The All New Shariah Advisory Council BNM Website

Posted on April 21, 2018 by Amir Alfatakh

THE ONE-STOP SHARIAH ADVISORY PAGE OF BANK NEGARA MALAYSIA

Finally it is here, the website dedicated to the works and reference regarding the Shariah Advisory Council (SAC) of Bank Negara Malaysia. There is a wealth of information on the decisions and fatwa of the SAC, and this will provide valuable reference point on how a particular decision is made. Good insights especially to leaners interested in knowing the methodologies and depth of deliberation that the SAC employs for a decision.

The Centre of Shariah Reference in Islamic Finance

The website itself looks clean and uncluttered and holds various sections of interest. They include:

Shariah Standards & Operational Requirements. Currently it covers the 12 Islamic contracts standards that has been issued up to today (21 April 2018). You can view the various standards individually as you scroll down the page. Click on the banner below to go to:

Shariah Resolutions 1997 – 2010. This is the English-language compilation of the various resolutions when the industry was in the infancy stages. Lots of very fundamental discussion happenning during this period in the industry. Click on the banner below to go to:

Shariah Resolutions 2011 – 2017. This is the continuing compilation cover a more advance level of discussions, as the products in the market become more sophisticated, More importantly, the introduction of Islamic Financial Services Act 2013 (IFSA 2013) provided a more robust consideration of operationalisation of the Islamic contracts. Personally, I learned quite a number of concepts during this segment of time. Unfortunately at the moment, the compilation is in Bahasa Malaysia (Malaysian language). Click on the banner below to go to:

Educators’ Manual. This section interestingly mentions the existence of manuals for learning organisations that teaches Islamic Banking and Finance courses. I am sure these are useful documents if it is coming from the SAC. But you need to sign up and agree to adopt the standards for your institution to access these. Therefore I can’t really comment on the contents. Click on the banner below to go to:

Latest Shariah Rulings (Individual SAC Meeting Resolutions). This section allows the reader to have access to the decisions made on certain specific issues. It aims to provide the reader the understanding of how a decision is derived, based on relevant Fiqh evidences. Interesting read and quite comprehensive. Click on the banner below to go to:

Infographics. I believe this is part of the efforts to educate the public on the understanding on the workings of Shariah contracts as well as the process flows (and Shariah requirements) of a particular Islamic structure. As at current date, there are only 3 Infographics available ie Tawarruq, Istisna’a and Murabahah, but I am sure over time, the number of contracts infographics will grow. Click on the banner below to go to:

List of Shariah Committee Members in Islamic Financial Institutions. This is an interesting section because of the willingness to disclose to public the Shariah scholars responsible for the resolutions or opinions at the institutional level. It provides transparency and also reference of the Shariah Committee strength compared between Islamic Financial Institutions. Click on the banner below to go to:

There are many other sections in this website and I personally believe that this site will be one of the most complete point of reference for all the Shariah-related banking decisions. It may provide a better understanding of how the SAC makes a resolution that impacts the overall industry. I personally encountered a few glitches but I hope the content accumulates further to finally become one of the prominent sites when it comes to Islamic Banking.

Also, hoping someday the website will publish a hardcopy of the resolutions because some of us do read actual books. But if there is a plan for an e-book, do let me park it here on my website. For free.

Overall, I think the SAC website looks awesome and would definitely be one of my reference website for Islamic Banking products, processes and issues.

P/S Somehow I am not able to register as a subscriber yet (April 2018). Maybe still developing this area of the website? Hope it is sorted out soon.

Sadaqa House : The Crowdfund That Could Circulate Good

Posted on April 19, 2018 by Amir Alfatakh

HOW TO CROWDFUND GOOD?

Little by little, we learn there are many ways to spread good. I recently had a sit-down with Umar Munshi (EthisCrowd) and we had a fine chat. About his new project, Sadaqa House with Bank Islam, which aims to collect donations to support good causes, such as funding for a child’s operation (with the National Heart Institute of Malaysia), and other small infrastructure projects. Some of the causes are well funded, but some still fall short. But what it shows is that; if the cause is believably genuine, it may well get to raise the funds it needs.

This initiative is not so much different from the Tabarru’ concept of Takaful, which means mutual assistance using donations, and it can achieve so much more than Takaful.The idea of Takaful is “the many contributors helping the few“. Here, in the EthisCrowd space, the understanding is that it is “the many contributors helping the one“. For example the funding of the operation’s cost of a heart patient (child) where the contributors of funds are asked to fund the cost of getting heart treatment. It is basically a rougher/simpler form of Takaful.

Well I say job well done, and this is testament to the power and innovation of Islamic structures where it can go further than just collections, finance and banking functions. It espouses the concept of mutual assistance and takes it to the next level of donation-giving. It is purposeful, transparent and convenient. My first experience was that the whole process of donating is seamless and easy. I urge friends to give Global Sadaqa and Sadaqa House a try and maybe spread a little cheer to the needy. The initiatives are simple and it helps spreads goodness in people’s heart (no pun intended!).

I do applaud the efforts by EthisCrowd because it does really provide an alternative platform where there is funding facilities outside the safe confines of a banking institution. With Global Sadaqah, hopefully charity is taken to a new, higher level where donations are hard to come by (as they provide no monetary gain to customers). This is where appealing to someone’s religious or moral consideration play its part in attracting individuals keen on doing good, even from Non-Muslims individuals. At the moment, they have amassed a huge number of followers / community to support their initiative, regardless of race and religion.

But most of all, this platform is easy to use and this is what Islamic fintech should be; to provide easy & mobile access to the unbanked segment while adhering to the requirements of Shariah for solutions that work.

Hopefully we see more spreading good initiatives championed by Islamic Banking entities and Institution that cares about the growth of Islamic finance while helping communities. May we find more ways to see these initiatives become successful in the future. Wallahualam.

The Deposit Battle

Posted on April 12, 2018 by Amir Alfatakh

IT IS FAR EASIER TO FINANCE SOMEONE THAN HAVE SOMEONE FINANCE YOU.

It really is easier to build a financing book than a deposit book in Islamic Banking. Companies and individuals constantly seek for financing but when it comes to deposits, it really is a price war. Banks are looking to outdo each other with tempting deposit packages to attract the most cash-rich customers they can get.

But I do not blame Banks for this fight for deposits. Deposits are a part of the whole infrastructure that is required for Islamic Banking. Sources and Application of Funds make up the basis of Mudarabah and Musyarakah, and also other available contract. While the Application of Funds (Financing and Investments) have always seem to have been growing well in the market, the Sources of Funds on the other hand, is always seemed to be struggling.

Technically, the cheaper the cost of a Bank obtaining their deposits, the better it is deployed into various types of financing at a lower pricing where the profit margins can be maintained. The dream will always be to figure out a way to get cheap deposits.

APPLICATION OF FUNDS

It is not to say it is very, very difficult to build a significant deposit book, as you can always “throw” the highest rates onto your Tawarruq deposits, and customers will flock. But more importantly, the funds must be “applied” and “used” in the most ideal way. It is not to say that building deposit products using high pricing will necessary be useful for the Bank as it will be an expensive deposit-building exercise. Bear in mind these deposits should be ideally used to finance/invest into the right types of assets. For example, what type of deposits is most suitable for a 30 years Home financing product? Is there a 30-year long deposit that will fund the 30-years Home financing? If not deposits, what type of funds is ideally used for 30 years financing?

So, can a Current Account / Savings Account fund a 30 years financing? Current Account / Savings Account are very fluid type of accounts, with no tenure restriction and usually available on demand (at any time the customer can withdraw the funds). There will be a tenure mismatch of daily redemption allowed (1 day tenure) and the house financing is paid over a period of 30 years. 30 years financing funded by 1 day deposits? This is a huge gap that on the surface, impossible to resolve.

But the answer is really simple. It all depends on the behaviour of the deposit products. You would think the most appropriate deposits to fund a 30 year financing is the shareholders funds, and that is always a limitation. Maybe raise a 30-year Sukuk but you don’t raise Sukuk just like that; it takes a lot of effort to launch a Sukuk. Or try to find a 5-year investment instruments, but that is a challenge as well.

CORE DEPOSITS VS NON-CORE DEPOSITS

As mentioned above, it depends on the behaviour of the products, or more accurately the portfolio. Within the various types of Deposit products, you can further split them into Core Deposits, and Non-Core Deposits (Variable, transactions, short-term). We understand a lot of customers do withdraw their cash, whether on needs basis, transfers and payment. But if you analyse the portfolio further, you can identify a minimum amount that is always in the account. For example, if you analyse a Current Account portfolio of RM1 million every month, you may find a certain minimum balance is present at a constant, continuous level e.g. RM400,000 is always there i.e. the Current Accounts balance have not gone below RM400,000 and therefore deemed as Core Deposit. And Core Deposits are what you use to fund a 30-year home financing.

SO WHAT IS CORE DEPOSIT?

Core Deposits are amounts of deposits that are at constant levels throughout many cycles. Some Banks have bigger core deposits due to higher proportion of transactional accounts in the Banks, where the balances sit for many days in the account. It may fluctuate but mostly the changes in balances are minimum within the core deposit. Because of the stability in the balances, it is used by Banks to finance longer term commitment and financing.

So, the battle for Deposits is to generally build a strong Core Deposits. This type of deposits are resilient, with long term balances that allow Banks to utilise these balances for long-term financing at the cheapest cost of funds. And depending on the growth strategy of the Bank, the types of deposits that a Bank builds (Sources of funds) must compliment the strategy for the Financing portfolio (Application of funds).

If such balance is achieved, the Islamic bank will have maximised the cost efficiency of its balance sheet.

So how do we win this battle for deposits to continue funding the growth of Islamic Financing? Where do we find the source of funds to meet the needs of the industry? What Islamic contracts are the most suitable to attract deposits? Can structures such as Waqf or linkages to Zakat help provide a source of deposits to support the liquidity in the market? Or can there be a more efficient way to pool the deposit resources and make it available to the market, accessing to a new group of funders that we have never touched before.

There must be a way to build a platform to access new group of funders or develop a structure where investors can fund a financing portfolio directly. I see some of these platforms available in the market but needs to have it developed on a bigger scale into the banking environment.

Banking fintech, anyone?

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Monthly Archives: April 2018

Sadaqa House : The Crowdfund That Could Circulate Good

The Deposit Battle