Islamic Shares Financing
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Transcript of Islamic Shares Financing
Practiced by more than 100 financial institutions in more than 45 countries.
Growth rate of more than 15% per year.
Annual turnover increased from $5 billion in 1985 to over $100 billion in 2000.
Potential market around the world making 25% of the world population.
Islamic Financing: Islamic Financing: Shares Margin FinancingShares Margin Financing
Imran Adeel HaiderMuhammad Akbar
Taha Lateef
Financial Accounting
AgendaAgenda Islamic Financing
Key Concepts
Principles of Islamic Financing
Islamic Financing Modes
Equities Financing Key Concepts
Margin Financing
Islamic Shares Financing Forming Murabaha Fund
Murabaha Model
Murabaha Transactions
Q & A
Islamic FinancingIslamic Financing
What is Islamic Financing?What is Islamic Financing?With conventional financing, a customer can walk into a bank, request a loan, and then pay the loan back over a period of time with interest.
Money (Loan)
Money (Loan repayment) + Interest
Conventional Financing
CustomerBank
What is Islamic Financing?What is Islamic Financing?In Islamic financing, the bank would purchase the product or service that the customer requires the loan for, and sell this onto the customer at a higher price over an agreed period of time, thus making a profit.
Product/Service
Money
Islamic Financing
Bank Customer
Principles of Islamic FinancingPrinciples of Islamic Financing
Prohibition of Interest
Risk Sharing
Money as “Potential” Capital
Prohibition of Speculative Behavior
Sanctity of Contracts
Shariah-approved Activities
Islamic Financing ModesIslamic Financing Modes
Trade with Markup or Cost-plus Sale (Murabaha)
Leasing (Ijara)
Profit-sharing Agreement (Mudaraba)
Equity Participation (Musharaka)
Sales Contracts
(i) Deferred-payment Sale (Bay’ Mu’ajjal)
(ii) Deferred-delivery Sale (Bay’ Salam)
Basic Islamic Rules of SaleBasic Islamic Rules of Sale1. The subject of sale must be existing at the time of sale.
2. The subject of sale must be in the ownership of the seller at the time of sale.
3. The subject of sale must be in the physical or constructive possession of the seller when he sells it to another person.
4. The sale must be instant and absolute.
5. The subject of sale must be specifically known & identified to the buyer.
6. The subject of sale must be a property of value.
7. The subject of sale should not be a thing which is not used except for a Haram purpose, like pork, wine etc.
8. The delivery of the sold commodity to the buyer must be certain and should not depend on a contingency or chance.
9. The certainty of price is a necessary condition for the validity of a sale.
10. The sale must be unconditional. A conditional sale is invalid, unless the condition is recognized as a part of the transaction according to the usage of trade.
Traditional Traditional Equities FinancingEquities Financing
Key ConceptsKey Concepts• Delivery
– The legal transfer and receipt of ownership rights.
• Settlement– The date by which an executed security trade must be
settled. That is, the date by which a buyer must pay for the securities delivered by the seller.
• Margin– Borrowed money used to purchase securities. The practice
is referred to as "buying on margin". – Amount of equity contributed by a customer as a
percentage of the current market value of the securities held in a margin account.
• Initial Margin– The percentage of the purchase price of securities (that can
be purchased on margin) that the investor must pay for with his or her own cash or marginable securities.
• Maintenance Margin– The minimum amount of equity that must be maintained in
a margin account.
Key ConceptsKey Concepts• Collateral
– Properties or assets that are offered to secure a loan or other credit. Collateral becomes subject to seizure on default.
– Collateral is a form of security to the lender in case the borrower fails to pay back the loan.
– Example: For a mortgage, the collateral would be the house. In margin trading, the pledged securities in the account are the collateral.
• Hypothecation– When a person pledges a mortgage as collateral for a loan,
it refers to the right that a banker has to liquidate goods if he fails to service a loan.
• Margin Call– A broker's demand on an investor using margin to deposit
additional money or securities so that the margin account is brought up to the minimum maintenance margin.
Buying Shares on MarginBuying Shares on Margin• Rationale
– Use the Leveraged Position to Buy More Shares– Maximize Profitability from Appreciation of Rates
• Result– Investors Can Buy More Shares than the Money
They Have– Thus Resulting in Increased Profits if Prices Go Up
• Risks– If the Share Prices Go Down, the Investor Bears all
the Loss– Losses can be Substantial and Even Bankrupt the
Investor– If the Investor Goes Bankrupt, the Bank May Not
Recover its Investment
Share Financing Process Customer/Investor approaches a financing institution He pledges collateral (Cash, Shares, Other Securities) The institution hypothecates the investor and sets a
limit Margin Limit = Value of Collateral / Margin Percentage The investor can then buy shares not exceeding the
Margin Limit If share prices drop, the investor’s collateral may fall
below maintenance margin The financier issues a Margin Call, upon which the
investor deposits more collateral If the Investor doesn’t respond, the financier
liquidates the collateral to cover its position Since the duration of contract is unknown, the
interest is charged daily
Valuation of ClientValuation of Client
3- The Credit Appraisal Department valuates the pledged collaterals and hypothecates the worth of the Customer. A financing limit is
then assessed for each Customer, which is then stored as a Master Agreement/Maximum Financing Limit. All Financing Requests from
each Customer are then checked against this limit.
Customers’ applications are sent to the Credit Appraisal Committee
for review and valuation.
Customer approaches the Financing Institution and
subscribes to the Murabaha Financing Service for Purchase of
Shares of Listed Companies.
Trading on MarginTrading on Margin
Customer Bank
KSE
No – Buy 100,000 PTCL@ Rs. 64
The Customer wants to buy 100,000 shares of PTCL @ Rs. 64.00
The Bank checks the allowed limit of the Customer
If the required financing does not exceed the allowed limit, the request is honored and the transaction is executed. Otherwise it is denied.
CDC Account of Bank
Main Account
PTCL – 100,000 @ Rs. 64.00
Transferred to Customer
Customer’s Sub-Account
Yes
Islamic Shares FinancingIslamic Shares Financing
Murabaha Shares Financing• Bank Assigns Credit Limit to the Investors • Investors Request the Bank to Purchase
Shares on Murabaha Basis• The Bank Checks the Requests Against
Allowed Limits• The Bank Purchases the Shares• After Settlement, the Shares are Sold to the
Investor at a Higher Price• The Investor Pays Back the Full Price in
Agreed Installments• If the Investor Wishes to Pay Earlier, it is
Bank’s Discretion if it should Waive the Remaining Balance
• If the Investor Pays Late, the Bank can Charge a Penalty
• Penalty Amount Cannot be Treated as Revenue
• The Investor May Sell the Shares Anytime
Bank
Forming Murabaha Fund
Investors
Trading & Financing Customers
Repayment
Schedule
DailyPayments
Murabaha Transactions
Customer
Bank
3- Day Contract
Customer
Bank
Transaction Day
Day 1
Customer
Bank
Day 2
Customer
Bank
Day 3
Transactions
Shares - Bank 600,000
Cash 600,000
Receivables - Client 600,600
Shares - Bank 600,000
Unrealized Profit 600
Cash 200,200
Client Receivables 200,200
Unrealized Profit 200
Profit 200
Cash 200,200
Client Receivables 200,200
Unrealized Profit 200
Profit 200
Cash 200,200
Client Receivables 200,200
Unrealized Profit 200
Profit 200
Buy 10,000 shares,PTCL @ Rs. 60.00
Profit = 12%
Murabaha – Considerations• Delay in Payments
– Penalties of fixed amount– Donated to charities
• Devaluation of Collateral– Customer to deposit additional amount to ensure
minimum pledged collateral value
• Default– Collateral liquidated by bank– Amount remaining after covering liabilities to bank is
returned to customer
Questions and Answers
Thank You