musharakah bankers perspective

8/6/2019 Musharakah Bankers Perspective

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Musharakah:

The Bankers Perspective

Presented by

Saleem Khan


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Introduction

Definition:

Musharakah means a joint enterprise formed forconducting a business

Profit is shared in pre-agreed ratio

Loss is shared in the ratio of investment.


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Musharakah an Ideal mode forIslamic Banks

Musharakah is the most preferred mode for Shariah-

compliant financing.

Meezan Banks has designed both asset & liabilityside products on Musharakah.


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Application ofMusharakah in MeezanBank

Liability products

Meezan Bank has successfully launched Riba Free

Certificates of Islamic Investment (COII) in 2000

Recently Meezan Banks has also introduced Savingaccounts based on Musharakah


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Product Features

Name: Riba Free Certificate of IslamicInvestment. (COII)

Tenure: 3 month, 6 month, 1 year, 2 years, 3years & 5 years

Minimum Investment: Rs. 50,000/-

Profit option: Monthly, Quarterly, at Maturity

Riba Free COII


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Riba Free COII

Basic Concept:

Riba Free COII is a Musharakah-based contract

between Meezan Bank and its customer.

All the principles and rules pertaining toMusharakah are strictly adhered.

Profit and loss is shared according to the rules ofIslamic Fiqh.


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Depositor is a partner with the bank in aninvestment pool formed as a result ofMusharakah

The Bank acts as an investor as well as aworking partner

Whereas the depositors are investors and

sleeping partners.

Riba Free COII


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The investment pool comprises of Murabahasand Ijarahs

Profit depends on the return of this pool and iscalculated on a quarterly basis.

Investors share the profit in a pre-agreed ratio

In case of a loss the Investor is liable to shareit in the ratio of investment

Riba Free COII


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Asset Side

On the Asset side Meezan Bank has successfullyused Musharakah for fulfilling the financing needsof its customers.



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Sitara MTFC

Meezan Bank acted as a joint lead manager andShariah Advisor in successful issuance of Sitara

Chemical Industries Musharakah Term FinanceCertificates.

The transaction has achieved financial close of Rs225 million in private placement.

Public issuance of Rs 110 million is expected inJuly 2002



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Musharakah: Bankers Perspective


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Musharakah: Bankers PerspectiveOn the Liability side of a bank, Musharakahbased products are simple to apply

However,

On the Asset side, Musharakah is a high riskmode of financing due to:

Operational Risk

Business Risk

Credit Risk

Proper mitigation of these risks are of mainconcern to an Islamic bank in Musharakah


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Risks in Musharakah

Operational Risk:

Success of Musharakah depends upon better

managing the factors of operational risks,which include:

Control over management

Transparency in income

Commitment by management


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Operational Risk: Mitigation

Islamic Banks can take following steps forproper management of Operational risks in

Musharakah.a) By appointing banks representatives in:

Companys BOD

Finance &

Internal audit

These representative should be given properauthority & will be directly reporting to Banksmanagement

R

isks in Musharakah


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Operational Risk: Mitigation

b) By conducting Qualitative evaluation ofcompanys management, its style, and its

general reputation.

R

isks in Musharakah


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Business Risk:

Islamic banks must be watchful of the

business risk in Musharakah because Musharik

bank takes a risk on:

The industry in which the business operates

The business as whole

Growth & profitability of the business

Risks in Musharakah


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Business Risk: Mitigation

For mitigating business risk as banker we need to

Develop a deeper understanding of thebusiness & industry

Understand the importance of viewing theMusharakah not only from a financiers

perspective, but also from a businessmansperspective.

Risks in Musharakah


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Credit Risk:

In Musharakah the Musharik bank is exposed

to similar credit risks as other banks, which

include:

Risk of default

Party risk

Risks in Musharakah


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Credit Risk: Mitigation

Credit risk can be mitigated by

Proper evaluation of the customers financialposition

Evaluation of customers credit history

Past relationship with bank

Risks in Musharakah


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General Applications ofMusharakah


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General Application ofMusharakah

Asset Side Financing

Short/Medium/Long - Term Financing

Project Financing

Small & Medium Enterprises setup Financing

Import Financing

LC with margin (for Musharakah)

Export Financing (Pre-shipment financing)

Working Capital Financing

Running Accounts Financing / Short Termadvances


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General Application ofMusharakah

Liability Side Financing

Saving/ Investment Accounts

Inter- Bank lending / Borrowing Term Finance Certificates & Certificate of

Investment

Securitization for Large Projects Certificate ofInvestment

Islamic Musharakah Bonds


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Conclusion

Musharakah can be used profitability by thebank provided all the risk are managed andeffective control are in place.

musharakah bankers perspective

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