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Home Financing

2010. 10. 25

Maybank :Musharakah Mutanaqisah

Group Members

Objectives

ALearn

BShare

CIdentify

IssuesDMake Things

Better

Content of Presentation

1.Product

2.Contract

3.Financial Report

4.Maqasid Shari’ah

5.Legal Documentation

Product

To own an asset

Joint Venture: Maybank and Customer

Customer promise to lease and buy share

Joint Venture buy asset

Maybank and Customer share profit according to ratio

Product

Product

Maybank90%RM117,000

Customer10%RM13,000

RM 130,000

Initial Capital Contribution

Product

Rent

Tenure:38years, 456month

Margin of profi t:BFR-1.6% per annumCurrent BFR-6.3%

Early Settlemen

t

Penalty Clause3.5% of the original fi nancing amount

RM 5000, whichever is higher

See spreadsheet sheet 1

Suggestion of Rent

Product

BFR -1.60% of current equity

Lower And Lower Payment Every Year

Make profit as well asPromoting Economic and Social Welfare

See spreadsheet sheet 2

Contract (Aqad)

Musharakah Mutanaqisah (Diminishing Musharakah)

technically is a partnership contract between two or more

parties on a particular asset or venture which allows one of

the partners to gradually acquire the shareholding of the

other partner through an agreed redemption method during

the tenure of the contract.

The basis of the formation of a musharakah mutanaqisah

contract: It is a contract that is concluded by two parties,

where each of them contributes capital to the partnership,

either in the form of cash or kinds (kinds - after valuation has

been done). The profi t sharing ratio must be agreed upon by

both parties, while the losses are borne on a pro rata basis,

i.e. in accordance to the shares of each partner.

Contract (Aqad)

Musharaqha mutanaqisah

Bai

Ijarah

Musharaqah

Contract (Aqad)

Pay the rent & buy shares owned by bank

Rent the house & sale i ts share to the customer

Contract (Aqad)

Contract (Aqad)

Musharakah

Ijarah & Bai

Conditions of sale/purchas contract:Contracting parties:‣ 1. Sound mind‣ 2. Authority to act

Off er and acceptance:‣ Verbal or written

expression

Subject matter:‣ 1. Ownership‣ 2. Valuable asset‣ 3. Shari’ah permissibil ity‣ 4. Possession

Condit ions of i jarah contract:‣ 1. Defi ned period and rentals,‣ 2. Valuable property,‣ 3. Durable,‣ 4. Ownership l iabi l i t ies - by

lessor, usage l iabi l i t ies - by lessee,

‣ 5. Amanah principle,‣ 6. No usufruct - no rental

payment,‣ 7. Proport ionate rental of 2 or

more people,‣ 8. Rental payment - from the

t ime of del ivery.

MM Contract

Sale/Purchas Contract

Ijarah Contract

Contract (Aqad)

Financial Report

• Balance sheet of Maybank Islamic Berhad (March, 2010)

Financial Report

Financial Report

• Time Of Contracting - Bank's Share Is Recognized Under The Title 'Musyarakah

Mutanaqisah Financing'

• Repayment Of Capital By Customer - Bank's Share Declines As The Customer's Share Increaes Per

Each Payment

Musyarakah Mutanaqisah Financing XXX

Cash XXX

Cash XXXMusyarakah Mutanaqisah Financing XXXX

Financial Report

• Rental payment - Periodic rental amonuts will be jointly shared between the bank

and the customer accoding to the percentage share holding at the particular times which Keeps changing as the customer purchases the bank's shares.

Cash XXX

Profit And Loss XXX

Financial Report

Disclosure on Capital Adequacy

Financial Report

Maqasid

Shariah

Maqasid Shariah

"The very objective of the Shariah (Maqasid Shariah) is

to promote the welfare of the people which lies in

safeguarding their faith, their life, their intellect, their

posterity and their property. Whatever ensures the

safeguard of these five serves public interest and is

desirable." Imam Al Ghazali

“One purpose of the Shariah is the preservation and

protection of the basic necessities (daruriyat) of man

without which life would probably be filled with anarchy

and chaos and thus become meaningless. Professor

Rosly.

Shariah aims at protecting and preserving public interests

(maslahah) in all aspects and segments of life.

Maqasid Shariah

Maqasid Shariah

Repel the harm

(madarrah)

Provide benefit

(manfa’ah)

Prohibits riba: to protect the property of people as riba depletes the property , and Encourages al-bay (trade) where people are exposed to diff erent types of risk hence their profi t is justifi ed and halal

example

Financial instruments, in particular musharakah mutanaqisah.

(MM) from MS perspective.

According to Maqasid ash-Shari’ah, home is one of the daruriyat (necessities) of human life, and it falls under “protection of life”.

Many people cannot aff ord buying the house for cash, thus, they look for someone who can finance purchasing one.

Islamic products should enhance economic growth, reduce poverty and bring happiness to human beings

Maqasid Shariah

Legality of MM

Maqasid Shariah

INTERNATIONAL

COUNCIL OF FIQH

ACADEMY

AAOIFI

SAC

The bank

Maqasid Shariah:

Benefi ts• Base Financing Rate (BFR) – higher returns

• The rental payment may be reconsidered in the future at the bank’s discretion

• The property may be revalued or valued in the future at the bank’s discretion at the cost of the Customer

Dis-benefi ts• If used property market prices then the bank loses out on some profi t.

• Possibility that the customer may default and opt not to purchase the remaining equity

The customer

Maqasid Shariah:

Benefi ts• Shelter;• Chance to buy out gradually throughout a long period.

• No collateral• The customer will be receiving most of the rental payment as time goes by.

Dis-benefi ts• All the costs are paid by the customer

• The customer has to pay more if based on BFR

• A new rental payment may be imposed onto the Customer as the new rental payment could be determined solely by the Bank

• The property can be revalued as the Bank deems necessary at the cost of the Customer.

Legal Documentatio

n

The principle of legal documentation is to provide security and protection to contracting parties for their rights and responsibilities to be clearly stated in the terms and conditions of the contract.

Importance of consumer protection in Islamic finance innovation

In Malaysia usually three categories for consumer legal protection:

1) Contractual Law;2) Law of tort. 3) Regulatory statutes.

Legal Documentation

Legal Documentation

In Islam the concept of right is defined as haqq. Primarily, Al-Haqq is one of the names of Allah (SWT) meaning “The Truth” and is mentioned more than 200 times in the Holy Qur’an.

That is because Allah— He is the Truth , and what you call upon besides Him is falsehood. Allah is the All-High, the Most Great. (Surah Luqman, 31:30)

Legal Documentation

O you who believe! When you deal with each other, in transactions involving future obligations in a fixed period of time, write it down. Let a scribe write it down in justice between you……Let him (the debtor) who incurs the liability dictate, and he must fear Allah, his Lord, and diminish not anything of what he owes……..And get two witnesses out of your own men. You should not become weary to write it (your contract), whether it be small or big, for its fixed term, that is more just with Allah; more solid as evidence, and more convenient to prevent doubts among yourselves….But take witnesses whenever you make a commercial contract. Let neither scribe nor witness suffer any harm, but if you do (such harm), it would be wickedness in you. So be afraid of Allah; and Allah teaches you. And Allah is the All-Knower of each and everything. (Al-Baqarah, 282)

In Shariah haqq is “the exclusive power over something or demand addressed to another party which the Shariah has validated in order to realise a certain benefit”. Based on this commercial right is confined to rights having monetary value (qima maliyya).

Legal Documentation

Rights over Property

Legal Documentation

The Bank’s rights

• The right of entry or re-entry for the purpose of inspection of the property;

• The right to cure any defects of the property (but shall not at any time impose any obligation upon the Bank to rectify such defects);

• The right to approve any significant improvements to the Property (but such right shall not impose any obligation upon the Bank to pay for such improvements)

The Customer’s rights

• The sole and exclusive right to occupy the Property;

• The right to purchase the ownership shares of the Bank in the Property at any time subject to the terms of this Facility.

Default Event

Legal Documentation

In theory

• In the event of customer default, the contract will be cancelled.

• Without wa’d (promise to purchase) the property will be sold and theprofit will be divided according to the ownership shares of the bank and the customer.

• With wa’d, the customer has to to acquire the bank’s remaining share of the property. This creates a debt to be paid by the customer to the bank.

In the case

• The Bank may terminate the contract if the Customer:

• Defaults or fails to pay any monthly payments of the home/Shop house Equity-i, the monthly rental or any other sums of money payable on its due date to the Bank

• There is no wa’d in the partnership.

Damages to the Property

All certificates will be taken up at the Customer’s costs and expenses

Legal Documentation

1. Fire, Lightning, Thunderbolt and Subterranean Fire2. Flood, 3. Aircraft Damage4. Hurricane, Cyclone, Typhoon and Windstorm5. Earthquake and Volcanic Eruption6. Explosion7. And such other perils as the Bank may require

The Bank requires the Property to be protected by Home Building/Fire Takaful certificate:

Property valuation and Rental reconsideration

Legal Documentation

In the case

• The Bank may time to time require the Property to be valued or revalue by the Bank’s appointed valuers at the cost of the Customer

• The monthly payment and acquisition payment may vary at any time at the Bank’s discretion.

In theory

• A property should be valued only when there is a sale of the property which would involve the full transfer of ownership. Meera & Razak (2010)

• The monthly rental could be reviewed at any time throughout the duration of the contract subject to consent of both parties. The customer may not be able to afford a new rental payment.

Bibliography and references

Rosly, Saiful Azhar (2010) “Shariah Parameters Reconsidered”, International Journal of Islamic and Middle Eastern Finance and Management, Vol. 3, No 2, 2010, pp.132-146

Meera, Ahamed Kameel Mydin, & Abdul Razak, Dzuljastri (2009) “Home Financing through the Musharakah Mutanaqisah Contracts: Some Practical Issues”, Journal of King Abdul Aziz University: Islamic Economics, Vol. 22 No. 1, 2009, pp. 3-27.

http://www.bookrags.com/tandf/haqqhaqiqa-tf/ Osmani, Noor Mohammad & Abdullah, Md. Faruk (2010)

“Musharakah Mutanaqisah Home Financing: A Review of Literatures and Practices of Islamic Banks In Malaysia” International Review of Business Research Papers, Vol. 6, No. 2, 2010 pp. 272 - 282

Legal Documentation

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