1. IB1005 DEPOSITS AND FINANCING PRACTICES OF ISLAMIC FINANCIAL INSTITUTIONS CHAPTER 4 : COMMODITY MURABAHAH COMPILED BY HAMDAN HJ IDRIS, BSc Econs, MBA (Islamic Banking & Finance) Certified Professional Trainer (MIM) Industry Expert INCEIF PRESENTED BY HJ MAHMUD HJ BUNTAT, MBA (AUOL, UK), DBM (Swansea Inst., UK), CIL (UIA) Part-time Lecturer (INCEIF) Former Head of Islamic Banking Division, OCBC Bank (Malaysia) Bhd

2. Chapter 4: Commodity Murabahah Buy & Sell The tenets and perequisities 1. Seller Able to carry out his/her responsibilities. Not restricted from dealing in business transactions. Not being forced to enter contract 2. Buyer Able to carry out his/her responsibilities. Not restricted from dealing in business transactions. Not being forced to enter contract

3. The parallel back-to-back transactions involving the commodities takes place simultaneously and therefore, does not expose the parties to the price risk associated with the underlying commodity.

4. Commodity Murabaha Deposits (CMD) Commodity murabaha serves as a deposit placement facility as well as an instrument to mop up surplus cash in the banking sector. In the latter, the central bank takes up the role of the deposit taker, while in the former the role is taken up by commercial banks. To accommodate depositors with lower risk appetites, some Islamic banks offer a commodity murabaha deposits (CMD).

5. To the deposit-taking bank, CMD is a fixed rate liability (FRL). By locking the murabaha price, the total profit can be known upfront. The CMD is based on the contract of murabaha with a promise to repurchase. By doing so, CMD guarantees capital preservation and fixed return.

6. WORKFLOW CMB Supplier Deposit-Taking Bank (DTB) Supplier Deposit-Placing Bank (DBP) $20 million 1.DBP Credited $20 million with Agent 2.DTB pays Cash 3.Supply CPO 4.DBP sells CPO to DTB 5.DTB pays DPB By lump-sum Deferred payment 6.DTB sells CPO to Supplier 7. Supplier pays cash Asset Liability $20m @ 7%$20m @ 3% DTB’s t-account

7. The structure of CMD is explained below:- Deposit-placing Bank (DPB) appoints the deposit- taking bank (DTB) as an Agent to purchase a commodity (crude palm oil or CPO) from a Supplier. DTB = Agent

8. The DTB receives the money for the payment of CPO from DPB. DTB purchases CPO from Supplier on cash basis. Agent holds legal ownership and DPB holds beneficial ownership. DPB sells CPO to DTB at murabaha price, based on the placement value, annual profit rate and tenor. No physical delivery taking place. DTB hold beneficial ownership of CPO.

9. DTB will make full settlement to DPB in bullet payment at the end of tenor. DTB sells CPO to Supplier in exchange for cash payment. DTB invest the cash proceeds into its financial operations.

10. There are many types of CMD. A CMD structure will change based on the following circumstances:- 1. Types of commodities utilized in the product. In Malaysia, crude palm oil is common while in the GCC and Europe copper is usually a popularchoice.

11. 2. Some DTBs prefer to purchase the commodity through a broker. Brokers usually earn $50 per $1 million transactions. When DTBs acted as an Agent, they earn a commission around 25 basis points (0.25%) 3. In some structures, the DTBs purchase the commodity directly from the Supplier.

12. There are many types of CMD. A CMD structure will change based on the following circumstances:- Types of commodities utilized in the product. In Malaysia, crude palm oil is common while in the GCC and Europe copper is usually a popular choice.

13. Some DTBs prefer to purchase the commodity through a broker. Brokers usually earn $50 per $1 million transactions. When DTBs acted as an Agent, they earn a commission around 25 basis points (0.25%) In some structures, the DTBs purchase the commodity directly from the Supplier.

14. VARIABLES IN CMD MASTER AGREEMENT DTB and DPB Agent Supplier Cost price and Murabaha price Yield and tenor Settlement date Commodity Prepayment Rebate Late payment Governing Law Tax and Stamp duty Event of Default

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