IB1005IB1005DEPOSITS AND FINANCING PRACTICES OF DEPOSITS AND FINANCING PRACTICES OF ISLAMIC FINANCIAL INSTITUTIONSISLAMIC FINANCIAL INSTITUTIONSCHAPTER 5 : NEGOTIABLE ISLAMIC CHAPTER 5 : NEGOTIABLE ISLAMIC CERTIFICATE OF DEPOSITSCERTIFICATE OF DEPOSITS

COMPILED BYHAMDAN HJ IDRIS, BSc Econs, MBA (Islamic Banking & Finance)

Certified Professional Trainer (MIM)Industry Expert

INCEIF

PRESENTED BYHJ MAHMUD HJ BUNTAT, MBA (AUOL, UK), DBM (Swansea Inst., UK), CIL (UIA)

Part-time Lecturer (INCEIF)Former Head of Islamic Banking Division, OCBC Bank (Malaysia) Bhd

Chapter 5: Deposit – Negotiable Chapter 5: Deposit – Negotiable Islamic Certificate of Deposits Islamic Certificate of Deposits Islamic Negotiable Instrument of Deposit (INID)

• is concluded on the basis of mudharabah and it is similar to a MIA.

INID is an Islamic negotiable instrument (INI) and can be sold/traded in the Islamic money market.

The maturity is from 90 days up to 60 months (5 yrs). With a nominal value of a minimum of RM50,000 and in multiples thereof up to RM10.0M.

The profit or declared dividend rate depends on the profit sharing ratio (PSR).

The return is equivalent to the time value of the

depositor’s money and comparable to conventional rates of interest

Profit Sharing ration in favour of customer (PSR) 80 : 20

Deposit placement (D) RM1,000,000 Declared divident rate ( r ) 7.5% p.a Tenor (months) ( t ) 6 or days to maturity 182.5

Proceeds D x [ 1+ r* ( t /365 ) ]

1,000,000 x [1 + (0.075 x 182 / 365) ] 1,037,500

Customer’s profit 37,500

Negotiable Islamic Deposit Certificate Negotiable Islamic Deposit Certificate (NIDC)(NIDC)

• This is a form of deposit instrument from the customer to the bank

• This instrument as practiced in Malaysia is based on the principle of bay’ –al`inah (sell and buy back.

• Although known as deposit, the underlying contract is essentially sale and purchase contract and should comply to all principles pertaining to sale and purchase, instead deposit or investment.

NIDC (MODUS OPERANDI)NIDC (MODUS OPERANDI)

BankSells asset

Customer(Depositor)

(e.g equipments for RM50,000)

Method of payment: cash – “Islamic Deposit”

BankBuys-back asset

Customer(Depositor)

(e.g equipments for RM50,000 + X%)

Method of payment: deferred over a period of 5 years BankAlso issues NIDC to evidence the indebtedness created by

The deferred payment sale

Bank sells an asset to its customer

Selling Price (SP) RM1,000,000 Profir margin ( r ) 7.5% p.a Tenor (months) ( t ) 6 or, days to maturity 182.5

Bank purchases from the customer SP x [ 1+ r* t / 365 ) ]

1,000,000 x [ 1 + (0.075 x 182 / 365) ] 1,037,500

Customer’s profit 37,500

• The bank sells its’ asset to a customer for immediate cash, whom simultaneously sells back the asset to the bank for a credit price. The deferred marked up credit price, is re-paid by the bank to the customer within a period from overnight up to 365 days.

The bank issues a Certificate of Debt (Shahadah

al-Dayn) as evidence of the bank's debt to the customer.

NIDC is based on an `inah transaction and may be subsequently traded as a debt to a third party (bai’ al-dayn).

Negotiable Islamic Debt Certificate (NIDC) is concluded on the basis of BBA, and is an INI, which can be traded in the Islamic money market.

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