum amount) or the full amount. razizi.uitm.edu.my

35. razizi.uitm.edu.my

36. PROJECT FINANCING (AL-MUDARABAH)(AL-MUSHARAKAH) razizi.uitm.edu.my

37. PROJECT FINANCING(AL-MUDARABAH) (AL-MUSHARAKAH) • Defi : Financing of a particular project in which an investor is satisfied to look initially to the cash flows and earnings of that project. • Goal must put in place that Shariah must provide clear rulings on certain aspects of project finance. • In project financing, the goal is to assemble funding for a project whose benefit will go to the sponsor. razizi.uitm.edu.my

38. razizi.uitm.edu.my

39. CONCEPT AND STRUCTURE OF ISLAMIC INSTRUMENTS • Instrument must be free from interest (riba), ambiguities (gharar), and gambling (maisir). • The requirement of ownership (milikiyah) is paramount to see the ownership risk (daman milkiyah) is rightly observed by the selling parties and lessors. • The contract of murabahah and ijarah are usually applied in Middle Eastern countries. • In Malaysia, most financing based on Bai’ al-Inah and Bai’ al-dayn. razizi.uitm.edu.my

40. Project financing techniques • Primary means for financing broad range of economic units world-wide. • Eg : Power generation, oil and gas industries, mining, various infrastructure projects, manufacturing and etc. Technique and instruments – shari’ah compliant • Conceptually • Structurally • Documentaries • Modus operandi – execution and implementation. razizi.uitm.edu.my

41. MUDARABAH PROJECT FINANCING Contract of Mudarabah profit sharing ratio (x:y) Financier (Rabb al Mal) Company (Amil/ Mudarib) Y: to rabb al mal Capital profit shared in accordance to pre- agreed proportions (x:y) x% to mudarib Invest in project Project revenue Loss borne totally by rabb al mal Ex: real estate razizi.uitm.edu.my

42. MUSHARAKAH (PROJECT FINANCING) Contract of Musharakah FINANCIER/BANK COMPANY Capital contribution x:y X% CAPITAL Y% PROJECT REVENUE INVEST IN PROJECT • Profit shared according to agreed ratio. • To ratio of capital contribution. • Loss shared according to ratio of capital contribution. razizi.uitm.edu.my

43. WORKING CAPITAL FINANCING MURABAHAH razizi.uitm.edu.my

44. MURABAHAH • Murabahah refers to the sales of goods at a price which includes cost plus profit as agreed by both seller and the buyer. • Allows customer : • To take delivery of the goods immediately • Settle deferred payment agreement with Bank razizi.uitm.edu.my

45. EVIDENCE • HADITH : • Some scholars made murabahah analogous to a form of sale called Tawliyyah (sale at purchase price without making profit) • It was reported that when Prophet (s.a.w) was preparing for hijrah to Madinah, Abu Bakar bought 2 camels for the journey. The Prophet (s.a.w) said to Abu Bakar : sell to me (at cost without profit) one of them. Abu Bakar said : it is yours for nothing. The Prophet (s.a.w) said : I would not take it for nothing. • Is a legitimate contract in Islam. Majority of fuqaha comprising the sahabah (companion of the Prophet), the tabien (followers the sahabah) and iman of the Mazhab considered Al-Muharabah as a permissible contract based on rukhsah principle. razizi.uitm.edu.my

46. APPLICATION • Murabahah can be apply : razizi.uitm.edu.my

47. USES • To provide financing for his working capital requirement to purchase stock & inventories, spare & replacement/semi finished goods and raw materials. • Bank purchases or appoints the customer as its agent to purchase the goods on its behalf. • Upon delivery, Bank pays the supplier at sight or upon maturity of credit term based on the invoice value. • The goods will be acquired in the bank’s name and with the bank’s funds. razizi.uitm.edu.my

48. Bank subsequently sells the goods to the customer on deferred payment terms at a price inclusive of the Bank’s profit (Murabahah principles) • Customer will undertake to settle the selling price on the maturity date (30, 60, 90 days or others) razizi.uitm.edu.my

49. FLOWS 1) Purchase order CUSTOMER ACTS AS AN AGENT FOR THE BANK SUPPLIER OF GOODS 2) Supplier goods to customer 3) Settles the purchase price on cash basis 5) Settles the Bank’s selling price on maturity BANK 4) Sells goods on deferred payment basis razizi.uitm.edu.my

50. BENEFITS • Enables customer to settle payment obligation to the seller. • Facilitates convenient cash flow management of a business by having a fixed rate financing nature. • As a prudent and reliable basis financing. • Provide up to 100% financing of invoice value. razizi.uitm.edu.my