THE APPLICATION OF NEW MUSYARAKAH MODEL IN ISLAMIC BANKING PRODUCTS

Maheran Mohd Jaffar Mathematics Department Fakulti Sains Teknologi & Matematik Universiti Teknologi MARA Malaysia
5-6 April 2011 ICIBF, Mauritius 1

Content
Introduction Background problem New Musyarakah model Application of model in musyarakah product Results Discussion Usefulness/benefits to society Conclusion
5-6 April 2011 ICIBF, Mauritius 2

Introduction
Islamic banking
Significant and popular Competitive alternatives to conventional products

Loan financing contracts

Bai bithaman ajil (deferred payment sale), murabahah (Cost plus profit), wadiah (savings with guarantee), ijarah (leasing) etc.

Equity fincancing contracts

not popular : mudharabah (profit sharing), musyarakah (joint venture)

Mudharabah contract Musyarakah contract

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Musyarakah Contract
A joint venture Very dynamic concept Not many musyarakah products The financial institutions love sure profit. Potential investors love profit sharing products. Higher risk Not many scientific research

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Percentage of Islamic Financial Concepts Used in Banking System (Malaysia) in 2007, 2008 and 2009

Percentage (%) Islamic Concepts Bai Bithaman Ajil Ijarah Ijarah Thumma Al-Bai Murabahah Musyarakah & mudharabah Istisna' Others Total
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2007 37.0 1.4 30.2 11.4 0.5 0.9 18.5 100

2008 33.0 2.7 30.4 15.2 1.4 1.3 16.1 100

2009 33.4 2.8 31.3 16.6 1.7 1.3 12.9 100

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Background Problem
Islamic banks
are pesimistic in packaging their products. prefer the sure profit need to improvise and offer new products to attract fund managers

Not many scientific research Need better understanding on the flow of money

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New Musyarakah Model

A new mathematical model for joint venture Both parties can put in initial capital. Provides two profit sharing rates. Investment can be calculated at any time Total investment and profit for the two parties. Transparent, fair, and justified profit sharing model. Risks are shared between investors. A catalyst to new products
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New Musyarakah Model

Customer (Capital provider)
Bank (Entrepreneur)

Initial investment:

Net Profit:
(1-k)% k% (1-j)% j%

Total investment:
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+
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New Musyarakah Model

Capital providers investment at time t :

Et capital providers investment at time t Qt entrepreneurs investment at time t rt rate of profit at time t k capital provider profit sharing ratio j entrepreneur profit sharing ratio

E t = E t 1 + rt kE t 1 + rt (1 j )Q t 1
Entrepreneurs investment at time t:

:
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Q t = Q t 1 + rt (1 k ) E t 1 + rt jQ t 1

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Application of Model in Musyarakah Products

A customer (capital provider)
Initial investment: RM1000 Profit sharing rate: k:(1-k) = 60%:40%

An Islamic bank (entrepreneur): RM500

Initial investment: RM500 Profit sharing rate: (1-j):j = 20%:80%

Tenor: 6 months Assumed profit rates: 4%, 5%, 6%, 4%, 6%, 7%

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Application
k:(1-k) 60%:40% Initial investment: 1st month profit is 4%
Customer (Capital provider) RM1000
Bank (Entrepreneur)

(1-j):j 20%:80%

RM500

RM40
40% 60% 20%

RM20
80%

Total investment: 1000 + 24 + 4 = 1028 2st month profit is 5% RM51.50

60% 40% 20%

500 + 16 + 16 = 532 RM26.60

80%

Total investment:
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1028 + 30.84+ 5.32 = 1064.16

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500 + 20.56 + 21.28 = 573.84

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Results
Term Investment + Profit Rate Profit Profit from Capital Provider's Investment Profit from Entreprenueur's Investment Total Profit

Year

Capital Provider

Entrepr e nueur

Capital Provi der

Entre pre nueur Capital Provi der

60:40 Capital Provide r 10 0.00 4.00 5.32 6.89 5.02 7.98 10.14 39.33

20:80

t % 0 1 2 3 4 5 6 1,000.00 1,000.00 1,028.00 1,064.16 1109.36 1141.00 1190.05

5-6 April 2011

Entrepre nueur 30 0.00 16.00 20.56 25.54 17.75 27.83 33.32 140.55

Entrepre nueur 90 0.00 16.00 21.28 27.54 20.06 31.91 40.55 157.34

Capital Provide r 0.00 28.00 64.16 109.36 141.00 190.95 250.17 250.17

Entrepre nueur

70 0.00 40.00 51.40 63.85 44.37 68.46 83.30 351.39 0.00 20.00 26.60 34.43 25.08 39.88 50.68 196.67 0.00 24.00 30.84 38.31 26.62 41.08 49.98
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500.00 500.00 532.00 573.84 626.92 664.74 724.03 797.89

0% 4% 5% 6% 4% 6% 7% -

0.00 32.00 73.84 126.92 164.74 224.03 297.89

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TOT AL

1250.17

210.83

297.89

Discussion
Customer

Profit calculated using new model

RM351.39 + RM196.67 =RM548.06

RM250.17 Bank RM297.89

BUT if use only 1 profit sharing rate 60%:40% then RM548.06

customer gains bigger profit unfair to the bank banks will not offer musyarakah product.
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Customer RM328.84 Bank RM219.22

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Discussion
If profit sharing rates k:(1-k) => 60%:40% and (1-j):j => 40%:60% or k = j
Unfair to bank. Bank involvement in the joint venture is far greater compared to customer. The values for k and j can never be the same. two profit sharing rates are essential.

gives credit for the expertise, time, and effort of the joint venture. Transparent calculation of any time Can calculate the total investment and profit

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Usefulness/Benefits to Society
Catalyst to innovation and research in the area of Islamic finance A catalyst to new products innovation & research in finance/investment Linkages and collaborations between academicians & industries Dynamic activities in implementing musyarakah concept Public have choices of investing instead of taking loans

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Conclusion
Justified and fair profit sharing model The risk are shared between both parties Encourage opportunity for entrepreneur to invest Able to package more musyarakah products in Islamic banking/investment An alternative or a complement to the existing products offered by Islamic banks Initiate new joint venture investment and financing products

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THANK YOU
Funded by the Fundamental Research Grant Scheme (FRGS), FRGS 600-RMI/FRGS 5/31Fst(26/2008) from the Ministry of Higher Education, Malaysia.

Maheran Mohd Jaffar maheran@tmsk.uitm.edu.my

5-6 April 2011

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