STRUCTURING FINANCIAL REQUIREMENTS

Islamic banking products are designed to serve the needs of market participants which are from the segment of retail, commercial, corporate and government. Some products are ready to ‘sell’ to customers but some need to be structured in according to their needs.

In structuring any products, there are some routine-process needs to step in:

-          To understand different needs or requirements

-          To analyze and recognize or business review

-          To structure and provide suitable shariah based financing facilities

-          To look into shariah perspective and risks & return (analyze & Mitigate)

-          To introduce the structured-product

-          To monitor, report and control

There are some pertinent factors that need to be embedded in the structuring process which are:

-          Shariah principles & maqasid as-shariah (the objective of shariah)

The product guy needs to ensure shariah compliant under certain principle and in accordance to the parameter of maqasid as-shariah.

-          Commercial-driven & economic value

The product should have commercial-driven, economic value and will bring beneficial to a majority of the people, not only to a certain province of them. It also must be able to generate justifiable income/profitability to the investors.

-          Risk & return

Risk and return should be at acceptable level in order to generate return to the contracting parties. As a rule of thumb, a product with high risk exposure should be able to generate high return; otherwise it will not be equitable and justifiable.

-          Governing law / tabi’ law

Even though, Islamic banking product is based on shariah principle which is originated from Qur’an and Sunnah of the Prophet (PBUH), it must be also documented according the country’s law (tabi’ law). Hence, proper documentations on the aqad/contract, transaction and operation must be inconsonance in order to provide legal protection to all parties involved. This is to avoid the element of gharar and al ghabnu al fahishy / huge losses.

The process and the four-pertinent factors must be fully observed from the beginning until the end of the product launching and up to the expiry of the stipulated contracts among the contracting parties (i.e. Islamic baking & customers).

Basically, for any new structured-products we need some sort of information requirements such as:

-          A detailed product description, including its features, structure, target market or customers, and distribution channel. Also the product illustrations where appropriate.

-          A sample product term sheet

-      Details of any arrangements (including distribution channel arrangements) with other parties/strategic alliances (if any) in offering the new product, including information about the strategic partner, associated risks and actions taken to minimize or mitigate the identified risks.

-         Description of the product’s key inherent risks from the Islamic banking and consumers’ angles and the systems and/or processes in place to manage the risks.

 By: Abdul Hadi Jusoh

       Daya Fikir, Kajang.