Modern vs.

Islamic Finance
(IF)
A Global Practical
Reality
Prof. Dr. Mohd. Masum Billah
www.drmasumbillah.blogspot.com

National University of Singapore (NUS)

Key Issues

The World View & Phenomena of IF.

IF: Product Or System?
Appreciation By Participation in IF System.
Governing Components of IF.
Modern vs. IF : A Global Practical Reality.
Is Dual Islamic Finance a Combination Or
Compromization Or Harmonization Or Segregation?
Leading Instruments Adapted in IF:
IF: The Dynamic Mechanisms
IF: The Platinum Tips
IF: The Road to Success
Final Remarks.

The World View & Phenomena

on Applied Islamic Finance

Global Preview
Middle East
ASEAN
Indo-subcontinent
Asia Pacific
Central Asia
Africa
USA
Europe.

Muslim Population (120 Billions)

Facts of Some Leading Muslim Countries:

GCC / Gulf
Indonesia 203.4m (87%)
Bangladesh 126m (90%)
Malaysia 15m (60%)
Sudan
Egypt
Jordan
Iran
Others

Facts of Some Leading Non-Muslim Countries:

France 5m (8%)
Russia 17m (12%)
Germany 3.2m (4%)
US 3m (1%)
UK 1.6m (3%)
China 19.8m (1%)
India 146m (13%)
Africa
Asia Pacific

Continued
Age Factors of Muslims

Muslim Countries:
Age

0-14 (33%)
Age 15-64 (62%
Age 65+ (5%)

G7 Countries:
Age

0-14 (18%)
Age 15-64 (67%)
Age 65+ 15%

IF : PRODUCT or SYSTEM ?

It is Neither a Product Nor a

Business.
BUT.. an Integrated System for
ALL Regardless of Ones Race,
Religion, Status, Sex or
Nationality With a Total Holistic /
Divine Approach in Reality.

Appreciation By Participation
in IF System
In terms of Global Average Market
Size
By Muslims 35-38%
By Non-Muslims 62-65%

Governing
Components of
Islamic
Finance
Shall Be Guided
By:
The Holy Quran
Prophetic Traditions (Sunnah)
Juristic Opinions (Fatawa)
Shriah Rulings (Fiqh)
Shariah Justified Regulatory
Frameworks / Guidelines / Policies /
Standards
Relevant Shariah Justified Cases

Modern vs. Islamic Finance

A Global
ISSUES
MODERN
ISLAMIC
Practical
Reality

Concept

Product / Business with

Commercial Objective

Integrated System with Holistic

Approach

Principles

Human Dominated Laws

Divine Laws

Risk

In a Bilateral Contract, the

Risk is Transferred Against

In a Bilateral Contract, the Risk is

Shared Mutually (Bilaterally)

One Unilaterally
Supervision

At the Central Level

At All Levels of Regulations,

Decision Makings & Operations

Income

With Gaining Concept

With Sharing Concept

Management

Based on BODs Decision

Based on Shariah Standard

Product

Based on Commercial
Objective

Compliance with Integrated

System

Tax

Income Tax Accordingly

Zakat on Income

Decision Making

BOD with Statutory & Policy

Compliance

SAB & BOD with Shariah

Compliance

Continued
ISSUES

MODERN

ISLAMIC

Window

Allowed

Opposed

Interest

Allowed

Opposed (alternatively the Profit

Sharing Technique)

Staffing

Mixed Allowed

Mixed Allowed But Headed By a

Qualified Muslim

Regulatory
Authority

CB / MOF / MA

CRA & SAB

Accounting

Cash & Accrual

Cash on Income But Accrual on

Expenses

Guarantee

Allowed in Both Equity &

Debt Financing

Disallowed in Equity Financing

But Allowed in Debt Financing
(Income Guarantee is Not
Allowed)

Contract

Contractual Spirit

Divine Spirit

Capacity

Legal Consideration

Humanitarian Consideration

Penalty

Rigid

Excuses But Last Resort is

Reasonable Damages
Accordingly

Continued
ISSUES

MODERN

ISLAMIC

Transparence

Not Essential

Essential

Forfeiture

Rigid

No Forfeiture But Justifiable

Remedies

Investment

Flexible with Commercial

Avenues

Selected Shariah Compliant

Avenues

Waver of Debt
(Liability)

At the Choice of the

Management

At Reasonable Grounds with

Holistic Approach

Approach

Commercial

Service / Cooperation

Benefits

Commercial

Commercial, Spiritual &

Socio-cultural

Application

Common

Common But With Shariah

Justification

Bargaining Power

With Institution

With Mutual understanding

Mechanisms of

Based on Fixed Rate

Based on Income Sharing

Continued .
ISSUES

MODERN

ISLAMIC

Selection Criteria

Commercial Objective

Integrated Objective with

Holistic Approach

Objective

Business

Services

Motive

Unilateral Gain Oriented

Bilateral Sharing Oriented

Administrative
Cost

Fixed Interest

Service Charge

Securitization

Physical and Or
Documentary

Spiritual Commitment with

Physical and Or Documentary

Distribution of
Wealth after
Death

Based on Distribution
Policies

Based on the Principles of

Faraidh

Screening

Based on Modern Financial

Policies

Based on Shariah Guidelines

Bank

As the Manager with

Bargaining Power

As the Trustee with

Management Responsibility

BankerCustomer

Commercial

Brotherhood, Solidarity &

Is Dual Islamic Finance a

Combination Or Compromization Or
Harmonization Or Segregation?

It is Neither Compromization Nor

a Combination.
But, A Segregation.
In Some Situations, It Is with
Harmonization by Shariah
Compliance.

Leading Islamic Finance

& Takaful Instruments
MUDHARABAH

MUSHARAKAH

MURABAHAH

Bai Bi Thaman Ajil

Wakalah

Tabarru

Ujr

Mirath

MUDHARABAH

Contract between two parties:

An Islamic bank as an investor (rab al-mal) who
provides a second party, the entrepreneur
(mudarib) with financial resources to finance a
particular project.

Profits are shared between the parties in a

proportion agreed in advance.

Losses are the liability of the Islamic bank and

the mudarib loses only its efforts and his
expected share in the profits

MUSHARAKAH
(JOINT PARTICIPATION)

The two partners participate in the capital of

the venture

Profits are allocated according to an agreed

proportion, allowing for managerial skills to be
remunerated

Losses are borne by the partners in proportion

to their contribution to the capital

MURABAHA
(MARK UP ON SALE)

Contract available for financing the purchase or

import of capital goods, consumable goods or raw
materials

Fundamental principles:
Purchase price should be declared to the client
Goods must be classified and clearly identified
according to international or commonly
accepted standards or classifications

Why more than 80% revenues

generated by most of Islamic
Banks are from the
Murabahah financing?

POTENTIAL ISSUES IN
MUSHARAKAH

Third party guarantee

Shared liability
Restriction on joint-ownership of
capital
Classification of non-performing
financing
Source of funds
Staff competency and efficiency
Control mechanism

Third Party Guarantee

No security / collateral is allowed

Negligence or misuse of funds
Jordan Government guarantee
Sudanese Islamic Bank Property as collateral
To allow third-party guarantee on Musyarakah
financing
To assess Takaful role as third-party guarantee
Both parties contribute to the appointment

Shared Liability

JV both parties share the liability

Indemnity Letter can be requested
but Syariah disallows financier to
absolve its liability to the project
To limit the liability under Syariah due
to the financiers non-involvement in
the normal management of the
project is to be obtained

Restriction on JointOwnership of Capital

Syariah: Capital contributed by the

partners will belong to the partnership
Title should be under the name of
partnership
Issues in JV-based Musyarakah
Section 66 of BAFIA, FIs are not
allowed to acquire or hold more
than 5% equity in any corporation
except by way of credit security

Assets which are contributed by partners

as capital must be clearly differentiated
from assets which are lent for specific
functions and period by the partners

Appointment of trustee economical for

small financing?

Alternative: Issue Trust Declaration need

to be registered with ROC

A private caveat can also be lodged if the

assets is land

Still need to amendment BAFIA

Classification of NonPerforming Financing

Does not have fixed payment schedule

Tenure can be specific or perpetual
It is difficult to classify Musyarakah as
non performing based on current Non
Performing Loan Guideline by BNM GP3
To amend the BNM GP3
Perpetual should be exempted from the
NPF classification
To divide it into 2 categories Specific
Maturity Musyarakah and Perpetual
Musyarakah

Source of funds
Where the funds should be tapped

from? Who are depositors? Specific

accounts holder risk takers?
Gapping issues short term
deposit versus long term lending
Limited shareholders fund worst
still - risky

Staff Competency and

Efficiency

To ensure that proper and

structure training and practical
are given to the parties involved

Control Mechanism

Difficult to monitor and control

especially JV-type
Selective customers only

Recommendations
For
Musharakah
Financing

Other
recommendations
BE SELECTIVE IN PROJECT SCALE: SMALL TO MEDIUM
In a project whereby capital investment is very huge, like
construction of dam, gas and oil production plant,
musyarakah
and mudharabah structure may not be recommended due to
the shortfalls of this structure. In practice the financing
structure are more toward debt structure, ijarah, rahn and
etc.

GO FOR MORE SECURED PROJECT CASH FLOW

For relatively small project like a secured

infrastructure government award project, bank
can adapt the musyarakah and mudharabah
structure replacing the murabahah or BBA in trade
financing that are widely use in current practice

In practice Islamic Bank use Murabahah Working

Capital Financing facilities in order to facilitate
trade finance of particular company that being
awarded with government project. In Malaysia,
infra project are booming and the need for such
financing is huge

In MWCF bank will get profit out of mark up sale

that they charges to its clients of more less like 11.5% p.m. and if the bank can participate directly
into the project by way of mudharabah or
musyarakah the return is far beyond the current
margin.

For example, government awarded a project

to an ABC Co. to construct a RM50 million
hospital for a period of 18 months in Gua
Musang

Since the project is guaranteed by the

government in term of progressive cash flow
payment, bank can use Musyarakah or
Mudharabah as a tool to participate in the
project for a better return

How this
recommendation can
solve
the TERM
shortfalls
GO FOR SHORT
PROJECT FINANCING

Liquidity problem can be resolved as the

project undertake is only for short term period

Bank can use depositors fund instead of

limited shareholders to capitalize the project
in order to give better return to depositors

Problems of gaping can be eliminated, since

cash in flow will be paid in progress payment.
In a typical government project, payment
made progressively in monthly payment
according to

Direct involvement from the

agents
Mudharib & Rabbul Maal are the
board of executives directors
Risk scorecard must be in place
and reviewed periodically
Appointed independent
project/account
manager/consultant to assess the
performance and detect warning
signals for pre-emptive measure

IF: The Dynamic

Mechanisms

Dynamic Marketing Strategies.

Sustainable Research & Rediscovery.
Ranks & Rewards.
Global Comparison.
Reasonable Less Liability with Added
Benefits & Rewards.
Mutual Corporate Care & Concern.
Punctuality with Smartness.
Settle Before Time.

IF: The Platinum Tips

Review Excercise With Innovation.

Avoiding Unhealthy Competition.
Dynamic Offerings with Acceptable
Standard.
Foreseeable Plan & Acceptable
Performance.

IF: The Road to

Success

Sincerity With Transparence.

Review (Products & Policies) Exercise
Considering the Socio-economic
Sensitivity.
PR & Performance With Standard
Professionalism.
Sustainable Risk Assessment &
Effective Decision Making.
Wisdom, Tolerance & Mutual Respect.
Plan & Action.
Shariah Compliance With Divine

Final Remarks
IF
SHALL NoT BE
REMAIN By NAME
BuT
SHALL Be PAVED By SMART
PLAN, ACTION & APPRECIATION
WITH a TOTAL
HOLISTIC INTEGRETED SPIRIT
For The SERVICES & BENEFIT of
ALL

Thank You
Wassalam