CHAPTER 6 - Structuring Islamic Financing.pptx

Slide untuk pelajar master MIBS & MIFB di UUM. Juga berguna kepada sesiapa yang ingin mendalami ilmu contemporary Islamic banking.

1. CHAPTER 6: Structuring Islamic Financing MAJOR DR. MOHD ADIB ABD MUIN, IFP, CQIF (WEALTH MANAGEMENT) Senior Lecturer Islamic Business school ( Ibs ), uum BWSB5053 Contemporary Islamic Banking - 2024

2. OUTLINE BWSB5053 Contemporary Islamic Banking 2 Financing the particular projects using Islamic Financing methodology Project assessment CASE STUDY EXAMPLE Financing offer Financing repayment

3. Financing Projects Using Islamic Financing 3 BWSB5053 Contemporary Islamic Banking Islamic finance refers to the means by which corporations in the Muslim world, including banks and other lending institutions, raise capital in accordance with Sharia, or Islamic law. It also refers to the types of investments that are permissible under this form of law. Key Principles of Islamic Finance: Prohibition of Riba (Interest) : Islamic finance prohibits the charging of interest. Instead, it promotes profit-sharing and risk-sharing. Ethical Investments : Investments should be made in ethically and socially responsible projects. Asset-Backed Financing : All financial transactions must be backed by tangible assets or services.

4. Structuring Islamic Financing for Projects 1. Identify Project Requirements and Objectives: Project Scope : Understand the nature and scope of the project (e.g., construction, manufacturing, services). Financial Needs : Determine the amount of financing required and the timeline for funding. Sharia Compliance : Ensure that the project and its objectives are in line with Sharia principles, avoiding prohibited activities like interest ( riba ), gambling ( maysir ), and uncertainty ( gharar ). 4 BWSB5053 Contemporary Islamic Banking

5. 2. Choose the Appropriate Islamic Financing Instrument 5 BWSB5053 Contemporary Islamic Banking Murabaha (Cost-Plus Financing) : Suitable for purchasing specific assets where the bank buys the asset and sells it to the client at a marked-up price. Mudarabah (Profit-Sharing) : Ideal for projects where one party provides capital and the other provides expertise and management. Musharakah (Joint Venture) : Appropriate for large-scale projects requiring equity participation and shared profit and loss. Ijara (Leasing) : Suitable for acquiring assets that can be leased, such as equipment or real estate. Istisna (Manufacturing Financing) : Ideal for construction and manufacturing projects where goods or services are produced and delivered at a future date. Sukuk (Islamic Bonds) : Suitable for raising large sums of capital through asset-backed securities. Qard Hasan (Benevolent Loan) : Used for social welfare projects requiring interest-free loans.

6. 3. Structure the Agreement 6 BWSB5053 Contemporary Islamic Banking Legal Documentation : Draft the legal documents ensuring Sharia compliance. This typically involves the use of standard contracts vetted by Sharia scholars. Terms and Conditions : Clearly outline the terms of the agreement, including profit-sharing ratios, repayment schedules, and asset ownership. Risk Sharing : Structure the agreement to ensure that risks are shared fairly between all parties involved. Sharia Board Approval : Obtain approval from a recognized Sharia board or committee to ensure the agreement complies with Islamic principles.

7. 4. Execute the Financing Agreement 7 BWSB5053 Contemporary Islamic Banking Due Diligence : Conduct thorough due diligence on the project, including feasibility studies, risk assessments, and financial projections. Signing Contracts : Ensure all parties sign the contracts and understand their obligations and rights. Disbursement of Funds : Arrange for the disbursement of funds as per the agreed-upon schedule and conditions.

8. 5. Monitor and Manage the Project 8 BWSB5053 Contemporary Islamic Banking Project Management : Implement robust project management practices to oversee the project's progress, ensuring it stays on track and within budget. Compliance Checks : Regularly review the project to ensure ongoing compliance with Sharia principles and the terms of the financing agreement. Reporting : Maintain transparent and regular reporting to all stakeholders, including financial performance and project milestones.

9. 6. Profit Distribution and Repayment 9 BWSB5053 Contemporary Islamic Banking Profit Distribution : Distribute profits according to the agreed-upon profit-sharing ratios in the contract. Repayment Schedule : Ensure timely repayments as per the schedule, avoiding any delays or defaults. Final Settlement : At the end of the project, ensure all financial obligations are settled, and the ownership of assets is transferred as agreed.

10. Case Study Example Project : Construction of a new hospital Financing Instrument : Istisna and Ijara 10 BWSB5053 Contemporary Islamic Banking

11. Step-by-Step Structuring : Identify Project Requirements : Project Scope: Construction of a 200-bed hospital. Financial Needs: RM50 million over two years. Sharia Compliance: Healthcare services, compliant with Islamic ethical standards. Choose Financing Instrument : Use Istisna for the construction phase. Use Ijara for leasing medical equipment. Structure the Agreement : Istisna Contract : Agreement between the financier and construction company, detailing the specifications, timeline, and cost. Ijara Contract : Agreement for leasing medical equipment with a fixed rental fee. 11 BWSB5053 Contemporary Islamic Banking

12. CONT…. Execute the Agreement : Conduct due diligence and feasibility studies. Sign the contracts and arrange for phased disbursement of funds. Monitor and Manage : Regular site inspections and progress reports. Ensure compliance with Sharia and contractual terms. Profit Distribution and Repayment : Profits generated from hospital operations shared according to the agreement. Lease payments made for medical equipment as per the Ijara contract. 12 BWSB5053 Contemporary Islamic Banking

13. Financing Offer and Repayment in Islamic Finance Banking 1. Financing Offer Types of Islamic Financing Products : Murabaha (Cost-Plus Financing) : The bank purchases an asset on behalf of the client and sells it to them at a marked-up price. The repayment terms and profit margin are agreed upon in advance. Mudarabah (Profit-Sharing Partnership) : A contract where one party provides capital while the other provides expertise. Profits are shared according to a pre-agreed ratio, while losses are borne by the capital provider. Musharakah (Joint Venture) : A partnership where both parties contribute capital and share profits and losses in proportion to their investment. Used for business ventures and large projects. 13 BWSB5053 Contemporary Islamic Banking

14. CONT… 4. Ijara (Leasing) : The bank buys and leases out an asset to the client for a fixed rental fee. At the end of the lease period, the client can purchase the asset. 5. Istisna (Manufacturing Contract) : A contract for manufacturing goods and commodities, allowing cash payment in advance and future delivery. Commonly used for construction and manufacturing projects. 6. Sukuk (Islamic Bonds) : Certificates representing ownership in an asset, usufruct, or investment. Investors receive returns from the asset rather than interest payments. 7. Qard Hasan (Benevolent Loan) : An interest-free loan given for welfare purposes or to help someone in need. Only the principal amount is repaid. 14 BWSB5053 Contemporary Islamic Banking

15. Process of Offering Financing Application and Assessment : The client submits a financing request, detailing their needs and the purpose of the financing. The bank conducts a thorough assessment, including a credit check and feasibility study. Sharia Compliance Review : The proposed financing structure is reviewed by the bank’s Sharia board to ensure compliance with Islamic principles. Approval and Terms Agreement : Upon approval, the bank and the client agree on the terms and conditions, including profit margins, repayment schedules, and any additional requirements. Contract Signing : Both parties sign the contract, formalizing the financing agreement. 15 BWSB5053 Contemporary Islamic Banking

16. Repayment in Islamic Finance Banking Repayment Structures : Murabaha : The client repays the bank the purchase price plus an agreed-upon profit margin over a fixed period. Payments are usually made in equal installments. Mudarabah : Profits generated from the business venture are shared between the bank and the client as per the agreed ratio. In case of losses, the bank absorbs the financial loss, while the client loses their effort and time. Musharakah : Profits and losses are shared in proportion to the capital contribution of each partner. Repayments depend on the profitability of the joint venture. 16 BWSB5053 Contemporary Islamic Banking

17. CONT.. 4. Istisna : Payments can be made in stages as the work progresses or in a lump sum upon completion and delivery of the goods. The repayment terms are agreed upon at the start of the contract. 5. Sukuk : Investors receive periodic payments derived from the returns generated by the underlying asset. At maturity, the principal amount is repaid, and the ownership of the asset is transferred back to the issuer or a third party. 6. Qard Hasan : The borrower repays only the principal amount without any interest. Repayment terms are flexible and agreed upon between the parties. 7. Ijara : 1. The client makes periodic rental payments to the bank for the use of the leased asset. 2. At the end of the lease term, the client may purchase the asset or return it to the bank. 17 BWSB5053 Contemporary Islamic Banking

18. Compliance, Transparency& Handling Defaults Ensuring Compliance and Transparency : Monitoring and Auditing : Regular monitoring and auditing ensure that all transactions comply with Sharia principles and the terms of the contract. Transparency : Clear documentation and communication between the bank and the client help maintain transparency in the financing and repayment process. Handling Defaults : Negotiation and Restructuring : In case of default, the bank may negotiate with the client to restructure the repayment terms. Sharia-Compliant Penalties : If necessary, penalties for late payment can be imposed, but they are donated to charity and not retained by the bank as profit. 18 BWSB5053 Contemporary Islamic Banking

19. CONCLUSION BWSB5053 Contemporary Islamic Banking 19 In summary, Islamic finance offers various Sharia-compliant financing products, each with its own structure and repayment mechanism. The focus is on ethical investment, risk-sharing, and ensuring that all transactions are backed by tangible assets or services. This approach promotes financial stability, social responsibility, and economic justice.

20. Dr. mohd adib abd muin [email protected] | [phone]