1

ISLAMIC BANKING ISLAMIC BANKING

AND TAKAFULAND TAKAFUL

LBA 3013LBA 3013

ContentContent

�� Theories of Islamic EconomicTheories of Islamic Economic

�� Overview of Modern financial management Overview of Modern financial management
of banking, capital market, insurance, of banking, capital market, insurance,
securities.securities.

�� History of Islamic banking. The History of Islamic banking. The
establishment of Islamic banks worldwide establishment of Islamic banks worldwide
both in the both in the muslimmuslim and nonand non--muslimmuslim
countries. History of Islamic banking. The countries. History of Islamic banking. The
establishment of Islamic banks worldwide establishment of Islamic banks worldwide
both in the both in the muslimmuslim and nonand non--muslimmuslim
countries.countries.

2

Economic System

Capitalist Socialist Islamic Economic

Theories of Islamic EconomicTheories of Islamic Economic

�� Temporary Scholars: Mahmud ElTemporary Scholars: Mahmud El--NagarNagar, ,

NejatullahNejatullah SiddiqiSiddiqi, , UmarUmar ChapraChapra, , KhurshidKhurshid

Ahmad and others.Ahmad and others.

�� TraditionistTraditionist: : IhyaIhya UlumuddinUlumuddin, AL, AL--AmwalAmwal by by

Abu Abu UbayadUbayad, , RisalataRisalata alal--shahabahshahabah by by

Abdullah al Abdullah al MuqaffaMuqaffa, , AlkharajAlkharaj by Abu by Abu

Yusuf.Yusuf.

�� AlAl--QuranQuran laid down basic principles of laid down basic principles of

economy. economy.

3

Fundamental of Islamic EconomicFundamental of Islamic Economic

�� Allah is the absolute ownershipAllah is the absolute ownership

�� SourcesSources--QuranQuran and and SunnahSunnah, , QiyasQiyas and and IjmaIjma’’

�� Vicegerent and TrusteeshipVicegerent and Trusteeship

�� Islam esteems wealth and wealthyIslam esteems wealth and wealthy

�� Social Mutual SolidaritySocial Mutual Solidarity-- BrotherhoodBrotherhood

�� The Prohibition of usuryThe Prohibition of usury

�� Ummatic(broadUmmatic(broad) ownership of natural ) ownership of natural
resourcesresources

Nature of the Islamic Economic Nature of the Islamic Economic

SystemSystem

UmarUmar ChapraChapra: :

Islamic system is dedicated to human Islamic system is dedicated to human
brotherhood accompanied by social and brotherhood accompanied by social and
economic justice and equitable distribution economic justice and equitable distribution
of income and to individual freedom within of income and to individual freedom within
the context of social welfare. This dedication the context of social welfare. This dedication
is it must be stressed spiritually oriented and is it must be stressed spiritually oriented and
finely interwoven into the whole fabric of its finely interwoven into the whole fabric of its
social economic social economic nomrsnomrs..

4

Financial System

Banking System
Non Bank Financial

Intermdaiaries Financial Markets

Banking SystemBanking System

�� Monetary InstitutionsMonetary Institutions-- BNM, Commercial BNM, Commercial

Banks.Banks.

�� NonNon--monetary Institutionsmonetary Institutions-- Finance Co, Finance Co,

Merchant Banks and Discount Houses.Merchant Banks and Discount Houses.

5

Non Bank Financial IntermediariesNon Bank Financial Intermediaries

�� Development Financial InstitutionsDevelopment Financial Institutions-- Bank Bank

PembangunanPembangunan, BKR, BKR

�� Saving InstitutionSaving Institution-- National Saving Banks and National Saving Banks and

Credit CooperativeCredit Cooperative

�� Provident and Pension FundProvident and Pension Fund--EPF, Pension Trust EPF, Pension Trust

Funds, LTAT.Funds, LTAT.

�� Insurance CompaniesInsurance Companies-- Conventional and IslamicConventional and Islamic

�� Other Financial IntermediariesOther Financial Intermediaries-- MBSB, Leasing MBSB, Leasing

Co. LTH.Co. LTH.

Financial MarketsFinancial Markets

�� Money and Foreign ExchangeMoney and Foreign Exchange-- Market for Market for
securities less than 12 months to maturity. securities less than 12 months to maturity.
EgEg-- bankerbanker’’s acceptance, negotiable s acceptance, negotiable
instruments.instruments.

�� Capital MarketCapital Market-- Primary and secondary Primary and secondary
securities market. SC.securities market. SC.

�� Commodity Futures market and financial Commodity Futures market and financial
futures market and options marketfutures market and options market--
COMMEX, MDEX.COMMEX, MDEX.

6

Islamic Banking World WideIslamic Banking World Wide

�� First Bank 1587First Bank 1587-- BancoBanco Della Pizza, Della Pizza, RealtoRealto

Venice ItalyVenice Italy

�� 16401640-- Bank of EnglandBank of England

�� Islamic Bank 1963Islamic Bank 1963-- MitMit GhamrGhamr Local Saving Local Saving

BankBank

Middle EastMiddle East

�� IDBIDB--1975 Saudi Arabia.1975 Saudi Arabia.

�� Dubai Islamic BankDubai Islamic Bank-- 1975 UAE1975 UAE

�� 1978 Jordan Islamic Bank 1978 Jordan Islamic Bank

�� Bahrain Islamic Investment Company 1981Bahrain Islamic Investment Company 1981

�� Qatar Islamic Bank 1983Qatar Islamic Bank 1983

7

AsiaAsia

�� PakistanPakistan-- 19771977--Report on elimination of interestReport on elimination of interest--
19791979--House Building Finance Corporation, House Building Finance Corporation,
National Inv. Corp of Pakistan. Until 1985National Inv. Corp of Pakistan. Until 1985-- Whole Whole
system was system was ribariba--free. 1991free. 1991-- COA declared Islamic COA declared Islamic
banking operation was not Islamic and confirmed banking operation was not Islamic and confirmed
by the Supreme Court 1999. Then, Pakistan by the Supreme Court 1999. Then, Pakistan
followed Malaysiafollowed Malaysia’’ s model.s model.

�� AlBarakaAlBaraka Kazakhstan BankKazakhstan Bank

�� NingxiaNingxia Islamic International Trust and Islamic International Trust and
InvestmentInvestment

�� Al Al AmeenAmeen Islamic and Financial Inv Corp India Islamic and Financial Inv Corp India
Ltd. 1985Ltd. 1985

�� IranIran--Law of Usury Free Banking 1983Law of Usury Free Banking 1983-- It takes It takes
about 6 years from 1979 Islamic Revolution to about 6 years from 1979 Islamic Revolution to
IslamiseIslamise the whole banking system of Iran.the whole banking system of Iran.

AfricaAfrica

�� Nasser Social Bank 1972Nasser Social Bank 1972

�� Faisal Islamic Bank of EgyptFaisal Islamic Bank of Egypt-- 19751975

�� Faisal Islamic Bank of Sudan 1977Faisal Islamic Bank of Sudan 1977-- about 9 about 9

IFIsIFIs..

�� Bait Bait EttamouliEttamouli Saudi Saudi TounsiTounsi Tunisia 1984Tunisia 1984

�� AlbarakaAlbaraka Bank Ltd, Durban (Bank Ltd, Durban (DallahDallah Al Al

BarakaBaraka Group)Group)

8

EuropeEurope

�� Dar alDar al--Mal alMal al--IslamiIslami-- Switzerland 1981.Switzerland 1981.

�� 19781978-- Islamic Banking System International Islamic Banking System International
Holdings, Luxemburg.Holdings, Luxemburg.

�� Union Bank of Switzerland 1990Union Bank of Switzerland 1990-- Offer Islamic Offer Islamic
Investment fund.Investment fund.

�� Islamic Bank of Britain 2004.Islamic Bank of Britain 2004.

�� BADR Bank Russia.BADR Bank Russia.

�� ALAL--BarakaBaraka Turkish Finance House 1985Turkish Finance House 1985-- 99% 99%
MuslimMuslim-- 1928 Secularism by 1928 Secularism by AtartukAtartuk..-- About 7 About 7
IFIsIFIs..

�� Islamic Bank International Denmark 1983Islamic Bank International Denmark 1983

North AmericaNorth America

�� American Finance HouseAmerican Finance House--LaribaLariba-- 1987 1987

California.California.

�� Islamic CoIslamic Co--operative Housing Corporation operative Housing Corporation

Ltd, Toronto Ltd, Toronto

�� AmeenAmeen Housing CoHousing Co--operative, San operative, San

Francisco Francisco

�� HSBC, USA HSBC, USA

9

South East AsiaSouth East Asia

�� Philippine Philippine AmanahAmanah Bank. 1973.Bank. 1973.

�� Bank Bank MuamalatMuamalat Indonesia 1992. Recently, 3 Indonesia 1992. Recently, 3

IB.IB.

�� AlirajniAlirajni Commercial Commercial EtablishmentEtablishment for for

Exchange, Bangkok 1985. Islamic Bank of Exchange, Bangkok 1985. Islamic Bank of

ThailandThailand--

�� DBS Bank Ltd SingaporeDBS Bank Ltd Singapore-- 2007 First IB in 2007 First IB in

Singapore.Singapore.

AustraliaAustralia

�� Muslim Community Cooperative Australia Muslim Community Cooperative Australia

1989.1989.

�� Muslim Community Credit Union 2000. Muslim Community Credit Union 2000.

Insolvent in 2002. Insolvent in 2002.

10

Afghanistan, Albania, Algeria, Azerbaijan, Benin,

Burkina Faso, Chad, Cameroon, Comoros,

Djibouti, Gabon, Gambia, Guinea Bissau,

Kyrgyztan,Lubnan, Mali, Maldives,Oman,

Palestin, Maghribi, Sierra Leone,

Somalia,Uganda, Turkmenistan, Yemen,

Tajikistan and Mozambique.

Conventional

System only

3

Dual system Malaysia, Pakistan, Indonesia, Singapore,

Thailand,Arab Saudi, Bahrain, Bangladesh,

Brunei, Mesir, Guinea, Indonesia, Jordan,

Kuwait, Niger, Qatar, Senegal, Tunisia, Turki

dan Emiriah Arab Bersatu

2.

Iran and SudanIslamic Banking

System

1.

CountryCategory

Related InstitutionRelated Institution

�� International Islamic Finance MarketInternational Islamic Finance Market--

Dubai 2002Dubai 2002

�� Accounting and Auditing Accounting and Auditing OrganisationOrganisation for for

Islamic Financial Institutions AAOIFIIslamic Financial Institutions AAOIFI-- 1990. 1990.

Bahrain.Bahrain.

�� Islamic Financial Services Board IFSB 2002Islamic Financial Services Board IFSB 2002--

KL.KL.

11

Evolution Evolution

�� RasulullahRasulullah SAW received deposit from SAW received deposit from

public.public.

�� AzAz ZubairZubair AwamAwam-- received deposit as loan.received deposit as loan.

�� Concept Concept wadiahwadiah, loan and , loan and mudharabahmudharabah..

�� UmaiyahUmaiyah, , AbasiyahAbasiyah and and UthmaniahUthmaniah

�� ZuhrZuhr alal--islamislam-- SaifSaif DawalaDawala al al HamdaniHamdani has has

already used already used chequecheque ((SuftajahSuftajah) in certain ) in certain

transaction. transaction. SafarnamaSafarnama by by NaserNaser KhasroKhasro

427m427m-- Active transaction using Active transaction using chequecheque..

Modern Islamic BankingModern Islamic Banking

�� MitMit GhamrGhamr Local Saving BankLocal Saving Bank-- Saving Saving

account, loan, equity financing and welfare account, loan, equity financing and welfare

services.services.

�� Its operation has been taken by National Its operation has been taken by National

Bank of Egypt in 1967 and Bank of Egypt in 1967 and ribariba--free free

transaction was neglected. 1971transaction was neglected. 1971-- National National

Social Bank.Social Bank.

�� OICOIC-- King Faisal. 1975 Dubai Islamic Bank King Faisal. 1975 Dubai Islamic Bank

and IDB.and IDB.

�� 1977 Faisal Islamic Bank of Egypt, Faisal 1977 Faisal Islamic Bank of Egypt, Faisal

Islamic Bank of Sudan and KFH.Islamic Bank of Sudan and KFH.

12

Modern Islamic BankingModern Islamic Banking

�� 11stst PhasePhase-- 1950s. Concept and Idea1950s. Concept and Idea

�� 22ndnd PhasePhase-- 1960s1960s-- Early Islamic BankEarly Islamic Bank

�� 33rdrd PhasePhase-- 1970s1970s-- Establishment of academic Establishment of academic
institution and banking institution. Publication of institution and banking institution. Publication of
text materials on IB.text materials on IB.

�� 44thth PhasePhase-- 1980s1980s-- Development of Islamic BankDevelopment of Islamic Bank--
Window and FullWindow and Full--fledgefledge

�� 5th Phase5th Phase--1990s1990s-- Development of Islamic Bank in Development of Islamic Bank in
USA marketUSA market-- Dow Jones Islamic Index was Dow Jones Islamic Index was
launched.launched.

�� 66thth PhasePhase-- 2000s2000s-- Maturity , Maturity , comperehensivecomperehensive
architecture, IFSB and etc.architecture, IFSB and etc.

MalaysiaMalaysia

�� 19801980-- BumiputraBumiputra Economic CongressEconomic Congress-- To establish To establish
IB.IB.

�� 19811981-- National Steering Committee.1982 table the National Steering Committee.1982 table the
report.report.

�� 1 March 19831 March 1983-- BIMB through IBA 1983. 1992BIMB through IBA 1983. 1992--
Listed in Bursar Malaysia.Listed in Bursar Malaysia.

�� 19931993-- Islamic Banking SchemeIslamic Banking Scheme-- 1 IB and 20 1 IB and 20
windows.windows.

�� 19941994-- International Islamic Money Market.International Islamic Money Market.

�� 19971997-- NSAC at BNMNSAC at BNM

�� 19991999-- BMMBBMMB

�� 20072007-- 12 IB 9 local and 3 foreign players.12 IB 9 local and 3 foreign players.

�� 20012001--20102010-- Islamic Financial Sector Master PlanIslamic Financial Sector Master Plan--
20%20%

13

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IFIs Branches

14

TutorialTutorial

�� Presentation to brief banksPresentation to brief banks’’ profile.profile.

�� Name, Logo, Board of Directors, SAC, Name, Logo, Board of Directors, SAC,

Capital, Products, Address and further Capital, Products, Address and further

particulars.particulars.

�� Each group is allocated 7 minutes.Each group is allocated 7 minutes.

Next LessonNext Lesson

�� Salient features of Islamic bankingSalient features of Islamic banking

�� An overview of the jurisdiction of the courts An overview of the jurisdiction of the courts

in cases pertaining to Islamic banking and in cases pertaining to Islamic banking and

finance.finance.

�� Salient features of various statutes governing Salient features of various statutes governing

Islamic banking and finance.Islamic banking and finance.

�� Theory of the classifications of transactions Theory of the classifications of transactions

in Islamic commercial law in Islamic commercial law


429 Too Many Requests

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+

Introduction to Takaful

Zulkifli Hasan, PhD

+
Contents

n Insurance

n Takaful

+
HISTORICAL BACKGROUND OF
WESTERN CONCEPT OF INSURANCE

n 1. Ottoman Empire- First introduce western
concept of insurance- Maritime Code 1863.

n 2. Ottoman Law of Insurance 1874-only life
insurance is haram or unlawful

n Since then, western concept of insurance is
practiced almost in all countries in the
world

+
Insurance?

n Financial protection which involves the
execution of contracts between the insurer
and the insured in which the insurer agrees
to underwrite the subject risk of such
contracts.

+
Definition

n  Insurance is an economic device
whereby the individual substitutes
a small certain cost (premium) for
a large uncertain financial loss
(the contingency insured against)
that would exist if it were not for
the insurance.

+Socio-Economic Benefits of Insurance

n  Risk Coverage

n  Habit of Thrift

n  Safe and Profitable Investment

n  Secure working environment for Businesses

n  Planning for life stage needs

n  Capital formation in the Economy

+
Nature of  Insurance Contract

Premium Compensation

Premium Compensation

General Insurance

Life Insurance

+ Insurance from Islamic Perspective

n  Three major groups.
1.  Those who consider both the concept and
practice of  commercial insurance un-Islamic.
2. Those who are in agreement with the
present insurance and find nothing wrong in
it.
3.  Those who accept the concept of
insurance, but find prohibited elements in its
present practice.

+ Rulings of  Collective Fiqhi Bodies

n  Islamic Research Institute of  Al-Azhar Uni: 1965
n  Council of  Grand Ulama of  Saudi Arabia
n   Majlis Tahqiqat-e-Shari'yah Lucknow,   India
n   Islamic Fiqh Academy of  Rabita al-Aa'lam-e-Islami
n   Al Majma’ Al-Fiqhi Al- Islami of  OIC: 1975
n  Council of  Islamic Ideology, Pakistan: 1983
n  International conference on islamic economic 1976
n  European Council for Fatwa.
Conventional Insurance is unlawful because of
involvement of  prohibited elements

+Fatwa on Conventional Insurance

n In 1972: the Fatwa Committee declared the western
concept of insurance was unlawful because of
gharar, riba and maisir

n In 1982-  A committee set up by the govt to study the
implementation of takaful.

n Fiqh Academy of the Organization of Islamic
Conference (OIC) at its gathering in Jeddah in
December 1985 resolved that no form of insurance,
be it life or general, had conformed to the Islamic
principle

+Fuqaha Views on Life Insurance

n 1. Opponents:- Sheikh Shaukat, Abu Zaharah and
others

n i. Insuring ones life

n ii. Betting

n iii. Element of riba, maisir, gharar.

n iv. Supersede the will of Allah

n v. against the principle of mirath

n vi. No direct authority to justify it

+Life insurance in the form of Family
Takaful

n Mere financial transaction through mutual cooperation.

n No unlawful element.

n  Implied model of takaful-aqilah and mudharabah.

n Mutual cooperation to protect the necessities.

n Securing the offspring it does not supersede the will of
Allah.

n Security for poor.

n Protection of unexpected difficulties.

n Self reliant society

+
Objection to the Western Concept Of
Insurance

n Riba

n Gharar

n Juhala

n Maysir

n Violation of inheritance law

n Against the concept of qada and qadr

n Forfeiture of premiums.

+
1. Riba

n Insurance companies invest in trade and
bonds.

n Life insurance- insurer undertakes to pay the
insured. The sum is in excess of the total
premium paid.

n Non-Life insurance- The insurance companies
invested the premium paid in fixed interest
earnings investment.

+
2. Gharar

n Uncertainty= Risk, hazard or peril

n Neither the insurer nor the insured knows the
nature and extent of their rights and obligation
until after the occurrence of the insured event.

n Any transaction must free from excessive
uncertainty

n The insured is ignorant of the terms of the
insurance.- Unacceptable reason.

+3. Juhala

n Uncertainty per se- all particulars of the
contract must be known to the parties at the
time of the contract. Otherwise- invalid

n Life insurance- The insured does not know –
how long he will be paying the premiums.

n Non life insurance- does not know how much
the insurer will pay him in the case of
insured event takes place

+4. Maisir

n Prohibition of unearned gains.

n To court unnecessary risk by entering into a
transaction with a hope of gain as well as fear of
loss.

n Undertaking a risk in the spirit of speculation

n Life insurance- If dies early-Lucky= Policy money
will be paid.

n Non life insurance- if the insured event occurs-
Lucky. If no- gets nothing

+Pure Risk v Speculative Risk

n Policyholders- Pure Risk

n Insurance Co- Speculative Risk

n Its an effective risk transfer mechanism by
which individuals or organizations can
exchange the uncertainty of financial loss
(or risk) for the certainty of premium.

n Premiums with promise to pay any claims

+5. Violation of Islamic Law of
Inheritance

n Law on Nomination- insurer can nominate to
any person as beneficiaries.

n S 23- Hock Hoes Policy. Nominee enjoys full
benefit of the insurance policy.

n In Islam- nomination is just a trustee. The
policy money must be distributed –faraid.

+
6. Contravention of the
Conception of Pre-Destination
n Concept of Qada and Qadar- The ultimate

destiny is in the hands of Allah.

n Failure to appreciate the real function of
insurance.

n The insurance does not prevent pre-destined
events. It only reduces the pain and suffering
resulting from the insured events.

+
7. Objection to forfeiture of
Premiums
n Insurer may forfeit the premiums that have

been paid in certain circumstances.

n May forfeit in the event of avoiding non-
disclosure or breach of warranty by the
insured.

+
Takaful

n The takaful model is based on the concept of
taawun, which means mutual assistance. The
concept of taawun is recommended in the Quran
(5:2):

n “Help (taawun) one another to do what is right (birr)
and good (taqwa); do not help one another towards
sin and hostility. Be mindful of Allah, for His
punishment is severe.”

+Development of takaful

n Takaful started some  30 years ago in Sudan and
Middle East in 1979 :
n The Islamic Arab Insurance Co. (IAIC) in the

UAE and
n The Islamic Insurance Co. of Sudan

n In 1984, Malaysia played a pioneering role in
setting the first Legal framework specific to
Takaful (Takaful Act Malaysia).

n This was instrumental in the successful
launching of the Takaful model in Malaysia and
in other countries of South East Asia.

+Takaful Operators for General and Family
Takaful Business

n HSBC Amanah Takaful (Malaysia) Berhad

n Hong Leong MSIG Takaful Berhad

n MAA Takaful Berhad

n Prudential BSN Takaful Berhad

n Sun Life Malaysia Takaful Berhad

n Syarikat Takaful Malaysia Berhad

n Takaful Ikhlas Berhad

n Etiqa Takaful Berhad

+
Takaful Operators for Family
Takaful Business

n AmMetLife Takaful Berhad

n Great Eastern Takaful Berhad

n AIA Public Takaful Bhd

+
Retakaful Operators for Family
and General Retakaful Business

n Munchener Ruckversicherungs-Gesellschaft

(Munich Re Retakaful)

n Swiss Reinsurance Company Ltd. (Swiss Re
Retakaful)

n MNRB Retakaful Berhad

+Conceptual Definition

n Kafala: responsibility, guarantee or suretyship

n Mutual Guarantee, shared responsibility, joint
guarantee, collective assurance and mutual
undertaking= mutuality and cooperation.

n Method of  joint guarantee among a group of
members or participants against loss or damage that
may inflict upon any of  them. The members of  the
group agree to guarantee jointly that should any of
them suffer a catastrophe or disaster, he would receive
certain sum of  money to meet the loss or damage. All
members of  the group pool together their efforts to
support the needy.

+Origin of Takaful

n 1. Aqilah- Blood money

n The tribe had to be ready to compensate the heir of  the
victim.

n Compensation likes indemnity in insurance policy

n 2. S.Umar- Al-Dawawin System- Ministry to contribute
money for emergency or in need.

n 3. Khairat Kematian- The principle of  “fortunate many
helping  the unfortunate few" is a concept recognized by
Islam.

+Sources of Law Affecting Takaful

n 1. Al-Quran- elements of mutual cooperation=
Almaidah: 5:2. Alleviation of hardship= 2:201

n 2. Sunnah= Prophet said: Tie the camel first and then
leave it to Allah

n 3. Practices of the companion- Al-Dawawin System by S.
Umar.

n 4. Fatwa or Ijtihad: Ibnu Abidin=Permissible insurance
in trade for merchant known as Sukra.

n Muhammad Abduh, Zarqa, Yusuf al-Qaradawi- agreed to
the validity of Islamic insurance

+Cont…
n 5. Masalih Mursalah= Life, necessity. A way of

providing material security.

n 6. Urf- Tribal Custom practice known as Aqilah.

n 7. Unanimous Decision of Muslim Scholars-

n Islamic Fiqh Week Syria 1961, Muslim Scholars
Conference 1965 Egypt and Islamic Economic
Conference Mecca 1976- Validity of insurance
business except life insurance.

n International Islamic Insurance Dubai 1996 and
Labuan 1997- Validity of Takaful.

+How To Free From Excessive Gharar

n 1. Mutual and Cooperative basis

n 2. The takaful coverage must be genuinely
required in order to safeguard interest
collectively

n 3.such coverage can only be safeguarded
through the insurance mechanism.

n 4. Type of contract is Unilateral Contract- Al-
Tabarruat.

+
Fatwa on Takaful

n Fatwa in Judicial Conference held in Makkah in 1398H.

n Unanimous resolutions and fatwa by Ulama in the
Muslim League Conference in Cairo in 1965.

n Unanimous decision by Muslim Scholars in seminar held
in Morocco, 1972.

n Fatwa by Higher Council of Saudi Arabia in 1397 A.H.

n Fatwa by the Fiqh Council of Muslim World League in
1398H.

n Fatwa by the Fiqh Council of the OIC in 1405 A.H. (1985).

+Fiqh Academy Resolution 1985

•  Islamic Fiqh Academy Jeddah:

•  The commercial Insurance contract is prohibited
(Haram) according to the Shariah.

•  The alternative Takaful contract which conforms to
the principles of Islamic dealings is Halal, being
the contract of cooperative insurance, which is
founded on the basis of charitable donation and
Shariah compliant dealings.

+
Takaful and Maqasid al Shariah

n 1. Protection of  property and Protection of  life:
hajiyat and daruriyat

n 2. Legal maxim: darar must be removed.

n 3. To spread the risks of  losses around the large
number of  participants

n 4. Contemporary fuqaha: making takaful mandatory
to muslims.
n Compulsory to protect the essential needs of  the

society.

+Characteristics of Takaful

n (i)  Cooperative risk-sharing for protection

n (ii)  Clear segregation between participant and operator

n (iii)  Shariah - compliant investment strategies

n (iv)  Avoidance of riba(interest),and maysir(gambling)

n (v)  Gharar (uncertainty) is forgiven, using tabarru
(charitable donation)

n (vi)  Shariah advisory oversight and judicial approval

+Insurance v Takaful

Issues Insurance Takaful

Organising principle
Profit for
shareholders/ risk
transfer

Mutual for
participants

Value proposition  Profit for
shareholders

Affordability and
spiritual satisfaction

Laws  Secular regulations  Shariah plus
Regulations

Ownership  Shareholders  Participants

+Insurance v Takaful

Issues Insurance Takaful

Management  Company management  Operator

Contract Form
Commercial exchange/
contract of compensa-
tion-adhesion

Cooperative, Islamic
Contracts of wakalah or
mudarabah with tabar’ru
donations

Investment  Equity/debt – no
restrictions

Shariah compliant equities/
no interest

Surplus  Shareholders account
Participants account
performance fee for
operator

+
Takaful Act 1984

n S 2: Scheme based on brotherhood,
solidarity, and mutual assistance which
provides for mutual financial aid and
assistance to the participants in case of
need whereby the participants mutually
agree to contribute for that purpose.

+
Takaful Act 1984

n “takaful business” means business of
takaful whose aims and operations do not
involve any element which is not approved
by the Syariah;

+
IFSA 2013

n “takaful” means an arrangement based on
mutual assistance under which takaful
participants agree to contribute to a
common fund providing for mutual financial
benefits payable to the takaful participants
or their beneficiaries on the occurrence of
pre-agreed events;

+IFSA 2013

n S5. takaful business shall be divided into two classes—

n (a)  family takaful business, which in addition to all
takaful business concerned with family takaful
certificates shall include any type of takaful business
carried on as incidental only to the family takaful
operator’s business; and

n (b) general takaful business,which means all takaful
business which is not family takaful business.

+
Classification of Takaful

n General Takaful Business

n Family Takaful Business

+General Takaful Family Business

n Short tem policy

n Contribution goes to GTF which is then invested
and the profits are paid back to the fund

n Contributions go to a common pool to
compensate participants in the event of a loss.

n No saving and investment elements. TO will
distribute any underwriting surplus to the
participants.

n Eg motor vehicle, marine, personal accident,
health.

+Family takaful Business

n Long term policy (children education,
pension, compensation in the event of death)
Eg. 10-30 years.

n PA: saving accounts

n PSA: tabarru accounts

n In the event of a loss the participants will be
compensated.

n TO: fees or profit sharing

+
Underlying contracts

n Takaful Business is based on the concepts of
Mudarabah, wakalah, waqf, jualah and Tabarru.

n Latest attempt to introduce new concepts for takaful
under the principle of wadiah and musharakah
musahamah taawuniyah.

n Involvement of these Islamic forms of business
eliminates the elements of Riba from insurance
contract and convert Gharar into tolerable form.

+
Nature of Relationship

n Amongst the participants- al Tabarru

n Contracts between participants and
takaful operators-
n Mudharabah
n Wakalah
n Jualah
n Waqf
n Hybrid
n Wadiah

+
Contract among takaful
participants
n Tabarru: gift or donation, which given by

one in favor of someone without seeking
any consideration.

n A tabarru’ made based on the general
principles of contract in which the
person binds himself unilaterally by
offering something valuable for the
noble cause of welfare of others

+
Concept of Al-Tabarru’

n  Mutual Help, Mutual Responsibility, Mutual
Protection and Mutual insure one another.

n Participants’ contributions credited mainly into two
accounts; participants account (PA) and
participants’ special account (PSA).

n PA- To be invested based on mudharabah

n The amount credited into the PSA is regarded as
tabarru, which is managed by the takaful operator to
provide a security for others who deserve

+Issue on al-tabarru

n  Opponent: it is not al-tabarru but contract of
exchange
n  Issue on gharar
n  al-ibratu bi al-maani la bi al-alfaz (one should

look at the end result and not at its wording)
n  Answer:
n  (iltizam bi al-tabarru (self imposed donation)

“the one who commits himself to doing good,
is obliged to do so”: Maliki’s view

n  AAOIFI: iltizam bi al-tabarru or nihd

+
Contracts btn participants and TO

n 1. Mudharabah: Profit sharing

n 2. Wakalah: Fees

n 3. Jualah: Commission. Commitment to pay
for the performance.

n 4. Waqf: TO as trustee.

n Relationship- Not as an insurer and insured
but participants and manager of the
contribution money.

+Takaful Conditions (Mutual Assistance
and Cooperation)

n 1. Speciality Condition: Compliance with the
Islamic cooperative principles

n 2. Partnership Condition: Participants- right t
entitlement of surplus profit and render liable to
cover losses. Surplus may be paid= pro rata basis.

n 3. Investment Condition: To invest in halal sectors.

n 4. Management Condition: Policy to have adequate
representation on the board of directors of the
company to scrutinize its accounts


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http://www.pro-cs.net

www.isdb.org

© Islamic Development Bank, 2016
 King Fahd National Library Cataloging-in-Publication Data

Islamic Development Bank
          Salam in convertible calling minutes./ Islamic
   Development Bank – Jeddah, 2016

     ISBN: 9960-32-321-8

     1-Salam   2-Islamic Finance   3-Financial Product  l-Title
     629.2221 dc  1437/7790

     L.D. no. 1437/7790
     ISBN: 9960-32-321-8

Cover Image: Shutterstock.com

All rights reserved. No part of this publication may be reproduced or
distributed in any form or by any means, or stored in a database or retrieval
system, without the prior written permission of the Islamic Development
Bank.

The views and analyses presented in this Report do not necessarily reflect
the views or official positions of the Islamic Development Bank Group.

CONTENTS

INTRODUCTION ...........................................................................................  V

THE PRODUCT DEVELOPMENT PROCESS ........................................  1. 1

1-1 Phase I: Feasibility Study .....................................................................  1

1-2 Phase II: Pre implementation Package .................................................  2

CONVERTIBLE CALLING MINUTES SALAM: GENERAL SCHEME & 2.
ADDED VALUE..........................................................................................  3

2.1- General Scheme of the Product ...........................................................  3

2.2- The Product Added value ...................................................................  4

CONVERTIBLE CALLING MINUTES SALAM: FEASIBILITY STUDY3. ....  5

3.1- Technological feasibility .....................................................................  5

3.2- Operational feasibility ........................................................................  5

3.3- Shariah Compliance ...........................................................................  8

3.4- Business feasibility ..............................................................................  8

CONVERTIBLE CALLING MINUTES SALAM: PRE IMPLEMENTATION 4.
PACKAGE....................................................................................................  9

4-1 Risk Management techniques ..............................................................  9

4.2-IT Specifications .................................................................................  15

4.3- High Level Procedures .......................................................................  20

4.4- Accounting schemes ...........................................................................  23

4.5- The product sales pitch ......................................................................  30

4.6- Implementation Road Map ................................................................  31

CONCLUSION ................................................................................................ 34

ACKNOWLEDGEMENTS

The Center led the design of this product concept. To further develop and

refine the product, the Center collaborated with (a) SABIC Chair of Islamic

Financial Markets Studies, and (b) Sheikh Mohammad Al-Rashid Chair for

Islamic Banking Studies, both at Imam Muhammad ibn Saud University,

Riyadh. The Team contracted Al Maali Consulting Group to study the

feasibility of the product and the implementation process.

INTRODUCTION
Islamic Finance ensures the connection and the integration between the financing
activities and the real economy in order to avoid crises that would paralyze the
economy. Thus, every Islamic Financial instrument must meet the two following
criteria:

Shariah •  Credibility: the Islamic financial instruments have to comply
with all the rules and to achieve the Shariah objectives.

Economic •  efficiency: the Islamic financial instruments should provide a
real economic added value and meet the interests of all the stakeholders.
Moreover, the underlying asset has to be needed for itself not only as a
way to provide Cash.

However, in some Islamic markets where the need for cash financing solutions
is high, Islamic financial institutions are implementing some instruments such
as commodity Murabaha –Tawarruq as a Shariah compliant alternative to cash
financing provided by conventional financial institutions. Nevertheless, these
instruments don’t meet the above criteria. Therefore, a need to develop effective
products has emerged so as to enhance the Islamic finance Industry and to come
up with effective solutions that would meet the real customers’ needs while
ensuring the compliance with Shariah objectives.

Specifically, this paper provides a clear presentation of the convertible calling
minutes Salam product scheme and its added value compared to existing
alternatives. It also addresses the guiding rules and principles to apply this
product as a new innovative solution for Islamic cash financing.

1- THE PRODUCT DEVELOPMENT PROCESS

The Product development process related to Convertible Calling minutes Salam is
composed of two main phases:

The feasibility study. •

The Pre-implementation package. •

P
h

as
e

A

A- Feasibility
Study

A1 – Technological Feasibility

A2 – Operational Feasibility

A4 – Business Feasibility

A3 – Shariah Compliance
Study

Feasible / Not feasible

P
h

as
e

A

B- Pre-
implementation

package

B1 – Risk management
techniques

If feasible

B2 – IT Specifications

B3 – Accounting schemes

B4 – Implementation Road map

General Scheme of the Product Development Process

1-1 Phase I: Feasibility Study

The first phase consists of assessing the product feasibility according to 4
dimensions:

Technological dimension:  • this stream aims at identifying the
telecommunication trends, the different choices to be made (type of
calling minutes to be used, billing methods, etc.).

Operational dimension:  • this stream aims at defining the global
operational model and the different choices to be made (Who buys
calling minutes from the bank? How to sell calling minutes? The
necessary IT adaptations? Etc.).

Shariah compliance dimension:  • this stream aims at assessing the
operational model from a Shariah standpoint.

Business dimension:  • This stream aims at measuring the demand
potential on cash financing products in both Morocco & Turkey (in both
countries Tawarruq is not used).

This phase is crucial to decide on the opportunity to implement the product.
1

1-2 Phase II: Pre implementation Package

The pre implementation study is based on the conclusions of the first phase and
aims at designing a detailed operational model while taking into consideration
the following aspects:

The Risk Management techniques:  • At that level, this stream aims
at identifying the different risks inherent in the Salam & Murabaha
products and suggesting the techniques to adopt in order to mitigate
the risk exposures.

The IT Specifications:  • this stream consists of defining the high level IT
specifications for both Salam & Murabaha products.

The High Level Procedures:  • On the basis of the previous conclusions,
this stream aims at defining the high level operational model.

The Accounting schemes:  • this stream consists of suggesting the
accounting entries for each product in every phase.

The Sales pitch:  • This stream aims at identifying the questions to be
frequently asked by prospects and to prepare appropriate answers.

The Implementation Road Map:  • this stream consists of defining the
different steps to follow in order to implement correctly the product.
The stream also aims at estimating the time needed for the product
implementation.

2

2- CONVERTIBLE CALLING MINUTES SALAM:
GENERAL SCHEME & ADDED VALUE

Convertible calling minutes Salam is a cash financing solution dedicated to
individuals. It consists of an immediate cash payment in exchange of a differed
delivery of a specified quantity of calling minutes.

2.1- General Scheme of the Product

The General Scheme of the Calling minutes Salam is as follows:

Telecom
operator

Islamic Bank Distributors and
large corporations

Customer

1

3

2

4
Bank delivers cash
(salam contract)

Customer delivers
calling minutes to
the Bank

Customer buys
calling minutes from
the Telecom operator

The bank sells the
Convertible calling
minutes to distributors
on Murabaha

1  The Islamic Bank pays cash to the Customer in exchange for the delivery
of an exact quantity of calling minutes at the delivery date.

2  At the delivery date, the Customer can obtain easily the quantity
required of calling minutes to deliver to the Islamic Bank (From a point
of sale connected to the IT systems of the Telecom operator and the
Bank or through an application available for download in Smart phones
or Tablets).

3  The Customer can deliver the quantity required of calling minutes by
transferring them electronically to the Islamic Bank’s account.

4  The Islamic Bank would sell its stock of calling minutes to distributors
and large companies on Murabaha. The Bank can convert its stock of
calling minutes to handset, Data; etc. according to the Customers’
needs (distributors and large companies).

3

2.2- The Product Added value

Unlike existing cash financing products offered by Islamic Banks, the calling
minutes Salam provides:

A •  real economic added value: Individuals can obtain Cash in exchange for
a differed delivery of a quantity of calling minutes that is clearly defined
and that can be easily obtained.

The calling minutes delivered by individuals can be used by the Islamic  •
bank to finance the Telecom sector (Distributors and large companies)
through Murabaha.

The Islamic Bank plays a complementary role to enhance the economic  •
efficiency of the Telecom sector. Indeed, its intervention is limited
to provide Shariah compliant financing formulas to individuals and
Distributors (& large companies) and not to compete with them.

A •  Shariah Credibility: The stakeholders are all interested in getting
calling minutes and their interests are all met (individuals can get cash
financing and can obtain easily calling minutes, the Islamic bank gets
calling minutes and uses them to finance the Telecom Sector and makes
a profit, the Telecom sector gets financing that is adequate to the nature
of the activity).

Moreover, the calling minutes Salam Volume can’t exceed the potential  •
demand on calling minutes. Otherwise, the Bank will be exposed to
liquidity risk. Thus, the financial activity is linked to the real economic
activity.

A •  better profitability for the Bank: The Islamic Bank can make profit in
three ways:

In the Salam Product: The Bank gives the Customer $X in exchange  Ŋ
for a quantity of convertible calling minutes valued at Y.

In the Murabaha on calling minutes: The Bank sells the quantity of  Ŋ
calling minutes valued $Y by installments. The total debt is valued at
Y + 10%.

Negotiating a discount with the Telecom Operator: The Bank can  Ŋ
negotiate with the Telecom Operator a discount on wholesale
convertible calling minutes which helps reducing costs and achieving
economies of scale.

4

3- CONVERTIBLE CALLING MINUTES SALAM:
FEASIBILITY STUDY

3.1- Technological feasibility

The study consists of identifying the telecommunication trends that we are
summarized as follows:

Decreasing revenues from voice services (increasing revenues from data  •
& added value services).

Operators tend to sell packaged offer that include voice, data, equipment,  •
voice and added value services.

Low customer loyalty. •

Development of MVNO’s (Mobile virtual network operator is a wireless  •
communications services provider that doesn’t own the wireless
network infrastructure over which the MVNO provides services to its
customers).

The technological study also focuses on the kind of calling minutes to be used:

Nature of call ( • call within the operators network, inter operators call).

Direction of the call ( • internal call or external call).

Timing of the call ( • off peak, on peak).

Special billing plans. •

Billing method. •

On the basis of this study, it was concluded that:

Calling minutes are exchanged on the basis of their value not on their  •
duration.

It is possible for the bank to convert its stock of calling minutes into  •
data, equipments, etc. to meet the financing needs of the operator
distributors and of large companies.

3.2- Operational feasibility

Based on the conclusions of the technological feasibility, the operational study
identified the optimal choices concerning the following questions:

5

To whom the bank should sell its stock of calling minutes? •
In principle, the Bank can sell its stock of calling minutes to:

MVNOs: The Bank can create a MVNO. This requires a license from the •
Telecom sector regulator and an important amount of investments.

ATM/ Mobile banking: The Bank can sell its stock of calling minutes •
to its clients through ATMs and Mobile banking applications.

Corporate clients: large companies with significant •
telecommunications expenses.

Distributors: the bank can sell its stock to the operators’ distributors •
through Murabaha as a financing instrument.

The different choices are assessed on the basis of two main criteria:

Return / Complexity: Measures the ratio of return to the complexity •
of implementation of each option.

Business Model fit: Assesses the fitness of the option with the •
business model of the bank and the mobile operator.

MVNO

ATM/M.B.

Distributors

Corporate clients

Return / Complexity

Business model fit
Assesses the fitness of
the option with the
business model of the
bank and Mobile
operator

Return / Complexity
Measures the ratio of
return to the complexity
of implementation of
each option

The optimal choice for the Bank is to sell its stock of calling minutes to Distributors
and to corporate clients.

How to sell calling minutes? •
Distributors are interested in calling minutes, Handsets, data, voice, network
equipments, services, etc. The Bank can convert the calling minutes into a basket
of goods & services and then sell them to the distributors via a differed payment
sale.

6

Example:

The distributor  financing needs
(1MDH)

• 100,000 calling minutes
• 100 handsets
• 100 GB Data

The Bank

• Owns a stock of 2M calling
minutes

• One calling minute has a price
of 1 DH

The distributor  financing needs
(1MDH)

• 100,000 calling minutes
• 100 handsets
• 100 GB Data

The Bank (after conversion)

Owns:
• A stock of 1.1M calling minutes
• 100 Handsets
• 100 GB Data

Necessary adaptations •

IT adaptations

The proposed product uses Salam and Murabaha contracts. IT core banking
applications are normally equipped with these modules (Path solutions, T24
Islamic banking…).

The bank needs, however, to develop an interface with the operator to get the
information about the calling minutes cost and the bank calling minutes’ stock.
This interface can be implemented in two ways:

Real time Ŋ : The bank accesses the operator IT system when needed
and the bank calling minutes’ stock is updated in a real time. This
option is recommended to reduce operational risks.

Batches Ŋ : The bank and the operators databases can be updated once
or twice a day.

Internal processes

From an internal process standpoint, the proposed Salam cash financing product
does not involve major changes to the Islamic bank, especially if the bank already
finances transactions through Salam contract.

7

3.3- Shariah Compliance

From a Shariah standpoint, calling minutes meet all the required conditions for
Salam Transactions. Moreover, the study presents arguments in favor of Salam by
value and emphasizes on the added value of the product and on its specificities
compared to Tawarruq. For more details, kindly refer to the Shariah study
deliverable (Arabic document).

3.4- Business feasibility

The study focuses on the potential demand on Islamic cash financing instruments
in Turkey and Morocco.

A- Potential demand in Morocco

The methodology adopted to measure the potential demand on Islamic cash
financing instruments is as follows:

Definition of the assumptions based on the results of the last survey  •
related to the potential of the Islamic finance market (IFAAS – 2012).
The assumptions concern:

The percentage of people interested in Islamic financial instruments.•

The percentage of people that would take out an Islamic financing •
in the first 6 months of the launch of Islamic banks (then in the first
year, the second year, the third year, the fourth year).

The percentage of people that would be interested in Islamic •
financing and that are ready to pay an additional cost of 5% (of 10%,
more than 10%).

Definition of the assumption related to the growth of Islamic financial  •
instruments during the next 5 years (2015-2020).

Definition of the assumptions related to the supply structure (number of  •
branches and Islamic banks).

Definition of the potential growth of the market share of the Islamic cash  •
financing solutions according to the supply structure and the potential
demand.

According to the business feasibility study, the Market share of the Islamic cash
financing solutions would be 6% by 2020. The potential size of assets is estimated
at $353 million.

8

B- Potential demand in Turkey

In the Turkish Islamic banking sector, Credit cards are the only cash financing
solution available. The measurement of the potential demand on Islamic cash
financing solutions relies mainly on the assumption that the structure of the
Islamic Market will replicate the conventional market structure by 2020.

According to the business feasibility study, the potential size of assets (cash
financing solutions) is estimated at $5,115 million by 2020.

4- CONVERTIBLE CALLING MINUTES SALAM: PRE
IMPLEMENTATION PACKAGE

4-1 Risk Management techniques

This aspect aims at identifying the risks inherent in the Calling minutes Salam
and Murabaha products. For each type of risk, management techniques are
recommended.

The risks inherent in the Calling minutes Salam can be summarized in the following
diagram:

the potential that a
counterparty fails to meet its

obligations in accordance with
the agreed terms

arises from situations in which
a seller cannot trade an asset
with an underlying compliant

contract to obtain liquidity
because of the lack of a buyer

uncertainties of future Market
values and of the size of the
future income caused by the
fluctuations in the prices of

the commodities

the risk of loss resulting from
inadequate or failed internal
process, people and systems,

or from external events

Credit Risk Liquidity Risk

Market Risk Operational Risk

Risks inherent
in the Salam

product

A- Liquidity Risk
The liquidity Risk arises when the bank would have difficulties finding buyers
in order to sell the whole stock of calling minutes. To mitigate this risk two
complementary solutions are recommended: 9

Solution 1:  • In order to meet the needs of Telecom distributors and sell
the existing stock, the Bank’s offer has to be diversified and not limited
to calling minutes. Indeed, the Bank’s stock of calling minutes can be
converted to handset, Data, etc.

Calling minutes stock
owned by the bank

Application

Client needs
(Minutes, data, handsets)

Murabaha financing

Calling minutes stock -
Update

US$ 120,000

50,000 minutes + 300 GB Data + 50 Cell phones

50,000 * $1 + 300*$20 + 50*$200
= $66,000

$60,000 + $ 12,000 = $78,000

$54,000

Solution 2:  • The Bank needs to monitor the stock of convertible calling
minutes owned by the Bank (and what is going to be delivered) and
the demand size in order to establish the equilibrium between both the
demand & the stock. To do so, the Bank has to:

Measure the potential demand Ŋ  on calling minutes (Allocate
Murabaha on calling minutes financing lines to define the potential
demand).

Define the maximum ceiling of funding Ŋ  for Salam Cash financing on
the basis of the potential demand. (for example 80% of the potential
demand).

Monitor the calling minutes accumulated Ŋ  and the real demand.

Revise the ceiling of funding Ŋ  according to the real demand.

Application

Ceiling of Salam cash financing = 80% of Murabaha non used lines – Convertible
Calling minutes stock – Outstanding Salam (Convertible calling minutes)

Potential demand on Murabaha/Convertible calling minutes (Murabaha financing
lines) = $100,000,000

Example:

Date
Initial
Ceiling

Calling
minutes stock

Outstanding Salam
(Calling minutes)

Total Calling
minutes

Murabaha non
used lines

Ceiling of Salam
cash financing

0 month $80m $0m $30m $30m $100m $50m

3

months $50m $15m $15m $30m $120m $66m

6

months $66m $20m $18m $38m $70m $18m

9

months $18m $10m $20m $30m $60 $18m

10

B- Market Risk

The Market Risk arises as a result of price fluctuation of convertible calling minutes
which can negatively impact the profitability of the transactions. To mitigate the
Market Risk, the Bank needs to neutralize the impact of calling minutes’ prices
variation on the profitability of the Bank’s operations.

Indeed, calling minutes can be delivered by quantity or by value which gives rise
to 4 possible scenarios illustrated as follows:

Salam by Quantity

Application

Scenario 1 Scenario 2 !

Scenario 3 Scenario 4

Quantity

Value

Value Quantity

Salam by Quantity

Salam by Value Salam by Value

Murabaha by Value Murabaha by Quantity

Murabaha by Value Murabaha by Quantity

Salam calling
minutes defined by

Calling Minutes
Murabaha defined by

The assessment of the financial profitability of each scenario showed that the
calling minutes’ delivery by value neutralizes the Market Risk.

11

Application

Scenario 1 Scenario 2 ! Scenario 3 Scenario 4

Salam by Quantity -
Murabaha by Value

$80,000 of cash

financing for 81,000
minutes

81,000 minutes

delivered valued at
$72,900

Bank sells $72,900

+ margin (10%)
= $80,190

$190

Signature date
1min = $1

Delivery date
1min = $0.9

Bank sells minutes
1min = $0.8

Bank’s profits

Salam by Quantity -
Murabaha by quantity

$80,000 of cash

financing for 81,000
minutes

81,000 minutes

delivered valued at
$72,900

Bank sells $64,800

+ margin (10%)
= $71,280

$ -8,720

Salam by value -
Murabaha by value

$80,000 of cash
financing for an

equivalent to
$81,000

The equivalent to

$1,000 is delivered

Bank sells $81,000

+ margin (10%)
= $89,100

$9,100

Salam by value -
Murabaha by quantity

$80,000 of cash
financing for an

equivalent to
$81,000

90,000 minutes

delivered valued at
$81,000

Bank sells $72,000
+ margin (10%)

= $79,200

$ -800

C- Credit Risk

Credit Risk occurs as a result of non delivery of calling minutes by the client (Non
delivery Risk) or his inability to meet his obligations according to the agreed
terms (Counterparty Risk).

To mitigate the Non delivery Risk, the transfer of calling minutes would be
electronic through an IT solution that connects the Bank to the Telecom Operator.
Thus, the Client can buy calling minutes from any point of sale connected to the IT
system (the client pays cash and transfer the calling minutes to the Bank) or use a
mobile application to buy calling minutes and deliver them to the Bank.

Individuals

Mobile
application

IT System

Point of Sale

Telecom
operator

Islamic Bank

12

Furthermore, to mitigate its Counterparty Risk:

The Bank needs to diversify its clients’ base to avoid the systemic •
risk.

(For Example, the diversification can be on the basis of the profession
or the geographical spread).

The Bank has to define operational procedures that include Credit •
Criteria.

D- Operational Risk

Operational Risk occurs as a result of inadequate IT system and Risk Management
techniques or failed Internal Control Process.

In this context, different operational aspects were analyzed so as to come up with
sound and effective mitigation plan.

Inadequate Commercial practices •
The first issue was related to inadequate commercial practices, since the structure
of the telecommunication sector is well defined; Operators sell calling minutes to
Distributors who sell to wholesalers and Wholesalers sell to retailers.

The Islamic Bank Offer shouldn’t unbalance the Sector’s structure. Indeed, the
Islamic Bank shouldn’t compete with any other agent (Distributors, Wholesalers
and Retailers). Therefore, the Commercial offer of the Islamic Bank must be
for financing purposes only to fill the gap existing in Islamic cash financing
instruments.

Incorrect assessment of the client’s eligibility •
The second concern was related to failure to assess the client’s eligibility that can
be based on failure in the process of management and assessment of documents
and criteria of eligibility, inadequate organizational structure, and fraud on
transactions by employees, errors in the provision of guarantees…etc.

Therefore, more emphasis and control must be conducted in the process by
ensuring that employees get the necessary training needed to perform their tasks
as required, and reinforcing internal assessment and control procedures.

Failure in the computer system •
Operational risk can be also as a result of a failure in the IT System such as buying
calling minutes in excess of the ceiling of Salam cash financing or selling a stock
that the bank doesn’t own. To overcome this issue, the bank must ensure having
an integrated and secured IT Solution and ensure that employees have the
necessary capabilities to use the solution effectively. The IT solution must also be
able to implement the limits of ceilings.

13

Regulatory & Shariah compliance of the process •
The other concern of operational standards and procedures is the regulatory
and Shariah compliance of the process. Thus, the bank must ensure having
the approval of the regulatory authorities and the compliance with the local
regulatory framework (banking and telecommunication). On the other hand,
Shariah compliance is ensured by submitting procedures and contracts to the
approval of the Shariah board while ensuring that effective training on Shariah
issues is performed so as to engage all the employees in the vision of keeping a
compliant and transparent system.

The summary of the 10 Risk Management techniques is as follows:

Define rules & criteria for the
assessment of clients

Risks inherent
in the Salam

product

Implement the IT solution in
the points of sale and develop
a mobile application
connected to the IT solution

Develop an IT solution with
the Telecom operators

Calling minutes should be
delivered by value

Possibility to convert the calling
minutes to data, Handsets etc.
according to the client’s needs

Follow up the stock of calling
minutes and the potential
demand to avoid liquidity
problems

Offer products adapted to the
Telecom sector specificities

Assessment by a neutral
entity, definition of clear
procedures and rules

Reinforcement of the logical
and physical security of the
computer system

Comply with local regulatory
framework, with Shariah
principles and reinforce the
internal central environment

9

10

8

7

1

2

3

4

5

6

Finally, the typical cases of the product’s deviations from its original goals &
objectives are:

The Bank overuses the Salam Cash financing •
The Bank has to be overseen by both the financial sector authority and the
Telecom sector regulator through reporting and audits to make sure that the
Salam cash financing is not overused in a way that disturbs the banking and the
telecom sectors.

Moreover, the Bank has to implement liquidity Risk Management techniques to
avoid liquidity problems by accumulating calling minutes.

14

The Bank competes with the other stakeholders in the Telecom  •
Sector

The calling minutes to be delivered to the Bank have to be bought exclusively
from the Telecom Operator and have to be delivered exclusively to distributors.
Otherwise, it’s possible to impose expiry dates on calling minutes.

The Client can get calling minutes on Murabaha to settle Salam  •
Cash financing which reproduces the Inah scheme.

The Bank sells exclusively its stock of convertible calling minutes to distributors.

4.2-IT Specifications

A- Expected impacts

The basic contracts used for the product are Salam and Murabaha.

If the bank has an Islamic commercial IT core banking system, it’s normally
equipped with these modules (Path solutions, T24 Islamic banking, Ambit Core
Banking …). The IT Core Banking supports a wide range of Islamic banking
products.

Hence, the product implementation would require minimum adaptations

If the bank has an in-house IT banking system, there are two scenarios:

If the in-house IT system has Murabaha and Salam applications, then,  •
the product implementation would require minimum adaptations;

If the in-house IT system doesn’t have Murabaha and Salam applications,  •
it would require the implementation of the missing applications and
modules.

B- Interfaces

The customer buys the calling minutes from the operator and the calling minutes
are delivered to the Bank. The delivery of calling minutes by customers to the
bank can be done through:

The operator “Point of sale”. −

The customer’s Smartphone / Tablet (an application needs to be  −
downloaded).

A website. −

15

The bank core IT system The operator IT system

InternetSmartphoneOperator point
of sale

Delivery through “Points of sale” •
If the customer decides to deliver the calling minutes to the bank from one of the
Operator points of sale, he/she needs to provide his/her client and transaction
identifiers. The client and transaction identifiers are given to the customers when
he/she requests Salam financing from the bank.

Client identification

Transaction ID

Cash financing

Clear Enter

Screen 1 : Operator point of sales (client identification)

The operator IT system

Operator point
of sale

The calling minutes will be bought directly from the Operator. The point of sales
will act just as an agent to facilitate this transaction. The information below is
extracted automatically from the operator IT system. The point of sale will enter
the value of calling minutes to be bought by the client from the operator and
delivered to the bank.

16

Client identification

Transaction ID

Cash financing

Clear Enter

Screen 1 : Operator point of sales (client identification)

The operator IT system

Operator point
of sale

Delivery through “Tablet/ Smartphone” •
If the customer decides to deliver the calling minutes from a tablet or Smartphone,
he/she needs to download an application from Google play or Apple Store.

The client and transaction identifiers are given to the customer when he/she
requests Salam financing from the bank.

Client identification

Transaction ID

Cash financing

Clear Enter

Screen 1 : App screen (client identification)

The operator IT system

Smartphone

The calling minutes will be bought directly from the Operator through the
application. The information below is extracted automatically from the operator
IT system. The client will enter the value of calling minutes to be bought from the
operator and delivered to the bank.

17

Client identification

Transaction ID

122345

56889

Cash financing

Cancel Proceed to payment

Screen 2 : App screen (customer’s details)

Amount due

Amount to be paid

1,200 SAR

C.minutes to be delivered

Maturity date 12/12/2014

Payment mode Payment card

The operator IT system

Smartphone

Delivery through “Internet” •
If the customer decides to deliver the calling minutes from his/her computer
he/she needs to access the operator payment website for calling minutes Salam
delivery.

The client and transaction identifiers are given to the customers when he/she
requests Salam financing from the bank.

Client identification

Transaction ID

Cash financing

Clear Enter

Screen 1 : Web screen (client identification)

The operator IT system

Internet

The calling minutes will be bought directly from the Operator through the website.
The information below is extracted automatically from the operator IT system.
The client will enter the value of calling minutes to be bought from the operator
and delivered to the bank.

18

Client identification

Transaction ID

122345

56889

Cash financing

Cancel Proceed to payment

Screen 2 : Web screen (customer’s details)

Amount due

Amount to be paid

1,200 SAR

C.minutes to be delivered

Maturity date 12/12/2014

Payment mode Payment card

The operator IT system

Internet

The bank needs to develop an interface with the operator to get the information
about the calling minutes cost and the bank’s stock of calling minutes. To minimize
operational risks, the interface should be implemented in Real time. The bank will
access the operator IT system when needed and the bank calling minutes’ stock
will be updated in a real time.

The following table presents the different triggers (external events) and their
impacts on the operator’s IT system:

Trigger Operator IT system
impacts Comments

Salam
contract
signature

Update/increase the “to
be delivered” convertible
calling minutes stock

The “To be delivered” information
is required for the telecom
regulator reporting

Salam
delivery

Update/increase the
convertible calling
minutes stock.
Update/decrease the “to
be delivered” convertible
calling minutes stock

The “To be delivered” information
is required for the telecom
regulator reporting

Salam
delivery

View the convertible
calling minute Price

Murabaha
contract
signature

Update/decrease the
convertible calling
minutes stock
View the convertible
calling minute Price

The “To be delivered” information
is required for the telecom
regulator reporting

19

C- Other Aspects

Reporting ¾

The IT core banking should be able to generate two types of reporting.
Complementary Software can be also used (example: SAP Business object, IBM
Cognos Power Play or Microsoft SQL Server Reporting Services):

Ad hoc reporting: flexible, on demand and interactive (drill down & •
filtering).

Predefined reporting: Periodic, detailed, Kept in the archives.•

Constraints ¾

The IT banking system will have to deal with the following constraints:

Many Telecom operators:•  The IT Bank team may need to develop
interfaces with each telecom operator.

Security: • While interfacing the IT system with the operator needs to
be done while securing the IT banking system from intrusions.

Core Banking upgrades: • if the IT bank team uses specific IT coding
within the IT core banking, the team needs to make sure that the
added IT coding is still working after the minor and major upgrades
of the IT core banking system.

4.3- High Level Procedures

A- Salam Cash financing procedure:

The following diagram summarizes the standardized process of convertible calling
minutes Salam:

Islamic Bank Individuals

1

3

2

4

Cash finance request

Provision of
guarantees (if any)

Assessment by the
Islamic Bank

Bank delivers cash
(Salam contract)

Decision of the bank

Guarantees

Cash

Convertible calling
minutes 5 Customer delivers

convertible calling
minutes to the bank
on the agreed
deadline

20

1  The Bank presents the Salam Offer (rules, characteristics and principles)
to the client, and if interested, this last provides information regarding
the financing amount needed as well as other necessary information
to run simulations. If the client accepts the offer, the account officer
provides him with the list of documents necessary for assessment.

2  After receiving the required documents from the client, the account
officer forwards them to the financial analyst who is responsible for
assessment of the financial eligibility of the client, the ceiling need as
well as the compliance of documents, according to the credit policy
of the bank. On the basis of this assessment a decision is made. If it’s
positive, the client is notified for acceptance and informed about the
necessary guarantees he must provide to get financing.

If the decision is negative, the client’s offer is rejected and his
documents are returned back, while insuring that the reason of
rejection is recorded in the IT solution.

3  After the provision of guarantees from the client, the account officer
controls their compliance and forwards them to the back office.

If the guarantees provided are compliant, the Salam Cash financing
contract is prepared to be signed by both parties, if not, the client
is notified for rejection and documents of guarantees are returned
back.

4  The Salam Cash Financing Contract is signed by both parties and
forwarded to the back office to be controlled and registered in the IT
Solution, and to credit the client’s account with the financing amount.

5  On the agreed deadline, the client delivers the convertible calling
minutes to the bank through a point of sale connected to the It System
or by buying convertible calling minutes and transferring them to the
bank through a Mobile application connected to the IT System (or a
website).

Once the operation is completed, the Bank’s IT system is automatically
updated.

In case the client doesn’t deliver the quantity of convertible calling
minutes on the delivery date, the bank sends him a dunning notice.

21

B- Murabaha on convertible calling minutes procedure:

The following diagram summarizes the standardized Murabaha process.

Islamic Bank

1

3

2

4

Murabaha financing
line request

Provision of
guarantees

Assessment by the
Islamic Bank

Bank delivers Convertible
Calling minutes or
equivalent according to
the client’s needs

Decision of the bank

Guarantees

Order

Installments 6 The Client repays
its debt according
to the agreed terms

Implementation of
the Murabaha
financing line

Delivery

Place an order to buy X
amount of convertible
calling minutes

5

Distributors and
large corporations

1  The Bank presents the Murabaha financing line’s Offer (rules,
characteristics and principles) to the client, and if interested, this latter
provides information regarding the financing amount needed as well
as other necessary information to run simulations. If the client accepts
the offer, the account officer provides him with the list of documents
necessary for assessment.

2  After receiving the required documents from the client, the account
officer forwards them to the financial analyst who is responsible for
assessment of the financial eligibility of the client, the ceiling need as
well as the compliance of documents, according to the credit policy
of the bank. On the basis of this assessment a decision is made. If it’s
positive, the client is notified for acceptance and informed about the
necessary guarantees he must provide to get financing.

If the decision is negative, the client’s offer is rejected and his
documents are returned back, while insuring that the reason of
rejection is recorded in the IT solution.

22

3  After the provision of guarantees from the client, the account officer
controls their compliance and forwards them to the back office.

If the guarantees provided are compliant, the Murabaha financing line
convention is prepared and signed by both parties, and the financing
line is implemented in the IT system.

If the guarantees provided are not compliant, the client is notified for
rejection and documents of guarantees are returned back.

4  The client presents his order to the bank according to the agreed terms
in the convention; the Account officer runs a simulation by checking in
the IT system the Murabaha total amount and the value of the order.

If the Order’s amount is covered by the Murabaha financing line, the
Murabaha contract is prepared as well as the Wakala Contract that
enables the client to get the delivery.

If the Order’s amount is not covered by the Murabaha financing line,
the client has to request an increase in its financing line (according to
Steps 1, 2 & 3).

After the signature of both contracts (Murabaha, Wakala) by both
parties, the Account Officer confirms the order in the IT system
connected to the telecom operator and launches the Murabaha
financing.

5  Once the Contracts are signed, the client can get delivery directly from
the Telecom Operator as specified in the Wakala Contract, and starts
paying his debt by installments according to the agreed terms in the
Murabaha Contract.

4.4- Accounting schemes

Two different accounting approaches can be used to record profit according to
the local accounting regulations.

The first is the prudent approach that is based on the AAOIFI accounting standards.
It suggests that the Whole profit is accounted in the Murabaha transaction.

The second approach is the alternative approach that is inspired from the IFRS
standards. This approach suggests that the profit should be split into two parts; a
part that is recorded in the Salam Cash financing transaction and the other one is
recorded in the Murabaha transaction.

23

A- Prudent approach:

Salam cash financing: •

1  Conclusion of the Salam Contract

At the signature of the Salam Cash Financing contract, the Islamic bank advances
an amount of cash ($80,000) to the client that has to deliver an equivalent of
$81,000 of convertible calling minutes.

The bank debits its account with $80,000 and credits the client’s account with the
same amount including provisions for doubtful debts.

Transactions Debit Credit
Salam Financing
                                 Client’s Account

80,000
80,000

Balance Sheet

Assets Liabilities
Salam Financing
Less: provisions for
doubtful debts
Net Salam financing

80,000
-

80,000

Client’s Account +80,000

2  The end of a financial period

At the end of the financial period, the client is unable to deliver more than
$75,000. Hence, the Islamic Bank shall make a provision of $5,000.

Transactions Debit Credit

Profit & loss
                                 Provision

5,000
5,000

Balance Sheet

Assets Liabilities and Shareholders’ Equity
Salam Financing
Less : provisions for
doubtful debts
Net Salam financing

80,000
(5,000)

75,000

Profit & Loss -5,000

24

3  Date of Delivery

At the delivery date, the Bank’s stock of convertible calling minutes increases and
the client’s obligation is honored.

Transactions Debit Credit

Stock of convertible calling minutes
                             Salam Cash Financing

80,000
80,000

Balance Sheet

Assets Liabilities

Salam Financing
Stock of convertible
calling minutes

-80,000
+80,000

Murabaha financing: •

1  Conclusion of Murabaha

At the time of the conclusion of the Murabaha Contract, the accumulated stock of
convertible calling minutes is sold to distributors or to corporate clients on a stock
value ($80,000) + Margin ($2,000).

The Account of Murabaha convertible calling minutes is debited at a value of
$82,000, and the stock of convertible calling minutes is credited at a value of
$80,000 + a deferred profit value of $2,000.

Transactions Debit Credit

Murabaha / convertible calling minutes
                      Stock of convertible calling
minutes
                     Deferred Profit

82,000
80,000
2,000

Balance Sheet

Assets Liabilities
Murabaha Financing
Deferred Profit
Stock of convertible
calling minutes

+82,000
-2,000

- 80,000

25

2  At the end of a financial period

At the end of the financial period, estimates indicate a doubtful debt related to
Murabaha financing at a value of $8,000, this amount is then registered in the
balance sheet and reduced from the net profit of Murabaha financing as shown
in the following balance sheet:

Transactions Debit Credit

Murabaha / convertible calling minutes
                      Stock of convertible calling
minutes
                     Deferred Profit

82,000
80,000
2,000

Balance Sheet

Assets Liabilities
Murabaha financing
Deferred Profit
Less : provisions for
doubtful debt
Net Murabaha financing

82,000
-2,000
-8,000

72,000

3  Payment

At the time of payment, the settlement is done on 10 installments of $8,200 each;
$8,000 of historical cost of convertible calling minutes sold and $200 of the profit
portion value.

The client’s account will be debited at the time of settlement by $8,200, indicating
a profit of $200 and registering the difference in the Murabaha financing account
as shown in the balance sheet bellow.

Transactions Debit Credit

Client’s account
                                          Murabaha Financing

8,200
8,200

Deferred Profit
                                       Murabaha Profit

200
200

Balance Sheet

Assets Liabilities
Murabaha Financing
Deferred Profit

73,800
-1,800

Profit & loss
Client’s account

200
-8,200

26

In case of early settlement, the distributor accelerates the payment of all the
remaining installments ($73,800). Therefore, the Islamic Bank deducts part of the
profit valued at $800 and registers $1000 as a profit as shown in the following
balance sheet:

Transactions Debit Credit
Client’s Account
                                  Murabaha Financing

73,000
73,000

Deferred Profit
                             Murabaha Profit
                            Murabaha Financing
(In case of discount)

1,800
1,000
800

Balance Sheet

Assets Liabilities
Murabaha Financing
Deferred Profit

-73,800
+1,800

Profit & loss
Client’s account

1,000
73,000

B- Alternative approach:

Salam cash financing  •

1  Conclusion of the Salam Contract

At the signature of the Salam Cash Financing contract, the Islamic bank advances
an amount of cash ($80,000) to the client that has to deliver an equivalent of
$81,000 of convertible calling minutes.

The bank debits its account with $81,000 and credits the client’s account with
the equivalent of Salam Cash financing registering the difference as unrealized
profit ($1000).

Transactions Debit Credit
Salam Financing
                                 Client’s Account
                               Unrealized Profit

81,000
80,000
1,000

Balance Sheet

Assets Liabilities
Salam Financing
Less : provisions for
doubtful debts
Net Salam financing

81,000
-

81,000

Client’s Account
Unrealized profit

+80,000
1,000

27

2  The end of a financial period

At the end of the financial period, the Bank figure out that the client is unable
to deliver more than $75,000. Hence, the Islamic Bank shall make a provision of
$5,000 as indicated below:

Transactions Debit Credit
Profit & loss
                                 Provision

5,000
5,000

Balance Sheet

Assets Liabilities and Shareholders’ Equity
Salam Financing
Less : provisions for
doubtful debts
Net Salam financing

80,000
(5,000)

75,000

Profit & Loss -5,000

3  Date of Delivery

At the Delivery date, the Bank’s stock of convertible calling minutes increases by
the agreed amount ($81,000) and the client’s obligation is honored.

Transactions Debit Credit
Stock of convertible calling minutes
                             Salam Cash Financing

81,000
81,000

Balance Sheet

Assets Liabilities

Salam Financing
Stock of convertible
calling minutes

-81,000
+81,000

Murabaha Financing: •

1  Conclusion of Murabaha

At the time of the conclusion of the Murabaha Contract, the accumulated stock of
convertible calling minutes is sold to distributors or to corporate clients on a stock
value ($81,000) + Margin ($1000) which is registered as a deferred profit.

The Account of Murabaha convertible calling minutes is debited at a value of
$82,000, and the stock of convertible calling minutes is credited at a value of
$81,000 + a deferred profit value of $1000.28

The balance sheet then shows the following values:

Transactions Debit Credit

Murabaha / convertible calling minutes
                       Stock of convertible calling
minutes
                     Deferred Profit

82,000
81,000
1,000

Balance Sheet

Assets Liabilities
Murabaha Financing
Deferred Profit
Stock of convertible
calling minutes

+82,000
(1000)

- 81,000

2  At the end of a financial period

At the end of the financial period, the Bank estimations indicates a doubtful debt
related to Murabaha financing at $8,000. Then the account of doubtful debts is
debited at $8,000 and the net Murabaha financing account is deducted by the
same amount.

Transactions Debit Credit
Profit & loss
                                                           Provision

8,000
8,000

Balance Sheet

Assets Liabilities
Murabaha financing
Deferred Profit
Less : provisions for
doubtful debt
Net Murabaha financing

82,000
(1000)
8,000

72,000

3  Payment

At the time of payment, the settlement is done on 10 installments of $8,200 each;
$8,100 of historical cost of convertible calling minutes sold and $100 of the profit
portion value.

At the time of settlement, the amount ($8,200) will be debited in the client’s
account, and credited in Murabaha Financing account. The profit of $100 will be
registered in both accounts, in the deferred profit account as debit, and in the
Murabaha profit account as credit.

29

The balance sheet will be as the following:

Transactions Debit Credit

Client’s account
                          Murabaha Financing

8,200
8,200

Deferred Profit
                        Murabaha Profit

100
100

Balance Sheet

Assets Liabilities
Murabaha Financing
Deferred Profit

73,800
-900

Profit & loss
Client’s account

100
-8,200

In case of early settlement, the distributor accelerates the payment of all the
remaining installments ($73,800). Therefore, the Islamic Bank deducts part of the
profit valued at $300 and registers $600 as a profit as shown in the following
balance sheet:

Transactions Debit Credit

Client’s Account
                              Murabaha Financing

73,500 73,500

Deferred Profit
                           Murabaha Profit
                           Murabaha Financing
(In case of discount)

900
600
300

Balance Sheet

Assets Liabilities
Murabaha Financing
Deferred Profit

-73,800
+900

Profit & loss
Client’s account

600
73,500

4.5- The product sales pitch

The sales pitch aims at defining questions to be frequently asked by costumers
and suggesting appropriate answers. The pitch addresses the following issues:

The Shariah Credibility of the product based on Salam by value. •

The delivery of calling minutes to the Bank (In fine/ by installments; in  •
case of non delivery; negotiations; early delivery; etc.).

The differences between Tawarruq & the Salam product. •

The impact of the product on the Telecom Sector. •
30

The value of calling minutes and their impact on the quantity of calling  •
minutes to be delivered.

Etc. •

For more details, kindly refer to the Sales Pitch deliverable.

4.6- Implementation Road Map

The General Scheme of the Implementation Road Map is as follows:

Business
feasibility

Technological
feasibility

Sign
Agreements

IT Specs

Contracts

Marketing
& Sales

Procedures

Training

1 Month 1 Month

2 Weeks

3 Weeks

3 Weeks

1 Month

2 Weeks

Scenario 1: The Bank
has an IT with

Murabaha & Salam
Modules

1 to 2 Months

Scenario 1: The Bank
doesn’t have a Salam

module

3 to 12 Months

Starting Point End

Market
Research

2 Months

$

Sign
Agreements

If
 O

K

Implementa
tion

2 Weeks

3.5 months (Scenario 1)
12 months (Scenario 2)

2 Weeks

The Product’s implementation
could take from 6.5 months

to 15 months according to the
IT scenarios

B-Market research

The Market Research consists of assessing the feasibility of the product in the
local Market. The research is based on two principle components:

Business feasibility: •
This phase aims at defining the size of the Market (potential demand on convertible
calling minutes and on cash financing), assessing the profitability of the profit as well as
defining the amount of investment required.
This will be achieved through the elaboration of a business case based on the
assessment of the potential demand of the market, assessment of distributors and
large companies’ demand, and the development of sales forecasts for the 5 coming
years.

31

Technological feasibility: •
This phase aims at presenting the product to the Telecom Sector’s regulator, to
Telecom Operators and to the Central Bank in order to have their approval for
launching the offer.

At the end of this phase, an updated pre-implementation package will be
delivered based on the remarks of the different stakeholders and on the necessary
adaptations to be made on the IT system.

The updated pre-implementation package will take also into account the
investment amounts related to the IT system and its implementation, as well as
the agreements and obligations of each party in the project.

C- Signing agreements:

The main objective of this phase is to sign Memorandum of understanding with
the Telecom Operator and the Distributors while making sure of getting the final
approval of the regulators (Central Bank, Shariah board, Telecom regulator).

D- Implementation:

The implementation phase involves the construction of the actual project results
by putting in action the following activities of the project:

Contracts: •
This phase aims at prepare the contracts for Salam Cash financing and Murabaha
on calling minutes and validating contracts by the Shariah Board, the Central Bank
and the different stakeholders.

This phase is implemented in a 3 weeks period by defining the Term sheet for
the different contracts, preparing the draft contracts of Murabaha financing line,
Murabaha on calling minutes and the Salam cash financing contracts and getting
approval of the Shariah board and the different stakeholders.

IT: •
This phase aims to draft the detailed specifications of the IT system to develop
and to implement by considering the two following possible scenarios; the bank
already has a core banking system with “Salam” and “Murabaha” modules, or the
bank has its specific internal IT solution.

In the first case, the main tasks will be concerned with the definition of the general
IT specifications and the analysis of the Gap between the general specifications

32

and the standard IT core system functionalities in order to come up with a
customized IT core system that will be tested and introduced.

In the second scenario, detailed IT specifications will be defined in order to
develop an integrated IT system that will be tested to be ready for operations.

Procedures: •
This phase aims at delivering procedures in detail on the basis of the IT
specifications & the contracts and getting the approval of the Shariah board and
the telecom Operator.

Procedures are defined on the basis of the links between the different operations
and the coherence between the relevant functions, the product policies and
procedures in place as well as the support functions in place to insure the
consistency of the contracts and procedures.

Marketing & Sales: •
Implemented in a 3 months period, this phase aims to define the marketing and
sales policy for the product by defining target customers, the pricing policy and
preparing the communication campaigns.

E-Training

The main objective of this phase is to train the bank’s team on the procedures,
the IT and on the Marketing strategy of the product.

This can be achieved through the definition of training objectives, developing
training content and material, arranging training schedule and organizing training
sessions.

33

CONCLUSION
The aim of this document was to present the convertible calling minutes Salam
Product and the methodology adopted to design the operational Model in a way
that meets both Shariah Credibility & Economic efficiency.

Indeed, the Convertible calling minutes Salam Product is an innovative Shariah
Compliant solution that aims at providing Cash financing to individuals. Unlike
existing Tawarruq practices, the Salam Product provides a real Economic Added
Value, a Shariah Credibility and a better profitability for the Bank.

Although the pre-implementation package seeks to facilitate the product
implementation at the bank level, it needs however to be adapted to both the
country and the bank specific environment. Therefore, this document includes
the Implementation Road Map to explain the necessary steps to implement
successfully the product.

Finally, the idea behind Salam cash financing can be extended to serve the needs
of inter banking financing solutions using calling minutes.

34

The Financial Product Development Center (FPDC) was established in Muharram
1432H (December 2010G). Its main purpose is to enhance the leadership of the
Islamic Development Bank Group in the development and promotion of
innovative Islamic financial products within the framework of the Maqasid al-
Shariah. This is accomplished while further strengthening the financial soundness
and relevance of the IDB Group.

The Center is the focal point for the development of new and innovative financial
instruments at IDB Group, and for this purpose it also collaborates with various
institutions in the Islamic financial industry.

Strategic Objectives

The Center has three major strategic objectives:
 Developing Business Process for new product development.
 Building capacity of product developers.
 Designing new financial products.

These three objectives are summarized by the “3Ps” that the Center works along:
Process, People, and Products.

For any queries, please contact:
Financial Product Development Center

Islamic Development Bank
19th Floor, HQ Building

Jeddah, Kingdom of Saudi Arabia

Email: fpdc@isdb.org
Tel: +966 12 646 7469
Fax: +966 12 636 7554

D
e

si
g

n
e

d
 b

y
p

ro
-c

s.
n

e
t

www.isdb.org

http://www.pro-cs.net

www.isdb.org


BLOG OF KNOWLEDGE (Shari'ah, Law, Islamic Finance and Muslim News)
Shari'ah, Law, Islamic Finance and Muslim News
Daily Archives: March 27, 2012
March 27, 2012
DR. ZULKIFLI HASAN
Islamophobia: Myth or Reality
Islamophobia: Myth or Reality
I would like to share my recent presentation on the issue of Islamophobia at Pusat Islam, Kuala Lumpur to staff of Islamic Religious Council of Federal Territories and representatives of the non-governmental organizations. It is important to note that the OIC has already initiated the establishment of the OIC Islamophobia Observatory Report to specifically monitor, promote and create awareness on the issue of Islamophobia. The First Annual Report on Islamophobia by the OIC Observatory was issued in May 2007 to May 2008 followed by the Second Annual Report in June 2008 to April 2009, the Third Annual Report in May 2009 to April 2010 and the Fourth Annual Report in June 2008 to April 2009 May 2010 to April 2011.
For further reading, click here:
Islamophobia: Myth or Reality
Islamophobia as a world view involving an unfounded dread or hatred of Islam and the subsequent fear and dislike of all Muslims. It also refers to the phenomenon as practice of discriminating against Muslims by excluding them from social, political and economic life.(The Runnymede Trust)
The effects of Islamophobia can be several and it impinges on micro, meso and macro levels of the society. Consequently, these effects inflict economical as well as social difficulties against people and nations. Foremost, The Runnymede Trust accentuate a systemi disadvantage where this could stand in relation to everyday attacks on Muslims as they can be spat on, mental and physically harassed, molested, abused and so forth based on a Islamophobic motives
Regards

ZULKIFLI HASAN
With Yvonne Ridley, a British journalist and human right activist, former Taliban captive and finally reverted to Islam.
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