Islamic Banking Operations (Sources of Fund)

FRAMEWORK FOR PROFIT SHARING & DISTRIBUTION

SOURCES OF FUND USES OF FUND GROSS INCOME LESS COST DISTRIBUTABLE INCOME

# Wadiah Savings/ Students S/As Wadiah Current Account Mudharabah Current Account Mudharabah General Investment Account Mudharabah Special Investment Account

Interbank Investment

Working Capital

BBA Financing BBA Refinancing Study Financing SME Financing Unit Trust Financing Trade Financing Interbank Investment Malaysia Government Investment Certificate Islamic Acceptance Bill Islamic Debt Securities

Gross Income

minus : General Provision Interbank Investment Cost Reserve Cost Working Capital Income

Distributable Income

Customer (75%)
Bank (25%)

# Less Statutory Reserve Requirements

OPERATIONS OF ISLAMIC BANKING WINDOWS IN COMMERCIAL BANKS UNDER DUAL BANKING SYSTEM Islamic Banking System (IBS) CONVENTIONAL

PROFIT FROM FINANCING

DIVIDEND FOR INVESTOR

INTEREST TO CUSTOMER
INTEREST FROM MONEY MARKET OPERATION INTEREST INCOME FROM

PROFIT FROM INVESTMENT

IBS FUND

CONVENT. FUND

CUSTOMER

FUNDS FROM INVESTOR/ ENTREPRENEUR

FUND FROM CUSTOMER/ CAPITAL

(2) TYPES OF DEPOSITS AND INVESTMENT PRODUCTS

Wadiah Savings Account

Wadiah Student Savings Account

Wadiah Current Account Mudharabah Savings Account

Mudharabah Current Account

Mudharabah General Investment Account

COMPARISON BETWEEN ISLAMIC AND CONVENTIONAL DEPOSITS PRODUCTS

Types of Product i) Conventional
Return is fixed at the beginning of the contract. Example: 3.5% p.a for Fixed Deposit Account

ii) Islamic
Guaranteed Custody Return (hibah)is at banks discretion (Wadiah)

i) Conventional

a) Savings Account b) Fixed Deposit Account c) Current Account

Profit-sharing between bank and customer (Mudharabah)

ii) Islamic
a) Wadiah Savings Account

b) Mudharabah General Investment Account

c) Mudharabah Current Account

TERMS OF ACCEPTANCE OF DEPOSITS

GUARANTEED SAFEKEEPING (WADIAH) PROFIT SHARING INVESTMENT (MUDHARABAH )

CONCEPT OF MUDHARABAH

A contract where one party provides the capital (customer) and the other (bank) provides the expertise in business
Profit derived from the business will be shared based on a pre-agreed profit sharing ratio between the customer and the bank. Loss will be borne by the capital provider

CONCEPT OF WADIAH Wadiah is a contract (akad) between the owner of the asset (customer) and the custodian (bank) to safeguard the asset on behalf of the customer. This is applicable to Savings and Current A/Cs

Types of Wadiah:
Wadiah Yad Amanah - Trustee Custody Wadiah Yad Dhamanah - Guaranteed Custody

Wadiah

Yad Amanah Trust Custodian of goods act as trustee but not obliged to replace the goods if accidentally lost or damaged

Yad Dhamanah Guarantee When: Goods are pooled together not segregated Custodian utilizes the goods in business Custodian can impose service charges Owner gives custodian consent for use of goods

CONSENT GIVEN BY WADIAH SAVINGS/CURRENT A/C CUSTOMERS TO USE THEIR FUNDS

Wadiah Yad Amanah

Wadiah Yad Dhamanah

Wadiah Savings A/C

Savings accounts may be opened for: Individuals Minors Joint (two or more individuals) parties * Societies, associations and institutions other than firms, corporations and business enterprises

Hibah computation is based on the followings: Principal (P) X Time (T) X Rate quoted *

Multi hibah rates

(effective 16/12/06-15/01/07 and 16/01/07- 15/02/07)

Example: Tier Tier 1 Tier 2 Tier 3 Range Up to RM 1,000 RM 1,001 to RM 5,000 RM 5,001 and above Rate (% p.a) 1.05 % 1.85 % 2.54 %

Hence compute WSA with balance of RM 7,000 for whole of January 2007 based on the above hibah rates. 31/365 X 1.05% X 1,000 31/365 X 1.85% X 4,000 31/365 x 2.54% x 2,000 Total hibah = RM 0.89 = RM 6.28 = RM 4.31 = RM 11.48

Exercise on Multi hibah rates

Please compute hibah based on the following information ?

(effective 16/12/06-15/01/07 and 16/01/07-15/02/07)

Example: Tier Tier 1 Tier 2 Tier 3 Range Up to RM 1,000 RM 1,001 to RM 5,000 RM 5,001 and above Rate (% p.a) 1.15 % 1.95 % 2.34 %

Hence compute WSA with balance of RM 10,000 for whole of January 03 2007 based on the above hibah rates.

Multi hibah rates

(effective 16/12/06-15/01/07 and 16/01/07- 15/02/07)

Example: Tier Tier 1 Tier 2 Tier 3 Range Up to RM 1,000 RM 1,001 to RM 5,000 RM 5,001 and above Rate (% p.a) 1.15 % 1.95 % 2.34 %

Hence compute WSA with balance of RM 10,000 for whole of January 03 based on the above hibah rates. 31/365 X 1.15% X 1,000 31/365 X 1.95% X 4,000 31/365 x 2.34% x 5,000 Total hibah = RM 0.97 = RM 6.62 = RM 9.94 = RM 17.54

Exercise on Multi hibah rates

(effective 16/12/02-15/01/03 and 16/01/03-15/02/03)

Please compute hibah based on the following information ?

Example Tier Tier 1 Tier 2 Tier 3 Range Up to RM 1,000 RM 1,001 to RM 5,000 RM 5,001 and above Rate (% p.a) 1.50 % 2.00 % 2.50 %

WSA with balance of RM 8,500 for whole of January 03 based on the above hibah rates.

MUDHARABAH CURRENT ACCOUNT

What Is Mudharabah Current Account ? A current account which is based on profit sharing concept of Mudharabah Profits gained from investment will be shared between the depositor and the bank based on a pre-determined profit sharing ratio

MUDHARABAH CURRENT ACCOUNT Example of dividend calculation:

Assume Islamic banking rates are as follows:Balance
(Customer: Bank)

Profit Sharing

0 - 1,999 2,000 - 49,999 50,000 - 99,999 100,000 & above

0 :100 50 : 50 60 : 40 70 : 30

..cont

MUDHARABAH CURRENT ACCOUNT

Example of dividend calculation: Assume Islamic banking rates are as follows:Balance 0 - 1,999 2,000 - 49,999 50,000 - 99,999 100,000 & above 16/9/06-15/10/06 16/10/06-15/11/06 0 % - 3.00 % - 3.07 % - 3.15 % 0 % 3.05 % 3.10 % 3.20 %

..cont

MUDHARABAH CURRENT ACCOUNT

Example of dividend computation:Assume daily balances in En Alis account are as follows for month of October 2006 (31 days) Date 1 - 10 11 - 15 16 - 20 21 - 25 26 - 31 No. of days 10 5 5 5 6 Balances 123,000 66,000 5,400 1,900 3,300

..cont

MUDHARABAH CURRENT ACCOUNT

Answer: Date
1 - 10 11 - 15 16 - 20 21 - 25 26 - 31

Calculation
123,000 x 3.15% x 10/365 66,000 x 3.07% x 5/365 5,400 x 3.05% x 5/365 no dividend (as bal.< 2,000) 3,300 x 3.05% x 6/365

Dividend
= = = = = 106.15 27.76 2.26 0.00 1.65

Total

= 137.82

MUDHARABAH GENERAL INVESTMENT ACCOUNT (MGIA)

The owner of the fund (customer) places money for a stipulated period of time (tenor) for the purpose of participating in the sharing of profits made from the banks investment of funds.

FEATURES OF MGIA
Tenure ranges from 1,2,3 until 60 months Minimum amount for 1 month investment is RM5,000 Minimum amount for 3 months and above investment is RM 500 Profit sharing 75% customer : 25% bank (1 month & above) Dividends are accrued on daily basis

Eligibility
Individual below 18 years of age, the account is opened and operated in the name of a trustee. Joint accounts are allowed for individuals. Tenor available 1,2,3 - 60 months Minimum Placement 1 month 2-60 months -

RM5,000-00 RM500-00

Statement Receipt issued with details on amount, tenor and profit sharing ratio.

Dividend computation compared to other banks

If a customer place RM10,000 in MGIA on 20/1 until 20/4, with declared rates as below: rates 16/1 - 15/2 3.30 % 16/2 - 15/3 3.25 % 16/3 - 15/4 3.20 % 16/4 - 15/5 3.12 % Dividend computation RHB Bank Based on daily accrual basis on the prevailing declared rates. (20/1-15/2 = 27 days) (16/2-15/3 = 28 days) (16/3-15/4 = 31 days) (16/4-20/4 = 05 days) Other banks Based on maturing rate. (20/1-20/4 = 91 days) 27/365 28/365 31/365 05/365 x 3.30 % x 10,000 = x 3.25% x 10,000 = x 3.20% x 10,000 = x 3.12% x 10,000 = Total dividend RM 24.41 24.93 27.18 04.27
80.79

91/365 x 3.12% x 10,000 = RM 77.79

Premature upliftment of MGIA

En Mohd Ali placed a 6 months time deposit for RM 70,000 on December 16, 2000. Due to unforeseen circumstances, he withdrew his deposits on May 2, 2001 i.e. after the completion of five (5) months. Compute dividends payable to him based of the following dividends rate declared. 16/12/00 - 15/01/01 16/01/01 - 15/02/01 16/02/01 - 15/03/01 16/03/01 - 15/04/01 16/04/01 16/05/01 Dividend computation RHB Bank Based on daily accrual basis on the prevailing declared rates. (16/12-15/1 = 31 days) 31/365 x 3.0 % x 70,000 = 178.36 (16/01-15/2 = 31 days) 31/365 x 3.2 % x 70,000 = 190.25 (16/02-15/3 = 28 days) 28/365 x 3.3 % x 70,000 = 177.21 (16/03-15/4 = 31 days) 31/365 x 3.5 % x 70,000 = 208.08 (16/04-02/5 = 17 days) 17/365 x 3.3 % x 70,000 = 107.59 Total dividend RM 861.49 3.0 % p.a 3.2 % p.a 3.3 % p.a 3.5 % p.a 3.3 % p.a

However En Mohd Ali will be paid only 75% X RM 861.49 =RM 646.12

MUDHARABAH SPECIAL INVESTMENT ACCOUNT (MSIA)

The concept of MSIA is similar to MGIA i.e. the customer places its fund for a stipulated period of time (tenure) for the purpose of participating in the sharing of profits made from the banks investment of funds.

MUDHARABAH SPECIAL INVESTMENT ACCOUNT (MSIA)

However, the differences are as follows: MGIA (i) Tenure of deposits - 1, 2-60 months
(ii) Minimum amount - RM 5K, RM 500 (iii) Profit sharing ratio Bk (25%), Cust (75%)

MSIA 28-92 days RM 100K

negotiable (r = 12 mths MGIA)