1. SEMINAR ON DERIVATIVES IN ISLAMIC FINANCE “ISLAMIC PROFIT RATE SWAP – ITS MECHANICS AND OBJECTIVES” by Badlisyah Abdul Ghani June 24, 2004

2. Page 2 CONTENT CONTENT What is Interest Rate Swap1 Islamic Profit Rate Swap (IPRS) – Definition2 Objective of IPRS3 The Dynamics of IPRS4 How IPRS Works5 IPRS Documentation6 Status of Development7

3. Page 3 WHAT IS AN INTEREST RATE SWAP WHAT IS AN INTEREST RATE SWAP  An Interest Rate Swap is an agreement to exchange interest rate cash flows, calculated on a notional principal amount, at specified intervals (payment dates) during the life of the agreement.  Each party’s payment obligation is computed using a different interest rate. In an interest rate swap, the notional principal is never exchanged. Swap typically refers to a generic interest rate swap in which one party pays a fixed rate and another pays a floating rate.

4. Page 4 ISLAMIC PROFIT RATE SWAP (IPRS) - DEFINITION ISLAMIC PROFIT RATE SWAP (IPRS) - DEFINITION  An Islamic Profit Rate Swap is an agreement to exchange profit rates between a Fixed Rate Party and a Floating Rate Party or vice versa implemented through the execution of a series of underlying contracts to trade certain assets under the Shariah principles of Bai’ and Bai’ Bithaman Ajil.  Each party’s payment obligation is computed using a different pricing formulae. In an Islamic profit rate swap, the notional principal is never exchanged as it is netted off. Swap typically refers to the difference in the price over and above the notional principal in which one party pays a fixed rate and another pays a floating rate.

5. Page 5 OBJECTIVES OF IPRS OBJECTIVES OF IPRS  to match funding rates with return rates (from investment);  to achieve lower cost of funding;  to restructure existing debt profile without raising new finance, or altering the structure of the balance sheet;  to manage exposure to interest rate movement as Islamic financial institutions still compete with conventional banks for market space;  to deepen Islamic Financial Market.

6. Page 6 Receives fixed returns THE DYNAMICS OF IPRS CIMB Financial Liabilities Financial Assets Islamic Swap Counter Party Receives floating profit rate Pays floating obligations Pays fixed profit rate

7. Page 7 HOW IPRS WORKS STAGE 1: Fixed Profit Rate CIMB Islamic Swap Counter Party ASSET STEP 1 CIMB sells Asset to Islamic Swap counter Party at notional principal of RM500k. STEP 2 Islamic Swap Counter Party sells Asset to CIMB at notional principal RM500k + mark-up based on fixed profit rate STEP 3 Notional principal amount of RM500k owed by both CIMB and Islamic Swap party to each other is set off STEP 4 The net difference i.e. the fixed profit rate in Step 2 is paid to Islamic Swap counter Party by CIMB at the agreed interval payment date of say 6 month

8. Page 8 HOW IPRS WORKS STAGE 2: Floating Profit Rate ASSET CIMB STEP 1 CIMB sells Asset to Islamic Swap counter Party at notional principal RM500k + STEP 1 CIMB sells Asset to Islamic Swap counter Party at notional principal RM500k + floating profit rate. STEP 2 Islamic Swap counter Party Islamic Swap counter Party sells Asset to CIMB at notional principal of RM500k. STEP 3 Notional principal amount of RM500k owed by both CIMB and Islamic Swap party to each other is set off STEP 4 The net difference i.e. the floating rate profit in Step 1 is paid to CIMB by Islamic Swap counter Party at the agreed interval payment date of say 6 month Islamic Swap Counter Party

9. Page 9 HOW IPRS WORKS STAGE 3 – Determination of Subsequent Floating Rate ASSET CIMB Floating Profit Rate (Stage 2) is repeated every 6 months until maturity. 6 MONTHS MATURITY Islamic Swap Counter Party

10. Page 10 IPRS DOCUMENTATION  Islamic Swap Master Agreement  Asset Purchase Agreement (fixed)  Asset Sale Agreement (fixed)  Asset Purchase Agreement (floating)  Asset Sale Agreement (floating)

11. Page 11 STATUS OF DEVELOPMENT  Secured approval from the National Shariah Advisory Council (NSAC) of BNM on structure subject to documentation  On-going discussion with the International Swap and Derivatives Association for regional/global standardisation  Finalising Malaysian documentation for submission to NSAC targeted in July/August 2005  To be launched in Malaysia as industry wide Islamic product in 4 th quarter 2005

12. Page 12 Contact Details CIMB Islamic Commerce International Merchant Bankers Berhad 10th Floor, Bangunan CIMB Jalan Semantan, Damansara Heights 50490 Kuala Lumpur, MALAYSIA Tel : +603 2084 8888/+603 2084 9666 Fax : +603 2093 0685 www.cimb.com.my