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Presented to The International Islamic Finance Forum 2008
Presented By Ruslena RamliApril 14, 2008
Innovation in Islamic Retail Products
- A Comparative Update Between Malaysia and GCC
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Types of Islamic Contracts Applied in Retail Products
Challenges and Sustainability
Presentation Outline
The Malaysian Banking Scene 3 - 6
10 - 33
34 - 35
7 - 9What is Islamic Retail Banking?
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1The Malaysian Retail Banking
Scene
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“From a modest start of USD158.27 million in 1895, Islamic banking assets in Malaysia is increasing at an average rate of 33% to USD45.23 billion by 2007”
Source: Central Bank of Malaysia Page 5
20062005
1999
2003200220012000
19971998
2004
19961995
1899
1993199219911990
18971898
1994
18951896
2007USD37,538.46USD34,407.39
USD11,118.92
USD25,297.49USD20,944.75USD18,262.52USD14,465.72
USD5,501.94USD6,517.87
USD29,226.48
USD3,117.68USD1,906.90
USD421.03
USD618.18USD515.76USD430.89USD438.75
USD286.87USD348.91
USD1,503.09
USD158.27USD336.31
USD45,230.77Million
Overview of Growth in Islamic Banking Assets
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21,9
18 23,6
1215
,850
14,6
0510
,271 13
,456
8,06
7 10,2
28
6,33
19,
406
7,64
98,
093
5,81
86,
437
5,25
56,
043
4,28
35,
130
3,64
83,
909
2,34
83,
163
505 3,
012
1,55
0 2,96
7
521
2,51
3
1,07
51,
613
1,00
31,
505
-29
4
15,7
3017
,345
-
5 ,000
10 ,000
15 ,000
20 ,000
25 ,000
May
bank
Bank
Islam
Bank
Mua
mala
t
Publ
ic Ba
nk
Am
Bank
RHB
Islam
ic
Hon
g Le
ong
Islam
ic
HSB
C
EO
N Is
lamic
Affi
n Ba
nk
OCB
C
KFH
Alli
ance
Ban
k
CIM
B Is
lamic
Citi
Gro
up
Stan
dard
Cha
rtere
d
Al R
ajhi B
ank
Oth
ers
2005 2006
Source: BNM, Annual Reports Page 6
Growth of Islamic Assets by Malaysian Banks
RM million
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Motor Vehicle Financing
2007
2007
Muslim 61.8%
Home Financing
2007
“Islamic banking today is no longer restricted to race or religion”
Profile of EONCAP Islamic’s Banking Assets
2007
Current Deposits Saving Deposits
Non-Muslim 83.8%
Muslim 16.2%
Non-Muslim 38.2%
Non-Muslim 25.6%
Muslim 74.4%Non-Muslim 29.7%
Muslim 70.3%
Page 7
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2What is Islamic Retail
Banking?
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Mass-market banking where products cater to individual needs of customers and is typically performed in local branches of larger commercial banks.
Common products include deposit accounts, home financing, car financing, personal financing, charge cards, etc.
Scope of services have evolved to address the entire financial solution of a customer, from growing and protecting customer’s assets to planning retirement and passing wealth on to future generation.
Brief Summary
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Types of Islamic Retail Products
Page 10
Motor VehicleFinancing
ChargeCards
Wealth Management
Deposits
Islamic Retail
Products
Personal Financing
HomeFinancing
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3Types of Islamic Contracts Applied in Retail Products
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3aIslamic Deposits
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Tawarruq/WakalahDepositMudharabahMudharabahGIA/SIA
Wadiah/QardHasan/Mudharabah
Wadiah YadDhamanah/Mudharabah
Saving/Current
Shariah Principles (International)
Shariah Principles (Malaysia)
Products
In Saving Accounts, most Banks adopt the principle of Wadiah(guaranteed safe custody) and Mudharabah (joint venture) for Current Accounts.
Other Islamic banks use the contract of Qard Hasan especially in Iran.
Alternative principles are Tawarruq and Wakalah.
Application of Islamic Contracts - Comparison
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Mudharabah Based Deposits
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BANKBANK CUSTOMERCUSTOMER
UTILISEUTILISE
Makes a deposit and agree on profit sharing
ratio
Bank utilises the deposits in investment or financing
PROFITSPROFITS
LOSSESLOSSES
Distributed based on profit sharing ratio
Solely borne by customer
1
2
3
4
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Establishment of an effective rate of return framework, which provides a standard methodology for deriving the rate of return on deposits – “Profit Equilisation Reserve”.
In a dual banking system, level of competitiveness is important in retaining customer and deposits.
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Innovation and Issues in Product Development
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Alternative : Tawarruq Based Deposits
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BANKBANKCUSTOMERCUSTOMER
BROKER ABROKER A BROKER BBROKER B
1
Purchase commodity Pays the
purchase price at cost on spot
2
Sells commodity at cost plus profit (deferred)
Pays the purchase price at cost plus profit
(deferred)
34
5Sells commodity at cost price6
Pays purchase price at cost on
spot
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BANKBANKCUSTOMERCUSTOMER
Alternative : Wakalah Based Deposits
Makes a deposit
1Invests
2
INVESTINVEST
SukukCommodityMurabahah
LEVERAGELEVERAGE
Buying and selling sharesIslamic Call Option
Note: The Bank acts as an Agent to invest the money in specified investment portfolio
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3bHome Financing
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MusyarakahMutanaqisah/ Murabahah/IjarahMuntahiyah Al Tamlik/Istisna
Bai Bithaman Ajil(Bai Inah)/ MusyarakahMutanaqisah/Istisna
Home Financing /Refinancing
Shariah Principles (International)
Shariah Principles (Malaysia)
Products
Almost all Malaysian Islamic Banks adopt the principles of BaiBithaman Ajil (sale and purchase).
Initiatives are underway to promote utilisation of MusyarakahMutanaqisah (diminishing ownership).
Application of Islamic Contracts - Comparison
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Musyarakah Mutanaqisah Home Financing
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CUSTOMERCUSTOMER BANKBANK
Co Ownership10% 90%2
Customer identifies a property and invite the
Bank to co-own
Over time the Customer purchases the Bank’s stake in the property until all ownership remain with the
Customer3
Note: Suitable for completed or houses under construction
1
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Waiver on double stamp duty for the transfer of Asset from the Bank to the Customer.
Enhancing IT System and reducing legal documentation for Customer.
Benchmark of sale price at the end of the MusyarakahMutanaqisah period. Market value or a price that is agreed upfront? In Malaysia, the price is agreed upfront.
How to recognise Musyarakah Mutanaqisah in the Bank’s books?- The Bank as owner of the Asset; or- The Customer (legal possession) as owner of the Asset but
the Bank has charge over the Asset (actual possession)Page 21
Innovation and Issues in Product Development
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Ijarah Home Financing
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CUSTOMERCUSTOMER BANKBANK
Customer enters into a Lease Agreement (or Forward Lease Agreement) to lease the house for an agreed lease rental with a
transfer of the asset to the Customer at the end of financing
DEVELOPERDEVELOPER
3
Pays monthly lease rentals
Deliver
2
Identify and pay downpayment
1 4
5
The Developer enters into a Parallel Istisna Agreement with the Bank to construct and deliver the house in consideration for a Istisna Purchase Price (principal)
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Parallel Istisna Home Financing
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CUSTOMERCUSTOMER BANKBANK
Customer enters into 1st Istisna Sale Agreement where the Bank agree to construct and deliver the house to the Customer in
consideration for a Istisna Sale Price (principal + profit margin)
DEVELOPERDEVELOPER
3
Deliver
Deliver
2
Identify and pay downpayment
1 4
5
The Bank enters into 2nd Istisna Purchase Agreement where Developer agree to construct and deliver the house to the Bank in consideration for a Istisna Purchase Price (principal)
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3cMotor Vehicle Financing
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MusyarakahMutanaqisah/ Murabahah/IjarahMuntahiyah Al Tamlik/ Ijarah WaIqtina
Ijarah Thumma Al Bai/Bai BithamanAjil (BaiInah)/Murabahah
Motor Vehicle Financing
Shariah Principles (International)
Shariah Principles (Malaysia)
Products
Various Islamic contracts are being practised by Islamic Banks in offering car financing. Ijarah Thumma Al Bai is widely adopted in Malaysia.
Product innovation underway to utilise Murabahah.
Standard Chartered Bank (Pakistan) adopts the MusyarakahMutanaqisah principle for its car financing.
Application of Islamic Contracts - Comparison
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Murabahah Vehicle Financing
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CUSTOMERCUSTOMER BANKBANK
Customer approaches the Bank and obtain Murabahahfinancing to buy the car based on a Purchase Price
CAR DEALERCAR DEALER
3
Sells the car based on a Selling Price (principal + margin) with deferred payment
Deliver
2
Customer identifies the car to be purchased
1 4
5
Pays cash
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Under Murabahah ownership is with the Customer. In the event of default, the Bank would exercise its Power of Attorney or assignment to auction the car but this would involve the Bank going to Court which is tedious.
In Malaysia, car financing under Ijarah Thumma Al Bai is govern under HP Act 1967. There is currently, no Islamic HP Act. Currently in the process of being developed.
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Innovation and Issues in Product Development
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Ijarah Vehicle Financing
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CUSTOMERCUSTOMER BANKBANK
Customer approaches the Bank and obtain Ijarah financing
CAR DEALERCAR DEALER
3
The Bank leases the car based on an agreed lease
rental with a transfer of the asset to the Customer at the end of the financing
period
Deliver
2
Identifies the car and pay 10%
deposit
1 4
5
The Bank purchases the car and pays the 90% balance
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3dCharge Cards
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Tawarruq/IjarahBai Bithaman Ajil(Bai Inah)/ Wadiah/QardhHasan
Charge Cards
Shariah Principles (International)
Shariah Principles (Malaysia)
Products
Some Malaysian Islamic Banks use a combination of Bai Inah, Wadiah and Qardh Hasan (benevolent financing) in providing the service.
Most International Islamic Banks uses the contract of Tawarruq.
KFH adopts the contract of Ijarah Muntahiyah Bi Tamlik for its credit cards. However, purchases are confined to purchase of goods which are leaseable.
Application of Islamic Contracts - Comparison
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Interest free.
No charging of late payment is allowed.
Some of the structures that have been adopted are debt free. Concept of debit card.
Alternative principle is to base the card on “Ujra” or service charge. An annual service charge is levied depending on the credit size payable in installments (monthly/quarterly).
The concept of Tawarruq is used to solve issues pertaining to purchases of intangibles such as services, cash withdrawals and consumables.
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Innovation and Issues in Product Development
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Alternative : Ujrah Based Credit Cards
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CUSTOMERCUSTOMER
BANKBANKCustomer pays
ujrah for the facility
The Bank opens the account and determines the credit limit
3
4
Customer pays for the goods with the
credit card
1
CREDIT CREDIT CARD CARD
ACCOUNTACCOUNTEstablish the credit card facility
2
MERCHANTSMERCHANTS
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Tawarruq Based Credit Cards
BANKBANK
BROKER ABROKER A BROKER BBROKER B
1
The Bank purchases the commodity for a Purchase Price (principal)
Manage the facility
The Bank sells the commodity for a Sale
Price (principal + profit)2
3Customer sells the commodity and receives cash
CUSTOMERCUSTOMER
CREDIT CREDIT CARD CARD
ACCOUNTACCOUNT
Customer deposit the proceeds into the credit card
account as its credit limit Page 33
4 5
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Ijarah Based Credit Cards
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CUSTOMERCUSTOMER
BANKBANK
The Bank identify suitable merchants
The Bank leases the goods for an
agreed rental with a purchase
option
The Bank appoints the Customer as Agent to purchase the goods
3
4
Customer pays for the goods with the credit card as Agent of the Bank
2
1
MERCHANTSMERCHANTS
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4Challengers and Sustainability
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What are the constraints and challenges faced by Islamic retail product providers and those who have successfully launched their products?
Why is there a need to grow retail products?
What are the critical success factors?
Challenges and Sustainability
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والسالم &
Thank You
EONCAP Islamic Bank Berhad17th Floor, Menara EON Bank
288 Jalan Raja Laut50350 Kuala LumpurTel: +603-2694 1188Fax: +603-2694 8688
www.eoncap-islamicbank.com.my
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