INTRODUCTION TO UOBM S ISLAMIC BANKING PRODUCTS & SERVICES AMIR ALFATAKH YUSOF SVP, ISLAMIC BANKING

Transcription

1 INTRODUCTION TO UOBM S ISLAMIC BANKING PRODUCTS & SERVICES AMIR ALFATAKH YUSOF SVP, ISLAMIC BANKING

2 ISLAMIC BANKING INDUSTRY What we need to know before we start

3 THE ISLAMIC BANKING INDUSTRY THE YEARS LEADING TO 2017

4 THE GLOBAL ARENA The Global Profit of Islamic Banks set to TRIPLE and is in line to reach USD$1.6 trillion in Assets by Islamic Assets in 6 core markets (Qatar, Indonesia, Saudi Arabia, Malaysia, UAE, Turkey) set to show double digit growth in The YOY growth is expected to sustain at 16%-17% growth until Malaysia is expected to sustain the 2015 growth of 11% for Source: World Islamic Banking Competitiveness Report (EY2016)

5 INTRODUCTION Islamic Banking to the Forefront For some time now, Islamic Banking has been the focus of the Banking world, arising from greater acceptance and faster growth in the industry than the conventional space. There is also greater awareness on the structures being offered On Par Recent developments on Shariah views or Business Practices = on par with conventional features & global standards Ethical Banking Desire to include Islamic Banking as Ethical Banking in practice puts responsibility to Shariah Committee to re-look at banking rules more carefully Segment Banking, Not Religion Better understanding that Islamic Banking is NOT religion banking, especially for non-muslim customers. It is an alternative model or infrastructure, that follows certain rules which complies with the requirements of the Shariah

6 OPPORTUNITIES ABOUND Overseas work opportunities for Islamic Banking Specialists (4-6 years background) Active hiring of experienced individuals esp for short-term contracts in Middle East Consultancy work / start-ups Support Areas Legal / Advisory / Shariah Consultancy / Operations / IT Growth in Islamic Financial Institutions: Local Islamic Banks Locally Incorporated Foreign Islamic Banks Islamic Subsidiaries of Local / Foreign Banks Development Financial Institutions (DFI) Islamic Banking Windows of Conventional Banks Islamic Investment Banks Takaful Companies Highest Growth Emerging Markets Untapped Potential Middle East North Africa South East Asia (+Malaysia) Eastern Europe / Turkey Hong Kong / Singapore United Kingdom China Western Europe Russia

7 GROWTH OF ISLAMIC BANKING ISLAMIC BANKING FINANCIAL INSTITUTIONS (MALAYSIA) excluding DFI & IBW 1. Affin Islamic Bank 2. Al Rajhi Banking & Investment Corp 3. Alliance Islamic Bank 4. AmIslamic Bank 5. Asian Finance Bank 6. Bank Islam 7. Bank Muamalat 8. CIMB Islamic 9. HSBC Amanah 10. Hong Leong Islamic Bank 11. Kuwait Finance House 12. Maybank Islamic 13. OCBC Al Amin 14. Public Islamic Bank 15. RHB Islamic Bank 16. Standard Chartered Saadiq BECOMING AN ISLAMIC BANKING HUB There is an on-going push by BNM to position Malaysia as the foremost leader in Islamic Banking products and services: ü Clear Guidelines ü Business-Friendly ü Close Supervision ü SAC Oversight BNM target for the industry : 40% of all Banking Assets to be booked under Islamic Banking by 2020

8 BUT WHY IS ISLAMIC BANKING GROWING? There is a sizeable demand for Islamic products, based on a more ethical & fair adoption of banking practice Market Demand BNM Push Shariah Compliance Strong support and incentives given by government to support the BNM vision and desired infrastructure Shariah requirements allow for compliant activites which allows for a bigger access to investors. Asset Backed transactions Not overly-geared as deals are based on real assets Prudent products the limited range of sophisticated products limits the risks Financing of stable activities real economies Growing Confidence removal of many contentious conventional and old skool Islamic Banking practices Demand by Customers

9 DEMAND BY CUSTOMERS 35% 11% Non-Muslims MUSLIM CUSTOMERS i. Greater awareness of Shariah requirements in Banking ii. iii. iv. Comfort of being involved in Shariah-compliant businesses only Good measure of fairness Prefers simple to use products NON-MUSLIM CUSTOMERS i. Attractive features of Islamic Products (at par) ii. iii. iv. Reasonable treatment for penalties on their financing Fair terms and conditions = maximise financial benefits No inclination to religion, just on features and benefits FUN FACT : ON AVERAGE, NON-MUSLIMS MAKES UP TO 80% OF CUSTOMERS-BASE FOR ISLAMIC BANKING Excluding the top 6 local banks such as Maybank, Public Bank, CIMB, Hong Leong, Bank Islam & AmBank 54%

10 MISCONCEPTIONS ABOUT ISLAMIC BANKING More Expensive 1. Is Islamic Finance more expensive due to Selling Price? 2. Additional Documents = More Legal Fees? 1. No. Rebate (Ibra ) guidelines bring us to par as conventional 2. No. Additional legal fees will be a small nominal stamping costs Name Change 1. Is Islamic Finance just a change in terminologies? 2. At the back end, is it still the same processes used? 1. It is a revamp of documents and clauses consistent with Shariah 2. No. 80% are same processes, additional Shariah process exists Back Door 1. Are the products really Islamic in nature? 2. Are the end result all the same as a conventional Product? 1. The tenets of each contract, Maqasid and intention adhered. 2. End Result is the same, with operationalising Shariah rules

11 BANK NEGARA MALAYSIA : REGULATORS FOR ISLAMIC BANKING The role of the Central Bank in developing Islamic Banking

12 PRINCIPAL OBJECTIVES AND FUNCTIONS OF BNM As outlined and adapted from the Central Bank Act 2009, the principal objectives of BNM are as follows: 1. Promote monetary stability and financial stability conducive to the sustainable growth of the Malaysian economy 2. Formulate and conduct monetary policy in Malaysia 3. Issue currency and keep reserves safeguarding the value of currencies 4. Regulate and supervise financial institutions which are subject to laws enforced in Malaysia 5. Provide oversight over money and foreign exchange markets 6. Promote reliable, efficient and smooth operation of national payment and settlement systems and to ensure that the notional payment and settlement systems policy is directed towards Malaysia s advantage 7. Promote a sound, progressive and inclusive financial system 8. Promote an exchange rate regime consistent with the fundamentals of the economy 9. Act as the financial advisor, banker and financial agent of the Malaysian Government

13 BANK NEGARA MALAYSIA AS THE DRIVER ISLAMIC FINANCIAL SERVICES ACT 2013 (IFSA) i. The Islamic Financial Services Act 2013 (IFSA) was introduced to re-align all the existing Acts governing Islamic Banking into a single Act. ii. iii. iv. The scope of business has been re-defined to encompass all entities offering Islamic product and services Some contracts nature were also re-defined The responsibilities of all the stakeholders in an Islamic Banking business is emphasized, especially Shariah Committee BNM POLICY DOCUMENTS & GUIDELINES i. Since 2013 when IFSA was introduced, BNM had released multiple Guidelines and Concept Papers to be discussed with the industry players ii. iii. iv. Comments and feedback on the intended guidelines were received from the various industry players Shariah Advisory Council (SAC) of BNM is also consulted before the paper is finalised. The final version : Policy Documents are introduced to Banks to comply

14 SHARIAH AS THE ULTIMATE LINE OF DEFENSE WITH GREAT POWERS COMES GREAT RESPONSIBILITIES i. IFSA 2013 outlined the roles and responsibilities of bank s Shariah Committee ii. iii. iv. Shariah Committee are required to discuss, deliberate and decide on all matters pertaining Islamic Banking in the bank Responsibility is on the Shariah Committee to make quality decisions, backed by proper research and robust deliberations Stiff penalties for negligence : RM25 million fine and/or 8 years jail SHARIAH GOVERNANCE FRAMEWORK (SGF) i. One of the important requirements by BNM on the operations of Islamic Banking business is the establishment of the Shariah Governance Framework (SGF) ii. iii. iv. SGF governs the operations of the Islamic Banking business including all review and oversight functions in the bank SGF outlines the roles and responsibilities of Shariah Committee and all other internal committees for Islamic Banking Detailed requirements to be set by bank.

15 EVOLUTION : ISLAMIC BANKING Since the introduction of Islamic Banking Act in 1983, the industry has slowly evolved in terms of the following: v Guiding principles of Islamic contracts by BNM v Suitability of products towards customers needs v Operational efficiency of Islamic products and services Draft Principles discussed with industry Idea Looking at Market Needs for design Concept Robust discussion on structure Develop Based on principles and competition Policy Detailed and specific instructions Enhance Catering for specific needs via new design v Shariah increased depth and quality of decision making Guided Shariah looks at existing regulations Discuss Questions the status quo and directs compliance Research Provides solutions based on specific research

16 EVOLUTION : PRODUCT DESIGN & APPROVAL PROCESS PRE-IFSA = INNOVATION 2013 POST-IFSA = COMPLIANCE Product by Bank A Product by Bank B Product by Bank C SC Approvals SC Approvals SC Approvals BNM Approvals BNM Approvals BNM Approvals Policy Doc Product A Policy Doc Product B Product by Bank A SC Approvals BNM Auto Approval Product by Bank D SC Approvals BNM Approvals Policy Doc Product B BNM Specific Approval

17 EVOLUTION : REGULATIONS EXPOSURE DRAFT Brainstorming Banks provide feedback and preference CONCEPT PAPER Final look on how the regulations are Short feedback period POLICY DOCUMENT Final regulation Implementation date to be met Non-adherence = Non-Shariah Compliant

18 SHARIAH & FUNCTIONS OF THE SHARIAH COMMITTEE With huge powers comes huge responsibilities

19 WHAT IS SHARIAH? شریعة Islamic law (Arabic: Islamic faith. ) is the religious law governing the members of the Literally, Shariah, in Arabic, denotes path way to water, which metaphorically means it is a divinely ordained way of life. Sharia governs the day-to-day aspects of life: politics, economics, banking, business law, contract law and other social issues.

20 1 Protection of Religion (Al Deen) Definition Protection of Life (Al Nafs) Protection of Intellect (Al Aqal) Protection of Lineage (Al Nasab) 5 Protection of Wealth (Al Mal)

21 THE SOURCES OF SHARIAH the holy scripture of Islam. Believed by Muslims to be the direct and unaltered word of God. the records and quotations of the life example of the Prophet Muhammad (peace be upon him).

22 KEY PRINCIPLES OF SHARIAH Roughly translated as usury, or the exploitative and unjust gain made in trade and business. In banking & finance, it is used to refer to interest charged on loans. Roughly translated as uncertainty, risk, and speculative transactions. In banking and finance, it is used to measure hazardous dealings, risky investments, and speculative trades. Roughly translated as permissible or allowed objects or actions, for consumption or to be engaged in, under Shariah.

23 OTHER PRINCIPLES The focus extends from daily life to business and financial dealings. Upholds the contractual obligations, and also the disclosure of information as a sacred duty. Some scholars refer hoarding to not only food, but also other items in trade and finance, that would bring harm to the people.

24 CONSIDERATION : LEGAL MAXIMS Matters are Determined by Intention The end do don t validate the means Hardship Begets Facility To remove hardship, consideration of dispensation or allowance must be considered Certainty Cannot be Dispelled by Doubt Having doubt on a certain matter do not invalidate the contract Injury Must Be Removed When someone suffers, that suffering must be reduced or removed Custom is Authoritative Any Shariah decision must also consider what is acceptable by the public in their benefit

25 ISLAMIC BANKING INSTITUTIONS & FINANCIAL MARKETS What structures are available in malaysia

26 FUNDAMENTAL ROLES OF ISLAMIC FINANCIAL INSTITUTIONS Manage Financial Resources Economic Prosperity There is little to differentiate Islamic Banking and conventional banking as essentially the Islamic Banks are built on the foundations of a conventional bank. Most of the infrastructure is a replication of the conventional banking. As such, the Value Propositions are also similar to what a conventional bank aspire to. The main difference is : Compliance to the rules and requirements of Shariah. In all aspects of the Islamic Bank, the functions are assessed and determined whether is is consistent with Shariah requirements, and if it is not, the Shariah requirements will be built into the functions. Most of the additional requirements are usually captured in guidelines issued by BNM Encourage Investments Value Propositions Effective Allocation of Resources

27 OVERVIEW OF BANKING & FINANCIAL MARKET MONETARY POLICIES FINANCIAL MARKETS ISLAMIC FINANCIAL SYSTEM ISLAMIC FINANCIAL MARKETS FINANCIAL SYSTEM FINANCIAL INTERMEDIATION ISLAMIC FINANCIAL INTERMEDIATION PRODUCTS & SERVICES CONTRACT, PRODUCTS & SERVICES ECONOMIC ACTIVITY Retail individuals SME companies Corporate companies Government linked Corporations Institutions

28 CONVENTIONAL BANKING STRUCTURE A conventional bank is designed to have 2 main functions i.e. 1) Collect Deposits and 2) Give Loans. As such, income and pricing becomes important when introducing their products. Under the Conventional Banking, the modus operandi is: 1. Shareholders gives capital 2. Bank receives customer deposits & invest 3. interest received are distributed 4. Customer request for loans 5. Bank borrows interbank funds 6. Bank lends the funds at an interest rate 7. Customer pays interest + principal Customer Deposits Interest Income Invest / Utilise TREASURY FUNCTION Customer Lending Interest Income Interbank Borrowing

29 Sources of Funds ISLAMIC BANKING STRUCTURE Distribution of Income (less Expenses) Pool of Funds In Islamic Banks, while income and pricing remains important, there is also consideration on why a product is launched and the impact it has on customers. Not all fees can be charged, and not all features can be used in Islamic Banking. The Islamic Banking Model itself is not a standalone arrangement. Income from Activities Application of Funds THE MOST SUITABLE APPLICATION IS THE MUDHARABAH Islamic Banking Contracts There is linkage between Sources and Application of Funds TREASURY OPERATIONS LEGAL SHARIAH REVIEW & AUDIT SHARIAH COMMITTEE Manage liquidity end to end Invest in compliant instruments Manage cost of funds Detailed workstream Commodity Desk Sequencing & Aqad Completion Contractual Relationships Aqad & Transactional Documents Islamic Terms & Conditions Execution of documents Completion of Aqad Shariah Non-Compliant Events Deliberation of New Products & Issues Decisions on SNC Events Approval of Products, Processes, Structures

30 VARIOUS ISLAMIC STRUCTURES IN THE MARKET Conventional Financial Institution Conventional Financial Institution Islamic Financial Institution Development Financial Institution Bank Pembangunan, SME Bank, EXIM Bank, Bank Rakyat, Bank Simpanan Nasional, Agrobank Islamic Banking Windows Islamic Banking Subsidiary Takaful Operators Citibank, Deutsche Bank, Bank of Tokyo Mitsubishi, UOB Bank Affin Islamic, Alliance Islamic, AmBank Islamic, CIMB Islamic, HSBC Amanah, Hong Leong Islamic, Maybank Islamic, OCBC Al Amin, Public Islamic, RHB Islamic, Standard Chartered Saadiq Al Rajhi Banking, Asian Finance Bank, Bank Islam, Bank Muamalat, Kuwait Finance House, AIA Public Takaful, AmMetLife, Etiqa, Great Eastern, HSBC Amanah Takaful, Hong Leong MSIG, Prudential BSN, Sun Life Malaysia, Syarikat Takaful, Takaful Ikhlas, Zurich Takaful

31 TYPES OF ISLAMIC INSTITUTIONS Windows Infrastructure: Conventional Bank Description: Islamic Banking products offered via Conventional Banking channels Advantage: Low cost, existing infrastructure Disadvantage: Dependent on Conventional Bank Subsidiary Infrastructure: Islamic Subsidiary leveraged on Conventional Bank (parent) Description: Islamic Banking products offered via Conventional Banking channels & Standalone Branches Advantage: Medium cost, existing infrastructure. Independent Management Disadvantage: High cost to set up Islamic Branches Full Fledged Infrastructure: Islamic Bank Description: Islamic Banking products offered via Islamic Banking channels Advantage: Standalone Management & Banking Infrastructure. Disadvantage: High Operating costs

32 ISLAMIC BANKING WINDOWS Conversion into Islamic Banking Windows are mainly the following: 1. New documents 2. New processes 3. New systems Allocated Capital Leverage Structure Shared Balance Sheet Banking Structure System Documents Processes Aqad Treasury Accounting Management Team = Conventional Conventional Core Banking System Terminologies change + enhancements Document Enhancements to Shariah contents Identify Shariah touch-points to enhance processes Design based on Islamic contracts Separate Treasury structure to be built and managed independently Separate General Ledgers to be built and flow through into different books

33 QUESTION.

34 ISLAMIC BANKING SUBSIDIARY Banking Structure System Management Team = Islamic Conventional Core Banking System Terminologies change + enhancements Conversion into Islamic Banking Subsidiary are mainly the following: 1. New documents Leverage Structure Documents Processes Document according to Shariah contents Identify Shariah touch-points to enhance processes (leverage) 2. New processes 3. New systems Capital from Parent Aqad Design based on Islamic contracts 4. New governance 5. Migration to Islamic (optional) 6. Vesting Order Standalone Balance Sheet Treasury Accounting Separate Treasury structure to be built and managed independently Separate General Ledgers to be built and flow through into different books

35 QUESTION.

36 ISLAMIC BANK (FULL FLEDGE) Conversion into Islamic Bank (Full Fledge) are mainly the following: 1. New documents 2. New processes 3. New systems 4. New governance 5. New Capital 6. Migration to Islamic (mandatory) 7. Vesting Order 8. Sell of Conventional Portfolio Standalone Capital Standalone Structure Standalone Balance Sheet Banking Structure System Documents Processes Aqad Treasury Accounting Management Team = Islamic Islamic Core Banking System Document according to Shariah contents Shariah based processes Design based on Islamic contracts Islamic Treasury structure General Ledgers for Islamic transactions

37 QUESTION.

38 OPERATIONAL CHALLENGES IN ISLAMIC BANKING vthe key challenge in Islamic Banking is the BALANCE between Shariah Requirements & Business Needs vadditional Shariah Requirements becomes a RISK for the Bank if fail to be observed vinadequate Controls, Human Error and Wrong Understanding of Requirements often leads to SHARIAH NON COMPLIANT EVENTS (SNCE) vwith IFSA 2013, Banks do not have a choice but to comply Shariah BALANCE Business

39 COMPARISONS What makes an Islamic Bank different from Conventional Banks

40 COMPARISON : BUSINESS OPERANDI ISLAMIC BANKING The functions and operating modes are based onshariah principles. The financial institutions have to ensure ALL their activities are in compliance with Shariah. Elements of justice (adil) and public interest (maslahah) to be considered. CONVENTIONAL BANKING The functions and operating modes are based on secular laws and commercial considerations.

41 COMPARISON : PROHIBITED ACTIVITIES ISLAMIC BANKING The financial institutions are prohibited from financing non-halal activities such as gaming, alcohol breweries etc. CONVENTIONAL BANKING No restriction from financing non-halal activities, as long as they are lawful operations. There are qualifying benchmarks to be considered as complying with Shariah when it is dealing with mix activities companies Whatever is not prohibited, is permissible

42 COMPARISON : RIBA (USURY) PRACTICES ISLAMIC BANKING Deposits are not interest oriented. Depositors are investors who share a portion of the profit. Financing is not based on interest. Transactions are based in buying and selling of assets. The selling price incorporates a profit that is determined from the beginning, payable at the end. CONVENTIONAL BANKING Deposits are based on interest, based on which depositors are guaranteed a percentage of returns. Financing is interest based. The use of money is charged either a fixed or floating rate of interest.

43 COMPARISON : PARTICIPATION BANKING ISLAMIC BANKING Islamic banks are prohibited from participating in transactions based on conventional banking structure and principles. Islamic banks do not prohibit conventional banks from participating in Islamic financing transactions, as long as the structures are Shariah compliant. CONVENTIONAL BANKING Conventional banks are not prohibited from participating in Islamic financing transactions, as long as the structure and principles are Shariah compliant. Conventional banks are not prohibited from participating in Islamic financing transactions, as long as the structure and principles are Shariah compliant.

44 COMPARISON : GHARAR (UNCERTAINTY) ISLAMIC BANKING Transactions involving uncertainty, speculation and risky elements are prohibited. e.g. derivatives. CONVENTIONAL BANKING No such prohibition. Derivatives are allowed. Element of justice is important, requiring all parties to be aware of responsibilities supported by clear and transparent terms and conditions to the contract.

45 COMPARISON : LATE PAYMENTS ISLAMIC BANKING There are 2 components in Islamic financing products i.e. 1. Compensation (Ta widh) charged on arrears amount up to 1.0% p.a. noncompounding, as Bank s income 2. Penalty (Gharamah) up to Average Financing Rate less Ta widh amount, to be given as charity For financing where the maturity has expired or terminated, the maximum Ta widh allowed is up to the Interbank Money Market Rate (IIMM) ranging between 2.70% to 3.10% (recovery of actual cost of funds) CONVENTIONAL BANKING Default accounts are charged on the following: 1. Late payment interest of 1.0% on arrears amount, as bank s income 2. For default accounts, the pricing of the loan can be increased to BR+3.50% p.a. (Punitive Pricing)

46 COMPARISON : CONTRACTUAL RELATIONSHIP ISLAMIC BANKING The relationship between the bank and customers is that of partners/investors. The contractual relationship must be made clear on the roles and responsibilities. Proper appointment and according to sequence is a Shariah requirement, as well as legally binding. CONVENTIONAL BANKING The relationship is that of debtor vs creditor. Roles and responsibilities are governed by the legal documents.

47 COMPARISON : SHARIAH OVERSIGHT ISLAMIC BANKING It is mandatory for each bank to have a Shariah Committee to ensure all activities are Shariahcompliant. CONVENTIONAL BANKING No such requirement. Each contracts, products, processes and procedures must be reviewed and approved by Shariah Committee They must be competent to understand the operational processes.

48 THE SOURCES & APPLICATION OF FUNDS The structures for sourcing of Islamic funds

49 FUNDAMENTAL IDEA OF ISLAMIC BANKING CAPITAL (INCLUDING RETAINED EARNINGS) SOURCES, USES AND APPLICATION OF FUNDS The fundamental idea of Islamic Banking is Risk-sharing and the partnership of economic activities to avoid hoarding and injustice in business practices. This understanding distinguishes Islamic Banking by the notion of Participative Banking where the sources of funds are deployed into Shariah compliant activities and the returns, based on actual performance are shared. In Participative Banking, the flow of funds and its application are clearly outlined DISTRIBUTION & REINVESTMENT RETURNS, PROFIT & FEES (LESS LOSSES & EXPENSES) FINANCING & INVESTMENT ACTIVITIES DEPOSIT POOL (INCLUDING CUSTOMERS FUNDS)

50 IMPORTANCE OF BUSINESS ACTIVITIES Islamic Banking places a lot of emphasis on the nature of customer s business where financing is concerned, as it involves deployment of Islamic Banking funds into non-shariah compliant business activities. There is lesser concerns on receiving funds from non-shariah compliant businesses, but financing requires diligent compliance to Shariah requirements. For individual depositors and financing, this requirement to be Shariah-compliant is not needed. DEPOSITS POOL OF FUNDS FINANCING & INVESTMENT Shariah Compliant Business Activity Mixed Business Activity No Restrictions Benchmark Check DEPOSIT POOL RESERVES INVESTMENTS & MONEY MARKET Shariah Compliant Business Activity / inv Mixed Business Activity NO PROHIBITION TO PROVIDE FINANCING CONSIDERATION IF WITHIN BENCHMARK Non Shariah Compliant Business Activity Reputational Risks FINANCING POOL Non Shariah Compliant Business Activity PROHIBITED TO PROVIDE FINANCING

51 QUESTION.

52 DISCUSSION SCENARIO Can Carlsberg Properties Sdn Bhd apply for a financing facility to purchase a new office property? Can Mr Lim, who is a pork-butcher at a local market open an Islamic Savings Account with an Islamic Bank? Can En Johan transfer all his non-islamic Fixed Deposit amount to an Islamic Bank to open Islamic Fixed Deposits? Can Islamic Bank A transfer funds to Bank B (Non-Islamic) for deposit placement into Bank B s Islamic operations?

53 ADVANTAGES OF BEING SHARIAH COMPLIANT Individuals Corporations Investors Religiouslyinclined individuals, as well as benefits considerations Companies seeking to invest in Shariah Compliant Counters Middle East & Islamic GLCs like Tabung Haji, PNB and EPF-i

54 CRITERIA FOR COMPLIANT COUNTERS

55 OVERVIEW OF ISLAMIC PRODUCTS MARKET COMPARISON TO UOB

56 UOBM ISLAMIC PRODUCTS (LAUNCHED JULY 2016) No. Product Product Name Product Concept 1. Demand Deposit 1. Basic Saving Account-i (Retail) 2. Basic Current-i (Retail) 3. Basic Current Account-i (Wholesale) 4. Current Account-i (Wholesale) Qard Qard Qard Qard 2. Term Deposit 5. Fixed Deposit-i (Retail) 6. Fixed Deposit-i (Wholesale) 7. Money Market Deposit-i (Wholesale) Commodity Murabahah Commodity Murabahah Commodity Murabahah 3. Retail Financing 8. Home Financing-i 9. Term Financing-i Commodity Murabahah Commodity Murabahah 4. Wholesale & Business Banking Financing 10. Term Financing-i 11. Revolving Credit-i Commodity Murabahah Commodity Murabahah 5. Trade Financing 12. Accepted Bills-i 13. Trust Receipts-i 14. Letter of Credit i 15. Bank Guarantee-i Bai Al-Dayn (Sale) Murabahah (Purchase) Murabahah Wakalah Kafalah 6. Interbank Placements 16. Interbank Placement-i 17. Commodity Murabahah Programme-i Qard Commodity Murabahah 7. Forex Exchange 18. Spot-i 19. FX Forward-i Bai sarf Wa d Total 19 Products 56

57 DEPOSITS The fuel for building Islamic Banking Assets

58 UOB VS INDUSTRY : DEPOSIT CONTRACTS Wadiah CASA Qard CASA Mudarabah FD UOB INDUSTRY CM Tawarruq FD CM Tawarruq CASA Wakalah FD

59 CATEGORIES DEPOSITS 1) Defined as amount received by the financial institutions where the principal amount is guaranteed upon demand 2) BNM further outlined that deposits structures will be aligned to Shariah contracts such as Qard, Tawarruq, Wadiah Yad Dhamanah 3) The deposits will be guaranteed by Perbadanan Insurans Deposit Malaysia (PIDM) INVESTMENT 1) Defined as amount received by the financial institutions where the principal amount is not guaranteed 2) BNM further outlined that investment structures will be aligned to Shariah contracts such as Mudarabah, Musyarakah and Wakalah Bil Isthihmar 3) The invesment will NOT be guaranteed by Perbadanan Insurans Deposit Malaysia (PIDM)

60 THE IMPORTANCE OF DEPOSIT IN ISLAMIC BANKING ECOSYSTEM USES OF DEPOSITS CASA GIA/FD 1. Fund the Bank s Asset and Financing Activities 2. Deploy to take advantage of Investment Opportunities 3. Statutory Reserves 4. Replacement Liquidity 5. Financial Ratios and Stability 6. Fee Generator 7. Cheap source of funding

61 USES OF DEPOSITS IN BALANCE SHEET MANAGEMENT SHAREHOLDERS FUNDS Low Cost Funding MT Financing Earns % from Medium Term Financing (5-10 years) VARIABLE CASA BALANCES Low Cost Funding Liquidity Earns % from overnight Interbank Placements CORE CASA BALANCES Low Cost Funding LT Financing Earns % from Long Term Financing (>10 years) BNM BORROWING Low/Medium Cost Funding Liquidity Earns % from overnight Interbank Placements INTERBANK BORROWING Medium Cost Funding ST Financing/ Ratio Compliance Earns % from Short Term Financing (<5 years) VARIABLE FD BALANCES Highest Cost Tactical ST Funding / Ratio Compliance Earns % from Interbank Placements & Short Term Financing (<5 years) CORE FD BALANCES High Cost Funding LT Financing Earns % from Long Term Financing (>10 years) PROFIT SHARING INVESTMENT ACCOUNT (PSIA) Low Cost Funding Specific Tenure Financing Earns % from Specific Tenure Term Financing (5-10 years) STRUCTURED DEPOSIT Medium Cost Funding MT Financing Earns % from Medium Term Financing (5-10 years) SUKUK Medium Cost Funding LT Financing Earns % from Long Term Financing (>10 years)

62 UOB VS INDUSTRY : FINANCING CONTRACTS AITAB Vehicle Financing CM Tawarruq Revolving Credit Murabahah Asset Financing UOB CM Tawarruq Revolving Credit CM Tawarruq Term Financing INDUSTRY Ijarah Equipment Financing Musyarakah Mutanaqisah Home Financing Ujrah Credit Cards

63 UOB VS INDUSTRY : TRADE CONTRACTS Wadiah CASA UOB Murabahah Trust Receipts Wakalah Letter of Credit Kafalah BG Bay Ad Dayn Accepted Bills CM Tawarruq OD INDUSTRY CM Tawarruq Trust Receipts CM Tawarruq Invoice Financing Kafalah Shipping Guarantee Murabahah Letter of Credit

64 UOB VS INDUSTRY : TREASURY CONTRACTS UOB Sarf FX Spot Wa d FX Forward CM Tawarruq Islamic Profit Rate Swap / ICCS Wa d FX Option INDUSTRY Mudarabah Investment Account Qard Gold Account

65 ISLAMIC DEPOSIT PRODUCTS SAVINGS ACCOUNT-i CURRENT ACCOUNT-i FIXED DEPOSIT-i MONEY MARKET DEPOSIT-i

66 CURRENT ACCOUNT-I & SAVINGS ACCOUNT-I It operates like a conventional current account / Savings Account. The money deposited into this account is guaranteed in payment (principal guaranteed). Shariah Concept : Qard (non-interest bearing loan) It is akin to a loan between two parties, with no extra charge. Any charges would be deemed as riba and thus prohibited. However, Hibah (gift) above the principal amount may be given by the bank on a discretionary basis and not promised up-front.

67 DEPOSIT : QARD (LOAN) Qard refers to a contract of lending money by a lender to a borrower where the latter is bound to repay an equivalent replacement amount to the lender. Money may include cash in any currency, gold or silver. 1. Generally used for Deposit products 2. Principal Protected ie principal to be returned on demand 3. Amount is given as loan to the Bank. 4. Bank is owner of funds & liability, Customer is owner of debt 5. Only principal is guaranteed 6. No returns to be promised for the deposit 7. Gift (Hibah) can be given by Bank, but on Bank s discretion only. 8. Historical hibah pay-out can be disclosed for information, but not as indicative future pay-out

68 PROCESS FLOW : QARD Customer Deposit Cash (Given as Loan) QARD (Loan) Any returns on the Qard is discretionary (not promised / agreed up-front) and given as Hibah (gift) Bank Utilises Cash (Ownership = Bank) Bank Repays Loan (Original Amount + Hibah, if any) Upon Demand (Dissolution of Contract) Customer Withdraw Cash (Loan Repayment by Bank)

69 PROCESS FLOW FOR CASA PRODUCTS Steps: Customer (Lender) makes deposit in the Bank (Borrower) Bank accepts the deposit, and makes it available for withdrawal. Bank invests the money from the deposit Bank receives returns on investment Bank pays original amount to customer Bank may give discretionary Hibah to customer 69

70 SUMMARY : CASA DEPOSITS

71 FIXED DEPOSIT-I Definition A fixed rate term deposit where the profit rate and amount are made known to the customer, upfront. Shariah Concept It is structured based on the Shariah Concept of: Murabahah a cost plus profit sale. Tawarruq or monetization where the mark-up is made known and agreed by all parties.

72 DEPOSIT : TAWARRUQ (COMMODITY TRADE) A tawarruq consists of two sale and purchase contracts. The first involves the sale of an asset by a seller to a purchaser on a deferred basis. Subsequently, the purchaser of the first sale will sell the same asset to a third party on a cash and spot basis. 1. Generally used for Fixed Deposit products 2. Principal Protected ie principal to be returned on demand 3. Amount is given as sales proceed to the Bank. 4. Bank is owner of funds & liability, Customer is owner of debt 5. A financial obligation is created via sale of Commodity (underlying asset) 6. Principal is guaranteed 7. Returns to be fixed arising from the Commodity Sale. 8. Early withdrawal will result on a rebate on the amount not earned.

73 TAWARRUQ ARRANGEMENT Agency (Wakalah) Deferred Sale (Commodity Murabahah) Simple Sale (Musawamah) TAWARRUQ ARRANGEMENT The underlying contracts in a Tawarruq arrangement 1. Wakalah Bank acting as both purchasing agent and selling agent of commodities on customer s behalf 2. Commodity Murabahah ( CM ) sale of commodities at a Selling Price (cost plus profit) to be settled at a future date. 3. Musawamah sale of commodities at cost Price between contracting parties and commodity brokers for same day settlement. The main contract in Tawarruq is Commodity Murabahah ( CM ) where approved valuable commodities such as non-precious metals and crude palm oil are used as the underlying asset for trading. The buy and sell of commodities will result in a debt obligation by one party, and cash proceeds is generated. 73

74 PROCESS FLOW FOR FIXED DEPOSIT Tawarruq Steps: Customer authorizes Bank as his Agent to enter into a transaction on his behalf. Bank, as the Agent, purchases commodity from Broker on spot value. Bank then makes offer to Customer to buy the commodity at Cost + Profit basis, to be paid by Bank on Deferred Payment basis. The deferred payment date is specified. So are the Cost and Profit Rate. Bank then sells commodity to another broker on spot basis. Bank received payment from Broker. On Deferred Payment Date, Bank pays Customer the Sale Price (cost + profit). Debt Created BANK 74

75 BURSA SUQ AL SILA The Bursa Suq Al Sila (BSAS) platform was launched in 2009 as a national project to address Islamic liquidity management challenges and represents the collaboration between BNM, SC Malaysia, Bursa Malaysia and industry players to support the Malaysia International Islamic Financial Centre Initiative. Online platform available Bursa Malaysia Islamic Services Sdn Bhd (BMIS) is 100% owned by Bursa Malaysia Berhad, to support the incorporation of the commodities trading platform (Bursa Suq Al Sila), launched in Bursa Suq Al Sila = Trading Platform BMIS = Trading counterparty (broker) 75

76 BUYING COMMODITY FROM BURSA SUQ AL SILA At the start of the Tawarruq transaction for deposits, the Bank will: 1. Be appointed as an Agent by the customer to purchase commodity from Bursa 2. Purchase the commodity from Bursa 3. Obtain evidence that the commodity has been purchased via the ecertificates 4. With ecertificates becoming evidence, of ownership, the Commodity is now owned by the Customer 76

77 SELLING COMMODITY FROM BURSA SUQ AL SILA Creation of the obligations by the sale of Commodities Customer has constructive ownership of the Commodities, and may take delivery of the commodities (physical) Customer opts to sell the Commodities to 3 rd party for a profit payable in the future Customer appoints Bank to sell Commodities to 3 rd party as an Agent. Bank sells Commodity to 3 rd party (Bank) and a financial obligation is created. The above is evidenced by the ecertificates as well 77

78 Qard Tawarruq / Commodity Murabahah Qard Restrictions Consists of Two Contracts Murabahah Wakalah Loan contract between depositor and the bank Withdraw anytime Bank can use $$ for investment & financing Bank can grant Hibah No profit/ gifts shall be agreed upfront (Rule of al-qard) A sale of goods at cost + agreed profit margin An agency contract where Bank appoints the customer to act on his behalf Products Product Basic Current Account-i Basic Savings Account-i Fixed Deposit Account-i Individuals + Small Medium Enterprises (SME) Individuals only Everyone 78

79 SUMMARY : DEPOSITS

80 ISLAMIC RETAIL FINANCING HOME FINANCING-i TERM FINANCING-i

81 UOB RETAIL FINANCING PRODUCTS Residential Properties Home Financing-i Home Financing-i (Skim Rumah Pertamaku, Cagamas) Home Financing-i (Priority Home) Term Financing-i (for top-up or unencumbered properties) Commercial Properties Term Financing-i

82 HOME FINANCING-I & TERM FINANCING-I 1. UOB s Islamic Home Financing is based on the Tawarruq arrangement consisting of the main contract of Commodity Murabahah. The intention is to finance the customer s purchase of Residential and Commercial properties, as well as provide cash for customer s own use (in cases of refinancing). 2. Tawarruq is used for the ease of the process, the minimal documentary requirements, and the flexibility of the contract. 3. The processing and booking of the Home Financing via Tawarruq arrangement is similar to booking a mortgage facility. 4. The validity of the Islamic contract is captured by the Aqad. 5. The important requirement for the product is the trading of actual commodities.

83 FINANCING : TAWARRUQ (COMMODITY TRADE) A tawarruq consists of two sale and purchase contracts. The first involves the sale of an asset by a seller to a purchaser on a deferred basis. Subsequently, the purchaser of the first sale will sell the same asset to a third party on a cash and spot basis. Usually, an Agency (Wakalah) structure is also present to ease operational processes. 1. Generally used for Home or Term Financing products, but flexible in utilisation of many financing application. 2. Principal Protected ie principal to be returned upon settlement or by expiry of the financing tenure. 3. Financing amount = from sales proceed of the Commodities by the Customer (immediate settlement). 4. A financial obligation is created via sale of Commodity i.e. Bank sell Commodity to Customer for a Deferred Sale Price (inclusive of profits) 5. The Deferred Sale Price = Selling Price calculated based on either Fixed Rate or Ceiling Rate (variable rate) for the total installment tenure. 6. On monthly basis, Bank will charge Customer based on either Fixed Rate or the Effective Rate, (with mandatory Rebate on the Ceiling Rate).

84 PROCESS FLOW FOR BASIC HOME FINANCING Steps: Customer requests for financing Bank buys commodities from bourse Bank sells commodities to Customer on Deferred Payment Basis at Selling Price (including profit) Customer owns Commodities and appoints Bank as Agent to sell commodities Bank sells Commodities as Customer Agent to Bursa for cash to Customer Customer uses cash to pay Developer Customer pays Bank the Selling Price on Deferred Basis BANK Financial Obligation Created

85 KEY SELLING POINTS 1. Tawarruq Structure = Simple structure 2. Ceiling Rate = Protection against high rates volatility 3. No Lock in Period and No Early Settlement Charges (normal rates) 4. 20% Stamp duty waiver for New Residential Property Purchases in % Stamp duty waiver for Refinancing of Conventional Loans into Islamic products 6. Day to day profit calculation based on Effective Rates ie same as Conventional loans calculation 7. Amount collected will not breach the Maximum Selling Price

86 DIFFERENCES : TAWARRUQ VS LOAN Item Commodity Murabahah under Tawarruq Conventional Loan Underlying Asset Commodity Not Applicable Dependency Traders/Suppliers Not Applicable Relationship between Customer & Bank Late Payment Charges Parties Income Buyer & Seller Recognised as the Bank s Income Upto 1% p.a. on arrears Based on a 4-party Standalone agreement From a pre-determined Profit margin (Effective Financing Rate) Creditor & Debtor Recognised as part of Bank s income Based on bilateral agreement Interest rate charged

87 CONVENTIONAL MORTAGE LOAN DESCRIPTION EFFECTIVE BASE RATE LOAN AMOUNT $1,000,000 INTEREST RATE (FLOATING) 6.0% TENURE 30 YEARS MONTHLY INSTALLMENTS $5,996 TOTAL SUM OF INSTALLMENTS $2,158,560 # TOTAL SUM OF INTEREST $1,158,560 # # These amounts are not calculated or shown to the customers, as the intention is not to limit the amount collected

88 ISLAMIC MORTAGE FINANCING DESCRIPTION CEILING RATE (AQAD) EFFECTIVE BASE RATE LOAN AMOUNT $1,000,000 $1,000,000 PROFIT RATE (FLOATING) 12.0% 6.0% TENURE 30 YEARS 30 YEARS MONTHLY INSTALLMENTS $10,287 $5,996 TOTAL SUM OF INSTALLMENTS IE SELLING PRICE $3,703,320 $2,158,560 TOTAL SUM OF PROFIT $2,703,320 $1,158,560 TOTAL REBATE ON CEILING RATE ($1,544,760)

89 WHAT IS SELLING PRICE? TRADING CONTRACT COMPONENTS 1. Purchase Price This the original price of Goods / Assets. (In CVB, this is Loan Amount) 2. Profit Rate This is the rate of return that the seller intends to earn from the transaction (in CVB, this is Interest Rate) 3. Sale Price This is the settlement amount that the buyer needs to pay the seller (in CVB, this is the sum of the instalments or total settlement amount. This amount is not calculated outright under CVB) 4. Payment Terms This is the condition of settlement of the contract, either lump-sum payment, scheduled frequency payment, profit servicing or instalment payments (In CVB, this is the Loan Instalment). Monthly Installment (based on Ceiling) : RM4,500 Tenure : 300 months Selling Price : RM4,500 x 300 = RM1,350,000 MAXIMUM OBLIGATIONS Selling Price is therefore the MAXIMUM amount that customer have to pay for the contract. It s underlying principles are: 1. It must be agreed between all parties 2. Once agreed, it cannot be further changed upwards without consent from all parties 3. The Selling Price must be formalised by a complete Aqad 4. Early settlement of the Selling Price is allowed, and a Rebate on the Selling Price must be given for the early settlement (Guidelines on Ibra Rebate for Sale Based Financing) The purpose of calculating Selling Price is to facilitate the completion of Aqad, where one of the tenet is Certainty of Price.

90 MANDATORY REBATE (IBRA ) SCENARIOS Banks are required to grant mandatory Ibra for the following Sale-Based Products incidences: 1. Early Settlement whenever the customer intends to make a lump sum early settlement, the unearned portion must be waived as a rebate. 2. Refinancing same scenario as Early Settlement, where rebate is on the unearned profit 3. Restructuring if the restructuring resulted in the reduction of tenure, the unearned profit for the shortened tenure 4. Default Settlement this refers to the point where during settlement (default cases) i.e. the default judgment amount is actually settled by the customers. The Ibra is only given once the amount is settled (provided that there is remaining unearned profit not earned yet). The formula for Ibra is the waiver of the outstanding Unearned Income from the Selling Price on date of settlement. Settlement Amount = Principal Balance Outstanding + Any Profit Already Due + Any Outstanding Amount Due

91 2 TYPES OF REBATE UNDER THE IBRA (REBATE) FOR SALE-BASED FINANCING GUIDELINES ISSUED BY BNM Rebate on the Ceiling Rate 1. For floating rate Sale-based products, there is usually a contracted Ceiling Rate to facilitate the Aqad for Financing. 2. For Example the contracted ceiling rate is 10% p.a. from which the Monthly Installment and Maximum Selling Price is derived for the Buy/Sell (Aqad). 3. However on daily/monthly basis, the customer is charged profit based on prevailing profit rate for example 4.7% p.a. This is called the Effective Profit Rate. Customer pays Installment based on 4.7%. 4. Therefore, the difference between the Contracted Ceiling Rate (10%) and the actual Effective Profit Rate (4.7%) is 5.3% % will not be claimed from the customer, although the Aqad is based on 10%. The 5.30% is waived by the Bank as a Rebate on the Ceiling Rate. Rebate on Early Settlement 1. For Sale-based products, the Selling Price consist of the Principal Amount + Unearned Profit (based on the contracted Ceiling Rate). 2. The Unearned Profit is the Maximum Profit that can be earned by the Bank, and on monthly basis a portion of it will be Earned. 3. If Customer whish to early settle the financing, the Bank can only claim profit up to the Earned portion. 4. For example, on month 24 the outstanding Selling Price is RM390,000 where the Principal Outstanding is RM220,000 and the earned profit still due is RM15,000 and other charges due is RM150. Therefore the Rebate Amount is : RM390,000 less RM220,000 less RM15,000 less RM150 = RM154, The RM154,850 cannot be further collected as Profit by the Bank. Any amount yet to be earned by the Bank, MUST be waived as a Rebate on Early Settlement.

92 CALCULATING SELLING PRICE (CEILING RATE) Completed Properties Properties Under Construction Installment Amount based on Ceiling Rate x No of Months Profit Charged based on Average Balance during Construction + Installment Amount based on Ceiling Rate x No of Months The purpose of calculating Selling Price is to facilitate the completion of Aqad, where one of the tenet is Certainty of Price.

93 CALCULATING INSTALLMENTS (EFFECTIVE RATE) Completed Properties Properties Under Construction Installment Amount based on Effective Rate x No of Months Profit Charged based on Actual Amount Disbursed during Construction + Installment Amount based on Effective Rate x No of Months Any amount of difference between the Ceiling Rate Installments and Effective Rate Installments are waived as Rebate (Ibra )

94 COMPARISON SIDE BY SIDE : ON PAR DESCRIPTION CONVENTIONAL LOAN ISLAMIC FINANCING AMOUNT $1,000,000 $1,000,000 EFFECTIVE RATE CEILING RATE (AQAD) EFFECTIVE RATE RATE (FLOATING) 6.0% 12.0% 6.0% REBATE OF PRICING N/A 12.0% - 6.0% = 6.0% TENURE 30 YEARS 30 YEARS MONTHLY INSTALLMENTS $5,996 $10,287 $5,996 REBATE ON INSTALLMENTS N/A $4,291 TOTAL INSTALLMENTS $2,158,560 $3,703,320 $2,158,560 TOTAL REBATE AMOUNT N/A $1,544,760 TOTAL SUM OF INTEREST / PROFIT $1,158,560 $2,703,320 $1,158,560 TOTAL REBATE ON PROFIT $1,544,760

95 COMPLETED PROPERTY : FLOATING RATE Selling Price based on 12% is fixed However, the Effective Rate is below the 12% (red column) and therefore, there is a monthly rebate on profit (orange column). Profit Principal Rebate Selling Price Selling Price Formula Product Description Rebate Component Floating Rate calculation based on Effective Profit Rate Rebate on difference between CPR and EPR Completed Period: Monthly Instalments x Tenure Home Financing-i and Term Financing-i: Completed Properties Rebate on Profit Rate Differential Rebate on Early Settlement

96 ILLUSTRATION : CEILING RATE 12.0% & EFFECTIVE RATE 6.0% Rebate = Ceiling Rate 12.0% less Effective Rate 6.0% 14.00% 12.00% 10.00% 8.00% 6.00% 6.00% 6.00% 6.00% 6.00% 6.00% 6.00% 6.00% 6.00% 6.00% 6.00% Total Pricing Rebate RM1,544,760 Total Selling Price (Aqad) 4.00% 2.00% 6.00% 6.00% 6.00% 6.00% 6.00% 6.00% 6.00% 6.00% 6.00% 6.00% Total Profit Charged (Actual) RM1,158,560 RM2,703, % Yr1 Yr2 Yr3 Yr4 Yr5 Yr6 Yr7 Yr8 Yr9 Yr10 Average Effective Rate Pricing Rebate

97 ILLUSTRATION WHERE THE DIFFERENCE BETWEEN THE CEILING RATE (12.0%) AND THE YEARLY AVERAGE RATE (EFFECTIVE RATE) RESULTS IN REBATE GIVEN TO CUSTOMERS. CUSTOMERS ARE CHARGED EFFECTIVE RATES ONLY 14.00% 12.00% 10.00% 8.00% 6.00% 4.00% 2.00% 0.00% Selling Maximum Ceiling Rate of 12.0% per annum 3.50% 3.30% 3.20% 3.60% 4.80% 5.00% 4.70% 5.80% 5.75% 3.90% 8.50% 8.70% 8.80% 8.40% 7.20% 7% 7.30% 6.20% 6.25% 8.10% Yr1 Yr2 Yr3 Yr4 Yr5 Yr6 Yr7 Yr8 Yr9 Yr10 Average Effective Rate Pricing Rebate

98 What is your experience?

99 LATE PAYMENT COMPENSATION(LPC) Previously, Islamic Banks have Shariah concerns on charging late payment penalties. HOWEVER, CONSUMER TOOK ADVANTAGE OF THE LOOPHOLE BY DEFAULTING ISLAMIC FINANCINGS In 2011, BNM issued the Guidelines for LPC to address the Banks concerns. The maximum LPC allowed is the AFR but split into Compensation + Penalty. 1. Compensation is to recover costs. Approved up to 1.0% (in tenure) or IIMM Rate (off-tenure). Non-compounding calculations 2. Penalty is to discourage customer defaults. Amount collected to be given to Charity. GHARAMMAH (PENALTY) The difference between the AFR for the product and the Compensation Rate [To discourage defaults] TA WIDH (COMPENSATION) 1.0% or IIMM Rate [Compensation to recover costs] Charity Income

100 PUNITIVE PRICING As part of the effort to manage Risks, Punitive Pricing has been accepted as one of the mitigating factors in financing. THE HIGHER THE RISKS, THE HIGHER THE RETURNS SHOULD BE. Change in Risks = Change in Pricing BNM issued a Risk Informed Pricing guideline to provide that Pricing can be increase to meet risks, but must not be more than 3.5% p.a. on top of the Prevailing Rate. Question: SHOULD IB ADOPT THE SAME? Prevailing Rate 4.20% Punitive Rate 4.20% + 1.0% Punitive Rate 4.20% + 2.0% CEILING RATE 12.0% Punitive Rate 4.20% + 3.5% 24 months reversion to prevailing rate

101 SELLING PRICE FORMULA : SUMMARY Types Properties under Construction (Floating Rate) Completed Properties (Floating Rate) Re-Financing Properties Term Financing Period in Construction / Partial Disbursement Fixed Rate Calculation: Maximum Rate x Construction Tenure x Maximum Amount = Profit Servicing Not Applicable Fixed Rate Calculation (if any): Maximum Rate x Tenure (3/6/12) x Maximum Amount = Profit Servicing Fixed Rate Calculation (if any): Maximum Rate x Tenure (3/6/12) x Maximum Amount = Profit Servicing Property Completed / Full Disbursement Amortised Schedule: Maximum Rate x Tenure x Maximum Amount = Installments Amortised Schedule: Maximum Rate x Tenure x Maximum Amount = Installments Amortised Schedule: Maximum Rate x Tenure x Maximum Amount = Installments Amortised Schedule: Maximum Rate x Tenure x Maximum Amount = Installments Revolving Credit Not Applicable Fixed Rate Calculation: Maximum Rate x Tenure x Maximum Amount = Profit Servicing Selling Price Formula Profit Servicing + Installments Installments Profit Servicing + Installments Profit Servicing + Installments Profit Servicing + Lump Sum Payment

102 SUMMARY : HOME FINANCING & TERM FINANCING

103 ISLAMIC WHOLESALE FINANCING TERM FINANCING-i REVOLVING CREDIT-i

104 UOB WHOLESALE FINANCING PRODUCTS Asset Acquisition Term Financing-i Working Capital Financing Term Financing-i (for top-up or unencumbered properties) Revolving Credit-i

105 TERM FINANCING-I 1. UOB s Term Financing is based on the Tawarruq arrangement consisting of the main contract of Commodity Murabahah. The intention is to finance the customer s purchase of Commercial properties (Shariah Compliant purposes), as well as provide cash for customer s own use (in cases of refinancing). 2. Tawarruq is used for the ease of the process, the minimal documentary requirements, and the flexibility of the contract. 3. The processing and booking of the Term Financing via Tawarruq arrangement is similar to booking a mortgage facility. 4. The validity of the Islamic contract is captured by the Aqad. 5. The important requirement for the product is the trading of actual commodities.

106 FINANCING : TAWARRUQ (COMMODITY TRADE) A tawarruq consists of two sale and purchase contracts. The first involves the sale of an asset by a seller to a purchaser on a deferred basis. Subsequently, the purchaser of the first sale will sell the same asset to a third party on a cash and spot basis. Usually, an Agency (Wakalah) structure is also present to ease operational processes. 1. Generally used for Home or Term Financing products, but flexible in utilisation of many financing application. 2. Principal Protected ie principal to be returned upon settlement or by expiry of the financing tenure. 3. Financing amount = from sales proceed of the Commodities by the Customer (immediate settlement). 4. A financial obligation is created via sale of Commodity i.e. Bank sell Commodity to Customer for a Deferred Sale Price (inclusive of profits) 5. The Deferred Sale Price = Selling Price calculated based on either Fixed Rate or Ceiling Rate (variable rate) for the total installment tenure. 6. On monthly basis, Bank will charge Customer based on either Fixed Rate or the Effective Rate, (with mandatory Rebate on the Ceiling Rate).

107 KEY SELLING POINTS TERM FINANCING 1. Tawarruq Structure = Simple structure 2. Ceiling Rate = Protection against high rates volatility 3. No Lock in Period and No Early Settlement Charges (normal rates) % Stamp duty waiver for Refinancing of Conventional Loans into Islamic products 5. Day to day profit calculation based on Effective Rates ie same as Conventional loans calculation 6. Amount collected will not breach the Maximum Selling Price

108 PROCESS FLOW FOR TERM FINANCING Steps: Customer requests for financing Bank buys commodities from Bursa Bank sells commodities to Customer on Deferred Payment Basis at Selling Price (including profit) Customer owns Commodities and appoints Bank as Agent to sell commodities Bank sells Commodities as Customer Agent to Bursa for cash to Customer Customer uses cash to pay Developer or own use Customer pays Bank on Deferred Basis

109 REVOLVING CREDIT-I 1. UOB s Revolving Credit is based on the Tawarruq arrangement consisting of the main contract of Commodity Murabahah. The intention is to finance the customer s Working Capital requirements. 2. Tawarruq is used for the ease of the process, the minimal documentary requirements, and the flexibility of the contract. 3. The processing and booking of Revolving Credit via Tawarruq arrangement is similar to conventional revolving credit. 4. The validity of the Islamic contract is captured by the Aqad. 5. The important requirement for the product is the trading of actual commodities, and will be based on the full approved amount.

110 KEY SELLING POINTS REVOLVING CREDIT 1. Tawarruq Structure = Simple structure 2. Ceiling Rate = Protection against high rates volatility. Fixed Rate option is also available 3. No Commitment Fees for unutilised amount % Stamp duty waiver for Refinancing of Conventional Loans into Islamic products 5. Day to day profit calculation based Utilisation Amount on Effective Rates ie same as Conventional loans calculation 6. Amount collected will not breach the Maximum Selling Price

111 PROCESS FLOW FOR REVOLVING CREDIT Steps Customer requests for working capital financing. Agrees with Bank on amount, profit rate, and tenor. Bank buys commodity from Broker A/Bursa, with cash. Broker A / Bursa transfers ownership of commodity to Bank. Bank sells commodity to Customer s Buying Agent at Cost + Profit (Murabahah). Customer via Agent sells commodity to Broker B / Bursa Broker B /Bursa pays Customer for the sales consideration. Customer gets the Cash, for Working Capital. Customer fulfils its obligations under the Murabahah Tawarruq by paying the deferred payment to the Bank, as agreed.

112 MECHANISM FOR REVOLVING CREDIT 1. Requests WC Financing. Agrees on Tenor + Profit Rate Customer 4. Bank sells commodity to Customer at Cost + Profit 7. Customer pays Bank for Cost + Profit at maturity 2. Bank buys commodity with cash Broker A 3. Broker transfers ownership of commodity to Bank 6. Broker B pays Customer Broker B 5. Customer sells Commodity to Broker B

113 SUMMARY : TERM FINANCING & REVOLVING CREDIT

114 ISLAMIC TRADE FINANCING ACCEPTED BILLS-I TRUST RECEIPTS-I WAKALAH LETTER OF CREDIT BANK GUARANTEE-I

115 ACCEPTED BILLS Sale of a debt arising from a trade transaction in the form of a deferred payment sales. Application A company has receivables and wants to sell them at a discount in order to get the cash for e.g. working capital purpose. Two types of Acceptance Bill financing: a) Imports & local purchases (contract Bay Ad Dayn) b) Exports & local sales (contract Murabahah)

116 TRADE : BAI AD DAYN (DISCOUNTED SALE) Bay Ad Dayn is a contract for discounted purchase of a receivable for eventual settlement which is binding in nature. Thus, the contract shall not be terminated unilaterally by any of the contracting parties. The specific inherent nature of the contract of Bay Ad Dayn is the discounting element of the Asset as it moves back towards the original principal amount. 1. Generally used for Working Capital Financing or Trade products 2. Financing amount arise from sales of bills or invoices which are discounted from the face value. 3. These bills and invoices are sold at a discount earlier than their maturity/ due date by the Customer to the Bank. 4. Bank owns the bills / invoice as a receivable at the maturity / due date. 5. On maturity / due date, the 100% value of the bills / invoice is paid to the Bank.

117 PROCESS FLOW FOR ACCEPTED BILLS IMPORT AND LOCAL PURCHASE BAY AD DAYN Steps Customer prepares sales documents Documents sent to Purchaser s Bank Customer draws new Bill on Bank Bank purchases Bill on agreed price and maturity, under Bai Dayn concept Bank credits Customer s account with proceeds Customer pays Bank at maturity On maturity Bank collects 100% on value Customer receives Cash Customer Needs WC Bank Purchase Bill at a Discount Draws Bill for Bank

118 MECHANISM OF BAI DAYN (IMPORT & LOCAL PURCHASE) 1. Appoints Customer as Purchasing Agent 4. Bank sells goods to Cost + Profit 6. Customer pays maturity with Cost + Profit Customer 2. Purchases goods on Behalf of Bank 5. Seller sends goods to Customer

119 PROCESS FLOW FOR ACCEPTED BILLS Steps Bank appoints Customer as Purchasing Agent Customer purchases goods on behalf of Bank Bank pays the Seller Bank sells goods to Customer on Deferred Payment & Cost + Profit. A debt is created, secured by bill of exchange drawn by Bank on & accepted by Customer. Seller send goods to Customer Customer pays Bank at maturity with Cost + Profit Bank Buy Goods Bank Sell Goods to Customer Customer settle on Maturity EXPORT AND LOCAL SALES MURABAHAH Goods agreed to be purchased at price Goods arrive with Bill of Lading Ownership confirmed and settlement of price made Bank sells Goods to customer once ownership is confirmed Bank completes Murabahah transaction Settlement is made once goods have been fully owned

120 TRUST RECEIPT Bank acts as the financier to Customer for the purchase of the goods. This is done with the Bank paying the Seller, and then sells to goods to the Customer on Cost plus & Deferred Payment basis. Shariah Concept This form of financing is based on the concept of Murabahah where: 1. It is structured as a Cost + Profit Sale of the goods, by the Bank to the Customer. 2. Payment by the Customer will be on Deferred basis. 3. The Cost and Profit Rate are made known to all parties concerned upfront. 4. The Deferred Payment Date is also agreed upfront.

121 TRADE : MURABAHAH (PROFIT SALE) Murabahah is a sale and purchase contract which is binding in nature. Thus, the contractt shall not be terminated unilaterally by any of the contracting parties. The specific inherent nature of the contract of Murabahah is the sale contract which is based on the element of trust in disclosing the cost and mark up. The common inherent nature of a sale contract is the transfer of ownership of the asset from the seller to the purchaser. 1. For Trade Financing, the intention is to purchase goods as required by the trade transaction. 2. The ownership of the Asset is transferred immediately upon conclusion of the Aqad. 3. The Debt is created (financial obligation), based on the agreed settlement terms and conditions such as Profit Rate, settlement Amount and tenure. 4. The Deferred Sale Price = Selling Price calculated based on Fixed Rate. 5. Settlement can be either in periodic payment (monthly, quarterly, yearly) or a specific date as a lump sum or balloon payment

122 MECHANISM OF MURABAHAH - EXPORT & LOCAL SALE 2. Customer draws new bill on Bank 3. Bank purchases Bill on agreed price & maturity Customer 4. Bank credits Customer s account with proceeds 5. Customer pays Bank on maturity 1. Customer prepares docs and (2) sends to Purchaser s bank Purchaser s Bank

123 Steps PROCESS FLOW FOR TRUST RECEIPTS Customer applies for a Letter of Credit to be issued in favour of its Supplier Bank issues the Letter of Credit in favour of Supplier Supplier ships goods Bank pays Supplier Bank and Customer engage in Trust Receipt-i Bank retains legal title but relinquishes physical possession of goods to Customer (importer). Customer disposes the goods and, with the proceeds, pays Bank on amount + profit, on deferred basis, on or before maturity Bank Buy Goods Bank Sell Goods to Customer Customer settle on Maturity MURABAHAH Goods agreed to be purchased at price Goods arrive with Bill of Lading Ownership confirmed and settlement of price made Bank sells Goods to customer once ownership is confirmed Bank completes Murabahah transaction Settlement is made once goods have been fully owned

124 MECHANISM OF MURABAHAH TRUST RECEIPTS 1. Customer applies for LC 5. Bank and Customer engage in Trust Receipt -i Customer 6. Bank relinquishes physical possession of goods 7. Customer pays Bank on deferred basis, cost + profit 2. Bank issues LC 3. Supplier ships goods 4. Bank pays Supplier

125 TRADE : WAKALAH (AGENCY) Wakalah refers to a contract where a party, as principal (muwakkil) authorizes another party as his agent (wakil) to perform a particular task on matters that may be delegated, with or without imposition of a fee. 1. Generally used as part of Trade product suite offering. 2. Purpose is to facilitate the import of goods for the customer via a Letter of Credit (form of guarantee) 3. The Bank will provide the Letter of Credit to Customer and appoint the Customer as Agent to procure the goods (Wakil) on Banks behalf 4. Upon delivery of the good to the Bank, the Bank will sell the goods to the Customer at the purchase price. 5. Bank will charge a fee for the issuance of the Letter of Credit

126 LC WAKALAH Wakalah (agency) is a contract in which a person appoints another party as his agent who would act on his behalf, and in return the agent receives a fee for the service rendered. Mechanism of Wakalah Letter of Credit Step 1 Customer (the Buyer/Applicant) appoints Bank as an agent. Step 2 Customer deposits full amount for goods to be purchased. Step 3 Bank issues the Letter of Credit in favour of Seller Step 4 Seller ships goods. Step 5 Bank receives all shipping documents for Customer to collect goods. Step 6 Bank debits Customer s account to pay Seller. Step 7 Bank releases documents for Customer to collect goods.

127 MECHANISM OF LETTER OF CREDIT WAKALAH 1. Customer appoints Bank as Agent Customer 2. Customer deposits full amount for goods 7. Bank releases docs to Customer for collection of goods 3. Bank issues LC 6. Bank debits Customer s account to pay Seller 5. Bank receives all shipping docs 4. Seller ships goods

128 PROCESS LIFECYCLE Customer request LC for import of goods Bank issues LC to Supplier to ship goods to Bank (+ownership) Customer pays Wakalah Fees Bank request Customer to settle the price of goods, or convert into a Financing Bank takes delivery of goods Supplier ships goods to Bank and sends documents

129 TRADE : KAFALAH (GUARANTEE) Kafalah refers to a contract where the guarantor conjoins the guaranteed party in assuming the latter s specified liability. 1. Generally used as part of Trade product suite offering. 2. Arrangement where the Bank agrees to Guarantee the customer s financial strength or performance to a beneficiary for a project or activity, at an agreed fee 3. In event of non-performance, the Bank will compensate the beneficiary and demand payment from customer 4. The guarantee can be fully secured, partially secured or unsecured.

130 BANK GUARANTEE-I Kafalah is a contract in which the Bank acts as the Kafil (guarantor) in guaranteeing the performance, action, and undertaking of its Customer, in favour of a Beneficiary (Makful lahu). The Beneficiary could be a Government Agency, Statutory Authority or any other party which has a contract (Makful) entered into with the Customer of the Bank, and a guarantee is called for. Mechanism of a Kafalah Guarantee-i Step 1 Step 2 Step 3 Step 4a Step 4b Step 5a Step 5b Step 6 Customer enters into contract with a third party (Makful lahu) Customer applies to Bank for issuance of Kafalah Bank Guarantee-i Bank issues the Kafalah Guarantee-i in favour of Beneficiary Customer fulfils all obligations under the contract Customer fails in its performance Kafalah Guarantee-i is returned and calcelled Kafalah Guarantee-i is called on. Bank pays the claims by Beneficiary

131 PROCESS LIFECYCLE The common types of Guarantee (Kafalah) are: 1. Financial Guarantee 2. Performance Guarantee PERFORMS: Kafalah Terminated Customer Apply for Bank Guarantee Bank Issues Bank Guarantee to Beneficiary Bank Charges Kafalah Fees to Customer AT END OF TENURE/ EXPIRY Some of the critics of Kafalah structure in the market revolves around the quantification of the fees and how it is being charged. Unable to fully justify the cost of funding for Default cases. DO NOT PERFORM: Beneficiary Claims from Bank Bank Claims from Customer

132 MECHANISM OF KAFALAH GUARANTEE-I 2. Applies for Kafalah Guarantee-i Customer

133 ISLAMIC MONEY MARKET FX SPOT-i FX FORWARD -i

134 FOREIGN EXCHANGE (FX) SPOT-I Foreign Exchange (FX) Spot-i contract is a commitment to buy and sell a specified amount of foreign currency on a fixed date and rate of exchange A foreign exchange transaction involves conversion of one currency with that of another The Shariah Concept 1. FX Spot-i is based on the Shariah concept of Bai al-sarf (Exchange) 2. Bai As-Sarf is a contract to exchange of money for another in the same or different form. 3. Bai al-sarf principle requires strict requirement for such transactions involving two currencies to be settled not later than on a spot basis i.e. T + 2 working days

135 FOREIGN EXCHANGE (FX) SPOT-I BASED ON BAI AL SARF Foreign Exchange (FX) Spot-i contract is a commitment to buy and sell a specified amount of foreign currency on a fixed date and rate of exchange A foreign exchange transaction involves conversion of one currency with that of another The Shariah Concept 1. FX Spot-i is based on the Shariah concept of Bai al-sarf (Exchange) 2. Bai As-Sarf is a contract to exchange of money for another in the same or different form. 3. Bai al-sarf principle requires strict requirement for such transactions involving two currencies to be settled not later than on a spot basis i.e. T + 2 working days

136 TREASURY : BAI AL SARF (EXCHANGE SALE) Bai` al-sarf refers to a contract of exchange of money for money of the same or different type. Money is a medium of exchange that shall be in the form of gold, silver, currency notes or coins that have legal tender, or other forms accepted by Shariah. 1. Generally used for Foreign Currency Exchange transactions 2. Customer intends to obtain a certain currency in exchange of his holding currency. Currency exchanged must be different currencies 3. The exchange rate is agreed upon by the Bank and the customer 4. On exchange date, the Bank and customer must exchange the currencies immediately (spot basis) 5. The Bank earns income from the exchange profit.

137 PROCESS LIFECYCLE On the day exchange Rate USD1.0 : MYR4.0 CUSTOMERS PAYS BANK RM100,000 PAYS CUSTOMER USD$25,000 BANK 1. Settlement of a spot can only happen when the cash is exchange 2. Without actual cash, the exchange shall not take place 3. Contract is terminated once exchange is complete 4. The Uruf Tijari is that to allow for T+2 settlement as part of the normal settlement processes

138 FOREIGN EXCHANGE SPOT-I BASED ON SARF (EXCHANGE) 1. Bank sells USD10,000 to Customer on spot basis 2. Customer pays Bank RM40,000 on spot basis Note: a. Assuming the exchange rate is USD/MYR4 b. Spot rate is based on board rates provided by dealer at the beginning of each business day

139 TREASURY : WA D (PROMISE) Wa`d is a unilateral promise which refers to an expression of commitment given by one party to another to perform certain action(s) in the future. 1. Generally used for Foreign Currency Exchange transactions at a future date 2. Customer intends to obtain a certain currency in exchange of his holding currency at a date agreed in the future, for purpose of hedging. 3. Currency exchanged must be different currencies 4. The exchange rate is agreed upon by the Bank and the customer and is binding 5. On exchange date, the Bank and customer must exchange the currencies immediately (spot basis) based on the agreed rate 6. The Bank earns income from the exchange profit. 7. Any cancellation of the promise, the Bank is entitled to recover any losses incurred from the customer.