A NEW PARADIGM OF DEPOSIT TAKING - INVESTMENT ACCOUNT Hizamuddin Jamalluddin Group Chief Strategy Officer Bank Islam Malaysia Berhad EXPERTS SPEAKER ROADSHOW 2016 21 July 2016 Strictly Private & Confidential
SHARIAH BASED REGULATORY FRAMEWORK … a new perspective Page 2
FUNDING STRUCTURE OF ISLAMIC BANK – IFSA 2013 Deposits Investment Accounts Shareholders’ Funds Current Account Unrestricted Investment Paid Up Capital Savings Account Account Retained Earnings Term Deposit Restricted Investment Others Account Page 3 CIMB – Expert Speaker Roadshow 2016
DEPOSIT VS INVESTMENT ACCOUNT Target Market:- Target Market:- D Individual, Corporate & Sophisticated Individual, Corporate & E I Institutional Institutional P Operating Account N Focus on greater returns and willing to Salary Account take greater risks O V Transactional Account Focus on term or longer tenure S E I S Impact to Banks Impact to Banks T Cheap – CASA Competitive pricing BUT with cost T M Competitive – Term Deposits savings E Simple “Bigger Share of Wallet” S N Minimal Disclosure Defensive Strategy T Variable Run-Off Rate for LCR & NFSR Greater Disclosure & Transparency Positive impact to LCR & NSFR A Key Drivers / Pricing/Benefits Key Drivers C Services Pricing/Benefits Delivery Channel Differing Risk Reward Profiles Guaranteed by PIDM – RM250K Track Record Page 4 CIMB – Expert Speaker Roadshow 2016
DEPOSIT TRANSITION PLAN – BANK ISLAM'S JOURNEY April - May April - May June 2014 Feb 2014 June 2015 2014 2015 1 June 2015 • Effective date • Introduction of • New resolution 2 April 2015 for Deposit new product for business • Effectiveness of Transition Term Deposit-i clients to decide • Launching of the BNM’s IA Policy. Policy (DTP) (Tawarruq) on deposit or first Restricted • Launching of 5 as directed (TDT) on 30 investment Investment new IA: by Bank April 2014. account. Account (RIA) in Al-Awfar Negara Malaysia i.e. TH Account Malaysia • All new on-lien • Conversion of all RIA (Al-Ansar) by Special IA (BNM). will be placed existing the Prime Minister Waheed IA under Mudarabah of Malaysia. Interbank IA TDT/marginal savings account (Mudarabah) account (SA) to Wadiah Interbank IA effective 1 SA.* (Wakalah) May 2014. • Reclassification 25 May 2015 and conversion of Al-Awfar SA to Al- • Communication Awfar Account with Al-Awfar SA (IA) or Wadiah SA customers’ to obtain consent for conversion. Page 5 CIMB – Expert Speaker Roadshow 2016
FUNDING MIX – A SNAPSHORT Page 6
INVESTMENT ACCOUNTS General mandate or allows the Bank to make ultimate investment decision without restrictions or any Unrestricted conditions Investment Term or Transactional A/C (Unlimited withdrawal) Mismatch maturity On-balance Sheet Contract under IA : Restricted Wakalah Investment Mudarabah A/C Investment Musharakah Account Specific Investment Mandate/Asset Class Holder Fixed tenure Redemption upon maturity of assets; or redemption only upon realisation of underlying assets to a third party; or redemption only upon finding replacement of funds from other IAH (other than the Bank) Off-balance Sheet (subject to compliance with principles of MFRS10) Page 7 CIMB – Expert Speaker Roadshow 2016
IA PRODUCTS AVAILABLE IN THE MARKET Restricted Investment A/C Unrestricted Investment A/C …eight (8) banks have obtained Saadiq Business$aver-i approval to offer investment accounts Saadiq JustOne Priority Investment Account-i Page 8 CIMB – Expert Speaker Roadshow 2016
STRUCTURING AN INVESTMENT ACCOUNT Product Design Product Disclosure Oversight Function Origination Execution Maintenance Target Market Fund Performance Report Asset Allocation Marketing Channel/ http://www.bankislam.com. Risk Profile my/home/assets/uploads/Al Communication -Awfar-FPR-231215-Final.pdf Rate of Return Or Accounting http://www.bankislam.com. Suitability my/home/assets/uploads/T Treatment erm-Investment-FPR-231215- Assessment Final.pdf Financial Statements & Service Level Disclosure Agreement(RIA) Page 9 CIMB – Expert Speaker Roadshow 2016
KEY CONSIDERATION IN STRUCTURING AN INVESTMENT A/C Application of Shariah Accounting Treatment Assets’ Allocation Contracts Balance Sheet Liquidity Management Composition Capital Savings (Fund vs Bank) (Impact to FDR) Risk Tolerance Level Asset Tagging & Expected Rate of Return & Impact to P & L (Low, Moderate, High) Disclosure Requirements Page 10 CIMB – Expert Speaker Roadshow 2016
APPLICATION OF SHARIAH PRINCIPLES 1 st Leg 2 nd Leg Investment Account Holder Funding Investors (as Muwakkil) entrust the IB (as Wakeel) to manage the Investors money in Wakalah Equity ◄ . Musharakah investment account ◄ . Mudarabah Financing IB receives Wakalah fee regardless of the performance of the investment account Lease based Ijarah ◄ . Financing Investors (as Rabbul Mal) entrust the IB (as Mudarib) to manage their money in the Mudarabah investment account at the agreed PSR IB receives its profit portion when the Sale based ◄ . Murabaha investment is profitable but loses its effort if ◄ . Tawarruq Financing the investment suffers a loss ◄ . Istisna’ Investors and IB (both as Shareek) put in Fee based Wakalah ◄ . their money together into investment Musharakah account IB receives its profit / loss sharing portion at the agreed PSR
RESTRICTED INVESTMENT ACCOUNT – OFF BALANCE SHEET Investment Account IAH determine the Specific Mandate Holders (IAH) dictate the composition of portfolio underwriting credit criteria IAH decide on the IAH determine the IAH determine the Profit principal terms of recovery expected rate of return - Sharing Ratio - Mudarabah or rehabilitation Wakalah Undisputed Rights on the Bank has no control over IAH take the ownership of Assets/ Ownership of the underlying asset residual cash flows from risk portfolio the underlying assets Page 12 CIMB – Expert Speaker Roadshow 2016
RESTRICTED INVESTMENT ACCOUNT – OFF BALANCE SHEET The underlying assets and The specific assets are the Investment amount is liabilities are not recorded only source of payment to subject to the credit risk of as part of the Bank’s the IAH underlying assets liabilities Upon termination, any Underlying Assets & Investments are not residual assets and cash Residual Cash Flow are guaranteed by the Bank, balances are returned to ring-fenced from the Bank PIDM or third party IAH IAH have absolute IAH indemnify the Bank discretion to review the Adherence to from any legal suits or investment portfolios or claims in relation to the MFRS 10 discontinue the availability Bank of the funds Page 13 CIMB – Expert Speaker Roadshow 2016
NEW LOOK ON THE BALANCE SHEET ASSETS LIABILITIES Cash & Short-term Funds Deposits from Customers Financial Assets (HFT, AFS, HTM) i.e. PDS Investment Account of Customers (URIA/RIA) (Note X) Financing (Consumer. Commercial & Deposit Placements of Banks & Financial Corporate) Institutions Investment in Subsidiaries Zakat & Taxation Other Assets Other Liabilities Equity Total Assets Total Liabilities & Equity Note X : Describes the funding structure i.e. URIA or RIA, the amount of funds applied to different Shariah contracts, and the underlying assets supporting the fund. As RIA is off balance sheet, the information presented is for disclosure purposes. Page 14 CIMB – Expert Speaker Roadshow 2016
BENEFITS OF IA Return to commensurate Effective Capital Enhance Liquidity with the risk taken or Management – Cost of Management – LCR Ratio Differing Risk-Return Capital is expensive Profiles Exempted from SRR Diversified Risk Profile – No longer restricted by the calculation – Reduce Effective Syndication size of Balance Sheet regulatory cost Medium & SCEL Flexibility to Undertake Risk Beyond Ordinary Risk Sharing Contract Appetite or Underwriting New Asset Class & (Mudarabah, Musharakah, Criteria – Off Balance Revenue Generator Istisna ’ and etc) Sheet Page 15 CIMB – Expert Speaker Roadshow 2016
CURRENT PROGRESS Page 16 CIMB – Expert Speaker Roadshow 2016
INVESTMENT ACCOUNTS AS "A NEW FRONTIER" Return to commensurate Acts as Investment Move towards with the risk taken or Intermediary in addition to “Responsible Risk Sharing” Differing Risk-Return Credit Provider Profiles Facilitates Mobilisation of Promotes Greater Capital – Gateway to Innovation Catalyst Transparency & Disclosure Financial Inclusion Competitive Edge to Flexibility to Right-size the Islamic Finance – Capital New Mindset & Skill Sets Management & Liquidity Balance Sheet Management Page 17 CIMB – Expert Speaker Roadshow 2016
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