The Application of Musyarakah Floor Stocking-i : A Case Study of Bank Muamalat Malaysia Berhad

Transcription

1 The Application of Musyarakah Floor Stocking-i : A Case Study of Bank Muamalat Malaysia Berhad Mohamad Nizam bin Jaafar Fakulti Pengurusan Perniagaan Universiti Teknologi MARA Shah Alam, Selangor. Tel: / mnizam7520@salam.uitm.edu.my Muhammad Saiful Islami B. Mohd Taher Pusat Pemikiran dan Kefahaman Islam (CITU) Universiti Teknologi MARA Shah Alam, Selangor. Tel: / msaiful0860@salam.uitm.edu.my Mohd Faizal Kamarudin Fakulti Pengurusan Perniagaan Universiti Teknologi MARA Shah Alam, Selangor. Tel: / faizal9476@salam.uitm.edu.my Abstract In Islamic banking, there are two major modes of financing namely via debt and equity respectively. It was reported that most of the financial institutions in Malaysia are applying the former model of financing in their products such as Bay al-inah, Murabahah, Bay Bithaman Ajil, Tawarruq and etc as compared to the latter model of financing i.e. Musyarakah and Mudarabah. The main reason for the financial institutions avoiding equity financing is mainly due to their profit oriented objective which attribute to avoiding the element of moral hazard, loss and dishonesty respectively which could be apparently found in the equity mode of financing. Nevertheless, most of the Islamic scholars are very much preferred equity financing as it seems to reflect most faithfully principles of the Shariah. In other word, the equity financing makes the nature of Islamic banking more visible. In addition, Islamic finance also stands for a system of equity sharing and stake taking and it operates on the principle of variable return based on actual productivity and the performance of the projects. Despite high risk features in the equity financing, Bank Muamalat has successfully introduce as such model under the product of Musyarakah Floor Stocking. Therefore, this paper will discuss the concept paper of Bank Muamalat Musyarakah Floor Stocking which is applying profit sharing principle. Keywords: Equity Financing, Musyarakah Floor Stocking-i, Bank Muamalat Malaysia Berhad 1

2 Introduction Islamic banking has already emerged over three decades and it has become one of the fastest growing industries. It was accepted among the Muslim and non Muslim from all over the world. Islamic banks perform the same essential function as conventional bank system except the need for them to assure their systems are in accordance with the rules and Islamic principles. Islamic banking as one of the most important players in the industry today is no longer regarded as a business entity striving only to fulfill the religious obligation for the Muslim community but it is also a business that cares of the need for winning the customers whilst retaining the old ones. 1 Through the establishment of Islamic banking, the Islamic banks have produced a lot of Islamic banking products and services based on the concept of Mudarabah, Musyarakah, Murabahah, al-wadi ah, Bay Bithaman Ajil and so on. 2 Although the Islamic banking was existed for over three decades ago, yet the application of musyarakah principle was very little. 3 In this paper we will discuss on the principle of musyarakah and how such principle being successfully implemented in Bank Muamalat Malaysia Berhad. The Concept of Musyarakah In the context of the modern conventional economy, interest is the backbone instrument used in all types of financing. The parties providing capital for running a business or trade or any 1 Fauzi Abdullah (2008), Sistem Kewangan Islam: Bank Islam in Mahbob Mahfot (ed.), Beberapa Aspek Asas Perakaunan Islam. Shah Alam: Pusat Penerbitan Universiti UiTM, p BIRT (1998), Konsep Syariah Dalam Sistem Perbankan Islam. Kuala Lumpur: BIMB Institute of Research and Training, p Abdus Samad et.al. (2005), Islamic Banking in Theory and Practice: The Experience of Malaysia and Bahrain. The American Journal of Islamic and Social Science, p.1. 2

3 project will be guaranteed a fixed return for their investment. 4 On the other hand, as interest is prohibited in Islam, this arrangement could not be used for providing funds of any kind within the framework of Islamic financing. 5 According to Islamic principles, a financier or a capital provider must be clear whether he is advancing a loan to a debtor to run a profitable business, or he is investing in the latter s business, hence desiring to share in the investee s expected profits. If he is a lender, he must resist from claiming any excess on the amount advanced as this will clearly involve riba. However, if he is an investor, he will share the profits as well as the loss accrued from the business. Thus, the Islamic economy promotes equity-based financing whereby the returns for the investors will be based on actual profits of the enterprise. 6 Musyarakah literally means intermingling of properties whereby one cannot be differentiated from the other. Technically it means a form of partnership where two or more persons combine either capital or labor or creditworthiness together to carry on a business venture on condition that they will share the profits, enjoying similar rights and liabilities. 7 The legality of musyarakah as a contract of partnership was supported by the evidences from the Quran, the Sunnah as well as ijma. Allah says in the Quran : 4 The conventional banking system, which is based on riba, is able to generate economy by providing credit. In this system, credit facilities are given to rich people who are able to pay a higher interest rate. This situation generates gap in the society. See Nafisah Mohammed and Abd. Ghafar Ismail (2003), Profit-Loss Sharing and Zakat in Wealth Distribution: A Micro-Macro Model For Counterfactual Analysis in Abdullah Alwi Hj. Hassan et.al. (ed.), Teori dan Aplikasi Kontemporari Sistem Ekonomi Islam di Malaysia. Kuala Lumpur: Utusan Publications and Distributors Sdn. Bhd., p INCEIF (2006), Applied Shariah in Financial Transactions. Kuala Lumpur: International Centre for Education in Islamic Finance, p. 96; Abdul Samad Haji Alias et.al. (1993), Guide to Islamic Banking in Malaysia: An Overview. Kuala Lumpur: Institut Bank-Bank Malaysia, p. 4; Sudin Haron (2007), Sistem Kewangan dan Perbankan Islam. Kuala Lumpur: Kuala Lumpur Business School Sdn. Bhd., p See Joni Tamkin B. Borhan (2000), Pemikiran Perbankan Islam: Sejarah dan Perkembangannya, Jurnal Usuluddin, bil. 12, Bahagian Pengajian Usuluddin, Akademi Pengajian Islam, Universiti Malaya, p Noor Saliza Zainal and Zulkafli Mohd. Yusof (2008), Perbankan Islam di Malaysia. Shah Alam: Pusat Penerbitan Universiti UiTM, p. 40, BIRT (1998), op.cit., p

4 Truly many are partners in business who wrong each other, not so do those who believe and work deed of righteousness and how few are they (al-sad:24) The above verse reminds the partners to bind themselves to ethical values in dealing with each other. This verse indirectly indicates the acknowledgment of the Quran for partnerships. As from the Sunnah, it was narrated by Saidina Abi Hurairah r.a that the Prophet (PBUH) said in the form of hadith qudsi : I am the third in the partners as long as there is no defector. If one of the partners does betray the other, I will withdraw from them. The hadith indicates that Allah will safeguard the partners and help them in terms of wealth and blessings in their trade. Therefore, Allah encourages the Muslims to enter into partnerships, provided that each of the parties must be honest in respect of the rights of the other. In addition, it was reported that the Prophet (PBUH) entered into a partnership with Sa ib bin Sharik in Mecca before his prophethood. During the opening of Mecca, Sa ib said to the Prophet (PBUH) : Welcome my brother and partner. 8 The Muslims scholars also agreed unanimously on the legality of partnership. Ibnu Qudamah in his book al-mughni mentioned that there is consensus among the Muslims as to the legality of musyarakah. 9 There are different classifications of musyarakah given by the jurists depending on the various considerations. Based on the terms of partnership regarding the rights and obligations of the partners, whether they enjoy full equality in exploiting the capital or sharing the profit or not, musyarakah can be divided into two types : inan (unequal shares partnership) and mufawadah (equal shares partnership) Saad al-harran (ed.) (1995), Leading Issues in Islamic Banking and Finance. Petaling Jaya: Pelanduk Publications (M) Sdn. Bhd., p Ibnu Qudamah (1981), al-mughni. Riyad: Maktabah al-riyad al-hadithah, juz. 5, p INCEIF (2006), op.cit., p

5 Syarikah al-inan means that two or more people commit themselves to paying a specified share into a capital, which is to be used in trade and profit would be divided between them according to a specified rate agreed upon by them. It does not require equality in investment amount whereby all the parties may hold unequal shares in the partnership. Equality of personal status or distribution of profit and liabilities among the partners is not a requirement. The partners act as agents but not sureties/guarantor of their colleagues. There is no dispute on the legality of this type of musyarakah amongst the Muslim scholars based on the principal of agency and trustworthiness. 11 Another type of musyarakah is syarikah al-mufawadah. In this company, each one of the partners has a share equal to that of his colleagues in capital, profit and freedom of disposal. It is opposite of inan whereby equality in investment, personal status, distribution of profits and liabilities are required. Each partner enjoys full and equal authority to transact with the partnership capital. The Hanafis consider each partner as an agent for the partnership business and stands as surety or guarantor for the other partners. The Hanafis and Zaidis opined this type of partnership as lawful but the Shafi i and Hanbali scholars said that this company is illegal and baseless. This is because it involves imperfect knowledge or delineation leading to ignorance and deceit. 12 Based on the subject matter of the partnership, the contract of musyarakah can be divided into three types : i. If the subject matter is in the form of money, it is syirkah al-amwal, where all the partners invest some capital into the commercial enterprise. ii. If the subject matter is in the form of labor, it will be termed as syirkah al-a mal, where all the partners jointly undertake to render some services to the customers and all the 11 Kamaruzaman Noordin et.al. (2006), Potensi Penggunaan Uqud Isytirak Dalam Pembiayaan Modal Teroka Islam, in Ab. Mumin Ab. Ghani and Fadillah Mansor, Dinamisme Kewangan Islam di Malaysia. Kuala Lumpur: Penerbit Universiti Malaya, p Ibid, p

6 income generated will be distributed among them according to the agreed ratio irrespective of the size of the work each partner has actually done. iii. If the subject matter is reputation or creditworthiness, it is syirkah al-wujuh, whereby the parties purchase commodities on a deferred price and sell them on the spot. The profit earned will be distributed among them on an agreed ratio. 13 Floor Stocking Facility Floor stocking facility is a very popular financing mechanism among the car dealers or the automobiles financing industry. It is a revolving credit advance granted to car dealers (franchise / authorized / used) to finance their purchase of stock of vehicles for sales. Since the car business is a highly capital intensity, the car dealer require vast capital to purchase its stock of vehicles. In order to finance the vehicle, as a rule, the dealer will present a Sola of Exchange and all the documents (required for car registration) to the bank (the dealer s financier). Upon redemption of the Sola by the dealer (when they sold its stock of vehicle), the bank will release the vehicle s financing document to the dealer to facilitate the registration of the vehicle with the Road and Transport Department in the name of the hirer. The types of goods that are financed under Floor Stocking are selected goods under the HP Act as follows:- New vehicles (national locally assembled) New imported vehicles, Complete built up (CBU) Secondhand motor vehicles Reconditioned vehicles (imported) 13 Ab. Mumin Ab. Ghani (1999), Sistem Kewangan Islam dan Pelaksanaannya di Malaysia. Kuala Lumpur: Jabatan Kemajuan Islam Malaysia, p ; INCEIF (2006), op.cit., p

7 Considering the highly demanded for this facility among the car dealers, the Islamic banking in Malaysia such as Maybank Islamic Bhd, CIMB Islamic bhd and others has also introduced a Floor Stocking facility to its customer by applying the principle of al-murabahah 14 for new car and al-inah 15 for used car respectively. However, this principle is categorized under debt financing / credit based which is less preferred by Islamic scholar. 16 In addition, Bay al- Inah has received some controversial and less accepted especially among the Islamic banking scholars from the Middle Eastern. As such, this will distract the Malaysian s government afford to attracts as many investors as possible from the Middle East which are known for their vast capital potential for investment. Furthermore, the international financial accounting board namely Islamic Financial Services Board or IFSB has also in the midst of gradually phased out Bay al-inah as the mode of financing for Islamic banking. Muamalat Musyarakah Floor Stocking-i Considering the above scenario, Bank Muamalat Malaysia Berhad (BMMB) has extended its Floor Stocking financing ( in addition to murabahah and bay al-inah financing) by applying the principle of Musyarakah i.e. equity financing / Profit Loss principle under the name of Muamalat Musyarakah Floor Stocking-i (MMFS-i). The said Musyarakah is applying the musyarakah al inan and syirkah al-amwal respectively. The product has obtained the approval 14 Murabahah is a cost plus profit sale or mark up sale and it is trust sale. It refers to the sale and purchase transaction for the financing of an asset whereby the cost and profit margin (mark-up) are made known and agreed by all parties involved. 15 Bay al-inah is a deferred installment sale where bank capitalizes its profit up front in the sale of property. It is a transaction which involved the sale and buyback of the assets by the seller. 16 Kurshid Ahmad(2000), Islamic Finance and Banking : The Challenge and Prospect: Review of Islamic Economic, p

8 from Bank Negara on August 2006 and BMMB subsequently lunched the product on the 4 th quarter of The objectives of BMMB to launch MMFS-i.are mainly as follows:- i. To offer alternative mode of working capital financing to car dealer by providing lower financing and holding cost as compared to existing Floor Stocking-i facility. ii. To penetrate hire purchase-i business more effectively by appointing the car dealer as business partner through this MMFS-i. iii. To earn income through profit loss sharing principal with the prospective car dealer. iv. To enable BMMB to add variety to its line of products related to car financing and subsequently increase its financing base. v. To be competitive in the market by offering new way of financing as compared to the existing Floor Stocking offered by conventional financial institutions in the market. Target Market / Customer The types of goods that are financed under the normal Floor Stocking are selected goods under the Hire Purchase Act such as new vehicles of new and non national cars, imported vehicles and so forth. However, since the Musyarakah Floor Stocking is applying principle of profit and loss sharing accordingly among the partners, BMMB is only focusing its target market to sellable vehicles that have good profit margin. As such, instead for vast market, this product is focusing to selected vehicles that have good demand and high profit margin such as imported Mercedes, BMW and Toyota model. The longer holding stock of vehicle will attribute to slighter profit potential earned. BMMB only focuses on the selected target markets as follows:- 8

9 i. Importers of reconditioned cars with proper Approved Permits. ii. Used car dealers that have been established in the market for a reasonable time period. iii. All new motor vehicle dealers that have been appointed as the authorized dealer by the respective car manufacturers or distributors such as UMW Toyota Sdn Bhd, Honda Malaysia Bhd and national cars. Peculiar Features in Muamalat Musyarakah Floor Stocking-i a) The participant The participant for this venture is between Bank Muamalat Malaysia Berhad and the car dealer (bank s partner) of which both parties will penetrate the car trading business. The bank will act as a capital provider meanwhile the car dealer s role is to sell the car. However in order to avoid any reputation risk involved while selling the vehicle, this venture will be performed by BMMB s wholly owned subsidiary namely Muamalat Venture Sdn Bhd (MVSB) and BMMB will act as an arranger and facility agent on behalf of MVSB. b) Capital Distribution In conjunction with the principle of musyarakah, both parties shall contribute certain amount of capital which will be utilized in the venture s business. Capital contribution by both partners i.e. MVSB and the car dealer shall be in the form of cash at an agreed contribution ratio/ amount. The capital contribution ratio is in the range of : 10-5 for MVSB and car dealer respectively. 9

10 c) Distribution of Profit Profit distribution is according to the agreed ratio that may be different from the capital contribution ratio. The profit sharing ratio is 70:30 to Customer: Bank, but not limited to such arrangement (may vary based on business requirement and Authority Approval). It is determined based on the gross profit obtained from selling of the car and calculated on unit per unit basis. Illustration: Capital contributed by the MVSB : RM 4,750,000 Capital contributed by the Customer : RM 250,000 Total Musyarakah venture capital : RM 5,000,000 Purchase price of the car Selling price of the car : RM100,000 : RM130,000 Total Profit : RM 30,000 Bank s Profit : [(SP PP )* 30%] : RM 9,000 Customer s profit [(SP PP )* 70%] : RM 21,000 Settlement amount : [SP - Customer s Profit/(Loss)] = RM109,000 During settlement, the RM100,000 will be treated as a capital and the RM9,000 will be credited as a profit. 10

11 d) Loss Distribution Losses will be distributed based on agreed loss sharing ratio. According to the pure concept of Musyarakah, the loss distribution must be based on the capital contribution ratio. However, in view of a high capital contribution by the Bank, a liability clause in the agreement is imposed by BMMB in order to share the losses with the car dealer at an agreed ratio that may be different from the capital contribution ratio. BMMB is imposing Loss distribution of 50 : 50. Losses occurred on two situations: i. Losses on per unit sold. ii. Losses on the Musyarakah venture. Illustration: Purchase price of the car : RM100,000 Selling price of the car : RM 80,000 Total Loss : RM 20,000 Bank s loss : RM 10,000 Customer s Loss : RM 10,000 Settlement amount: [SP - Customer s Profit/ (Loss)] = RM90,000. During settlement, RM100,000 will be treated as a capital and the RM10,000 will be credited as a loss of the venture. Upon losses, car dealer to reload the amount of their losses portion i.e. RM10,000 and the total losses (RM20,000) will be reflected in the profit & loss account. 11

12 Based on the Musyarakah principle, BMMB musyarakah financing shall be operated as follows:- The proposed musyarakah shall be for the purpose of purchasing stock of vehicles only. BMMB participation shall be in the form of investment into the business venture partnership with the car dealer where both partners shall contribute certain capital requirement at an agreed ratio/amount. Meanwhile, the bank s partner responsibilities in this venture are to be in charge of the trading motor vehicles activity which include purchase of vehicles from supplier and sell the vehicles at good profit margin. Nevertheless, BMMB 17 still control on all the vehicles purchased under the Musyarakah venture as the partner is required BMMB s approval before any purchasing of vehicle is made. The distribution of profit/loss to be made based on the gross profit/loss of each trading transaction i.e. on each unit sold. Apart from selling vehicles, for monitoring purposes, the dealer (partner) shall also be responsible to provide the sales performance and the cost of purchasing vehicles reports on monthly basis as well as other incidental cost involved such as transportation, Approved Permits, maintenance and etc to BMMB). 17 BMMB is the agent of MVSB 12

13 The venture s performance shall be reviewed every month. Should the venture did not met the minimum requirement of the venture, the bank shall suspense the facility and to review the arrangement accordingly. The benchmarks for the performance evaluation are as follows:- a) The sales volume. b) The profitability level at the targeted minimum return of 10% to BMMB c) Turnaround of the stock, which the bank will categorize the vehicles as fast moving or slow moving(each category has the acceptable turn around period). The fund will only be disbursed to purchase stock of vehicles where the modus operandi shall be similar to the existing Floor Stocking-i financing. The fund shall be released to supplier/ manufacturer for the identified vehicle upon request. All the relevant financing documents on the units shall be kept by BMMB. (BMMB can avoid any possible double financing, having better control on the unit and ensure that the dealer shall settle the outstanding units first prior to any registration.) The detail modus operandi of MMFS-i is as per illustration I. 13

14 illustration I. AUTOMOBILE FINANCIAL SERVICES PROCESS FLOW ON ENTERING MUSYARAKAH AGREEMENT MVSB BMMB Musyarakah Agreement Car Dealer Determine Capital Ratio Determine Profit Ratio Determine Loss Ratio To agree on all the terms of the agreement. Buy and Sell Cars Profit/Loss Distributed on Monthly Basis 14

15 AUTOMOBILE FINANCIAL SERVICES Musyarakah Operation Step 1 CAR DEALER 1 Car dealer to identify the vehicle to be purchased via request letter to BMMB* and to submit performa invoice and related security documents such as AP and etc. BMMB 5. The vehicle shall be sent to car dealer for sale. 2. BMMB processes the request and makes approval 4. Manufacturer/supplier to forward the relevant registration documents to BMMB for safekeeping. MANUFACTURER/ SUPPLIER 3. Once approved on the model requested, BMMB will make payment to manufacturer/supplier Note : BMMB shall provide the guideline on the vehicles that are allowed to be purchased i.e. make, model, year, age etc. 15

16 AUTOMOBILE FINANCIAL SERVICES Musyarakah Operation Step 2 CAR DEALER 1.Car dealer will find the buyer for the unit and to introduce him / her to BMMB or other banks for Hire Purchase-i financing. BUYER BMMB 2. Upon approval of MHP-i, BMMB shall forward the registration documents to car dealer of the identified unit for registration and settlement purposes. Upon completion of the sale transactions, BMMB and car dealer shall distribute the profit/loss accordingly based on the agreed ratio. 16

17 Conclusion The contemporary financial system namely debt based is exploitative, unjust, discriminatory, unstable and crisis generating. Despite there are some positive attributions from the current system but the bad consequences are out numbers the good. It is a high time that Islamic banks is destined to play a very important role in the making of the future by moving from a debt based economy to a risk sharing, stake holding, participatory, community-oriented and people friendly economy. Islamic approach is rooted in a different vision of economy. The capital and entrepreneurship relationship would be co-participant, sharing the risk as well as rewards of the enterprise. Islam encourages trade and commerce trade. Profit is not only permissible; it is encouraged as a positive value. Instead of fixed rate, Islam provides variable rate of return based on actual profit. This is the basis on which Islam wants capital and entrepreneurship to cooperate and co-participate in the production process. BMMB step in introducing MMFS-i is the initial step towards the abovesaid efforts. The area of equity financing is still untapped fully by most of Islamic bankers. Despite, inherent the risk elements of moral hazard, loss and dishonesty, this is the best way to evade exploitative, unjust, discriminatory, unstable and crisis generating. This new financing product namely MMFS-i is really reflecting the Islamic economic and has proved that equity financing is more relevant and applicable in the contemporary economic system. We as a muslim should shift our attention to this area, despite all its weakness, a positive development will bear great promise for the future. 17

18 References Abdul Samad Haji Alias et.al. (1993), Guide to Islamic Banking in Malaysia: An Overview. Kuala Lumpur: Institut Bank-Bank Malaysia. Abdus Samad et.al. (2005), Islamic Banking in Theory and Practice: The Experience of Malaysia and Bahrain. The American Journal of Islamic and Social Science. BIRT (1998), Konsep Syariah Dalam Sistem Perbankan Islam. Kuala Lumpur: BIMB Institute of Research and Training. Fauzi Abdullah (2008), Sistem Kewangan Islam: Bank Islam in Mahbob Mahfot (ed.), Beberapa Aspek Asas Perakaunan Islam. Shah Alam: Pusat Penerbitan Universiti UiTM. Ibnu Qudamah (1981), al-mughni. Riyad: Maktabah al-riyad al-hadithah. INCEIF (2006), Applied Shariah in Financial Transactions. Kuala Lumpur: International Centre for Education in Islamic Finance. Joni Tamkin B. Borhan (2000), Pemikiran Perbankan Islam: Sejarah dan Perkembangannya, Jurnal Usuluddin, bil. 12, Bahagian Pengajian Usuluddin, Akademi Pengajian Islam, Universiti Malaya. Kamaruzaman Noordin et.al. (2006), Potensi Penggunaan Uqud Isytirak Dalam Pembiayaan Modal Teroka Islam, in Ab. Mumin Ab. Ghani and Fadillah Mansor, Dinamisme Kewangan Islam di Malaysia. Kuala Lumpur: Penerbit Universiti Malaya. Nafisah Mohammed and Abd. Ghafar Ismail (2003), Profit-Loss Sharing and Zakat in Wealth Distribution: A Micro-Macro Model For Counterfactual Analysis in Abdullah Alwi Hj. Hassan et.al. (ed.), Teori dan Aplikasi Kontemporari Sistem Ekonomi Islam di Malaysia. Kuala Lumpur: Utusan Publications and Distributors Sdn. Bhd. Noor Saliza Zainal and Zulkafli Mohd. Yusof (2008), Perbankan Islam di Malaysia. Shah Alam: Pusat Penerbitan Universiti UiTM. Sudin Haron (2007), Sistem Kewangan dan Perbankan Islam. Kuala Lumpur: Kuala Lumpur Business School Sdn. Bhd. Saad al-harran (ed.) (1995), Leading Issues in Islamic Banking and Finance. Petaling Jaya: Pelanduk Publications (M) Sdn. Bhd. 18

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