Sie sind auf Seite 1von 44

June 2008 Issue #20

Islamic Finance
Bulletin
. . .
Towards an informed market
in this issue.
Musharakah Contract and Its Shariah Issues
The role of asset-backed securitisation in modern Islamic
banking
Financing Underlying Assets
Stock Screening Process
Malaysian Sukuk Market - Deals Closed in 1H 2008
Market statistics

Islamic Finance Bulletin, a quarterly
release on the Islamic capital market in
Malaysia, is dedicated to informing and
educating those active in the growing
market of Islamic finance on issues,
developments and trends in the
domestic Islamic capital market.

The contents are intended to be
educative in nature so as to accelerate
the learning curve of those new in
Islamic finance and stimulate further
discussions, research and development;
all with the view of enabling the
Malaysian Islamic capital market to
effectively meet the growing
sophistication of the investment
community.

Should you have any views or
comments to share or wish to
contribute to the bulletin by way of
editorials, please send your e-mail to
islamicratings@ram.com.my.










MESSAGE FROM RAM RATI NGS
Dear Readers
The Islamic Finance Bulletin marks another cornerstone in
2008, with the start of a partnership between RAM Rating
Services Berhad (RAM Ratings) and our new joint publisher,
Islamic Banking and Finance Institute Malaysia (IBFIM). As
part of this strategic partnership, RAM Ratings will work with
IBFIM on a variety of initiatives involving content sharing.
Along with this collaboration, we are also proud to announce
that the Islamic Finance Bulletin will be moving on to an
electronic platform. This move is to align our information
services with the changing times and new methods of delivery.
This is also to improve the publications time to market. As we
strive to improve our information services, an online network
will undoubtedly improve the flow of information to the market.
Irrespective of our evolution, we wish to assure our readers of
our continued commitment to delivering timely and value-added
information on the developments within the Islamic finance
market. We would also like to thank you for your firm support
since the debut of the publication in 2003, and look forward to
your continued patronage.






T OWARDS AN I NF OR ME D MARK E T
MUSHARAKAH CONTRACT AND ITS SHARIAH ISSUES







Islamic Finance Bulletin April - June 2008 Issue #20 1
IBFIM
Musharakah Contract and t's 8hariah Musharakah Contract and t's 8hariah Musharakah Contract and t's 8hariah Musharakah Contract and t's 8hariah
ssues ssues ssues ssues

Islamic Banking and Finance Institute Malaysia Sdn Bhd


usharakah is a contract that is
applicable for a joint venture
business. It is a partnership
arrangement between the Bank and the
customer, each contributing certain
capital. Any profit or loss arising from the
venture will be shared among them as
agreed at the inception of the partnership.
Musharakah financing can be granted
through the following arrangements:
a. On joint-venture or partnership
basis which is based on Joint-
account and without formation of
any separate entity.
b. Through equity participation which
involves the incorporation of a
joint-venture limited company
under the Company Act, 1965

Normally, it is the Bank who seeks the
opportunity to invest in new or growing
or struggling business.

Before the Bank invest in the company,
by way of injecting capital, the Bank shall
perform some necessary financial test in
order to test the project viability. The
Bank shall have a representative in the
management of the company to monitor
the progress of the project. The
representative has some power in the
management of the company.

The profit made during the period shall be
shared between the two parties according
to the pre-agreed profit sharing ratio.
However, should there be any loss, it will
be shares between them based on the
capital contribution ratio. Apart from that,
the Bank shall also receive a certain sum
of money from the Company as
management fee for the project.
Once the company is already viable, the
Bank shall withdraw his capital from the
company. The company shall buy back all
the shares held by the Bank, in the terms
agreed by both parties as per in the
Partnership Agreement.


M
T OWARDS AN I NF OR ME D MARK E T
MUSHARAKAH CONTRACT AND ITS SHARIAH ISSUES







Islamic Finance Bulletin April - June 2008 Issue #20 2
IBFIM
3 3
The Bank Customer
Project
Capital
Profit / Loss
1
2
Illustration













Description
1 The Bank injects some capital into the project, along with the Customer.
2 The money will be invested in the project
3 The profit will be distributed according to pre-agreed ratio while the loss will be
distributed according to capital contribution ratio.

8HARAH A8PECT8 8HARAH A8PECT8 8HARAH A8PECT8 8HARAH A8PECT8
Musharakah literally means sharing.
Musharakah Financing refers to financing
given by a Financial Institution to its
customer based on a partnership
arrangement. Both parties will share the
profit and loss of a project and both
parties will contribute capital on a pre-
agreed ratio. The partnership arrangement
referred to in this section is based on
Shirkah al-Amwal where partners or
parties contribute some capital into the
partnership.
Legality of Partnership Legality of Partnership Legality of Partnership Legality of Partnership
The legality of partnership contracts was
established in the Quran, Sunnah and
consensus of the Muslim scholars and
community:
Proofs are derived from the Quranic
verses :
If more than two, then they share in
third (4:12)
Truly many are the partners (in
business) who wrong each other: not
to do those who believe and work
deeds of righteousness (38:24)
Proof of legality of partnership is
found in the Hadith Qudsi where
Allah SWT says : I am the third of
every two partners as long as neither
one betrays the other. However, if
one betrays the other, I leave their
partnership. This Hadith Qudsi was
narrated on the authority of Abu
Hurairah who validated its chain of
narration.
T OWARDS AN I NF OR ME D MARK E T
MUSHARAKAH CONTRACT AND ITS SHARIAH ISSUES







Islamic Finance Bulletin April - June 2008 Issue #20 3
IBFIM
The Prophet (pbuh) found the people
using the partnership contract and did
not question this behavior, and there
are many Hadiths that indicate his
approval of the contract. One such
Hadith is: Allah supports the
partners as long as they do not betray
one another. In general, Muslims
have approved the legality of
partnership, with the differences in
opinion only existing over specific
types that we shall discuss below.
The wisdom in permitting partnerships is
clear. The contract allows individuals to
combine their properties in manner that
allows them to produce more wealth than
they could each produce individually.
Essential Elements {Rukun} Essential Elements {Rukun} Essential Elements {Rukun} Essential Elements {Rukun}
Any Musharakah arrangement needs to
fulfill the following rukun:
1. Owner of capital
The arrangement is carried out
between individuals and/or legal
entities.
All partners have right over the
management of the project and
may designate an independent
management team which is paid
for its service or designate a
management team with which the
partners have entered into a
Mudharabah contract.
Any of the partners may be only a
sleeping partner.

2. Capital
The contributed capital can be either
in the form of cash or assets with an
ascribed monetary value. It is
noteworthy to point out that while the
majority of Islamic scholars insist
that capital must be in cash, Imam
Malik allows assets to be considered
as capital. Imam Shafie further allows
commodities of similar features in
quantity and quality to be considered
as capital.
3. The ownership of the capital is
transferable.
The contributed capital by the
partners need not be on equal basis.
However, the ownership of the capital
will then belong to the partnership.
4. Project
The contract and project must be
halal or permissible in Islam such as
construction of buildings, houses,
highways and even supply of goods
and equipment.
5. Profit
The basis for dividing profit should
be predetermined at the time of the
Musharakah aqad is being performed.
It must be based on either a
percentage or a ratio of the profit.
Under Mazhab Shafie and Maliki, the
profit ratio must be proportionate to
the capital investment. Any
agreement other than that basis, will
render the Musharakah contract
invalid. Under Mazhab Hambali and
T OWARDS AN I NF OR ME D MARK E T
MUSHARAKAH CONTRACT AND ITS SHARIAH ISSUES







Islamic Finance Bulletin April - June 2008 Issue #20 4
IBFIM
Hanafi, the profit ratio is negotiable.
However, Hanafis do not allow the
profit ratio of a sleeping partner to
exceed the ratio of an active partner.
All scholars, however, are in
consensus that any losses incurred by
the project must be shared based on
the capital contribution ratio.
However, if the loss is due to the
negligence of the managing partner or
management team, then the partner or
the team shall bear the loss.
6. Offer and Acceptance (Ijab Qabul)
The Musharakah terms must be
voluntarily accepted by both parties.

The termination of the arrangement
needs to be spelled our together with
the distribution of the remaining
capital.
The Musharakah can be terminated in
any of the following events:
at any time after giving the other
partner a notice to this effect.
If any of the partners die.
However, the heirs will have the
option to either continue with the
Musharakah or to draw the share
of the deceased.
If any of the partners becomes
incapable to effect commercial
transactions such as insane or
comatose.
The distribution mode of the remaining
capital will depend on the following
scenarios:
If the remaining capital and/or profit
is in cash, the net amount (after
deducting expenses) will be
distributed amongst the partners as
per the predetermined ratio.
If the remaining capital is not in a
liquid form, the partners shall sell the
assets. The sale proceeds will then be
distributed as per the predetermined
ratio. A prior agreement to this effect
could also be arranged to solve this
issue.

Categories of Musharakah Categories of Musharakah Categories of Musharakah Categories of Musharakah
Partnerships are of two types: holding
partnership and contract partnership.
A holding partnership is created by means
of inheritance or wills or other
circumstances resulting in the holding by
two or more persons of an asset in
common.
A contract partnership is created by
means of an agreement whereby two or
more persons agree that each of them
contributes to the capital of the
partnership and shares in its profit or loss.
Contract partnerships are divided into:
mufawada, al-inan, alamaal and al-
wojooh. Fuqaha (jurists) have differed on
whether Mudaraba is a partnership in this
sense or not. Some Fuqaha consider
Mudaraba to be such a partnership
because in general it fulfils the elements
and terms of a partnership contract.
Others, however, do not consider
T OWARDS AN I NF OR ME D MARK E T
MUSHARAKAH CONTRACT AND ITS SHARIAH ISSUES







Islamic Finance Bulletin April - June 2008 Issue #20 5
IBFIM
Mudaraba to be one of the types of
contract partnership.
Following is a brief definition of each of
the above types in light of what is
reported in Fiqh texts.
1. Shirkah al-Mufawada
It is a contract between two or more
persons. Each of the two parties
contributes a portion of the overall
fund and participates in work. Both
parties equally divide profit or loss. It
is a condition of this type of
partnership that contributed funds,
work, mutual responsibility and
liability for debts be equally shared
by the parties. Both Hanafis and
Malikis have permitted this type of
partnership but have stipulated many
restrictions for it.
2. Shirkah Inan
lt is a contract between two or more
persons. Each of the parties
contributes a portion of the overall
fund and participates in work. Both
parties share in profit or loss as
agreed between them, but equality is
not required either in the contribution
to the fund or in work or in sharing of
profit (these being subject to
agreement between the parties). This
type of partnership is approved by all
Fuqaha.
Hanafis and Hanbalis allow any of
the followings. Profits of the two
parties to be divided in proportion to
their contributed funds; profits may
be divided equally but contributed
funds may be different; and profits
may be unequally divided, but
contributed funds are equal. lbn
Qudamah said: preference in profit
is permissible with the existence of
work, as one of them may be more
knowledgeable in trade than the other
and he may be stronger than the other
in doing the work, and thus he is
allowed to make an increase in his
profit. share a condition of his work.
It is permissible for one of the
partners to propose that if profits
exceed a certain amount, such excess
or a percentage of it will be credited
to him. It is stated in Al-Bahr AI-
Zukhar Al-Gami Lema thahib
Ulamma Al-Absar that if one of
them (partners) says that I will have
ten if we gain more than that then this
will be valid and the condition will be
binding as there is no exigency of
revocation
3. Shirkah al-Amal
It is a contract between two persons
who agree to accept work jointly and
to share the profit from such work.
For example, two persons of the same
profession or craft may agree to work
together and to divide the profit
arising from such work on an agreed
basis. It is sometimes called abdan or
sanaie partnership.
An amaal partnership is considered
permissible by Hanafis, Malikis,
Hanbalis. It is considered valid within
the same profession or otherwise. Its
permissibility is based on much
evidences including explicit approval
T OWARDS AN I NF OR ME D MARK E T
MUSHARAKAH CONTRACT AND ITS SHARIAH ISSUES







Islamic Finance Bulletin April - June 2008 Issue #20 6
IBFIM
thereon by the Prophet, prayers and
peace be on him. In addition, it is
based on agency which is
permissible.
4. Shirkah Al-Wujooh
It is a contract between two or more
persons who have good reputation
and prestige and who are expert in
trading. Parties to the contract
purchase goods on credit from firms,
depending for that on their reputation,
and sell the goods for cash. They
share profit or loss according to the
guarantee to suppliers provided by
each partner. Accordingly, this type
of partnership does not require capital
since it is based on credit backed by
guarantee. Hence, it is sometimes
called a receivables partnership.
A wojooh partnership is considered
permissible by Hanafis and Hanbalis.
Those who support its permissibility
argue that it includes an agency
guarantee which is also acceptable. It
has been used throughout without
being disapproved of.
Rules of Musharakah Rules of Musharakah Rules of Musharakah Rules of Musharakah
Termination Termination Termination Termination
In general, the partnership shall be
terminated if one of the partners
terminates the contract, or dies, if his
legal competency ceases or if the
partnership capital is lost.
The majority of Fuqaha, except for
Malikis, are of the opinion that as
partnership is one of the permissible
forms of contract, each of the partners is
entitled to terminate it whenever he
wishes, as is the case with agency
contracts.
The partnership is based on agency and
probity. Each of the partners is a proxy
for the others and a principal at the same
time.
Rules of P Rules of P Rules of P Rules of Profit rofit rofit rofit
He acts in respect of his share as a
principal and in respect of his partners
shares as a proxy, i.e., as an agent. In
principle, agency is one of the
unanimously permissible contracts and no
one party is forced to proceed with it
against his will. The partnership, too,
should start with an agency relationship
between the partners, and this relationship
provides the basis for its continuity. If the
agency reltionship is severed by
termination on the part of one of the
partners, the legal basis upon which they
acted in respect of each others funds will
be eliminated In the case of death, one of
the heirs, if he is of sound mind, may
replace the deceased provided that the
other heirs and the other partners agree to
that. This shall also be applicable in case
one of the partners loses competency.
8HARAH 88UE8 8HARAH 88UE8 8HARAH 88UE8 8HARAH 88UE8

Due to the nature of Musharakah which is
of no exact comparison with any of the
conventional banking loan, there are
several issues that need to be addressed
before it can be widely offered to
customers.


T OWARDS AN I NF OR ME D MARK E T
MUSHARAKAH CONTRACT AND ITS SHARIAH ISSUES







Islamic Finance Bulletin April - June 2008 Issue #20 7
IBFIM
a) Third Party Guarantee

Under Musharakah, there cannot be
any security or collateral to the
financing. For a project financing
with a possible cost overrun and
unexpected delay in works or
collection, the risks faced by
Financial Institutions are great.

There are Islamic scholars who allow
a third-party guarantee or collateral to
secure the return of the contributed
capital in a Musharakah arrangement
in the event of fraud or negligence of
the other party. Some scholars require
that the third party should not have a
direct interest to the partners. An
example of the third party is the
Government or the project awarding
party.

In Jordan, the Government of Jordan
has acted as a guarantor in one of the
Musharakah arrangement. In Sudan,
the Sudanese Islamic Bank accepts
the customers own property as
collateral against negligence or
misuse of fund.


b) Shared Liability

Under JV type of Musharakah, the
Financial Institution and customer
will share any liability to the project.
Even though legally, the Financial
Institution can request for an
Indemnity Letter from the customer
to indemnify the former from any
claim or suit on the project (eg. Injury
or non-completion of project), under
Syariah, the Financial Institution
cannot absolve its liability to the
project.

However, if the partnership
arrangement is not based on complete
equality between the partners (where
the capital contribution and profit
distribution ratios are not 50 : 50) the
agreement can exclude a contract of
suretyship. Thus arrangement, called
shirkah man, only contains a contract
of agency. Consequently, the partners
are not sureties the one for the other.
(The Mejelle, Chapter 6, Section 11).

However, shall there be any claim on
the project itself - not due to the act
of the customer, the Financial
Institution still has to share that
liability. This is not the case in an
equity participation Musharakah
where the Financial Institution does
not take part in the running of the
business or represent the others as
agent.

c) Accounting Requirement on Equity
Participation

Under the International Accounting
Standard (lAS) 28, an investor is
required to classify its investment in
an associate as a long term assets and
is disclosed as a separate item in the
balance sheet (usually under
Investment in Associate). An
associate is generally defined as an
enterprise in which the investor has
significant influence with direct or
indirect 20% or more equity of the
company.

T OWARDS AN I NF OR ME D MARK E T
MUSHARAKAH CONTRACT AND ITS SHARIAH ISSUES







Islamic Finance Bulletin April - June 2008 Issue #20 8
IBFIM
RECOMMENDATON RECOMMENDATON RECOMMENDATON RECOMMENDATON
As earlier stated, this section will propose
a model of Musharakah for equity
financing. In reality, the Musharakah
financing is applicable, but not limited, to
any of the following sectors:
Real estate
Property development
Trading
Manufacturing
Infrastructure


The information herein has been obtained from
sources believed to be reliable but cannot be
guaranteed. The views or opinions expressed are
subject to change at any time. Neither the
information nor any opinion expressed is to be
construed as a solicitation for the purchase or sale
of any securities. Islamic Banking and Finance
Institute Malaysia Sdn Bhd do not assume any
responsibility whatsoever in this respect.
The article has not been edited by RAM Ratings in
the interest of presenting originality in content and
presentation.

ISLAMIC BANKING AND FINANCE
INSTITUTE MALAYSIA SDN BHD

Islamic Banking and Finance Institute
Malaysia Sdn. Bhd. (IBFIM) is an institute
dedicated to produce well-trained, high
calibre individuals and management teams
with the required expertise in the Islamic
finance industry.

Based on the industrys demands and
customers needs, we provide complete
assistance to our clients through a wide
spectrum of inter-related services: training
and education, advisory and consultancy, and
research and development in Islamic finance.

Our close relationship with the industry gives
us the opportunity to share knowledge and
resources. We also enjoy a strong network
with local and international authorities and
financial institutions. Having assisted
numerous governments, financial institutions,
and other organisations in this arena, we are
propelled to serve the need for further
enhancement and development of the industry
in years to come.






























For more information, please contact:




Islamic Banking and Finance Institute
Malaysia Sdn Bhd (340040-M)

Level 3, Dataran Kewangan Darul Takaful
Jalan Sultan Sulaiman
50000 Kuala Lumpur, Malaysia
Tel: +603-2031 1010
Fax: +603-2031 9191
E-mail: info@ibfim.com
Website: www.ibfim.com.my

T OWARDS AN I NF OR ME D MARK E T
SECURITISATION IN MODERN ISLAMIC FINANCE




Islamic Finance Bulletin April - June 2008 Issue #20 9
BANK RAKYAT

The Role of slamic Asset The Role of slamic Asset The Role of slamic Asset The Role of slamic Asset- -- -Backed Backed Backed Backed
8ecuritisation in Modern 8ecuritisation in Modern 8ecuritisation in Modern 8ecuritisation in Modern slamic Banking: slamic Banking: slamic Banking: slamic Banking:
Part Part Part Part 4 44 4

Dr. Mokhrazinim Mokhtar
Bank Kerjasama Rakyat Malaysia Berhad


Possible Solutions


his section proposes possible
solutions to overcome the Shariah
issues and technical issues. The
section begins with firstly, the issue of
ownership, secondly, the trading of debt
and thirdly credit enhancement. Finally, it
analyses the technical issue on the rating
of Islamic banks.

ssues on 8hariah ssues on 8hariah ssues on 8hariah ssues on 8hariah
Requirements Requirements Requirements Requirements

1. 1. 1. 1. Ownership of Asset Ownership of Asset Ownership of Asset Ownership of Asset

It has already been mentioned in section
2.3.1 that even though with regular cash
flows, assets that are based on cost-plus
(debt) mode of financing are difficult to
securitize because Islamic banks do not
have the ownerships of these assets. This
is because once the asset is sold to the
customer; the ownership is also
transferred even though the customer may
have not paid the entire purchase price. In
addition to this, assets based on cost-plus
(debt) mode of financing can only be
traded at face value. They cannot be
discounted.

In Islam there is a contract called Hawala.
Hawala means transferring debt. Islamic
banks can use the contract of Hawala to
transfer assets based on cost-plus to
another party thus overcoming the
problem of the ownership of asset. The
rules of Hawala works as below (www.al-
islam.org/laws/transactions3)

2390. If a debtor directs his creditor to
collect his debt from the third
person, and the creditor accepts
the arrangement, the third person
will, on completion of all the
conditions to be explained later,
become the debtor. Thereafter,
this creditor cannot demand his
debt from the first debtor.

2391. The debtor, the creditor and the
person to whom collection is
referred, should be adult and
sane, none should have coerced
them, and they should not be
feeble-minded, that is, those who
squander their wealth. Also, if a
bankrupt person is barred from
the right of discretion over his
property by a fully competent
Mujtahid, cannot be asked to get
his debt from others and others
T
T OWARDS AN I NF OR ME D MARK E T
SECURITISATION IN MODERN ISLAMIC FINANCE




Islamic Finance Bulletin April - June 2008 Issue #20 10
BANK RAKYAT

cannot transfer their debt to him,
but he may transfer his debt to a
person who does not owe him
anything.

2392. As an obligatory precaution,
transferring the debt to a person
who is not a debtor will not be
correct, unless he accepts it. And
if a person wishes to affect a
transfer to a debtor for a
commodity other than that for
which he is indebted (for
example, if he transfers the debt
of wheat while he is indebted to
him for barley), the transfer will
not be in order, unless he accepts
it.

2393. It is necessary that a person
should actually be a debtor at the
time he transfers the debt.
Therefore, if he intends taking a
loan from some one, he cannot
transfer the prospective debt in
advance to another party, telling
the would-be creditor to collect
the debt from the party.

2394. The debtor must specify exactly
the category and the quantity of
the debt he transfers to another
party. For example, if his debt
comprises of ten kilos of wheat
and 10 dollars owned to one
person, and he tells him to go and
collect either of the two debts
from a certain party, that transfer
will not be valid.

2395. If the debt is fully identified, but
the debtor and creditor do not
know its quantity and category at
the time of assigning the transfer,
the transaction is in order. For
example, if a person who has
recorded the debt he owes to
someone in his books, assigns a
Hawala or transfer of debt before
referring to the books, and later,
after consulting his record,
informs the creditors about the
quantity of his debt, transfer is in
order.

2396. The creditor may decline to
accept the transfer of debt,
although the person in whose
name the assignment has been
given may be rich, and may not
fail to honor the Hawala.

2397. If a person accepting the Hawala
is not a debtor to the person
giving the Hawala, he can
demand the amount of the
Hawala from the person who
gave it, before honoring the
Hawala. And if the creditor
compromises for a lesser amount,
the person honoring the Hawala
should demand only that sum
which he has paid.

2398. When the conditions of the
transfer of debt or Hawala have
been fulfilled, the person
affecting the Hawala and the
person receiving it cannot cancel
the Hawala, and if the person
receiving the Hawala was not
poor at the time the Hawala was
issued, the creditor cannot cancel
the Hawala, even if the recipient
becomes poor afterwards. The
same will apply if the recipient of
the Hawala was poor at the time
it was issued, and the creditor
knew about it. But if the creditor
did not know that the person to
whom the Hawala has been
issued is poor, and when he
comes to know of it, the recipient
is still poor, then the creditor can
T OWARDS AN I NF OR ME D MARK E T
SECURITISATION IN MODERN ISLAMIC FINANCE




Islamic Finance Bulletin April - June 2008 Issue #20 11
BANK RAKYAT

abrogate the Hawala transaction,
and demand his money from the
debtor himself. But if the
recipient of Hawala has turned
rich, then canceling Hawala
cannot be substantiated.

2399. If the debtor, the creditor, and the
person to whom the Hawala is
assigned agree among themselves
that all of them or any one of
them has a right to cancel the
Hawala, they can do so in
accordance with the clause of the
agreement.

2400. If the person issuing a Hawala
pays the creditor himself, at the
request of the person in whose
name the Hawala was issued,
who was also his debtor, he can
claim from the recipient of
Hawala what he has paid. And if
he has paid without his request,
or if he was not his debtor, he
cannot demand from him what he
has paid.

Currently, the contract of Hawala is used
in a bill of exchange. A cheque issuance
by a customer against his or her balance
in a bank is a Hawala transaction. A
cheque issued by a customer against an
account without balance (overdraft) may
be catagorised as Hawala transaction even
if the payer is not a debtor to the
transferor provided that the payer accepts
to pay.

The using of Hawala in an asset backed
securitization for cost plus assets can be
implemented as below:

1. In line with the rule 2390 of
Hawala, the debts of the borrowers
of an Islamic bank will be
transferred to a third body, the
SPV. However, this does not mean
that the borrower will be taken of
their duties to pay back their debts.
As the SPV is not a debtor to the
borrowers, the SPV will demand
the borrowers to continue paying
their debts to the bank (see 2397 of
rules of Hawala). The bank acts as
an agent for the SPV in collecting
the debts from the borrower and
giving them to the SPV at a fixed
period of time like every three
months for example. (The legal
documentation of the ABS is
however not the main issue in this
chapter)

2. Since the debts of the borrowers
have been transferred to the SPV,
the SPV now pays the debts of the
borrowers to the bank. However,
since the SPV settles the debt of the
borrowers earlier than the bank
expected, the bank will reward the
SPV by allowing the SPV to pay
only a certain amount. For
example, if the total of the debt is
RM100 million, the bank could ask
the SPV to pay only RM80 million
instead. The difference of RM20
million is as a reward to the SPV
for paying the debt earlier and for
sharing in the risk of non-payment
of the debt of some borrowers.
Some jurists find this discounting
as riba because the Shariah permits
the selling of debt by its equivalent
in quantity and time of maturity.
Chapra and Khan (2000)
challenged this by explaining that
the debt is created by the
Murabahah (cost plus) mode of
financing and the price includes the
profit on transaction and not
interest. When the bank sells a debt
instrument at a discount, the bank is
relinquishing its share in the profit
T OWARDS AN I NF OR ME D MARK E T
SECURITISATION IN MODERN ISLAMIC FINANCE




Islamic Finance Bulletin April - June 2008 Issue #20 12
BANK RAKYAT

and the buyer is getting a share in
the profit and not the interest. (This
is further explained in 4.4.3).

3. The SPV will then issue
mudharabah (profit and loss
sharing) securities and interested
investors amounting the value that
is needed to pay to the bank. For
example RM 80 million as earlier
explained in paragraph 2. Interested
investors could purchase these
notes. These notes represent the
participation of the investors in the
shareholding of the SPV.

4. In the Hawala there is a
requirement that all parties involves
in the transaction should not be a
bankrupt. If any of the party is
bankrupt, debt cannot be
transferred to him or her and he
cannot ask others to get his debts
from some one else but he can
transfer his debt to others. In
relation to the securitization
structure, the SPV must be
bankruptcy remote. Otherwise, debt
cannot be transferred to it. This
coincides with the requirement that
an SPV should be a bankruptcy
remote entity. This requirement
also ensures that the pool of loans
must be of a good quality.

5. The bank collects and pays periodic
installments of RM100 million
owed by the borrowers to the SPV.
The SPV will then forward them to
the investors. The RM20 million is
the profit that the investors will
make for the investing in the SPV.

The operation of this is illustrated in
Diagram 3.

T OWARDS AN I NF OR ME D MARK E T
SECURITISATION IN MODERN ISLAMIC FINANCE




Islamic Finance Bulletin April - June 2008 Issue #20 13
BANK RAKYAT

Diagram 3: Structure of an Islamic Asset- Backed Securitization for Debt-based Mode of Assets Using Hawala

















1. The borrowers debts are
transferred to SPV using
HAWALA arranged by the bank as
originator

2. SPV accepts the debt and pays the
bank the debts of the borrower

3. Since the SPV is not a debtor to the
borrowers, the borrowers continue
paying the bank installments of
their debts as the SPV is not
indebted to the borrowers. The
bank will monitor the servicing of
the debts on behalf of the SPV. The
bank can charge the SPV a fee for
this.

4. The Islamic bank will forward the
payment of debts to the SPV

5. The SPV then issues securities of
itself. The securities will be rated
and also approved by an
internationally recognized Shariah
Board. The securities will be traded
in the Secondary Market through
appointed market makers. At
maturity the SPV will be abolished





Originator (Islamic bank)
Special Purpose Vehicle
Securities
Investors
Borrowers of an
Islamic Bank
1 2
3
5
4
T OWARDS AN I NF OR ME D MARK E T
ISLAMIC ABS SECURITISATION







Islamic Finance Bulletin April - June 2008 Issue #20 14
BANK RAKYAT
2 22 2 Trading of debt Trading of debt Trading of debt Trading of debt

As mentioned in section 2.3.2, trading
debt at must be at face value. In diagram
3, the SPV issues zero coupon securities
to investors. The discount offered by
Islamic bank to the SPV for paying of its
debts earlier should be looked the banks
relinquishing some of its share in profit in
the contract. Chapra and Khan (2000)
argue that the selling price under the
Murabaha contract includes the profit on
the transaction. Therefore, when the bank
sells debt at a discount, the bank is
actually relinquishing its share in the
profit.

Another reason for discounting can be the
fact that there is immediate payment of
the debt thus discharging the debtor from
liability and earlier recovery of the debt.
Both parties benefit from the transaction
without any loss or damage. This is
different than interest that is prohibited
because it is damaging the debtor who has
to suffer losses from the interest. In a
hadith
1
narrated by Ibn Abbas, that when
the Nadhir tribe was ordered to leave
Medina (for violation of a peace treaty),
they approached the Prophet (pbuh) and
said: O messenger of God, you have
ordered your people to expatriate us and
we have debts against some people that
are yet to fall due. The Prophet (pbuh)
said: discount the debts for payment
2
.
Ibn Abbas was asked about a creditor

1
Words from the Prophet (pbuh)
2
Many hadith reporters report this hadith.
However some scholars classify this hadith as
weak due to Muslim ibn Khalid who is in the
chain of the hadith, nevertheless Muslim is
trustworthy and a reliable jurist as Imam Shafii
has reported hadiths through him and regard his
view as authoritative.
whose debt is yet to fall due and he
suggested a discount to the debtor for
immediate payment. Some of the Muslim
jurists including some of the school of
jurisprudence
3
do not allow it. The
majority of the Muslim jurists do not
accept this hadith as authentic and this
hadith is considered as a weak narration.
However, in Malaysia, where the Shafi
School of jurisprudence is practiced, there
is acceptance of securitised Murabahah-
based assets. Most of the Islamic debt
papers issued to date have been based on
the principles of Murabahah and Bai
Bithaman Ajil.


3 33 3 Credit enhancement Credit enhancement Credit enhancement Credit enhancement

Credit enhancement is provided in order
to increase the marketability of an asset
backed securitization. The types of credit
enhancement in conventional ABS can be
divided into:
1. external enhancements
2. internal enhancements

Examples of external enhancements are;
cash-collateral-account method, currency
exchange agreement, direct credit
substitution, guarantee, guaranteed
investment contract, insurance, standby
letter of credit and swap arrangement.
Examples of internal enhancements are
overcollateralisation of the loan pool
method, senior/subordinated structure
(tranches) method and spread account.

The type credit enhancement offered must
comply with the Shariah requirements.

3
There are four well-known schools of Islamic
jurisprudence, namely Hanafi, Maliki, Shafi and
Hanbali.
T OWARDS AN I NF OR ME D MARK E T
ISLAMIC ABS SECURITISATION







Islamic Finance Bulletin April - June 2008 Issue #20 15
BANK RAKYAT
Interest is strictly prohibited and return or
fixed return cannot be guaranteed. There
must be an element of the sharing of risk
in return for a gain.

The type of credit enhancement must
show that there is some form of sharing in
the profit and loss of the securitization
structure. A credit enhancement that acts
as a form of guarantee for investment
made by investors would not be
appropriate as there is no form of risk in
their investments. Their profits in the
investments are guaranteed. A cash
collateral account method whereby a loan
is made to the SPV by the originator or a
specific amount of liquidity is put aside in
an account may not be appropriate, as this
resembles a guaranteed. Clearly, credit
enhancement in the form of a guarantee,
either conditional or unconditional
guarantee by the originator or third party
of the performance of the asset is also not
suitable for an Islamic securitization as it
is clearly stated that it is a guarantee. A
standby letter of credit where a financial
institution promises to provide the SPV
with a loan in the event of income
shortfall may not be appropriate as this
will reflect that there is no sharing of loss
by the investors. A guaranteed investment
contract where a financial institution in
example a bank or an insurance company
guarantees a fixed return on any funds
invested by the SPV is also not
appropriate for Islamic ABS.

Based on the Shariah requirements of
profit and loss sharing, the most suitable
form of credit enhancement where the
investors can actually participate in the
sharing of profit and loss would be
insurance. In Islam, insurance is seen as a
mutual help. Islamic jurists acknowledge
insurance as shared responsibility. The
concept of insurance is acceptable in
Islam because;
the policy holders would cooperate
among themselves for their
common good;
every policyholder would pay his
subscription in order to assist those
of them who need assistance;
it falls under the donation contract
which is intended to divide losses
and spread liability according to
the community pooling system;
the element of uncertainty will be
eliminated insofar as subscription
and compensation are concerned;
it does not aim at deriving
advantage at the cost of other
individuals.
Source: BIMB Institute of Research and
Training Sdn. Bhd., 1996

The contract of Islamic insurance is based
on the Islamic profit-sharing principle. By
this principle, the entrepreneur will accept
payment of the insurance installments or
contributions from investors. The contract
specifies how the profit from operations
of the insurance managed by the
insurance operator is to be shared, in
accordance with the principle of profit
sharing between the participants. In
Islamic insurance, the participant shall
agree to relinquish certain proportion of
his insurance installments or
contributions that he agrees to pay should
any of his fellow participants suffer a
defined loss. This way, the participant is
fulfilling his obligation of mutual help
and joint guarantee, helping other
participants who might suffer loss or
damage due to catastrophe or disaster.

T OWARDS AN I NF OR ME D MARK E T
ISLAMIC ABS SECURITISATION







Islamic Finance Bulletin April - June 2008 Issue #20 16
BANK RAKYAT
Insurance would be the best form of
credit enhancer for Islamic ABS as it is
acceptable to Islamic practices.

Technical ssue Technical ssue Technical ssue Technical ssue - -- - Credit Credit Credit Credit
Rating Rating Rating Rating

Credit rating is important in a
securitization structure. Credit rating sets
a defined standard that investors
understand and accept (Baron, 2000). The
rating says that credit enhancements are
appropriate and that investment decisions
can be made on whether or not to
purchase the security. Markets where
credit ratings are absent found that it can
affect the price and marketability of new
issues and unrated issuers of debt may
find limited based of investors. Reiter and
Zeibart (1991), Ederington, Yawed and
Roberts (1987) and Liu and Thakor
(1984) suggest that ratings bring more
information to the marketplace than
publicly available financial information.
Hsueh and Kidwell (1988) suggest that
issuers can resolve the asymmetric
information problems by using credit
ratings to signal the market on the credit
quality of their bonds.

According to Tran (2002) the identity of
the originator and its operational
procedures are key questions that are
asked because the originators skill in
selecting, sizing and pricing the assets, its
past experience and why it wants to sell
its assets are important. The servicing
quality of the assets is also important
because cash flows of assets can
deteriorate if commitments are not met.
There must be disclosure and
transparency in the setting up of the SPV
as well.

The requirements above are all the
necessary requirements for rating to be
made possible.

It is actually not compulsory for ABS to
be rated to especially if they are being
sold to private investors and not issued on
a primary market. However, in practice
selling securities without a rating would
be very difficult. There is no law or
regulatory rule that says that these types
of securities have to be rated. Issuer will
have to pay a higher cost because
investors do not have confidence in the
rating. The same law also applies to the
rating of the originator. It is also not
compulsory for the originator to be rated
but if an originator has no rating it will
incur higher costs. For example, a bank
that has a low credit rating (say single B)
can through the use of credit
enhancements issue AB securities that are
rated triple A. The lower the originators
rating is, the higher is the associated costs
with the issue (either a higher spread will
have to be offered or more costly credit
enhancements will have to be used).
Therefore, the rating of a bank can lower
the cost of the securities.

In rating the issue of the ABS, the
analysis of the assets is the starting point
for an ABS deal. Historical data on the
loan are needed to analyse the frequency
of defaults and foreclosures (Baron,
2000). The rating agency analyses the
characteristics of loans in the pool. How
much money will be recovered if
foreclosure takes place? How severe
would the size of losses be? How many
loans will default? Where are these loans
located? These questions all relate to
the bank as the originator. The rating of
T OWARDS AN I NF OR ME D MARK E T
ISLAMIC ABS SECURITISATION







Islamic Finance Bulletin April - June 2008 Issue #20 17
BANK RAKYAT
the securities looks at the quality of the
originator. What sort of loans does the
originator have? What risk management
policy does it use? How does it manage
its non-performing loans? How is the
policy on recovery of non-performing
loans? All these will determine the
quality of the pool of loans.

Rating agencies have their own way of
issuing a rating. For example, Moodys
Bank Financial Strength Ratings (BFSRs)
represent Moodys opinion of a banks
intrinsic safety and soundness and, as
such, exclude certain external credit risks
and credit support elements that are
addressed by Moodys Bank Deposit
Ratings (Moodys Investors Service,
www.moodys.com). In addition to
commercial banks, Moodys BFSRs may
also be assigned to other types of
financial institutions such as multilateral
development banks, government-
sponsored financial institutions and
national development financial
institutions. Bank Financial Strength
Ratings do not address the probability of
timely payment. Instead, Bank Financial
Strength Ratings can be understood as a
measure of the likelihood that a bank will
require assistance from third parties such
as its owners, its industry group, or
official institutions.

Moodys BFSRs do not take into account
the probability that the bank will receive
such external support, nor do they address
risks arising from sovereign actions that
may interfere with a banks ability to
honour its domestic or foreign currency
obligations.

Factors considered in the assignment of
Moodys BFSRs include bank-specific
elements such as financial fundamentals,
franchise value, and business and asset
diversification. Although Moodys
BFSRs exclude the external factors
specified above, they do take into account
other risk factors in the banks operating
environment, including the strength and
prospective performance of the economy,
as well as the structure and relative
fragility of the financial system, and the
quality of banking regulation and
supervision.

According to Hassoune, Volland and Al-
Yousouf (2002) the problem with rating
Islamic banks is that compared to non-
Islamic banks it is difficult to judge
whether an Islamic banks asset portfolio
is of higher or lower quality than that of
the non-Islamic banks. This is due to the
limited disclosure relating to asset
quality. This hampers the comparison.
Furthermore, in the case of impaired
financing, financial instruments like
mudharabah and musyarakah can only be
assessed at the end of a contract.
According to Standard and Poors,
Islamic financial institutions have a weak
track record of high, consistent and
exhaustive financial disclosure. This view
is shared by Willis (2000,
www.gtnews.com) who suggests that
Islamic banks will need to provide a far
greater level of transparency because so
far they have done very little to provide a
clear picture of their general activities,
asset quality or management policies.
Furthermore, rating agencies are
concerned with the asset quality.

Recurrent weaknesses in disclosure relate
to volumes of non-performing assets,
internal classification rules concerning
impaired assets, provisioning policies,
T OWARDS AN I NF OR ME D MARK E T
ISLAMIC ABS SECURITISATION







Islamic Finance Bulletin April - June 2008 Issue #20 18
BANK RAKYAT
and the breakdown of deposits between
savings accounts and investment accounts
and capital adequacy ratio. Also,
information provided to investors
regarding these issues is generally
insufficient, while there remain large
differences between Islamic financial
institutions in terms of practices and
disclosure. The problems in rating Islamic
financial institutions only add to the
importance of an appropriate policy of
measurement and management of non-
performing loans for Islamic banks and
adequate information disclosure in an
Islamic bank. Therefore the problem of
rating actually lies in the Islamic financial
institutions themselves. If they can be
transparent by making adequate
disclosures then there should be no
problem in rating Islamic financial
institutions.

The suggestion that an Islamic rating
agency should be established because
current rating agencies have taken a
varied approach in analyzing Islamic
financial institutions resulting in
inconsistent rating is arguable.
International rating agency for example
Moodys has made an effort of
understanding the operations of Islamic
financial institutions (Cunningham,
2000). Moodys are aware that the
instruments they used are different from
interest-based bank. Fitch IBCA rating
agency is also coming up with their rating
of Islamic financial institutions. In
conclusion, international rating agencies
are making an effort to understand the
operations of Islamic banks.

If Islamic banks can disclose the quality
of its assets, its policy on the risk
management and its policy on non-
performing assets, then there would be no
problem of getting a good rating.
Disclosure is very important, as it is a
source of information for public.
Information that includes the
management policies, risk exposures and
risk management practices helps to
enhance the transparency and efficiency
of the financial markets thus promoting a
greater stability to the financial systems
of any country. Disclosure of credit risk,
market risk, liquidity risk helps investors
and other parties to assess the risk and the
return of their investments should they be
interested to purchase the securities.

Conclusion Conclusion Conclusion Conclusion

The Islamic banking system involves
some sharing or distribution of risk in the
operation of an Islamic bank.
Understandably, this would require
Islamic banks to have a conducive and
supportive environment in the form of
jurisdiction and framework that facilitate
the development of appropriate systems.
There should be development that can
help Islamic banks to improve their
position in the banking system. There is
tough competition from conventional
banks that have experience and
technology on their side. The
conventional banks are finding it easier to
provide the same products as Islamic
banks. Islamic banks should meet this
challenge through product innovation and
liquidity management. Banks and
financial markets are becoming more
sophisticated and competitive and Islamic
banks must exploit this opportunity.
Asset-backed securitization is an
important development for banks. More
illiquid loans can be transformed into
T OWARDS AN I NF OR ME D MARK E T
ISLAMIC ABS SECURITISATION







Islamic Finance Bulletin April - June 2008 Issue #20 19
BANK RAKYAT
securities that are liquid. However,
Shariah rules must also be observed.

As mentioned in the introduction, like
conventional banks, Islamic banks are
also exposed to banking risks especially
credit risks. They are also subject to
capital adequacy ratio and reserve
requirements by regulatory bodies. Most
importantly, their special characteristics
whereby the principle of profit and loss
sharing is used in their relationship
between depositors and in extending
financings makes them more vulnerable
to losses therefore making risk
management very important in Islamic
banks. Islamic banks also face the
problem of non-performing loans that can
affect their performance. In addition,
Islamic banks have been facing a liquidity
issue that is created by the mismatch of
deposits tenure and financing tenure.
There is either surplus idle cash position
to be invested or shortage cash position to
be funded immediately. The limited tools
in liquidity management in Islamic banks
make them vulnerable. The predominance
of debt-based financial modes is a
weakness as it is difficult to transform
these into negotiable financial
instruments.

ABS has offered a way for conventional
banks to overcome the issues above.
Islamic banks on the other hand have had
some problems in implementing Islamic
securitization. The issues of ownership,
trading of debt, credit enhancement and
rating of Islamic bank has impeded the
development of Islamic securitization.
Several scholars like Dualeh (1998),
Thomas (2001) have highlighted the
potential of Islamic ABS without
analyzing the issues that might arise from
the structuring of the ABS. This paper
analyses the problems in implementing
the Islamic ABS and also suggests
solutions to overcome the problems in
structuring Islamic ABS.

The issuance of $500 million floating rate
sukuk by Islamic Development Bank
(IDB) is a major leap in Islamic banking
development as the assets are of Ijara
contracts and installment payments under
the Murabahah and Istisna contracts. The
sukuk is AAA rated and was
oversubscribed of $780 million that it had
to be closed quickly as orders were still
coming in. The sukuk are a ring fenced
portfolio of IDB assets. They are
separated from other assets of the banks
multilateral assets. The assets consist of
not less than 30% of its total value, assets
under the Ijara contracts with rentals
consisting of the unamortized portion of
the acquisition with fixed or variable
profit portion. In addition to this assets,
installment payments under Murabahah
and Istisna contracts that IDB has entered
into with some of its clients also forms
part of the assets. The IDB also retains
the risk of default on the sukuk assets
whereby it acts as a liquidity provider to
cover costs and expenses and periodic
distribution payments to sukuk holders.

The problem of ownership can be
overcome using the principles of Islam
itself. The assets based on the cost plus
(debt) mode of financing can be
securitized using Hawala. Hawala was
used when the Prophet (pbuh) was alive
and should not be an issue. The
discounting of the value of debt should
not be likened to interest. Instead it
should be likened to capital appreciation.
Furthermore, the practice of discounting
T OWARDS AN I NF OR ME D MARK E T
ISLAMIC ABS SECURITISATION







Islamic Finance Bulletin April - June 2008 Issue #20 20
BANK RAKYAT
was also implemented during the time of
the Prophet (pbuh). The issue of credit
rating can be overcome if Islamic banks
practice adequate disclosure. This would
enable rating agencies to rate Islamic
banks fairly. As for credit enhancements,
insurance appears to be the most
appropriate as credit enhancement should
also be in the form of sharing of risk
between the investors and another party.
Given these, Islamic securitisation can
play a role in the development of Islamic
banking system in the future.



This article was prepared by Dr. Mokhrazinim
Mokhtar (PhD in Economics majoring in Islamic
Banking from the University of Southampton).
The information herein has been obtained from
sources believed to be reliable but cannot be
guaranteed. The views or opinions expressed are
subject to change at any time. Neither the
information nor any opinion expressed is to be
construed as a solicitation for the purchase or sale
of any securities. Islamic Banking and Finance
Institute Malaysia Sdn Bhd do not assume any
responsibility whatsoever in this respect.
The article has not been edited by RAM Ratings in
the interest of presenting originality in content and
presentation.

BANK KERJASAMA RAKYAT
MALAYSIA BERHAD

Bank Rakyat was established in September
1954 under the Cooperative Ordinance 1948,
following an expansion of the cooperative
movement in Peninsular Malaysia. On 6
January 1973, the name was changed to Bank
Kerjsama Rakyat Malaysia Berhad or better
known as Bank Rakyat.

Bank Rakyat is governed by its by laws and
Bank Kerjasama Rakyat (M) Berhad Act 1978
(Special Provision 202), which allows Bank
Rakyat to provide financing to non-members.
In 1993, the Cooperative Act was reviewed
which allows the Bank to operate in Sabah
and Sarawak.

On 8 May 1993, Bank Rakyat took a giant
step towards becoming a syariah co-operative
bank by introducing Islamic banking products
at four of its branches. Bank Rakyat became a
full-fledged Islamic cooperative bank in 2002.
Hence, with this major decision, Bank Rakyat
marked another milestone in history where it
became the third bank to offer total Islamic
banking products in Malaysia.

On 15 February 2002, Bank Rakyat together
with six other financial and development
institutions were placed directly under the
supervision of Bank Negara Malaysia
(Central Bank of Malaysia) under the
Development of Financial Institution Act
(DFIA). On 27 March 2004, Bank Rakyat was
placed under the supervision of the Ministry
of Entrepreneur and Cooperative
Development. To date, Bank Rakyat has a
total of 111 branches offering Islamic banking
facilities to its customers.













For more information, please contact:



Bank Kerjasama Rakyat Malaysia
Berhad

Tingkat 3, Bangunan Bank Rakyat,
Jalan Tangsi,
Peti Surat 11024
50732 Kuala Lumpur, Malaysia
Tel: +603-2612 9600
Fax: +603-2612 9655
Website: www.bankrakyat.com.my

T OWARDS AN I NF OR ME D MARK E T
FINANCING UNDERLYING ASSETS







Islamic Finance Bulletin April - June 2008 Issue #20 21
INCIEF
Financing Underlying Assets Financing Underlying Assets Financing Underlying Assets Financing Underlying Assets

RHB Islamic Bank Berhad



ne of the clear differences
between Islamic banking and
conventional banking
transactions is that Islamic banking
transactions are predominantly based on
buying/selling or exchanging contracts
whereas conventional transactions are
based on lending contracts.

This clear distinction is based on the
foundation of Islamic banking as stated in
the Quran verse 2:275, "Trade is like
usury". But Allah SWT hath permitted
trade and forbidden usury. The Quranic
foundation has resulted in one of the most
important characteristics of Islamic
financing where it is based on asset-
backed financing and it places the
importance of underlying assets in the
contract.

The conventional banking financing
approach, on the converse, merely deals
in money and monetary papers only.

Islamic banking promotes the trading and
sale of real goods, assets and
commodities, thus enabling Islamic banks
to derive profit from it whereas interest,
which is forbidden in Islam, is obtained
through the lending of money by
conventional banks.

In an Islamic contract, such as Murabahah
contract (mark-up sale) and Ijarah
(leasing), the underlying asset must be of
value, in existence at the time of the
sale/lease and the seller must have the
physical or constructive possession of the
goods and the goods must not be used for
purposes not allowed under Shariah.

In conventional banking, the lender gives
the client an interest-bearing loan, after
which the client may make use of it
(notwithstanding what may have been
described under the purpose of the loan)
for his own needs, which may or may not
be productive in nature.

In a conventional loan, the money is
advanced for profitable purposes which
may not be socially ethical, i.e. gambling
and liquor businesses.

In financing underlying assets, Islamic
banking can ensure that only goods and
commodities that are allowed under
Shariah will be purchased by the client.

The next question is: what if there is no
underlying asset at the point of contract?
Can it still be financed under Islamic
banking? The answer is definitely, Yes.
For example, through contract of Salam
(forward sale) and Istisna (contract to
manufacture) - contracts which are not
commonly used in this country but well
accepted and practised in the other parts
of the Islamic banking world.
O
T OWARDS AN I NF OR ME D MARK E T
FINANCING UNDERLYING ASSETS







Islamic Finance Bulletin April - June 2008 Issue #20 22
INCIEF

From the above discussion, it is evident
that Islamic banking is deeply involved in
financing underlying assets, which
promotes the creation of real trade, real
goods, production and services, as
opposed to the increase in money supply
under conventional loans for which the
supply may or may not enhance the
creation of real assets or at worst fuels
inflation.

In placing the importance of underlying
assets, Islamic bankers analyse clients
differently from their conventional
counterparts.

Conventional bankers evaluate credit
quality as the ultimate test in determining
how much loan to give out but Islamic
bankers will have to go deeper into other
risk factors such as construction risk,
project financing risk under Istisna
contract, performance risk of producer
and commodity supply risk under Salam
contracts, and risks associated with the
asset under Murabahah and Ijarah
contracts.

This is evident as Islamic bankers directly
and indirectly act as traders, sellers,
contractors, producers and suppliers of
real goods and services as opposed to
conventional bankers who act as mere
lenders.

Islamic bankers in this case, are more
engaged and involved with the clients in
the trading activities and the risks
associated with the clients' trade.

The need for underlying assets has also
enhanced the credibility and transparency
to the transaction where the price of the
assets to be transacted must be made
known and the mark-up is determined at
the point of the contract in all the said
Islamic contracts.

This is certainly a great shift from a
conventional loan transaction where the
bank is only interested in the loan pricing
to customer.

There still is this issue of monies required
to start off a business in the form of
capital injection or funds required for the
acquisition of shares in a company. In
such a situation, where is the underlying
asset to start with?

Shares, in this case shares allowed under
Shariah, are a form of asset that can be
transacted upon and financed under
Islamic financing contracts such as
Murabahah, thus dispelling the notion
that we only transact in physical assets.

To go further, the underlying asset could
be in the form of systems software that is
of value and can be bought and sold in the
market.

Time has also come for us to broaden the
scope and further explore structuring
Musharakah (partnership) and
Mudharabah (profit and loss sharing)
contracts to address the capital injection
financing requirement, and packaging it
together with the earlier contracts of
exchange, thus providing the working
capital in delivering productive assets and
commodities into the market.

To achieve this ideal scenario, all
interested parties, especially the
regulatory bodies, must come together
firstly in appreciation of the peculiar
T OWARDS AN I NF OR ME D MARK E T
FINANCING UNDERLYING ASSETS







Islamic Finance Bulletin April - June 2008 Issue #20 23
INCIEF
differences in the requirements of
financing underlying assets, versus that of
a straight forward conventional loan.

This understanding will certainly
facilitate Islamic bankers' efforts to
expand the reach and scope of the
application of these structures, and will
bode well for the expansion of Islamic
banking in this country.



RHB ISLAMIC BANK BERHAD

RHB ISLAMIC Bank first opened its doors to
customers on 16 March 2005, offering the full
suite of Shariah compliant banking and
financial products and services to all.

RHB ISLAMIC Bank is a wholly owned
subsidiary of RHB Bank. It offers a range of
consumer, corporate, commercial and
electronic banking solutions that can be
customized to meet every individual
requirement. They include Shariah compliant
Savings and current Accounts, financing
facilities, Payment and Trade Services as well
as Treasury Products.

RHB ISLAMICs products and services are
available at RHB ISLAMIC branch and
offices in Sarawak, Kelantan, Terengganu and
Kuala Lumpur. Transactions can also be done
at any of the more than 200 RHB Bank
branches and over 500 ATMs across the
nation, as well as through the RHB
PhoneBanking and Internet Banking services.
RHB ISLAMIC Bank corporate office is
located at Level 11, Menara Yayasan Tun
Razak, Jalan Bukit Bintang, Kuala Lumpur.
RHB ISLAMIC will endeavour to deliver its
many products and services through its
various channels as well as to leverage on the
commitment and synergies within the RHB
Group to expand its market share through
cross selling efforts and to ensure customers
enjoy a professional and friendly banking


For more information, please contact:



RHB ISLAMIC Bank Berhad
(680329-V)

Level 11, Menara Yayasan Tun Razak
200 Jalan Bukit Bintang
55100 Kuala Lumpur, Malaysia
Tel: +603-2171 5000
Fax: +603-2171 5001
Website: www.rhbislamicbank.com.my

T OWARDS AN I NF OR ME D MARK E T
STOCK SCREENING PROCESS







Islamic Finance Bulletin April - June 2008 Issue #20 24
INCEIF
8tock 8creening Process 8tock 8creening Process 8tock 8creening Process 8tock 8creening Process

Prof. Datuk Dr. Syed Othman Alhabshi
International Centre for Education in Islamic Finance



Definition Definition Definition Definition

Stock screening is a process of
determining whether a stock or security is
Shariah-compliant or not. It consists of
various Shariah principles that form the
criteria which should be used to
determine whether the stock or security is
Shariah-compliant or not.


Ob]ective Ob]ective Ob]ective Ob]ective

The main objective of screening the stock
is to ensure that the stock or security that
one purchases or invest in does not
contain any prohibited elements that
make it Shariah non-compliant. For
Muslims, it is a grave sin to consume
something that is unlawful or prohibited.

According to a hadith of the Holy Prophet
(peace and blessings of Allah be upon
him) as reported by Jabir (may Allah be
pleased with him), the Messenger of
Allah said: The flesh grown from
unlawful provisions shall not enter
Paradise, and every flesh grown from
unlawful provisions deserves to be
thrown in the Hell fire (Ahmad). From
the hadith, it is clear that Muslims need to
be very careful not to consume or feed his
family with food that originates from
unlawful income. In fact it is not just food
that we consume must be permissible, it
is all that we consume in the general
sense should be pure and clean.
8cope of This Paper 8cope of This Paper 8cope of This Paper 8cope of This Paper

This paper will confine discussion only
on the stock screening processes as
adopted by the Securities Commission of
Malaysia (SC) and the Dow Jones Islamic
Market Index (DJIM).


8hariah Principles in slamic 8hariah Principles in slamic 8hariah Principles in slamic 8hariah Principles in slamic
Transaction Transaction Transaction Transaction

To ensure that we consume only what is
permitted, we have to ensure that the
income that we earn and the resulting
wealth that we generate and accumulate
must have been done through lawful
means. To help us ensure this, the Shariah
has laid down the basic principles that
should be followed in our business or
commercial transactions.

The Holy Quran also states, O ye who
believe! Eat not up your property among
yourselves in vanities; but let there be
amongst you traffic and trade by mutual
goodwill: Nor kill (or destroy)
yourselves: for verily God hat been to you
Most Merciful [An-Nisaa (4):29]

From the above verse, it is clear that we
should not take each others wealth or
property through vain means. But there
should be proper, transparent, fair and
just exchange or transactions which are
mutually agreed by both parties. At the
end of the verse, it says about killing or
T OWARDS AN I NF OR ME D MARK E T
STOCK SCREENING PROCESS







Islamic Finance Bulletin April - June 2008 Issue #20 25
INCEIF
destroying oneself which implies that by
cheating or forcing one to give up his
property you are in fact killing his
livelihood although he may not die. Based
on such interpretations of the verse, the
scholars have outlined the principles of
Islamic transactions as follows:

Willing buyer
Willing seller
Well defined or specified good,
commodity or product
Agreed price
Offer and acceptance

The following can be derived from the
above list of requirements:

First, the participants in transactions must
be of age, free man, represented if blind
and sane individual. Underage person is
not allowed to transact unless permitted
by the guardian or parents.

Second, the good or commodity or
product must be well defined or specified
to avoid any ambiguity or uncertainty
(gharar) which is prohibited. The good
must be owned by the seller and can be
delivered at the appointed time.

Third, both parties need to agree on the
price.

Fourth, the offer and acceptance can be
verbal or in writing which acts as the
conclusion of the agreement by both
parties to the transaction.

The Holy Quran has addressed mankind
thus: O ye people! Eat of what is on
earth, lawful and good and not follow the
footsteps of the evil one, for he is to you
an avowed enemy [Al-Baqarah (2):
168].

The verse clearly states two basic criteria
in selecting food for our consumption,
namely, they should first be lawful and
secondly they should be good. From the
science of the Holy Quran, the order of
the words in the verse implies that we
should choose food that is lawful first.
Among the lawful food we should then
choose those that are good for us. There
are two implications here: First, it implies
that what is lawful must be good.
However, what is good may not be lawful
such as strong drinks. Secondly, what is
good for someone may not be good for
another. Hence, one should be selective in
choosing among the lawful what is good
for him.

While the first verse outlines the basic
principles of Islamic transactions in
general, the second provides the basis for
stock screening. This does not mean that
the basic principles of Islamic
transactions do not apply in the stock
screening process. In fact, the third
principle of Islamic transactions which
pertains to good or product to be
transacted is further clarified by the
second verse quoted above. In other
words the stock cannot contain any
prohibited elements whether by action or
by contents. Stock screening therefore
entails the scrutiny of the good or product
of the company and the manner it is being
produced, particularly in terms of
financing.









T OWARDS AN I NF OR ME D MARK E T
STOCK SCREENING PROCESS







Islamic Finance Bulletin April - June 2008 Issue #20 26
INCEIF
Universe Creation and 8tock Universe Creation and 8tock Universe Creation and 8tock Universe Creation and 8tock
8election 8election 8election 8election
1 11 1


The universe for Securities Commission
(SC) of Malaysia is limited only to those
stocks or securities that are listed in Bursa
Malaysia. This includes those securities
listed in the First and Second Boards as
well as in MASDEQ.

The universe for Dow Jones Islamic
Market Index (DJIM) is based on global
markets.

The DJMI include stocks from 34
countries and cover 10 economic sectors,
18 market sectors, 40 industry groups and
70 subgroups. Currently, the Dow Jones
Islamic Market family of indices consists
of the broad DJ Islamic Market Index, the
DJ Islamic Market Canadian Index, the
DJ Islamic Market UK Index, the DJ
Islamic Market Europe Index, and the DJ
Islamic Market Asia/Pacific Index.

Both the Securities Commission (SC) of
Malaysia and Dow Jones Islamic Market
Index (DJIM) have the same approach to
the first level of screening which is based
on core business. The core business is
considered permissible as long as they do
not belong to any of those businesses that
are listed as non-permissible.

The SC listed the non-permissible core
businesses as follows:

Financial services based on riba
(interest);
Gambling and gaming;

1
This section onwards has made reference to
Securities Commission booklet on List of
Shariah-Compliant Securities by the Shariah
Advisory Council of the Securities Commission
dated 25 May 2007 and the Dow Jones Islamic
Market Index website

Manufacture or sale of non-halal
products or related products;
Conventional insurance;
Entertainment activities that are
non-permissible according to
Shariah;
Manufacture or sale of tobacco-
based products or related products;
Stock broking or share trading in
Shariah-non compliant securities;
and
Other activities deemed non-
permissible according to Shariah

For DJIM most Shariah boards have
advised against investment in companies
involved in the following activities:

Alcohol
Tobacco
Pork-related products
Conventional financial services
(banking, insurance, etc.)
Weapons and defense
Entertainment (hotels,
casinos/gambling, cinema,
pornography, music, etc.)

Shariah-compliant securities include
ordinary shares, warrants and transferable
subscription rights (TSRs). This means
that warrants and TSRs are classified as
Shariah-compliant securities provided the
underlying shares are also Shariah-
compliant. On the other hand, loan stocks
and bonds are Shariah non-compliant
securities unless they are issued based on
Shariah principles







T OWARDS AN I NF OR ME D MARK E T
STOCK SCREENING PROCESS







Islamic Finance Bulletin April - June 2008 Issue #20 27
INCEIF
8creening From 8ources of 8creening From 8ources of 8creening From 8ources of 8creening From 8ources of
ncome ncome ncome ncome

(A) By the Securities Commission of
Malaysia

Having got the universe of securities
with permissible core business, the
Shariah Advisory Committee (SAC)
of SC also scrutinizes the level of
contribution of interest income
received by the company from
conventional fixed deposits or other
interest bearing financial
instruments. In addition, dividends
received from investment in Shariah-
non compliant securities are also
considered in the analysis carried out
by the SAC

For companies with activities
comprising both permissible and
non-permissible elements the SAC
considers two additional criteria:

the public perception or image of
the company must be good; and
the core activities of the company
are important and considered
maslahah (benefit in general) to
the Muslim ummah (nation) and
the country and the non-
permissible element is very small
and involves matters such as
umum balwa (common plight and
difficult to avoid) uruf (custom)
and the rights of the non-Muslim
community which are accepted by
Islam

(B) By the Dow Jones Islamic Market
Index (DJMI)

During the component selection
process, each company in the index
universe is examined based on its
revenue allocation. If the company
has business activities in any one of
the following sectors defined by the
Industry Classification Benchmark
(ICB), it is considered inappropriate
for Islamic investment purposes and
is excluded from the index.

Defense
Banks
Distillers & Vintners
Full Line Insurance
Food Products
Insurance Brokers
Recreational Products
Property and Casualty Insurance
Tobacco
Reinsurance
Food Retailers & Wholesalers
Life Insurance
Broadcasting & Entertainment
Real Estate Holding & Development
Media Agencies
Consumer Finance
Gambling
Specialty Finance
Hotels
Investment Services
Recreational Services
Mortgage Finance
Restaurants and Bars


Tolerable Level of Non Tolerable Level of Non Tolerable Level of Non Tolerable Level of Non- -- -
permissible Elements permissible Elements permissible Elements permissible Elements

(A) By the Securities Commission of
Malaysia

To determine the tolerable level of
mixed contributions from permissible
and non-permissible activities
towards turnover and profit before
tax of a company, the SAC has
established several benchmarks
based on ijtihad (reasoning from the
source of Shariah by qualified
Shariah scholars). If the contributions
from non-permissible activities
exceed the benchmark, the securities
T OWARDS AN I NF OR ME D MARK E T
STOCK SCREENING PROCESS







Islamic Finance Bulletin April - June 2008 Issue #20 28
INCEIF
of the company will be classified as
Shariah-non compliant.


The benchmarks are:

The five-percent benchmark

It is used to assess the level of mixed
contributions from the activities that
are clearly prohibited such as riba,
(interest-based companies like
conventional banks), gambling,
liquor and pork

The 10-percent benchmark

It is used to assess the level of mixed
contributions from the activities that
involve the element of umum balwa
which is a prohibited element
affecting most people and difficult to
avoid. An example of such a
contribution is the interest income
from fixed deposits in conventional
banks. This benchmark is also used
for tobacco-related activities

The 20-percent benchmark

It is used to assess the level of
contribution of mixed rental payment
from Shariah non-compliant
activities, such as rental payments
from premises used in gambling, sale
of liquor, etc.

The 25-percent benchmark

It is used to assess the level of mixed
contributions from the activities that
are generally permissible according
to Shariah and have an element of
maslahah to the public, but there are
other elements that may affect the
Shariah status of these activities.
Among the activities that belong to
this benchmark are hotel and resort
operations, share trading, stock
broking and others as these activities
may also involve other activities that
are deemed non-permissible
according to the Shariah.




(B) By the Dow Jones Islamic Market
Index (DJMI)

For DJIM, after removing companies
with unacceptable primary business
activities, the remaining stocks are
evaluated according to several
financial ratio filters. The filters are
based on criteria set by the Shariah
supervisory Board to remove
companies with unacceptable levels
of debts or impure interest income.

All of the following must be less than
33%:
Total debt divided by trailing 12-
month average market
capitalization
The sum of a companys cash and
interest-bearing securities divided
by trailing 12-month average
market capitalization
Accounts receivables divided by
12-month average market
capitalization


Change of 8hariah Change of 8hariah Change of 8hariah Change of 8hariah- -- -compliant compliant compliant compliant
8tatus 8tatus 8tatus 8tatus

As a guide to investors, the SAC would
like to advise investors on the timing for
the disposal of securities which have been
classified as Shariah non-compliant.

Shariah-Compliant Securities Which
Are Subsequently Considered Shariah
Non-Compliant

T OWARDS AN I NF OR ME D MARK E T
STOCK SCREENING PROCESS







Islamic Finance Bulletin April - June 2008 Issue #20 29
INCEIF
This refers to those securities which were
earlier classified as Shariah-compliant
securities but due to certain reasons, such
as changes in the companies operations,
are subsequently considered Shariah non-
compliant. In this regard, if on the date
the updated list takes effect (e.g. 25 May
2007), the value of the securities held
exceeds the original investment cost;
investors who hold such Shariah non-
compliant securities must liquidate them.
Any capital gain arising from the disposal
of the Shariah non-compliant securities
made at the time of the announcement can
be kept by the investors. However, any
excess capital gain derived from the
disposal after the announcement day at a
market price that is higher than the
closing price on the announcement day
should be channeled to charitable bodies.

On the other hand, investors are allowed
to hold their investment in the Shariah
non-compliant securities if the market
price of the said securities is below the
original investment cost. It is also
permissible for the investors to keep the
dividends received during the holding
period until such time when the total
amount of dividends received and the
market value of the Shariah non-
compliant securities held equal the
original investment cost. At this stage,
they are advised to dispose of their
holding.

In addition during the holding period,
investors are allowed to subscribe to:

any issue of new securities by the
company whose Shariah non-
compliant securities are held by the
investors, for example rights issues,
bonus issues, special issues and
warrants [excluding securities
whose nature is Shariah non-
compliant, e.g. irredeemable
convertible unsecured loan stock
(ICULS)]; and
securities of other companies
offered by the company whose
Shariah-non compliant securities
are held by the investors

on condition that they expedite the
disposal of the Shariah non-compliant
securities. For securities of other
companies [as stated in (b) above], thy
must be Shariah-compliant securities.
Shariah Non-Compliant Securities

The SAC advises investors who invest
based on Shariah principles to dispose of
any Shariah non-compliant securities
which they presently hold, within a month
of knowing the status of the securities.
Any gain made in the form of capital gain
or dividend received during or after the
disposal of the securities has to be
channeled to charitable bodies. The
investor has a right to retain only the
original investment cost.

Note: Original investment cost may
include brokerage cost or other
related transaction cost.


Purification or Cleansing Purification or Cleansing Purification or Cleansing Purification or Cleansing
Process Process Process Process

Purification or cleansing is normally done
when we know for sure that part of the
income or revenue of the company that is
Shariah compliant

derives from non-permissible
sources such as interest on
conventional fixed deposits; or
contributed by a portion of capital
that is obtained through
conventional loan; or
some other sources that are Shariah
non-compliant

T OWARDS AN I NF OR ME D MARK E T
STOCK SCREENING PROCESS







Islamic Finance Bulletin April - June 2008 Issue #20 30
INCEIF
Such income as described above could be
cleansed from the total revenue or profits
by channeling it to charitable
organizations. This act is called cleansing.
However both the SC and DJIM do not
practice cleansing. It is only when the
status of the securities have changed to
Shariah-non compliant that cleansing is
done, provided the disposal is done after
the date of announcement that the
securities have changed status to Shariah
non-compliant.

Periodic and Ongoing Review Periodic and Ongoing Review Periodic and Ongoing Review Periodic and Ongoing Review

The composition of Shariah-compliant
securities is reviewed periodically on a
quarterly and annual basis. Ongoing
review is also conducted especially to
accommodate extraordinary events such
as delisting, bankruptcy, merger, takeover
etc. which may affect the status of the
security.


Conclusion Conclusion Conclusion Conclusion

Despite general acceptance of the
screening processes adopted by various
markets globally there are still doubts in
the minds of some who feel that there
should not be any compromise in
screening. The security has to be either
Shariah-compliant or otherwise. The
situation as it presents clearly admits non-
permissible elements. How come? What
Shariah principle is involved?

Whether we look at the approach of the
SC or the DJMI we find that there is
something in common. Both comply to
the principle of non-wastage such as the
way the Shariah treats water when some
amount of filth falls into it. As long as
there is no change in colour, taste or
appearance, the water is still considered
clean and pure.


Prof. Datuk Dr. Syed Othman Alhabshi joined
INCEIF as Professor of Islamic Economics &
Econometrics and Head of Takaful Faculty in
March 2007. He holds a B.Ec (Hons) in Statistics
from University of Malaya, M.S. (Statistics) from
University of Wisconsin, U.S.A. and Ph.D.in
Econometrics from University of Birmingham,
U.K. Since 1969, he has served in various
academic capacities in four public universities in
the country, namely University of Malaya,
Universiti Kebangsaan Malaysia, International
Islamic University Malaysia and Universiti Utara
Malaysia. In October of 1997, he served as the
Founding President and CEO of Universiti Tun
Abdul Razak until March 2005. He is a member of
the Board of a number of companies including
Etiqa Takaful Berhad; Pak-Kuwait Takaful Pte Ltd
Pakistan; Maybank Islamic Berhad and Asia Unit
Trust Berhad. He also sits on Shariah Advisory
Committee for five (5) financial institutions in
Malaysia and Singapore and has been appointed
as a member of the Board of Trustees for three
different foundations at the national level. He has
written more than 100 papers on various topics
related to Islam, Economics, Banking and Takaful
and has written and edited a total of 12 books

INTERNATIONAL CENTRE FOR
EDUCATION OF ISLAMIC FINANCE

The International Centre for Education in
Islamic Finance (INCEIF) was set up by
Bank Negara Malaysia (Central Bank of
Malaysia) in March 2006 to develop and
enhance human capital in Islamic finance, in
order to meet the growing needs of the
global Islamic finance industry. INCEIF is
Malaysia's initiative to promote educational
excellence in Islamic finance for the
domestic and international finance
community

INCEIF is staffed with scholars of
international standing and maintains
T OWARDS AN I NF OR ME D MARK E T
STOCK SCREENING PROCESS







Islamic Finance Bulletin April - June 2008 Issue #20 31
INCEIF
strategic relationships with renowned
local and international organisations. This
will accelerate our endeavor in delivering
the best human capital solution for the
global Islamic finance industry
















For more information, please contact:



International Centre for Education in Islamic
Finance

2
nd
Floor, Annexe Block,
Menara Tun Razak, Jalan Raja Laut
50350 Kuala Lumpur
Malaysia
Tel: +603-2781 4000
Fax: +603-2692 4094
E-mail: info@inceif.org
Website: www.inceif.org
T OWAR DS AN I NF OR ME D MAR K E T
STOCK SCREENING PROCESS





Islamic Finance Bulletin April - June 2008 Issue #20 32
RAM RATING SERVICES

8ukuk Market Roundup 8ukuk Market Roundup 8ukuk Market Roundup 8ukuk Market Roundup - -- - Deals Clos Deals Clos Deals Clos Deals Closed in ed in ed in ed in
1H 2008 1H 2008 1H 2008 1H 2008

RAM Rating Services Berhad


total of 34 new sukuk deals,
with a combined issuance value
of RM14.5 billion, were
successfully closed in 1H 2008. Although
less than half that of the previous
corresponding period, this is still
respectable considering the jittery market
and widening bond spreads amid the
ongoing credit crisis, mounting
inflationary pressures and continued
concerns about flagging global economic
growth. RAM Ratings notes that sukuk
issues accounted for about 34% of the
domestic markets RM43.4 billion of
rated corporate bond issues in the first
half of this year.

Big Boys Club: The sukuk market is still
the domain of infrastructure issues. Eight
corporates from this sector entered the
market with some RM8.16 billion of
sukuk programmes in 1H 2008,
accounting for 56% of the total sukuk
market. This was followed by the real
estate and construction sector, with a
12%-share.

























A

ABS / Structured
Finance
10%
Finance
7%
Industrial
4%
Infrastrutcure
56%
Oil & Gas
6%
Plantation
1%
Real Estate &
Construction
12%
Services
1%
Trading
3%
Sukuk Programme by Economic Sector
Total Rated Facility Programme = RM14.50 Billion
as at End-June 2008
Source: FAST / RAM Ratings Database

T OWAR DS AN I NF OR ME D MAR K E T
STOCK SCREENING PROCESS





Islamic Finance Bulletin April - June 2008 Issue #20 33
RAM RATING SERVICES

The more notable sukuk programmes that
were closed between January and June
this year included those by PLUS SPV
Berhad (PLUS SPV), Menara ABS
Berhad (Menara ABS) and Al-Aqar
Capital Sdn Bhd (Al-Aqar Capital).

The RM4.0 billion (nominal value) sukuk
programme by PLUS SPV represents the
markets largest year-to-date sukuk deal.
PLUS SPV is an independent special-
purpose company through which PLUS
Expressways Berhad (PEB) had issued
sukuk to meet its funding requirements.
PEB is an investment-holding company,
and is primarily involved in the operation
of tolled roads, both in Malaysia and
abroad. Its stable of domestic toll-road
concessionaires includes Projek
Lebuhraya Utara-Selatan Berhad
(PLUS), Expressway Lingkaran
Tengah Sdn Bhd (ELITE), Linkedua
(Malaysia) Berhad (LINKEDUA) and
Konsortium Lebuhraya Butterworth
Kulim (KLBK) Sdn Bhd (KLBK). In
addition, PEB has ventured into India and
Indonesia, with stakes in 3 toll-road
concessionaires.

Meanwhile, the RM1.0 billion Sukuk
Ijarah by Menara ABS, a real-estate-
backed transaction involving the
securitisation of properties with a
combined value of RM1.03 billion, is
Malaysias largest securitisation of
property assets executed to date. Menara
ABS is a special-purpose vehicle,
incorporated for the purpose of
undertaking a sale-and-leaseback
transaction involving 4 properties owned
by Telekom Malaysia Berhad.

Despite its relatively small offering, Al-
Aqar Capitals RM300 million Sukuk
Ijarah is noteworthy as the first domestic
commercialreal-estate-backed ransaction
involving hospital properties. Under this
transaction, Al-Aqar Capital had issued
medium- and short-term Sukuk Ijarah to
acquire the beneficial interests in 6
hospitals from Al-Aqar KPJ Real Estate
Investment Trust (Al-Aqar REIT). The
KPJ Group - the largest provider of
private healthcare services in Malaysia -
is also the largest shareholder of Al-Aqar
REIT and has a vested interest in the
operational and financial stability of Al-
Aqar REIT, i.e. the lessee under the
Ijarah Agreement (lease agreement). Al-
Aqar Capital, a special-purpose vehicle,
is wholly owned by Amanah Raya
Berhad - the REIT Trustee for Al-Aqar
REIT.

Credit Concentration: In 1H 2008,
RAM Ratings published the ratings of 22
new corporate sukuk issues, with an
aggregate issuance value of RM11.2
billion; about 46% or RM5.1 billion of
this had already been issued by end-June
2008. This constituted about 70% of the
entire markets RM7.3 billion of sukuk
issued as at the same date.



Rated Sukuk Market As At June 2008 (RM) Facility Programme Issued Amount
Source: RAM Ratings / FAST
RAM Ratings-Rated 11,239,000,000 5,119,000,000
MARC-Rated 3,265,000,000 2,223,000,000
Total Rated Sukuk Market 14,504,000,000 7,342,000,000
Total Rated Corporate Bond Market 43,354,000,000 23,162,000,000

T OWAR DS AN I NF OR ME D MAR K E T
STOCK SCREENING PROCESS





Islamic Finance Bulletin April - June 2008 Issue #20 34
RAM RATING SERVICES

In terms of rating distribution, the AA
rating bracket had the highest density vis-
-vis RAM Ratings sukuk portfolio,
skewed by the large sukuk programmes
originated by infrastructure-based
obligors. PLUS SPVs RM4.0 billion
(nominal value) sukuk programme is
rated AA
1
while Lingkaran Trans Kota
Sdn Bhds (Litrak) RM1.54 billion
sukuk facility has been assigned a long-
term rating of AA
2
. In the meantime,
MRCB Southern Link Berhads (MRCB
Link) RM845 million Senior and
RM199 million Junior Sukuk
programmes have been accorded
respective AA
3
and A
2
ratings. All the
long-term ratings have a stable outlook.

RAM Ratings' Rated Sukuk


Rating Distribution Based on Issued Sum RM Proportion
AAA(s) 100,000,000 1.95%
AAA(bg) 55,000,000 1.07%
AA
1
(s) 150,000,000 2.93%
AAA 550,000,000 10.74%
AA
3
1,235,000,000 24.13%
AA
2
1,525,000,000 29.79%
AA
1
1,055,000,000 20.61%
A
2
209,000,000 4.08%
A
1
240,000,000 4.69%
Total Sum Issued 5,119,000,000 100.00%
Total Facility Programme 11,239,000,000 -
List of RAM Ratings' Rated Sukuk: January - June 2008
Long-Term Short-Term
Menara ABS Berhad ABS Sukuk Ijarah-Tranche A1 240,000,000 AAA 15-Jan-08
Menara ABS Berhad ABS Sukuk Ijarah-Tranche B1, B2, B3 155,000,000 AAA 15-Jan-08
Menara ABS Berhad ABS Sukuk Ijarah-Tranche A2 55,000,000 AA
2 15-Jan-08
Menara ABS Berhad ABS Sukuk Ijarah-Tranche A3 40,000,000 A
1 15-Jan-08
Menara ABS Berhad ABS Sukuk Ijarah-Tranche A4 10,000,000 A
2 15-Jan-08
Gamuda Berhad IMTN 180,000,000 AA
3 24-Jan-08
Pendidikan Industri YS Sdn Bhd BaIDs 150,000,000 AA
1
(s) 31-Jan-08
Al-Aqar Capital Sdn Bhd IMTN Class A 155,000,000 AAA 6-Feb-08
Al-Aqar Capital Sdn Bhd IMTN Class C 55,000,000 AAA(bg) 6-Feb-08
Al-Aqar Capital Sdn Bhd IMTN Class B 25,000,000 AA
2 6-Feb-08
Tanjung Offshore Berhad IMTN 80,000,000 AA
3 14-Mar-08
Lingkaran Trans Kota Sdn Bhd IMTN 300,000,000 AA
2 15-Apr-08
Lingkaran Trans Kota Sdn Bhd IMTN 1,145,000,000 AA
2 15-Apr-08
Muhibbah Engineering (M) Bhd ICP/IMTN 200,000,000 A
1 P1 15-Apr-08
Hong Leong Industries Berhad ICP/IMTN 130,000,000 AA
3 P1 2-May-08
UMW Toyota Capital Sdn Bhd ICP/IMTN 100,000,000 AAA(s) P1(s) 3-Jun-08
MRCB Southern Link Berhad Junior Sukuk 199,000,000 A
2 23-Jun-08
MRCB Southern Link Berhad Senior Sukuk 845,000,000 AA
3 23-Jun-08
PLUS SPV Berhad IMTN 1,055,000,000 AA
1 27-Jun-08
Total Sum Issued 5,119,000,000
Total Facility Programme 11,239,000,000
Issuer Instruments
Issued Amount
(RM)
Rating
Issue Date
T OWAR DS AN I NF OR ME D MAR K E T
STOCK SCREENING PROCESS





Islamic Finance Bulletin April - June 2008 Issue #20 35
RAM RATING SERVICES


The rating of PLUS SPVs sukuk is
essentially a reflection of PEBs credit
risk. Under the Musyarakah structure, the
sukuk holders recourse to PEB is
recognised via a Purchase Undertaking
Deed; PEB, as the Obligor, will undertake
to purchase the sukuk holders interests in
the Musyarakah venture upon its
dissolution - scheduled or otherwise.
With this strong credit link between
PLUS SPV and PEB, we had assessed
both companies in aggregate from a credit
perspective. In evaluating the
creditworthiness of PEB, we had relied on
our corporate rating methodology, given
its make-up as an investment-holding
company. A similar approach had been
adopted when assessing the sukuk issues
of Gamuda Berhad, Muhibbah
Engineering (M) Berhad and Tanjong
Offshore Berhad, where our assessment
had focused on the entity tasked with
redeeming the sukuk. The final assigned
rating had depended on the ranking of the
sukuk in relation to the entitys other
financial obligations.

In contrast, the creditworthiness of the
sukuk programmes of Litrak and MRCB
Link had been assessed using RAM
Ratings project-finance methodology,
given the nature of these entities as
single-purpose companies and that the
transactions were wholly driven by the
particular projects. Here, RAM Ratings
had focused on the aptitude of the
underlying toll-road projects to generate
sufficient funds to meet the periodic
returns and final capital repayment. The
ratings are supported by favourable
project economics, the robust cash-
generating ability of the concession asset,
strong debt-protection measures and
stringent covenants as well as cash-trap
mechanisms for the benefit of the sukuk
holders. In the case of MRCB Link, the 2-
notch rating difference between the
Senior Sukuk and Junior Sukuk is
attributed to the strong equity-like
features of the latter, which strengthen the
credit position of the Senior sukuk
holders.

On another note, the creditworthiness of
the sukuk issued by Menara ABS and
Menara AlAqar had been appraised
based on RAM Ratings asset-
backed/structured-finance rating
methodology. In rating this type of sukuk,
which bears a resemblance to asset-
backed transactions, we had focused on
the robustness of the underlying assets in
generating sufficient funds to meet the
SPVs ongoing profit obligations, and in
supporting the realisable sustainable
values of the assets to meet principal
redemption by their legal maturity dates.

Malaysian Sukuk League Table for
1H 2008: The RM14.5 billion of
sukuk issues in 1H 2008 had been
brought to the market by 15
financial and advisory institutions.
RAM Ratings provisional
tabulation, based on data collated
from Bank Negara Malaysias
FAST information system and the
websites of the rating agencies,
indicates that CIMB Investment
Bank Berhad topped the table with
a 43%-share, followed by
Aseambankers Malaysia Berhad
(16%) and AmInvestment Bank
Berhad (8%).
T OWARDS AN I NF OR ME D MARK E T
STOCK SCREENING PROCESS





Islamic Finance Bulletin April - June 2008 Issue #20 36
RAM RATING SERVICES






























League Table of Lead Managers - as at 30 June 2008
No of Sukuk
Programme
RM %
CIMB Investment Bank Berhad 6,198,000,000 42.7%
Aseambankers Malaysia Berhad 2,265,000,000 15.6%
AmInvestment Bank Berhad 1,100,000,000 7.6%
OCBC Bank (Malaysia) Berhad 590,000,000 4.1%
MIDF Amanah Investment Bank Berhad 585,000,000 4.0%
HSBC Bank Malaysia Berhad 348,000,000 2.4%
RHB Investment Bank Berhad 348,000,000 2.4%
OSK Investment Bank Berhad 800,000,000 5.5%
Citibank Berhad 550,000,000 3.8%
Bank of Tokyo-Mitsubishi UFJ (Malaysia) Berhad 500,000,000 3.4%
Hong Leong Bank Berhad 500,000,000 3.4%
Bank Islam Malaysia Berhad 250,000,000 1.7%
Kuwait Finance House (Malaysia) Berhad 250,000,000 1.7%
Affin Investment Bank Berhad 150,000,000 1.0%
KAF Discounts Berhad 70,000,000 0.5%
34 14,504,000,000 100.0%
Source : RAM Ratings / FAST
The value of consortium issues have been equally divided by the number of lead managers of a consortium

For more information, please contact:



RAM RATING SERVICES BERHAD
(763588-T)

No 19-G, The Boulevard
Mid Valley City
Lingkaran Syed Putra
59200 Kuala Lumpur
Tel: +603-7628 1000
Fax: +603-7628 1700
Website: www.ram.com.my

T OWARDS AN I NF OR ME D MARK E T
MARKET STATISTICS







Islamic Finance Bulletin April - June 2008 Issue #20 37
Market Statistics
Malaysian Islamic
Capital Market




















T OWARDS AN I NF OR ME D MARK E T
MARKET STATISTICS







Islamic Finance Bulletin April - June 2008 Issue #20 38
Market Statistics
Malaysian Islamic
Capital Market





T OWARDS AN I NF OR ME D MARK E T
MARKET STATISTICS







Islamic Finance Bulletin April - June 2008 Issue #20 39
Market Statistics
Malaysian Islamic
Capital Market










Islamic Corporate Bond Market
Issued & Rated by Economic Sector
as at June 2008
Div hldg
3%
Fin services
5%
Mining/Petrol
3%
Plant/Agri
10%
Cons prod
1%
Indust prod
15%
Const & engin
5%
Prop/R_estate
16%
Transp
2%
Trdg/Serv
6%
Infra/Utilities
24%
ABS
9%
Public Finance
1.1%
Total number of issues =467
Source: RAM Ratings

Islamic Corporate Sukuk Market
Issued & Rated byEconomic Sector
as at June 2008
Divhldg
6%
Fin services
6%
Mining/Petrol
2%
Plant/Agri
1%
Cons prod
1%
Indust prod
5%
Const & engin
2%
Prop/R_estate
11%
Transp
1%
Trdg/Serv
4%
Infra/Utilities
55%
ABS
6%
Public Finance
0.0%
Total value=RM265billion
Source: RAMRatings

Islamic Corporate Bond Market
Issued & Rated by Financing Contract
as at June 2008 (by value)
BBA
25%
Murabahah
31%
Istisna
7%
Ijarah
4%
Mudharabah
1%
Bai Al-Dayn
1%
Qard Hassan
1% Musyarakah
29%
Others
1%
Total value = RM265 billion
Source : RAMRatings

Islamic Corporate Bond market
Issued & Rated by Financing Contract
as at June 2008 (by number of issues)
BBA
30%
Murabahah
36%
Istisna
3%
Ijarah
18%
Mudharabah
2%
Bai Al-Dayn
1%
Bai' Bi Al-Taqsit
0%
Qard Hassan
1%
Bai' Inah
0%
Musyarakah
9%
Others
0%
Total number of issues =467
Source: RAM Ratings

T OWARDS AN I NF OR ME D MARK E T
MARKET STATISTICS







Islamic Finance Bulletin April - June 2008 Issue #20 40
Market Statistics
RAM Ratings-Rated
Islamic Bonds












RAM Ratings-Rated Islamic Bonds (long-term)
as at June 2008
A
31%
AAA
23.4%
AA
34.8%
BBB
6.2%
BB
0.3%
B
1%
C
0.7% D
2.4%
Total number of issues = 290
Source: RAM Ratings

RAM Ratings-Rated Islamic Bonds (long-term)
as at June 2008
AAA
33.5%
AA
49.9%
A
13.3%
BBB
0.9%
BB
0.1%
B
1.3%
C
0.2% D
0.7%
Total value = RM173.30billion
Source: RAM Ratings

RAM Ratings-Rated Islamic Bonds (long-term)
as at June 2008
A
31%
AAA
23.4%
AA
34.8%
BBB
6.2%
BB
0.3%
B
1%
C
0.7% D
2.4%
Total number of issues = 290
Source: RAM Ratings

RAM Ratings-Rated Islamic Bonds (short-term)
as at June 2008
P1
73.5%
P2
13.3%
P3
10.8%
NP
2.4%
Total number of issues = 83
Source: RAM Ratings

T OWARDS AN I NF OR ME D MARK E T
MARKET STATISTICS







Islamic Finance Bulletin April - June 2008 Issue #20 41
Market Statistics
Malaysian Islamic
Banking Market






































Islamic Assets in the Banking Sector
Source: Bank Negara Malaysia
3.37%
5.44%
6.91%
8.23%
8.93%
11.35%
10.45%
9.72%
12.18%
13.66% 13.08%
12.80%
-
200,000
400,000
600,000
800,000
1,000,000
1,200,000
1,400,000
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 M ar-08 Jun-08
R
M

m
i
l
l
i
o
n
0.00%
2.00%
4.00%
6.00%
8.00%
10.00%
12.00%
14.00%
16.00%
Islamic Asset s To t al Asset s in B anking Syst em M arket share o f Islamic B anking asset s (%)
Islamic Banking by Financing Contract
as at June 2008
Istisna, 1.5%
Others, 16.0% Mudharabah,
0.2%
Musyarakah,
0.8%
Murabahah,
15.7%
Ijarah Thumma Al-
Bai', 30.6%
Ijarah, 1.8%
Bai Bithaman Ajil,
33.6%
Total Financing : RM93.8 billion
Source Bank Negara Malaysia







Information contained in this publication is obtained from sources
believed to be reliable and correct at the point of writing; however, its
accuracy or completeness cannot be guaranteed. Opinions in this
publication are expressed from the point of view of the writers and are
not necessarily those of the Publisher. The views or opinions
expressed are subject to change at anytime. No statement in this
publication is to be construed as a recommendation to buy, sell or hold
securities.

All rights reserved. No part of this publication may be copied or
otherwise reproduced, repackaged, further transmitted, transferred,
disseminated, redistributed or resold or stored for subsequent use for
any such purpose, in whole or in part, in any form or manner or by
any means whatsoever by any person, without prior written consent
from the Publisher and / or writers.



Ram Rating Services Berhad
Suite 20.01, Level 20
The Gardens South Tower
Mid Valley City
Lingkaran Syed Putra
59200 Kuala Lumpur

3
rd
Floor, Dataran Kewangan Darul Takaful
Jalan Sultan Sulaiman
50000 Kuala Lumpur

Das könnte Ihnen auch gefallen