International Conference on Islamic Banking & Finance in Mauritius by alhudacibe

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									         THE APPLICATION OF NEW MUSYARAKAH
                       MODEL IN
                 ISLAMIC BANKING PRODUCTS


                         Maheran Mohd Jaffar
                      Mathematics Department
                 Fakulti Sains Teknologi & Matematik
                     Universiti Teknologi MARA
                               Malaysia

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Content
         Introduction
         Background problem
         New Musyarakah model
         Application of model in musyarakah product
         Results
         Discussion
         Usefulness/benefits to society
         Conclusion

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Introduction
     Islamic banking
           Significant and popular
           Competitive alternatives to conventional products
     Loan financing contracts
           Bai’ bithaman ajil (deferred payment sale), murabahah (Cost
           plus profit), wadiah (savings with guarantee), ijarah (leasing)
           etc.
     Equity fincancing contracts
           not popular : mudharabah (profit sharing), musyarakah (joint
           venture)
     Mudharabah contract
     Musyarakah contract
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Musyarakah Contract
     A joint venture
     Very dynamic concept
     Not many musyarakah products
     The financial institutions love sure profit.
     Potential investors love profit sharing products.
     Higher risk
     Not many scientific research


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   Percentage of Islamic Financial Concepts Used in
   Banking System (Malaysia) in 2007, 2008 and 2009


                                                         Percentage (%)
     Islamic Concepts                             2007        2008        2009
     Bai Bithaman Ajil                            37.0        33.0        33.4
     Ijarah                                       1.4          2.7        2.8
     Ijarah Thumma Al-Bai                         30.2        30.4        31.3
     Murabahah                                    11.4        15.2        16.6
     Musyarakah & mudharabah                      0.5          1.4        1.7
     Istisna'                                     0.9          1.3        1.3
     Others                                       18.5        16.1        12.9
     Total                                        100         100         100

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Background Problem
     Islamic banks
           are pesimistic in packaging their products.
           prefer the sure profit
           need to improvise and offer new products to attract
           fund managers

     Not many scientific research

     Need better understanding on the flow of
     money


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New Musyarakah Model
     A new mathematical model for joint venture
     Both parties can put in initial capital.
     Provides two profit sharing rates.
     Investment can be calculated at any time
     Total investment and profit for the two parties.
     Transparent, fair, and justified profit sharing
     model.
     Risks are shared between investors.
     A catalyst to new products

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    New Musyarakah Model…
                         Customer                                  Bank
                      (Capital provider)                      (Entrepreneur)




Initial investment:



Net Profit:
                                           (1-k)%         (1-j)%
                                                                           j%
                                k%
Total
investment:                     +          +                          + +
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New Musyarakah Model…
                                Capital provider’s investment at time t :


Et – capital provider’s               :                 +        +
 investment at time t
Qt – entrepreneur’s                E t = E t −1 + rt kE t −1 + rt (1 − j )Q t −1
 investment at time t
rt – rate of profit at time t
k – capital provider profit     Entrepreneur’s investment at time t:
sharing ratio
j – entrepreneur profit                 :              + +
sharing ratio
                                     Q t = Q t −1 + rt (1 − k ) E t −1 + rt jQ t −1
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Application of Model in
Musyarakah Products
     A customer (capital provider)
           Initial investment: RM1000
           Profit sharing rate: k:(1-k) = 60%:40%
     An Islamic bank (entrepreneur): RM500
           Initial investment: RM500
           Profit sharing rate: (1-j):j = 20%:80%
     Tenor: 6 months
     Assumed profit rates: 4%, 5%, 6%, 4%, 6%, 7%


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    Application…
                         Customer                                  Bank
                                                                                      (1-j):j
     k:(1-k)                                                  (Entrepreneur)
                      (Capital provider)
    60%:40%                                                                           20%:80%
Initial investment:             RM1000                                   RM500


 1st month profit is 4%    RM40                                   RM20
                                   40%               20%
                          60%                                             80%

 Total investment: 1000 + 24 + 4 = 1028                           500 + 16 + 16 = 532

 2st month profit is 5%    RM51.50                                 RM26.60
                                      40%                   20%
                            60%                                                 80%

  Total investment:   1028 + 30.84+ 5.32 = 1064.16                  500 + 20.56 + 21.28 = 573.84

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     Results
                                                                                                  Profit from
                                                                    Profit from Capital
Term      Investment + Profit   Rate           Profit                                           Entreprenueur's
                                                                   Provider's Investment
                                                                                                  Investment
                                                                                                                          Total Profit
                      Entrepr          Capital      Entre
         Capital
Year                     e              Provi        pre                     60:40                     20:80
         Provider
                       nueur             der        nueur
                                                                   Capital                   Capital
                                                                                  Entrepre                Entrepre
                                                                    Provi                    Provide                  Capital
                                                                                   nueur                   nueur                 Entrepre
 t                                                                   der                        r                     Provide
                                                                                                                                  nueur
                                                                                                                         r
                                 %                                   70              30        10              90

 0       1,000.00     500.00    0%      0.00            0.00        0.00             0.00     0.00             0.00    0.00        0.00

 1       1,000.00     500.00    4%     40.00        20.00          24.00           16.00      4.00         16.00      28.00       32.00

 2       1,028.00     532.00    5%     51.40        26.60          30.84           20.56      5.32         21.28      64.16       73.84

 3       1,064.16     573.84    6%     63.85        34.43          38.31           25.54      6.89         27.54      109.36      126.92

 4        1109.36     626.92    4%     44.37        25.08          26.62           17.75      5.02         20.06      141.00      164.74

 5        1141.00     664.74    6%     68.46        39.88          41.08           27.83      7.98         31.91      190.95      224.03

 6        1190.05     724.03    7%     83.30        50.68          49.98           33.32     10.14         40.55      250.17      297.89
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TOT
          1250.17     797.89           351.39       196.67         210.83         140.55     39.33         157.34     250.17      297.89
 AL                              -
   Discussion
                                                         Customer
                                                         RM250.17
    Profit calculated using new model
           RM351.39 + RM196.67 =RM548.06             Bank
                                                     RM297.89

     BUT if use only 1 profit sharing rate         Customer
     60%:40% then RM548.06                         RM328.84
           customer gains bigger profit           Bank
           unfair to the bank                     RM219.22
           banks will not offer musyarakah
           product.

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Discussion…
     If profit sharing rates k:(1-k) => 60%:40% and
     (1-j):j => 40%:60% or k = j
           Unfair to bank.
           Bank involvement in the joint venture is far greater compared to
           customer.
           The values for k and j can never be the same.
           two profit sharing rates are essential.
     gives credit for the expertise, time, and effort of the joint
     venture.
     Transparent – calculation of any time
     Can calculate the total investment and profit



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Usefulness/Benefits to Society
     Catalyst to innovation and research in the area of
       Islamic finance
     A catalyst to new products innovation & research in
     finance/investment
     Linkages and collaborations between academicians &
       industries
     Dynamic activities in implementing musyarakah concept
     Public have choices of investing instead of taking loans




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Conclusion
     Justified and fair profit sharing model
     The risk are shared between both parties
     Encourage opportunity for entrepreneur to invest
     Able to package more musyarakah products in Islamic
     banking/investment
     An alternative or a complement to the existing products
     offered by Islamic banks
     Initiate new joint venture investment and financing
     products



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THANK YOU

     Funded by the Fundamental Research Grant Scheme (FRGS),
     FRGS 600-RMI/FRGS 5/31Fst(26/2008) from the Ministry of Higher
     Education, Malaysia.


                   Maheran Mohd Jaffar
                 maheran@tmsk.uitm.edu.my




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