FINANCIAL SECTOR TALENT ENRICHMENT PROGRAMME

ISLAMIC FINANCING FACILITIES

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ISLAMIC EQUITY FINANCING

Al-Mudharabah (Trustee Profit Sharing)

Al-Musharakah (Joint-venture Profit Sharing)

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DEFINITION: AL-MUDHARABAH is a trustee profit sharing venture between an owner of capital (e.g. bank / investor ) & an entrepreneur who provides the enterprise or expertise.
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OBJECTIVE:

To match owner of capital ( investor ) with no opportunity or expertise to carry out business with an entrepreneur who has the opportunity & skills but no capital to carry out business.
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OBJECTIVE..cont

The owner of capital ( investor ) -- surplus unit The entrepreneur -- deficit unit.

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AL-MUDHARABAH FINANCING (TRUSTEE PROFIT SHARING)

The customer acts as the Entrepreneur (Mudharib). The Bank acts as the provider of funds (sahibulmal) and contributes 100% of the capital. Both parties will combine their resources for the implementation of a certain project & agree on the proportion of profit sharing.
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AL-MUDHARABAH FINANCING

1. Bank provides capital to customer e.g. RM3 million. Both parties agree on profit sharing ratio (e.g. 60:40) i.e. 60% of gross profit to be distributed to customer 40% to bank.
2.PROJECT

3.PROFIT

LOSS

AL-MUDHARABAH FINANCING (TRUSTEE PROFIT SHARING)...Cont..

The Bank acts as the provider of capital 100% financing. The client is the entrepreneur who will manage the project. The Bank does not interfere in the management of the project but has the right to follow-up and supervise. Both parties negotiate on the ratio of profit distribution. In the event of loss, the Bank bears all losses.
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Essentials (Rukun) of Mudharabah Owner of Capital (Shahibul Mal) Entrepreneur (Al-Mudharib) Capital Project Profit Contract (Offer & Acceptance)
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AL-MUDHARABAH FINANCING (TRUSTEE PROFIT SHARING) - Cont...

Example:
Contract Value Cost of Purchase Profit Capital contribution 100% by Bank 0% by customer RM 3.5 million RM 3.0 million RM 0.5 million

RM 3.0 million RM 0 million

Profit sharing ratio 40% to the Bank - RM 200,000 60% to the customer - RM 300,000 Contract payment received within 3 months
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AL-MUDHARABAH FINANCING (TRUSTEE PROFIT SHARING) - Cont...

Example: On a per annum basis, the return: @ to Bank - 27% ( 200k / 3m*100*4 )

@ to customer - 34% ( 300k / 3.5m*100*4 ) Should there be a loss, the Bank will bear all the loss .

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Necessary Conditions (Hukum) of Mudharabah 1. The Mudharabah capital must be in the form of money. 2. The profit-sharing ratio shall be determined at the point of Akad (execution of contract) 3. The owner of capital contributes capital and the entrepreneur the expertise. Therefore it is not valid to set as condition that the owner of capital must also do the work.
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Necessary Conditions (Hukum) of Mudharabah 4. If the Mudharabah venture results in a loss, the owner of capital bears the loss entirely and the entrepreneur does not get anything out of the venture UNLESS the loss arises out of any of the following: a) Negligence b) Misappropriation c) Misuse of fund, in which case the loss is borne by the entrepreneur
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Necessary Conditions (Hukum) of Mudharabah 5. The Mudharabah project must be HALAL in nature according to Syarak. Eg. of Haram Project # Alcoholic Beverage # Gambling # Non Islamic Financing # Production or sale of najis # Production or sale of products or services which are haram in the first place.
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AL-MUSHARAKAH FINANCING (JOINT-VENTURE PROFIT SHARING)

A partnership where both parties combine resources, both capital & labour, to undertake a certain project.

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DEFINITION A partnership agreement between two or more individuals or bodies, each contributing capital, and profit or loss is shared between the partners according to the agreed ratios.

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Musharakah is better known as Syarikat which is described as a grouping of capital by shareholders to finance a particular project and the profit from the project is divided according to agreed ratio. If the project incur losses then the losses are borne by the shareholders according to their percentage share.
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PROJECT FINANCING CONTRACT: TRUSTEE PROFIT SHARING AL-MUSHARAKAH

The Bank and the Entrepreneur will provide the financing for the project. Both parties have the right to participate in the management of the project. Both parties will negotiate on the ratio of distribution of profit. In the event of loss, both parties will bear the loss proportionately to their share of financing.
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Essentials (Rukun) of Musharakah Shareholders or partners Capital Project Profit Contract (Offer & Acceptance)

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AL-MUSYARAKAH FINANCING

1. BANK AND CUSTOMER PROVIDE CAPITAL FOR THE PROJECT E.G. RM 6 MILLION FROM BANK & RM 4 MILLION FROM CUSTOMER. BOTH PARTIES AGREE ON PROFIT SHARING RATIO (E.G. 70:30) I.E. 70% OF GROSS PROFIT TO BE DISTRIBUTED TO CUSTOMER ; 30% TO BANK.

2.PROJECT

3.PROFIT

CAPITAL/LOSS

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AL-MUSYARAKAH FINANCING (JOINT-VENTURE PROFIT SHARING) - Cont...

Example:
Contract Value Cost of Purchase Profit Capital contribution 60% by Bank 40% by customer RM 12 million - RM 10 million RM 2 million

- RM -

6 million RM 4 million

Profit sharing ratio 30% to the Bank - RM 0.6 million 70% to the customer - RM 1.4 million Contract payment received within 3 months
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AL-MUSYARAKAH FINANCING (JOINT-VENTURE PROFIT SHARING) - Cont...

Example: On a per annum basis, the return: @ to Bank - 40% ( 0.6/6 *100*4 )

@ to customer - 47% ( 1.4/12*100*4 ) Should there be a loss, both parties will bear the loss in proportion to the capital contribution.
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Necessary Conditions (Hukum) of Musharakah 1. The Musharakah capital must comprise assets which is either money or goods that can be valued in the terms money 2. The profit-sharing ratio (which need not be the same as percentage shareholding) shall be determined at the point of Akad (execution of contract)

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Necessary Conditions (Hukum) of Musharakah

3. Each shareholder is an owner of the Syarikat and has a right to run the project on his own behalf and on behalf of other shareholders as Agent.

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Necessary Conditions (Hukum) of Musharakah 4. Loss sharing except for those caused by deceit or negligence, is according to percentage shareholding. 5. All Musharakah project must be HALAL projects.

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MAIN DIFFERENCES -- MUSHARAKAH & MUDHARABAH

Musharakah Definition Capital-Contribution -Form Profit Loss ( genuine ) Management Partnership Shared between partners Cash &/or asset Shared Shared Shared

Mudharabah Trustee profitsharing Investor only Cash only Shared Investor only Entrepreneur only

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WORKING CAPITAL FINANCING - i

Can be structured using: i- Murabahah Contract ii- Hiwalah bil Wakalah Contract

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Work Flow : Working Capital Financing i Murabahah

Start Customer Termination of The Contract Bank End Full settlement or revoked by either party

Bank appoint the customer as agent To purchase the Parts/materials

Evidenced by Purchase invoices

Mode of Payment: Customer pay the Bank As per the agreement i- Instalment ii- Lump-sum payment

Asset Purchase Agreement Bank purchase the said merchandise/Mal

Bank Sell The said mal/ merchandise To the customer

Asset Sale Agreement

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Work Flow : Working Capital Financing i Hiwalah Bil Waakalah

Start Customer Termination of The Contract Bank Bank act as agent to the customer make full settlement to the vendors/supplier Or Bank may credit into the customer account and the customer is making the said purchased settlement. End Full settlement or revoked by either party

Debt evidence by Invoices is assignment To Bank

Bank act as agent To the customer Make the bill settlement

As agent, Bank Entitled for The fee.

Customer pay the fee plus the debt (invoice value) Upon maturity

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FINANCIAL SECTOR TALENT ENRICHMENT PROGRAMME

Thank you

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