workshop sc3
TRANSCRIPT
-
8/2/2019 Workshop Sc3
1/33
1
Mohd Nasiruddin bin Mohd Kamaruddin
Standard Chartered Saadiq
Operational Details in MudharabahContract for Islamic Liquidity
Management
-
8/2/2019 Workshop Sc3
2/33
Objectives
1. Definition of Mudharabah
2. Banking Products Using Mudharabah3. Managing Rate of Return in Mudharabah
4. Treasury Products Using Mudharabah
5. Managing Risk in Mudharabah
6. Suitability as Liquidity Management Instrument
-
8/2/2019 Workshop Sc3
3/33
Definition of Mudharabah
It is a partnership whereby one partyprovides the capital (rab al-maal) and
the other party as the entrepreneurprovides professional services (mudharib)
-
8/2/2019 Workshop Sc3
4/33
Definition of Mudharabah
Profit will be shared between Raab Al Maaland Mudharib at a pre agreed ratio.
-
8/2/2019 Workshop Sc3
5/33
Definition of Mudharabah
Loss if any will be treated as follows;
1. Raab Al Maal will bear capital loss.
2. Mudharib will bear labor related loss(staff salary, use of computer system,use of office furnitures and premises andetc).
-
8/2/2019 Workshop Sc3
6/33
Banking Products Using Mudharabah
1. Mudharabah Term Deposit
2. Mudharabah Interbank Deposit andPlacement
3. Mudharabah Corporate Deposit and
Placement4. Mudharabah Savings
5. Mudharabah Financing?
-
8/2/2019 Workshop Sc3
7/33
Mudharabah Term Deposit
-
8/2/2019 Workshop Sc3
8/33
Mudharabah Deposit Modus Operandi
Investment activities
Profit
Financial Institution(Raab Al Maal)
2. Invest
1. Enter into Mudharabah transaction atpre-agreed profit sharing ration andtenure
Loss 3a. Profitdistribution basedon pre-agreedratio
Customer(Mudharaib)
3b. Distribution ofcapital loss toRaab Al Maal andlabor loss toMudharib
-
8/2/2019 Workshop Sc3
9/33
How profit is distributed?
Pre agreed profit Sharing ratio C:B
where C is customer and B is Bank
Portfolio yield determined
Portfolio Profit/Deposit Base = R%
Customer profit = Deposit Amount x R% x 0.C
-
8/2/2019 Workshop Sc3
10/33
Example
Customer place a RM1 million Mudharabah deposit for 12 months
Pre agreed profit Sharing ratio between customer and Bank is
55:45
Portfolio yield is 10%
Customer profit = RM1 mio x 10% x 0.55 x 12/12
= RM55,000
-
8/2/2019 Workshop Sc3
11/33
How portfolio yield is determined?
Portfolio Profit/Deposit Base = R% (R rate)
Portfolio Profit Deposit Base
1. Profit from Home Financing 1. Retail Mudharabah
2. Profit from Interbank Placement 2. Treasury Mudharabah
3. Profit from Corporate Financing4. Other Profits
-
8/2/2019 Workshop Sc3
12/33
Managing Rate of Return in Mudharabah
1. Inherent feature of Mudharabah arrangement -
profit varies and is not certain
2. Profit Equalization Reserve
3. Hibah from Bank to Customer
4. Issues in Managing Rate of Return in Mudharabah
-
8/2/2019 Workshop Sc3
13/33
Inherent feature of Mudharabah arrangement -profit varies and is not certain
1. Profit on Investment Fluctuates
2. Deposit Base Fluctuates
-
8/2/2019 Workshop Sc3
14/33
Profit Equalization Reserve (PER)
1. Stabilizes Profit from Mudharabah portfolio
2. Allocate Profit from Mudharabah portfolio to PERwhen R rate exceeds expected payout rate (CreditPER)
3. Draw Profit from Mudharabah portfolio from PERwhen R rate is below expected payout rate (DebitPER)
-
8/2/2019 Workshop Sc3
15/33
Hibah from Bank to Customer
1. PER may dry up and may not be sufficient to
support expected return
2. Bank may give Hibah to Customer to the level ofExpected Return if R rate is lower than expected.
-
8/2/2019 Workshop Sc3
16/33
Issues in Managing Rate of Return in Mudharabah
1.Amount allocated to PER is govern by certain rulesnot to exceed 15% of gross monthly income.
2.Total amount in PER must not exceed 30% of capital.3.Hibah is only 1 way Hibah from Customer to Bank
will require Customer consent.
4. Items such as Collective Impairment Provision(General Provisions) and Individual ImpairmentProvision (Specific Provisions) both Additions as wellas Releases will affect PER calculation.
5.Market pressure, including from conventional banks.
-
8/2/2019 Workshop Sc3
17/33
General Investment Deposit Account
1. Portfolio Yield Derived from Common InvestmentPool
2. Profit Sharing Ratio non-negotiable
3. Profit Sharing Ratio applies board rate
-
8/2/2019 Workshop Sc3
18/33
Special General Investment Deposit Account
1. Portfolio Yield Derived from Common InvestmentPool
2. Profit Sharing Ratio negotiable
3. Profit Sharing Ratio does not apply board rate
-
8/2/2019 Workshop Sc3
19/33
Specific Investment Deposit Account
1. Portfolio Yield Derived from Specific Investment Poolie. Home Financing Portfolio
2. Profit Sharing Ratio negotiable
3. Profit Sharing Ratio does not apply board rate
-
8/2/2019 Workshop Sc3
20/33
How portfolio yield for SIA is determined?
Portfolio Profit/SIA Deposit Base = S% (S rate)
Specific Portfolio Profit SIA Deposit Base
Only Include Specific Portfolio Only include SIA deposit
Ex: Sukuk Investments in Real Estate
-
8/2/2019 Workshop Sc3
21/33
Early Termination
1. Original feature of Mudharabah Mudharib canwithdraw fund at any time.
2. However, for term deposit since tenor arrangementhas agreed upfront, Customer will only be entitled tooriginal investment amount (principal amount).
3. Bank may grant Ehsan Profit for cases of earlytermination.
-
8/2/2019 Workshop Sc3
22/33
Treasury Products Using Mudharabah
1. Mudharabah Interbank Deposit and
Placement2. Mudharabah Corporate Deposit and
Placement
-
8/2/2019 Workshop Sc3
23/33
Features
1. Mostly on are Special General
Investment Account where;
Investment is in general pool
PSR is negotiated
-
8/2/2019 Workshop Sc3
24/33
Sample
Confirmation
-
8/2/2019 Workshop Sc3
25/33
Managing Risk in Mudharabah
Predominantly Market Risk
1. Rate of Return Risk
2. Systemic Risk
-
8/2/2019 Workshop Sc3
26/33
Managing Risk in Mudharabah
Fluctuating R Rate
-
8/2/2019 Workshop Sc3
27/33
Rate Risk and Islamic Banks
Given extensive linkage between the two
systems, when interest rates change in the
conventional systems, profit rates must change
within the Islamic banking system
This is inevitable since, the absence of
corresponding changes in Islamic bank deposit
rates, rate differentials will prevail leading to easy
arbitrage opportunity
-
8/2/2019 Workshop Sc3
28/33
Managing Risk in Mudharabah
Systemic Risk Issue in Mudharabah
Mudharabah accounts are non-principalprotected accounts
- can the industry sustain the confidence if 1institution fails to return the principal amount on
maturity of the deposit?
-
8/2/2019 Workshop Sc3
29/33
Suitability as Liquidity Management Instrument
1. R rate cannot be Guaranteed
2. R rate Fluctuates
3. Principal cannot be Guaranteed
-
8/2/2019 Workshop Sc3
30/33
Suitability as Liquidity Management Instrument
R rate cannot be GuaranteedR rate Fluctuates
- how do we mitigate?
tenure less than 1 monthdo not transact on R Rate revision date
- how to maintain a more stable R Rate?
-
8/2/2019 Workshop Sc3
31/33
Suitability as Liquidity Management Instrument
Profit cannot be Guaranteed
- how do we mitigate?
-
8/2/2019 Workshop Sc3
32/33
Interbank Mudharabah Transaction
0.00
50.00
100.00
150.00
200.00
250.00
300.00
2005 2006 2007 2008 2009
RMb
illion
-
8/2/2019 Workshop Sc3
33/33
END