presented by Razli Ramli Principal Adviser Shariah Business

presented by Razli Ramli Principal Adviser Shariah Business Advisory IBFIM razli@ibfim. com 1

DIMINISHING MUSHARAKAH Diminishing Musharakah or Musharakah Mutanaqisah is a diminishing partnership where the Customer and the Bank enter into a co-ownership agreement to acquire and own an asset with the view to progressively reduce the ownership of one partner (the Bank) until the other Musharakah Partner (the Musharik Customer) finally holds the full ownership of the asset. The Diminishing Musharakah model that the Bank introduces will utilise the Ijarah (Lease) concept to enable the Bank to recoup its investment i. e. its capital contribution by renting out the Bank’s part of the property to the customer. 2

• Step 1 The customer identify a shop. • Step 2 The customer applies for financing from bank to buy shop and upon approval, the Bank issues a Letter of Offer. • Step 3 The customer and Bank execute Musharakah Mutanaqisah Coownership Agreement. Both agree to jointly purchase the shop. • Step 4 The Bank will lease its share of the shop to the customer and the customer, as an owner-tenant, agrees to pay monthly payments which consist of monthly rental payment (profit charged for the month) and the acquisition payment (principal payment) intended to gradually acquire the Bank's share of the jointly-owned shop. • Step 5 At the end of the financing tenure and upon full payment, the customer would have acquired all the Bank's share and the partnership will come to an end with the customer being the sole owner of the shop. 3

Modus Operandi Bank leases its i. e. 90% share of shop to customer 90% 0% 100% Customer pays rent for usage of Bank’s 90% share of shop Customer gradually buys share of shop from Bank Customer’s monthly installment payments 4

Method of Financing • Under the Shariah principle of Musharakah Mutanaqisah, the Bank and you shall jointly purchase the rights, interests and benefits in an identified property (“Property”) whereby you shall contribute a sum equivalent to the initial acquisition payment (“Customer’s Initial Acquisition Payment”) and the Bank shall contribute towards the purchase of the Property a sum equivalent to the bank’s commitment amount (“Bank’s Commitment Amount”). • You shall gradually acquire the Bank’s Ownership interests, rights and benefits in the Property by making monthly payments in accordance with the terms of the Facility until you shall wholly and fully own the Property. • As a result of the monthly payments made under the Facility, your ownership interests in the Property will increase and the Bank’s ownership interests will decrease proportionately. 5

Documents – – 1. 2. – Letter of Offer Musharakah Mutanaqisah Co-Ownership Agreement Sale Agreement Leasing Agreement Other security documents (Charge, Deed, Guarantee etc) The above list is non-exhaustive in nature and is dependent on the transaction structure contemplated. In any circumstances, the Shariah Committee and legal adviser’s opinion should be sought. 6

PURCHASE OR ACQUISITION OF PROPERTY – In the event that at the time of execution of this Agreement, the Customer has entered into the Sale and Purchase Agreement to acquire the Property from the Vendor, the Bank agrees to jointly purchase rights, interests and benefits in the Property with the Customer up to the Bank’s Commitment Amount to facilitate the acquisition of the Property from the Vendor; or – In the event that at the time of execution of this Agreement, the Customer is the legal and/or beneficial owner of the Property and the Customer intends to refinance the Property, the Bank agrees to acquire from the Customer the rights, interest and benefits in the Property for the consideration of up to the Bank’s Commitment Amount. 7

In the event that at the time of execution of this Agreement, the Customer is the legal and/or beneficial owner of the Property and the Customer intends to refinance the Property, the Bank agrees to acquire from the Customer the rights, interest and benefits in the Property for the consideration of up to the Bank’s Commitment Amount. 8

CO-OWNERSHIP AND LEASE OF PROPERTY • Subject to the terms of this Agreement, the Parties hereto agree to acquire the Property as co-owners and the proceeds from the Bank’s Commitment Amount shall be used towards the purposes to buy the property. • For the above purpose, the Customer contributes or shall contribute the Customer’s Initial Acquisition Payment which represent or shall represent such percentage in the ownership interest in the Property. 9

• The Bank contributes or shall contribute the remaining of the acquisition payment amount of up to the Bank’s Initial Acquisition Amount which represents or shall represent such percentage in the ownership interest in the Property. • Upon request by the Customer, the Bank hereby leases and the Customer hereby takes on lease of the Property at the Monthly Rental Payment for the agreed period commencing from the date of this Agreement up to the date of full settlement of the Buyout Amount. 10

• • If at the commencement of the lease tenure, the Property is not ready for occupation or possession by the Customer, the parties agree that the Monthly Rental Payment shall be deemed as payment for the consideration of an agreement to lease granted by the Bank to the Customer. It is known as ‘advance rental’ 11

Purpose • To part finance the purchase of *shop/property inclusive of financing of Mortgage Reducing Term Financing (MRTT)/ or Home Building Takaful (HBT) and/ or other amount financed by the Bank. 12

Facility Amount or Bank’s Commitment Amount Home Financing RM MRTT Premium RM HBT Premium RM (if applicable) -----------RM ======= 13

Customer’s Initial Acquisition Payment • Customer’s deposit 14

Initial Ownership Interests • • Customer’s (10%) Bank’s (90%) 15

Description of the Property • Title details 16

Tenure • How many years 17

Margin of Profit • % p. a. on monthly rest to be effective from the date of 1 st release of the financing. OR • • • % p. a. on monthly rest for months to be effective from the date of 1 st release of the financing, % p. a. on monthly rest for the following months, % p. a. on monthly rest for the following for months. Notwithstanding anything herein contained, the above margin of profit and/or the duration may be varied at any time at the Bank’s discretion. Currently the Bank’s BLR is % p. a. 18

Payment of Financing • By monthly payment of RM which comprises collectively the monthly aggregate of the Acquisition and Rental Payments to be paid by you until full settlement of the financing. OR • By monthly payment based on the agreed tiered margin of profit until full settlement of financing. In the event of the financing is fully released at the rate of % p. a. the payment will be RM monthly which comprises the Acquisition and Rental Payments. The subsequent monthly payments will be computed based on the subsequent applicable tiered rates, remaining tenure and on the outstanding financing amount thereon. 19

The Monthly Payment comprises of: - • • Acquisition Payment is such sum being part of your monthly payment that is applied to increase your ownership interest in the Property and decrease the Bank’s ownership interest in the Property; and Rental Payment is such sum being part of the monthly payment that you pay to the Bank in consideration of your having right of possession, use and enjoyment of the whole Property. Notwithstanding anything herein contained, the above margin of profit and/or the monthly payments may be varied at any time at the Bank’s discretion. 20

Securities Musharakah Mutanaqisah Co-Ownership Agreement and First legal charge over the Property • 1 st Legal Charge (1 st/3 rd. Party) over the property held under ____ and known as ____ and such other documents or security documents as the Bank’s solicitors may advise, or 21

Securities • Pending issuance of the individual title/strata title, Deed of Assignment over the Property By Deed of Assignment*(1 st/3 rd Party) of the Sale and Purchase Agreement with Power of Attorney to transfer or otherwise deal with the property held under _____ and known as _____. and such other documents or security documents as the Bank’s solicitors may advise. 22

Late Payment Charges (LPC) • You shall be liable to pay LPC on the amount overdue and payable to the Bank which shall be calculated in the manner as approved by Shariah Council or any other appropriate authority as follows: - For Overdue Rental/Payments • For failure to pay rental/payments or monies due from date of release of the financing until maturity of the financing, the Bank shall collect _____% p. a LPC based on the overdue rental/payments or monies. 23

Late Payment Charges(LPC) For Matured Financing • For failure to pay outstanding financing due after the maturity period, the bank shall collect LPC from date of maturity to date of payment based on prevailing Islamic Interbank Money Market (IIMM) rate or ‘r’ (i. e Gross dividend rate for 12 months General Investment Account) on the outstanding amount. 24

DM Vs MURABAHAH DM FINANCING-i MURABAHAH HOME FINANCING 1 Partnership contract with a view to Debt contract between buyer and diminish one partner’s equity. In seller addition, in a Musharakah/Ijarah structure, customer is also the Bank’s tenant 2 Gradual buy out of the Bank’s Fixed Selling Price determined up equity. At the end of Ijarah tenure, front ownership will be transferred from the Bank to the customer 3 Property belongs to the Musharakah (Partnership) & the customer holds the asset on trust for the Bank. Property belongs to the customer 25

Continued… DM FINANCING-i MURABAHAH HOME FINANCING Widely used in Malaysia, but not widely accepted internationally 4 Internationally accepted 5 Sale of asset to customer in Sale of asset to customer the form of gradual units of immediately after Purchase equity buy out of asset from customer 26

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FINANCIER’S RISK PROFILE AS PARTNER • The Musharakah and Mudharabah financing facilities will have a slightly higher risk profile compared to the Bank’s existing financing based business activities. In essence, these financing facilities are no different from a sub-debt/junior debt arrangement. • The additional but manageable risks are attributed to the fact that the Bank will have to bear any losses arising from the ventures to be undertaken or losses not resulting from the negligence or willful misconduct of the client e. g. force majeure etc. 28

LEGAL RISKS The Attitude of The Court v Reported cases in Islamic Finance show that the court always based its decision on the current banking law regime v A lawyer who is drafting the docs need to have sound understanding of the Shariah principles 29

Unique Operational Risks to Musharakah v Inadequate due diligence/lack of appropriate technical expertise v Inadequate monitoring of financial performance 30

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The region’s Shariah Adviser, serving 61% of Islamic trust funds in the country, and adviser to numerous Award Winning Funds. Industry-recognized training provider via AIF Industry-owned entity ISLAMIC BANKING AND FINANCE INSTITUTE MALAYSIA (IBFIM) 3 rd Floor, Dataran Kewangan Darul Takaful, Jalan Sultan Sulaiman 50000 Kuala Lumpur. (Tel) +603 -2031 1010 (Fax) +603 -2031 9191 32