EBOOK : Alternative Financial System Islamic (Halal) Finance – IBFIM

One of the ongoing efforts that some of us have is to figure out how we provide greater access of Islamic Banking to the mass market. This includes not just to Muslim readers, either here in Malaysia or other global countries, but also to access non-Muslims readers as well. And to do that in their mother tongue will be the ideal method as it will provide familiarity and ease in understanding on what is being communicated.

alternative-halal

Click picture to Download PDF

Realising this, the Islamic Banking and Finance Institute of Malaysia (IBFIM) has just launched a book in Mandarin Chinese titled “Alternative Financial System Islamic (Halal) Finance” with the hope of providing greater understanding on the concepts, rationales and practices of Islamic Banking and Finance. This is in line with IBFIM’s mandate from Bank Negara Malaysia to produce a pool of talent whom will be competent in Islamic Banking issues and practices. Also, IBFIM currently offer courses for various technical levels for the purpose of raising knowledge and awareness toward Islamic Banking in the industry. Over a period of time, IBFIM has become one of the knowledge leaders  and recognised internationally as a place where practical advisory can be obtained.

I have spoken to the folks at IBFIM about posting this book on this site and I am grateful they have consented, for the benefits of readers. Unfortunately I am not able to comment on the book (as I am not a Chinese reader) but I sincerely hope the book helps to provide some insight towards the mysteries of Islamic Banking.

To get a Hardcopy of this book, do get in touch with IBFIM directly at their website www.ibfim.com or look out for their various events nationwide.

To download the PDF copy, please click on this link: (Click Here)

ALTERNATIVE FINANCIAL SYSTEM ISLAMIC (HALAL) FINANCE

Thank you IBFIM for this great effort.

 

 

 

The Difference Between Islamic Banking Financing and Conventional Banking Loans

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.

Difference 1

The basic difference between Islamic Banking and conventional banking is the contractual relationship. This fundamental difference posed a totally different outlook on what happens after that. The contract between a customer and a conventional bank is simple; a loan where interest is charged upon. But look at an Islamic contract. It is much more complex, 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.

Difference 2

There is a huge layer of governance surrounding an Islamic Banking proposition. Whatever features that it offers, it goes through strict scrutiny by the regulators as well as the independent 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 committee will be held solely by the committee themselves, therefore there is a huge responsibility to ensure their decisions have take 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 my be clear and without any doubt to its validity.

Difference 3

The deployment of Islamic Banking funds is not for charity. It is still a business that needs to be sustained by investing in 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.

Difference 4

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 to ensure 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.

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, where it has become increasingly difficult to separate truth from fact.

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”.

There really is a difference between Islamic Banking and conventional banking, and there are some of us trying very hard to make a difference in the compulsion towards riba’.

My earlier posting on roughly the same conversation:

  1. Consequence for Choosing Islamic Banking
  2. Shariah Banking in Malaysia
  3. Conversations on Islamic Banking in Malaysia
  4. Choosing the Right Options

Goods and Services Tax on Islamic Products

Goods Services Tax (GST)  will be one of the hot topics for the years to come in Malaysia, when the GST finally comes into place in 2015 to replace the Services Tax. Many arguments have been made on both side of the political divide but the reality is that GST will be implemented and have a huge impact on how services and goods are being priced.

A quick look at the GST finds that Sharia compliant banking, while having all its contracts requiring underlying transactions, asset ownership and movement of actual goods, the impact that the GST may have on Islamic contract will remain similar to what impacts a conventional banking product. There is not expected to have a “worse-off” effect on Sharia compliant banking.

GST

It is heartening to see that Customs has made an effort to understand the various Islamic banking contracts and how it works, and identify potential transactional points where a GST may be imposed. I find the attached document (GST Industry Guide – Islamic Banking (As at 1 November 2013)) extremely useful summary of the intended GST implementation on Sharia banking contracts.

10 particular contracts have been identified and the GST points are outlined accordingly.

Please Click Here

Sharia Compliant Banking in Malaysia

One of the long running arguments on Islamic Banking in its current state is the level of compliance to the rules of Sharia. There are still many believers out there who are not really believing in Islamic Banking. There are many suspicions in the industry. The main one is that Islamic Banking is a copy of conventional banking with merely a Sharia wrapper around it.

Sharia CompliantThis view is admittedly hard to dispel, unfortunately. Especially in a market where the industry is running 2 parallel banking systems ie Islamic Banking and Conventional Banking side by side. Sometimes, there is an additional element ie Islamic Banking Windows where an Islamic Banking operation resides in a conventional banking, leveraging totally on the conventional banking infrastructure.

The Middle-East has been able to gain more focus on the development of Islamic Banking. Despite Malaysia being one of the prominent pioneers of the industry, the stability of what we are seeing in the Middle-East has been the focus of ensuring the products they offer are deemed more Sharia compliant. While Malaysia is coming out with innovations to catch up with competition from conventional banks, the Middle-East is looking to products they already have and improving them to ensure Sharia compliance, fully backed by an international Shari’a framework.

This is clearly a different approach to the development between the two Islamic Banking industry.

In my view, the Middle-East has a clear advantage when in comes to sustainability. The advantage is simply this; the wants of the consumer. The Middle-East consumer simply WANTS Islamic Banking. No question about it. The consumers are split to either want Islamic Banking or does not want Islamic Banking. The trend is shifting away from the view that they are indifferent to any banking structure. There is a growth in preference for Islamic Banking, and this is the main driver for the development of the industry.

Malaysia, on the other hand, has a different set of consumers. The Malaysian consumers, whom may be just as pious as their Middle-Eastern brothers, continues to view the Islamic offerings with deep suspicion, which mould the attitudes towards Islamic banking industry. Admittedly, some Islamic Banking contracts have been disputed, tested and contested in a court of law, and in some cases the banks are not able defend these contracts properly. Reputational damage done; and some quarters have taken advantage in making the molehill bigger than it really was.

In Malaysia, the consumers only want and expect certain things from their banking product; cost savings features with full benefits, cheap pricing and easy to use. There is strong preference for Islamic Banking products but if there is a better alternative in the conventional banking space, the attitude is “Why not?”. At the end of the day, it all comes down to dollars and sens; “How much does it cost, what savings do I get, how much do I save”? Islamic or non-Islamic? It is all about what money I earn or save which I can use for my family and myself.

Maybe economic standing of the consumers do play a part. A product in Malaysia seems to be more about justice, even if it is just a misplaced perception, and therefore it must be cheap. Islamic Banking products in Malaysia have evolved significantly since its inception in the early 80’s. It is now more equitable, competitive and in many cases, has more “justice” elements in its structure. The issues that may arise 10 years ago, in my view, has already been looked at and smoothed out.

Bank Negara Malaysia (BNM) has introduced many measure to support this idea of justice. The Ibra guidelines to ensure equitable settlement. Regulated Late Payment Charges to ensure consumer rights are protected. Synchronisation with the conventional banks on Responsible Financing and Product Transparency. Tight regulations of the Fees and Charges that an Islamic bank can charge to consumers. Does anyone know how rigorous the process BNM has imposed to approve fees and charges that an Islamic Bank can charge? 4 levels of approval at BNM, even after the Bank’s internal Sharia Committees have approved those charges. To get approval from the internal committee is already tough; to go to BNM to get the final approval is not something we look forward to.

These are good steps, but is it enough? Will the Malaysian consumer take that quantum shift to buy into Islamic banking products?

SSBAs I mentioned earlier, the main difference between what’s happening in the Middle-East and Malaysia is the consumer preference. In Malaysia, the consumer wants a product that provides justice to them, whether it’s pricing or features or convenience. Islamic or otherwise, it’s the job of Islamic Banks to win them over.

Therefore, this difference in the consumers mindset in the Middle-East may eventually be an important factor. Since Middle-East consumers just WANT Islamic banking, the industry there is given the benefit of the doubt for its development. Because of this, the emphasis of the development is more on Sharia compliance rather than just pricing, features and innovation.

fatwa

My limited experience in the Middle-East led me to one important conclusion; consumers want the comfort that when they choose Islamic Banking, the product must assure it meets the Sharia compliance required. By this, it is important to know the people who develop and approve the products. Great weight is placed on the names and reputation of the Sharia scholars themselves. Consumers genuinely want to know who approves the product structure, and want to see the scholars stamp on it. Requests for a copy of the fatwa governing the approval of the product is a norm in the Middle-East. As mentioned, the emphasis is on Sharia compliance, more than merely pricing. There is a huge trust and confidence in the Sharia scholars themselves, in their ability and the quality of decisions made on the products.

For that, I do applaud the consumers who chose Islamic Banking for looking beyond pricing. Many times I have been asked to furnish details and profiles of the Sharia scholars who approved the products. The decision to buy the product is more often than not, based on these profiles. The assurance of Sharia compliant banking became more important, even though there are better pricing elsewhere. And I believe that product innovation will have to come naturally once the performance of the Islamic banking industry is in the upswing. Competition and customer feedback drives innovation, but in the first place we need the right customers asking for the right solutions to be banking with us. As pricing and feature becomes the second priority, the Middle-East banks will be well placed to take a step back and assess compliance and therefore build consumer confidence organically.

Furthermore, many corporates and government-linked institutions mandates their financial dealings to be Sharia compliant, even making it part of their constitution and governance. This will drive the demand for Sharia compliant banking even more. With a ready market seeking, looking and wanting Islamic products and services, one can foresee a sustainable growth in the industry.

I don’t know what can possibly change the consumer mindset for this in Malaysia. Until then, we will always be playing catch up with the conventional banks even when BNM is pushing for a more wholesome Sharia compliant banking system. It could be a painful transition that the Banks will find difficult to stomach when the existing structure seemed to be working well. But without this change, will the industry ever make that quantum leap?

It’s catch-22. Someone needs to be bold enough to see it out, bite the bullet and draw that line in the sand; take a chance on Islamic banking with confidence and without so much suspicion. Maybe that is what is needed to make that paradigm shift in consumers.

Synopsis of 2013 BNM Exposure Drafts

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.

Kafalah ED

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.

Waad ED

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.

Wakala ED

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.

Tawarruq

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

Murabaha

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

  1. Murabahah (2013)
  2. CP Mudarabah (SR,OP, OR)
  3. CP Musharakah (SR,OP,OR)

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.