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Report
ISLAMIC BANKING
TERM PAPER PRESENTATION
by
Asmah Mohd Jaapar
Hishamuddin Abdul Wahab
Khusmuhammad
Sulistya Rusgianto
Yusif
BBA HOME FINANCING: CASE STUDIES CIMB ISLAMIC
HOME FINANCING-i AND FLEXI HOME FINANCING-i
SEPT 2010
INCEIF
OBJECTIVES
Contract (‘Aqd)
Legal Documentation
Financial Reporting
Maqāṣid al-Sharī‘ah
Objectives


To understand the basic concept of CIMB Islamic Home
Financing-i and Flexi Home Financing-i
To determine sharī‘ah legitimacy of CIMB Islamic Home
Financing-i and Flexi Home Financing-I using contract
(‘aqd), legal documentation, financial reporting and Maqāṣid
al-Sharī‘ah parameters
YUSIF
2
2
Objectives
CONTRACT (‘AQD)
Legal Documentation
Financial Reporting
Maqāṣid al-Sharī‘ah
Bai’ Bithaman Ajil (BBA) (Deferred-payment Sale)




Bai’ Bithaman Ajil is a contract of sale and purchase of an
asset in which the payment of price is deferred and paid in
installment within an agreed period of time. The selling price
includes profit.
The margin is up to 90%
Financing all types of completed or under construction
residential properties
Required documents are PPA, PSA, Deed of Assignment
(by way of security)
KHUSMUHAMMAD
3
Objectives
CONTRACT (‘AQD)
Legal Documentation
Financial Reporting
Maqāṣid al-Sharī‘ah
(Cont.)


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
Customer has executed a Sale and Purchase Agreement
with the vendor
Customer has the right to sell the property to bank by
executing Property Purchase Agreement with the Bank
Bank Resells the property to the customer by executing the
Property Sale Agreement(Fixed or Floating rate)
This falls under the concept of Bay Inah, where the bank
buys directly from customer and resells the same property
to same customer without incurring any risk
KHUSMUHAMMAD
4
4
Objectives
CONTRACT (‘AQD)
Legal Documentation
Financial Reporting
Maqāṣid al-Sharī‘ah
CIMB Islamic Home Financing-i






Home Financing-i, is fixed rate home financing for 3-years, 5-years 10 or
20 years
A sample calculation for 20 years of house of 225000RM, at profit rate of
5.88% is as follows
(Payment of monthly installment)=[Facility amount(1+profit
rate)xnxr]/[1+(1+pr)xn-1]
Monthly
installment=[225000(1+5.88/12)x240x5.88/12]/[1+(1+5.66/12)x2401]=1,596RM
The bank contract /selling price will be 1596.43x240=383,143RM
The contract does not allow bank to adjust their profit rate and
contracted price will remain fixed in 158,143RM
KHUSMUHAMMAD
5
5
Objectives
CONTRACT (‘AQD)
Legal Documentation
Financial Reporting
Maqāṣid al-Sharī‘ah
CIMB Islamic Flexi Home Financing-i







Variable rate home financing based floating rate features based on the
movement of Base Financing Rate (BFR), with capped at an agreed
ceiling rate, this is actually BBA financing with Ibra’ features, any
shortfall will be treated as rebate given to client
The bank sets ceiling price of 10.75% per annum whatever above this
will be rebate to the customer
The bank purchase is RM114,986
The bank selling price RM280,169, installment in 20 years
Contracted profit rate/Ceiling rate 10.75% p.a
Base financing rate on the time of offer latter is 6.5%
The monthly payment amount is calculated based on the Effective Profit
Rate which is the current Base Financing Rate - /+Spread per annum
which 1-240 month, BFR-1.95% p.a. the amount = RM730.57
KHUSMUHAMMAD
6
6
Objectives
CONTRACT (‘AQD)
Legal Documentation
Financial Reporting
Maqāṣid al-Sharī‘ah
Requirement of ‘Aqd/Contracts





Agents of Contract
- Customer
- Bank
Objective of Contract
- BBA Property Financing
Subject Matter and the price of Contract
- Fixed/Floating Financing Rate- House financing
Offer and Acceptance
- Bank buys the house and resells the product by contracted profit rate
installment
- Customer accepts the selling price and monthly installment
The whole arrangement of purchase and resale involves Bai-al-Inah
concept
KHUSMUHAMMAD
7
Objectives
Contract (‘Aqd)
LEGAL DOCUMENTATION
Financial Reporting
Maqāṣid al-Sharī‘ah
Legal Documents for Home Financing


Conventional
 Sale and Purchase Agreement (S&P) or Memorandum of
Contract
 Loan Agreement
 Deed of Assignments/Charge
Islamic banking
 Sales and Purchase Agreement (S&P) or Memorandum
of Contract
 Property Purchase Agreement (PPA)
 Property Sale Agreement (PSA)
 Deed of Assignments/Charge
SULISTYA RUSGIANTO
8
Objectives
Contract (‘Aqd)
LEGAL DOCUMENTATION
Financial Reporting
Maqāṣid al-Sharī‘ah
Sale and Purchase Agreement




The customer(s) purchase the property from the
developer/vendor
In this case, SPA in the form of the Memorandum
of Contract (MoC) endorsed by the Auctioneer
which indicate that the customer(s) is the
successful bidder and the successful bid price is
declared
The customer(s) paid 10% down payment
There is a transfer of ownership and title but has
not been issued by the relevant authorities.
SULISTYA RUSGIANTO
9
9
Objectives
Contract (‘Aqd)
LEGAL DOCUMENTATION
Financial Reporting
Maqāṣid al-Sharī‘ah
Property Purchase Agreement



The bank purchase the property from the
customer(s)
There is no title transfer, but beneficial ownership in
and/or rights to the property only.
The bank pay the purchase price (bid price – down
payment) to the developer/vendor for benefit of the
customer(s)
SULISTYA RUSGIANTO
10
10
Objectives
Contract (‘Aqd)
LEGAL DOCUMENTATION
Financial Reporting
Maqāṣid al-Sharī‘ah
Property Sale Agreement




Agreement between the Bank as selling party and the
customer as buyer
Consists information on the rights and contractual
obligation of the contracting parties, the property, the
price, monthly payment, period of financing and other
terms and conditions
Attached with the Letter of Offer and Deed of
Assignment/Charge
The Bai’ al-’Inah concept is explained in this agreement
and so, the BBA mode of payment which allow the
customer to settle the bank’s selling price on deferred
payment basis.
ASMAH MOHD JAAPAR
11
11
Objectives
Contract (‘Aqd)
LEGAL DOCUMENTATION
Financial Reporting
Maqāṣid al-Sharī‘ah
Default


Definition
1) Failure to pay the monthly payment or any sum of money
due and payable to the bank under the BBA facility
2) An act of bankruptcy under Bankruptcy Act 1983 has been
committed
3) If Section 25 (1) of the Islamic Banking Act 1983 is
triggered
4) Insanity or death of any of the customer(s)
5) Breach of any terms, conditions or approval contained in
PSA and the Legal Docs.
In the event of default, the customer(s) have to pay the whole
bank’s selling price and all other sums payable under the BBA
facility
ASMAH MOHD JAAPAR
12
12
Objectives
Contract (‘Aqd)
LEGAL DOCUMENTATION
Financial Reporting
Maqāṣid al-Sharī‘ah
Payment



Installment based on the EPR=BFR-1.95% p.a. on
daily rest throughout the facility period
The installment is adjusted to reflect the changes of
EPR based on the movement of BFR but shall not
> CPR of 10.75% p.a.
Automatic monthly ibra’ is given based on
difference between EPR and CPR
ASMAH MOHD JAAPAR
13
13
Objectives
Contract (‘Aqd)
LEGAL DOCUMENTATION
Financial Reporting
Maqāṣid al-Sharī‘ah
Late Payment

Ta’widh
 During the facility period: 1% p.a. on the overdue
amount or a minimum of RM1 whichever is
higher or any other method approved by BNM
 After the facility period: based on the bank’s
current Islamic Interbank Money Market (IIMM)
rate on the outstanding principal balance or any
other method approved by BNM
 Ta’widh shall not be compounded on the
principal amount
ASMAH MOHD JAAPAR
14
14
Objectives
Contract (‘Aqd)
LEGAL DOCUMENTATION
Financial Reporting
Maqāṣid al-Sharī‘ah
Early Settlement/ Redemption of Facility




During lock-in period (5 years)
– Settlement/redemption is allow at the bank’s sole
discretion and ibra’ may not be granted or granted
at lower rate
After the lock-in period
– Ibra’ of any unearned profit over the bank’s selling
price may be permitted
Ibra’ computation shall be treated as final and binding
Partial payment of the BBA facility is allowed through
excess payment of the customer(s) by way of
withdrawal of EPF or additional payment
ASMAH MOHD JAAPAR
15
15
Objectives
Contract (‘Aqd)
LEGAL DOCUMENTATION
Financial Reporting
Maqāṣid al-Sharī‘ah
GMTP





The property must be covered with a TO on the
Bank’s panel naming the Bank as beneficiary
The GMTP contribution is either self-financed by
the customer or the Bank
For single applicant, the coverage is 100%
For joint applicants, the coverage is about 50%
each
In the event GMTP is cancelled for whatsoever
reason, the customer will be charge extra 1% of the
profit rate
ASMAH MOHD JAAPAR
16
16
Objectives
Contract (‘Aqd)
Legal Documentation
FINANCIAL REPORTING
Maqāṣid al-Sharī‘ah
Financial Reporting





Financial Reporting can be defined as a process of recording all business’ financial
transactions and activities.
The importance of the Financial Reports has been clearly emphasized from the Quranic
Verse as follows:
“…Never get bored with recording it, however small and large, up to its maturity date, for
this is seen by Allah as closer to justice, more supportive to testimony and more resolving
to doubt…” [Al-Baqara: 2, 82].
The true source of financial reporting will be based on Annual Report of CIMB Islamic
Bank Bhd in year 2009 which in accordance with the requirements of the Companies Act
1965 (Malaysia), MASB Approved Accounting Standard and BNM Guidelines.
For the purpose of testing the level of conformity with Shariah Injunction, we use
Accounting, Auditing and Governance Standards For Islamic Financial Institutions (2008)
published by AAOIFI (the Accounting and Auditing Organization for Islamic Financial
Institutions) as yardstick
HISHAMUDDIN ABDUL WAHAB
17
Objectives
Contract (‘Aqd)
Legal Documentation
FINANCIAL REPORTING
Maqāṣid al-Sharī‘ah
Accounting Standards for Murabaha (BBA)
AAOIFI
FAS 1
Bank
Negara
GP8-i
MASB
FRS i12004
FAS 2
HISHAMUDDIN ABDUL WAHAB
18
18
Objectives
Contract (‘Aqd)
Legal Documentation
FINANCIAL REPORTING
Maqāṣid al-Sharī‘ah
Problem of Inconsistency in Financial Reporting



In the real Balance Sheet of CIMB Islamic Bank Bhd, all the
entries have been recorded such Murabaha financing, cash,
account receivable and profit realized from financing except for
the asset purchase transaction.
The inconsistency of financial reporting of CIMB Islamic Bank
Bhd arises from BBA transactions - absence of the financial
records of the “property buying” by the bank from the customer.
It violates the Hadith “One must not sell what one does not
own”. It makes buy-sell (bay al-enah) procedures only fictitious
since no transaction recorded for asset buying
HISHAMUDDIN ABDUL WAHAB
19
19
Objectives
Contract (‘Aqd)
Legal Documentation
FINANCIAL REPORTING
Maqāṣid al-Sharī‘ah
Journal Entry for BBA (or Murabaha) (Shahul Hameed, 2009)
No
Transactions/ Events
Dr
Cr
1
Purchase of Asset by bank
Equipment
Cash/Creditor
Murabaha
2
Murabaha (BBA) sale
financing (cost +
profit)
3
4
Installment receipt
Recognition of profit as each
installment received
Equipment at cost of
deferred profit with profit
Cash
Murabaha Financing
Deferred profit
Profit n Loss
5
Termination of contract
A/c receivable
Murabaha Financing
6
Rebate for early payment
Deferred profit
Murabaha Financing
HISHAMUDDIN ABDUL WAHAB
20
20
Objectives
Contract (‘Aqd)
Legal Documentation
FINANCIAL REPORTING
Maqāṣid al-Sharī‘ah
General Presentation and Disclosure Relating to BBA
Standard
General Presentation and Disclosure
In Balance sheet, on the asset side, BBA financing is pooled together with other types of
financing into category of Financing, advances and other loans.
No presentation for the asset purchased by bank before sell to customer.
GP8-i
In notes to financial statement, under category of Financing, advances and other loans,
there’s specification for BBA by contract.
From definition of paragraph 6, the standard defines BBA as :
“Bai Bithaman Ajil (lit., deferred payment sale) - A form of financing in which an IFI finances a
customer who wishes to acquire a given asset and who agrees to repay by instalments within
an agreed period. The IFI will purchase the asset required by the customer and subsequently
sells it to him at an agreed price inclusive of the IFI's profit margin.”
Paragraph 10, the standard only mentions about requirement of information for financial
statement such asset, liabilities, equity, income and expenses, changes in equity and cash
flows. No specifications of items for assets except for paragraph 41 on Information to be
presented on face of balance sheets
FRS-i2004
“The assets of an IFI include cash balances and short-term funds, placements with other
financial institutions, dealing and investment securities, and financing of customers...The
financing of customers usually comprises financing extended to customers based on various
Shariah principles. Other items include receivables, statutory deposits with BNM, and
property, plant and equipment.”
HISHAMUDDIN ABDUL WAHAB
21
21
Objectives
Contract (‘Aqd)
Legal Documentation
FINANCIAL REPORTING
Maqāṣid al-Sharī‘ah
(Cont.)
Standard
General Presentation and Disclosure
Regarding to BBA, one close paragraph mention about it is in
paragraph 27. The paragraph basically mentioning about the
permissibility of offsetting certain items in assets and liabilities, and
income and expenses. The paragraph 27 as below:
FRS-i2004
(cont)
27. Offsetting of balances may be made in respect of unearned profit
for murabahah, BBA and Ijarah financing against murabahah, BBA
and rental receivables.
In FAS (1), the asset purchased by bank is recorded in the inventory
account.
In para 37 FAS(1) of Statement of Financial Position, the Disclosure
should be made on the face of financial statement including:
FAS 1
“Inventories (including goods purchased for Murabaha customers
prior to consummation of Murabaha agreement)”
HISHAMUDDIN ABDUL WAHAB
22
22
Objectives
Contract (‘Aqd)
Legal Documentation
FINANCIAL REPORTING
Maqāṣid al-Sharī‘ah
Extract of Annual Report CIMB Islamic Bank Bhd (2009)
HISHAMUDDIN ABDUL WAHAB
23
23
Objectives
Contract (‘Aqd)
Legal Documentation
FINANCIAL REPORTING
Maqāṣid al-Sharī‘ah
Extract of Annual Report CIMB Islamic Bank Bhd (2009)
HISHAMUDDIN ABDUL WAHAB
24
24
Objectives
Contract (‘Aqd)
Legal Documentation
Financial Reporting
MAQĀṢID AL-SHARĪ‘AH
Introduction to Maqāṣid Al-sharī‘ah



Consist of the deeper meanings (ma‘ānī) and inner aspects
of wisdom (ḥikam) considered by the Lawgiver (Shāri‘) in all
or most of the areas and circumstances of legislation (aḥwāl
al-tashrī‘) (Ibn Ashur, 2006).
Either the realization of benefit (maṣlaḥah)or the repulsion
of harm (mafsadah) or achieving both at the same time. (Ibn
Ashur, 2006).
Maqāṣid al-sharī‘ah:
 Necessities (ḍarūriyyāt): Preserves one’s faith, soul,
wealth, mind, and offspring
 Needs (ḥājiyyāt)
 Luxuries (taḥsīniyyāt)
YUSIF
25
Objectives
Contract (‘Aqd)
Legal Documentation
Financial Reporting
MAQĀṢID AL-SHARĪ‘AH
Importance of Home in Islam


Abu Musa reported AlLāh's Apostle (SAW) as
saying: The house in which remembrance of AlLāh
is made and the house in which AlLāh is not
remembered are like the living and the dead (Sahih
Muslim, Book 4, Hadith 1706)
“And stay in your houses, and do not display
yourselves like that of the times of ignorance…” [alAhzaab 33:33]
YUSIF
26
26
Objectives
Contract (‘Aqd)
Legal Documentation
Financial Reporting
MAQĀṢID AL-SHARĪ‘AH
CIMB Home Financing


Repulsion of harm:
 No actual transfer of ownership (-)
 Involve property under construction (-)
Realization of benefit:
 Preservation of faith, soul, wealth, mind, and
offspring (+)
YUSIF
27
27
‫وهللا س بحانه وتعاىل أعمل ابلصواب‬
‫‪Thank You‬‬

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