Continuing Post : True Islamic Banking is Not in a Commercial Bank

Posted on September 4, 2019 by Amir Alfatakh

By Dr Rosana Gulzar

EXCERPT : This is the ‘square’ that the ‘round’ Islamic Banks have been fitted into. So although Islam encourages a range of objectives that include communal welfare and profit-making (Note: NOT profit-maxisiming), Islamic Banks, as Commercial Banks, are almost single-mindedly pursuing the highest profits they can make for shareholders. They do this through all kinds of loans that look eerily like the riba they are supposed to replace. This is the outcome of a decision made by a group of founders in the Gulf Cooperation Council (GCC) countries in the 1970s. They wanted to quickly absorb the people’s newfound wealth from the oil boom. Several earlier attempts at genuine PLS in Egypt failed so the fastest build-up for Islamic banking would be by replicating conventional finance.

This is the continuing discussion by Dr Rosana on the above topic, which puts in the case for Cooperative Banks to be a more suitable testbed for Islamic Banking concepts and contracts. Perhaps a new look on what financial structure is most suitable adopt the requirements of Shariah banking is required. What do you think? Do give your comments and contribute to the discussion. Read the full article here or click on the above diagram.

For more writing under Dr Rosana, visit the page in the site which houses more of her writings by clicking below:

Bank Islam’s Application of Shariah Contract in Islamic Banking Products and Services (2013)

Posted on May 15, 2019 by Amir Alfatakh

In conjunction with Bank Islam Malaysia Berhad’s 30 years anniversary (Bank Islam was established in 1983), the kind bank decided to release this useful book of knowledge of the various structures they have in the Bank for the public. Perhaps produced as a gesture for publicity and a bit of chest-thumping, but it is a useful insight on the mechanism that the bank use in its day-to-day operations. And it is written is simple language and illustrated to provide simple understanding, it can be a useful reference to new learners of Islamic Banking contracts and structures.

Have a read and you can get valuable insights on the simplicity of Islamic banking products and services.

Note: This booklet is written prior to the introduction of the Islamic Financial Services Act 2013 (IFSA 2013) so while some of the terminologies may now differ, conceptually I do not see any significant variations to the structures now prevalent in the market.

Download your copy of the Application of Shariah Contracts in Islamic Banking Products and Services (2013) here or on the picture above.

For More Books, click on below picture

It is 2019. BBA and Bai Al Inah are Old News.

Posted on January 9, 2019 by Amir Alfatakh

WHY ARE YOU STILL ASKING ME ABOUT BBA AND BAI AL INAH?

It remains a mystery when people ask me why Malaysia continues to offer Bai Bithaman Ajil (BBA) and Bai Al Inah products, as according to them, these structures are based on elements of Hilah (trickery). It is a mystery because starting from 2012/2013 period, the instructions on Interconditionality issued by BNM to Islamic Financial Institutions requires that the provisions of “mandatory buy-back” must not appear in financing contracts such as Bai Inah and BBA. Because of this, Malaysian Islamic Banks have slowly weaned itself from such products and have since moved to other Islamic contracts.

Read the circular issued by Bank Negara Malaysia in 2012 on the practice of Bai Inah and their expectations by clicking this link (BNM Circular).

WE ARE STILL READING OLD BOOKS AND ARTICLES

In general, I still find that some learning institutions are incorrectly teaching students that the contracts are still alive and well in the Malaysian market. The text books used are still ones that predates 2011 and really, this is a disservice to students. When they come for interviews with our bank, it does not give the students any advantage or good impression as the syllabus remains outdated. Many do not know about the Policy Documents issued by Bank Negara Malaysia or the contracts covered by the policy documents. This really should be covered in a learning module as the latest requirements are captured in these documents. It is a good reference read, but it seems only practitioners and Shariah scholars are aware of these documents.

This is true as my last few interns also impressed the same. Tawarruq structures sounds alien to some of them, as their teachers prefer to teach BBA and Bai Inah to unlock its controversies as points for discussion. Let us be clear that most banks NO LONGER offer Bai Inah or BBA, and those which does, offer it as a continuation for a legacy arrangement or due to certain unavailable scenarios, such as fresh new documentations are not obtained for Tawarruq arrangement (such as Wakalah to buy commodities). It is no longer offered as a product to the public and this is evidenced from the Banks website where the structures can no longer be found. And most of the time if used, this is a temporary fix allowed until the deal reaches expiry or the Tawarruq appointments are obtained.

And with Tawarruq arrangements now being ably supported by good infrastructure such as Bursa Suq As Sila trading platform and other commodity brokers worldwide, there is no issue of Darurah (emergency) to justify the continued usage of Bai Al Inah or BBA.

SO, WHERE HAVE WE GONE TO SINCE 2011?

In short, we have moved to the following contracts:

Bai Bithaman Ajil (BBA) – Usually BBA is used for purchasing of properties (Home financing or Commercial properties financing), or sometimes for trade financing products. These usage is now done under the Tawarruq arrangement (using Commodity Murabahah) where the proceeds from the sale of Commodities is used to settle the purchases of houses or commercial properties. Alternatively, Musyarakah Mutanaqisah arrangement (Diminishing Partnership) is also used by many banks where houses or properties are purchased by the Bank and leased out to the customer, who then pays rental and gradually purchases the shares of the house and properties over time. So now, BBA has been replaced with Islamic arrangements of Tawarruq or Musyarakah Mutanaqisah. Other Islamic contracts has also been known to support some elements of BBA, such as Istisna’a (property construction), Murabahah (good sale at profit) or Ijarah / Ijarah Mausufah fi Dhimmah (forward lease).
Bai Al Inah – Usually Bai Inah is deployed for Personal Financing or Working Capital Financing and even Islamic Credit Cards. Again, Tawarruq arrangements has generally replaced these usage with the end result of providing cash. On a smaller note, the contract of Ujrah (Services) is also deployed to support some requirements of personal financing (where purchase of goods and services are required) and Islamic Credit Cards. So now, Bai Al Inah has now been replaced by Tawarruq arrangements or Ujrah contract to meet the cash and working capital requirements.

The final controversial contract that Malaysia currently deploy is the Bay Ad Dayn (Discounted Sale of Debt), which serves a specific purpose in trade financing products. Eventually a common ground must be found to make this contract more globally accepted, or replaced with a better solution.

UPDATE YOUR STUDY NOTES, PLEASE

The main challenge nowadays is to innovate further by improving what we have. Criticisms are good, especially on the old structures. But we practitioners do hope the learning academia afford us a bit more confidence and trust, especially these criticisms and consequent issues are not “unknown” to us, since we lived and breathed in its controversies many years ago. The comments made in recent times are something we had encountered and resolved 10 years ago. We enhance and evolve, and it will be good to see new students coming into the market armed with the latest updates of what is happening and let’s move forward.

It is now 2019. Do not get stuck in the muddy past. These contracts have gone into the history books. We have so much to do in the future arena.

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.

Where Regulations on Islamic Banking Lives

Posted on February 11, 2018 by Amir Alfatakh

Many times I have been asked, during talks and sharing sessions, where we can find all the Regulations, Frameworks and product Policy Documents issued by Bank Negara Malaysia. Many are not aware that I do house most of the relevant documents right here in my site. It is hidden (actually, not hidden…) in my REGULATIONS (MALAYSIA) tab.

Most of it are very technical documents and perhaps will make sense more for the practitioners in the industry. But there are many documents that is very useful, even for academicians and students, which is concisely well written and captures the essence of what needs to be conveyed. Especially documents such as the Islamic Banking contracts, which you can find at the PRODUCT STANDARD / POLICY DOCUMENTS (PRODUCTS) section of the same page.

Also there, the latest Shariah Advisory Council (SAC) Resolutions and Updates on various resolutions under under SHARIAH RESOLUTIONS.

Do use it if you are looking for a place for your reference. Also you can click on the above banner to go straight to Bank Negara Malaysia Website to search for items that are not in my page.

Happy Reading and do share the page if you find it useful.

Connecting the Dots : Islamic Fintech

Posted on December 31, 2017 by Amir Alfatakh

REVOLUTION OR EVOLUTION?

This posting is in the danger of being written too long, but I think it is necessary to close this year with this topic, simply because it looks at the future. The word “Islamic Fintech” has been buzzing for quite some time now and there have been pockets of excitement on what it should mean. Many financial institutions have jumped onto the bandwagon declaring they are also part of this new wave of what a bank could offer.

While all these are still early stages of development, I do notice a lot of effort is built into “digitalisation” and “apps-based application” and “efficiently and convenience” of EXISTING banking processes and relationships. These enhancements are still driven by financial institutions and centred around improving traditional processes for banking services, or short-circuiting the credit processing elements of financing. Although enhancements via technology is an important aspect, these should not be defined as “fintech”. There is an element of fintech in process improvements, but PROCESS IMPROVEMENT itself are not fintech.

DO PEOPLE NEED BANKS?

Traditionally, banks always hold the impression that “People need Banks, one way or another”. It is this understanding that the bank can continue investing into their brick and mortar business model, with customers always coming to them when they need capital, financing funds or products and services. The competition is that who can deliver existing products in the most efficient manner, with technology as the enabler. Money is spent to improve accessibility to the bank’s EXISTING products, services and proposition.

In improving processes, banks just needs to concentrate on all the products and services offered and build the corresponding infrastructure to ensure efficient delivery with technology. It can be “Apps-driven” based on inquiry or transaction-based, with new features attached to existing products. It is just creation of new delivery channels which will deliver existing products to customers faster than before.

But that in my view is NOT what fintech is all about.

IF FINTECH IS NOT PROCESS IMPROVEMENTS THEN WHAT IS IT?

The easiest google/cut/paste definition of Fintech is that “fintech is a new financial industry that applies technology to improve financial activities“ and “FinTech is the new applications, processes, products, or business models in the financial services industry, composed of one or more complementary financial services and provided as an end-to-end process via the Internet”. The key words I believe are:

New Financial Industry
New Application
New Processes
New Products
New Business Model

While “Process Enhancement” can help support the “New Processes” element, but I think it falls short of the idea for fintech i.e to re-think the business model of financial services. The idea of fintech should be this: Understanding what the requirements of the Gen Y customers are and how they work, develop the products and services on platforms that they are most familiar with, and the proposition that the bank can offer on their chosen platform. It is a total re-think of delivering products and propositions to the up-coming Gen Y potential customers.

SHARING OF FINANCIAL WALLET

As much as banks and financial institutions like to believe the financial wallet cannot exist outside the regulated financial system, the evidence is slowly being presented as otherwise. Companies are finding ways to survive, live and thrive outside the banking system with facilities and opportunities in the New Economy, slowly eroding the traditional banks’ share of financial wallet.

Big Data companies have proven that their database is far more powerful (and valuable) than the database an individual bank would have on its existing customers. Bitcoin and other cryptocurrencies goes through thousands of transactions within blockchain and is only realised into banks network when actual physical cash is needed. eWallet lets value resides in tech platforms for purchasing and sales of goods and services (more like barter or exchange of goods and services), and up to a certain extent provides microfinancing. Prepaid and loaded value arrangement provides free seed funding and capital for businesses, without the cost of borrowing incurred via banks. Peer to Peer (P2P) arrangement links crowdfund Investors to Entrepreneur without complicated documentation with speed and transparency levels never seen before. Sharing of risks and profits (including potential pay-offs) are now more understood as compared to traditional financing arrangements. Mudharabah, Musyarakah, and Ijarah may now have a place in an economy where equity participation is expected and sought after.

“FINANCIAL SOLUTIONS” ARE JUST A SINGLE ELEMENT IN THE UNIVERSE

Technology can now provide a single-point possibility of all our needs; goods, services, food, shopping, bills payment, money transfers, investments, borrowing, deliveries, medical, transport, social interaction, travel, holidays, education, careers development, information and even branding. Financial services can be integrated into all these elements, now driven via apps. But for this new infrastructure, the various “relationships” are needed to be identified and re-looked and re-engineered. With the proper Shariah compliance consideration.

This “single point” proposition is where tech companies play a crucial part. Rethinking the financial model must happen with the involvement of tech companies due to the advantage of everything being on the internet (internet of things). There are still a lot of limitations to what a bank can do, understandably due to financial regulations. The space of where banks are continuously competing (or evolving) is the “FINANCIAL SOLUTIONS” box above, and maybe payment gateways linked to service providers. But tech-companies? The revolution of technologies move so quickly that regulations will continue to struggle to catch up.

In the diagram above, I attempt to identify some of the areas of traditional banking where fintech can come in and provide a like-for-like solution or even fully replace the proposition by traditional banks. Certainly a lot of the consumer touch-points can be easily replicated in a technology platform, and crowdfunding and crowdsourcing can replace traditional financing and working capital requirements as well. Some services are still embedded into a banking structure (such as Current Accounts or Treasury product propositions) but over time, such products may be linked to fintech and the banks may eventually become ancillary service providers rather than main bank, earning just fees for services provided.

The landscape of what a bank offers will ultimately change in the next few years, when consumers no longer go to banks for financing, services, remittance and settlement of business transactions. As the new generation grows up with tech and becomes financially affluent, their expectation of how a banking experience should be will also dictate the model a bank adopts.

CONNECTING THE DOTS

So where do I see the banking industry in the next 5 years? Personally, I think a “price-comparison platform” will emerge, as seen nowadays in the travel/hotel/tourism industry. Information from all the financial service providers are flowed into a single platform, and consumers are able to immediately compare products, services and prices on a single platform and choose their solutions. Instead of customers subscribing to multiple banks offering different products and services (at different pricing), they only need to subscribe to a single platform where all information on the products are available to select. This is where the promise of fintech can thrive; accuracy of information, convenience of access, and speed of transaction.

It is a matter of time the various industries converge. We may think regulatory pressure will halt some of the progress but mostly it have been reactive regulations. And the challenge is that these developments are driven by tech companies which has no loyalties to banking regulations as their scope of business cuts across various industries. It will be a period of “non-regulated” until the market starts to recognise the need to regulate and managing the risks. A regulatory sandbox will be usefull, but if the “New Economy” moves faster than the speed where regulations are being formalised, there will be a lot of speculative and arbitrage opportunities for the market to gain.

This also means the New Economy brings new risks that the consumers are not aware off. While the banks have been fine-tuning its risks that it takes over the past half-century or so, the fintech companies may not see the elements of risks other than technology risks or systemic risks. Almost all the risks faced by banks are also prevalent in fintech companies or non-banks, plus the specific risks by fintech companies. They might be great at integration of technology, but banks are still masters when it comes to understanding financial risks.

WHAT NEEDS TO BE DONE?

As I mentioned, banks understand risks better than a tech company. A tech company understand speed, efficiency and channels better than any banks can have. At the moment, banks are developing “fintech” on their own which is mostly a process improvement project. Tech companies are developing “banking services” on their own as well, where it linked investor’s money and economic entrepreneurs via technology. The question is really, “why not a bank consume or enter into a partnership with tech companies to provide a solution beyond traditional banking?” We have started to see this trend where banks attempt to purchase outright a tech company and use the company as an incubator for new products and services. It should look into having a different operating structure which encourages new ideas, innovation, internet-based solutions, as well as delivering to a larger segment of consumers (including the Unbanked segment).

The end-result might not look like what we recognise as banks we see today. This could be a separate line of business for banks, where the element of technology integrated into the wider economy is more dominant than its traditional banking products and services. You could have Bank A offering the traditional products and services, and Bank A-Tech offering fintech solutions to a new generation. The same bank catering to 2 business lines, employing different delivery channels.

But breaking away from such traditional infrastructure may take time, and the greatest fear is that the market cannot wait. Fintech companies may be able to offer similar proposition in half the time required, and this will not motivate fintech companies to join-venture with a financial institution. In an environment where new opportunities arise at the blink of an eye and regulations have yet to be formalised, the temptation to go on its own will drive innovation by the fintech companies, leaving behind banks. Fintech companies have the capability to look at consumer needs and develop the solutions from the bottom, and flow the linkages to the top. Connect the dots where the solutions provider are linked together in a platform.

Will fintech companies be the next driver in providing financial solution? I know my answer to that question. It is perhaps just a matter of time where future banking is done outside of a bank. Perhaps the model of banking needs to be re-imagined.

Wishing all my readers a Happy New Year in 2018. I appreciate the support I have received so far. But the new world beckons and hopefully we can do enough to ensure the continuation of the banking industry. I hope Islamic Banking can play a bigger role in taking the industry into this exciting online generation.

The Tawarruq Dilemma

Posted on December 25, 2017 by Amir Alfatakh

Islamic Banking in Malaysia is fast reaching a crossroad. While Islamic Banking continues to offer like-to-like conventional structures, the requirements by Shariah Committees and Policy Documents by Bank Negara Malaysia continues to challenge the way Islamic Banks implement and operationalise the products within a viable banking structure. Islamic Banks are becoming mindful of the need to comply fully to each policy requirements.

It is precisely this fear of being “non-compliant” to these requirements that pushes many Islamic Banks to develop the Tawarruq-based products into its most efficient form. As I have written earlier in Disruption : Islamic Contracts where I felt the Tawarruq arrangements has become the “go to” structure that Islamic Banks can easily comply with, the notion that other contracts such as Musyarakah or Ijarah or Mudharabah may now be left behind in its development due to perceived complexities. Or in some cases, difficulty to comply due to the existing banking set-up, especially in matters of risks, capital and operational processes which is intrinsically based on conventional banking infrastructure.

BUT CAN TAWARRUQ ALWAYS BE THE ANSWER?

It is generally accepted that a lot of processes in the Tawarruq arrangement can be complied with. There were strong operational support and infrastructure both internal and external, such as the London Metal Exchange (LME) and Bursa Suq Al Sila which has an efficient commodity platform specifically designed to support Tawarruq with or without commodity brokers, to the choice structure that bridges the middle-east players to most of the rest of the Islamic Banking geographies. But that is by no means that Tawarruq is a perfect solution for Banks.

Despite Tawarruq is now greatly used over the last decade or so, there are still contention points that remains amongst financial practitioners and Shariah scholars. Most scholars want to have the view that Tawarruq should be the “contract of last-resort” but what we see now are quite the opposite. It is the preferred choice being used not just for Working Capital requirements, but now also for Asset Financing, Mortgages, Trade Financing, Fixed Deposits, Structured Investments, and even Savings Account. Whenever an Islamic Bank hits a roadblock with a particular product being developed or requiring compliance to the latest rules, the tendency is always to consider Tawarruq as the solution.

If this is the approach, how much do we really need other Islamic contracts which only addresses a single problem or requirement? Shouldn’t we develop Tawarruq as far as it can take us and make other contracts as “supporting” contract to cater for specific nuances?

THE UNANSWERED QUESTIONS ON TAWARRUQ

Each year when Bank Negara Malaysia audit comes around, there will always be new compliance points to be proven and tested. Even at the level of understanding and interpreting the Policy Documents into processes and banking operations. Each Bank interprets the rules differently, and each banking set-up have different operational capabilities which more often than not, requires exceptional Shariah indulgence. So, the questions will remain unanswered whenever dispensation is obtained.

Many argue that the main issue of Tawarruq is actually the “intention” of the contract itself, and that intention is not to “trade in commodities” but to create debt via a trading transaction. This has been debated at length for many years in all types of forum, but we concede on some of the arguments by virtue of there being no other viable solution to cater for certain banking requirements. Islamic Banks, and its scholars, had to choose either:

Allowing for the Tawarruq arrangement with strict adherence to requirements until a solution arrives, or
Disallowing the Tawarruq arrangement which may result in customers being impaired in their Islamic business, which may result in the customer reverting to a conventional banking solution.

Is there a case of choosing the lesser of two evils?

Nonetheless, I won’t discourse what have been extensively discussed, but instead look at the operational issues of Tawarruq arrangements that I pick up going through the Tawarruq Policy Document. Among them that are still being debated in different forums are:

The issue of Commodity Delivery – To demonstrate that the Tawarruq being practised by the Bank is real, the test of delivery of Commodity is a key qualifying factor. The Bank must have in place a mechanism that allows the customer an option to take delivery of the commodity whenever the customer calls for it, bearing in mind that may have not been the intention in the first place i.e. taking delivery of commodities. How a Bank prove this to Shariah Committee and regulators are crucial to demonstrate “real transaction” and paper transactions.
The issue of Price Fluctuation – Depending on commodities, its price tend to fluctuate periodically, because these are actual live commodities being traded. Because of this, Banks have not been able to be precise in its documentation or price disclosures. Whatever price per commodity unit at 10am, it might change at 2pm, so how do you lock-in a specific price when the buy and sell of the commodity was not concluded immediately? The fact that Bursa Suq Al Sila states in its guidance notes that an Islamic Bank could not hold the commodities for more than 2 hours implies the issue of price fluctuation is a valid concern for Shariah Committees.
The issue of Discrepancies of Terms – Because the Murabahah transaction in the Tawarruq arrangement is the most crucial contract, Scholars always insist on the details of the transaction to be as precise as possible to ensure what was offered was eventually rightly accepted. For example in a Personal Financing structure, the customer makes a credit application according to certain terms such as financing amount, or financing tenure, but what eventually gets approved might be a lesser amount or shorter tenure, which means differences in the initial “Agency” instruction to transact the commodity. Scholars question how do Banks re-engage customers with such “counter-offer” for their acceptance? At which point after the credit approval?
The issue of Delay in Transactions – Some banks are more efficient than others. Some banks are able to conduct commodity trading on the same day while others can only do it in the next day after the day’s batch run. End of day batch runs are what conventional banking live by, and there is no motivation to conclude and consolidate all transaction in real-time; there is no requirements to do so. Batch runs allows for more systematic consolidation of records. But that becomes an issue for Islamic banks running next to a conventional banking proposition. So if an Islamic bank is limited to only end of day batch run to consolidate its records, it means the end of week transactions requirements will only be fulfilled on the next working day (across the weekend). This is a delay in the conclusion of the initial instruction given by customer to conduct Murabahah which may impact specific terms including price of commodity and its availability. There is also the danger of missing out delayed transactions as those instructions are not “current” anymore. There is a provision in the Policy Documents that “delay” in transaction should not be more than 2 days (T+2), but there are also periods where the off-days are more than that due to public holidays and other disruptions.
The issue of Qard in Tawarruq – An extension of the above scenario where Commodity transactions are delayed, the next question will be “what is the status of the funds when no transaction is done?” Is it a Qard (Loan) contract until the transaction is fulfilled, or is it an Amanah (Trust) arrangement? In either case, for the scenario of Tawarruq Deposits, how do you accrue the profit for both contracts which forbids “interest” or “returns“? Profit is only realised once the Murabahah (trade) takes place. Without the trade being transacted, profit accruals can only be justified by arguing that Islamic banks should not penalise customers who, in this case, has done nothing wrong. Dispensation is always given for the reason of fairness. And this “Incidental Qard” issue has also been discussed at the Shariah Advisory Council of Bank Negara Malaysia, where the fatwa on Incidental Qard and its conditions were issued. But the fact that it was discussed, indicated that this issue is not as easily brushed aside as one like to think.
The issue of Agency and Dual Agency – There are still some banks that feels the Dual Agency structure contributes greatly to the notion of “arranged” Tawarruq and thus stays away from it. The Dual Agency structure is where the customer appoints the Bank as both the Buying Agent and Selling Agent. This gives the Bank the full right to conduct trading without any Customer intervention (given mandate), which makes the “ability or option to take delivery of commodity” redundant or unnecessary requirement. It effectively removes the proof of Murabahah i.e. deliverability of the Commodity.
The issue of Physical Commodity – One of the main contention is the ability to ascertain the availability of Commodity. While on paper it can be evidenced but nonetheless the challenge is to ensure the Commodity is identifiable and deliverable according to quantity. Efforts have been made to split into smaller denominations whenever needed, and commodities like Crude Palm Oil (CPO) is easier to be allocated. But there is always suspicion whether this is superficial where proof of otherwise is actually much more difficult to obtain. Where is the certainty that the assets being traded are the right physical ones?

THE REAL QUESTION IS WHETHER THE ABOVE CAN REALLY BE RESOLVED

So is there any other alternatives to Tawarruq? The above questions have so far not been answered satisfactorily and scholars while do not prohibit its usage, still frown on how much Tawarruq has impacted everyday banking life. It is truly a “love/hate relationship,

I believe there is such “replacement” contract that can address most, if not all, of the above concerns. But it needed to be proofed and challenged and at the end of the day, we question such necessity and thus the rising dilemma to replace it after all the work done. Tawarruq has really taken root with so much invested in perfecting the structure, and expertise in its documents and mechanism. It solves a lot of problems, yes. But will Tawarruq be the end of innovation for Islamic Banking?

I like to think there must life beyond Tawarruq. It just needed courage to acknowledge the big task required for such massive structural changes in replacing Tawarruq. Such replacement must not just be an equal substitute but also addresses the Shariah concerns. That is the ultimate test of any Islamic Banking contract; the reason for being.

The Unbanked

Posted on November 30, 2017 by Amir Alfatakh

YOU EXIST IF YOU HAVE MONEY

Throughout our banking life, we were always reminded on the privilege of having a Bank that supports you for your financial needs or your businesses for expansion and growth. The banking products are designed to provide SOLUTIONS and access to these products and services relied on the following:

Your scope of business : What is your business and industry and more importantly, what’s the potential for your business to grow? Is it a sunset industry or emerging business? What is the long term outlook of the industry?
Your credit standing and payments conduct : How strong are you financially? Is your business reliant of project or is there continuous flow of business? Is there any issue in collections and payments? What is the payment track record? Is the Bank able to obtain evidence of your businesses credit strength via Audited Financial Statements, Bank Accounts, Invoices records and any other documents?
Your collateral : Is your business able to provide any form of collaterals that is acceptable to the Bank? What is the valuation of these collaterals? Is there a secondary market for the collateral and what is the likely protection towards the Bank’s capital?

These are all the tested ways of traditionally assessing your credit worthiness or financial viability. These are what Banks call you if you qualify: BANKABLE CUSTOMERS.

BUT WHAT IF YOUR BUSINESS DO NOT HAVE ANY OF THE ABOVE?

So now, you don’t have any or some of those, or you never really cared. You are a small business, with young people running it, utilising tech as your business platform. You source your materials and goods directly from suppliers, shipped to your home (or just resides at supplier’s premise), advertise on FaceBook and Instagram, and receive your orders online. You shipped them out to your clients via DHL or any decent courier service, and all your payments and receipts are done via epayment. Business is good and you want to grow.

You seek a financing facility with the Bank.

But the Bank promptly tells you : Your business is no good because you don’t fit the criteria that Banks have for their “target clients”. No track record. No financial statements. No collateral. You are officially UN-BANKABLE or UN-BANKED.

WHERE DO THE UNBANKED GO, THEN?

As much as the Banks like to think that the only way for your business to grow is to comply with the requirements to qualify for a banking facility, you have discovered that it is not necessarily so. Many have managed to grow without going through the banking red tape; in fact they avoid the Banks altogether. Options are starting to emerge to help you build your business, and most of them are not even Banks. Is it a scam or a money-game fly by night operation? Dare you take the risks? But it seems that they are willing to take a risk on your business, and since there is little other options, why not give it a try.

The banking world is ultimately changing. We hear all the new words being used; Fintech, Bitcoin, Ethereum, Blockchain, Crowdsourcing, Crowd funding, Big Data, Antminers, Challenger Banks, Venture Capital, Seed Funding, Angel Investors, Digital Banking, ePayments, eWallet, Mobile Banking, Apps Banking, Tribe, etc. All these new “non-banking channels” appeals to a different type of customers; ones that understand technology and has a lot of trust in its capabilities.

Now the first experience for a new business in obtaining funding may no longer be via a banking experience. It could be a social media platform, a tech company or even the greater public (peer to peer). The digitalised “banks” (which are consequently NOT banks) offers the following benefits:

Creation of relationships without transactions or track records
Reduced Costs of doing business i.e. cheaper transactional costs
Speed and mobility
Less regulatory requirements (which could be a bad thing…)
Ease of Cross Border transactions
Digital interface instead of human connection

WHERE ARE WE HEADED?

I agree with the view that the form of traditional banks must change in 5 years time to offer products and services that’s totally different from what we have now, reaching out to a wider group of Gen-Y and Millennials. But how do we attract such emerging generation whom are now glued to their mobile devices?

This is where the Social Economy will be prominent. Just as the ease of the social media connects the Gen-Y to everything quickly and effortlessly, the new generation will not subscribe to the old tedious banking model. It will be about conveniences, and life which is more online 24/7. And if they are not able to obtain a required facility, they will be more likely to look at their own community for support, or else “Do-It-Yourself” solutions which taps on the fintech, internet or mobile infrastructure. They will become Digital Entrepreneurs, and Banks have yet to create a space for these young tech-savvy entrepreneurs to occupy.

“ISLAMIC BANKING” OUTSIDE ISLAMIC BANKS

While the banking industry continue to develop traditional Islamic Banking products and services, there are many small initiatives that has taken the practices of Islamic Banking (knowingly or unknowingly) and made it into a viable business model. Even now we have real life example such as EthisCrowd.com that’s able to raise funds within 45 days for affordable property development projects to complete within 1 year via Mudharabah arrangement; this basically means there is no longer a need for banking institutions as a source of funding.

And ironically, some of these alternative banking models are so aligned with Islamic Banking principles, and borders more of “socialism” more than anything else. The desire to “share risks” and “support the community” and “fund a worthy cause” moves the financial model away from “money making” and “return on investments” that we often associate “banking” with. This smacks familiarity with what the Islamic Banking industry has been created for in the first place; the realisation of Maqasid Sharia.

Even Musyarakah (partnership) structures are already at work, where risk sharing translates to appropriate risk rewards for investors. This is also a relevant to the idea of Investment Account where the sources of Mudharabah funds are used to finance a project directly and returns are based on actual performance. Equity financing (as per my previous month posting on Dr Daud Bakar’s commentary on Profit Loss Sharing) is already being practiced by non-Banks, thus begging the question whether a Bank can really be as effective (or quick) to support equity-based structures as a non-Bank initiative.

While this is yet to be a mainstream phenomenon but do remember as the Gen-Y and Millennials grow up into the bankable space with credible financial strength, their views of what banking should be may be far different from what we think it is now.

SHAKING UP THE TREE

With all the alternatives happening around the Islamic Banking industry, it really is time for practitioners and industry to consider the model that we have always wanted to build. That is where the discussion must happen to embed the Islamic Banking industry into the “Social Economy” and “Alternative Banking”:

Challenger Banks. The funding structure offered by these non-bank entities may/may not be based on crowdsourcing or crowdfunding. These essentially can be arranged as a Mudharabah (profit sharing), Musyarakah (partnership), Wakalah (Agency) but without the regulatory shackles. The question is on the rights and warranties for the crowd. Extra due diligence may be required but it should not be a tedious process. Otherwise, the crowd will see this as just another “banking” entity which they wanted to avoid in the first place.
Crypto-currency. Much has been debated on the presence of bit-coin and ethereum where these “currency” were raised from algorithms processed by “mining” machines. So it may or may not be real money, but the more prudent definition of crypto-currency is “stored value”, “work-credit” or “medium of exchange”; not currency yet. And Shariah discussion on what these really are in the Islamic transactional context shall continue at least for the next few years
Online Payments & Mobile Money. A key part of the process where the transactions may by-pass regulated banks and go straight from Peer to Peer (P2P). All online payment structures will be validated via blockchain infrastructure, at the fraction of a price and even faster speeds of transaction. Shariah will also be interested in the sequencing and the process flow and issues of ownership of the cash when it is done at the blink of an eye.

I admit all of these are still new terminologies and understanding to me, but it represents such a huge opportunity to rebuild the industry on the right footing, learning from past mistakes, taking the best practices from non-Bank models and moving away from simply debt-financing. It is an exciting world that is still evolving, and will be driven by the new generation so comfortable with technology, community and convenience. The banking model must change to meet this reality, the question is how to also get the Shariah elements into the various key processes.

There is no better time to incubate this. Especially in the Islamic Banking space of equity-based structures. Welcome to the new world, and it is a big world out there.

Is There a Secret Book I Don’t Know About?

Posted on July 17, 2017 by Amir Alfatakh

ISLAMIC BANKING PRODUCTS ARE EXPENSIVE?

It is one of the mysteries of the universe that there is this perception that Islamic Banking products are MORE EXPENSIVE than the Riba products counterpart. It never fails to surprise me that in Malaysia, whenever I open the session for Q&A after a talk on Islamic Banking, that the question put to me was “Why is Islamic Banking financing products more expensive than conventional banking products?”.

Honestly, I wondered if this question comes from the possibility of everyone reading from the same exact book published many many years ago, making that one point of contention again and again. Which book have people been reading? Can someone pass me this book? It seems everyone is reading or referencing the same book which says “Islamic Banking products are expensive”. Can someone tell me about it?

So I decided to ask around. I asked the persons asking the question on why does he/she say that? In what scenario? Which product? What feature of the product makes it expensive? In all attempts, they replied “It is the general view that Islamic Banking is more expensive”. But they have yet to give me any evidence when I asked for their source.

Amazing…

This is like a scary bedtime story that parents tell their children if they don’t behave. So now I am asking around for specific scenarios on why they made such comments. From what I gathered, these are some of what I think people are referring to. But I couldn’t be 100% sure, so please, do leave your comments and scenarios (and details) for me to evaluate and respond to.

Because, for the past 20 years (in Malaysia at least), this claim of “Islamic Banking products are more expensive than conventional banking” are simply not true.

YES, THERE ARE DIFFERENCES

Of course, before I delve deeper into this perception, there are differences in Islamic Banking that requires additional items or costs, but mainly these are operational costs or documentary costs or management costs which are linked to mainly Shariah requirement on Aqad. For conventional banking, it is just a loan agreement, For Islamic Banking, a trading transaction may occur, and if it does… there may be additional costs.

But these costs are usually absorbed by the Bank itself, and hardly passed on to the customers. So why would it be more expensive for the customer, if the Bank is absorbing these “costs” as part of their cost of doing Islamic Banking business?

And additionally, the costs borne by the Bank for doing Islamic Banking business are not significantly higher. The Bank have to remain competitive as well, either against conventional banks or other Islamic banks as well. So the costs, if significant, will not be passed to customers to remain competitive. It should be on par with other players in the market.

FINDING THE REASONS

As far as I can tell, some of the perception on Islamic Banking is more expensive than Conventional products are based on these:

Selling Price – In some Islamic Banking products, there are trading requirements (Murabaha / Tawarruq / Istisna’a / BBA) and one of the tenets of valid sale is that there must be a Selling Price. Selling Price is the sum calculation of all the Installments the customer has to pay over the period of financing. The formula is that Selling Price = Monthly Installment x No of Months of Financing. Once this is agreed, it cannot change; anything above and beyond the agreed Selling Price (maximum) is considered Riba. Conventional Banking products do not have this as they only declare the Installment amount per month based on prevailing rate. Truth is, no one really know how much they eventually pay under conventional banking product, because there is no capping of the amount they may pay. The tenure can be extended, the installment can be increased, the rates may be revised upwards under conventional banking. There is no control of how much (maximum) conventional banking can collect from the customer. If conventional banking products add up the installments over the period of time, they can also see the amount equivalent to a Selling Price ie total amount payable over the tenure. But they don’t, because it ties their hands from collecting more. So, is Islamic products more expensive? It is possibly the opposite i.e. cheaper than conventional due the maximum Selling Price compared to a conventional loan without any maximum amount (sky is the limit).
Ceiling Rate – Islamic Banking products may work on either a fixed rate structure or floating rate structure. If the structure is a fixed rate structure, it looks similar to the above. If is floating rate structure, then there is a need to put up a Ceiling Rate (a maximum rate that Shariah allows us to charge) for the purpose of the Aqad, where the certainty of price is required. However, once the Aqad has been concluded (Selling Price is contracted), the day-to-day running of the financing is charged at the Effective Profit Rate (usually below the Ceiling Rate) which is reflective of the prevailing market rates. Which is what the conventional banking products are charging. This makes the actual amount paid for Islamic Banking product at par with conventional banking products. The difference between the Ceiling Rate and the Effective Profit Rate is not charged on the customer therefore given as a Rebate on price (Ibra’). For example, if the Ceiling Price for the Aqad is 10% and the Effective Rate for day-to-day is 6.0% (ie customer is charged only 6.0%), then the difference of 4.0% is a pricing rebate to the customer. So, is Islamic products more expensive? No. It is on par after pricing Rebate. In fact, having a Ceiling Rate provides additional “protection” for an Islamic Banking customer i.e. during times of high volatility of Base Rate / Funding Rate, the Ceiling Rate serves as a rate protection for the customer. For example, should the all-in rate of the financing increase to be 13% or 14.0%, the customer’s rate will not exceed the Ceiling Rate of 10%, therefore saving the customer the excessive rate during periods of uncertainty. So, during period of high volatility of rates, the Ceiling Rate will not be exceed thus making the product cheaper than the Conventional product.
More Documents – I acknowledge that some Islamic products do require additional products as a package. But as for main documents, where the most charges are incurred including stamp duties, are usually the same as any conventional banking product. Maybe there are earlier perception that because of the Selling Price based on Ceiling Rate, the stamp duty will be more expensive. It is not true. Stamping will still be made based on the principal amount even for an Islamic facility. Furthermore, secondary documents are usually stamped at nominal amount i.e. $10 per document. The additional documents for Islamic product, if we assume requires 5 additional, will cost the customer $50 extra. That is not significant. So, is Islamic products more expensive? For documents, maybe. But it is dependant on structure and the additional documents will be stamped nominal value.
Early Settlement Rebate – I probably understand and agree with this point, provided it was made 15 years ago! Traditionally, when a customer takes a loan with a conventional bank and want to do an early settlement after a few months, an early settlement penalty was charged. For an Islamic Banking products, when BBA was offered many years ago, the method was to give a “reduced discretionary rebate” on the unearned profit. This means maybe some Islamic Banks want to earn the same early settlement penalties (like a conventional bank) via a reduced rebate as rebates are by nature, discretionary in the eyes of Shariah. However in 2011, BNM issued a specific guidelines on the treatment of rebate for early settlement of Islamic sale-based financing products. The guidelines ensures that the rebate given is mandatory, with a specific formula to be adhered to. The guidelines also included the required disclosures for transparency purposes. In short, Islamic Banks cannot charge early settlement compensation (only a couple of scenario where it is allowed) and the rebate given must follow a strict formula. So, is Islamic products more expensive? There might be a case for this argument before 2010 (for early settlement cases only) but with the Ibra guidelines issued in 2011, the product would possibly result in at par or cheaper than a conventional bank product.
Commodities Trading Fees – This is a recent phenomena. A lot of structures are riding on the popular Tawarruq structure, and this structure involves the buying and selling of commodities via brokers or established trading platform and there are Trading Fees being charged. Generally, for retail consumers, the trading fees are absorbed by the Banks; you will never notice it. But for Large Corporates dealing in hundreds of million deals, a trading fee may be noticeable. However, these fees are also deemed small enough to be ignored. The standard trading fees at Bursa Malaysia is $15 for every $1,000,000 commodities traded. That’s 0.0015% charge. For a $100 million transaction, the trading fee will only be $1,500. I have not seen any Corporate customers refusing to pay this trading fees. And there are some brokers who are even charging lesser rates. So, is Islamic Banking more expensive? Only for Tawarruq, there is additional costs but for the quantum, I do not believe 0.0015% is considered significant, or expensive.

It really is testament that the men and women in the industry were always looking to enhance, resolve and improve on contentious practices to serve the public. The products were always evolving to be better for the consumers. In fact, I believe we are at the stage that some of the offerings under Islamic Banking is CHEAPER than the conventional banking products due to certain fees and charges and treatment on the account are instructed by Shariah Committee.

IT IS A PERCEPTION THAT NEEDS CORRECTION. IT IS NOT CLEAR WHICH PART OR PRODUCT FEATURE THAT THE PUBLIC PERCEIVES AS MORE EXPENSIVE. IS IT THE RATE, THE PRICE, THE PENALTIES?. IS THERE ANY UNFAIR TERMS LEADING TO THIS PERCEPTION.

COULD ISLAMIC BANKING FINANCING PRODUCTS ACTUALLY BE CHEAPER THAN CONVENTIONAL LOANS?

In some scenarios, I do believe so.

There are many areas that is governed by Shariah decisions formulated to protect or benefit customers for fairness. Especially in areas of fees and charges and compensation. IF YOU WANT TO KNOW MORE ABOUT ISLAMIC BANKING PRODUCTS BEING CHEAPER THAN A CONVENTIONAL BANKING PRODUCT, CHECK OUT MY COMING POST.

I really hope someday someone will pass me this mystery book to read. We are in 2017 and so much have changed in the past decade. Huge and big regulations have been introduced and most of it with heavy input and consideration from the Shariah Advisory Council (SAC) of BNM. These are learned individuals that I believe are not greatly motivated by money. There are huge responsibilities on their shoulders thus the decisions made will be for the benefit of customers in mind.

Again, I invite readers to provide me with the latest findings where it is believed that Islamic Banking is more expensive than conventional banking products. Let us discuss and evaluate them based on actual facts.

Wallahualam

Popular Islamic Finance Terms

Posted on March 5, 2017 by Amir Alfatakh

While Islamic Banking in general has been codified since early 1980’s in Malaysia, the familiarity to Islamic Banking or Finance terms remain a challenge. Terms like Mudarabah or Musyarakah or Wakalah remains difficult to remember but also it’s meaning have been lost to many, although there has been many attempts to communicate the various glossaries already available.

This makes the layman to go back to something more familiar, in most cases it is conventional banking, simply because of the ingrained understanding of conventional banking terms and terminologies. Some become “allergic” to Islamic terms simply because of the fear of failing to explain and understand the “arabic” terms. It does seem a daunting task to remember the terms, and understand what they mean.

So, I picked up a simple slide from a friend from IBFIM ie Haji Razli Ramli (his introduction available here in this website – click here) and made it into a simple slide.

Get familiar with the terms for Islamic Finance, the easy way. Click on this 1-minute video. Share this video with friends. Know the meaning of those Arabic word. It’s quick and simple. In both English and Bahasa Malaysia. Comments are also appreciated.

Also, you can download the file into your desktop or mobile at the following links:

Share out to your friends. Thank you.

CLICK HERE FOR MORE VIDEOS

VideoBlog : Islamic Finance

Posted on November 6, 2015 by Amir Alfatakh

One of my ultimate dream is to have VideoBlogs for this site. I have dreamt it for quite some time but it has been hard to find the opportunity to create one according to what I envision. InshaAllah that day will come, although I am not sure I am photogenic enough to be on “TV”.

But a friend has managed to realise that vision. Hussain Kureshi whom became an acquaintance a couple of years ago, took that bold step to make a difference. He self-produced a series on Islamic Finance, following the launch of his book (Contracts and Deals in Islamic Finance) and I must say I am impressed.

So when Hussain asked me if he can feature his VideoBlogs on this site, it was my absolute honour to have it. Please do visit and take a listen to the various topics he has elaborated upon. As at yesterday, there’s already 20 VideoBlogs (YouTube) that you can go through. Looking forward to more additions in the future.

Click on the picture of the book to go to the VideoBlog page. Happy listening.

Types of Sukuk

Posted on November 2, 2015 by Amir Alfatakh

One of the topics that I hardly write about are Sukuk (islamic Bonds). Unfortunately, I am not greatly involved in many Sukuk deals, either by design or exposure. In my line of work, I get to see the legal documents, but somewhat uninvolved when it comes to actual structuring. There are many, many experts in the field so I will not even attempt to pretend what they do is easy.

But I did come across this interesting presentation on the types of Sukuk. A presentation I saw on Linkedin by Camille Paldi on the Types of Sukuk provides an excellent introduction to the subject. With her permission, I attached herewith the presentation on Sukuk in pdf for your easy download.

Click here to read Types of Sukuk (PDF format)

Also, I notice Camille Paldi writes (via her presentation slides) a massive amount of literature on Islamic Banking, which is a trove of information for someone who seeks it. Do have a read on her other presentations as well.

Happy reading.

Most Commonly Used Islamic Banking Contracts

Posted on October 23, 2015 by Amir Alfatakh

It is reaching the end of the year and I thought it will be good to have a quick look on how many Islamic Banking contracts that we have in and around the industry. Granted, I might miss some of the contracts as there are many banks offering hybrids nowadays. I do apologise for such shortfall, and will endeavour to update this chart as often as possible, should there be some interesting and new contracts being introduced in the Islamic Banking industry.

For pdf, please click here

In general, common Islamic Banking contracts can be segregated into a few categories:

Gratuitous Contracts

These types of contracts are typically unilateral in nature where the contracts do not require mutual consent to be applied. It is just a one-way arrangement where one party provides a product or service based on mandates or scope of work and is at discretion to vary the terms without requiring the other party to specifically accept the changes. For example, the Hibah contract (Gift). One party provides the gift, and the other party receives the gift. It should be on a unilateral / discretionary basis by it not being “promissory”.

Another example is the contract of Qard (Loan). One party lends money to the other party, and the other party (borrower) undertakes to pay back the loan (original amount) when required by the lending party, without any expectation of additional return. But the other party (borrower) can pay more than the original amount (by way of Gift) but is not obliged to, and such additional gift do not require the borrower to obtain “consent” from the lender to be given. It is simply the payment of the loan, and any other gift (which is not obligatory). Such “gifts” avoid the definition of Riba’ by being not promissory.

Under gratuitous contracts, the Aqad is not greatly necessary (it being unilateral) but it will be ideal for all parties if an Aqad can be concluded upon.

Trading Contracts

Trading or transactional contracts are debt-based contracts. Very similar in nature and intention to a conventional loan, but requires specific Islamic contract to be perfectly executed to avoid riba’. Such contracts greatly involves the participation of 2 parties (sometimes 3 or multiple parties) and there is a defined Aqad executed to finalised the terms and conditions to the contract. These terms are to be defined and agreed upon within the Ijab/Qabul period for all parties to accept. Once accepted, any proposed further changes captured in the Aqad must be accepted by all parties by mutual consent.

A common example will be a Murabaha financing transaction, where the terms and conditions are agreed up-front in a bilateral agreement. A purchase price is discussed, together with the profit amount, selling price and the settlement tenure. Ownership of the asset (used as an underlying asset for the Murabaha) is also moved between the parties, and transactional sequence is observed. Any changes that is proposed outside the Aqad majlis will require approval and consent by all parties.

A Leasing contract is also deemed a bilateral contract although the owner of the asset has the right to unilaterally increase or revise the rental amount of the asset under hire / rental, the person who lease that asset will also have a right to remain in or exit out of the leasing arrangement, thus making it bilateral (where there is also a material change in the terms and conditions.

The perfection of Aqad holds great importance to Transactional Contracts to ensure the validity of the transactions.

Investment Contracts

These types of contracts deals more on equity and corresponding returns in the subject matter. It follows the concept of investment where such equity-based structures takes on the risks of the investments, and concentrate on the concept of entrepreneurship and risk-sharing. In such contracts, where there is an element of trust, bilateral arrangements are strictly adhered to. Changes to the terms and conditions requires explicit consent especially from the party that is in a disadvantageous position.

The most popular of these contracts is the Mudharabah, which is used in many depository products. However, although this is technically a deposit, these deposits must be utilised or deployed into economic transaction for the purpose of generating a return on the capital i.e. in this case, the Mudharabah deposit. Once profit is recognised (if ever…) then the profit must be distributed to the customers based on the agreed Mudharabah profit sharing ratios. The Bank, usually acting as a Mudharib (fund manager / entrepreneur) , will behave as a pure entrepreneur with the customer (as Rab Ul Mal), acting as the fund provider with the possibility that the investments is not up-to-market returns which can result in both loss in profit and loss of principal (principal not guaranteed).

Another example. Under a Musharakah structure, there is even more defined roles that the all parties must take and agree under a bilateral arrangement. With Musharakah, each party will be required to contribute equity (or capital) and even contribute expertise into the partnership venture to ensure profit can be made. All terms and conditions are captured as part of the important Aqad. Any profits declared will be shared according to equity ratio or agreed profit sharing ratio, and any losses shall also be shared amongst partners, usually based on equity ratio or equity contribution.

Supporting Contracts

Supporting contracts are often important because they act to complete many aspects of services, products and banking. Many supporting contracts are created to cater mostly for specific situation and most of it requires proper Aqad as well. Such contracts are also considered a facility to provide specific outcomes for the customer. It also falls into a bilateral arrangement.

Popular contracts include the contract of Kafalah (guarantee) where a person can enter into a Kafalah to secure a financing facility by providing a letter of guarantee. Other contracts include Rahn (mortgage or pawn broking) that has specific terms to the arrangements, Hamish Jiddiyyah (security deposit) or even Wakalah (Agency for services)

Contractual Arrangements

Contractual Arrangement are not necessarily contracts on its own, but can be construed as a combination of contracts to achieve a certain objective. The arrangement itself is not legally binding, but what is inside those arrangements are usually standalone valid Islamic Banking contracts.

Take for example the contractual arrangement of Tawarruq. Inside a Tawarruq arrangement, it consists of several standalone Islamic Banking contracts. Firstly there is the contract of Wakalah (Agency) to purchase the commodities on behalf of the transacting party. Secondly, there is the contract of Commodity Murabahah where the commodities purchased will be sold at a Sale Price to the purchasing party. Once the Commodity ownership is transferred into the purchasing party, the purchasing party can make an offer to another party as a Musawamah (simple sale) to obtain the desired cash.

Other contractual arrangement is the arrangement for Wa’ad (Promise) usually used for FX transactions. A Wa’ad itself is not binding, but it can be enforced upon certain events where eventually an exchange can be made (Sarf) or even a Commodity Murabahah is executed to deliver certain obligations.

Again, these are not exhaustive list of contracts, and can easily be expanded in a short period of time. Innovations are done everyday, and it will be a matter of time until critical mass will push a contract to the forefront. I hope to keep updating this list more in the coming years.

Wallahualam.

The Difference Between Islamic Banking Financing and Conventional Banking Loans

Posted on July 11, 2015 by Amir Alfatakh

I know the title of this post is a mouthful, but I am insisting on the title. Simply because today I came across another round of bashing by individuals on Islamic Banking. Again, the contention is that Islamic Banking is no different from conventional banking; worse still it is claimed that Islamic Banking is more detrimental than conventional banking. How can this be? I watched the video and aghast by the level of ignorance to the nature of Islamic Banking. And gauging from the response by the rest of the audience, it seems that the audience themselves knows no better.

It seems that a lot of individuals are still unconvinced about Islamic Banking. Furthermore, the impression that it is worst-off than conventional banking needs to be addressed. Islamic Banking, while on the surface is still banking, but it is built on a totally different foundation. There are significant difference which is brought about by a single requirement; Shariah-compliance.

THE STRUCTURE

The basic difference between Islamic Banking and conventional banking is the structure of how the Bank is set up. For a conventional banking, the purpose of set up is to collect deposit and to give loans. This is the shareholders understanding of what it should be. 2 very distinct function ie Collect Deposit and Give Loans, and the arrangement is managed by a Treasury function which tries to balance the returns to shareholders’ funds.

Conventional Banking Structure (Diff)

But what is Islamic Structure then? In essence, how an Islamic Bank is supposed to be set up is based on the theory of “Sources and Application of Funds”. There should be a single flow between the deposits and the financing / investment use of funds; this means there is no distinct function. It is a single function where customer deposits or investment pool is used to fund financing portfolio or deploy into investment instruments, from which returns are derived and recognise. Once the returns are determined, these returns are “shared” between the Bank and the customers (deposit/investment). This “Profit Loss Sharing” structure demands a different way of managing the Bank, although not all Islamic Banks are able to successfully pull this off 100% (especially when the Islamic Banks are still under the parentage of a conventional bank).

Islamic Banking Structure (Diff)

In my personal view, the structure of an Islamic Bank is most suited if it is built around the Mudharabah structure. It fits perfectly on how the Bank is to be managed. It should be the backbone of any Islamic Banks, where the set-up is linked end to end resulting in sharing of actual returns arising from a Shariah-compliant financing/investment activity.

Finally, the processes in an Islamic Bank and conventional Bank are also different, simply due to the structure of which it has been set up. There is a broader requirement for oversight and research required to ensure the Islamic products and services meets Shariah requirements. A lot more layers to comply with, a lot more details needed.

Islamic Banking Diff (Structure)

THE SHARIAH COMMITTEE

Shariah Committee is the most important difference between an Islamic Banking business and conventional Banks. It provides an oversight accountability in ensuring that all the operations of an Islamic Bank is consistent with the rules of Shariah.

Shariah Committee (Diff)

There is a huge layer of governance surrounding an Islamic Banking proposition. Whatever features that it offers, it goes through regulatory oversight by the Shariah Advisory Council of BNM, and stricter scrutiny by the Shariah Committee whom are not under the jurisdiction of the Bank but reports directly to the Board of Directors. The decisions (or “fatwa”) given by the Shariah Committee will be held solely by the committee themselves, therefore there is a huge responsibility for them. The Shariah Committee must ensure their decisions have taken into account all requirements of justice, customer protection, compliance to Sharia, interpretation to customary civil practices as well as practicality of implementation. In short, decisions must be clear, defensible and without any doubt to its validity.

SUSTAINABLE MAQASID OF SHARIA

In Islamic Banking, matters really are determined by intentions. And the intention is to ensure the Maqasid (Objectives) of Shariah are met.

Maqasid

These Objectives are a key consideration in setting up an Islamic Banking operation. But it does not mean the operation of Islamic Banking and the deployment of its funds are for charitable purposes. It is still a business that needs to be sustained by investing in Sharia-compliant economic activities, therefore it is misleading to assume Islamic Banking is a holistic endeavor that “should not charge interest” or merely to “provide assistance to the ummah”. There are costs for running an Islamic Banking business, and as far as possible it should be at par to the costs of running a conventional banking business. Returns on Shareholder capital is also important to ensure that capital is continued to be invested into Islamic Banking for it to grow. With growth comes the ability to continue supporting the ummah. The key word is sustainable banking. You cannot grow or even survive if you are not competitive.

THE PRODUCT & CONTRACTUAL RELATIONSHIP

Designing and launching an Islamic product is not easy. The amount of work that needs to be done in relation to the fundamental difference between an Islamic Bank and conventional Bank. The fundamental difference is the totally different outlook on what happens after entering a contract. The contract between a customer and a conventional bank is simple; a loan where interest is charged upon over a period of time.

Key Diff - Product (Example)

But look at an Islamic contract. It is much more complex structure, but once determined, it really makes total sense. The contract defines the relationship, the relationship defines the responsibilities and subject matter, the subject matter defines the sequencing and ownership requirements for the use in an economic transaction, the transaction defines the rewards and returns on the completion of the contractual obligation. Cause and effect, risks and compensating return, action and rewards.

What usually confounds practitioners (whom are not well versed in Islamic Banking contracts) are the level of detail. Some may consider the issues discussed in an Islamic Banking forum as “petty” but others expressed amazement in the level on consideration undertaken during discussions. For example, an Islamic Banking forum would discuss the nature of loan (Qard) and responsibilities of Qard, conditions of Qard, transferability of Qard, conclusion of a Qard Aqad (offer and acceptance), dissolution of Qard and implications of Qard when attached to other Islamic contract. This level of discussion is missing from the conventional banking space where in their view is that a loan is an amount given to customer where it is to be repaid back with interest.

OVERALL SUMMARY OF DIFFERENCES

There really are differences between Islamic Banking and conventional banking, and there are some of us trying very hard to make a difference in the compulsion towards Riba’. As a summary, below are some quick differences I have compiled from my earlier days in the industry on the differences between the models.

DNA OF ISLAMIC BANKS

For me, the main difference between Islamic Banking and conventional banking is that the concept of justice to customer is not regulatory driven; it is conceptually driven by the idea of Islamic Banking itself. A lot of conventional banking practices are developed to maximize returns while minimizing risk, and risk-transference is a key consideration for conventional banks. Regulators have to be vigilant in ensuring conventional banking toe the line to protect customer’s interests.

Islamic Banking, in its DNA is intended more than just being profitable. It is meant to be providing service to support the activities of the ummah (Muamalat) defined within Shariah-compliant transactions. There are specific rules that must be followed; breach of these rules means the penalties are non-negotiable i.e. whatever returns gained from these breaches must be given to charity. Care and consideration is a must. Justice and fairplay is always important in a decision by Shariah Committee. Release of customers burden is a priority.

AVOIDING FITNAH

Many customers still lack knowledge of what Islamic Banking is all about. They collate biased and misleading information from truncated and unverified sources on the internet, facebook postings that intends to be malicious rather than presenting the true picture, and comments by individuals who make generalized comments on their experience which may well be isolated cases due to misinformation, misunderstanding or just plain ignorance to the fact. And yet these comments are sensationalized, made viral and deemed to be the absolute truth without further exploration or verification.

Cut and paste seems to be the easy way forward. Yet people forget the discipline that is practiced by the companions of the Prophet; you must verify the information by determining it all the way to the source of the information, up to naming the individuals who made the first comments, and deciding whether the individuals are trustworthy and of good standing. This discipline is lost in this world of over-abundance of unverified information in the social media where direct accountability is undetermined, and it has become increasingly difficult to separate untruth from fact.

I had always advised friends and critics alike to be careful of what they “recommend” when dealing with Islamic Banking due to the huge responsibility of such recommendations. If they are ready to criticise Islamic Banking as “same as conventional” or “open to back-door riba” without full understanding of what it really is, they should be ready to take responsibility for that. If their basis of stating as such is based on “viral whastsapp message” or “comments by third party islamic practitioners” or “explaination by insiders in the industry” or “commentary by blogs”, I do appreciate if we as practitioners can be provided with these “sources” for us to verify its accuracy. Many times I find the comments are based on partial information, taken out of context, outdated writings or information as well as just being malicious without proper basis or discussion. Some are not even Shariah related or relevant to Islamic Banking practices, just operational and processes defects.

Do think of the implications: Should a person make such comments that “Don’t take Islamic Banking products because it is not really Islamic and there is a lot of trickery to it”, and the person listening to that comment thinks “Owh then there is no difference between Islamic product and conventional riba banks’ product” and proceeded to take Riba-based loan products, the implication is that the person who made the comment had directly influenced another person, in my view, in making a wrong and sinful decision. Will that person be responsible for this act of “pushing another Muslim into taking Riba products”? It is a heavy burden to take, not just immediate but in the hereafter. So be careful when a person makes that comment.

And to imagine what will happen when the person who took the Riba product commented to another person (and another) that someone commented that “there is no difference between Islamic Banking and Riba Banking…” . It will become a tree with a massive root, grown by the single seed of the original “defective” comment by the first person.

MashaAllah

Hopefully those doubtful questions on Islamic Banking should be directed to Islamic scholars, Islamic banking practitioners or relevant academicians with stature, knowledge and qualifications before the ummah believes and spread untruth that will, in the end, become a disservice to the religion of Islam by spreading “fitnah”.

ISLAMIC BANKING IS EVOLVING

Evolution

Granted, Islamic Banking is a 30 year old structure, with many building blocks are still in progress. But it has not stopped evolving to existing times as and when new regulations and Shariah decisions comes into discussion. It is not perfect yet, but practitioners are aware of the difficulties of meeting all the requirements without enhancements and considerations to practicality. There is a misguided assumption that academia are aware of all the shortfall of Islamic Banking practices and the industry had turned a blind eye to these. Nothing can be further than the truth. Islamic bankers, Shariah Committees and BNM are well aware of all of the issues raised by academia as well as other practitioners, with the benefit of global awareness as well. In truth, practitioners know more of the issues they faced on a day-to-day basis, as compared to academia where some of the issues had already been resolved by the industry but not made known to academia.

Criticisms are always welcome, but ideally it should be constructive on how to improve. It is a heavy responsibility to ensure the differences between Islamic Banking (based on Shariah) and conventional banking (based on lending) are managed diligently. It is an on-going evolution that I am confident one day will reach its apex. Ideas are welcome and proposed solutions considered in earnest. And as I have always said to my product team; If you’re not part of the solution, then you are part of the problem. So, let’s be the solution that we had always wanted.

Wallahualam

My earlier postings on similar conversation:

More videos at Islamic Bankers Resource Centre on YouTube

Synopsis of 2013 BNM Exposure Drafts

Posted on December 24, 2013 by Amir Alfatakh

The following is what I understood from the various Exposure Drafts issued by BNM on 9 December 2013. Of the 7 exposure drafts that we received, I have earlier summarised the Wadiah Exposure Draft, and I will ignore the Bai-Inah Exposure Draft as we are no longer subscribing to the Bai Inah structure at the workplace.

Please find the remaining Exposure Draft review for your understanding.

2013 ED – Kafalah – One of the key issues for a Kafala (Guarantee) contract is the charging of fees for providing the guarantee services. The main issue has always been the quantum of fees charged, either in percentage of the financing or via a fixed charge for all financing amount. The justification of this charge is always tricky, because technically the fee should not be imposed if there is no call for the guarantee (in cases of no default). The guarantee will only materialise if the customer defaults, that’s when the work happens to justify any fees. Issuing a piece of paper at the start of the relationship to guarantee the amount does not amount to too much work, and there no funds disbursed to any parties (unfunded). To justify the charging of any fees based on percentage instead of actual work, especially for huge amounts of financing guarantee, can be problematic to justify in the eyes of Sharia.

2013 ED – Wa’d – At one point of time, Wa’ad (Promise) seems to be the answer to many structures, where a promise is given without any requirement to transact before a specific event. The terms therefore can be negotiated and re-negotiated without the need to strictly specify the terms of the transaction and re-signing of documents. This gives a lot of leeway for deals to happen.However, at the end of the day, Wa’ad remains as only a promise, legally distanced from a contract or an agreement. Enforcement at the courts are therefore without full confirmation of all the terms, and makes for a loose structure and potential disputes. This flexibility and enforceability remains one of the key risks to a Wa’ad contract, which is why until today Wa’ad is generally transacted between known parties i.e. between established and trusted Financial Institutions.

2013 ED – Wakalah – Wakala (Agency) will remain an integral contract for Islamic Banking as it validates a lot of action that can be done by the Bank, in order to remain efficient. In general, Banks hold a lot of expertise in various fields, such as investments, financing, leasing and trading; something a normal customer may not want to be involved in on a daily basis. An Agency arrangement conveniently provides for this. Anything that improves the efficiency by leveraging on the Bank’s expertise and infrastructure, can be arranged via Agency. However, the way we practice it usually is transparent to the customer. In practice, Agency Fees are the right of the Agent, and the waiver of such fees, although allowed, is sometime seen as not adhering to the spirit of Agency and entrepreneurship. You do the work as an Agent, but don’t earn any fees as it is waived. In real life, this does not happen as whenever a work is completed, you should earn something.

2013 ED – Tawarruq – As Tawarruq (Three-party Murabaha Sale) becomes more prominent in the Malaysian market, I was surprised that the ED was not more comprehensive than this. There are sequencing issues not addressed but more importantly, there is a lack of illustration on what is defined as Tawarruq. Is there any difference between a Tawarruq and Commodity Murabaha, which essentially is a 4 party transaction? The issue of interconditionality is adequately addressed in the ED but I would love to have seen more details related to products, such as for Islamic Credit Cards and Revolving Credit with a rebate structure (Ibra’) based on a floating rate financing. It mentions that the discount can be given based on certain benchmark agreed by the contracting parties. This opens the clause to various interpretation as it is without real detail.

I will look at the Hibah (Gift) ED but essentially, it is related to the Wadiah ED. Most of what’s covered under the Hibah ED is relevant to the Wadiah product, such as the discretionary Hibah issue and the giving of Hibah becoming a business practice (Urf Tijari) which can be construed as Riba (Usury). Wait for the posting.

Thank you for reading, hope everyone have an enjoyable holiday period ahead. Wasalam.

Readings : December Papers x 3

Posted on December 23, 2013 by Amir Alfatakh

And to close off the year, BNM gave us a further 3 reading gifts for us to enjoy our holidays:

The Murabahah Standards looks interesting, and so is the Mudarabah Concept Paper. Do have a read and tell us what you think.

Looking forward to the coming holidays.

Exposure Draft : Wadiah

Posted on December 20, 2013 by Amir Alfatakh

One of the panic buttons we are pressing now is the new Wadiah Exposure Draft (ED). As a rule, Wadiah is a “safe-keeping with guarantee” arrangement, where a Bank agrees to take on-board customers deposits as a loan (Qardh). And in the rules of loan under Islamic Banking, a loan must be returned on the same amount when required; any amount above and beyond the loan amount, if put as a condition at the start or during of the deposit placement, may be construed as “Riba”. If the Bank utilises the deposits for any business activities, the Bank is given the discretion to award “Hibah” or gift payments allocated based on the balance outstanding.

With the introduction of the IFSA and the requirements that Malaysian Banks comply with the Investment Account Framework if Mudarabah continued to be offered to Customers, the common wisdom is to migrate lock-stock-and-barrel into a Wadiah account. In my earlier writings, I already mentioned that to comply with the Investment Account Framework, a massive shift in thinking, processes, and management is required. Therefore to convert into a Wadiah structure may not be the ideal solution, but it will provide an “easier” route towards retaining Customers’ deposit.

However, in this chess game between the Islamic Banks and Bank Negara Malaysia (BNM), the new ED is introduced on Wadiah has effectively further tied the hands of the industry players. BNM had anticipated the industry intentions to move the Mudarabah structure into Wadiah, and promptly outlined further restrictions on Wadiah itself. The industry is now caught between a cold and hard place; stay with Mudarabah and comply with Investment Account Framework, or migrate into Wadiah and comply with the new Wadiah Guidelines.

As we know, Wadiah also puts significant limitation on the marketing of returns and benefits to customers for their deposits. BNM took this a step further; to emphasize that returns on a Wadiah account should always be discretionary, as Wadiah is now seen as a loan. The impact comes in several clauses in the Exposure Draft:

Wadiah Yad Dhammanh is considered similar in nature to Qard. Therefore the rules of Qardh should also apply to Wadiah.
A majority of customers should not be getting a return on the deposit under Qardh. Generally this is saying that out of 100 customers, only 49% of customer will be given a “gift” on their deposits
The payment of the discretionary “gift” should not be construed as regular or common business practice (Urf’ Tijari) else it will imply that the “gift” is a constant return to the customer. Historical performance can be shown to customers.
Any benefits, monetary or otherwise, deriving directly from the placement in the Wadiah account may be construed as “Riba” as well.
Any benefits includes scenarios where should the Wadiah account be opened as part of a financing facility, and benefits enjoyed in the financing facility from amounts available in the Wadiah account (for example a rebate structure to off-set an obligation), shall be construed as riba’ as well.

My main question is; now that Mudharabah is turned into a pure investment account, and Wadiah carrying so many restrictions, what other solutions are there? It cannot be that BNM only expects us to comply but do not help with a viable solution on these restrictions. Yes we are looking at the Commodity Murabahah structures, but operationally this will be a challenge for the Banks to control the cost of commodity trade.

And how do we define majority, then? The system must now be enhanced to determine who gets the discretionary “gifts” based on which formula. Even if they qualify for the discretionary “gifts”, to award them on a regular basis will also lead to it be construed as “Urf Tijari”, where consistent payment of Hibah will imply a similar future returns. How do we define this “non-majority” of Customers whom qualifies for Hibah but do not get regular awards of Hibah? What system logic can we build and will what we build be acceptable to Sharia? More importantly, would the customer even accept such “discretionary” practice?

Now that BNM has issued a new Concept Paper on Shariah Requirements, Optional Practices and Operational Requirements of Mudarabah today, we get a somewhat watered-down requirements to Mudarabah products. I have read it and saw that under this new Framework, the Mudarabah structure remains viable as it is, with enhancements needed for documentation and disclosures. Manageable and workable. The next steps must be; if we were to stick with Mudarabah, which Framework will take precedent. Mudarabah is an Investment structure. So, would we follow the Mudarabah Framework, or to comply with the Investment Account Framework? Both Frameworks makes reference to each other; yet one is stricter than the other.

I am putting all my hopes on the new Framework. That will give me some leeway of having both Wadiah structure and a viable Mudarabah structure (not based on the Investment Account Framework). This is definitely the light at the end of the tunnel. But as usual, indications are to take the “stricter” guidelines into account, rather than keeping hope for an easier implementation.

Back To Wadiah

Posted on September 9, 2013 by Amir Alfatakh

True to form, BNM have called for an urgent discussion with the industry players on the implementation of the IFSA. The message is very simple; industry players are given time to comply to the IFSA i.e. no later than 30 June 2015. During this time, we are asked to either:

Retain Mudharabah and Wakala structures to comply with the Investment Account guidelines; or
Move the Mudharabah and Wakala structures into an alternative structure.

Obviously no one has the answer to both options. Especially for Current Account and Savings Account now offered under Mudharabah. To retain a simple product such as Savings Account under Mudharabah, the Bank needs to comply with tedious risk profiling of customers and numerous disclaimers on investments. Customers will be confused by this arrangement, and we foresee many will stay away. Marketing wise, it is a nightmare. Operationally as well, if we were to comply with the investment disclosures. Gone will be the simple structures that customers are used to.

Bringing the Current Account and Savings Account into Commodity Murabahah structures is the most viable solution in Shariah’s perspective. However, operationally tedious, money required for system development, revised documentation and more importantly, building customer awareness and acceptance will be the main challenges for the industry to move to this alternative.

Committees were promptly set-up to discuss solutions, and as expected, there can be no commercial viability into moving to Commodity Murabahah, at least not in such a short period of time. For Time Deposits it is possible, but how to address the daily deposits and withdrawals of funds in a Current or Savings Account under Commodity Murabahah?

The easy solution; take a step backwards.

Wadiah is suddenly the solution. Most Banks has decided to migrate back into Wadiah structures, even with limited value proposition. Hang on, this is not the solution. Perhaps only workable for a short term stop-gap measure, but definitely not feasible for moving forward, especially when there is a conventional banking alternative.

Wadiah is definitely not the solution for deposit building. But then, what else is there? Until someone comes up with a brilliant solution, we will have to make the best of what Wadiah has to offer.

Ethica Institute

Posted on June 13, 2011 by Amir Alfatakh

Today I came across a very useful site which I feel worthwhile to share with readers. The Ethica Institute of Islamic Finance has this section of a Database for Q&As relating to Islamic Banking, with Scholar-approved answers. I make no guarantee of the “Scholar approved” statement, but reading some of the answers to the questions, it is consistent with the practices and experiences that I have in this limited time in Islamic Banking industry.

I attached their link for readers and hope they can be useful to you too.

(## No I don’t get a commission for this!)

If there should be any other links that readers may find useful for other readers, don’t hesitate to send the link to me and I will add it to the list of useful link on this website.

Shukran and Assalamualaikum all…

Learn More About Islamic Banking

Posted on July 5, 2007 by Amir Alfatakh

Find out more about Islamic Banking Contracts and Concepts.

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Category Archives: Islamic Banking Concepts