Transcript Dr. Aznan bin Hasan Ahmad Ibrahim Kulliyyah of Laws, International Islamic University Malaysia, [email protected] [email protected] Presentation Outline  Retail Banking?  What are the products offered?  Prospect.

Dr. Aznan bin Hasan
Ahmad Ibrahim Kulliyyah of Laws,
International Islamic University Malaysia,
[email protected]
[email protected]
Presentation Outline
 Retail Banking?
 What are the products offered?
 Prospect and Challenges for further
development
 Conclusion
2
Section 1: What is Retail Banking?
3
Retail Banking
 Typical mass-market banking where individual customers use





local branches of larger commercial bank.
Banking for individual customers
Common services include deposit accounts (demand or non
demand) personal financing, house financing, car financing,
cards facilities, etc
This very basic definition has evolve to also cover private banking
in which a more holistic approach towards banking, asset and
wealth management is provided especially to the HNWI
Beyond just providing financing, retail banking scope has
evolved to address the entire financial situation of a client.
Including everything from protecting and growing the client’s
asset in the present, to planning retirement andpassing wealth
on to future generations
4
Cont’d
 Potential for Islamic retail banking is enormous, especially in countries
which have big Muslim population.
 This presentation will only cover some Islamic retail products:
 Deposits
 Home finance
 Car Finance
 Cards facility
 Instead of only focusing on the products, this presentation will try to
explore on the future prospect in Islamic retail banking
5
Section 2: What are the products
offered?
- Deposit Taking Activities
- House Financing
- Car Financing
- Personal Financing
- Credit Cards
6
In The Nutshell
PRODUCTS
SHARIAH PRINCIPLES
(LOCAL)
SHARIAH PRINCIPLES
(INTERNATIONAL)
Savings / Current Acc
Wadiah/mudharabah
Wadiah/qard/mudharaba
h
GIA / SIA
Mudharabah
Mudharabah
LIABILITIES
Deposit
Tawarruq / wakalah
ASSETS
House Financing /
Refinancing
BBA (Bay’ al-’Inah),
Istisna’
Murabahah, AIMAT, MM,
Istisna’
Vehicle Financing
BBA (Bay’ al-’Inah), AITAB Murabahah, MM, AIMAT
Cash Line Facility /
Personal financing /
overdraft
BBA, Bay’ al-Inah
Murabahah, Ijarah,
tawarruq
Credit Card
Bay’ al-Inah, Wadiah, alQard al-Hasan
Tawarruq, Ijarah
7
1) DEPOSIT TAKING
ACTIVITIES
8
1) Deposit Taking Activities
 In Savings and Current Accounts, the principles used
are WYD (guaranteed safe custody), al-qard or
mudharabah
 Some banks employ both principles (qard,
mudharabah) based on certain percentage.
 In WYD and al-qard, no return (in whatever form,
including the right to enter into contest) can be
promised
9
Other Alternatives in Deposit
Taking Activities
Tawarruq based Deposit
Wakalah based Deposit
10
ISLAMIC DEPOSIT BASED ON TAWARRUQ
BROKER A
1
Sells
Metal
“X”
BROKER B
6
2
Pays purchase
price at Metal
“X’ at cost
price
Rm100 on
spot
Pays the
purchase price at
cost (RM100) on
spot
5
Sells metal
“X” at cost
price(RM10
0)
4
Pays the purchase price at cost plus
profit (deferred)
Islamic Bank
Depositors
3
Sells metal “X” at cost plus profit (deferred)
11
WAKALAH BASED DEPOSIT
1)
Invests
Deposit
DEPOSITORS
BANK
2)
3)
Fixed Income
Securities
Commodities
Murabahah
Etc
Leverage using:
1- Buying and
selling share
2-Islamic Call
Option
Bank works as an agent to
invest the money in specified
investment portfolio
12
2) HOUSE FINANCING
13
House Financing
 Almost all banks employ BBA (bay’ al-Inah)
 Several Shariah & Legal Issues surrounding the
application
14
Modus Operandi
Developer
S &P
Customer
PPA
PSA
Bank
Is this BBA
or Bay’ al-’Inah?
15
Shariah & Legal Issues
 Issue of bay’ al-’Inah
 What is the asset sold and bought? House to be
completed? Right over the house to be completed?
 Full right? Beneficial Ownership? NLC on beneficial &
Legal rights?
 Is this right saleable?
 Gharar is excessive. The rate of non completion is
high?
16
Suggestions:
 Real Murabahah (BBA)
 Istisna’
 Extended AITAB
 MM
17
“Real” Murabahah
5
CLIENT
1
BANK
4
2
3
DEVELOPER
 What about 10% S & P requirement?
 Only suitable for completed house.
 Are the banks and the developers wiling to do this?
18
Parallel Istisna’
2
CLIENT
1
BANK
5
4
3
DEVELOPER
 For House under construction
 Performance risk. The bank will be more selective?
 Are the banks and the developers wiling to do this?
 The practice of Bank Muamalat
19
AITAB / AIMAT
2
CLIENT
1
BANK
5
4
3: Bay’ or Istisna’
DEVELOPER
 Suitable for both (house under construction and
completed)
 Forward lease is needed for house under construction
 Performance risk. The bank will be more selective?
 Are the banks and the developers wiling to do this?
20
MM
6
CLIENT
CLIENT
5
1
10
90
4. Co 0r joint ownership
2
DEVELOPER
•Suitable for both (house under construction and completed house)
•Forward lease must be employed for house under construction
•Performance risk in house under construction
21
ISLAMIC REFINANCING
 Sell and buy back (‘Inah Contract)
1. sells asset “x” at RM 1000 on
spot (PP)
Client
Financier
2. Resells asset “X” at RM
1200 on deferred
payment basis (SP)
 Notes
The client will refinance his “asset” to get more money/cash for his other
financial needs
b) Part of the amount proceeds (PP) will be used to redeem the outstanding
balance of previous House financing (if there is any)
c) New facility will be created
d) Sale transaction has been used to avoid dealing in “money for money”
(compare with conventional personal financing (refinancing)
a)
22
3) CAR FINANCING
23
Car Financing: An Overview
 To purchase car on credit. Two options:
1) Get a financing from the bank
2) Sometimes, dealers have their own package of car
financing.
 In conv., the main contact used is either loan given or
hire purchase
 And all in all, the repayment is based on IR (principal
& interest).
24
The Islamic Alternatives
 In general, the same effect of auto loan in conventional
can be achieved in Islamic finance.
 However, various Islamic contracts have been utilised
by Islamic banks in their offering of car financing.
 Among the most important contracts:
- Murabahah / BBA
- AITAB / AIMAT / Ijarah wa Iqtina’
- MM
25
BBA / Murabahah
 BBA in Malaysia is, in fact, bay al-’nah.
 In Middle East, some banks use murabahah as a basis
for auto financing, e.g KFH, Commercial bank’s al-Safa
Islamic banking (vehicle murabaha)
 Simply said, the bank will purchase the car from the
developer on cash basis and then sell the car to the
client on deferred term basis
 The client is not allowed to pay a deposit to the car
dealer at all
26
AITAB
 It is combination of various contracts.
 The bank purchases the car from the car dealer
 The bank then lease the car to the customer at agreed
consideration (fixed or floating).
 Undertaking to sell by the bank
 Transfer of the asset to the client
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Modus Operandi
2. Client approaches the bank
and obtain AITAB financing
facility
CLIENT
BANK
3. The Bank
purchases the
car and pay
the remaining
purchase
price of the
car (90%)
4. The bank leases the car to
the client at certain rental
price (pp + profit) with an
option to purchase at the
ned of the financing period
1. Client
identifies the
vehicle and pays
deposit
CAR DEALER
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TRANSFER THE ASSET TO THE CLIENT
 It can be done in various ways.
The bank unilaterally promise to make a gift of the asset to
the client at the end of the period. (ijarah al-muntahiyah bi alTamlik).
2) A promise upon the payment of the remaining installments.
(ijarah walqtina)
3) The final payment is considered the price of the car
4) A promise to sell for a token or other consideration (AITAB).
 All these contracts must be documented in a way that shows that
they are different contracts all together
1)
©Copyrights reserved Amanie 2006 29
Put and Call Option

2 Situations:
 Call Option (the right of the client to purchase): Unilateral
promise by the bank to sell / give the leased object to the
customer.
 In case of event of default, the bank has two options:
call back the facility and repossess the car
2) Put option (the right of the bank to sell). By requiring the
client to purchase the car at an agreed price.
1)
©Copyrights reserved Amanie 2006 30
Cont’d
 Presently, there is no specific Act regulating Islamic Hire
Purchase transaction. Instead all HP transactions are
governed by HP Act 1967
 New amendment to the HP is now under review. Should
surface in the near future.
 This amendment is very important as the present HPA
does not only allow interest, but also to a certain extent
make provisions to HP:
 Sec 4c. Contents of HP agreement
 Sec 34. Avoidance of certain provisions
©Copyrights reserved Amanie 2006 31
Cont’d
 Presently, the legal doc for IHP are drafted to suit the HPA in the
following manner
 terms charges clause in the 2nd schedule is defined as rental
payment rather than interest charges
 late payment interest – late payment charges. But the amount?
 So far, the AITAB financing in Malaysia is in fixed rate financing.
 Amendments to the law are made to allow for a floating rate AITAB
 Some banks have already had their model of floating rate AITAB
©Copyrights reserved Amanie 2006 32
Cont’d
 Some have added flavour to the AITAB. E.g. Hong
Leong HP Reward Financing-I, where one-time Cash
reward of 0.5% of the financing amount is paid to the
qualified customer on the 7th month from the funding
date.
©Copyrights reserved Amanie 2006 33
Musharakah Mutanaqisah
 SCB (Pakistan) Islamic Auto Financing: MusharaCar
 It is a partnership whereby a financier and his client
participate in the joint ownership of a car. It is
understood that the client will purchase the share of
the financier gradually over the life of the transaction,
thus increasing his own share until all the share of the
financier is purchased by him so as to make him the
sole owner of the property.
©Copyrights reserved Amanie 2006 34
Modus Operandi
2. Client approaches the bank
and obtain MM financing
facility
BANK
3. The Bank
pays the
remaining
purchase price
of the car
(90%) as its
contribution
CLIENT
4. The bank leases the car to
the client at certain rental
price . The client will also
purchase the bank’s share
gradually according to
agreed method. At the end
of the period, the car
belongs solely to the client
1. Client
identifies the
vehicle and pays
10% contribution
CAR DEALER
35
4) PERSONAL FINANCING
36
Personal Financing
 The nature of personal financing  liquidity.
 Though it may be used for acquiring asset, it is largely
considered for cash purposes.
 As such, the financing mode to be used must have the
ability to provide cash.
 For the time being, the most suitable principles to provide
the facility are bay’ al-’inah & tawarruq
37
TAWARRUQ FOR PERSONAL FINANCING
Pay cash
Sells com
Client
Com.
Broker A
Pay deferred
Sells comm.
Bank
Sells commodity
Pay cash
Com.
Broker B
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Explanation:
1) Bank obtains promise to buy from clien
2) Bank buys commodities from broker A and
pays cash
3) Bank sells the commodities to client on
deferred basis.
4) The client authorises the bank as his agent
to sells the commodities to commodities
broker B on cash.
5) The amount will be deposited into client’s
account. Client obtains liquidity and has
liability to pay bank on deferred basis.
6) Client will pay the bank on deferred basis,
according to their agreement
• This model has been used by Islamic bank in
Middle East to provide personal financing
(personal loan) to their clients.
• E.g. al-tawaruq al-mubarak finance (Arab
National Bank –Saudi Arabia), al-Khair
financing (Abu Dhabi Islamic Bank- UAE),
Amanah Personal Financing (HSBC Amanah),
tasaheel (al-Manar – Kuwait)
Cash Line Facility
 The principle use is bay’ al-Inah and the procedure is
the same like personal financing.
 The cash proceeds, however, is not disbursed directly
to the client, rather it will be deposited into client’s
account as cash line facility.
 Client can utilise the line for cash facility.
 Profit is only charged on the utilised amount and the
remaining will be rebated.
 Repayment of the facility can be on lump sum
payment at the end of financing or on yearly reduction
limit, or any time frame agreed between the client and
the bank
39
5) CREDIT CARD
40
Credit Card Facility
 BIMB, Ambank and BSN use combination of bay’ al-
’Inah, wadiah and qard in providing the facility.
 Normally, the asset used for bay’ al-’Inah is the shares
certificate of a land belongs to the Bank
 Most Middle Eastern Banks use tawarruq for the
facility
 KFH uses AIMAT for its credit cards. But this can only
be use to purchase asset which are leaseable
41
Credit Card based on Bay’ al-inah
1. Client approaches the bank for
credit card. The bank sells the
bank’s asset at selling price (PP + p)
CLIENT
BANK
3. The purchase
price will be
deposited into
the client’s
wadiah account,
to be utilised as
credit limit.
2. The bank purchase back
the asset at purchase price)
4. Client
utilises the
facility.
Credit Card
Account
42
Credit Card based on Tawarruq
Broker A
Broker B
1. Bank purchases
commodity at pp
3. Client sells
the commodity
at pp.
2. Bank sells the
commodity at sp (pp + p)
Bank
4. Manage the
facility
Client
Credit Card
Account
4. The proceeds will be
deposited into the client’s
credit card account to be
utilised as his credit limit
43
Credit Card Based on Ijarah
1. Bank identifies suitable merchant
Bank
Merchant
3. Client
purchases goods
as an agent for
the bank
4. Bank rents the durable goods to
the client on AIMAT basis and the
client will pay rental accordingly
Client
2. Bank appoints client as agent to
purchase the durable goods from the
merchant
44
Credit Card based on Ujrah
Bank
Merchant
1. Bank opens
the account and
determines
credit limit
2. Client purchase
goods from
merchant and pays
using credit card
Credit Card
Account
Client
1. Credit card
facility
45
6) FINANCIAL CONSOLIDATION
46
Financial Consolidation
 Offered by some banks.
 Utilises bay’ al-’Inah concept
 Specially targeted to individual clients who are facing
very tight cashflow due to excessive financial
obligation.
 In normal circumstances, the maximum obligation
should not be more than 75% of monthly gross
income.
 This facility will try to consolidate all the financial
obligation of the client (like HF, CF, PF,CC etc) into
less financial obligations.
47
Cont’d
 Two methods are normally employed:
 1) Refinancing the client’s asset, e.g. house to get cash to
pay other financial obligation.
 2)Getting new personal financing.
 By doing this, the client will be able to reduce the
amount of monthly installment, though extending the
period
 Depending on situation, financial consolidation will
make client’s cash flow more liquid, healthy and
affordable.
48
SECTION 3: PROSPECT AND CHALLENGES FOR
FURTHER DEVELOPMENT
49
1) Challenges In Offering Deposit
Products
 The nature of loan in wadiah yad al-dhamanah & qard: The
practice of hibah, it is really indicative?
 The nature of the term deposit in certain jurisdiction, e.g
 UK: “Art. 5 (Paragraph 2) of the Financial Services and Market
Act 2000 (Regulated Activities) Order 2001 (as amended):

…. ‘deposit’ means a sum of money.. Paid on termsA) under which it will be repaid, with or without interest or
premium, and either on demand or at a time or in circumstances
agreed by or on behalf of the person making the payment and the
person receiving it…”
50
Case Study: UK
 IBB’s terms for deposit accounts (para. 6) try to bridge this
issue:
 “…..6.3: As a matter of English Law (which applies to these
special conditions ) and in accordance with our
Memorandum and Articles of Association, in the event that
your capital suffers a loss, we shall seek to mitigate the loss
in the following manner:


6.3.1. We may forego some or all of the fees chargeable by us
in respect of the investment of the pooled funds for the
calculation period relevant to your account(s).
6.3.2: We shall draw upon any available balance in the profit
stabilisation reserve account administrated by us to make
good as much of your capital loss as the available balance
permits us to do so
51
Cont’d

6.3.3: In accordance with our Memorandum and Articles of
Association, our directors are prevented from declaring any
distribution to our shareholders unless they are satisfied that
there is no shortfall in meeting your claim (s)
 6.4: If the pooled funds referable to your capital return a loss, we
shall make an offer to you to make good the amount of any
shortfall that you may have suffered. We are required by current
UK bank regulations and policy to make this offer to you. If you
choose to accept this offer, you shall be entitled to receive
payment from us of the full amount that you had previously
deposited with us. You are entitled to refuse this offer from us.
 6.5: We would like to draw your attention to the guidance offered
by our Shari’a Supervisory Committee. Their guidance is that if
you accept our offer to make good the amount of any shortfall
(set out in special condition 6.4), you will not be complying with
Shari’ah principles.
52
Cont’d
 6.6: In certain circumstances, we may not be able to pay back to you the
amount that we are obliged under these terms and conditions to pay
back to you. If the terms of the Financial Services Compensation
Scheme (FSC) apply in these circumstances, you may be able to apply
to the FSC for payment of compensation
 6.7: If you have suffered a loss in respect of which we have made an
offer to you which you have accepted (see special condition 6.4), you
may be able to apply successfully to the FSCS for payment of
compensation if we fail to make payment to you in respect of that loss,
If you have refuse such an offer from us, you may not be able to apply
successfully to the FSCS for payment of compensation in respect of the
amount that was previously refused by you
 6.8: Should you suffer a capital loss due to fraud, gross misconduct or
gross negligence committed by us, then we may be obliged, in
accordance with Shari’a principles, to make good to you any such
capital loss on your savings or term deposit account out of money held
by us on behalf of our shareholders
53
2) House Financing Facilities
 Most suitable alternatives are MM and Ijarah
Muntahiyah bi al-tamlik.
 Easy even for refinance
 At present, most banks have the product or in the
course of getting approval for the products.
54
3) Finding Alternatives for Personal
Financing
 The nature of personal financing: To obtain cash instead




of acquiring certain asset
In certain circumstances, acquisition of asset cannot be
effected using other instrument rather than bay’ al-inah,
simply because the asset is not financeable due to
restriction by law, e.g. financing the acquisition of land /
construction of house, without individual title to the land.
In some banks, personal financing is offered indirectly, e.g
al-Rajhi in Car Financing
Should tawarruq be considered as an alternative?
Tawarruq is another controversial principle?
55
Suggestion
 Determine the needs of the clients. Cash money,
commodities, services, etc.
 Decide on the structure based on the needs
 For asset to be acquired, various structures can be used
like murabahah (BBA), AITAB, MM, Salam, Istisna’
 For services, we can use ijarah
 For cash money, Tawarruq?
 Since the resolution of “muzakarah Ulama Nusantara”
organisec by Bank Negara resolve that the two
contracts should only be utilised when no modes of
financing are available, then their use should be
limited to the situation where cash is the purpose
56
Case Study: Dubai Islamic Bank
 Dubai Islamic Bank has offered Islamic personal
financing
 The product structure is based on Islamic financing
principles of Ijarah (for services) and Murabaha (for
automobiles and goods
 Focus here is only on services
 Products offered under the category of services are:
 House Rent in Advance
 Medical Treatment
 Education and Training
 Travel Services (Tickets and Travel Packages, Haj and Umrah)
 Event Hall Services (Marriages and other functions)
 Hiring of Professional Service
57
Modus Operandi
Buy service
Pay rent
Client
Bank
Hire Service
Provide
Service
Service
Provider
 Case Study: Education finance
 Client selects the University
 Application for financing from the bank
 The Bank will buy the education service from the school
 The Bank then leases the service to the client
 The client will pay back to the bank in monthly installment
basis.
 Q: Can we use murabahah for this
58
4) USING NON-CONVENTIONAL
BENCHMARK
 LARIBA Retail Financing, applied in house and Auto
Financing
 Using the concept of lease to purchase. However, the
concept used is actually MM.
 Reference to the payment is not interest-based.
 Rather it is marked to market. How?
 In case of car financing: calling around to find the
monthly rental rate of a similar auto at the car dealer or
or the rent-a-car agency  utility value of the vehicle
 May be difficult to be implemented due to variation in
rental, even in one country or state.
©Copyrights reserved Amanie 2006 59
Conclusion
 The prospect for retail financing is very huge.
 Studies have shown that in difficult situation, the retail banking




is the last segment of banking that will be effected.
The purpose of retail financing is basically to meet the needs of
clients.
As the needs of clients are different, depending on various
factors, such as standard of living, age, life styles, purposes etc,
the range of retail financing offered must be wide and
competitive.
The first and foremost, all the products must comply with the
Shariah and this poses another challenges as the determination
of Shariah compliance is also different in certain products.
So, offering products that are acceptable globally should be one
of the priority in product structuring and enhancement
60
THANK YOU
WASSALAM
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