Islamic Banking Theory and Practice

DAY 3

Prof.Saiful Azhar Rosly, INCEIF

Basic Principles, Modes of Financing & Risk Management University of Luxembough & INCEIF 12th March 15th March 2012

Islamic Finance
Doing the Right Thing Doing Things Right
Peter Drucker
EQUITY,JUSTICE and FAIRNESS Deterministic ie Rule set by God Shariah Rules Philosophy Maqasid Al-Shariah

EFFICIENCY efficient use of scarce resources (ie funds) Using Reason and Facts in decision making Strategies, Planning, Process/procedures. Back, Middle, Front Office.

Islamic Finance

Shari Components
Product development and screenning activities
Value: Quran and Hadiths (Shariah) JUSTICE AND EQUITY

Tabi Components
Business models, strategies and policies Value: Reason and Experience EFFICIENCY

The Emergence of Islamic Finance

2000 onwards 1980s/1990s Islamic Banking 1960s and 1970s Islamic Economics
5

Islamic Finance

Components of Islamic Finance

Shariah

Islamic Wealth Planning

Islamic Economics

Islamic Finance
Takaful Islamic Banking Islamic Capital Market

Three Facets of Islamic Finance

As a Financial System : Set of Rules and Regulation that govern the flow of funds from the Surplus Unit to the Deficit Unit
Rule 1: Al-Ghorm bil Ghonm
no reward without risk

As a Field of Study

As a Business

Shariah (Quran,Hadiths and Fiqh)

Equity Objective Achievable by adhering to the Shariah Rules and Values

as Primary or Core Knowledge

Secondary Knowledge from Reason and Facts

Rule 2: Al-Kharaj bil Daman with profit comes responsibility

Efficiency Objective Achievable by observing the law in nature.

Islamic Finance: Development and Updates

Islamic finance industry

Evidence steady progress

1960+ -1970+
Gulf/ Middle East

1980+
Gulf/ Middle East Asia Pacific

1990+
Gulf/ Middle East Asia Pacific

2000+
Gulf/ Middle East Asia Pacific Europe/ 2001 : IIFM* 2002 LMC, IFSB, IIRA

2005+
Gulf/ Middle East Asia Pacific Europe/ Americas Global Offshore Market

1975 - IDB

1990 - AAOIFI

Bancatakaful

Liquidity & Money Markets

Structured Products Sukuk Structured Products Sukuk Fund Management Ijarah (Leasing) Equity Project Finance & Syndications Takaful Commercial banking

Product

Fund Management Ijarah (Leasing) Equity Project Finance & Syndications Takaful Commercial banking Commercial banking Project Finance & Syndications Takaful Commercial banking

Fund Management Ijarah (Leasing) Equity Project Finance & Syndications Takaful Commercial banking

Significant growth factors

Some pivotal events

- 1973 OPEC Oil Crisis

- 2001 U.S. Reaction to Sept 11

- 2006 PetroDollar

- 2006 The Subprime Crisis

IF Growth

1 0

Institutional framework
Key infrastructure of Islamic finance
Organisations

LMC, Feb, Bahrain IIFM, Nov, Bahrain IIRA, Oct, Bahrain

International Islamic Liquidity Management Corporation

IDB, Jeddah

March, Bahrain

GCIBAFI, May, Malaysia

Nov, Malaysia

IILM, Malaysia

1975
Research

1981

1990

2001

2002

2003

2006

2008

2010

March, Malaysia
IRTI, Jeddah

Education & Training

Bahrain Malaysia Oct, Malaysia March, Malaysia

1 1

Islamic finance market

From niche to mainstream
BEFORE
Muslim Population Asset Size
21% of total world population of 6.8 billion About 1.4 billion (CIA fact book ,2008) Islam the fastest growing religion 1.8 %/year Mid 1990 = USD 150 Billion (KFH, 2008) 2011 = USD 1.086 trillion

NOW
24% of total world population Estimated at about 1.7 billion

IFSB expects the Global Islamic finance asset to reach USD1.6 trillion by 2012

Growth Rate

29.7 % in 2006 (thebanker.com)

annual growth rate of > 30 % since 2000 (Bankscope & Oliver Wyman)

Market focus

Islamic countries of the MENA and South-east Asia (SEA)

Muslim-minority e.g. US, UK and Germany, France, China, Japan, Canada, South Korea

Market share

Islamic Finance represents 1% of global assets 2003 :the GCC 13%, Malaysia 9%, Indonesia 1,2 %

In 2010 estimated: the GCC 17% , Malaysia 22.6%, Indonesia 3.1%

Infrastructure Product Innovation Government & Regulation 1 2

More than 300 Islamic Financial Institutions IFIs 50 countries (S&P IF Outlook 2006) Retail financing Vanilla & simple products Reliance on domestic conventional regulatory

Over 1000 IFIs currently operating in about 75 countries worldwide

Complex products & structures

Development of International Standard Increasing support of Government & Regulators Source: Bankscope & Oliver Wayment, Kettel, etc 2010

Source: Source: Deloitte, S&P IF Outlook 2006, thebanker.com, KFH

Growth drivers of Islamic finance

Factors & opportunities
Increasing demand for Islamic Finance products by Muslims and rising affluence in Islamic nations Pricing of Islamic finance products is competitive due to high demand Portfolio diversification by fund managers

Growth of global Islamic Finance

Islamic finance products are being included in portfolios of pension funds and mutual funds

Growing acceptance of Islamic Finance by non-Muslims

2000

2002

2004

2006

2008

2010

2012

2014

2016

Conventional financial institutions want a piece of the Islamic finance industry pie More Islamic banks and IFIs needed to cater to future demand

Islamic Finance is thought to be fairer, more transparent, and have fewer penalties and hidden costs
1 3

Government & regulatory support for development & promotion of IF

Regional overview - UK, MENA, SEA GCC, Malaysia and

The heart of Islamic finance
Indonesia are the high

potential markets
for Islamic Finance

United Kingdom (UK)

UK:

Heart of Islamic Finance Interesting development The rest

Financial

Services

Authority

(FSA)

provides

regulatory

framework. The government has undertaken various initiatives such as modifying tax legislation to promote Islamic finance.

Middle East and North Africa (MENA)

Bahrain: The Central bank of Bahrain provides a regulatory framework. Kuwait: Standards of IFSB for Pillar 1, Basel II norms are mandatory Qatar: member of IFSB and AAOIFI.
Saudi : Saudi Arabian Monetary Agency acts as a regulator for all IFIs.

South East Asia (SEA)

Malaysia: All IFIs have to comply with IFSB by the end of 2010 Indonesia: 2010-Indonesia sells Rp 2,9 Mil Sukuk to Hajj fund. the government of Indonesia passed Law No 42/2009 value added tax of goods and services Brunei : Aims to become Islamic financial services hub for ASIA

UAE: All IFIs must comply with Federal Law No. 6 of 1985

Iran: Since 1979, the entire banking system is strictly Islamic

Oman: The Central Bank is preventing the establishment and expansion of IFIs Lebanon: Islamic banking is relatively new.

Singapore: Changed its banking and tax.

Singapore (MAS has put in place a regulatory framework) Thailand: There is only one fully-fledged the Islamic Bank of Thailand.

Syria: the CBS separated regulations for the creation and operation of IB.

1 4

Source : Blominvest, 2009

Regional overview - new comers

Other interested countries
LUXEMBOURG
IFSB Member Looking forward for dual financial system

CANADA
IF in Canada has grown rapidly in last 12 months. The first conference on Islamic finance in Canada was held on March 2010 which was organized by UFANA (Usury-Free Association of North America)

CHINA
Bank Ningxia spearheads Islamic finance

KENYA
The Central Bank of Kenya (CBK) is working on a framework that will lead to flotation of Sukuk in the local money market

SOUTH KOREA
Parliament expected to pass the law related to offering of tax waiver on foreign investors interest income from Sukuk

US
2008 - now allowing Islamic Banks to operate in USA

JAPAN
Law passed allowing banks to do Islamic finance 2010-Japanese institutions go for Islamic finance

RUSSIA
2008-Proposing conversion to Islamic Banks

HONGKONG
Aims to become Islamic finance gateway to China Plans to issue sovereign Sukuk

KAZAKHSTAN
Amendments & addition Legislation Act of Republic of Kazakhstan

INDIA
2009: Government issues its first Islamic banking licence; operations to commence in 2010.

FRANCE
Passed rules to support Islamic finance activities In process of licensing Islamic banks

PHILIPINA
2010- The Philippines state-owned Al Amanah Islamic Bank may sell Sukuk to finance Muslim Mindanao

GERMANY
Heart of Islamic Finance Interesting development The rest Source: Modified from Bursa Malaysia, 2010 1 5
Saxony issued first Islamic Bonds (Sukuk), 2004. First Islamic bank opened in 2010

THAILAND
Introduction of Sukuk or Islamic bonds issuance under Capital Market Development Master Plan

SRILANKA
2010-Sri Lankan informal Islamic financier should prepare for regulation

AUSTRALIA
Australia as a Financial Centre, an industry led review document has Islamic finance as key agenda

Market potential
At which stage is each country?
Market depth Business motivation Market motivation Competitor matching Explore market potential Minimum presence Monitor development Wait and see Explore market potential
Source: Dr. Volker Nienhaus

Malaysia, UAE, Bahrain, Saudi Arabia, Kuwait, Qatar Turkey, UK, Pakistan, Brunei Advanced Islamic Luxembourg, Hong Kong, Egypt, Singapore
finance markets

Potential Islamic finance markets

South Korea, US, Canada, Australia, Germany

Emerging Islamic finance markets

Sporadic development

Market development activities

Market expansion activities

Market reach

1 6

Infrastructures & supporting institutions

Towards global regulatory framework & standardisation

AAOIFI
To spread & conduct applied research in IF

Accounting & auditing standard Governance regulatory standard

ISRA

IFSB

To promote research & training

Regulators
IRTI IIFM

To create environment for Islamic secondary market

Rating IFI and Islamic finance instrument

Abbreviations : - IFI = Islamic financial Institution - Regulator = Central Bank, Monetary authorities, Securities commission

IFI
IIRA
New

GCIBAFI

To enhance market understanding of Islamic finance

1.AAOIFI = Accounting & Auditing Organization for Islamic financial Institutions 2.IFSB = Islamic Financial Standard Boards 3.IIFM = International Islamic Financial Market 4.GCIBF = General council for Islamic Banks and Financial Institutions 5.LMC = Liquidity management Centre 6.IILM = International Islamic Liquidity Management Corporation 7.IIRA = International Islamic Rating Agency 8.IRTI = Islamic Research & Training Institute 9.ISRA = Islamic Scholar Research Academy for IFI

IILM

LMC

To Develop and implement short term liquidity management solutions

Market maker for Islamic secondary market instrument (crosses government business lines)

1 7

Islamic financial service industry

Industry structure
Financing Islamic Banking Deposits and Investment Islamic Securities/Sukuk

Indirect

direct
Equity

Islamic Financial Services

Islamic Capital Market

Funds & Unit Trust REITs

Islamic Venture Capital/

Private Equity, Derivatives Takaful Takaful Re-takaful
Source : modified from Islamic Capital Market LexisNexis, 2009

Indirect

1 8

Global asset of Islamic finance

The fastest growing financial industry
Islamic assets have expanded at a CAGR of 14.1% from USD150bln in the mid-1990s to around USD1.0tln in 2010. Based on the CAGR, the global Islamic finance assets are expected to reach USD2tln by 2015.
2500 2000
CAGR 14.1%

Total global Islamic finance assets USDbln (1990s - 2015F)

1933.9

During crisis, showed its resilience during the global financial crisis period 1500 Post crisis, apart from Muslim majority countries, Islamic finance is making headways into new jurisdictions As at end-2010, Islamic banking represented 83% of the Islamic finance assets followed by Sukuk (12%), Islamic funds (4%) and Takaful 1%.
1000 500 0 380 150 500

639

822

1000

1141

1990s 2006 2007 2008 2009 2010 2011F 2015F

The global Islamic finance industry 2010

No. of players 628 Islamic banking, 83% 200 300 400 500 600 700

Breakdown of Islamic finance assets 2010

No. of countries 0

48 100

Sukuk, 12% Islamic funds, 4% Takaful, 1% 19

Source: The Banker, PricewaterhouseCoopers, MIFC

Islamic banking
Reaching broader market
Reach non-Muslim countries Increasing awareness of customers Growing demand for Shariahcompliant product

Excess liquidity but limited tool

Increasing number of players

Product development

Government & regulation support

Institutional development

Global acceptance & Flexibility in Islamic finance system

20

Islamic banking (cont)

Asset & market share
Share of global Islamic banking asset (2011)
Kuwait, 7.33% UAE, 8.66% Malaysia, 12.28% Bahrain , 6% Qatar, 4.82% UK, 1.75% Turkey, 2.58%

Islamic banking asset by country (2009)

Others, 6.98%
Saudi Arabia, 13.89% Iran, 35.71%

Source : The Banker. Top 500 Islamic Financial Institutions 2011

Islamic banks market shares are currently : 12.28% in Malaysia 40.03% in the GCC. 35.71 % in Iran (the largest market share)
Source : KFH, GIFF Report, 2010

21

Islamic banking (cont)

Asset growth & revenues
There is a growing customer demand for stand alone Islamic banking over Islamic windows set up by conventional player
Billion USD

Islamic Banking Asset

Stand alone Islamic Windows 20 %

Billion USD

Islamic Banking Revenues

Stand alone Islamic Windows
26 % CAGR 49%

700 600 CAGR 500 36 %

60 50 40

400 30 300 20 200 100 0 2003 2004 2005 2006 2007

10
0 2003 2004 2005 2006 2007

Source : S & Poor, Islamic Finance Outlook, 2010 Bankscope & Oliver Waymen Analysis

Source : S & Poor, Islamic Finance Outlook, 2010 Bankscope & Oliver Waymen Analysis

22

Current regulatory environments

Some evidences
Muslim & Non-Muslim

Shariah Matters

Product Developed

Current Regulatory Environment

Liquidity Issues Current Business model

Regulation & Standard

23

Muslim & non-Muslim countries

More global acceptance
There is no significant correlation between Muslim population and Islamic Finance players .
Muslim Population, Islamic Assets, Revenues and Profit Pool Breakdown by Region, 2007
No. of Islamic Finance Players

1% 17% 11% 61% 10%

Africa Asia America Europe Oceania

Source: CIA World Factbook

Muslim Population by Continent 0% 3% 0% 28%

Africa

Asia
America Europe Source: IFSB, IRTI , April 2010

69%

Oceania

Source: Institute of Islamic Banking and Assurance

24

Muslim & non-Muslim countries

Muslim population increased steadily over time
The presented data show that the percentage of the World Muslim population with respect to the total World population has increased steadily from 15% in 1870, to 17% in 1950 to 26% by 2020, to 34% by 2070. (Houssain Kettani, June 2010. http://www.pupr.edu/hkettani/papers/WMP.pdf )

North America : 3,9 Million

Europe : 115, 5 Million

Asia : 962,9 Million

South America : 0,9 Million

Africa : 426,9 , 5 Million

Oceania : 0,4 Million

Source : http://en.wikipedia.org/wiki/List_of_countries_by_Muslim_population

Source: Institute of Islamic Banking and Assurance

25

Muslim & non-Muslim countries

Increasing Muslim economic power
The New Muslim Consumer Emerging halal food market
With mass, comes spending power. Globally, the halal food market is pegged at $560bn, with Islamic finance worth a hefty $400bn and growing at 15 percent a year.

34% by 2070 worlds population will be Muslim.

The New Muslim Consumer is fundamentally different because of a strong reliance on faith and the ethical values of Islam.

Significantly, 52 per cent of the Muslim community are under 24 years old

Americas eight million Muslims spend a reported $170bn annually while, across the Atlantic, those in the UK fork out $31.5bn. In France, the halal food market alone is worth $7.1bn a year.

Modern Muslims are undergoing a major reassessment of their relationships with religious structures, cultural assumptions, authority, consumption and technology.

Young Muslims are already starting to stamp their influence on the consumption habits of the wider global Muslim community.

Supermarkets such as Carrefour, Tesco and Asda have all been certified halal in the last three years.

*Source: Ecopnomist Intellingence Unit

Source: http://www.arabianbusiness.com/596759#continueArticle

26

Muslim & non-Muslim countries

Where is the Muslim purchasing power?
Largest Muslim Population
Indonesia Pakistan India Bangladesh Turkey Egypt Iran Nigeria China Ethiopia Algeria Morocco Sudan Afghanistan

Largest Muslim% of total Population

Bahrain Kuwait Saudi Arabia Algeria Iran Oman Turkey Yemen Tunisia Iraq Libya Pakistan UAE Qatar

Highest Purchasing Power of Muslim Population*

Saudi Arabia Turkey Iran Malaysia Qatar Russia France Libya UAE United States Algeria Singapore Indonesia Egypt

Iraq

Egypt

The Netherlands

*Source: Ecopnomist Intellingence Unit Calculated in purchasing power parity terms, which equalises the purchasing power of different currencies in their home currency.

27

Current regulations & standards

The roles & responsibilities
The Roles of International Regulatory Framework
AAOIFI
Developing internationally-compatible Islamic accounting standards Differentiation from conventional financial system

IFSB
New

Enhances the soundness and stability of the Islamic finance industry Issuing global standards and GP for the industry, including capital markets

IILM

Develop and implement short term liquidity management solutions (provide instant access and daily liquidity) Programs, procedures, membership advantages To rate, evaluate and provide independent assessment and opinions To asses the shariah compliance aspects of IFIs To facilitate the pooling of asset acquired from governments To introduce a set of rating products and services and transparency Standardizing Islamic products, documentations and related processes unifying ICM and Islamic Money Market segment of IFSI IFSB complements BCBS, IOSC and IAIS To facilitate the creation of an Islamic interbank monetary market To facilitate the pooling of asset acquired from governments To provide competitive return on short term Liquidity investment opportunities for IFIs by creating secondary market. 28

IIRA

IIFM

LMC

Islamic Banking: Theory and Principles

Islamic Banking, Shariah Board & Pillars of Contract law in Islam

Shariah Advisory Board

Buyers and Seller

Subject Matter Price
Free from
RIBA UNCERTAINTIES GAMBLING INTOXICANTS IMPURE COMMODITIES

Contracts
Valid & Permissible
1. Business as act of Worship Protecting rights of counterparties in the court of law

Offer and Acceptance

2.

Allah has allowed Al-Bay (trading) but prohibits Riba

(Al-Baqarah 275)

AL-BAY (TRADE) (profit derived from non-lending business) BUSINESS RISK

RIBA (INTEREST) (profit derived from loans) CREDIT RISK

31

Allah has allowed Trading (al-bay) but prohibits Riba (2:275)

Trading Entity Trade and Commerce

Types of Business (Business risk)

Capital (business risk)

Murabaha (sale with mark-up)

Mudaraba Partnership Salam & Istisna Fee-based - Wakala Musharaka (Partnership) Ijara (leasing)

Rules of Trading
Principles of Trading

Al-ghorm bil ghonm

Al-Kharaj bil daman

Risk:
Identitification With Profits comes Risks Measurement Assessment Control Profit is accompanied with responsibility (warranty agreement)

TRADE IN EARLY ISLAM Partnership Capital + Type of Business operations

CAPITAL
PARTNERSHIP Mudaraba (Prophet Muhammad saw and Saidatina Khadija) BUSINESS RISK

Trading

(AL-BAY)
OPERATION
Cash sale CARAVAN TRADING BUSINESS RISK CASH FINANCIAL RISK - Credit

TRADE IN EARLY ISLAM: LOAN CAPITAL + TYPE OF BUSINESS OPERATION

CAPITAL
Riba Loans

Credit risk

Trading

(AL-BAY)
Cash sale CARAVAN TRADING BUSINESS RISK CASH FINANCIAL RISK Credit

Al-BAY
Capital (Financing of Business)

Al-BAY
Income Generating Vehicle
36

Allah has allowed Trading (al-bay) but prohibits Riba (2:275)

Conventional Banking

Interest-bearing Loans (Credit risk)

Interest-bearing Deposits

Capital (business risk)

Retail

Enterprise/Corporate

Transaction deposits Fixed Depossits

Equity Debt

Allah has allowed Trading (al-bay) but prohibits Riba (2:275)

Islamic Banking

Deposits

Financing based on Trading principles

Based on trading principles

Capital (business risk)

Retail

Enterprise/Corporate

Transaction deposits Investment deposits

Equity

Islamic Banking Modes

CREDIT-BASED
BBA/Murabaha, Ijarah

salam, istisna

Asset-Based

Salam & Istisna

PARTNERSHIP Mudaraba

musharaka
Islamic Banking

Trade finance

Fee-Based

Private BankingWealth Planning

Investment Banking
SUKUK arranging

Intermediation function of Conventional banking: Bank as a borrower and lender and carry financial risks

Deficit Sector

Bank as financial Intermediary

Surplus Sector

40

A Bank as a Financial Intermediary

Make loans to customers Borrows from depositors

Holds capital

41

Conventional Banks: Market for deposits and loans based on interest rates.

Market for Deposits

Demand for Deposits Supply of Deposits

Market for Loans

Demand for Loans Supply of Loans

42

Asset
The Banking Business

Liability

Loans $200m@10%

Deposits $200m@ 5%

profit = (iL x L) (iD x D) = (0.1 x 200m) (0.05 x $200m) = $20m - $10m = $10 million

Capital

Market for Financing r

iL

Market for Deposit r Sd

SL

10%

id 5% DL L1 $200m Loans D1 $200m Dd Deposit

43

Profit versus Financial Stability

More bank profits: Bank take risky and aggressive and irresponsible positions to maximize profits Credit defaults and bank closures: Financial

Instability

44

Islamic Banking Infrastructures: Regulatory, Fiscal and Legal Challenges

Bank Regulation: The 3 Pillars of Basel II

The new Basel Accord is comprised of three pillars

Pillar I
Minimum Capital Requirements

Pillar II
Supervisory Review Process

Pillar III
Market Discipline

Establishes minimum standards for management of capital on a more risk sensitive basis: Credit Risk Operational Risk Market Risk

Increases the responsibilities and levels of discretion for supervisory reviews and controls covering: Evaluate Banks Capital Adequacy Strategies Certify Internal Models Level of capital charge Proactive monitoring of capital levels and ensuring remedial action

Bank will be required to increase their information disclosure, especially on the measurement of credit and operational risks. Expands the content and improves the transparency of financial disclosures to the market.

46

The Banking Business

Risk-Weight Assets - to reflect risk-profile of business units Capital Adequacy ratio = 8% To absorb potential losses

Bank Capital

47

Business of Leveraging CAR = 8%. CAR = Capital/ RWA; 0.08 = $100m/RWA RWA = $1250m

Financing $1250m

Deposits $1250m Capital = $100m

(for every $1 financing, it is supported with 8 cents of banks capital)

(Bank can raise up to $1.25billion of deposits from its $100m capital)

48

Risk-taking and Capital Allocation

Financing weights Risk

$100m

50%

Capital

CAR = K/RWA 0.08 = K/ ($100 x .5) K = $4m

(to make $100m loan at 50% RW, the bank needs to hold $4m)

49

Risk-taking and Capital Allocation

Financing weights Risk

$100m

150%

Capital

CAR = K/RWA 0.08 = K/ ($100 x 1.5) K = $12m

(to make $100m loan without collateral at 150% RW, the bank needs to hold $12m)

50

Risky Financing and Capital Stress

Higher Riskweights

Risky positions

Higher capital

51

Conventional risk-weights
Financing Loans with collateral Personal loan Government bonds Corporate bonds Equities Risk-weights 50% 100% 50% 80% 150%

52

Risk-weights: Islamic products

Financing Murabaha with collateral AITAB (financial lease with collateral) Government Sukuk Corporate sukuks Equities Istisna Bona fide Murabaha Risk-weights 50% 50% 50% 80% 150% 150% 150% 150%

53

Conventional Banking Balance Sheet

Asset Cash Liability Current Account

Home Loans
HP Car loans

Savings Account
Fixed deposits

Personal Loans
Government Securities Corporate Bonds Fixed Assets

NICD

Shareholders Capital

54

Conventional banking P & L

Profit and Loss Revenues Cost of Funds Gross Profit Overheads Provisions for NPL Profit Before Tax Tax Net Profit $500m $200m $300m $80m $10m $5m $200m $60m $140m

55

1. High NPL
2. Low revenues 3. High cost of deposits Negative Earnings Capital Erosion Bank Insolvent

56

1. Low NPL
2. High revenues 3. Low cost of deposits Positive Earnings Capital Accumulation Healthy & Stable Banking

57

Aggressive
High yielding Loans without collateral Safe Low yielding loans with control repayment Irressponsible Loans to nonviable customer

subprime loans

Bank Business Model?

58

Islamic Banking

Holds Capital

Takes Deposits

Extend Financing

Brand Manual

59

Islamic banking: Bank as mudarib/agent and depositors as investors: as a mudarib, the bank manages deposit funds.

Deficit Sector

Bank as financial Intermediary

Surplus Sector

60

Islamic banks as financial intermediaries

Deposit Market Financing Market

Based on Trading contracts Not based on lending and borrowing contracts

Based on Trading contracts Not based on lending and borrowing contracts

61

NON-BANKING BUSSINESS FIRM

ASSET OPERATIONS $100m LIABILITY CAPITAL $100m

CONVENTIONAL & ISLAMIC BANKING FIRMS Using Deposit Funds in Financing Operations
ASSET OPERATIONS $1250m LIABILITY DEPOSITS $1250m

CAPITAL $100m CAR = 8% = K/ (F x RW)

Islamic Banking

Takes Deposit

Purchases Assets

Holds Assets

Capital Allocation Problem

Financing options: A. Murabaha $400m with RW = 80%; expected return = 6% How much capital should be allocated to support the murabaha facilty? Answer:

B. Ijara $400m with RW = 150%; expected return = 10% How much capital should be allocated to support the Ijara facilty? Answer:

C. Musharaka $400m with RW = 200%; expected return = 15% How much capital should be allocated to support the Musharaka facility? Answer:
Brand Manual 65

Credit-based Modes of Finance

Salam Ijara (Operating Leasing) (Advance bullet payment sale by order)

Istisna BBA (credit sale)

Modes of Finance

(Advance installment payment sale by order)

Islamic banking operations within conventional infrastructure

DEPOSIT PRODUCTS
CASA Investment deposits Commodity murabaha deposits

FINANCING PRODUCTS
Islamic Banking
Mortgage Hire-Purchase Personal Financing Enterprise Financing

Shariah framework

Regulatory framework

Legal framework

Fiscal framework

Halal & Haram Contract

Basel II & III IFSB Prudential regulation

Legal documentation of contracts & litigations

Tax implication of contracts

Financing Products: Asset-Based Credit Financing(ABCF) Infrastructural issues.

Asset-Based Credit Financing

AssetFinancing

BBA/Murabaha

TermFinancing for Business

Personal Financing

Al-Bai-Bithaman Ajil/Murabaha
Vendor Sells X For $100 Trader sells X On credit terms for $120

VENDOR

TRADER

CUSTOMER

Trader pays Cash $100

Customer pays by installments

Plain BBA
Customer Customer pays Bank on deferred payment basis.

Bank Sells asset To Customer

Developer

Transfer ownership $

Bank

Bank buys directly from Developer on cash basis

71

BBA as applied in Banks

Bank
Bank pays Customer cash Customer pays by installment

3
Bank Sells Asset to Customer S&P

PSA

PPA
2
Customer Sells asset To bank

Developer

1
Customer Pays down payment

Customer

72

BBA Property Financing

Price of Property = $400,000 Down-Payment = $80,000 (20%) Bank Financing = $320,000 Profit rate = r =6% Tenure = n = 20 years Profit margin = BF x r x n = $320,000 x 0.06 x 20 Selling price = BF + (BF x r x n) = $320,000 + $384,000 = $704,000. Monthly payment = {BF + (BF x r x n)} /120 = $5,866.

73

Al-Bai-bithaman Ajil Financing

Structure
1. Risk 2. Pricing Fixed and floating rate asset 3. Amortization allocation of profit and capital

Documentation
1. Sale and Buyback PPA : Property Purchase Agreement PSA: Property sale Agreement 1. Charge agreement

Governing Laws
1. Litigation
74

BBA Based on Novation Agreement

Downside: 1.Developer will find it risky dealing with Bank as Buyer. Failure to deliver on prescribed time has severe legal implications since the developer is dealing now with a bank and not an individual customer.

Customer

2. Bank feels uneasy since there is no binding comittement of Customer to purchase the property. A promise (waad) may not be enough to guarantee a sale.

Customer promises to buy property from Bank.

Developer

Bank

Developer to deliver asset to Bank as if the Bank = Customer

Bank buys Asset on Behalf of Customer

ISLAMIC FINANCING Bay al-enah

(1) Bank Sells asset $10,000 + profit margin = $12,000

Bank

(2) Customer pays by Equal instalment over 5 Years = $12,000/60 = $200

Customer

(3) Customer sells asset To Bank for $10,000

COF = RM10,000Profit rate per al (4) Bank pays cash $10,000

To Customer

76

Vehicle Financing

Leasing

Operational Leasing

Financing Leasing

Leasing without intention to own

Not a loan

Leasing with intention to own

Term Loan HP Act 1967

Ijarah Thumma Al-Bay (AITAB) Leasing

Bank holds beneficial ownership Customer holds legal ownership

Sale
At maturity Price 1. Last installment payment 2. Nominal value $1

79

AITAB
Cost of Car = $40,000 Term charges = 7% per annum (flat) Tenure = 5 years Total charges = 0.07 x $40,000 x 5 = $14,000 Total rental to be collected over tenure = $40,000 + $14,000 = $54,000 Monthly rental = $54,000/60 =$900 Documentation: 1. Master Ijarah agreement 2. Charge agreement
80

Murabaha/BBA Financing
Murabaha/BBA Selling Price $150,000

Profit Margin Cost Price $100,000 Profit rate x $Facility x tenor 10% x $100,000 x 5 years = $50,000
81

Seller holds ownership risk Seller must own asset

Islamic allows the charging of higher price from credit sale

Holds only for Sale contract

Credit Based Asset Financing: Time Value in Price vs Time value of Money

Price of Sale with Deferred Payment: Time Value in Price

Price will possibly rise due to its deferred payment (Badai as-Sonai, Al-Kasani, 5/187) The deferment for some period of time has a value in the price (Bidayatul Mujtahid, Ibn Rush Al-Hafid, 2/108)

Five which is paid in cash is equal to six which is paid on deferred (Al-Wajiz,
(Abu Hamid Al-Ghazali, 1/85). The period is part of the price (Fatawa Ibn Taimiya, 29/499)

This is the evidence that the period of time in sale and purchase has its portion in the price; and it is permissible for sale and purchase contracts (Al-Mughni,
Ibn-Qudamah, 6/385)

84

Profit from delayed payments

Murabaha
Profit derived from delayed payment Money exchange for Asset

Interestbearing Loan
Profit derived from delayed payment Money exchange for money

85

Profits from delayed payments

Opportunity costs?

Default risk?

Profits from Delayed Payments

Inflation risk?

Others?

86

Conditions on the permissibility of profits from delayed payments

Price determination based consent (negotiation) Bank must hold ownership of asset Bank exposure to inventory risk

Profit from delayed payments

87

TRUE SALE - BUSSINESS OPERATION RISKS FACED BY THE TRADER/MERCHANT/Islamic Bank

Risk

Business Risk AL-BAY

Financial Risk

Holding of Assets

Asset Value changes based on price movement

Credit risk Market risk

Arises from credit BBA/murabaha

Trading Models for Islamic Banks

Trading Model I

Buy Sell

Trading Sell Model II

Buy Financing

Trading Model II

Financing

89

Trading (Al-Bay) Models in Islamic Banking

Trading Model III (GENERAL CASE EXISTING PRACTICES) Buys at $15 (Market Price) Sells at $20 credit Profit = $5 Credit risk Interest rate risk

Trading Model 1 (NON-BANKING) Buys at $10 Sells at Retail $15 cash Profit = $5 Business risk

Trading Model II (SPECIAL CASE) Buys at $10 cash (discount price) Sells at Retail $15 cash Sells at $20 credit Profit = $5 + $5 = $10 Business risk Credit risk Interest rate risk

90

Cash Sale and Sale by deferred payments

CASH SALE

DEFERRED SALE

1/6/09 Wholesale Price = $20

5/6/09 Retail Price = $25

5/6/10 Deferred price $30

Profit = $5 = risk + effort + liability

Profit = $5

91

Islamic Banking Models

Islamic Banking

True Sale (Rare)

Non
True Sale (General Case) ENAH Murabaha

Additional cost

AITAB SUKUK

No additional cost

AL-BAY within a BANKING FRAMEWORK: ADDITIONAL COST

HIGHER CAPITAL CHARGE

(AL-BAY) True Sale

OWNERSHIP RISK

TAX BURDEN

BUSINESS RISK EXPOSURE

CAPITAL CHARGE: Islamic Banking under Basel II

Asset Financing $1250m Liability Deposits $1250m

Capital $100m CAR = 8% CAR = C / RWA RWA = F x RW RW = PD x EAGD x LGD x N

Risks in Islamic Financing: Trading

Trading

Murabaha Buy (own ) and Sell on credit

Leasing Buy (own ) and lease

Business risk

Credit risk Market risk

Business risk

Islamic Banking under Basel II/IFSB

Islamic Products Murabaha without title Murabaha with title Ijara Financing lease Ijara Operating lease Musharakah Salam Istisna Tawaruq Risk-weights 50% 150% 50% 100% 150% 100% - 150% 100%- 150% 100%

96

Capital Requirement
True Sale $200m RW = 150% CAR = C/RWA C = 0.08 x $200m x 1.5 C = $24m MORE STRESS ON CAPITAL Loan $200m RW = 80% CAR = C/RWA 0.08 x $200m x 0.8 C = $12.8m

Capital Requirement
True Sale $200m RW = 150% CAR = C/RWA C = 0.08 x $200m x 1.5 C = $24m MORE STRESS ON CAPITAL Non-True Sale (Enah) $200m RW = 80% CAR = C/RWA 0.08 x $200m x 0.8 C = $12.8m

Stamp duty: Fiscal liabilities/Tax implication

Stamp duty tax is one of the important property taxes applicable within the country. For comparison, the stamp duties in Malaysia within the year 2007 and 2008 are given below.
Price Stamp RM250, 000 RM150, 000 RM350, 000 Stamp Duty in 2007 RM4, 500 RM2, 000 RM6, 000 Stamp Duty in 2008 RM2, 250 (-50%) RM1, 000 (-50%) RM6, 000 (unchanged)

Based on the current rate of 1% for first RM100,000 and 2% for RM100,001 to RM1,000,000) This situation is prompting property developers to provide more properties at below the price of RM250,000 in order to entice buyers. However, new home buyers face two main Stamp Duties: for title transfer and the bank loan facility agreement.

1. Higher Capital Charges

True Sale 2. New tax burden 3. Carries new risk business risk

Impact on: 1. Pricing of Islamic instruments 2. Return on Equity

OnBalance Sheet

Exposure to business risk

Ownership of Asset

Higher Capital Charge

Tax on asset purchase

Banking Infrastructure

True Sale

Non-bona fide sale

Shariah Framewrok

Bank purchases Asset from Vendor as cash price (lower price) Bank sells asset to Customer at credit price (higher price)

Bank purchases asset from Customer at lower price and sells it back at higher price.

Regulatory Framework I

Higher Risk-Weights

Risk-weight equal to risk-weight of loans

Regulatory Framework II

Islamic bank to hold additional capital

Islamic bank holds same amount of capital

Legal Framework I

Pay Stamp-Duties

No Stamp-duties

Legal Framework II

No tax neutrality

Tax neutrality

Legal Framework III

Civil Court determines sale character based on legal documentation drawn by solicitor Title transfer

Civil Court determines sale character based on legal documentation drawn by solicitor no title transfer

Illustration 4: Cost of True Sale Asset financing

1.Cost capital charges Capital charge at 150% risk-weight

1.Cost of ownership risk/inventory risk Transfer of title from Bank to Customer Sale of Goods Act 1957

1.Cost of tax burden Stamp duties on sale and purchase agreement paid by Bank.

103

Table 4: Islamic Banking in Malaysia: Composition of Financing as of January 2011 Source: BNM Monthly Bulletin January 2011.

Products Al-Bai-Bithaman Ajil (BBA) Ijara Ijara Thumma Al-Bai (AITAB)

RM Million 54,662.2 3,999.5 43,992.2

Share (%) 33.6 2.4 27.1

Murabaha Musharaka Mudaraba Istisna Others Total

23,734.3 4,104.4 273.9 1,613.5 29,845.4 162,225.40

14.6 2.5 0.16 0.9 18.3 100

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Components of Profits in Islamic Financing

1. Risking his Capital

2. Putting work and effort

Trader deserves to earn profit

3. Warranty

4. Delayed Payments

106

Traditional Murabaha

Cash murabaha (General Case) $25 (retail) - $20 (wholesale) = $5

Credit Murabaha (Special Case) $30 (credit) $25(retail) = $5

107

Profit from BBA

BBA profit = Profit A + Profit B Profit A = Due to the risking of capital + effort (ie equity premium): $25-$20 = $5 Profit B = Due to delay which can lead to default of debt (ie credit premium): $30 - $25 = $5
108

Profit from Cash sale Profit from Trading Profit from Credit sale

Buy wholesale

Sell retail
Buy retail Sell on credit

Table 1: Murabaha transactions in early Islam and modern Islamic banking

Islamic Transaction Early Islam Buys wholesale and sells retail cash at a profit

Profit Profit from business risk-taking. eg.Inventory risk.

Principles Al-Ghorm bil ghonm Al-Kharaj bil Daman

Current practices Not common in Islamic banks.

Modern Islamic Banks

Buys retail and sells on credit terms at a profit

Profit from financial risk-taking. eg.Credit risk, market risk.

Uncertain

Widespread application in Islamic banking. Provisionin g for impairment financing

110

Banking Murabaha

Buys retail and sells on credit

Enah Murabaha 1.RW 80% Does not carry tax/stamp-duties Main risk: Credit risk

True Sale Murabaha RW 150% Carries tax Main risks: Business + credit risk

111

Profit from cash price

Profit from delayed payment

Cost price = $10

Retail price = $15

Retail price = $15

Credit price = $20

Profit from Deferred Sale $10

112

113

Enah BBA Sale: Benchmarking of profit rate against interest rate is consistent.

Loans RW = 80% S & P between Customer and Vendor - bank does not pay stamp duties Charge agreement Credit risk

Enah BBA RW = 80% S & P between Customer and Vendor - bank does not pay stamp duties Charge agreement Credit risk

114

Murabaha/BBA Financing (Bay Enah)

Profit Rate Cost of Deposit Statutory profit margin Risk/Default Premium

Overhead

115

Pricing of Enah BBA and True Sale BBA

Enah BBA Cost of Deposit = 3% Lower overhead cost = 1% Credit risk premium =2% Profit rate = 6% True Sale
Cost of Deposit = 3% Higher overhead cost = 1.5% Business risk premium = 2% Credit risk premium = 2% Profit rate = 8.5%

116

True Sale BBA : Trading and Financing Positions

Uses Deposit Fund which requires capital cushioning Title moves from Seller to Buyer (ie bank)

Bank Buys From Vendor

Bank Holds

On-Balance Sheet Capital Charge RW 150 % Tax Liabilities stamp duties Capital charges Risky position - Business risk

at profit at loss Risky position - Business risk Bank faces credit risk Bank Sells to customer on credit Ownership title moves from Bank to Customer at maturity.

117

True Murabaha/BBA Financing Bona fide Sale

Profit Rate

Cost of Deposit

Overhead2

Statutory profit margin

Business risk premium Bank holds asset on-balance sheet

Risk/Default Premium

Tax on asset purchases

118

Contractual Financing Rate

Profit from loans Interest rate = COD + OVH + credit risk premium Profit from Non-true sale = COD + OVH + credit risk premium

Enah products behave like loan products

Profit from true sale = COD + HIGHER OVERHEAD + BUSINESS RISK PREMIUM + CREDIT RISK PREMIUM

Enah sale

Lower cost of doing business

Will trigger Shariah compliance risk

CONCLUSION 1

Cost of doing Islamic banking without true sale (enah sale) is the same as cost of doing conventional banking business.
CONCLUSION 2

Cost of doing Islamic banking with true sale (enah sale) is higher than cost of doing Islamic banking business under the enah regime.
CONCLUSION 3

While the cost of doing Islamic banking business under the enah regime is lower than that under a true sale regime, the former invites Shariah Compliance Risk (SCR) while the latter not.

True sale

Higher cost of doing business

Will not trigger Shariah compliance risk

Shariah Risk in Islamic Banking

Islamic Banking

True Sale
(Rare)

Non
True Sale (General Case)

None

Shariah Complaince Risk

Mayban Finance vs Taman Ihsan Jaya

Affin bank vs Zulkifli BIMB vs Tinta Press etc

Whats Next
To lower cost of doing business in true sale banking system

Using Profit-Sharing Investment Account (PSIA) with riskabsorbent factor

Bank bulk buying & sells asset at lower prices

Customer seeks assistance from bank and not supplier

Islamic Term & Personal Financing

Tawaruq Financing: Term and Personal Financing 1) Sells X (OIL PALM) at credit price = $5000; n = 2 years
Bank Client

2) deferred Payments = $5000/24 months

Sells X Cash $4200

Pays cash $4200

Buyer

ACCEPTABLE IN MOST ARAB ISLAMIC BANKS

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Islamic Project Financing

PROJECT OR CONTRACT FINANCING

TRADE FINANCE
Raw Materials Wakalah LC

PARTNERSHIP

DD and Business Valuation

Working Capital BBA Overdraft

SHARE OWNERSHIP

Murabaha Trust Receipt

RISK-SHARING

Project Finance Musharakah

Shariah Issues
Type of Musharakah IBA 1983 Assessment of Capital/Asset contribution Assessment of Labor/human capital/management contribution Determination of profit-sharing ratio Determination of loss distribution Determination of share ownership Instruments ordinary shares, preference shares, loan stocks Profit-reserves Collateral & security Exit mechanism Documentation

Commercial Issues
Investment Policy Funding GIA,PSIA or banks capital Capital Adequacy, risk-weights & Capital Charges GIA Business/Investment Valuation Risks, Monitoring & Control Financial reporting/accounting Banking solutions Types of customers Limits BNM Supervisory Review

Physical capital contribution: $500,000: $330,000 Loss distribution: 60:40 Total capital (physical + human) contribution: PSR?

Agrobank Money capital: $500,000 TOTAL = $500,000

Client Land 4 acres - $300,000 Shelter 1 -$10,000 Machineries 1 lorry $20,000 Human capital - ? TOTAL = $330,000

MUSHARAKA FINANCING
INSTRUMENTS Ordinary shares Clients dilution of ownership and more control by Islamic Bank Preference shares no dilution but fixed income Loan-stock Qard + shares PROFIT RESERVES Projects Expected profit = 40% Actual profit = 60% 20% placed as reserves Reserves as a security during loss period.

COLLATERAL May not need collateral Valuation based on contracts, cash flows, good track record. Collateral to recover from loss due to moral hazards. EXIT MECHANISM To sell off shares 1. Profitability 2. Loss

MUSHARAKA DOCUMENTATION
Recitals Definitions Interpretations Contract Disbursement of facility Indemnity Waad, covenants, undertaking. Loss and termination Etc.

The Islamic Deposit Market

Basel III Back to Basics

Takes Deposit

Originates

Holds

Funding needs Back to Basics

CORE FUNDING Deposits (Financing/Deposit) Ratio

Funding
NON-CORE FUNDING Interbank Market

Subprime Crises, Northern Rock etc

CORE FUNDING Deposits (Financing/Deposit) Ratio

Funding
NON-CORE FUNDING Interbank Market

Islamic Deposits
ProfitSharing/Mudarabah Investment Account (PSIA) Transaction Deposits (Safe-Custody with Guarantee)
Wadiah Dhamanah Current Account

Money Market Deposits

General

Specific

Wadiah Dhamanah
Savings Account

Commodity Murabaha

Negotiable Islamic Certificates of Deposits

137

Funding Deposits Interbank money market 4% per annum Bank Negara Funds 5% Per annum

Core Deposits

CASA Fixed Deposits 2% per annum

138

Transactional Deposits
Product Contract

Current Account

Wadiah Yad Dhamanah

Savings Account

Wadiah Yad Dhamanah

139

Investment Deposits
Product Contract

General Investment Account

Mudarabah

Specific Investment Account

Mudarabah

140

Money Market Deposits

Product Contract

Negotiable Islamic certificate of Deposit

Bay al-Dayn (Sale of Debt)

Commodity Murabaha

Tawaruq

141

Wadiah Dhamanah Deposits

1. Islamic bank acts a custodian and guarantees full withdrawal/capital protection with a condition that depositors allow the bank to use the fund in its financing operations. No fee charges on the safe-custodial service.

Deposits $5,000 1/8/09

2. Bank does not give any fixed return on the deposits. 3. Bank may give an extra over the deposits based on the principle of gift (hibah/hadiah).

Deposits 0 $5,000 15/8/09

142

Hibah is not contractual but voluntary

$5,000

$5

$5005

1/8/09

(Hibah)

15/8/09

143

Hibah is not fixed upfront

0%

10%
Hibah

5%

144

Tagging deposits financing

Transaction Deposits BBA (Current and Savings Account)

Joint Venture Financing

Mudarabah Deposits

145

RabulMal
(Depositors)

Contributes Capital

Mudarabah
Project

Mudarib (Bank)

Contributes Skill and Expertise

146

Al-Mudarabah Investment
1. No guarantee on deposits 2. No guarantee on returns 3. Flexible rate liability Placement of deposits using the principle of Al-Mudarabah (trustee partnership)

Bank - Mudarib (value added)

Al-Mudarabah Project

Depositors Rabulmal (Capital)

Loss (if any)- capital depreciation Total liability on Profit depositors Value added not compensated

Loss
147

Bank Negara Malaysia (BNM) Guidelines on Profit-Sharing Investment Account (PSIA) with risk absorbent

In order to highlight the more accurate nature of mudarabah deposits (PSIA) and its impact on bank capital, BNM has provided a new formulation for determining regulated for Islamic banks. PSIA will be used to finance a relatively more risky projects based on mudarabah, istisna and musharakah contracts. The formulation capital adequacy ratio (CAR) = Capital/ (RWA less (1)RWA funded by PSIA less ()RWA in the form of PER) When = 1, the bank holds all risks in the balance sheet. When is say 30%, the bank carry risks only from wadiah dhamanah deposits and general mudarabah deposits. Then 70% of the risks (1-) = (1-0.3), is carried by PSIA deposits. Then CAR will be less than CAR without as a risk-absorbent factor. This will reduce stress on Islamic banking capital. Hence, the smaller the i.e. the more risks carried by PSIA, the lower is the CAR.

148

Modified Formula Incorporating the Risk nature of Mudarabah Deposits RWCAR = [Capital Base] /[(TRWA ) Less (1-) (Credit and Market Risk Weighted Asset funded by PSIA) Less ()(proportional of Credit and Market Risk Weighted Assets funded by PSIA in the form of PER)]
Islamic Islamic 149

Islamic Bank with Musharakah financing under Basel 2: Higher Capital Requirement Assets Amount Riskweights RWassets Murabaha AITAB Personal F Sukuk Musharakah TOTAL $500m $300m $200m $100m $100m $1200 50% 50% 100% 50% 250% $250 $150 $200 $ 50 $250 $900

Capital ratio = (Regulated Capital /( RWA [1-]RWA funded by PSIA [] RWA funded by PSIA as PER) 1.= 30% 2.(1-) = 70% 3.RWA funded by PSIA = $250m (musharaka) 4.RWA as PER = $2m (by assumption) RWA = [($500m x 0.5) + ($300m x 0.5) + ($200m x 1.00) + ($100 x 0.5) + ($100 x 2.5)] = [$250m + $150m +$200m + $70m + $250] - (0.7)($250) (0.3)($2) = $900m - $175m - $0.6m = $724.4m RC = $724.4 x 0.08 = $57.95m Note Risk weight also known as conversion factor.PER = Profit Equalization Reserve.

150

 (1-) represents the quantum of PSIA recognized as a risk absorbent for RWCR computation purposes and approved by Bank Negara Malaysia. = 1 means all risks carried by bank = 0 means all risks carried by PSIA. The smaller the , the lower is RWCR.

151

Money-Market Placement: Commodity Murabaha

Money market placement: Commodity Murabaha

Sells X
Commodity Supplier

Islamic Liquidity Center (ILC)

Broker B Pays Cash $10m

Sells X $10.5m murabaha Buys X Broker A Surplus Bank (SB)

Pays $10.5m at maturity

Pays cash $10m

Commodity Murabaha
SB to place excess funds with ILH in return for fixed income and protected deposit. How? SB purchases commodity (eg palm oil) from Supplier A via broker A at $10m. SB sells the commodity to ILH. ILH will pay on credit in 6 months at $11m. This is a 6-month facility placement. ILH sells the commodity to Supplier B via Broker B and obtain cash. Cash will be invested in ILH financing operations. ROI of the $10m varies. Assume that the ROI = 20%. Thus ILH secures $10m x 0.2 = $2m profit. At maturity ILH pays SB $11 million with net margin for SB and ILH respectively = $1m.

Brokers charges: Commodity Murabaha Deposit Deposit = $20 million Agents Fee (AF) = 25 basis points $20,000,000 x 0.025 = $500,000 Brokers fees (BF) = $50 per $1 million transaction $50 x 20 = $1000 Depositor will received net of AF and BF.
155

Thank You

Tel: +603 2781 4000 Email: Website: www.inceif.org

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