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World Economic Reform?
World Economy had basically been dominated by the "debt based economy with risk transferring techniques", which compelled the world economy suffered with repeated failures as had been undeniably witnessed by the world of nature.
It is now timely to move forward with alternative justifiable changes in the global economic chapter by creating a new dimension with holistic economic democracy by harmonizing with the contemporary desirous reality as to discover an avenue, which may open up a gate to acceptable peace, progress and prosperity for all humanity and that is, an "asset based economy with risk sharing technique".
The prime objective of "World Economic Reform" is to say Good Bye to "debt based economy with risk transferring technique" while Welcoming with appreciation to "asset based economy with risk sharing technique" as an alternative way forward for the global humanity by visioning an economic democracy with rescue platform for all.
World Economic Reform (Plan), shall not entertain any political or personal agendas, but a pure k-charitable platform in exchanging intellectual, professional, corporate and humanitarian thoughts in view of contributing towards creating a result oriented “World Economic Reform” for the interest of all humanity regardless of the issue of religion, race, culture, gender, status or one’s background.
Thus, a site "World Economic Reform?" has just been launched as an intellectual sharing platform to foresee possible alternative sustainable economic direction for the benefit of the global humanity.
It can be linked through: http://www.facebook.com/#!/groups/321184167946512/
Saturday, March 31, 2012
Thursday, March 29, 2012
10 REASONS of GOBAL CRISIS TO DAY?
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1. Neglecting Divine / Theo-Principles, while being Confused by emotional thoughts & Philosophy.
2. Doubtful & Dishonest Personality by No Correspondence between FAITH, WORDS & ACTIONS.
3. Violation of Universal Value as to Natural & Legal Rights and Obligations.
4. Power Crazy with Self Satisfaction Dominates the Common Humanitarian Concerns as to Peace, Progress & Prosperity for ALL.
5. Debt Based Economy with Risk Transfer by Gaining at the Expense of others. Alternatively, an effective adaptation of Asset based Economy with Risk Sharing Paradigm may be the right Platform for the Rescue of to day's World economy with promising result for all humanity.
6. Lack of tolerance & mutual respect.
7. Dishonouring the holistic spirit of Brotherhood, Solidarity, mutual Cooperation, Sharing and Caring among the Creatures.
8. Ignoring the Natural Morale Values while being Influenced by Unacceptable Desires.
9. Lip Services (words) supersede Result Oriented Actions.
10. Discrimination & Revenge are habitual for Personal Satisfaction, while ignoring the Universal Common interest.
1. Neglecting Divine / Theo-Principles, while being Confused by emotional thoughts & Philosophy.
2. Doubtful & Dishonest Personality by No Correspondence between FAITH, WORDS & ACTIONS.
3. Violation of Universal Value as to Natural & Legal Rights and Obligations.
4. Power Crazy with Self Satisfaction Dominates the Common Humanitarian Concerns as to Peace, Progress & Prosperity for ALL.
5. Debt Based Economy with Risk Transfer by Gaining at the Expense of others. Alternatively, an effective adaptation of Asset based Economy with Risk Sharing Paradigm may be the right Platform for the Rescue of to day's World economy with promising result for all humanity.
6. Lack of tolerance & mutual respect.
7. Dishonouring the holistic spirit of Brotherhood, Solidarity, mutual Cooperation, Sharing and Caring among the Creatures.
8. Ignoring the Natural Morale Values while being Influenced by Unacceptable Desires.
9. Lip Services (words) supersede Result Oriented Actions.
10. Discrimination & Revenge are habitual for Personal Satisfaction, while ignoring the Universal Common interest.
Wednesday, March 28, 2012
Financial Democratic Reform through Poverty Alleviation? An Islamic Gate-Way to New World Order...
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Financial Democratic Reform & the New World Order............?
Oxford Dictionary defines ‘Poverty’ as being poor, great lack of money or resources, scarcity or inferiority. Others define it as disadvantaged, low income, poor or less developed. These conventional definitions do not seem to differ or vary from that defined by Al- Ghazali who gave meaning to poverty as a state of not being able to satisfy one’s needs which are basic in nature.
Poverty nowadays is no longer viewed only as economic issue but also is a complex social and political concern that is yet to be successfully solved universally. The concept of poverty is viewed in the context of society as a whole where it persisted in every community around the world but the extent or degree in which it affected human race varies from one society to another.
Even though it is prevailing throughout the world, poverty has always been ignored and is closely associated with disbelieve (kufr). As said by Prophet Muhammad SAW: “Poverty might lead a person to disbelief”, further clarifies the intensity of this situation. Thus, the Holy Quran cannot emphasis more on the poor and needy as commanded by Allah in Surah An-Nisaa:8:
واذا حضر القسمة أولوا القربى واليتامى والمساكين فارزقوهم منه وقولوا لهم
قولا معروفا
“But if at the time of the division, other relatives, or orphans, or poor are present, feed them out of the (property), And speak to them words of kindness and justice”.
A report states: "Poverty is a multidimensional phenomenon, encompassing inability to satisfy basic needs, lack of control over resources, lack of education and skills, poor health, malnutrition, lack of shelter, poor access to water and sanitation, vulnerability to shocks, violence and crime, lack of political freedom and voice. The numbers show little progress in reducing income poverty over the last decade--impressive gains were made in East Asia before the crisis hit, but have been partly reversed, and little if any progress took place elsewhere--and a large majority of poor people said they were worse off now, have fewer economic opportunities, and live with greater insecurity than in the past."
Classification of Poor & Insufficiency of Income
Poverty in Islam is concerned with insufficiency of income and the inability in fulfilling basic human needs. One is considered poor if he does not possess sufficient necessities to fulfill his basic needs. Therefore, poverty can be interrelated to two basic classifications of poor, which are faqir who are the needy, and miskin who are the poor, as identified and understood in Islam. Faqir is defined as someone who can only satisfy less than half of his basic necessities while miskin is a poor man who can satisfy half or more of his basic necessities, but is still below the minimum requirement of basic necessities required.
Prophet SAW said (about those defined as miskin):
“He who does not get enough to satisfy himself, and he is not considered so, so that charity may be given to him, and he does not beg anything from people”.
There are no distinct techniques to measure poverty, as it is always associated with some level of income required to provide for the basic human needs. This human needs refer to the right of food, clothes and shelter as pronounced by the Prophet SAW that are to be identified and met in order to sustain a minimum standard of living. The poverty line or income level, which serves as an indicator to identify whether a person is poor, is useful where a person is considered poor if his income is below poverty line income.
Factors Causing Poverty
The Nature of Man
Man is the essential element in any society thus; any problem related to the society must have something to do with individual because it is his actions on the ethical aspects that affect others as a whole. One of the many reasons poverty persists in any one community is because of the widespread existence of income inequality and unjust wealth distribution. It is due to man’s narrow-mindedness and selfishness as well as ignorance for a collective life has made man a slave to things, which are material in essence. In fact, poverty is caused by man’s deviation from divine teachings in which he practices unlawful things and the man-made problems such as injustice, laziness, selfishness, dictatorship, fraud, cheating, monopoly practices, speculative hoarding and oppression that with each passing day, making the poor getting poorer and the rich getting richer.
ان الله يأمر بالعدل والإحسان وايتاىء ذى القربى وينهى عن الفحشاء والمنكر والبغى يعظكم لعلكم تذكرون
“Allah (swt) commands justice, the doing of good, and liberation to kith and kin, and He forbids all shameful deeds, and injustice and rebellion: He instructs you, that ye may receive admonition”. (16:90).
Mismanagement and misallocation of funds happening today as a result of so much power in the hands of the elite, who maintain the status quo at national levels is the rationale for the existence of an income gap between the poor and the non-poor. There are also corruptions and bribery, or the misuse of public power and resource for private benefit and profit by officials such as politicians and policy makers in which they enrich themselves through the misuse of power entrusted to them. Negative attitude, easy access to money as well as deficiency in democratic government initiates corruption and provides an ideal condition for corruption to prevail. Accumulation of wealth by the rich people will therefore hurt the common people as they are left out and the public interest is further disturbed.
Islam promotes just distribution and ethics in everything we do. Those practicing corruption should be penalized for their inefficiency and those who are efficient should be reward for their creditability.
Function of the Government & the Market Failure
The government is established as a protector for the public interest. It means that government will only see to it if there exist to be a market failure in the economic activity. However, there seem to be an interruption in the economic balance when the government is no longer protecting the public and is applying free trade thus causing massive competition to develop. Government especially in the third world countries tends to borrow from international donor organization such as the IMF, which in turn requires the debtor country to export their production instead of for local circulation. This will have a severe impact when the prices go up, food subsidies are eliminated, basic services cost such as electricity increased and health and educational funds vanish.
In addition to the said government’s failure, inadequate access to employment, lack of physical assets such as land and capital to be owned by the poor, lack of means of supporting rural development in poor region, inadequate access to markets where the poor can make trade, low endowment of human capital and the destruction of natural resources leading to environmental deprivation as well as reduced productivity are merely some of the causes of poverty in light of the function of the government.
Consequently, poor governance and market failure are two aspects, which should be properly addressed to attain justice in the economic activities, which will help in poverty eradication.
Poverty Eradication Strategies in Islam
Being a mankind, we are to approach poverty like any other problems faced by our society, in accordance with the Islamic teachings and way of life. It is the concern for the poor, which leads us to address their needs through many approaches, instruments and government policies.
Element of Poverty Alleviation
It is identified earlier that poverty is a result of diverse factors and therefore has different dimensions in which it would be implemented. These elements are the individual and society’s role in eradicating poverty as well as the government’s role.
Role of Individual & Society
As the creature of Allah (swt) on this Earth, we are to live a moderate lifestyle in such a way that we fulfill our material and spiritual needs simultaneously. Islam recognizes differences in individual human potentials because each is endowed with different types and levels of abilities.
Therefore, man is to earn his living according to his capacity and ability as that enshrined by Allah (swt) in the Holy Qur'an (al- Jumu’a: 10).
It is therefore, the public duty of individuals and society to focus on integrating the Islamic principles, moral and ethical aspect in our daily life, as well as the response from the society about poverty, regardless of involvement of the Government. In other words, the strategy to combat poverty is through harmonious equilibrium in development and Islamic ethical values. There should also be fundamental changes at both the management and policy level, and change in individual character to be more inspired, efficient and selfless individuals in any society. The Prophet also mentioned the importance of earning an honest living in his many hadith. One of them is reported by Al- Miqdam, who quoted the Prophet (saw) as saying:
“Nobody has ever eaten a better meal than that which one has earned by working with one’s own hands”.
Role of State in Economic Reform to Realize its Grand Impact: An Islamic Direction.
Creed and Islamic Economics The basic creed that promotes Islamic economic behaviour evolves from the Islamic concept of God, Allah, with attributes ascribed to Him – Al-Malik (the absolute Owner of All), Al-Rahim (who gives blessings and prosperity, particularly to whom use these gifts as he has permitted), Al-Muhaymin (watches over and protects all things), Al-Wahhab (donates all things to His creatures, even to non-believers), Al-Fattah (opens the solutions to all problems and eliminates obstacles), Al-Razzaq (the Provider of all things that are beneficial to His creatures) and so on.
The Divine attributes do not only have metaphysical significance; a firm belief in them acts as a powerful source of inspiration and guidance in economic pursuits and planning.
These attributes have been described through the Quranic verses and Hadith to construct a mind and guides individual behaviour in a direction, which truly reflects firm belief in Allah’s Unity, Tawhid. Without this firm belief the Islamic economic system and the whole life, falls prey to inconsistency and discord. How do beliefs in this attribute influence economic attitude?
A firm belief in the divine attribute of the Provider eliminates insatiable lust for amassing wealth through unlawful means and cools down impatience. It dissuades from unhealthy competition and egotism. It relieves tension and anxiety and unhealthy reaction in the event of poor for one’s effort. A firm belief in the divine assurance:
‘Whosoever fears Allah, Allah will appoint a way out for him and will provide for him from (a quarter) whence he has no expectation’ (65:2, 3).
It is not only discourages one from becoming avaricious and resorting to unlawful earning but also plays an important role in guiding policy-makers and planner to cast off the capricious fears of loss due to abolition of unlawful institutions and undesirable policies and programmed.
A firm belief in his attribute, Al-Razzaq, as expressed in the verse:
‘Slay not your children, fearing a fall to poverty, We shall provide for them and for you. Lo! The slaying of them is a great sin’ (17:31),
It would inspire the policy-makers to be restrained, barring exceptional cases, in launching on economic grounds a country-wide campaign for birth-control, which often provides a refuge for the morally corrupt. Similarly, belief in the Divine Wisdom of unequal distribution of wealth (4:32) shuns class antagonism and persuades the well-to-do to share their fortune to the poor, thus reducing the distance between the haves and haves-nots.
To conclude, firm belief in divine attributes not only has a far-reaching influence on the general attitude of the individual, it also touches economic enterprises, policy-making and planning. Without such firm belief practicing the Islamic injunctions poses formidable difficulties and leads one to impracticable compromises, which result in dualism and hypocrisy.
The Role of the Government towards Poverty Alleviation
Poverty, Employment and Growth The economic resources of this world belong to Allah who gave them to mankind to benefit from them. So, the duty of man is to properly utilize them for the welfare of society. This world entails:
(i) the full and efficient employment of all human and natural resources,
(ii) the alleviation of poverty and fulfillment of basic needs, and
(iii) the optimum rate of economic growth.
The objective of the alleviation of poverty, the full employment of resources and optimum rate of growth can only be achieved by the active participation of government. The Islamic government should not leave the allocation of resources only to the blind market forces because; being an impersonal entity, the market may not take care of the total welfare, especially of the poor, of the society.
The Government should play a positive role in the economy through pragmatic planning and by providing necessary physical and social infrastructure. The government must invest in this sector since private entrepreneurs may not find enough incentive to invest because of the heavy investment requirement and small monetary return realized over a long period time. In this case, government investment should be channeled into the improvement of highways, dams, bridges, the construction of irrigation networks, airports, telecommunication services and the provision of other facilities, which would bring about external economies to the different sectors of the economy.
So, An Islamic government has a great responsibility to eradicate poverty, fulfill basic needs and improve the living standard of the people. If it fails to do so, the Prophet’s (s.a.w) warning should remind them:
“Whom Allah has made administrator over the affairs of Muslims but remain indifferent to their needs and poverty, Allah will also be indifferent to his needs and poverty.”
Establishment of Equitable Distribution of Income and Wealth The establishment of an equitable distribution system calls for certain governmental functions, such as:
(i) the provision of training and rendering assistance for gainful employment to the public. A variety of technical training programs may be launched to assist the unskilled labour force of the less developed countries. (ii) the government should enforce a just remuneration system so as to fairly distribute the generated income among the factors of production.
(iii) the arrangement of a social security system based on zakat and other charitable revenues.
They would serve as insurance to the unemployed, handicapped, divorcees and other needy members of society. As basic necessities are provided, the national wealth circulates among the members of the community. This is why Islam makes it obligatory for the government to guarantee the provision of basic needs to all. If the existing fund is not sufficient, government has the right to pull resources from the rich in addition to the obligatory dues to guarantee basic needs to each and every one in the society. Ibn Hazm calls for the extra levies on the rich to fulfill the basic needs of the destitute of a society.
He says: “The rich of every locality are obliged to manage the basic needs of the destitute living in it. If the wealth, stored in Baitul-Mal, is not adequate to meets the wants of the indigents, the head of the state may compel the rich to contribute by imposing extra levies on them.”
The Government should play a great role through monetary and fiscal policies in reducing the disparity between the haves and have-nots. These policies should be geared towards the benefit of the poor. It is also one of the responsibilities of an Islamic government to differentiate between the deserving and undeserving of the national help.
In this case, the government should invest in the social overhead capital such as education, healthy and other infrastructural development so that the poor may benefit more than the rich.
Islam strongly encourages the rich to spend for people in the lower income group over and above compulsory payments so that wealth trickle-down among the various classes of society. In this context, the principle is that the more one has, the more responsible towards providing the poor one is. Allah says:
.ويسألونك ماذا ينفقون قل العفو...
“And they ask you how much they are to spend; say: what is beyond your needs.”
There are compulsory measures of distribution which also heavily contribute to the reduction of inequality among the people. The institutions of Zakat, tithe, sadaqatul fitr, inheritance, bequest etc. come under this category. In these cases, one has to dispose one’s wealth to one’s fellow-beings whereby have-nots become better off. Mutual gifts, endowments and other optional charities, on which Islam places a heavy emphasis, also reduce the disparity between the haves and the have-nots of society.
Taxation in an Islamic Economy
The classical Islamic scholars also gave justifications for taxation as a major of sources of government revenue in an Islamic state. This has been supported by Imam Malik:
“If there were no funds in the treasury or the need of the army increased above the capacity of the treasury, the state has the right to levy taxes on the rich up to the level that satisfies the need immediately and until the revenues of the treasury appear.”
Islamic government should make sure that the imposition of taxes does not the kill work incentives of the tax payers. It must carry out some research to find out which particular rates and types of taxation are the most suitable to maximize government revenue in the economy.
There should not be any injustice involved with taxation policy in an Islamic state. Although Islamic state has the right to impose taxes on the poor it should try to minimize their tax burden in general. The bulk of tax revenue should come from the rich of the society because, they are economically more capable to contribute towards revenue collection than the poor.
This is why suggestion has been made that the Islamic state should minimize indirect taxes, which are normally borne by the poor and concentrate on the direct taxes, which are usually collected from the rich.
Islamic Financial Institutions
Manadatory Tax (Zakat)
Zakat can be the source of sizeable financial resources for an Islamic state. It is collected from a full one-year possession of wealth, which reaches to the Nisab. The coverage of the zakat is very wide encompassing cattle, horses, sheep, gold, silver, merchandise, cash and securities. It should be kept in mind that zakat revenues couldn’t serve all the fiscal needs of an Islamic state since the avenues of this revenue have explicitly been mentioned in the Qur'an.
The expenditure of zakat proceeds must strictly be directed to the defined heads otherwise, the socio-economic objectives of the institution of Zakat may not be realized in a given society. The Zakat proceeds should be collected centrally by the Islamic government. It should establish a zakat department and employ efficient mechanisms, which will draw and disburse zakat revenue under the close supervision of the government. The overall efficiency of zakat collecting machinery must be maintained so that high operational costs and other administrative weaknesses may not jeopardize the objectives of the institution of Zakat as an instrument to alleviate poverty, redistribute income and act as a stabilizing device of an Islamic economy.
Tax on Land (Kharaj)
Agricultural land tax, Kharaj, is a rental fee on the land that becomes of the property of an Islamic government as a result of its liberation by Muslim troops. It is the consensus of the Muslim jurists that such lands be kept as public property and be taxed so that the future Muslim generations may benefit from these lands. Umar, the second caliph, did not distribute the large tract of Syrian, Egyptian and Iraqi fertile lands among the troops. Instead, he kept them with the public treasury as a state property. He left the land with their original owners and levied taxes on them.
The Islamic government would fix a rate for land tax depending on the qualities of the land such as the level of fertility, irrigation requirements and so on. The tax rates should be fixed on the basis of equity so that no injustice is done to farmers in case of over charging as well as to the state in case of under charging.
Jizyah
Islamic government may obtain a good amount of monetary resources from Jiziyyah. It is the Poll-tax on all non-Muslim male adults living in an Islamic state.
Since Islamic government provides security to their lives and properties ensures all other social rights, they obliged to pay a Poll-tax to the Islamic government. The Qur’an states:
...حتى يعطوا الجزية عن يد وهم صغرون
“Until they pay the Jiziyyah with willing submission and feeling themselves subdued.”
There is no fixed rate for the Poll-tax in Islam but it should not be below the rate of zakat on Muslims. In fact, the rate of jiziyyah would very much depend on the size of the share of national income enjoyed by the non-Muslims. This is to enable Islamic government to adequately finance the public expenditure of the country.
Charitable Trusts or Endowments (Al-Awqaf)
Charitable trusts transfer wealth from private ownership to beneficial, social, collective ownership. Islam does not make this practice obligatory but has strongly encouraged it and left it to voluntary initiatives of individuals. In spite of this, the Muslims accepted it wholeheartedly even in periods of economic decline and created charitable trusts, since the period of the Prophet (s.a.w) for important social and economic functions.
These trusts have successfully brought a changes and well improvement in the welfare of the needy.
Gifts (Al-Maniha)
Al-Maniha or Al-Minha are special kinds of gifts. The Prophet (s.a.w) in his various traditions used this method to provide some assistance to the early Muslim migrants from Mecca to Madinah who were in real need of some help. Al-Maniha means the granting of the usufruct of a productive asset to a needy person for a specific period. These gifts can be in term of money (cash), riding animals, dairy animals, agricultural land, fruits and other productive assets such as cars, ships etc.
Al-Fay’
Al-Fay’ is the wealth that Muslims acquire from the enemy without actual fighting. The recipients of fay’ are the Prophet (s.a.w), his family, the orphans, the needy and the wayfarer. This is also suggestive of the simple fact that the common man’s welfare does not depend on increase in items of ownership but also on increase in the benefits accruing to him without directly owning many of them. Besides, there are properties whose utility can be retained and protected only under government administration and ownership.
Treasure (Rikaz)
Rikaz is buried wealth found in land, which has no owner. The finder will have to pay 20% or one-fifth of the wealth. The opinions of the jurists on the recipients of this one-fifth of the wealth are divided. Some are the opinion that it should be distributed to the recipients of the fay’. Some others opine that it should be distributed as zakah. Whichever way it is distributed, it is still an important source of the needy.
Poverty Alleviation Strategy: a case study.
Amanah Raya Ikhtiar Malaysia (AIM) is a Non-Government Organization (NGO) has been established in order to create; out of the hard-core poor households, highly motivated individuals who would be committed to earn an honest living and eventually move out of the poverty trap. Instead of providing those grants or subsidies, they were given interest free loans to undertake income-generating projects of their choice. The loan was to be repaid on a weekly basis. They were entitled to another bigger loan whenever they have cleared the first loan.
This process goes on as long as they need the loan. The first loan is normally restricted to $500, the second $1000, continued with $1500, and $2000. If they have proven to be very successful, they could apply for much bigger loans of $5000 or even $15000.
It is also to noted that from the start these loans were given without any security, guarantor, or court action. If the beneficiaries pass away, the loans were be written off. Apart from the high rate of payback, the impact of this small loan scheme has been very commendable. About 55% of the beneficiaries would be out of poverty after taking three loans. This percentage would increase after the fourth and successive loans. Overall, not less than 80% of the beneficiaries will eventually out of the poverty.
This success of AIM has been widely publicized. AIM is actually not only Islamic in terms of the employing the developmental approach, but it is also Islamic in terms of loans extended which are completely free from riba. Although AIM insists on good pay back record all the time, but when the time comes to extend benevolence all debts due are written off. The group that has been extended the loans is those who belong to the destitute category, rather than poor, which is also Islamic.
History has it that about 99-100 years after the establishment of the Islamic State in Madinah, during the reign of Sayyidina Umar ibn Abdul Aziz, it was very difficult for the State to find someone who wanted to receive the Zakah allocated to the destitute and the poor.
Final Remarks
The socio-economic system of Islam has, from the very outset, addressed the problem of poverty, in a comprehensive and pragmatic way. Islam rightly distinguishes between the destitute and the poor to set the right approach and priority to alleviate them. Islam also establishes the obligatory sources of funds and assistance to the needy.
It is indeed unique to Islam to include zakah payment as the pillar of Islam and make the first two of the eight beneficiaries of zakah, the destitute and the poor, in that order. This clearly shows the commitment Islam has to combat poverty. Islam also establishes many other institutions, which are voluntary, for the needy.
This is indeed remarkable in the sense that is not only the obligation of the State to provide the minimum level of living for each citizen, but Islam makes it the business of every citizen to participate in this battle. This is a very significant approach because by so doing we are making the whole society aware of the need to give a helping hand. It also provides the checks and balances between the government and society.
A very significant contribution by the Islamic economic system is its approach to the alleviation of poverty. Whilst it provides transfers from the rich to the poor, it is only to those poor who cannot work, that are eligible to receive such transfers. These transfers, which come mainly from the public treasury, are enough for the whole year. Annual allocations are being made for these needy until their demise.
Secondly, the able-bodied are not encouraged depending their livelihood on the society and State. They are taught to earn an honest and honorable living, which is known as developmental approach that has long-term effects.
Thirdly, Islam through the zakah collection and disbursements, have always identified the needy and ensure that they receive their dues directly. In other words, Islam zeros in the individual or household instead of tackling them on group or regional basis.
This approach, coupled with the well-defined two distinct groups of destitute and poor, made it possible to narrow the scope and concentrate on alleviating the destitute first.
Financial Democratic Reform & the New World Order............?
Oxford Dictionary defines ‘Poverty’ as being poor, great lack of money or resources, scarcity or inferiority. Others define it as disadvantaged, low income, poor or less developed. These conventional definitions do not seem to differ or vary from that defined by Al- Ghazali who gave meaning to poverty as a state of not being able to satisfy one’s needs which are basic in nature.
Poverty nowadays is no longer viewed only as economic issue but also is a complex social and political concern that is yet to be successfully solved universally. The concept of poverty is viewed in the context of society as a whole where it persisted in every community around the world but the extent or degree in which it affected human race varies from one society to another.
Even though it is prevailing throughout the world, poverty has always been ignored and is closely associated with disbelieve (kufr). As said by Prophet Muhammad SAW: “Poverty might lead a person to disbelief”, further clarifies the intensity of this situation. Thus, the Holy Quran cannot emphasis more on the poor and needy as commanded by Allah in Surah An-Nisaa:8:
واذا حضر القسمة أولوا القربى واليتامى والمساكين فارزقوهم منه وقولوا لهم
قولا معروفا
“But if at the time of the division, other relatives, or orphans, or poor are present, feed them out of the (property), And speak to them words of kindness and justice”.
A report states: "Poverty is a multidimensional phenomenon, encompassing inability to satisfy basic needs, lack of control over resources, lack of education and skills, poor health, malnutrition, lack of shelter, poor access to water and sanitation, vulnerability to shocks, violence and crime, lack of political freedom and voice. The numbers show little progress in reducing income poverty over the last decade--impressive gains were made in East Asia before the crisis hit, but have been partly reversed, and little if any progress took place elsewhere--and a large majority of poor people said they were worse off now, have fewer economic opportunities, and live with greater insecurity than in the past."
Classification of Poor & Insufficiency of Income
Poverty in Islam is concerned with insufficiency of income and the inability in fulfilling basic human needs. One is considered poor if he does not possess sufficient necessities to fulfill his basic needs. Therefore, poverty can be interrelated to two basic classifications of poor, which are faqir who are the needy, and miskin who are the poor, as identified and understood in Islam. Faqir is defined as someone who can only satisfy less than half of his basic necessities while miskin is a poor man who can satisfy half or more of his basic necessities, but is still below the minimum requirement of basic necessities required.
Prophet SAW said (about those defined as miskin):
“He who does not get enough to satisfy himself, and he is not considered so, so that charity may be given to him, and he does not beg anything from people”.
There are no distinct techniques to measure poverty, as it is always associated with some level of income required to provide for the basic human needs. This human needs refer to the right of food, clothes and shelter as pronounced by the Prophet SAW that are to be identified and met in order to sustain a minimum standard of living. The poverty line or income level, which serves as an indicator to identify whether a person is poor, is useful where a person is considered poor if his income is below poverty line income.
Factors Causing Poverty
The Nature of Man
Man is the essential element in any society thus; any problem related to the society must have something to do with individual because it is his actions on the ethical aspects that affect others as a whole. One of the many reasons poverty persists in any one community is because of the widespread existence of income inequality and unjust wealth distribution. It is due to man’s narrow-mindedness and selfishness as well as ignorance for a collective life has made man a slave to things, which are material in essence. In fact, poverty is caused by man’s deviation from divine teachings in which he practices unlawful things and the man-made problems such as injustice, laziness, selfishness, dictatorship, fraud, cheating, monopoly practices, speculative hoarding and oppression that with each passing day, making the poor getting poorer and the rich getting richer.
ان الله يأمر بالعدل والإحسان وايتاىء ذى القربى وينهى عن الفحشاء والمنكر والبغى يعظكم لعلكم تذكرون
“Allah (swt) commands justice, the doing of good, and liberation to kith and kin, and He forbids all shameful deeds, and injustice and rebellion: He instructs you, that ye may receive admonition”. (16:90).
Mismanagement and misallocation of funds happening today as a result of so much power in the hands of the elite, who maintain the status quo at national levels is the rationale for the existence of an income gap between the poor and the non-poor. There are also corruptions and bribery, or the misuse of public power and resource for private benefit and profit by officials such as politicians and policy makers in which they enrich themselves through the misuse of power entrusted to them. Negative attitude, easy access to money as well as deficiency in democratic government initiates corruption and provides an ideal condition for corruption to prevail. Accumulation of wealth by the rich people will therefore hurt the common people as they are left out and the public interest is further disturbed.
Islam promotes just distribution and ethics in everything we do. Those practicing corruption should be penalized for their inefficiency and those who are efficient should be reward for their creditability.
Function of the Government & the Market Failure
The government is established as a protector for the public interest. It means that government will only see to it if there exist to be a market failure in the economic activity. However, there seem to be an interruption in the economic balance when the government is no longer protecting the public and is applying free trade thus causing massive competition to develop. Government especially in the third world countries tends to borrow from international donor organization such as the IMF, which in turn requires the debtor country to export their production instead of for local circulation. This will have a severe impact when the prices go up, food subsidies are eliminated, basic services cost such as electricity increased and health and educational funds vanish.
In addition to the said government’s failure, inadequate access to employment, lack of physical assets such as land and capital to be owned by the poor, lack of means of supporting rural development in poor region, inadequate access to markets where the poor can make trade, low endowment of human capital and the destruction of natural resources leading to environmental deprivation as well as reduced productivity are merely some of the causes of poverty in light of the function of the government.
Consequently, poor governance and market failure are two aspects, which should be properly addressed to attain justice in the economic activities, which will help in poverty eradication.
Poverty Eradication Strategies in Islam
Being a mankind, we are to approach poverty like any other problems faced by our society, in accordance with the Islamic teachings and way of life. It is the concern for the poor, which leads us to address their needs through many approaches, instruments and government policies.
Element of Poverty Alleviation
It is identified earlier that poverty is a result of diverse factors and therefore has different dimensions in which it would be implemented. These elements are the individual and society’s role in eradicating poverty as well as the government’s role.
Role of Individual & Society
As the creature of Allah (swt) on this Earth, we are to live a moderate lifestyle in such a way that we fulfill our material and spiritual needs simultaneously. Islam recognizes differences in individual human potentials because each is endowed with different types and levels of abilities.
Therefore, man is to earn his living according to his capacity and ability as that enshrined by Allah (swt) in the Holy Qur'an (al- Jumu’a: 10).
It is therefore, the public duty of individuals and society to focus on integrating the Islamic principles, moral and ethical aspect in our daily life, as well as the response from the society about poverty, regardless of involvement of the Government. In other words, the strategy to combat poverty is through harmonious equilibrium in development and Islamic ethical values. There should also be fundamental changes at both the management and policy level, and change in individual character to be more inspired, efficient and selfless individuals in any society. The Prophet also mentioned the importance of earning an honest living in his many hadith. One of them is reported by Al- Miqdam, who quoted the Prophet (saw) as saying:
“Nobody has ever eaten a better meal than that which one has earned by working with one’s own hands”.
Role of State in Economic Reform to Realize its Grand Impact: An Islamic Direction.
Creed and Islamic Economics The basic creed that promotes Islamic economic behaviour evolves from the Islamic concept of God, Allah, with attributes ascribed to Him – Al-Malik (the absolute Owner of All), Al-Rahim (who gives blessings and prosperity, particularly to whom use these gifts as he has permitted), Al-Muhaymin (watches over and protects all things), Al-Wahhab (donates all things to His creatures, even to non-believers), Al-Fattah (opens the solutions to all problems and eliminates obstacles), Al-Razzaq (the Provider of all things that are beneficial to His creatures) and so on.
The Divine attributes do not only have metaphysical significance; a firm belief in them acts as a powerful source of inspiration and guidance in economic pursuits and planning.
These attributes have been described through the Quranic verses and Hadith to construct a mind and guides individual behaviour in a direction, which truly reflects firm belief in Allah’s Unity, Tawhid. Without this firm belief the Islamic economic system and the whole life, falls prey to inconsistency and discord. How do beliefs in this attribute influence economic attitude?
A firm belief in the divine attribute of the Provider eliminates insatiable lust for amassing wealth through unlawful means and cools down impatience. It dissuades from unhealthy competition and egotism. It relieves tension and anxiety and unhealthy reaction in the event of poor for one’s effort. A firm belief in the divine assurance:
‘Whosoever fears Allah, Allah will appoint a way out for him and will provide for him from (a quarter) whence he has no expectation’ (65:2, 3).
It is not only discourages one from becoming avaricious and resorting to unlawful earning but also plays an important role in guiding policy-makers and planner to cast off the capricious fears of loss due to abolition of unlawful institutions and undesirable policies and programmed.
A firm belief in his attribute, Al-Razzaq, as expressed in the verse:
‘Slay not your children, fearing a fall to poverty, We shall provide for them and for you. Lo! The slaying of them is a great sin’ (17:31),
It would inspire the policy-makers to be restrained, barring exceptional cases, in launching on economic grounds a country-wide campaign for birth-control, which often provides a refuge for the morally corrupt. Similarly, belief in the Divine Wisdom of unequal distribution of wealth (4:32) shuns class antagonism and persuades the well-to-do to share their fortune to the poor, thus reducing the distance between the haves and haves-nots.
To conclude, firm belief in divine attributes not only has a far-reaching influence on the general attitude of the individual, it also touches economic enterprises, policy-making and planning. Without such firm belief practicing the Islamic injunctions poses formidable difficulties and leads one to impracticable compromises, which result in dualism and hypocrisy.
The Role of the Government towards Poverty Alleviation
Poverty, Employment and Growth The economic resources of this world belong to Allah who gave them to mankind to benefit from them. So, the duty of man is to properly utilize them for the welfare of society. This world entails:
(i) the full and efficient employment of all human and natural resources,
(ii) the alleviation of poverty and fulfillment of basic needs, and
(iii) the optimum rate of economic growth.
The objective of the alleviation of poverty, the full employment of resources and optimum rate of growth can only be achieved by the active participation of government. The Islamic government should not leave the allocation of resources only to the blind market forces because; being an impersonal entity, the market may not take care of the total welfare, especially of the poor, of the society.
The Government should play a positive role in the economy through pragmatic planning and by providing necessary physical and social infrastructure. The government must invest in this sector since private entrepreneurs may not find enough incentive to invest because of the heavy investment requirement and small monetary return realized over a long period time. In this case, government investment should be channeled into the improvement of highways, dams, bridges, the construction of irrigation networks, airports, telecommunication services and the provision of other facilities, which would bring about external economies to the different sectors of the economy.
So, An Islamic government has a great responsibility to eradicate poverty, fulfill basic needs and improve the living standard of the people. If it fails to do so, the Prophet’s (s.a.w) warning should remind them:
“Whom Allah has made administrator over the affairs of Muslims but remain indifferent to their needs and poverty, Allah will also be indifferent to his needs and poverty.”
Establishment of Equitable Distribution of Income and Wealth The establishment of an equitable distribution system calls for certain governmental functions, such as:
(i) the provision of training and rendering assistance for gainful employment to the public. A variety of technical training programs may be launched to assist the unskilled labour force of the less developed countries. (ii) the government should enforce a just remuneration system so as to fairly distribute the generated income among the factors of production.
(iii) the arrangement of a social security system based on zakat and other charitable revenues.
They would serve as insurance to the unemployed, handicapped, divorcees and other needy members of society. As basic necessities are provided, the national wealth circulates among the members of the community. This is why Islam makes it obligatory for the government to guarantee the provision of basic needs to all. If the existing fund is not sufficient, government has the right to pull resources from the rich in addition to the obligatory dues to guarantee basic needs to each and every one in the society. Ibn Hazm calls for the extra levies on the rich to fulfill the basic needs of the destitute of a society.
He says: “The rich of every locality are obliged to manage the basic needs of the destitute living in it. If the wealth, stored in Baitul-Mal, is not adequate to meets the wants of the indigents, the head of the state may compel the rich to contribute by imposing extra levies on them.”
The Government should play a great role through monetary and fiscal policies in reducing the disparity between the haves and have-nots. These policies should be geared towards the benefit of the poor. It is also one of the responsibilities of an Islamic government to differentiate between the deserving and undeserving of the national help.
In this case, the government should invest in the social overhead capital such as education, healthy and other infrastructural development so that the poor may benefit more than the rich.
Islam strongly encourages the rich to spend for people in the lower income group over and above compulsory payments so that wealth trickle-down among the various classes of society. In this context, the principle is that the more one has, the more responsible towards providing the poor one is. Allah says:
.ويسألونك ماذا ينفقون قل العفو...
“And they ask you how much they are to spend; say: what is beyond your needs.”
There are compulsory measures of distribution which also heavily contribute to the reduction of inequality among the people. The institutions of Zakat, tithe, sadaqatul fitr, inheritance, bequest etc. come under this category. In these cases, one has to dispose one’s wealth to one’s fellow-beings whereby have-nots become better off. Mutual gifts, endowments and other optional charities, on which Islam places a heavy emphasis, also reduce the disparity between the haves and the have-nots of society.
Taxation in an Islamic Economy
The classical Islamic scholars also gave justifications for taxation as a major of sources of government revenue in an Islamic state. This has been supported by Imam Malik:
“If there were no funds in the treasury or the need of the army increased above the capacity of the treasury, the state has the right to levy taxes on the rich up to the level that satisfies the need immediately and until the revenues of the treasury appear.”
Islamic government should make sure that the imposition of taxes does not the kill work incentives of the tax payers. It must carry out some research to find out which particular rates and types of taxation are the most suitable to maximize government revenue in the economy.
There should not be any injustice involved with taxation policy in an Islamic state. Although Islamic state has the right to impose taxes on the poor it should try to minimize their tax burden in general. The bulk of tax revenue should come from the rich of the society because, they are economically more capable to contribute towards revenue collection than the poor.
This is why suggestion has been made that the Islamic state should minimize indirect taxes, which are normally borne by the poor and concentrate on the direct taxes, which are usually collected from the rich.
Islamic Financial Institutions
Manadatory Tax (Zakat)
Zakat can be the source of sizeable financial resources for an Islamic state. It is collected from a full one-year possession of wealth, which reaches to the Nisab. The coverage of the zakat is very wide encompassing cattle, horses, sheep, gold, silver, merchandise, cash and securities. It should be kept in mind that zakat revenues couldn’t serve all the fiscal needs of an Islamic state since the avenues of this revenue have explicitly been mentioned in the Qur'an.
The expenditure of zakat proceeds must strictly be directed to the defined heads otherwise, the socio-economic objectives of the institution of Zakat may not be realized in a given society. The Zakat proceeds should be collected centrally by the Islamic government. It should establish a zakat department and employ efficient mechanisms, which will draw and disburse zakat revenue under the close supervision of the government. The overall efficiency of zakat collecting machinery must be maintained so that high operational costs and other administrative weaknesses may not jeopardize the objectives of the institution of Zakat as an instrument to alleviate poverty, redistribute income and act as a stabilizing device of an Islamic economy.
Tax on Land (Kharaj)
Agricultural land tax, Kharaj, is a rental fee on the land that becomes of the property of an Islamic government as a result of its liberation by Muslim troops. It is the consensus of the Muslim jurists that such lands be kept as public property and be taxed so that the future Muslim generations may benefit from these lands. Umar, the second caliph, did not distribute the large tract of Syrian, Egyptian and Iraqi fertile lands among the troops. Instead, he kept them with the public treasury as a state property. He left the land with their original owners and levied taxes on them.
The Islamic government would fix a rate for land tax depending on the qualities of the land such as the level of fertility, irrigation requirements and so on. The tax rates should be fixed on the basis of equity so that no injustice is done to farmers in case of over charging as well as to the state in case of under charging.
Jizyah
Islamic government may obtain a good amount of monetary resources from Jiziyyah. It is the Poll-tax on all non-Muslim male adults living in an Islamic state.
Since Islamic government provides security to their lives and properties ensures all other social rights, they obliged to pay a Poll-tax to the Islamic government. The Qur’an states:
...حتى يعطوا الجزية عن يد وهم صغرون
“Until they pay the Jiziyyah with willing submission and feeling themselves subdued.”
There is no fixed rate for the Poll-tax in Islam but it should not be below the rate of zakat on Muslims. In fact, the rate of jiziyyah would very much depend on the size of the share of national income enjoyed by the non-Muslims. This is to enable Islamic government to adequately finance the public expenditure of the country.
Charitable Trusts or Endowments (Al-Awqaf)
Charitable trusts transfer wealth from private ownership to beneficial, social, collective ownership. Islam does not make this practice obligatory but has strongly encouraged it and left it to voluntary initiatives of individuals. In spite of this, the Muslims accepted it wholeheartedly even in periods of economic decline and created charitable trusts, since the period of the Prophet (s.a.w) for important social and economic functions.
These trusts have successfully brought a changes and well improvement in the welfare of the needy.
Gifts (Al-Maniha)
Al-Maniha or Al-Minha are special kinds of gifts. The Prophet (s.a.w) in his various traditions used this method to provide some assistance to the early Muslim migrants from Mecca to Madinah who were in real need of some help. Al-Maniha means the granting of the usufruct of a productive asset to a needy person for a specific period. These gifts can be in term of money (cash), riding animals, dairy animals, agricultural land, fruits and other productive assets such as cars, ships etc.
Al-Fay’
Al-Fay’ is the wealth that Muslims acquire from the enemy without actual fighting. The recipients of fay’ are the Prophet (s.a.w), his family, the orphans, the needy and the wayfarer. This is also suggestive of the simple fact that the common man’s welfare does not depend on increase in items of ownership but also on increase in the benefits accruing to him without directly owning many of them. Besides, there are properties whose utility can be retained and protected only under government administration and ownership.
Treasure (Rikaz)
Rikaz is buried wealth found in land, which has no owner. The finder will have to pay 20% or one-fifth of the wealth. The opinions of the jurists on the recipients of this one-fifth of the wealth are divided. Some are the opinion that it should be distributed to the recipients of the fay’. Some others opine that it should be distributed as zakah. Whichever way it is distributed, it is still an important source of the needy.
Poverty Alleviation Strategy: a case study.
Amanah Raya Ikhtiar Malaysia (AIM) is a Non-Government Organization (NGO) has been established in order to create; out of the hard-core poor households, highly motivated individuals who would be committed to earn an honest living and eventually move out of the poverty trap. Instead of providing those grants or subsidies, they were given interest free loans to undertake income-generating projects of their choice. The loan was to be repaid on a weekly basis. They were entitled to another bigger loan whenever they have cleared the first loan.
This process goes on as long as they need the loan. The first loan is normally restricted to $500, the second $1000, continued with $1500, and $2000. If they have proven to be very successful, they could apply for much bigger loans of $5000 or even $15000.
It is also to noted that from the start these loans were given without any security, guarantor, or court action. If the beneficiaries pass away, the loans were be written off. Apart from the high rate of payback, the impact of this small loan scheme has been very commendable. About 55% of the beneficiaries would be out of poverty after taking three loans. This percentage would increase after the fourth and successive loans. Overall, not less than 80% of the beneficiaries will eventually out of the poverty.
This success of AIM has been widely publicized. AIM is actually not only Islamic in terms of the employing the developmental approach, but it is also Islamic in terms of loans extended which are completely free from riba. Although AIM insists on good pay back record all the time, but when the time comes to extend benevolence all debts due are written off. The group that has been extended the loans is those who belong to the destitute category, rather than poor, which is also Islamic.
History has it that about 99-100 years after the establishment of the Islamic State in Madinah, during the reign of Sayyidina Umar ibn Abdul Aziz, it was very difficult for the State to find someone who wanted to receive the Zakah allocated to the destitute and the poor.
Final Remarks
The socio-economic system of Islam has, from the very outset, addressed the problem of poverty, in a comprehensive and pragmatic way. Islam rightly distinguishes between the destitute and the poor to set the right approach and priority to alleviate them. Islam also establishes the obligatory sources of funds and assistance to the needy.
It is indeed unique to Islam to include zakah payment as the pillar of Islam and make the first two of the eight beneficiaries of zakah, the destitute and the poor, in that order. This clearly shows the commitment Islam has to combat poverty. Islam also establishes many other institutions, which are voluntary, for the needy.
This is indeed remarkable in the sense that is not only the obligation of the State to provide the minimum level of living for each citizen, but Islam makes it the business of every citizen to participate in this battle. This is a very significant approach because by so doing we are making the whole society aware of the need to give a helping hand. It also provides the checks and balances between the government and society.
A very significant contribution by the Islamic economic system is its approach to the alleviation of poverty. Whilst it provides transfers from the rich to the poor, it is only to those poor who cannot work, that are eligible to receive such transfers. These transfers, which come mainly from the public treasury, are enough for the whole year. Annual allocations are being made for these needy until their demise.
Secondly, the able-bodied are not encouraged depending their livelihood on the society and State. They are taught to earn an honest and honorable living, which is known as developmental approach that has long-term effects.
Thirdly, Islam through the zakah collection and disbursements, have always identified the needy and ensure that they receive their dues directly. In other words, Islam zeros in the individual or household instead of tackling them on group or regional basis.
This approach, coupled with the well-defined two distinct groups of destitute and poor, made it possible to narrow the scope and concentrate on alleviating the destitute first.
Sunday, March 25, 2012
Islamic Private Debt Securities (IPDS)? a Financial Gate-Way for ALL Humanity....
Islamic Private Debt Securities (IPDS)?
a discovered financial corridor for all humanity in the contemporary global socio-economic reality.
Changing economic and business environments as well as rapid technological advances over the last decade have had significant impact on the development of the financial system, domestically and globally. The needs to tackle the Islamic financial products are also crucial in order to align with the changes and promotion of Islamic financial products.
Global forces at work and advances in technology have redefined the rules of the game and transformed the operational environment within which financial institutions operate.
Indeed, the ability to reap the benefits arising from greater competition depends largely on the capability and capacity of financial institutions to adapt swiftly and to embrace the changes. Similarly, the rapid pace of economic development and transformation that creates new demands as well as opportunities for businesses have called for a more effective and efficient provision of financial services.
In moving ahead, a well-defined strategy will need to be formulated for the financial sector if it were to prosper in the new environment and play a meaningful role in the nation’s future economic development. This is very true in the light of making Malaysia as Islamic financial hub in the region; the proper landscape lay down should be properly design.
Key Challenges that Need to be Addressed
As changes in the global financial industry continue to evolve and accelerate in the new millennium, the Malaysian financial system, particularly domestic banking institutions and insurance companies will face mounting pressure to become more efficient and competitive, innovative, technology-driven, and strategically more focused. The financial infrastructure will have to be developed accordingly to facilitate and support this development. In so doing, the industry will face the following key challenges:
(i) The need for domestic institutions to improve their efficiency and effectiveness to be at par with the best international players; and
(ii) The need to ensure that performance gaps do not widen, as technology continues to drive global trends in financial services. In order to compete in the new environment, financial institutions in leading markets are leveraging on new technology, as well as:
(a) Becoming increasingly global and specialized;
(b) Using new organization structures and more aggressive compensation models;
(c) Relying much more on alliances and third party relationships; and
(d) Investing more in technology.
A well-diversified and competitive financial system is vital for the long-term economic growth and development to ensure that risks in the economy are well distributed among the various sub-sectors. In the new millennium, the future of the financial system lies in its ability to create a dynamic set of financial players, which are able to provide the support to the domestic economy, and more importantly, that are increasingly more efficient, competitive, sound and stable that would facilitate the economic transformation process.
While opportunities have emerged in this new environment, threats of the global marketplace are becoming more intensive, as global players and technology advancements are having an unprecedented impact on the approach of banking and financial businesses. Against this background, it is vital for the financial system, particularly the domestic financial institutions to be resilient and efficient if Malaysia is to ensure that its financial sector remains effective and responsive in the face of a more globalised, liberalized and a more complex domestic economy.
Declining of Traditional Financial Intermediation
The declining of traditional financial intermediation role of banking resulted from rapid expansion of capital market particularly financial innovation indicates deteriorating monopoly power over the surplus unit in the economy i.e. the depositors. As such, differentiated strategies based on strengths and market niches need to be formulated with a greater emphasize given to formulate strategies to tap the lowest cost and stable funds.
Debt Capital Market
Expansion of capital market resulted in declining role of intermediation of financial institution and narrowing margin. Fee based income through expansion in capital market activities becomes a new major source of income. The Islamic private debt securities (IPDS) market has grown slowly but steadily over the last few years as it provides alternative and sound avenue of investment. The growth in IPDS market is shown below:
Dynamic Risk Management
The new Basel Capital Accord
The competitive dynamic of financial market shifts from size of financial institution (i.e. big banks vs. small banks) to risk inherent with the financial institutions (high-risk vs. low-risk bank).
Addressing risk concentration and insulating the financial system through reducing reliance on loans. It creates pressure on high-risk financial institutions to restructure their balance sheet and take on less leverage.
A more flexible and forward-looking mechanisms need to be innovated including ongoing innovation of risk-transfer vehicle that can meet the changing reality of risk management.
Credit derivatives (i.e. Asset backed securitisation) through issuance of collateralised debt obligation by the special purpose vehicle i.e. a bankruptcy remote entity is one of the mechanisms to completely transfer the risks.
Benefit of Asset Backed Securitization
The asset backed securitization is expected to bring about the following benefits:
1. Capital Adequacy Ratio.
2. Increase in Profitability.
3. Risk Management
Capital Adequacy Ratio
Based on the preliminary assumed target transaction size is approximately RM 500 million. By selling these facilities to a newly established Special Purpose Vehicle ("SPV"), RM 500 million of risk-weighted assets ("RWA") will be released from bank's Balance Sheet. This would free up the current risk-based capital and enable bank to originate newer and more profitable facilities.
Based on the Prudential Standards on Asset Backed Securitization Transactions by Licensed Institutions issued by Bank Negara Malaysia ("BNM"), dated March 2003, paragraph 2.4:
"Where a banking institution (both originating and third party licensed institution) provides first loss facility, directly or indirectly to the SPV, the banking institution is required under the capital adequacy framework to deduct the full amount of the facility from its capital base (i.e. total capital). The deduction will however, be capped at the amount which would have been provided for as it the entire assets were to remain or appear in the institution’s balance sheet.”
Assuming a Senior Note issuance amount of 90% of total transaction size, the first loss portion retained by bank through the Junior Note would be 10% of the transaction size. Based on our understanding of the guidelines, the amount of the Junior Note would be deducted from the capital base, but would be capped at the amount which would have been provided for as if the entire assets were to remain or appear in bank's balance sheet.
Hence from this analysis, we believe that the adjustments for bank's CAR would be as follows:
That the ABS transaction would increase the CAR of bank by 1.60%1 to 11.88%. Hence from the illustration above, we conclude that the transaction would not adversely affect the CAR of bank. Further, given the specific statement regarding the capped limit outlined in the Prudential Guideline, the CAR of the bank will not be adversely affected under any circumstances.
Increase in Profitability for Bank
We believe that bank's profitability can increase by participating in the following three roles:
(i) Junior Note holder;
(ii) Servicer;
(iii) Placement Agency in this transaction. Furthermore, bank can gain a leveraged return from the newly originated assets.
Junior Note holder
The junior note will have implied yield more than the average yield of the securitized loan portfolio. Hence the bank will still earn more spread as compared to keeping the loan portfolio in its balance sheet. However the risk profile still remains for the portion of junior note as if the loan portfolio still remains in the balance sheet.
Service
Additionally, bank would also generate an ongoing fee through acting as the servicer of the transaction. With this qualification, in addition to the market recognition, it would entitle bank to collect a fee through acting as a backup-servicer for other future securitization transactions. i.e., to act as the servicer of the transactions in which the originator does not have strong credit and servicing quality. This requirement is usually imposed by the rating agency.
Placement Agency
Common place for many primary transactions in Malaysia, bank would also be able to obtain a substantial profit as the placement agency during the syndication process.
Newly Originated Assets
Assuming that new facilities are originated in this exercise, bank also stand to gain an expected profit from the newly originated facilities in addition to the expected profit from the Junior Note. In order words, this transaction allows a leveraged return on the asset. This funding technique has been a common tool for international financial institutions to diversify their funding sources and allow them to enhance their profitability through a more efficient allocation of their capitals.
Risk Management
Asset-Liability Hedge
This transaction represents an alternative source of funding for bank, and would enable bank to lock-in long term funding cost based on estimated average life of the transaction. Given that the funding cost of portfolio, the average yield is able to be locked-in a low long term funding cost as well as the profit rate margin though this transaction.
Reduction of Single Borrowing Limit
Since this transaction is targeted as an off-balance sheet transaction, bank would have the opportunity to extend further credits to existing customers who have already reached the single borrowing limit within bank by off-loading the existing facilities to this transaction. At the same time, we can still capture the existing benefits through holding the Junior Note. Therefore, we believe that this Transaction can manage the credit quality of our portfolio in a very effective manner.
Limited Downside in Investment in Junior Note
Further, upon closing of the transaction, bank will only be the Junior Note holder. As such, the risk incurred in the securitized portfolio will be capped by the size of the Junior Note while investment. In other words, the risk faced by bank will only be limited to its investment in the Junior Note. For any additional defaults beyond the subordination level, the risk will be borne by the Senior Note holders.
Bay al 'Inah (Buy Back Sell)in the Issuance of IPDS
Bay’ al-'Inah is a forbidden contract based on the consensus of the jurists (ijma’), however it’s a lawful contract in the Shafi’s view. This is a type of sale taken as a means for Riba.
The Maliki and Hanbali jurists hold that the contract of 'Inah is not valid (Sahih) because, according to them the motive of the parties to the contract determines the legality or illegality of the contracts, and in the sale under consideration the motive of the parties is illegal and, therefore, the sales are not valid because they constitutes a legal device (Hilah) to get a loan with interest which should be averted at all costs according to the Sharicah. Ibn Qayyim, a Hanbali author states that intention influences legal act: the formality of legal act can be the same but end results depend on the intention.
According to Shafi’i school such sales are to be allowed because, in the words of Imam Shafi’i, contracts are valid (Sahih) by the external evidence that they were properly concluded: the unlawful intention (niyya or qasd) of the parties is immaterial, it does not invalidate their act, unless expressed in that act.
In addition to the above, Ibn Qayyim prohibited the contract of Bay’ al-inah based on the hadith of the Prophet (PPUH) in which he said:
“a time is certainty coming to mankind when they legalise the riba under the name of Bay’ (Sale)”.
To several Muslim scholars al-'Inah contract is haram based on the following hadith hasan:
" إذا تبايعتم بالعينة وأخذتم أذناب البقر، ورضيتم بالزرع، وتركتم الجهاد سلط الله عليكم ذلا لا ينزعه حتى ترجعوا إلى دينكم " (صحيح أبي داود، حديث رقم 2956 ) (صححه الألباني)
Ibn Umar said: “I heard the Prophet of Allah (S.A.W) say when you enter into the cinah transaction, hold the tails of oxen, are pleased with agriculture, and give up conducting jihad, Allah will make disgrace prevail over you, and will not withdraw it until you return to your original religion”.
From the above, it is very clear that this type of contract (better not to say bai’ or sale, because once we mention the world bai’ it seems as if it is permissible) is not halal based on ajima and some Prophetic sayings.
Most of the Muslims scholars (such as Ibn Abbas, Um al-Muamneen Aishah, Al-hassan, Ibn Syreen, Al-Thoriah, Imam Malik, Al-awzah, etc)are on the opinion that every body who sell goods or any type of asset based on deferred price and then buy back that asset for lower cash price, that contract is not valid.
According to Abu Hanifa, this sale is void if it is concluded without the intermediation of a third person .However, Imam Al-Shafi, and the Zahiry’s School (only), Said: this type of contract is valid.
The Structure
Securitization for a corporate entity involves more complicated issues. It involves three main parties, namely the Originator (i.e. the owner of the assets), the Special Purpose Vehicle (SPV) which buys the assets and issues securities and the investor (who buys the securities). Banks participate in the securitization process as originator cum servicer.
Securitization enables a company to convert its assets into immediate cash, which will then determine the company’s ability to going concern. It is regarded as an off-balance sheet financing whereby not only a company can convert the usable assets in to cash, but it also removes the assets (e.g. receivables) from the books.
Requirement For Assets That May Be Securitized The assets that are the subject matter of a securitization transaction must fulfill all of the following criteria:
(i) the assets must generate cash flow;
(ii) the Originator has a valid and enforceable interest in the assets and in the cash flows of the assets prior to any securitization transaction;
(iii) there are no impediments (contractual or otherwise) that prevent the effective transfer of the assets or the rights in relation to such assets from an Originator to an SPV. For example: that the necessary regulatory or contractual consents have been obtained in order to effect the transfer of such assets from an Originator to an SPV; that the Originator has not done or omitted to do any act which enables a debtor of the Originator to exercise the right of set-off in relation to such assets;
(iv) the assets are transferred at a fair value;
v) no trust or third party’s interest appears to exist in competition with an Originator’s interest over the assets; and
(vi) where the interest of an Originator in the assets is as a chargee, the charge must have been created for a period of more than 6 months before the transfer.
Where the issue, offer or invitation of ABS are Islamic in nature, the assets that are the subject matter of the securitization transaction must be acceptable in accordance with Shari'ah principles. In the event of doubt, clarification should be sought from the Shari'ah Advisory Council of the SC.
The Originator
1. An Originator must be an entity incorporated in Malaysia.
2. An Originator must be a going concern at the date of transfer of any assets to an SPV. For the purposes of these Guidelines, an Originator will not be considered as a going concern if it is unable to pay any of its debts as they fall due or when it suspends payment of any of its debt obligations.
3. Any transfer of assets by an Originator to an SPV must comply with the true sale criteria.
4. The Originator may only purchase ABS issued by an SPV up to 10% of the original amount of the ABS issued by the SPV at market value at any time unless otherwise permitted by the SC.
5. No limits with respect to the holdings of subordinated debt securities by an Originator. Where an Originator is the only primary subscriber resulting in the Originator holding more than 10% of the ABS, the Originator must make best endeavors to place out such excess ABS within a period of not more than 3 months from the date of issuance of such ABS.
6. An Originator should also have internal systems to ensure that funds due to the SPV are separated and “ring-fenced” from other funds due to the Originator as soon as practicable.
True Sale Criteria
The underlying assets must have been isolated from an Originator i.e. put beyond the reach of the Originator and its creditors even in receivership or bankruptcy as far as possible.
The risk that a transfer of assets by an Originator to an SPV might be re-characterized as a financing transaction rather than a sale of assets should be minimized as far as possible. In this regard, the Originator must effectively transfer all rights and obligations in the underlying assets to the SPV.
An Originator must not hold any equity stake, directly or indirectly, in an SPV. In addition, the Originator must not be in a position to exercise effective control over the decisions of the SPV in relation to the securitization transaction.
An SPV must have no recourse to an Originator for losses arising from those assets for any credit enhancement provided by the Originator at the outset of the securitization transaction.
Where an Originator is also the Servicer, the services must be provided on an arm’s length basis, on market terms and conditions. In addition, there must be no obligation imposed on the Originator to remit funds to the SPV unless and until they are received from the debtor of the Originator in respect of the underlying assets.
Notwithstanding of the above provisions,
(i) Where such assets have declined to a level that renders the asset securitization transaction uneconomical to carry on, an Originator may retain a first right of refusal to repurchase assets from an SPV at a fair value; or
(ii) the Originator may repurchase assets from the SPV where the Originator is under an obligation to do so under a securitization transaction when it has breached any conditions, representation or warranty in respect of the securitization transaction.
The Special Purpose Vehicle (SPV)
1. An SPV must be resident in Malaysia for tax purposes.
2. An SPV must have independent and professional directors or trustees as the case may be.
3. In determining whether an SPV is sufficiently “bankruptcy remote”, the following must be taken into account:
(i) An SPV cannot include in its objectives, the power to enter into any other activities that are not incidental to its function as a special purpose vehicle in relation to the securitization transaction.
(ii) An SPV must sub-contract to third parties all services that may be required by it in order to maintain the SPV and its assets;
(iii) An SPV is not permitted to have employees or incur any fiduciary responsibilities to third parties other than to parties involved in the securitization transaction; and
(iv) All the liabilities, present or future, of an SPV (including tax) must be quantifiable and capable of being met out of resources available to it.
4. An SPV must be responsible for the acts and omissions of all persons to whom it delegates any of its functions. Thus, an SPV is ultimately responsible to ensure that its assets are managed with due care and in the best interests of ABS holders.
5. Without prejudice to any applicable law, an SPV must cause to be maintained proper accounts and records to enable a complete and accurate view to be formed of its assets, liabilities, income and expenditure and to comply with all other regulatory reporting requirements in respect of the issue, offer or invitation of ABS.
6. An SPV must be dissolved when the following circumstances arise:
(i) It refuses to accept transfers of the assets or issue ABS within 6 months from the date on which the securitization transaction is approved by the SC or such other period as may be specified by the SC; or
(ii) More than seventy five percent of ABS holders have resolved, in accordance with the terms and conditions agreed by all the relevant parties in a securitization transaction, that the SPV shall be dissolved and the SC has been notified of this resolution. In addition, more than 50% of the senior classes of ABS holders must consent to the dissolution; or
(iii) Upon full repayment of the ABS in accordance with the terms and conditions of the securitization transaction.
Servicer
The duties of any Servicer of the assets must include the following:
(i) The Servicer must keep proper accounts;
(ii) The trustee must be informed of any change of Servicer;
(iii) The Servicer must have adequate operational systems and resources to administer the asset portfolio. In particular, these internal systems should ensure that the cash flows belonging to the SPV are "ring-fenced" and segregated in relation to a securitization transaction; and
(iv) Where there is any change of Servicer, provision must be made in the legal documentation for the periodic transfer of the necessary information from the Originator to the substitute Servicer to enable the monitoring of the asset portfolio, its performance analysis and collections from debtors of the Originator.
Rating Requirement
All issues, offers or invitations that come within the scope of these Guidelines must be rated by a rating agency recognized by the Commission unless otherwise allowed in writing by the Commission. An indicative rating must have been obtained by the issuer at the time of submission of the declarations and information to the Commission.
The mandatory rating requirement need not be complied with in regard to any issue, offer or invitation in respect of irredeemable convertible loan stocks.
Where the credit rating of any issue, offer or invitation is below investment grade, the issuer must disclose the extent of credit risk to investors and their professional advisers in order to evaluate the risks relating to the private debt securities.
Underwriting
The underwriting of any issue, offer or invitation shall be decided by the issuer and its adviser.
In the event that the issuer and its adviser should decide that no underwriting is required, the issuer must state the minimum level of subscription necessary to achieve the funding objectives of the issuer.
Unless otherwise allowed in writing by the Commission, where any issue, offer or invitation is under-subscribed and cannot meet the minimum level of subscription, the issue, offer or invitation must be aborted and any consideration received for the purposes of subscription, where applicable, must be immediately returned to all subscribers.
In relation to Islamic Private Debt Securities (“IPDS"), the issuer must appoint either:
(i) An independent Shari’ah adviser(s) who has been approved by the Commission and who meets the following criteria:
(a) is not an undercharged bankrupt;
(b) has not been convicted for any offence arising out of a criminal proceeding;
(c) is of good repute;
(d) possesses the relevant qualifications and expertise, particularly in fiqh muamalah and Islamic jurisprudence, and has a minimum of 3 years working experience or exposure in Islamic finance; or
(ii) the Shari'ah Committee of an Islamic bank or a licensed institution approved by Bank Negara Malaysia to carry out Islamic Banking Scheme or Skim Perbankan Islam, to advise on all aspects of the IPDS including documentation, structuring, investment as well as other administrative and operational matters in relation to the IPDS.
Where the Shari'ah adviser proposed to be appointed is a company, such company must have, in its employment, a minimum of one individual who meets certain criteria. In addition, the company should not have breached any securities or banking laws since the date of its incorporation nor have a winding up order or resolution passed against the company.
Any Shari'ah principle and concept adopted in order to structure an IPDS must be based on such principles and concepts as approved by the Commission’s Shari'ah Advisory Council ("SAC").
Where any Shari'ah principle or concept applied in the structuring of an issue, offer or invitation is based on a principle or concept, the approval of the SAC must be obtained prior to any submission of declarations and information to the Commission.
Credit Enhancement
Banking institutions may provide credit enhancement facilities in order to improve the credit attractiveness of a securitization scheme. These facilities may be in the form of first or second loss facilities that include but are not limited to arrangements such as subordinated loan facilities, over-collateralization or cash collaterals.
A banking institution providing credit enhancement must ensure that:
i. The facility has a finite amount and duration, specified at the outset of the transaction;
ii. There is no recourse to the banking institution beyond the fixed contractual obligations under the facility;
iii. The SPV and/or investors have the right to select and alternative party to provide the facility;
iv. The facility is documented separately from any other facility provided by the banking institution;
v. The details of the facilities are disclosed in the offering information memorandum or prospectus; and
vi. The facility is provided on an arm's length basis and is subject to the banking institution's normal credit approval and review.
First Loss Facility
First loss credit enhancement facility represents the first level of protection against potential loss. This amount is determined with the rating agencies based on certain formula such as the multiples of expected loss of the asset pool or certain minimum levels of over-collateralization and interest cover ratios with a view to secure a particular rating for the senior classes.
First loss credit enhancement can be provided in several forms such as a subordinated investment, capitalization of the SPV, or over-collateralization (discussed separately below). Irrespective of its form, the purpose of first loss credit enhancement is to absorb any losses in the asset pool caused by the 6ks to which the asset pool is exposed to.
1. Where a banking institution (both originating and third party licensed institution) provides first loss facility, directly or indirectly to the SPV, the banking institution is required under the capital adequacy, framework to deduct the full amount of the facility from its capital base (total capital). The deduction will however, be capped at the amount which would have been provided for as if the entire assets were to remain or appear in the institution's balance sheet.
2. In cases where the asset transferred to the SPV is more than the total amount of securities being issued by the SPV, the difference between the two values would normally constitute an over-collateralization amount (transferred as security). This could act as a first loss facility in which case will require capital deduction by the originating banking institution, unless provision has been made through the income statement.
3. A first loss facility may also be in the form of maintenance of cash collateral account, where cash is provided upfront by the provider of the credit enhancement. Banking institutions that provide such facility as first loss facility would normally write off that amount in the income statement, failing which, the amount (outstanding amount) would have to be deducted from its capital base (total capital) under the capital adequacy computation.
4. Credit enhancement could also be provided through the structure of the securities issued itself. This will involve the issuance of senior and subordinated securities; the latter is normally unrated and held by the originator as a form of first loss facility, in which case, capital deduction is applied.
5. The maintenance of excess spread accounts within the SPV could also be a form of credit enhancement. If the excess spread is provided the difference between the return at which the pool is transferred to the SPV and the weighted average cost of the funding raised by the SPV as first loss facility and has been captured as a gain on sale (and therefore become part of the capital of the originating institution), the amount shall be deducted from the capital base.
Second Loss Facility
1. A cedit enhancement facility will be treated as 'second loss facility' if it ranks above the first loss facility that has been agreed by BNM. Such facility is often rated lower than BBB or equivalent quality and is often provided as protection against the mezzanine risks tranches. Banking institutions that provide 'second loss facility' shall assign a 100% risk weight to the facility on its balance sheet.
2. Where various credit enhancements are given for a transaction in a hierarchy (that is, one being senior to the other in terms of allocation of cash flows), BNM may consider the senior ones among the several enhancements as being a 'second loss' in limited circumstances, where BNM has to be satisfied that the junior forms of credit enhancement are sufficient as a first loss facility.
For instance, if there is an over-collateralization as well as a subordinated debt security in a transaction, where the level of over-collateralization is considered sufficient and no less than that enjoyed by any BBB-rated tranche in a securitization transaction, the subordinated debt may be treated as second loss piece.
In such circumstances, banking institutions shall demonstrate to BNM their claim on the quality of the unrated/subordinated tranche to be treated as 'second loss' and shall obtain the opinion of the rating agencies as to the quality of the subordinated tranche.
3. In the event of downgrades of the second loss facility, the facility may continue to be treated as 'second loss' and held by banking institutions. However, BNM reserves the right to assign a higher risk weight, require provision to be made, or reclassify the facility as first loss (in which case capital deduction is required and subject to the 8% cap) should the situation warrant.
4. In any traditional securitization where several forms of credit enhancements are involved, the originating banking institutions must be able to demonstrate to BNM the order in which they will be used to absorb losses from the underlying assets.
5. Where credit enhancements provided are other than those mentioned herein (e.g. third party credit enhancements), the principles in the preceding paragraphs as well as existing capital adequacy framework shall apply. Banking institutions are advised to discuss with BNM the regulatory impact of providing such a facility.
6. While an originating banking institution is allowed to provide both first and second loss facility, BNM reserves that right to require that the second loss facility be provided by a third party, which could be another banking institution, under certain circumstances such as deteriorating capital strength of the originating banking institution.
Accounting Issue
Standing Interpretation Committee of Guidelines of the International Accounting Standard Board
This interpretation addresses the question of when a special purpose entity would be consolidated by a reporting enterprise. The SIC agreed that an enterprise should consolidate a special purpose entity ("SPE") when, in substance, the enterprise controls the SPE.
Examples of SPEs include entities set up to affect a lease, a securitization of financial assets or R&D activities. The concept of control used in IAS 27: Consolidated Financial Statements requires having the ability to direct or dominate decision making accompanied by the objective of obtaining benefits from the SPE's activities.
The Interpretation provides example indications of when control may exist in the context of an SPE. The examples involve activities of the SPE on behalf of the reporting enterprise, the reporting enterprise having decision-making powers over the SPE, and the reporting enterprise having rights to the majority of benefits and exposure to significant risks of the SPE.
Some enterprises may also need to evaluate separately the topic of derecognition of assets, for example, related to assets transferred to an SPE.
In some circumstances, such a transfer of assets may result in those assets being derecognized and accounted for as a sale. Even if the transfer qualifies as a sale, the provisions of IAS 27 and SIC-12 may mean that the enterprise should consolidate the SPE. SIC-12 does not address the circumstances in which sale treatment should apply for the reporting enterprise or the elimination of the consequences of such a sale upon consolidation.
Tax Issues
Some uncertainties are still looming over, especially in the areas of taxation. Naturally, a person will only raise fund via a selected method over other alternatives if he can derive benefits there from of at least achieve a “no gain, no loss” position from tax perspective.
Tax cost is of great significance and as such, tax implications arising from any financing structures must be addressed at outset.
To date, there is no specific income tax law in Malaysia governing the taxation of the originator or SPV involved in securitization exercise.
Since asset securitization is relatively new, it will take a while before it is fully-developed in Malaysia, including the related tax issues. Hence, one has to rely on the existing tax law.
Final Remarks
It is important to have a master plan that cater private debt issuance in the Islamic financial dealings as the growth of the products has substantially increase in the recent development.
The issue of Bay’ al-'Inah has to take into consideration. On what ground Muslim jurists make their ijtihad on the applicability of Bay’ al-'Inah in the issuance of Islamic Private Debt Securities.
Bai al-'Inah is a valid contract in the Shaf’iis point of view based on Qiyas, and is a forbidden sale in the Jamhor’s opinion based on a sahih hadith. Up to our knowledge, Malaysia is the only Muslim country which is practicing bai’ al-inah, and widely being used in the bonds market -in the securitization process.
Nevertheless, it is important to have a sound Islamic Financial system in order to meet the challenge of globalization and rapid technology changes, so that Malaysia can be a the leader of Islamic financial dealings which Muslim world are lacking.
The OIC summit may be a platform to design and duly endorse the landscape for future Islamic Financial system which ultimately benefit the Ummah.
The needs of mutual agreement between OIC members, the spirit of brotherhood, and the solidarity of Ummah must be put in place in order to find the right tune for Muslim countries to advance in the this world and hereafter.
The differences must be reconciled in a right manner so that Muslim will unite under the banner of the Islam noble teachings with universal character, which may simultaneously bring advantage for all humanity regardless of one's background of religion, race, status, gender, color or even nationality.
a discovered financial corridor for all humanity in the contemporary global socio-economic reality.
Changing economic and business environments as well as rapid technological advances over the last decade have had significant impact on the development of the financial system, domestically and globally. The needs to tackle the Islamic financial products are also crucial in order to align with the changes and promotion of Islamic financial products.
Global forces at work and advances in technology have redefined the rules of the game and transformed the operational environment within which financial institutions operate.
Indeed, the ability to reap the benefits arising from greater competition depends largely on the capability and capacity of financial institutions to adapt swiftly and to embrace the changes. Similarly, the rapid pace of economic development and transformation that creates new demands as well as opportunities for businesses have called for a more effective and efficient provision of financial services.
In moving ahead, a well-defined strategy will need to be formulated for the financial sector if it were to prosper in the new environment and play a meaningful role in the nation’s future economic development. This is very true in the light of making Malaysia as Islamic financial hub in the region; the proper landscape lay down should be properly design.
Key Challenges that Need to be Addressed
As changes in the global financial industry continue to evolve and accelerate in the new millennium, the Malaysian financial system, particularly domestic banking institutions and insurance companies will face mounting pressure to become more efficient and competitive, innovative, technology-driven, and strategically more focused. The financial infrastructure will have to be developed accordingly to facilitate and support this development. In so doing, the industry will face the following key challenges:
(i) The need for domestic institutions to improve their efficiency and effectiveness to be at par with the best international players; and
(ii) The need to ensure that performance gaps do not widen, as technology continues to drive global trends in financial services. In order to compete in the new environment, financial institutions in leading markets are leveraging on new technology, as well as:
(a) Becoming increasingly global and specialized;
(b) Using new organization structures and more aggressive compensation models;
(c) Relying much more on alliances and third party relationships; and
(d) Investing more in technology.
A well-diversified and competitive financial system is vital for the long-term economic growth and development to ensure that risks in the economy are well distributed among the various sub-sectors. In the new millennium, the future of the financial system lies in its ability to create a dynamic set of financial players, which are able to provide the support to the domestic economy, and more importantly, that are increasingly more efficient, competitive, sound and stable that would facilitate the economic transformation process.
While opportunities have emerged in this new environment, threats of the global marketplace are becoming more intensive, as global players and technology advancements are having an unprecedented impact on the approach of banking and financial businesses. Against this background, it is vital for the financial system, particularly the domestic financial institutions to be resilient and efficient if Malaysia is to ensure that its financial sector remains effective and responsive in the face of a more globalised, liberalized and a more complex domestic economy.
Declining of Traditional Financial Intermediation
The declining of traditional financial intermediation role of banking resulted from rapid expansion of capital market particularly financial innovation indicates deteriorating monopoly power over the surplus unit in the economy i.e. the depositors. As such, differentiated strategies based on strengths and market niches need to be formulated with a greater emphasize given to formulate strategies to tap the lowest cost and stable funds.
Debt Capital Market
Expansion of capital market resulted in declining role of intermediation of financial institution and narrowing margin. Fee based income through expansion in capital market activities becomes a new major source of income. The Islamic private debt securities (IPDS) market has grown slowly but steadily over the last few years as it provides alternative and sound avenue of investment. The growth in IPDS market is shown below:
Dynamic Risk Management
The new Basel Capital Accord
The competitive dynamic of financial market shifts from size of financial institution (i.e. big banks vs. small banks) to risk inherent with the financial institutions (high-risk vs. low-risk bank).
Addressing risk concentration and insulating the financial system through reducing reliance on loans. It creates pressure on high-risk financial institutions to restructure their balance sheet and take on less leverage.
A more flexible and forward-looking mechanisms need to be innovated including ongoing innovation of risk-transfer vehicle that can meet the changing reality of risk management.
Credit derivatives (i.e. Asset backed securitisation) through issuance of collateralised debt obligation by the special purpose vehicle i.e. a bankruptcy remote entity is one of the mechanisms to completely transfer the risks.
Benefit of Asset Backed Securitization
The asset backed securitization is expected to bring about the following benefits:
1. Capital Adequacy Ratio.
2. Increase in Profitability.
3. Risk Management
Capital Adequacy Ratio
Based on the preliminary assumed target transaction size is approximately RM 500 million. By selling these facilities to a newly established Special Purpose Vehicle ("SPV"), RM 500 million of risk-weighted assets ("RWA") will be released from bank's Balance Sheet. This would free up the current risk-based capital and enable bank to originate newer and more profitable facilities.
Based on the Prudential Standards on Asset Backed Securitization Transactions by Licensed Institutions issued by Bank Negara Malaysia ("BNM"), dated March 2003, paragraph 2.4:
"Where a banking institution (both originating and third party licensed institution) provides first loss facility, directly or indirectly to the SPV, the banking institution is required under the capital adequacy framework to deduct the full amount of the facility from its capital base (i.e. total capital). The deduction will however, be capped at the amount which would have been provided for as it the entire assets were to remain or appear in the institution’s balance sheet.”
Assuming a Senior Note issuance amount of 90% of total transaction size, the first loss portion retained by bank through the Junior Note would be 10% of the transaction size. Based on our understanding of the guidelines, the amount of the Junior Note would be deducted from the capital base, but would be capped at the amount which would have been provided for as if the entire assets were to remain or appear in bank's balance sheet.
Hence from this analysis, we believe that the adjustments for bank's CAR would be as follows:
That the ABS transaction would increase the CAR of bank by 1.60%1 to 11.88%. Hence from the illustration above, we conclude that the transaction would not adversely affect the CAR of bank. Further, given the specific statement regarding the capped limit outlined in the Prudential Guideline, the CAR of the bank will not be adversely affected under any circumstances.
Increase in Profitability for Bank
We believe that bank's profitability can increase by participating in the following three roles:
(i) Junior Note holder;
(ii) Servicer;
(iii) Placement Agency in this transaction. Furthermore, bank can gain a leveraged return from the newly originated assets.
Junior Note holder
The junior note will have implied yield more than the average yield of the securitized loan portfolio. Hence the bank will still earn more spread as compared to keeping the loan portfolio in its balance sheet. However the risk profile still remains for the portion of junior note as if the loan portfolio still remains in the balance sheet.
Service
Additionally, bank would also generate an ongoing fee through acting as the servicer of the transaction. With this qualification, in addition to the market recognition, it would entitle bank to collect a fee through acting as a backup-servicer for other future securitization transactions. i.e., to act as the servicer of the transactions in which the originator does not have strong credit and servicing quality. This requirement is usually imposed by the rating agency.
Placement Agency
Common place for many primary transactions in Malaysia, bank would also be able to obtain a substantial profit as the placement agency during the syndication process.
Newly Originated Assets
Assuming that new facilities are originated in this exercise, bank also stand to gain an expected profit from the newly originated facilities in addition to the expected profit from the Junior Note. In order words, this transaction allows a leveraged return on the asset. This funding technique has been a common tool for international financial institutions to diversify their funding sources and allow them to enhance their profitability through a more efficient allocation of their capitals.
Risk Management
Asset-Liability Hedge
This transaction represents an alternative source of funding for bank, and would enable bank to lock-in long term funding cost based on estimated average life of the transaction. Given that the funding cost of portfolio, the average yield is able to be locked-in a low long term funding cost as well as the profit rate margin though this transaction.
Reduction of Single Borrowing Limit
Since this transaction is targeted as an off-balance sheet transaction, bank would have the opportunity to extend further credits to existing customers who have already reached the single borrowing limit within bank by off-loading the existing facilities to this transaction. At the same time, we can still capture the existing benefits through holding the Junior Note. Therefore, we believe that this Transaction can manage the credit quality of our portfolio in a very effective manner.
Limited Downside in Investment in Junior Note
Further, upon closing of the transaction, bank will only be the Junior Note holder. As such, the risk incurred in the securitized portfolio will be capped by the size of the Junior Note while investment. In other words, the risk faced by bank will only be limited to its investment in the Junior Note. For any additional defaults beyond the subordination level, the risk will be borne by the Senior Note holders.
Bay al 'Inah (Buy Back Sell)in the Issuance of IPDS
Bay’ al-'Inah is a forbidden contract based on the consensus of the jurists (ijma’), however it’s a lawful contract in the Shafi’s view. This is a type of sale taken as a means for Riba.
The Maliki and Hanbali jurists hold that the contract of 'Inah is not valid (Sahih) because, according to them the motive of the parties to the contract determines the legality or illegality of the contracts, and in the sale under consideration the motive of the parties is illegal and, therefore, the sales are not valid because they constitutes a legal device (Hilah) to get a loan with interest which should be averted at all costs according to the Sharicah. Ibn Qayyim, a Hanbali author states that intention influences legal act: the formality of legal act can be the same but end results depend on the intention.
According to Shafi’i school such sales are to be allowed because, in the words of Imam Shafi’i, contracts are valid (Sahih) by the external evidence that they were properly concluded: the unlawful intention (niyya or qasd) of the parties is immaterial, it does not invalidate their act, unless expressed in that act.
In addition to the above, Ibn Qayyim prohibited the contract of Bay’ al-inah based on the hadith of the Prophet (PPUH) in which he said:
“a time is certainty coming to mankind when they legalise the riba under the name of Bay’ (Sale)”.
To several Muslim scholars al-'Inah contract is haram based on the following hadith hasan:
" إذا تبايعتم بالعينة وأخذتم أذناب البقر، ورضيتم بالزرع، وتركتم الجهاد سلط الله عليكم ذلا لا ينزعه حتى ترجعوا إلى دينكم " (صحيح أبي داود، حديث رقم 2956 ) (صححه الألباني)
Ibn Umar said: “I heard the Prophet of Allah (S.A.W) say when you enter into the cinah transaction, hold the tails of oxen, are pleased with agriculture, and give up conducting jihad, Allah will make disgrace prevail over you, and will not withdraw it until you return to your original religion”.
From the above, it is very clear that this type of contract (better not to say bai’ or sale, because once we mention the world bai’ it seems as if it is permissible) is not halal based on ajima and some Prophetic sayings.
Most of the Muslims scholars (such as Ibn Abbas, Um al-Muamneen Aishah, Al-hassan, Ibn Syreen, Al-Thoriah, Imam Malik, Al-awzah, etc)are on the opinion that every body who sell goods or any type of asset based on deferred price and then buy back that asset for lower cash price, that contract is not valid.
According to Abu Hanifa, this sale is void if it is concluded without the intermediation of a third person .However, Imam Al-Shafi, and the Zahiry’s School (only), Said: this type of contract is valid.
The Structure
Securitization for a corporate entity involves more complicated issues. It involves three main parties, namely the Originator (i.e. the owner of the assets), the Special Purpose Vehicle (SPV) which buys the assets and issues securities and the investor (who buys the securities). Banks participate in the securitization process as originator cum servicer.
Securitization enables a company to convert its assets into immediate cash, which will then determine the company’s ability to going concern. It is regarded as an off-balance sheet financing whereby not only a company can convert the usable assets in to cash, but it also removes the assets (e.g. receivables) from the books.
Requirement For Assets That May Be Securitized The assets that are the subject matter of a securitization transaction must fulfill all of the following criteria:
(i) the assets must generate cash flow;
(ii) the Originator has a valid and enforceable interest in the assets and in the cash flows of the assets prior to any securitization transaction;
(iii) there are no impediments (contractual or otherwise) that prevent the effective transfer of the assets or the rights in relation to such assets from an Originator to an SPV. For example: that the necessary regulatory or contractual consents have been obtained in order to effect the transfer of such assets from an Originator to an SPV; that the Originator has not done or omitted to do any act which enables a debtor of the Originator to exercise the right of set-off in relation to such assets;
(iv) the assets are transferred at a fair value;
v) no trust or third party’s interest appears to exist in competition with an Originator’s interest over the assets; and
(vi) where the interest of an Originator in the assets is as a chargee, the charge must have been created for a period of more than 6 months before the transfer.
Where the issue, offer or invitation of ABS are Islamic in nature, the assets that are the subject matter of the securitization transaction must be acceptable in accordance with Shari'ah principles. In the event of doubt, clarification should be sought from the Shari'ah Advisory Council of the SC.
The Originator
1. An Originator must be an entity incorporated in Malaysia.
2. An Originator must be a going concern at the date of transfer of any assets to an SPV. For the purposes of these Guidelines, an Originator will not be considered as a going concern if it is unable to pay any of its debts as they fall due or when it suspends payment of any of its debt obligations.
3. Any transfer of assets by an Originator to an SPV must comply with the true sale criteria.
4. The Originator may only purchase ABS issued by an SPV up to 10% of the original amount of the ABS issued by the SPV at market value at any time unless otherwise permitted by the SC.
5. No limits with respect to the holdings of subordinated debt securities by an Originator. Where an Originator is the only primary subscriber resulting in the Originator holding more than 10% of the ABS, the Originator must make best endeavors to place out such excess ABS within a period of not more than 3 months from the date of issuance of such ABS.
6. An Originator should also have internal systems to ensure that funds due to the SPV are separated and “ring-fenced” from other funds due to the Originator as soon as practicable.
True Sale Criteria
The underlying assets must have been isolated from an Originator i.e. put beyond the reach of the Originator and its creditors even in receivership or bankruptcy as far as possible.
The risk that a transfer of assets by an Originator to an SPV might be re-characterized as a financing transaction rather than a sale of assets should be minimized as far as possible. In this regard, the Originator must effectively transfer all rights and obligations in the underlying assets to the SPV.
An Originator must not hold any equity stake, directly or indirectly, in an SPV. In addition, the Originator must not be in a position to exercise effective control over the decisions of the SPV in relation to the securitization transaction.
An SPV must have no recourse to an Originator for losses arising from those assets for any credit enhancement provided by the Originator at the outset of the securitization transaction.
Where an Originator is also the Servicer, the services must be provided on an arm’s length basis, on market terms and conditions. In addition, there must be no obligation imposed on the Originator to remit funds to the SPV unless and until they are received from the debtor of the Originator in respect of the underlying assets.
Notwithstanding of the above provisions,
(i) Where such assets have declined to a level that renders the asset securitization transaction uneconomical to carry on, an Originator may retain a first right of refusal to repurchase assets from an SPV at a fair value; or
(ii) the Originator may repurchase assets from the SPV where the Originator is under an obligation to do so under a securitization transaction when it has breached any conditions, representation or warranty in respect of the securitization transaction.
The Special Purpose Vehicle (SPV)
1. An SPV must be resident in Malaysia for tax purposes.
2. An SPV must have independent and professional directors or trustees as the case may be.
3. In determining whether an SPV is sufficiently “bankruptcy remote”, the following must be taken into account:
(i) An SPV cannot include in its objectives, the power to enter into any other activities that are not incidental to its function as a special purpose vehicle in relation to the securitization transaction.
(ii) An SPV must sub-contract to third parties all services that may be required by it in order to maintain the SPV and its assets;
(iii) An SPV is not permitted to have employees or incur any fiduciary responsibilities to third parties other than to parties involved in the securitization transaction; and
(iv) All the liabilities, present or future, of an SPV (including tax) must be quantifiable and capable of being met out of resources available to it.
4. An SPV must be responsible for the acts and omissions of all persons to whom it delegates any of its functions. Thus, an SPV is ultimately responsible to ensure that its assets are managed with due care and in the best interests of ABS holders.
5. Without prejudice to any applicable law, an SPV must cause to be maintained proper accounts and records to enable a complete and accurate view to be formed of its assets, liabilities, income and expenditure and to comply with all other regulatory reporting requirements in respect of the issue, offer or invitation of ABS.
6. An SPV must be dissolved when the following circumstances arise:
(i) It refuses to accept transfers of the assets or issue ABS within 6 months from the date on which the securitization transaction is approved by the SC or such other period as may be specified by the SC; or
(ii) More than seventy five percent of ABS holders have resolved, in accordance with the terms and conditions agreed by all the relevant parties in a securitization transaction, that the SPV shall be dissolved and the SC has been notified of this resolution. In addition, more than 50% of the senior classes of ABS holders must consent to the dissolution; or
(iii) Upon full repayment of the ABS in accordance with the terms and conditions of the securitization transaction.
Servicer
The duties of any Servicer of the assets must include the following:
(i) The Servicer must keep proper accounts;
(ii) The trustee must be informed of any change of Servicer;
(iii) The Servicer must have adequate operational systems and resources to administer the asset portfolio. In particular, these internal systems should ensure that the cash flows belonging to the SPV are "ring-fenced" and segregated in relation to a securitization transaction; and
(iv) Where there is any change of Servicer, provision must be made in the legal documentation for the periodic transfer of the necessary information from the Originator to the substitute Servicer to enable the monitoring of the asset portfolio, its performance analysis and collections from debtors of the Originator.
Rating Requirement
All issues, offers or invitations that come within the scope of these Guidelines must be rated by a rating agency recognized by the Commission unless otherwise allowed in writing by the Commission. An indicative rating must have been obtained by the issuer at the time of submission of the declarations and information to the Commission.
The mandatory rating requirement need not be complied with in regard to any issue, offer or invitation in respect of irredeemable convertible loan stocks.
Where the credit rating of any issue, offer or invitation is below investment grade, the issuer must disclose the extent of credit risk to investors and their professional advisers in order to evaluate the risks relating to the private debt securities.
Underwriting
The underwriting of any issue, offer or invitation shall be decided by the issuer and its adviser.
In the event that the issuer and its adviser should decide that no underwriting is required, the issuer must state the minimum level of subscription necessary to achieve the funding objectives of the issuer.
Unless otherwise allowed in writing by the Commission, where any issue, offer or invitation is under-subscribed and cannot meet the minimum level of subscription, the issue, offer or invitation must be aborted and any consideration received for the purposes of subscription, where applicable, must be immediately returned to all subscribers.
In relation to Islamic Private Debt Securities (“IPDS"), the issuer must appoint either:
(i) An independent Shari’ah adviser(s) who has been approved by the Commission and who meets the following criteria:
(a) is not an undercharged bankrupt;
(b) has not been convicted for any offence arising out of a criminal proceeding;
(c) is of good repute;
(d) possesses the relevant qualifications and expertise, particularly in fiqh muamalah and Islamic jurisprudence, and has a minimum of 3 years working experience or exposure in Islamic finance; or
(ii) the Shari'ah Committee of an Islamic bank or a licensed institution approved by Bank Negara Malaysia to carry out Islamic Banking Scheme or Skim Perbankan Islam, to advise on all aspects of the IPDS including documentation, structuring, investment as well as other administrative and operational matters in relation to the IPDS.
Where the Shari'ah adviser proposed to be appointed is a company, such company must have, in its employment, a minimum of one individual who meets certain criteria. In addition, the company should not have breached any securities or banking laws since the date of its incorporation nor have a winding up order or resolution passed against the company.
Any Shari'ah principle and concept adopted in order to structure an IPDS must be based on such principles and concepts as approved by the Commission’s Shari'ah Advisory Council ("SAC").
Where any Shari'ah principle or concept applied in the structuring of an issue, offer or invitation is based on a principle or concept, the approval of the SAC must be obtained prior to any submission of declarations and information to the Commission.
Credit Enhancement
Banking institutions may provide credit enhancement facilities in order to improve the credit attractiveness of a securitization scheme. These facilities may be in the form of first or second loss facilities that include but are not limited to arrangements such as subordinated loan facilities, over-collateralization or cash collaterals.
A banking institution providing credit enhancement must ensure that:
i. The facility has a finite amount and duration, specified at the outset of the transaction;
ii. There is no recourse to the banking institution beyond the fixed contractual obligations under the facility;
iii. The SPV and/or investors have the right to select and alternative party to provide the facility;
iv. The facility is documented separately from any other facility provided by the banking institution;
v. The details of the facilities are disclosed in the offering information memorandum or prospectus; and
vi. The facility is provided on an arm's length basis and is subject to the banking institution's normal credit approval and review.
First Loss Facility
First loss credit enhancement facility represents the first level of protection against potential loss. This amount is determined with the rating agencies based on certain formula such as the multiples of expected loss of the asset pool or certain minimum levels of over-collateralization and interest cover ratios with a view to secure a particular rating for the senior classes.
First loss credit enhancement can be provided in several forms such as a subordinated investment, capitalization of the SPV, or over-collateralization (discussed separately below). Irrespective of its form, the purpose of first loss credit enhancement is to absorb any losses in the asset pool caused by the 6ks to which the asset pool is exposed to.
1. Where a banking institution (both originating and third party licensed institution) provides first loss facility, directly or indirectly to the SPV, the banking institution is required under the capital adequacy, framework to deduct the full amount of the facility from its capital base (total capital). The deduction will however, be capped at the amount which would have been provided for as if the entire assets were to remain or appear in the institution's balance sheet.
2. In cases where the asset transferred to the SPV is more than the total amount of securities being issued by the SPV, the difference between the two values would normally constitute an over-collateralization amount (transferred as security). This could act as a first loss facility in which case will require capital deduction by the originating banking institution, unless provision has been made through the income statement.
3. A first loss facility may also be in the form of maintenance of cash collateral account, where cash is provided upfront by the provider of the credit enhancement. Banking institutions that provide such facility as first loss facility would normally write off that amount in the income statement, failing which, the amount (outstanding amount) would have to be deducted from its capital base (total capital) under the capital adequacy computation.
4. Credit enhancement could also be provided through the structure of the securities issued itself. This will involve the issuance of senior and subordinated securities; the latter is normally unrated and held by the originator as a form of first loss facility, in which case, capital deduction is applied.
5. The maintenance of excess spread accounts within the SPV could also be a form of credit enhancement. If the excess spread is provided the difference between the return at which the pool is transferred to the SPV and the weighted average cost of the funding raised by the SPV as first loss facility and has been captured as a gain on sale (and therefore become part of the capital of the originating institution), the amount shall be deducted from the capital base.
Second Loss Facility
1. A cedit enhancement facility will be treated as 'second loss facility' if it ranks above the first loss facility that has been agreed by BNM. Such facility is often rated lower than BBB or equivalent quality and is often provided as protection against the mezzanine risks tranches. Banking institutions that provide 'second loss facility' shall assign a 100% risk weight to the facility on its balance sheet.
2. Where various credit enhancements are given for a transaction in a hierarchy (that is, one being senior to the other in terms of allocation of cash flows), BNM may consider the senior ones among the several enhancements as being a 'second loss' in limited circumstances, where BNM has to be satisfied that the junior forms of credit enhancement are sufficient as a first loss facility.
For instance, if there is an over-collateralization as well as a subordinated debt security in a transaction, where the level of over-collateralization is considered sufficient and no less than that enjoyed by any BBB-rated tranche in a securitization transaction, the subordinated debt may be treated as second loss piece.
In such circumstances, banking institutions shall demonstrate to BNM their claim on the quality of the unrated/subordinated tranche to be treated as 'second loss' and shall obtain the opinion of the rating agencies as to the quality of the subordinated tranche.
3. In the event of downgrades of the second loss facility, the facility may continue to be treated as 'second loss' and held by banking institutions. However, BNM reserves the right to assign a higher risk weight, require provision to be made, or reclassify the facility as first loss (in which case capital deduction is required and subject to the 8% cap) should the situation warrant.
4. In any traditional securitization where several forms of credit enhancements are involved, the originating banking institutions must be able to demonstrate to BNM the order in which they will be used to absorb losses from the underlying assets.
5. Where credit enhancements provided are other than those mentioned herein (e.g. third party credit enhancements), the principles in the preceding paragraphs as well as existing capital adequacy framework shall apply. Banking institutions are advised to discuss with BNM the regulatory impact of providing such a facility.
6. While an originating banking institution is allowed to provide both first and second loss facility, BNM reserves that right to require that the second loss facility be provided by a third party, which could be another banking institution, under certain circumstances such as deteriorating capital strength of the originating banking institution.
Accounting Issue
Standing Interpretation Committee of Guidelines of the International Accounting Standard Board
This interpretation addresses the question of when a special purpose entity would be consolidated by a reporting enterprise. The SIC agreed that an enterprise should consolidate a special purpose entity ("SPE") when, in substance, the enterprise controls the SPE.
Examples of SPEs include entities set up to affect a lease, a securitization of financial assets or R&D activities. The concept of control used in IAS 27: Consolidated Financial Statements requires having the ability to direct or dominate decision making accompanied by the objective of obtaining benefits from the SPE's activities.
The Interpretation provides example indications of when control may exist in the context of an SPE. The examples involve activities of the SPE on behalf of the reporting enterprise, the reporting enterprise having decision-making powers over the SPE, and the reporting enterprise having rights to the majority of benefits and exposure to significant risks of the SPE.
Some enterprises may also need to evaluate separately the topic of derecognition of assets, for example, related to assets transferred to an SPE.
In some circumstances, such a transfer of assets may result in those assets being derecognized and accounted for as a sale. Even if the transfer qualifies as a sale, the provisions of IAS 27 and SIC-12 may mean that the enterprise should consolidate the SPE. SIC-12 does not address the circumstances in which sale treatment should apply for the reporting enterprise or the elimination of the consequences of such a sale upon consolidation.
Tax Issues
Some uncertainties are still looming over, especially in the areas of taxation. Naturally, a person will only raise fund via a selected method over other alternatives if he can derive benefits there from of at least achieve a “no gain, no loss” position from tax perspective.
Tax cost is of great significance and as such, tax implications arising from any financing structures must be addressed at outset.
To date, there is no specific income tax law in Malaysia governing the taxation of the originator or SPV involved in securitization exercise.
Since asset securitization is relatively new, it will take a while before it is fully-developed in Malaysia, including the related tax issues. Hence, one has to rely on the existing tax law.
Final Remarks
It is important to have a master plan that cater private debt issuance in the Islamic financial dealings as the growth of the products has substantially increase in the recent development.
The issue of Bay’ al-'Inah has to take into consideration. On what ground Muslim jurists make their ijtihad on the applicability of Bay’ al-'Inah in the issuance of Islamic Private Debt Securities.
Bai al-'Inah is a valid contract in the Shaf’iis point of view based on Qiyas, and is a forbidden sale in the Jamhor’s opinion based on a sahih hadith. Up to our knowledge, Malaysia is the only Muslim country which is practicing bai’ al-inah, and widely being used in the bonds market -in the securitization process.
Nevertheless, it is important to have a sound Islamic Financial system in order to meet the challenge of globalization and rapid technology changes, so that Malaysia can be a the leader of Islamic financial dealings which Muslim world are lacking.
The OIC summit may be a platform to design and duly endorse the landscape for future Islamic Financial system which ultimately benefit the Ummah.
The needs of mutual agreement between OIC members, the spirit of brotherhood, and the solidarity of Ummah must be put in place in order to find the right tune for Muslim countries to advance in the this world and hereafter.
The differences must be reconciled in a right manner so that Muslim will unite under the banner of the Islam noble teachings with universal character, which may simultaneously bring advantage for all humanity regardless of one's background of religion, race, status, gender, color or even nationality.
Tuesday, March 20, 2012
e-Financial Services? the Shari'ah Directive with Global Opportunities....
The emergence of Internet had changed our life, either directly or indirectly. This is also true with the corporate and business world nowadays. Companies and organizations no longer regard the Internet only as a tool or reminder to the public to show who they are or what are they doing. Today, Internet has become a very important tool to do business. Among the earliest and important examples of how Internet has changed the ways companies fully utilized the benefits of Internet are Amazon.com, e-Buy and others.
Banking and financial institutions have also realized the true potentials and benefits of the internet. Right now, their websites are no longer just another advertisement to show that they are still alive and kicking, but also offer various type of products and services to the customers. The services are no longer just to show what is the amount of money in the accounts of their customers, but also offers various products and services such as online banking, bill payment, mortgage, loans, insurance and so on. These terms are what we are now calling ‘online financial services’.
Basically, commercial banks performed two functions: money transfer services (including all current account operations) and money lending. In general, the former does not involve any interest. On the other side of the balance sheet, we have two types of deposits: current account (demand) deposits and savings deposits. Here too, the former generally does not involve any interest. Therefore current account operations and money transfer operations are free of riba on both sides of the balance sheet. As such all commercial banks are interest-free banks with respect to these operations.
The problem, then, arises only in respect of savings deposits on the one side and loans on the other, because both incur interest. Thus, the questions of lending and accepting savings deposits, without dealing in interest (riba) arise.
Interest-Free Commercial Banking
A real Muslim does wish to avoid dealing in interest in order to comply with their religious belief, and limits itself to finding a simple, logical and easily executable methodology of achieving this objective. It does not concern itself with providing a justification or philosophy for the prohibition nor with the subtle differences and related discussions regarding the correct definition of riba. It simply accepts the commonly understood meaning of it that, any money demanded or received by the lender in addition to his original capital is riba and proceeds from there. The resulting system, therefore, is practicable irrespective of why one wishes to avoid dealing in interest. For there are also people who are convinced for various reasons that demanding or receiving interest is bad.
The approach adopted is to “first take a closer look at modern banking practices and find out whether and where the prohibited riba (interest) occurred and then to see whether it could be eliminated from the existing practices and then to check if the resulting system was still viable.”
On the deposit side, what the depositor receives in addition to his capital is the interest. This is riba (pure interest) by definition. If a Muslim refuses this interest because it is prohibited by his religion, then this side of the balance sheet is free of riba. On the other side of the balance sheet, we have the “interest” collected by the bank from the borrower. Ideally, the bank uses the funds it receives from depositors to grant loans to clients. But the “interest” it charges the borrowers is more than the interest it pays the depositors. This is because the former should also cover, besides the interest paid to the depositor, the costs the bank incurs in collecting and disbursing the funds as well as in accounting, administration, safekeeping, etc.
A model is constructed where the “interest” charged by the bank is split into several components. Then each of these components is studied to see if it contained the prohibited riba. The idea is that if any one component contained such riba then to see if it could be removed. If some components are free of riba, and others containing riba can be removed, then we have an “interest” which is free of riba. If this can be achieved and if the resulting system is viable, then we have a riba-free system that is also viable. And, since it was originally derived from the conventional model it should also be compatible with it.
This “interest” collected by the bank from the borrower is a cost to the borrower, of obtaining this amount of financing. Therefore, it is named the Cost of Borrowing (CoB) and is considered as consisting of six components: interest (paid to the depositor), services cost, overheads cost, risk premium, profit, and compensation for the value erosion of capital due to inflation. It is shown that only the first component falls under the definition of riba and all others are free of it.
Muslims are prohibited by to deal in interest (riba) in any way. Giving and receiving as well as witnessing are all prohibited. Thus an Islamic banking system cannot pay any interest to its depositors; neither can it demand or receive any interest from the borrowers nor could the banks witness or keep accounts of these transactions. But the lender is entitled to the return of his capital in full. This is a Qur’anic injunction. The proposed system complies with these fundamental Islamic requirements.
A basic tenet of commercial banking is capital guarantee. The capital entrusted to the bank by a depositor must be returned to him in full. The proposed system fully complies with this requirement. Islamic banking as practised today does not provide capital guarantee in all its deposit accounts. In many countries, this is one of the two main objections to permitting the establishment of Islamic banks. There is no objection to paying zero interest on deposits.
Thus, by paying zero interest and guaranteeing capital, the proposed system satisfies both the riba-prohibition rule of Islam and the capital guarantee requirement of conventional banking acts. This enables it to obtain permission to set up and operate as a deposit bank in all countries of the world, while obeying the riba-prohibition rule and qualifying to be an “Islamic” bank. This is of paramount importance to Muslim minorities living in non-Muslim countries. Furthermore, the existence of interest-free banks in all countries will also remove the many difficulties faced today by Islamic banks in transacting international business. Like any other human being, Muslims also need and desire a secure dwelling for themselves and their families. For example, in the past, owning a home was an unthinkable proposition for practicing Muslims, because Islam prohibits usury. The Qur'an (2:276) says: " Allah has permitted trade and forbidden usury," and in 2:278 reminds the Muslims: "O ye who believe, keep your duty to Allah and relinquish what remains (due) from interest, if you are believers."
The Prophet (p.b.u.h) forbade usury. One of the better-known Hadith, narrated by Ibn Mas'ud, quotes the Messenger of Allah (p.b.u.h), saying, "Allah has cursed the receiver, the giver of the interest and also the witness and the scribe of the interest- bearing transaction; they are alike." (Muslim, Tirmidhi).
The concept of interest-free housing finance is still unknown in the West, thus the term "mortgage" is used here in the sense of collateral and as having the title of the property in the names of those who provide the funds. The cooperative housing programs help those Muslims who need financial help to purchase a home, while helping to generate income for the investors from the rent and shares in the appreciation of the property's value.
Practicality:
Islamic investment equity funds market is one of the fastest growing sectors within the Islamic financial system. Currently there are approximately 100 Islamic equity funds worldwide. The total assets managed through these funds currently exceed US$5 billion and is growing by 12-15% per annum. With the continuous interest in the Islamic financial system, there are positive signs that more funds will be launched. Some western majors have just joined the fray or are thinking of launching similar Islamic equity products.
Despite these successes, this market has seen a record of poor marketing as emphasis is on products and not on addressing the needs of investors. Over the last few years, quite a number of funds have closed down. Most of the funds tend to target high net worth individuals and corporate institutions, minimum investments ranging from US$50,000 to as high as US$1,000,000.
Target markets for Islamic funds vary, some cater for their local markets e.g. Malaysia and Gulf based investment funds. Others clearly target the Middle East and Gulf regions, neglecting local markets and have been accused of failing to serve Muslim communities.
Since the launch of Islamic equity funds in the early 90's, we have seen the establishment of credible equity benchmarks by Dow Jones Islamic market index and the FTSE Global Islamic Index Series. The website failaka.com monitors the performance of Islamic equity funds and provide a comprehensive list of the Islamic funds worldwide.
Al-Taslif Credit Card (AmBank Group, formerly known as Arab Malaysian Banking Group):
Based on Shari’ah Principle:
The AmBank Al-Taslif Credit Card has been formulated based on the Shari'ah principle of Bai' Al Inah (Buy back sale), which govern installment payments over a fixed period. One can use the Al-Taslif Credit Card with the assurance that it has been tailored with one's spending needs in mind, and without compromising Islamic values.
Low Banking Cost of 15% p.a.:
Customer will only be charged a low banking cost of 1.25% per month or 15% per annum on our outstanding balance. What's more, if we decide to settle only the minimum amount each month, customers will not be subjected to additional banking cost. It's free of Interest!
Annual Fee Waiver & Charity:
With AmBonus, there is more than providing customers with savings on card annual fees! It also allows customers to do a bit for charity. For every RM100 spend on retail transactions, we will receive AmBonus worth RM1 which can be set off against the annual card fees. What's more, the excess will be donated on our behalf to charitable organizations.
More Cash Rebates For Our Loyalty:
With AmTransfer, one can use up to our available card limit to consolidate customers' outstanding balances from our other credit or charge cards at 15% p.a. until full settlements.
AmProtector:
For only RM0.03 on every RM 100 outstanding balance, we and our family will enjoy peace of mind as our outstanding balances are covered up to maximum of RM50, 000 in the event of any mishap.
Instance Acceptance and Cash Worldwide:
The card is welcomed at more than 22 million establishments worldwide. However, in keeping with Shari’ah principle, card members are advised not to use the card in establishments that contradicts Islamic values e.g. casino, massage parlors, dating and escort services, bars etc. We'll also have instant access to more than 600,000 MasterCard/CIRRUS and VISA/PLUS ATMs or affiliated banks and financial institutions worldwide.
Automatic Travel Accident Plan Charge:
Travel tickets to our Gold card and we will enjoy automatic free travel accident insurance of up to RM500, 000. We will also enjoy additional coverage for travel inconveniences.
AmDirect Phone Banking and Online Banking Service:
One may easily access the card account anytime for a host of financial services and enquiries. We can simply enjoy your personal banking service by calling AmDirect Call Center at 03-2612 6888 or login to http://www.ambg.com.my.
No Joining Fees:
No fee is required for securing a Card (membership) of AmBank.
Zakat payment:
For the convenience, AmBank has made provision for Al-Taslif card members to make our zakat (tithe) payments directly through the card. This facility is currently available with Pusat Pungutan Zakat Wilayah Persekutuan.
0% Interest Easy Payment Plan:
With interest-free installment payment, we can select from a range of products and services from AmBank’s partnering establishment.
MasterCard Global Service:
Provides emergency 24-hour travel assistant service and worldwide emergency assistant for lost and stolen reporting, emergency card replacement, emergency cash advance, ATM network location information, and issuer directory assistance.
MasterAssist Travel Assistant Service for Gold card members:
Provides 24-hour travel assistance service and worldwide emergency assistance, pre-trip information, traveling assistance, legal referrals and bail bond assistance.
VISA 24-hour Global Customer Assitance Service(GCAS):
Provides medical referrals, monitoring, assistance and follow-up, transportation assistance, legal assistance, pre-trip assistance, interpreter assistance as well as lost/valuable document delivery.
Flexible Payment Options:
We have a worldwide choice of payment method on how we want to make our monthly card payment, either in full or the minimum repayment of 5% or RM50 whichever is higher.
ATM Services:
AmBank’s Extensive AmBank Group ATM network and CIRRUS/PLUS ATM, which covers a wide range of automated services allows us access our card account 24 hours a day.
Recommendations:
Because the online financial service is still a new phenomenon worldwide, it does have benefits to everyone. But if we take the Shari’ah principles into consideration, some extra works must be done in order to make sure that it is accordance with Islamic principles as mentioned before. Just for a note, usually, Shari’ah based online financial system is still based on ‘off-line’ financial services provided by financial institutions, only now, instead of physical building, there will be a cyberspace!
First, financial institutions must provide a clear picture to the customers of how does the shari’ah based online financial services works. It is not only shown some figures but also explanation like which company that they are going to invest, what principles that they take, how does the profit is distributed and so on. If possible, they should also provide the list of the companies that they are invested and also the member of the Shari’ah panel board in their financial institutions. It will make customers feel secure because they know that their deposits is legally invested and supervised by Islamic scholars.
Then, for the customers, they should put aside the stigma in their mind that just because some financial institutions’ name is not sound like Islam, they do not follow accordingly with Islamic rules and regulations. For instance, there are an interview with Malay/Muslim customers on why don’t they invest in one financial institution, which they reply that that financial institution is not sound like Islam at all! This perception must be discarded from our mind to ensure that Shari’ah based financial system will be better accepted worldwide.
Banking and financial institutions have also realized the true potentials and benefits of the internet. Right now, their websites are no longer just another advertisement to show that they are still alive and kicking, but also offer various type of products and services to the customers. The services are no longer just to show what is the amount of money in the accounts of their customers, but also offers various products and services such as online banking, bill payment, mortgage, loans, insurance and so on. These terms are what we are now calling ‘online financial services’.
Basically, commercial banks performed two functions: money transfer services (including all current account operations) and money lending. In general, the former does not involve any interest. On the other side of the balance sheet, we have two types of deposits: current account (demand) deposits and savings deposits. Here too, the former generally does not involve any interest. Therefore current account operations and money transfer operations are free of riba on both sides of the balance sheet. As such all commercial banks are interest-free banks with respect to these operations.
The problem, then, arises only in respect of savings deposits on the one side and loans on the other, because both incur interest. Thus, the questions of lending and accepting savings deposits, without dealing in interest (riba) arise.
Interest-Free Commercial Banking
A real Muslim does wish to avoid dealing in interest in order to comply with their religious belief, and limits itself to finding a simple, logical and easily executable methodology of achieving this objective. It does not concern itself with providing a justification or philosophy for the prohibition nor with the subtle differences and related discussions regarding the correct definition of riba. It simply accepts the commonly understood meaning of it that, any money demanded or received by the lender in addition to his original capital is riba and proceeds from there. The resulting system, therefore, is practicable irrespective of why one wishes to avoid dealing in interest. For there are also people who are convinced for various reasons that demanding or receiving interest is bad.
The approach adopted is to “first take a closer look at modern banking practices and find out whether and where the prohibited riba (interest) occurred and then to see whether it could be eliminated from the existing practices and then to check if the resulting system was still viable.”
On the deposit side, what the depositor receives in addition to his capital is the interest. This is riba (pure interest) by definition. If a Muslim refuses this interest because it is prohibited by his religion, then this side of the balance sheet is free of riba. On the other side of the balance sheet, we have the “interest” collected by the bank from the borrower. Ideally, the bank uses the funds it receives from depositors to grant loans to clients. But the “interest” it charges the borrowers is more than the interest it pays the depositors. This is because the former should also cover, besides the interest paid to the depositor, the costs the bank incurs in collecting and disbursing the funds as well as in accounting, administration, safekeeping, etc.
A model is constructed where the “interest” charged by the bank is split into several components. Then each of these components is studied to see if it contained the prohibited riba. The idea is that if any one component contained such riba then to see if it could be removed. If some components are free of riba, and others containing riba can be removed, then we have an “interest” which is free of riba. If this can be achieved and if the resulting system is viable, then we have a riba-free system that is also viable. And, since it was originally derived from the conventional model it should also be compatible with it.
This “interest” collected by the bank from the borrower is a cost to the borrower, of obtaining this amount of financing. Therefore, it is named the Cost of Borrowing (CoB) and is considered as consisting of six components: interest (paid to the depositor), services cost, overheads cost, risk premium, profit, and compensation for the value erosion of capital due to inflation. It is shown that only the first component falls under the definition of riba and all others are free of it.
Muslims are prohibited by to deal in interest (riba) in any way. Giving and receiving as well as witnessing are all prohibited. Thus an Islamic banking system cannot pay any interest to its depositors; neither can it demand or receive any interest from the borrowers nor could the banks witness or keep accounts of these transactions. But the lender is entitled to the return of his capital in full. This is a Qur’anic injunction. The proposed system complies with these fundamental Islamic requirements.
A basic tenet of commercial banking is capital guarantee. The capital entrusted to the bank by a depositor must be returned to him in full. The proposed system fully complies with this requirement. Islamic banking as practised today does not provide capital guarantee in all its deposit accounts. In many countries, this is one of the two main objections to permitting the establishment of Islamic banks. There is no objection to paying zero interest on deposits.
Thus, by paying zero interest and guaranteeing capital, the proposed system satisfies both the riba-prohibition rule of Islam and the capital guarantee requirement of conventional banking acts. This enables it to obtain permission to set up and operate as a deposit bank in all countries of the world, while obeying the riba-prohibition rule and qualifying to be an “Islamic” bank. This is of paramount importance to Muslim minorities living in non-Muslim countries. Furthermore, the existence of interest-free banks in all countries will also remove the many difficulties faced today by Islamic banks in transacting international business. Like any other human being, Muslims also need and desire a secure dwelling for themselves and their families. For example, in the past, owning a home was an unthinkable proposition for practicing Muslims, because Islam prohibits usury. The Qur'an (2:276) says: " Allah has permitted trade and forbidden usury," and in 2:278 reminds the Muslims: "O ye who believe, keep your duty to Allah and relinquish what remains (due) from interest, if you are believers."
The Prophet (p.b.u.h) forbade usury. One of the better-known Hadith, narrated by Ibn Mas'ud, quotes the Messenger of Allah (p.b.u.h), saying, "Allah has cursed the receiver, the giver of the interest and also the witness and the scribe of the interest- bearing transaction; they are alike." (Muslim, Tirmidhi).
The concept of interest-free housing finance is still unknown in the West, thus the term "mortgage" is used here in the sense of collateral and as having the title of the property in the names of those who provide the funds. The cooperative housing programs help those Muslims who need financial help to purchase a home, while helping to generate income for the investors from the rent and shares in the appreciation of the property's value.
Practicality:
Islamic investment equity funds market is one of the fastest growing sectors within the Islamic financial system. Currently there are approximately 100 Islamic equity funds worldwide. The total assets managed through these funds currently exceed US$5 billion and is growing by 12-15% per annum. With the continuous interest in the Islamic financial system, there are positive signs that more funds will be launched. Some western majors have just joined the fray or are thinking of launching similar Islamic equity products.
Despite these successes, this market has seen a record of poor marketing as emphasis is on products and not on addressing the needs of investors. Over the last few years, quite a number of funds have closed down. Most of the funds tend to target high net worth individuals and corporate institutions, minimum investments ranging from US$50,000 to as high as US$1,000,000.
Target markets for Islamic funds vary, some cater for their local markets e.g. Malaysia and Gulf based investment funds. Others clearly target the Middle East and Gulf regions, neglecting local markets and have been accused of failing to serve Muslim communities.
Since the launch of Islamic equity funds in the early 90's, we have seen the establishment of credible equity benchmarks by Dow Jones Islamic market index and the FTSE Global Islamic Index Series. The website failaka.com monitors the performance of Islamic equity funds and provide a comprehensive list of the Islamic funds worldwide.
Al-Taslif Credit Card (AmBank Group, formerly known as Arab Malaysian Banking Group):
Based on Shari’ah Principle:
The AmBank Al-Taslif Credit Card has been formulated based on the Shari'ah principle of Bai' Al Inah (Buy back sale), which govern installment payments over a fixed period. One can use the Al-Taslif Credit Card with the assurance that it has been tailored with one's spending needs in mind, and without compromising Islamic values.
Low Banking Cost of 15% p.a.:
Customer will only be charged a low banking cost of 1.25% per month or 15% per annum on our outstanding balance. What's more, if we decide to settle only the minimum amount each month, customers will not be subjected to additional banking cost. It's free of Interest!
Annual Fee Waiver & Charity:
With AmBonus, there is more than providing customers with savings on card annual fees! It also allows customers to do a bit for charity. For every RM100 spend on retail transactions, we will receive AmBonus worth RM1 which can be set off against the annual card fees. What's more, the excess will be donated on our behalf to charitable organizations.
More Cash Rebates For Our Loyalty:
With AmTransfer, one can use up to our available card limit to consolidate customers' outstanding balances from our other credit or charge cards at 15% p.a. until full settlements.
AmProtector:
For only RM0.03 on every RM 100 outstanding balance, we and our family will enjoy peace of mind as our outstanding balances are covered up to maximum of RM50, 000 in the event of any mishap.
Instance Acceptance and Cash Worldwide:
The card is welcomed at more than 22 million establishments worldwide. However, in keeping with Shari’ah principle, card members are advised not to use the card in establishments that contradicts Islamic values e.g. casino, massage parlors, dating and escort services, bars etc. We'll also have instant access to more than 600,000 MasterCard/CIRRUS and VISA/PLUS ATMs or affiliated banks and financial institutions worldwide.
Automatic Travel Accident Plan Charge:
Travel tickets to our Gold card and we will enjoy automatic free travel accident insurance of up to RM500, 000. We will also enjoy additional coverage for travel inconveniences.
AmDirect Phone Banking and Online Banking Service:
One may easily access the card account anytime for a host of financial services and enquiries. We can simply enjoy your personal banking service by calling AmDirect Call Center at 03-2612 6888 or login to http://www.ambg.com.my.
No Joining Fees:
No fee is required for securing a Card (membership) of AmBank.
Zakat payment:
For the convenience, AmBank has made provision for Al-Taslif card members to make our zakat (tithe) payments directly through the card. This facility is currently available with Pusat Pungutan Zakat Wilayah Persekutuan.
0% Interest Easy Payment Plan:
With interest-free installment payment, we can select from a range of products and services from AmBank’s partnering establishment.
MasterCard Global Service:
Provides emergency 24-hour travel assistant service and worldwide emergency assistant for lost and stolen reporting, emergency card replacement, emergency cash advance, ATM network location information, and issuer directory assistance.
MasterAssist Travel Assistant Service for Gold card members:
Provides 24-hour travel assistance service and worldwide emergency assistance, pre-trip information, traveling assistance, legal referrals and bail bond assistance.
VISA 24-hour Global Customer Assitance Service(GCAS):
Provides medical referrals, monitoring, assistance and follow-up, transportation assistance, legal assistance, pre-trip assistance, interpreter assistance as well as lost/valuable document delivery.
Flexible Payment Options:
We have a worldwide choice of payment method on how we want to make our monthly card payment, either in full or the minimum repayment of 5% or RM50 whichever is higher.
ATM Services:
AmBank’s Extensive AmBank Group ATM network and CIRRUS/PLUS ATM, which covers a wide range of automated services allows us access our card account 24 hours a day.
Recommendations:
Because the online financial service is still a new phenomenon worldwide, it does have benefits to everyone. But if we take the Shari’ah principles into consideration, some extra works must be done in order to make sure that it is accordance with Islamic principles as mentioned before. Just for a note, usually, Shari’ah based online financial system is still based on ‘off-line’ financial services provided by financial institutions, only now, instead of physical building, there will be a cyberspace!
First, financial institutions must provide a clear picture to the customers of how does the shari’ah based online financial services works. It is not only shown some figures but also explanation like which company that they are going to invest, what principles that they take, how does the profit is distributed and so on. If possible, they should also provide the list of the companies that they are invested and also the member of the Shari’ah panel board in their financial institutions. It will make customers feel secure because they know that their deposits is legally invested and supervised by Islamic scholars.
Then, for the customers, they should put aside the stigma in their mind that just because some financial institutions’ name is not sound like Islam, they do not follow accordingly with Islamic rules and regulations. For instance, there are an interview with Malay/Muslim customers on why don’t they invest in one financial institution, which they reply that that financial institution is not sound like Islam at all! This perception must be discarded from our mind to ensure that Shari’ah based financial system will be better accepted worldwide.
Monday, March 19, 2012
ISLAMIC WILL (Wasiyyat) in Asset Management?
In the Islamic Law, the distribution of the wealth of a deceased person is the remaining balance after deducting the expenses incurred to settle all the debts of the deceased and the funeral expenses.
Finally, the whole residue is distributed among the heirs by right of inheritance. If the deceased person made a Wasiyyat (Will) during his lifetime, one-third or less of the residue proportion can be exercised according to his own will. And the other two-third of the remaining balance will go to the heirs; which is the wife or wives, sons and daughters of the deceased in which the sons will receive two-times compare to the daughters.
The issue arises when the heirs disagree with the distribution of wasiyyat even though Islam encourages the making of Wasiyyat (Will), because if the deceased person did not make a will, the one-third portion will also be distributed according to Faraid (Inheritence)system. To avoid disputable among the family members, Islamic Jurist have recommend that the portion of the wasiyyat to be reduced to less than one-third. As we know, the Wasiyyat (Will) will be executed after the death of the testator and it is not permissible for the heirs to receive it.
Although it can be exercised; if the testator still wishes for giving the portion to one of his heir, the consent and approval from all the heirs must be obtain or else the will is annulled. So, to overcome this argument, one of the ways is to make it as a hibah or gift to the heir during his lifetimes. Hibah is treated as gift where it involves the transfer of ownership from the owner of the wealth to the acceptant.
But the disagreement between scholars will be further debated when referring to the following hadith. The Prophet (p.b.u.h) had said,
“God has allotted to every heir his particular right. And that a bequest to particular heirs is unjust.” (Sahih Muslim).
The argument about the disposition of wealth in the Muslim society indicates that proportion is high on the materialism and worldly possession. The holy Qur'an to the effect:
“Your riches and your children may be but a trial; but in the Presence of God, is the highest, Reward. So fear God as much as you can; listen and obey and spend in charity for the benefit of your own soul and those saved from the covetousness of their own souls,- they are the one that achieve prosperity.”(al-Taghabun : 15-16).
From the above ayahs, it enlightens the purpose of being a Khalifah (Vicegerent) in this world. The worldly possession is only borrowed to human beings as a temporary ownership of God to His servant. It will show the true self of each human being; the greed, ignorance, and also the pious and humble servant of Allah (swt).
It is not that the Muslim is denied for the accumulation of wealth in this world, but it is actually encourage for the betterment of one’s family and contribute to the society as a whole with the condition that it is performed in accordance of Islamic Shari’ah. The wealthy and pious Muslim is the best of being for he can balance the worldly possession and achievement in hereafter.So, the issue in the distribution of Wasiyyat (Will) is not supposed to emerge in the Muslim society.
The Faraid (Inheritence) system, which had been clearly stated in the holy Qur’an is the most efficient way of inheritance, while the alternative of making a Will for the one-third portion is supposed to enhance the involvement of Muslims in the charitable purpose.
Islamic Will (Wasiyah) and Its Writing Mechanisms in Wealth and Asset Management
Islam is the comprehensive religion and the only religion accepted by Allah (swt). Hence, provides guidelines to all fields of human activities irrespective of whether spiritual, material, social, political or economical. Therefore, Islam also have provide rule in distribution of wealth.
Historically, Will had been practiced in Roman Empire, in which a head of a clan the only who had the right to make a will and he gave to the people he want to give which oppressed other people who deserve it. As same in the pre-Islamic days, the males were the only rightful people to inherit wealth and denied the right of females in inheritance.
Therefore, Islam has laying down the rules to regulate the distribution of wealth among members of the family in which those rightful persons in the family get rightful share of it and there will be no dispute within the family.
There are two types of wealth distribution, one of which is following the total guidelines from Faraid (Inheritence) system and the other one, which is by making a Wasiyyat (Will).
The detail on the subject is provided with possible explanation in my book (Islamic Asset Management) published by Thompson Reuters (trans. Indonesian language "Penerapan Manajement Aset Islami").
Finally, the whole residue is distributed among the heirs by right of inheritance. If the deceased person made a Wasiyyat (Will) during his lifetime, one-third or less of the residue proportion can be exercised according to his own will. And the other two-third of the remaining balance will go to the heirs; which is the wife or wives, sons and daughters of the deceased in which the sons will receive two-times compare to the daughters.
The issue arises when the heirs disagree with the distribution of wasiyyat even though Islam encourages the making of Wasiyyat (Will), because if the deceased person did not make a will, the one-third portion will also be distributed according to Faraid (Inheritence)system. To avoid disputable among the family members, Islamic Jurist have recommend that the portion of the wasiyyat to be reduced to less than one-third. As we know, the Wasiyyat (Will) will be executed after the death of the testator and it is not permissible for the heirs to receive it.
Although it can be exercised; if the testator still wishes for giving the portion to one of his heir, the consent and approval from all the heirs must be obtain or else the will is annulled. So, to overcome this argument, one of the ways is to make it as a hibah or gift to the heir during his lifetimes. Hibah is treated as gift where it involves the transfer of ownership from the owner of the wealth to the acceptant.
But the disagreement between scholars will be further debated when referring to the following hadith. The Prophet (p.b.u.h) had said,
“God has allotted to every heir his particular right. And that a bequest to particular heirs is unjust.” (Sahih Muslim).
The argument about the disposition of wealth in the Muslim society indicates that proportion is high on the materialism and worldly possession. The holy Qur'an to the effect:
“Your riches and your children may be but a trial; but in the Presence of God, is the highest, Reward. So fear God as much as you can; listen and obey and spend in charity for the benefit of your own soul and those saved from the covetousness of their own souls,- they are the one that achieve prosperity.”(al-Taghabun : 15-16).
From the above ayahs, it enlightens the purpose of being a Khalifah (Vicegerent) in this world. The worldly possession is only borrowed to human beings as a temporary ownership of God to His servant. It will show the true self of each human being; the greed, ignorance, and also the pious and humble servant of Allah (swt).
It is not that the Muslim is denied for the accumulation of wealth in this world, but it is actually encourage for the betterment of one’s family and contribute to the society as a whole with the condition that it is performed in accordance of Islamic Shari’ah. The wealthy and pious Muslim is the best of being for he can balance the worldly possession and achievement in hereafter.So, the issue in the distribution of Wasiyyat (Will) is not supposed to emerge in the Muslim society.
The Faraid (Inheritence) system, which had been clearly stated in the holy Qur’an is the most efficient way of inheritance, while the alternative of making a Will for the one-third portion is supposed to enhance the involvement of Muslims in the charitable purpose.
Islamic Will (Wasiyah) and Its Writing Mechanisms in Wealth and Asset Management
Islam is the comprehensive religion and the only religion accepted by Allah (swt). Hence, provides guidelines to all fields of human activities irrespective of whether spiritual, material, social, political or economical. Therefore, Islam also have provide rule in distribution of wealth.
Historically, Will had been practiced in Roman Empire, in which a head of a clan the only who had the right to make a will and he gave to the people he want to give which oppressed other people who deserve it. As same in the pre-Islamic days, the males were the only rightful people to inherit wealth and denied the right of females in inheritance.
Therefore, Islam has laying down the rules to regulate the distribution of wealth among members of the family in which those rightful persons in the family get rightful share of it and there will be no dispute within the family.
There are two types of wealth distribution, one of which is following the total guidelines from Faraid (Inheritence) system and the other one, which is by making a Wasiyyat (Will).
The detail on the subject is provided with possible explanation in my book (Islamic Asset Management) published by Thompson Reuters (trans. Indonesian language "Penerapan Manajement Aset Islami").
Sunday, March 18, 2012
ISLAMIC PROJECT FINANCE? its reality drive.....
Issue 1:
An Executive understanding of Islamic project finance and how would it be different from other type of finance?
Solution:
i. Any legitimate project recognized by the Shari’ah Principles required to be financed for a further development.
ii. The Owner or the authorized developer of the Project may apply for Islamic justified Financing Facilities to any Islamic financial institution.
iii. Islamic Financial Institution concern may approve the application considering the following components:
(a) Either JV with equity participation (using Mudharabah or Musharakah or any other Shari’ah approved instruments), or Debt financing (using the BBA or Murabahah or Tawarruk as the case may be, that is: a resale on credit with differed settlement by installment within an agreed period of time).
(b) In a debt financing arrangement, the title of the project may be required by the Financier to be held as a securitization on collateral basis till the debt is fully settled.
(iv) It shall be noted that, in any Islamic project financing, profit guarantee, any form of usury or Shari’ah contrary element shall not be acceptable per se.
(v) An Islamic Project financing is different from other types of financing in terms of basically the requirement of securitization (title) on collateral basis against the sound settlement of the debt.
Issue 2:
What sectors usually apply project finance?
Solution:
i. Shari’ah Justified and Legally recognized Real Estate development related projects.
ii. Shari’ah Justified and Legally recognized Mining, Plants, Installations, Explorations and or alike related projects.
iii. Any other Shari’ah Justified and legally recognized Projects either commercially or socially or Public beneficial related projects.
Issue 3:
In the past 2 years, which Islamic project finance deal would you categorized as a landmark deal. Why?
Solution:
i. WPI (IDR) project in JB, Malaysia (Planning stage);
ii. Pavillion project financed by KFH near Bukit Bintang KL, Malaysia.
iii. Dubai Tower, UAE (in Progress). Few Hotels in Mekkah, KSA.
iv. A few other projects financed by IDB, KFH, Dubai Islamic Bank, Dallah al Barakah, RHB, Islamic, CIMB, and so on.
Islamic project financing (with risk sharing by opposing the risk transferring concept and also being incorporated with Divine ethical standard on the holistic approach of brotherhood with care and concern)is more attractive as compared to the conventional ones, which are generally adapted on the risk transferring concept.
Issue 4:
In terms of market practice, what is the most common Shari’ah Contract utilized for a project finance deal (Ijarah, Musharakah etc). Why is that so?
Solution:
i. Musharakah Mutanaqisah (Diminishing Partnership).
ii. Ijarah (Leasing).
iii. Istisna’ (Manufacturing).
iv. al-Ijarah Tantahi Bi al Tamleek (Leasing Leading to (ownership).
The above instruments are commonly adapted in Islamic project financing have been evidentially proven the risk minimization with better benefits for all the parties concerned.
Issue 5:
Is there any difference between the Malaysian and GCC market in Terms of contract utilized for project finance?
Solution:
In most cases the application of Islamic project financing mechanisms adapted in Malaysia and GCC are quite similar except in the following avenues:
i. Malaysia adapts Bai’ al- Dayeen (Debt Trading) and Bay’ al- Ina’ (Buy back Sale).
ii. In the GCC on the other hand, Bai’ al- Dayeen (Debt Trading) and Bay’ al- Ina’ (Buy back Sale) adapted in any transaction are strongly opposed.
Alternatively in the GCC the doctrine of al-Tawarruk (Special Purpose Vehicle) is adapted in most of the Debt financing arrangements including Project Financing besides recognizing and applying Musharakah Mutanaqisah (Diminishing Partnership).
Issue 6:
Do you observe an increasing trend of Islamic project finance in the market? Why or why not?
Solution:
i. There is an increasing trend of Islamic project financing in GCC, UAE, Malaysia, OIC Countries as well as some other parts of the world especially through the arrangement of i-REITs, issuance of Sukuk, venture capitalizing and also Musharakah Mutanaqisah (Diminishing Partnership) and so on.
ii. This is perhaps because of, rational risk management mechanisms with sharing concept, sustainable profit return, transparence transaction and flexible options enjoined by all parties in the contract.
Issue 7:
Would you highlight two issues and challenges in Islamic project finance and how do you overcome these?
Solution:
i. Lack of Proper skill in underwriting the deal by considering the relevant risk factors;
ii. Poor time management and applying irrelevant skill in completing and managing the project.
The above challenges may be overcome through the smart professionalism, cooperation, good faith and trustworthiness with ethical standard at all levels of activities.
An Executive understanding of Islamic project finance and how would it be different from other type of finance?
Solution:
i. Any legitimate project recognized by the Shari’ah Principles required to be financed for a further development.
ii. The Owner or the authorized developer of the Project may apply for Islamic justified Financing Facilities to any Islamic financial institution.
iii. Islamic Financial Institution concern may approve the application considering the following components:
(a) Either JV with equity participation (using Mudharabah or Musharakah or any other Shari’ah approved instruments), or Debt financing (using the BBA or Murabahah or Tawarruk as the case may be, that is: a resale on credit with differed settlement by installment within an agreed period of time).
(b) In a debt financing arrangement, the title of the project may be required by the Financier to be held as a securitization on collateral basis till the debt is fully settled.
(iv) It shall be noted that, in any Islamic project financing, profit guarantee, any form of usury or Shari’ah contrary element shall not be acceptable per se.
(v) An Islamic Project financing is different from other types of financing in terms of basically the requirement of securitization (title) on collateral basis against the sound settlement of the debt.
Issue 2:
What sectors usually apply project finance?
Solution:
i. Shari’ah Justified and Legally recognized Real Estate development related projects.
ii. Shari’ah Justified and Legally recognized Mining, Plants, Installations, Explorations and or alike related projects.
iii. Any other Shari’ah Justified and legally recognized Projects either commercially or socially or Public beneficial related projects.
Issue 3:
In the past 2 years, which Islamic project finance deal would you categorized as a landmark deal. Why?
Solution:
i. WPI (IDR) project in JB, Malaysia (Planning stage);
ii. Pavillion project financed by KFH near Bukit Bintang KL, Malaysia.
iii. Dubai Tower, UAE (in Progress). Few Hotels in Mekkah, KSA.
iv. A few other projects financed by IDB, KFH, Dubai Islamic Bank, Dallah al Barakah, RHB, Islamic, CIMB, and so on.
Islamic project financing (with risk sharing by opposing the risk transferring concept and also being incorporated with Divine ethical standard on the holistic approach of brotherhood with care and concern)is more attractive as compared to the conventional ones, which are generally adapted on the risk transferring concept.
Issue 4:
In terms of market practice, what is the most common Shari’ah Contract utilized for a project finance deal (Ijarah, Musharakah etc). Why is that so?
Solution:
i. Musharakah Mutanaqisah (Diminishing Partnership).
ii. Ijarah (Leasing).
iii. Istisna’ (Manufacturing).
iv. al-Ijarah Tantahi Bi al Tamleek (Leasing Leading to (ownership).
The above instruments are commonly adapted in Islamic project financing have been evidentially proven the risk minimization with better benefits for all the parties concerned.
Issue 5:
Is there any difference between the Malaysian and GCC market in Terms of contract utilized for project finance?
Solution:
In most cases the application of Islamic project financing mechanisms adapted in Malaysia and GCC are quite similar except in the following avenues:
i. Malaysia adapts Bai’ al- Dayeen (Debt Trading) and Bay’ al- Ina’ (Buy back Sale).
ii. In the GCC on the other hand, Bai’ al- Dayeen (Debt Trading) and Bay’ al- Ina’ (Buy back Sale) adapted in any transaction are strongly opposed.
Alternatively in the GCC the doctrine of al-Tawarruk (Special Purpose Vehicle) is adapted in most of the Debt financing arrangements including Project Financing besides recognizing and applying Musharakah Mutanaqisah (Diminishing Partnership).
Issue 6:
Do you observe an increasing trend of Islamic project finance in the market? Why or why not?
Solution:
i. There is an increasing trend of Islamic project financing in GCC, UAE, Malaysia, OIC Countries as well as some other parts of the world especially through the arrangement of i-REITs, issuance of Sukuk, venture capitalizing and also Musharakah Mutanaqisah (Diminishing Partnership) and so on.
ii. This is perhaps because of, rational risk management mechanisms with sharing concept, sustainable profit return, transparence transaction and flexible options enjoined by all parties in the contract.
Issue 7:
Would you highlight two issues and challenges in Islamic project finance and how do you overcome these?
Solution:
i. Lack of Proper skill in underwriting the deal by considering the relevant risk factors;
ii. Poor time management and applying irrelevant skill in completing and managing the project.
The above challenges may be overcome through the smart professionalism, cooperation, good faith and trustworthiness with ethical standard at all levels of activities.
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