HJ. ABDUL RAHMAN BIN MOHD YUSOFF CPIF. MIM-CPT
• Deputy President, Chartered Institute of Islamic Finance Professional (CIIF)
• Head Islamic Product & Business Development, OCBC Al-Amin Bank Berhad
• Chartered Professional in Islamic Finance (CPIF)
• Chartered Professional Trainer (MIM-CPT)
• Master of Science in Islamic Finance (INCEIF)
• Chartered Islamic Finance Professional (INCEIF)
• Master in Business Administration (KENTUCKY, USA)
• Bachelor of Science in Finance (INDIANA, USA)
• BSc. Finance (INDIANA, USA) 2
TRAINER’S PROFILE
FCSBF 3
What’s on the plate...
01 Islamic Finance Framework
02
03 Practical Issues in Shariah
04
Prohibition and Pillars
Lessons Learned & Moving Forward
5
The Financial System Structure
Surplus units Financial
Intermediaries Deficit units
$ vs % $ vs %
• Individual
• Corporation
• GLCs
• Financial Inst.
• Deposits / Liabilities
• Financing / Assets
• Conventional / Islamic
• Fixed / Floating rates
• Types of products
• Individual
• Corporation
• GLCs
• Financial Inst.
“Issues in locking-in fixed & modest return with principal guaranteed to depositors whilst simultaneously
structuring a floating rate financing to customers with flexible collateral terms and conditions”
INTERNAL
6
Differences between Islamic Banking & Conventional Banking
“Challenges in creating public awareness on the conceptual differences and practical aspect
in Islamic Banking & Finance”
INTERNAL
7
Correct Usage of Islamic Banking Terminologies
Conventional Banking Terminologies Islamic Banking Terminologies
Lending Financing
Borrower Customer
Lender Bank/Financier
Interest Profit
Interest Rate Profit Rate
Loan Financing
Repayment Payment
Total Repayment Total Payment
Monthly Repayment Monthly Payment
Penalty Charges Compensation Charges
Insurance Takaful
Insurance Premium Takaful Contribution
Mortgage Reducing Term Assurance
(MRTA)
Mortgage Reducing Term Takaful
(MRTT)
Base Lending Rate Base Financing Rate
“Challenges of using inter-changeable terminologies in websites, documents, brochures etc.” INTERNAL
8
Islamic Window/Subsidiary
ADVANTAGES
Reduced cost of operations in terms of manpower, premises & shared services
Wider reach of mass market
Competitive advantages
Leveraging on same data base – alternative products for customers
Capital outlay minimized for new start-up
DISADVANTAGES
Difficulty to command trust of customers – Displaced Commercial Risk
Not completely Shariah-compliant in terms capital, co-mingling of funds and knowledge
of staff is limited
More or price takers rather than price makers
May lead to cannibalization between parent & subsidiary
Similar scenario for subsidiary except on the degree of impact
For full-fledge Islamic Bank – high capital outlay is overcome from M&A
“Challenges in ensuring Shariah-compliant due to single platforms, marketing
paraphernalia , shared-services, regulatory etc.”
INTERNAL
10
PROVISION 28
DUTY OF INSTITUTION TO
ENSURE COMPLIANCE WITH
SHARIAH
Islamic Financial Services Act 2013
11
Duty of Institution to Ensure Compliance with Shariah
What constitute Shariah-compliance products, transactions & activities?
Why is Shariah-compliance so important – religious duty or regulatory obligation?
12
Who in the institution to identify that the activity is not in compliance with Shariah?
Duty of Institution to Ensure Compliance with Shariah, cont.
13
IFSA Vs BNM SGS – what’s the difference & which is more important?
Why do we need SGF in Islamic Banking?
BNM Shariah Governance Framework 2010
16
Riba
(Interest)
Gharar
(Uncertainty)
Maysir
(Gambling)
Haram Items/Activities
(Prohibited Items/Activities)
Avoidance of the 4 Prohibited Elements
17
There are 3 pillars or elements of ‘aqad:
Subject Matter
- Existence - Identifiable - Legal - Deliverable - Measurable - Transferable
Contracting Parties
- Min. 2 parties
- Sanity
- Puberty
- Maturity
Offer & Acceptance
- Conformity
- Ijab & qabul
- Oral or Written
- Communication
- Exchange of value
19
GOVERNANCE PRODUCTS
PEOPLE PROCESS & INFRA
PRACTICAL ISSUES
Islamic Finance encapsulates end-to-end activities from product development to maturity
which must be supported by good governance, shariah knowledge and readiness of people
as well as the process and infrastructure.
As financial intermediaries, the issues on Shariah-compliance are crucial as per its
commitments and duties to customers in ensuring that its revenue from business is Halal &
purified from any tainted elements.
Despite having craftily structured Islamic products, IFIs are normally exposed to various
Shariah Non-Compliance Events (SNCE) arising from the operationalization of Shariah in its
products, process, infra and the human errors due to incompetency or negligence.
Practical Issues in Islamic Finance
20
Areas of concerns:
Independence: issuance of fatwa – SAC resolution vs bank’s SC endorsement
Competency: banking operation – knowledge on credit, treasury, trade financing etc.
Confidentiality: product innovation – sharing of fatwas on product structure?
Consistency: SC’s endorsement – may not be industry-wide practices
Accountability: scope of duties – Shariah structure, Aqad, documentation, SOP etc?
Responsibility: business vs compliance – Shariah-compliance & yet business minded
Commitment: performance appraisal – Head of Shariah, Shariah Review to CEO/SC?
Continuing Professional Development (CPD): Tertiary vs Professional – CB, CPIF, CSA/CSP
Governance – Corporate & Shariah
21
Areas of concerns:
Replication: Forms vs Substance – A chicken is still a chicken?
Innovation: Risk-sharing a hard-sell to banks – focusing only Sale-based
Uniqueness: only on the Aqad? What about the Maqasid (objective), process?
Documentation: cumbersome & complicated? How about the cost vs benefit?
Marketability: Islamic First vs Islamic Must or remain optional to all?
Recovery chances – Case precedent
High capex – Customization
Issuance of Policy Documents (PDs) – frequency of issuance
Shariah Non-Compliance – penalties & monetary losses
Products – Replication vs Innovation
22
Sale-Based
• Murabahah
• Tawarruq/Commodity Murabahah
• Bai’ Al-’Inah
• Bai’ Bithaman Ajil (BBA)
• Bai’ Ad-Dayn
• Bai’ As-Sarf
• Bai’ Al-Istisna
• Bai’ Al-Salam
Lease-Based
• Ijarah
• Ijarah Muntahiah Bi Tamlik (IMBT)
• Ijarah Mawsufah Fi Zimah (IMFZ)
• Al-Ijarah Thumma Al-Bai’ (AITAB)
Equity-Based
• Musharakah
• Mudharabah
• Musharakah Mutanaqisah
Others
• Wadiah
• Wakalah
• Kafalah
• Hawalah
• Qard
• Rahn
• Hibah
• Ibra’
• Wa’d
Classification of Shariah contracts
23
Shariah contracts using Murabahah
Murabahah
Tawarruq/Commodity Murabahah
Bai’ Al-’Inah
Bai’ Bithaman Ajil (BBA)
Bai’ Ad-Dayn
Bai’ As-Sarf
Bai’ Al-Istisna
Bai’ Al-Salam
Practical Issues in Murabahah
Identification & attributes of subject matter (SM)
Any recourse is on the sale-contract not loans
Non-existence of SM – gharar al-fahish (Void)
Transfer of ownership – sequencing is documented
Selling Price – Fixed throughout the tenor
Asset-Sale Agreement (ASA) /Murabahah Sale Contract (MSC) are transaction docs to the Aqad
Commodity Murabahah – E-certs & Master Listing on Block dealings with Commodity Trader
Termination of contract is required to claim the whole outstanding balance of the sale price less ibra’ (rebate)
Shariah Contracts in Sale-based
24
Product Issues in Ijarah
Identification & attributes of subject matter (SM)
Any recourse is on the Wa’d (undertaking) to purchase the asset upon failure to meet the lease payment
Usufruct of SM – to justify the lease amount paid
Transfer of ownership – sequencing is documented
Lease Rental can be varied throughout the tenor
Asset-Purchase Agreement (APA), Ijarah Agreement, Wa’d are transaction docs required in the Aqad
Invocation of the Wa’d is required to claim the whole outstanding balance.
Proceed of sale to 3rd.party if inadequate shall be claimed from the lessee.
Shariah Contracts in Lease-based
Shariah contracts using Ijarah
Ijarah
Ijarah Muntahiah Bi Tamlik (IMBT)
Ijarah Mawsufah Fi Zimmah (IMFZ)
Al-Ijarah Thumma Al-Bai (AITAB)
25
Practical Issues in Musyarakah
Identification & attributes of subject matter (SM)
Any recourse is on the Wa’d (undertaking) to purchase the remaining ownership share of the partnership
Transfer of ownership on gradual & proportionate basis
Rental portion can be varied throughout the tenor but equity (principal) portion remains fixed
Musyarakah Agreement & Wa’d are transaction docs required in the Aqad
Invocation of the Wa’d is required to claim the remaining ownership share of the partnership
Proceed of sale to 3rd.party if inadequate shall be claimed from the defaulting partner
Shariah Contracts in Equity-based
Shariah contracts using Musyarakah
Musyarakah
Mudarabah
Musyarakah Mutanaqisah (MM)
26
Areas of concerns:
Sales & Marketing – cross-selling allowed? Dress code & Etiquette
Marketing paraphernalia – images, shared brochures/pamphlets
Marketing channels – is ok to sell Hijab at Zioux i.e. by an entertainer?
Marketing expenses – Lucky draw, claims on liquor & haram F&B?
Competency – Operationalization beyond Shariah principles
Outsourcing structure – SLA on accountability & transparency
Responsibility – business vs compliance
Continuing Professional Development (CPD) – Certification program?
People – Flexibility and Multi-tasking?
27
Areas of concerns:
Keeping abreast with banking industry movement towards VBI, Fintech, Auto Intelligence (AI) etc
Overlapping process & procedure between Shariah Risks, Review, Audit
Remedial rates – penalty, compensation, judgment rates
Transparency of reporting
Robustness of training programs
Process – System & Infrastructure
29
Shariah Issues Possible Causes Mitigation
Financing to SNC business activities Process Update facility template & checklist
Sequence of transactions documents executed
incorrect
Process
Amend SOP & process flow
Absence of subject matter in ‘aqad execution Process Update contract docs / checklist
Wrong usage of terminologies in product
brochures, correspondences such as interest,
loans, borrowings, penalty interest, repayment etc
People Enhance training materials – E-Learning and
classroom session
Lack of Shariah awareness from solicitor People
Assess solicitor on periodical basis &
provide in-house training
Crediting of interest from conventional FD into
Islamic account
Process
Amend SOP & process flow
Absence of ownership during ‘aqad execution Process
Update contract docs / checklist
Failure to execute wakalah contract for CM GIA People
Update contract docs / checklist
Entertainment claims on customer by Relationship
Managers and sales team include alcoholic drinks
and entertainment outlets eg. Pub, karaoke etc
Process Update HR policy & procedure on claims
Misselling & Common Errors
30
Shariah Issues Possible Causes Mitigation
E-cert number wrongly stated in the contract People
Update facility template & checklist
Commodity Murabahah was omitted on
Revolving Financing
People
Amend SOP & process flow
Subscribing insurance coverage instead of
Takaful for collateral
People
Amend SOP & process flow
Referral program for conventional parent
products for commission
Process / Infra
Amend SOP & process flow
Conventional branch staff doing sales activities
of conventional products at Islamic branch
premises
Process / Infra Shariah Awareness training & update policy
on shared-services
No regular engagement/meeting of Shariah
Committee with CEOi/management/Board
Governance Update internal policy on corporate &
shariah governance
Lack of Shariah knowledge amongst staff
following random interview &/or MCQ quizzes
given to them during your visit
People Enhance training materials – E-Learning and
classroom session
Branch premises displaying historical Fixed
Deposit rates
Infra Enhance training materials – E-Learning and
classroom session
contd. Misselling & Common Errors
31
Shariah Issues Possible Causes Mitigation
Islamic product marketing pamphlets using
conventional parent logo and portraying Shariah
non-compliance images
Process Shariah Awareness training & update policy
on marketing
From the sample of selected accounts, 3 financing
accounts were of mixed business activities and
income
Process Shariah Awareness training & update policy
on shared-services
Internal outsource business units under shared-
services eg. Finance, HR, IT, Business banking,
Consumer banking, Recovery etc. without Service
Level Agreement (SLA)
Process Shariah Awareness training & update policy
on shared-services
KPI of Head of Shariah (HOS) is set and assessed
by the CEOi – Islamic Bank
Governance Update internal policy on corporate &
shariah governance
Shariah Review reports direct to HOS
Governance Update internal policy on corporate &
shariah governance
All business plan & corporate strategy is under
Board of Directors & senior management with nil
engagement with SC Chairman
Governance Update internal policy on corporate &
shariah governance
Shariah Risk & Shariah Audit were not
represented in the monthly SC meeting
Governance Update internal policy on corporate &
shariah governance
contd. Misselling & Common Errors