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Shariah Contracts in Islamic Finance

Shariah Requirements for
Commodity
Value Proposition for CSP
Bursa Suq Al-Sila
Overview
Salient Features
Transaction Flow
The Agenda
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Types of Contracts
Contract of
Guarantee
Contract
of Gift
Contract of
Partnership
Contract of
Exchange
Contract
of Saving
Kafalah
Hawalah
Rahnu
Takaful
Hibah
Qard
Hasan
Waqf
Wasiyah
Wadiah
Ijarah
Jualah
Bai Salam
Istina
Sarf
Murabahah
Tawarruq
Musharakah
Mudharabah
Contract of
Delegate/
Proxy
Wakalah
Islamic Markets
COMMODITY MURABAHAH
-Murabahah is the most globally accepted Shariaah concept used to manage
short-term liquidity.
-When a commodity (e.g. cpo, rbd olein) is used as an underlying, it is deemed as
a Commodity Murabahah transaction
-Traded on spot basis (up to T+2 business days)
-Murabahah (cost-plus sale) occurs when a Party A purchases the commodity and
sells to Party B on a deferred payment terms
-Party B with ownership right to the commodity can sell the commodity for cash
-The purchase of commodity on deferred payment basis and selling it for cash is
made under the Tawarruq contract.
Tawarruq is a tripatite arrangement whereby a buyer buys an asset from a seller on
deferred payment and subsequently sells the asset to the third party for cash with a
price lesser than the deferred price, for the purpose of obtaining cash. This
transaction is called tawarruq mainly because when the buyer purchases the asset
on deferred terms, it is not the buyer's interest to utilize or benefit from the
purchased asset but rather to facilitate him to attain liquidity
Bursa Suq Al-Sila
Shariah Requirements for Commodity
Unencumbered Unencumbered
not tagged to
any sale at
point of offer
Specified
location
during offer
Commodity Commodity
must be
owned by
supplier or
agent (CSP)
Defined
specification
quantity &
quality
Commodity
must be in
existence
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Value Proposition for CSP
Business as usual for
suppliers
Good profiling by
supporting a national
effort
No membership cost
Delivery cost is at the
hence better value
Delivery cost is at the
expense of purchaser,
hence better value
Minimize holding cost of idle
Commodity inventory
Extra revenue from
Commodity inventory
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Bursa Suq Al-Sila
Fee Sharing Structure:
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Type of Fee (per million basis)*
Trading Fee
1
RM 15.00
* Note: In its equivalent currency value
1
Paid by CTP for using the platform
2
Based on RM 15 paid by CTP
Fee Sharing Structure
2
(per million basis)*
Supplier RM 9.00
BMIS RM 6.00
Islamic Markets
Income Simulation:
Example:
Location Volume (MT) Price (RM)* Total Value (RM Mil)
Kuantan 2,500 4,000 10.0
Tawau 2,500 4,000 10.0
Sandakan 2,500 4,000 10.0
Lahad Datu 2,500 4,000 10.0
Total Offer 10,000 4,000 40.0
Potential income for CSP :
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Offer Amount Fee
Income
Daily Weekly Monthly Annually
RM40 million RM9 RM360 RM1,800 RM7,200 RM86,400
RM400 million RM9 RM3,600 RM18,000 RM72,000 RM864,000
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The worlds first multi-commodity and multi-currency commodity trading
platform to support murabahah transactions
A hybrid market offering members a choice of trading electronically through
a secured web-based system or through traditional voice broking
Bids and Offers are placed daily and trades are matched electronically
Commodities are deliverable upon election of the purchaser
Members are governed by a set of trading rules encompassing best
market practices and Shariah principles
Housed in a Shariah-compliant wholly-owned subsidiary of Bursa
Malaysia called Bursa Malaysia Islamic Services Sdn Bhd (BMIS).
Bursa Suq Al-Sila
Overview
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Item Details
Basic Feature Real deliverable market - delivery is by default
Allows periodical Shariah verification audit
Underlying E-cert representing ownership of commodity in BSAS
Contract specification
Participants Commodity Supplying Participant (CSP)
Commodity Trading Participant (CTP)
Taking
Delivery
Buyer indicates intention directly to BMIS
Leaves open position beyond market closing for the day
Trading
Session
Sunday - Friday : 10.00am to 10.30pm
Friday (1
st
session) : 10.00am to 12.30pm
(break) : 12.30pm to 2.30pm
(2
nd
session) : 2.30pm to 10.30pm
Bursa Suq Al-Sila
Salient features
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Commodity
Payment
(spot)
Payment
(deferred)
Islamic
Bank A
Client /
Islamic
Bank B
2
1
4
Bursa Suq Al-Sila
Transaction Flow
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Commodity
Supplier A
Commodity
Supplier B
Commodity
Supplier C
Commodity
Supplier D
5
3
Commodity
Payment
(spot)
Payment
(deferred)
Islamic
Bank A
Client /
Islamic
Bank B
2
1
4
Bursa Suq Al-Sila
Transaction Flow
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Commodity
Supplier A
Commodity
Supplier B
Commodity
Supplier C
Commodity
Supplier D
5
3
1
CSP key in the commodities offered for
the day
The stocks will be accumulated in BSAS
inventory
Commodity
Payment
(spot)
Payment
(deferred)
Islamic
Bank A
Client /
Islamic
Bank B
2
1
4
Bursa Suq Al-Sila
Transaction Flow
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Commodity
Supplier A
Commodity
Supplier B
Commodity
Supplier C
Commodity
Supplier D
5
3
2
Suppliers sell commodity directly to IBA
on cash, ownership transfers to IBA
Bursa ensures delivery of commodity to
IBA if delivery is requested
IBA credits payment into BMIS account
(BMIS as settlement agent for Suppliers)
E-Certificate generated by system
detailing trade information
E-CERTS - A
Commodity
Payment
(spot)
Payment
(deferred)
Islamic
Bank A
Client /
Islamic
Bank B
2
1
4
Bursa Suq Al-Sila
Transaction Flow
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Commodity
Supplier A
Commodity
Supplier B
Commodity
Supplier C
Commodity
Supplier D
5
3
3
IBA sells commodity to its Client/IBB at
marked-up price, on deferred payment
basis
Ownership transfers to Client/IBB as
evidenced in the eCert
E-CERTS E-CERTS - B
Commodity
Payment
(spot)
Payment
(deferred)
Islamic
Bank A
Client /
Islamic
Bank B
2
1
4
Bursa Suq Al-Sila
Transaction Flow
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Commodity
Supplier A
Commodity
Supplier B
Commodity
Supplier C
Commodity
Supplier D
5
3
4
Client/IBB sells CPO to BMIS on cash
BMIS debit its settlement account for
Client/IBB
Ownership transfers to BMIS as
evidenced in the eCert
E-CERTS
E-CERTS - C
Commodity
Payment
(spot)
Payment
(deferred)
Islamic
Bank A
Client /
Islamic
Bank B
2
1
4
Bursa Suq Al-Sila
Transaction Flow
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Commodity
Supplier A
Commodity
Supplier B
Commodity
Supplier C
Commodity
Supplier D
5
3
5
BMIS offer (to sell) & Suppliers bid (to
purchase): matching done on random
basis
Ownership transfers to Supplier
Commodity may or may not be reoffered
into system
Commodity
Payment
(spot)
Payment
(deferred)
Islamic
Bank A
Client /
Islamic
Bank B
2
1
4
Bursa Suq Al-Sila
Transaction Flow
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Commodity
Supplier A
Commodity
Supplier B
Commodity
Supplier C
Commodity
Supplier D
5
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