APPLIED SHARI`AH IN
FINANCIAL TRANSACTIONS
Associate Professor Dr Engku Rabiah Adawiah
Ahmad Ibrahim Kulliyyah of Laws
International Islamic University Malaysia
[email protected]
[email protected]
INTRODUCTION
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Shari`ah law works in financial transactions (mu`amalat)
by way of interpretative efforts (ijtihad) of the primary
sources (Quran & Sunnah); & using various secondary
sources & techniques of arriving at legal rules
Shari`ah law declares that the original status of each and
every contract is permissibility unless proven otherwise
(al-asl fi al `uqud al-ibahah)
This doctrine of permissibility gives flexibility and opens
up opportunities for innovation and creativity in “Islamic
financial engineering” and product development
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CONTEMPORARY ISLAMIC FINANCIAL
SERVICES
Islamic Banking
Islamic Capital
Market
Takaful
Financing
Financing
Equity
Equity Market
Market
Takaful
Takaful
Deposit
Deposit &
&
Investment
Investment
Bond
Bond Market
Market
Retakaful
Retakaful
Securities Commission
SCA 1993
CA 1965
Bank Negara
Takaful Act 1984
Bank Negara
IBA 1983 - Islamic Bank
BAFIA 1989 – Islamic
Windows
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KEY ISLAMIC COMMERCIAL CONTRACTS
Gratuitous
Gratuitous
Contracts
Contracts
Gift
Gift
Trading
Trading
Contracts
Contracts
Leasing
Leasing
Sale
Sale
Waqf
Waqf
Loan
Loan
Ibra’
Ibra’
Operational
Operational
Lease
Lease
Financial
Financial
Lease
Lease
Bay`
Bay`
Bithaman
Bithaman
Ajil
Ajil (BBA)
(BBA)
Investment
Investment
Contracts
Contracts
Supporting
Supporting
Contracts
Contracts
Mudarabah
Mudarabah
Kafalah
Kafalah
Musharakah
Musharakah
Rahn
Rahn
Hiwalah
Hiwalah
Wadiah
Wadiah
Murabahah
Murabahah
Wakalah
Wakalah
Salam
Salam
Istisna’
Istisna’ etc.
etc.
Jualah
Jualah
Muqasah
Muqasah4
SALE CONTRACTS & SOME
APPLICATIONS IN ISLAMIC
FINANCIAL SERVICES
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Murabahah & Bay` bithaman Ajil (BBA)
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Application in Asset Financing
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Application in Sukuk issuance
MURABAHAH & BAY` BITHAMAN
AJIL (BBA)
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Both contracts are contracts of sale and purchase (bay`)
Sale and purchase is a contract of exchange (`aqd al
mu`awadah)
The exchange is between the two counter values, i.e.,
goods and price
Sale and purchase presupposes the transfer of
ownership between the parties (regardless of any formal
registration of transfer)
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SPECIAL FEATURES FOR MURABAHAH
& BAY` BITHAMAN AJIL (BBA)
Murabahah
BBA
• It is a sale and purchase
contract based on trust (bay`
al amanah)
• Full disclosure and
transparency between the
parties
• Cost and amount of mark-up
are disclosed
• Payment of price can be spot
or deferred, depending on the
agreement between the
parties (if deferred – also a
BBA)
• Sale where payment of price
is deferred
• Final price should be
contractually agreed and
known to both parties
• Time and mode of payment
should be ascertained
• No need to state the cost
price and amount of mark-up
(if disclosed – also a
murabahah)
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MURABAHAH & BBA
(Modus Operandi for Asset Financing)
Property Purchase
Asset Owner
Financier
Purchase Price
Asset
STEP ONE
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MURABAHAH & BBA
(Modus Operandi for Asset Financing)
Property Sale
Financier
Customer
Sale Price
(Purchase Price + Mark-up)
Asset
STEP TWO
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OBSERVATIONS
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The Islamic banking practice in Malaysia tends to
confine BBA to long term asset financing and
Murabahah to short & medium term financing.
This has nothing to do with any Islamic law requirement.
BBA in Islamic law is simply a method of payment, i.e.,
“deferred payment” and thus, it applies to all kinds of
sales where the payment is deferred whether on the
basis of instalments or lump sum payment at the end of
the tenor.
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APPLICATION OF MURABAHAH/BBA IN
SUKUK (BASIC STRUCTURE – MALAYSIA)
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Primary Subscriber pays
the Purchase Price
Primary
Primary
Subscriber
Subscriber
Issuer
Issuer
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Issuer
identified Assets
Issuer’s
Assets
Purchase of Assets by
the Primary Subscriber
at Purchase Price
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APPLICATION OF MURABAHAH/BBA IN SUKUK
(BASIC STRUCTURE – MALAYSIA) Cont’d…
Murabahah/BBA
Creation of the Debt
Issuer
Issuer
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Resale of the assets at the
Selling Price
Primary
Primary
Subscriber
Subscriber
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Murabahah/BBA
Murabahah/BBA
IDS/Bonds
IDS/Bonds
Trading
Secondary
Secondary
Market
Market
The issuer issues the sukuk evidencing the debt (sale
price) arising from the second leg of the sale of
assets (which is a Murabahah/BBA)
The Securitization
process
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COMMENTS
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Murabahah/BBA sukuk are just tradable in Malaysian
domestic market or perhaps some regional markets that
adopt the Malaysian fatwa on bay` al `inah and bay` al
dayn
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Not suitable for global / GCC market
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IJARAH CONTRACT & SOME
APPLICATIONS IN ISLAMIC
FINANCIAL SERVICES
Ijarah – Islamic lease
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Application of Ijarah as Operating Lease
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Application of Ijarah as Lease followed by
Purchase (AITAB)
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Application of Ijarah in Sukuk Issuance
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IJARAH – ISLAMIC LEASE
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Ijarah contract is a form of exchange contract (`aqd al
mu`awadah) – usufruct vs rent.
Ijarah is a contract that results in the transfer of the right
to use (usufruct).
The ownership of the asset remains with the owner cum
lessor.
In practice, ijarah can be used as operating lease or
lease contract with an option to purchase – al ijarah
thumma al bay` (AITAB).
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OPERATING LEASE (Modus Operandi)
Purchase Agreement
Supplier
Financier
Purchase Price
STEP 1
Asset
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OPERATING LEASE (Modus Operandi)
Lease Agreement
Customer
Financier
Rental Payment
STEP 2
Asset
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AL IJARAH THUMMA AL BAY’ - AITAB
(Modus Operandi)
Purchase Agreement
Supplier
Financier
Purchase Price
STEP 1
Asset
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AL IJARAH THUMMA AL BAY’ - AITAB
(Modus Operandi)
Lease Agreement /
2nd Schedule HPA 1967
Customer
Financier
Rental Payment
STEP 2
Asset
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AL IJARAH THUMMA AL BAY’ - AITAB
(Modus Operandi)
Sale Agreement
Customer
Financier
Sale Price
STEP 3
Asset
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APPLICATION OF LEASE TO SUKUK
(ISLAMIC SECURITIES)
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Nature of Sukuk al Ijarah:
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represents a share in a leased asset (pro-rata
ownership by the sukuk holders of the leased asset)
share entitles to economic benefits under the lease
(enables the sukuk holders to enjoy rental income &
capital gain from disposal of the leased asset, if
any)
subject to the obligations / liabilities (to bear the risk
of loss and damage of the leased asset)
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MALAYSIAN GLOBAL SOVEREIGN
SUKUK: TRANSACTION SUMMARY
Issuer
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Malaysian Global Sukuk Inc.
Rating
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Baa2 (Moody’s) and BBB (S&P)
Size
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USD 600 million
Format
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Reg-S
Type
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Sukuk al Ijarah (floating rate)
Tenor
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5 year bullet
Yield & Coupon
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USD LIBOR + 95 bps
Listing
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Bahrain, Luxembourg & Labuan (LFX)
Launch/Pricing Date
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June 2002
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51% Mid-East; 30% Asia; 15% Europe;
4% US
Investor Distribution
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USD600m MALAYSIAN GLOBAL SOVEREIGN
SUKUK: TRANSACTION STRUCTURE
Government
Government of
of
Malaysia
Malaysia
6. Payment of rentals
2. Lease of land parcels
8. Sale at dissolution
9. Exercise price at dissolution
10.Dissolution Amount
1. Sale & Transfer of
Beneficial Title for
USD600m
Federal
Federal Lands
Lands
Commissioner
Commissioner
SPV:
SPV: Malaysian
Malaysian
Global
Global Sukuk
Sukuk Inc.
Inc.
5. Proceeds
7. Periodic rental payments
3. Sukuk issuance
Sukuk
Sukuk Holders
Holders
(Investors)
(Investors)
4. Payment of Proceeds
from sale of sukuk
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PARTNERSHIP CONTRACTS &
SOME APPLICATIONS IN
ISLAMIC FINANCIAL SERVICES
Musharakah
Application of Musharakah in Project Financing
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Mudarabah
Application of Mudarabah in Project Financing
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Application of Musharakah & Mudarabah in
Sukuk Issuance
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MUSHARAKAH
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Meaning of “musharakah”:
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“an arrangement whereby two or more persons contribute
to the capital with their property for the purpose of trading
with the joint capital, the profit of which, shall be shared
among the partners”
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MUSHARAKAH PROJECT FINANCING
Contract of Musharakah
Capital contribution – X:Y
Financier
Financier // Bank
Bank
• Profit: shared
according to
agreed ratio or
according to ratio
of capital
contribution
• Loss shared
according to ratio
of capital
contribution
Company
Company
X%
Project
Project
Revenue
Revenue
Capital
Y%
Invests
Invests in
in
project
project
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MUDARABAH
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Meaning of mudarabah:
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“an arrangement whereby the owner of some property
(termed as rabb al mal) gives a specified amount of capital
to another person (termed as mudarib) who is to act as the
entrepreneur to trade with the capital, the profit of which
will be shared between the two parties according to the
terms of their agreement. The losses will be borne by the
rabb al mal as the financier, whilst the mudarib suffers the
frustration of a fruitless effort”
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MUDARABAH PROJECT FINANCING
Contract of Mudarabah
Profit Sharing ratio – X:Y
Financier
Financier
((Rabb
Rabb al
al Mal)
Mal)
Y% to
rabb al
mal
Profit shared
in accordance
to pre-agreed
proportions
(X:Y)
Loss borne
Totally by
rabb al mal
Project
Project
Revenue
Revenue
Company
Company
((Amil
Amil // Mudarib
Mudarib))
CAPITAL
X% to mudarib
Invests
Invests in
in
project
project
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BASIC STRUCTURE OF MUSHARAKAH SUKUK
Issues sukuk
Investors
Investors
Issuer
Issuer
Contract of Musharakah
Capital contribution – X:Y
• Profit: shared
according to
agreed ratio or
according to ratio
of capital
contribution
• Loss shared
according to ratio
of capital
contribution
X%
Revenue
Revenue
of
of
Project
Project
Capital
Y%
Invests
Invests in
in
Project
Project
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ASSAR SENARI RM150m MUSHARAKAH
SUKUK: TRANSACTION STRUCTURE
Sukuk
Sukuk
Holders
Holders
(Investors)
(Investors)
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Invest Capital
(87%)
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Invest Capital
(13%)
Musyarakah
Musyarakah
Venture
Venture
Owned by
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Profit sharing
(Starts 2nd Year)
Company
X%
Investors
Y%
Construction period 12 – 18 Months
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Lease
completed
IOT
User
User
Agreements
Agreements
(RMXXX
(RMXXX Million)
Million)
Trustee
Trustee
Project Manager
(As Agent of Trustee)
Completed
Completed IOT
IOT
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Company
Company
Issue Sukuk Musyarakah
Construct & Lease
IOT
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Oil
Oil
Companies
Companies
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WINGS FZCO: TRANSACTION STRUCTURE
Emirates
Emirates as
as obligor
obligor
Emirates
Emirates as
as lessee
lessee
Emirates
Emirates as
as lessee
lessee
Lease of New Emirates
Group Headquarters
Exercise Price
Rental
Lease of New
Engineering
Centre
Rental
MUSHARAKAH
MUSHARAKAH
Sale of units
Wings
Wings FZCO
FZCO
Emirates
Emirates
as
as partner
partner
as
as partner
partner
Proceeds:
USD550m
Land parcels
valued at
USD100m
Emirates
Emirates
Wings
Wings FZCO
FZCO
dd
cc
bb
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a) Issues Sukuk – evidence proportionate share in Musharakah
b) Proceeds – USD550m: used for construction of Group
Headquarters & Engineering Centre
Investors
Investors
c) Periodic Distribution Amount
d) Dissolution Distribution Amount
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BASIC STRUCTURE OF MUDARABAH SUKUK
Issues Mudarabah Sukuk
Investors
Investors
((Rabb
Rabb al
al Mal)
Mal)
Profit shared
in accordance
to pre-agreed
proportions
(X:Y)
Contract of Mudarabah
Issuer
Issuer
((Amil
Amil // Mudarib
Mudarib))
Y% to
rabb al
mal
CAPITAL
X% to mudarib
Loss borne
Totally by
rabb al mal
Outcome
Outcome
of
of
project
project
Invests
Invests in
in
project
project
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PG MUNICIPAL MUDARABAH SUKUK
Security
Trustee
Rabb al Mal 1
Sukuk
Holders
Profit sharing
SPV
X%
Investors
Y%
Issue Mudarabah
Bonds (AAA – RAM)
1st Mudarabah - Invest Capital (Bond
Proceeds) – RM80 m
PG Municipal
(SPV)
Profit
Mudarib 1
&
Rabb al Mal 2
2nd Mudarabah
Profit sharing
Administrator
X%
PG Local Authority
(Administrator)
Investors
Y%
Profit from
Tax Collection
Mudarib 2
Manage and Administer
Tax Collections
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ISLAMIC DEPOSIT SERVICES
PRODUCTS: SOME
APPLICATIONS
Islamic Deposit Services Products
Islamic Savings / Current Account – Wadi`ah
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Islamic Accounts – Mudarabah
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Islamic Deposits – NIDC
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Islamic Deposits – Murabahah Commodity
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DEPOSIT SERVICES PRODUCTS
Current
Current //
Saving
Saving
Account
Account
Investment
Investment
Account
Account
Negotiable
Negotiable
Islamic
Islamic
Deposit
Deposit
Certificates
Certificates
Wadi`ah
Wadi`ah Yad
Yad
Damanah
Damanah
Mudarabah
Mudarabah
Bay’
Bay’ al
al `Inah
`Inah
Murabahah
Murabahah
Commodity
Commodity
Deposit
Deposit
Murabahah
Murabahah
&
& Tawarruq
Tawarruq
Sale
Sale and
and Buy
Buy
Back
Back
Arrangement
Arrangement
Bay’
Bay’ al
al Dayn
Dayn
Mudarabah
Mudarabah
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ISLAMIC SAVING & CURRENT
ACCOUNTS
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Some Islamic banks use the concept of wadi`ah yad
damanah (guaranteed safe custody) in their Islamic saving &
current account
Other Islamic banks use mudarabah contracts for Islamic
savings & current accounts
For Islamic investment accounts – normally mudarabah
contract is used.
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FEATURES OF WADI`AH YAD DAMANAH
(GUARANTEED SAFE CUSTODY)
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The custodian (bank) is both a trustee and guarantor
The deposit need not be separated/segregated
The deposit can be used for trading, etc.
The custodian (bank) has a right to any income derived from
the utilization of the deposit
Depositor can take back the deposited asset at any time
Wadi’ah Yad Damanah is more like Qard (loan); thus, all
principles of loan would be applicable
Wadi`ah Yad Damanah (like loan) cannot generate any preagreed benefit/income to the depositor, over and above the
principal amount of deposit. Failure to safeguard this may
result in riba
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MUDARABAH ACCOUNT
(MODUS OPERANDI)
CAPITAL
Work with
capital
MUDARIB
MUDARIB
(Manager
-Bank)
(Manager-Bank)
Profit
Profit
• Shared between mudarib + rabb al mal
• Profit sharing according to a contractually
agreed ratio
• Profit sharing cannot be a fixed amount/a fixed
percentage of capital contribution
Provide
capital
RABB
RABB AL
AL MAL
MAL
(Capital
(Capital provider
provider-depositors)
depositors)
Losses
Losses
• Born solely by rabb al mal
• Mudarib will only be personally
liable if the loss is caused by his
negligence
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NIDC (MODUS OPERANDI)
Sells asset
Bank
Bank
(e.g. equipments for RM100,00)
Customer
Customer
(Depositor)
(Depositor)
Method of payment: cash – “Islamic Deposit”
Buys-back asset
Customer
Customer
(Depositor)
(Depositor)
Bank
Bank
(e.g. equipments for RM100,00 + X%)
Method of payment: deferred over a period of 5 years Bank
also issues NIDC to evidence the indebtedness created by
the deferred payment sale
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MURABAHAH COMMODITY DEPOSIT-I
11
Customer buys on a spot basis USD10 million worth
of LME metal warrants (“commodity”) from Broker A
Customer
Customer
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LME
LME Broker
Broker
A
A
Customer sells the
commodity to the
Bank at USD10
million plus a profit
margin payable on a
deferred payment
basis
22 USD10 million
55 USD10 million
LME
LME Broker
Broker
B
B
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Bank
Bank
Bank sells on a spot basis the Commodity
to Broker B for USD10 million
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APPLICATION OF ISLAMIC
CONTRACTS IN TAKAFUL
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Contract among Takaful Participants – Tabarru`
Contract between Takaful Participants & Takaful
Operator
CONTRACT AMONG TAKAFUL
PARTICIPANTS: TABARRU’
Takaful Participants
Mutual Indemnity
Donation
Mutual Indemnity
Takaful Fund
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CONTRACT BETWEEN TAKAFUL
PARTICIPANTS & TAKAFUL OPERATOR
Takaful Participants
Donation
Takaful Funds
Manage
Possible Contract/s:
• Mudarabah
• Wakalah
• Ju`alah
• Wadi`ah yad
damanah
Takaful Operator
Investment
Investment
Pay
Pay Claims
Claims
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CONCLUSION
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There is a wide range of contracts that can be applied in
structuring & developing Islamic financial services products
The choice of contracts depends on the purpose and needs of
the parties (financial institutions & their clients)
For example, sales contracts have been widely used for the
purpose of financing, especially for asset financing
Other contracts like leasing and partnership are also widely
applied in project financing and securitization transactions
Takaful industry uses more of donation, agency & investment
contracts
There is always room for more application & diversification of
Islamic contracts in Islamic financial services products
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THANK YOU
Wassalam