bba home financing: case studies cimb islamic home financing-i and flexi home financing-i sept 2010...
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BBA HOME FINANCING: CASE STUDIES CIMB ISLAMIC HOME FINANCING-i AND FLEXI HOME FINANCING-i
SEPT 2010INCEIF
ISLAMIC BANKING
TERM PAPER PRESENTATION
by
Asmah Mohd Jaapar
Hishamuddin Abdul Wahab
Khusmuhammad
Sulistya Rusgianto
Yusif
2
OBJECTIVESLegal
DocumentationFinancial Reporting
Maqāṣid al-Sharī‘ah
Contract (‘Aqd)
To understand the basic concept of CIMB Islamic Home Financing-i and Flexi Home Financing-i
To determine sharī‘ah legitimacy of CIMB Islamic Home Financing-i and Flexi Home Financing-I using contract (‘aqd), legal documentation, financial reporting and Maqāṣid al-Sharī‘ah parameters
Objectives
YUSIF 2
Bai’ Bithaman Ajil is a contract of sale and purchase of an asset in which the payment of price is deferred and paid in installment within an agreed period of time. The selling price includes profit.
The margin is up to 90%
Financing all types of completed or under construction residential properties
Required documents are PPA, PSA, Deed of Assignment (by way of security)
Bai’ Bithaman Ajil (BBA) (Deferred-payment Sale)
KHUSMUHAMMAD 3
ObjectivesLegal
DocumentationFinancial Reporting
Maqāṣid al-Sharī‘ah
CONTRACT (‘AQD)
4KHUSMUHAMMADKHUSMUHAMMAD 4
Customer has executed a Sale and Purchase Agreement with the vendor
Customer has the right to sell the property to bank by executing Property Purchase Agreement with the Bank
Bank Resells the property to the customer by executing the Property Sale Agreement(Fixed or Floating rate)
This falls under the concept of Bay Inah, where the bank buys directly from customer and resells the same property to same customer without incurring any risk
(Cont.)
ObjectivesLegal
DocumentationFinancial Reporting
Maqāṣid al-Sharī‘ah
CONTRACT (‘AQD)
5KHUSMUHAMMAD 5
Home Financing-i, is fixed rate home financing for 3-years, 5-years 10 or 20 years
A sample calculation for 20 years of house of 225000RM, at profit rate of 5.88% is as follows
(Payment of monthly installment)=[Facility amount(1+profit rate)xnxr]/[1+(1+pr)xn-1]
Monthly installment=[225000(1+5.88/12)x240x5.88/12]/[1+(1+5.66/12)x240-1]=1,596RM
The bank contract /selling price will be 1596.43x240=383,143RM The contract does not allow bank to adjust their profit rate and
contracted price will remain fixed in 158,143RM
CIMB Islamic Home Financing-i
ObjectivesLegal
DocumentationFinancial Reporting
Maqāṣid al-Sharī‘ah
CONTRACT (‘AQD)
6KHUSMUHAMMAD 6
Variable rate home financing based floating rate features based on the movement of Base Financing Rate (BFR), with capped at an agreed ceiling rate, this is actually BBA financing with Ibra’ features, any shortfall will be treated as rebate given to client
The bank sets ceiling price of 10.75% per annum whatever above this will be rebate to the customer
The bank purchase is RM114,986 The bank selling price RM280,169, installment in 20 years Contracted profit rate/Ceiling rate 10.75% p.a Base financing rate on the time of offer latter is 6.5% The monthly payment amount is calculated based on the Effective Profit
Rate which is the current Base Financing Rate - /+Spread per annum which 1-240 month, BFR-1.95% p.a. the amount = RM730.57
CIMB Islamic Flexi Home Financing-i
ObjectivesLegal
DocumentationFinancial Reporting
Maqāṣid al-Sharī‘ah
CONTRACT (‘AQD)
7
Agents of Contract
- Customer
- Bank Objective of Contract
- BBA Property Financing Subject Matter and the price of Contract
- Fixed/Floating Financing Rate- House financing Offer and Acceptance
- Bank buys the house and resells the product by contracted profit rate installment
- Customer accepts the selling price and monthly installment The whole arrangement of purchase and resale involves Bai-al-Inah
concept
Requirement of ‘Aqd/Contracts
ObjectivesLegal
DocumentationFinancial Reporting
Maqāṣid al-Sharī‘ah
CONTRACT (‘AQD)
KHUSMUHAMMAD
Objectives LEGAL DOCUMENTATION Financial Reporting
Maqāṣid al-Sharī‘ah
Contract (‘Aqd)
Legal Documents for Home Financing
Conventional Sale and Purchase Agreement (S&P) or Memorandum of
Contract Loan Agreement Deed of Assignments/Charge
Islamic banking Sales and Purchase Agreement (S&P) or Memorandum
of Contract Property Purchase Agreement (PPA) Property Sale Agreement (PSA) Deed of Assignments/Charge
8SULISTYA RUSGIANTO
9
Sale and Purchase Agreement
The customer(s) purchase the property from the developer/vendor
In this case, SPA in the form of the Memorandum of Contract (MoC) endorsed by the Auctioneer which indicate that the customer(s) is the successful bidder and the successful bid price is declared
The customer(s) paid 10% down payment There is a transfer of ownership and title but has
not been issued by the relevant authorities.
SULISTYA RUSGIANTO 9
Objectives LEGAL DOCUMENTATION Financial Reporting
Maqāṣid al-Sharī‘ah
Contract (‘Aqd)
1010
Property Purchase Agreement
The bank purchase the property from the customer(s)
There is no title transfer, but beneficial ownership in and/or rights to the property only.
The bank pay the purchase price (bid price – down payment) to the developer/vendor for benefit of the customer(s)
SULISTYA RUSGIANTO 10
Objectives LEGAL DOCUMENTATION Financial Reporting
Maqāṣid al-Sharī‘ah
Contract (‘Aqd)
11
Property Sale Agreement
Agreement between the Bank as selling party and the customer as buyer
Consists information on the rights and contractual obligation of the contracting parties, the property, the price, monthly payment, period of financing and other terms and conditions
Attached with the Letter of Offer and Deed of Assignment/Charge
The Bai’ al-’Inah concept is explained in this agreement and so, the BBA mode of payment which allow the customer to settle the bank’s selling price on deferred payment basis.
ASMAH MOHD JAAPAR 11
Objectives LEGAL DOCUMENTATION Financial Reporting
Maqāṣid al-Sharī‘ah
Contract (‘Aqd)
12
Default Definition
1) Failure to pay the monthly payment or any sum of money due and payable to the bank under the BBA facility
2) An act of bankruptcy under Bankruptcy Act 1983 has been committed
3) If Section 25 (1) of the Islamic Banking Act 1983 is triggered
4) Insanity or death of any of the customer(s)5) Breach of any terms, conditions or approval contained in
PSA and the Legal Docs. In the event of default, the customer(s) have to pay the whole
bank’s selling price and all other sums payable under the BBA facility
ASMAH MOHD JAAPAR 12
Objectives LEGAL DOCUMENTATION Financial Reporting
Maqāṣid al-Sharī‘ah
Contract (‘Aqd)
13
Payment
Installment based on the EPR=BFR-1.95% p.a. on daily rest throughout the facility period
The installment is adjusted to reflect the changes of EPR based on the movement of BFR but shall not > CPR of 10.75% p.a.
Automatic monthly ibra’ is given based on difference between EPR and CPR
ASMAH MOHD JAAPAR 13
Objectives LEGAL DOCUMENTATION Financial Reporting
Maqāṣid al-Sharī‘ah
Contract (‘Aqd)
14
Late Payment
Ta’widh During the facility period: 1% p.a. on the overdue
amount or a minimum of RM1 whichever is higher or any other method approved by BNM
After the facility period: based on the bank’s current Islamic Interbank Money Market (IIMM) rate on the outstanding principal balance or any other method approved by BNM
Ta’widh shall not be compounded on the principal amount
ASMAH MOHD JAAPAR 14
Objectives LEGAL DOCUMENTATION Financial Reporting
Maqāṣid al-Sharī‘ah
Contract (‘Aqd)
15
Early Settlement/ Redemption of Facility During lock-in period (5 years)
– Settlement/redemption is allow at the bank’s sole discretion and ibra’ may not be granted or granted at lower rate
After the lock-in period– Ibra’ of any unearned profit over the bank’s selling
price may be permitted Ibra’ computation shall be treated as final and binding Partial payment of the BBA facility is allowed through
excess payment of the customer(s) by way of withdrawal of EPF or additional payment
ASMAH MOHD JAAPAR 15
Objectives LEGAL DOCUMENTATION Financial Reporting
Maqāṣid al-Sharī‘ah
Contract (‘Aqd)
16
GMTP
The property must be covered with a TO on the Bank’s panel naming the Bank as beneficiary
The GMTP contribution is either self-financed by the customer or the Bank
For single applicant, the coverage is 100% For joint applicants, the coverage is about 50%
each In the event GMTP is cancelled for whatsoever
reason, the customer will be charge extra 1% of the profit rate
ASMAH MOHD JAAPAR 16
Objectives LEGAL DOCUMENTATION Financial Reporting
Maqāṣid al-Sharī‘ah
Contract (‘Aqd)
Financial Reporting Financial Reporting can be defined as a process of recording all business’ financial
transactions and activities.
The importance of the Financial Reports has been clearly emphasized from the Quranic Verse as follows:
“…Never get bored with recording it, however small and large, up to its maturity date, for this is seen by Allah as closer to justice, more supportive to testimony and more resolving to doubt…” [Al-Baqara: 2, 82].
The true source of financial reporting will be based on Annual Report of CIMB Islamic Bank Bhd in year 2009 which in accordance with the requirements of the Companies Act 1965 (Malaysia), MASB Approved Accounting Standard and BNM Guidelines.
For the purpose of testing the level of conformity with Shariah Injunction, we use Accounting, Auditing and Governance Standards For Islamic Financial Institutions (2008) published by AAOIFI (the Accounting and Auditing Organization for Islamic Financial Institutions) as yardstick
HISHAMUDDIN ABDUL WAHAB 17
ObjectivesLegal
DocumentationFINANCIAL REPORTING
Maqāṣid al-Sharī‘ah
Contract (‘Aqd)
18
Accounting Standards for Murabaha (BBA)
HISHAMUDDIN ABDUL WAHAB 18
AAOIFI
FAS 1
FAS 2
Bank Negara
GP8-i
MASB
FRS i-12004
ObjectivesLegal
DocumentationFINANCIAL REPORTING
Maqāṣid al-Sharī‘ah
Contract (‘Aqd)
19HISHAMUDDIN ABDUL WAHAB 19
Problem of Inconsistency in Financial Reporting
In the real Balance Sheet of CIMB Islamic Bank Bhd, all the entries have been recorded such Murabaha financing, cash, account receivable and profit realized from financing except for the asset purchase transaction.
The inconsistency of financial reporting of CIMB Islamic Bank Bhd arises from BBA transactions - absence of the financial records of the “property buying” by the bank from the customer.
It violates the Hadith “One must not sell what one does not own”. It makes buy-sell (bay al-enah) procedures only fictitious since no transaction recorded for asset buying
ObjectivesLegal
DocumentationFINANCIAL REPORTING
Maqāṣid al-Sharī‘ah
Contract (‘Aqd)
20
Journal Entry for BBA (or Murabaha) (Shahul Hameed, 2009)
N
oTransactions/ Events Dr Cr
1 Purchase of Asset by bank Equipment Cash/Creditor
2 Murabaha (BBA) sale
Murabaha
financing (cost
+ profit)
Equipment at cost of
deferred profit with
profit
3 Installment receipt Cash Murabaha Financing
4Recognition of profit as each
installment receivedDeferred profit Profit n Loss
5 Termination of contract A/c receivable Murabaha Financing
6 Rebate for early payment Deferred profit Murabaha FinancingHISHAMUDDIN ABDUL WAHAB 20
ObjectivesLegal
DocumentationFINANCIAL REPORTING
Maqāṣid al-Sharī‘ah
Contract (‘Aqd)
21
General Presentation and Disclosure Relating to BBAStandard General Presentation and Disclosure
GP8-i
In Balance sheet, on the asset side, BBA financing is pooled together with other types of financing into category of Financing, advances and other loans.
No presentation for the asset purchased by bank before sell to customer.
In notes to financial statement, under category of Financing, advances and other loans, there’s specification for BBA by contract.
FRS-i2004
From definition of paragraph 6, the standard defines BBA as :“Bai Bithaman Ajil (lit., deferred payment sale) - A form of financing in which an IFI finances a customer who wishes to acquire a given asset and who agrees to repay by instalments within an agreed period. The IFI will purchase the asset required by the customer and subsequently sells it to him at an agreed price inclusive of the IFI's profit margin.”
Paragraph 10, the standard only mentions about requirement of information for financial statement such asset, liabilities, equity, income and expenses, changes in equity and cash flows. No specifications of items for assets except for paragraph 41 on Information to be presented on face of balance sheets
“The assets of an IFI include cash balances and short-term funds, placements with other financial institutions, dealing and investment securities, and financing of customers...The financing of customers usually comprises financing extended to customers based on various Shariah principles. Other items include receivables, statutory deposits with BNM, and property, plant and equipment.”
HISHAMUDDIN ABDUL WAHAB 21
ObjectivesLegal
DocumentationFINANCIAL REPORTING
Maqāṣid al-Sharī‘ah
Contract (‘Aqd)
22
(Cont.)Standard General Presentation and Disclosure
FRS-i2004
(cont)
Regarding to BBA, one close paragraph mention about it is in paragraph 27. The paragraph basically mentioning about the permissibility of offsetting certain items in assets and liabilities, and income and expenses. The paragraph 27 as below:
27. Offsetting of balances may be made in respect of unearned profit for murabahah, BBA and Ijarah financing against murabahah, BBA and rental receivables.
FAS 1
In FAS (1), the asset purchased by bank is recorded in the inventory account.
In para 37 FAS(1) of Statement of Financial Position, the Disclosure should be made on the face of financial statement including:
“Inventories (including goods purchased for Murabaha customers prior to consummation of Murabaha agreement)”HISHAMUDDIN ABDUL WAHAB 22
ObjectivesLegal
DocumentationFINANCIAL REPORTING
Maqāṣid al-Sharī‘ah
Contract (‘Aqd)
23
Extract of Annual Report CIMB Islamic Bank Bhd (2009)
HISHAMUDDIN ABDUL WAHAB 23
ObjectivesLegal
DocumentationFINANCIAL REPORTING
Maqāṣid al-Sharī‘ah
Contract (‘Aqd)
24
Extract of Annual Report CIMB Islamic Bank Bhd (2009)
HISHAMUDDIN ABDUL WAHAB 24
ObjectivesLegal
DocumentationFINANCIAL REPORTING
Maqāṣid al-Sharī‘ah
Contract (‘Aqd)
YUSIF
ObjectivesLegal
DocumentationFinancial Reporting
MAQĀṢID AL-SHARĪ‘AH
Contract (‘Aqd)
Introduction to Maqāṣid Al-sharī‘ah
Consist of the deeper meanings (ma‘ānī) and inner aspects of wisdom (ḥikam) considered by the Lawgiver (Shāri‘) in all or most of the areas and circumstances of legislation (aḥwāl al-tashrī‘) (Ibn Ashur, 2006).
Either the realization of benefit (maṣlaḥah)or the repulsion of harm (mafsadah) or achieving both at the same time. (Ibn Ashur, 2006).
Maqāṣid al-sharī‘ah: Necessities (ḍarūriyyāt): Preserves one’s faith, soul, wealth,
mind, and offspring Needs (ḥājiyyāt) Luxuries (taḥsīniyyāt)
25
26YUSIF
Importance of Home in Islam
Abu Musa reported AlLāh's Apostle (SAW) as saying: The house in which remembrance of AlLāh is made and the house in which AlLāh is not remembered are like the living and the dead (Sahih Muslim, Book 4, Hadith 1706)
“And stay in your houses, and do not display yourselves like that of the times of ignorance…” [al-Ahzaab 33:33]
26
ObjectivesLegal
DocumentationFinancial Reporting
MAQĀṢID AL-SHARĪ‘AH
Contract (‘Aqd)
27YUSIF
CIMB Home Financing
Repulsion of harm: No actual transfer of ownership (-) Involve property under construction (-)
Realization of benefit: Preservation of faith, soul, wealth, mind, and
offspring (+)
27
ObjectivesLegal
DocumentationFinancial Reporting
MAQĀṢID AL-SHARĪ‘AH
Contract (‘Aqd)
والله سبحانه وتعالى أعلم بالصواب
Thank You