AAOIFI - World Bank Annual Conference on Islamic Banking and Finance

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1 AAOIFI - World Bank Annual Conference on Islamic Banking and Finance Ghazzali Saduk 03 December 2012 Investment Accounts Murabaha vs Wakala

2 Contents Murabaha Investment Accounts Wakala Investment Accounts Shari a principles and requirements Effects on accounting principles and treatments? How can Murabaha and Wakala be applied to interbank money market operations? 2 AAOIFI - World Bank Annual Conference on Islamic Banking and Finance

3 Murabaha Investment Accounts (MIA) MIA s is the most popular form of raising liabilities among IFIs. The current day MIA is structured by attaching a monetization process to a Murabaha sale transaction. To achieve the economics of an Investment Account; this modified form of Murabaha needs to follow some strict guidelines to be valid under the laws of Shariah. 3 AAOIFI - World Bank Annual Conference on Islamic Banking and Finance

4 Shari a Requirements for MIAs Bank (as Agent) Broker A Client (seller) Spot Movement of Commodity Movement of Cash Murabaha Transaction Monetization Process Spot Deferred ` Broker B Bank (Buyer) The commodity should exist & must be owned by the seller. The commodity should be in the physical or constructive possession of the seller. The price of the commodity (cost and markup) and the deferred payment date should be known certainly without any ambiguity. Once the price is fixed, it cannot be decreased in case of earlier payment, nor can it be increased in case of default. The buyer of the commodity should be able to take delivery if he wishes to. The Bank must monetize the commodities with a party other than the one from whom it was purchased on deferred basis. 4 AAOIFI - World Bank Annual Conference on Islamic Banking and Finance

5 Wakala Investment Accounts (WIA) Wakala (Agency) is nothing but to appoint another person in one's position to fulfill a permissible and known transaction. In our case to manage the funds of a client (Muwakkil) by an IFI (Wakil) in a profitable manner. Muwakkil places his utmost trusts of the business capabilities of Wakil. The core money making process in Wakala is a PLS module which is no different to Mudaraba or Musharaka or an hybrid form of both. 5 AAOIFI - World Bank Annual Conference on Islamic Banking and Finance

Basic Structure & Shari a Requirements Client IFI s Funds Asset Pool Pool Profit Less Costs + Charges

IFI: Client capital contribution) Client Share of Profit IFI s Share as Fund Manager Profit Comparison

difference. The principal & the agent should posses legal capacity to enter into a contract.

The Wakeel must be aware of his status and do the work according to the instructions of the Muwakkil.

6 Basic Structure & Shari a Requirements Client IFI s Funds Asset Pool Pool Profit Less Costs + Charges The form of Agency (Offer & Acceptance) Distributable Income Client IFI s Profit (Shares are based on IFI: Client capital contribution) Client Share of Profit IFI s Share as Fund Manager Profit Comparison If the client s share of Profit falls lower than the Anticipated Profit; then the bank can top-up the difference. The principal & the agent should posses legal capacity to enter into a contract. The Principal should posses all legal right of the subject matter of Agency. The Wakeel must be aware of his status and do the work according to the instructions of the Muwakkil. The subject matter of agency should be known and it should be disposed through agency. 6 AAOIFI - World Bank Annual Conference on Islamic Banking and Finance

7 Accounting Principles and Treatment Risk in theory & in substance. Legal vs perceived risk Basis of On / Off Balance Sheet treatment. Restricted vs Unrestricted Agency funds vs Equity of Investment accountholders. Wakala funds vs Mudaraba funds Transparency & Ease in profit calculation. Simple and logical profit calculation. 7 AAOIFI - World Bank Annual Conference on Islamic Banking and Finance

8 Murabaha and Wakala in Interbank The limitation of Murabaha to manage short-term liquidity. Yield (bp) 200 Extra Cost of Doing Murabaha Execution time of WIA clearly outpace a MIA / Mn 30 / Mn 15 / Mn Commodity supply & market limitations. Issues related to Broker/Bank arrangements. 0 O/N 1W 2W 3W 1M 2M 3M 6M 1Y Limitation to use PLS contracts with non IFIs on the assets side. Crystallized vs Ex-post values of principal & profit. 8 AAOIFI - World Bank Annual Conference on Islamic Banking and Finance

9 Thank You

MCMA Enhancing Liquidity Management

IIFM Seminar on Islamic Financial Markets Monday, 1 st December 2014, Manama Ismail Dadabhoy Advisor - IIFM MCMA Enhancing Liquidity Management Murabahah transaction with the benefit of : 1 1 Purpose of