Islamic vs. Conventional Asset Management

ISLAMIC VS. CONVENTIONAL ASSET MANAGEMENT By: Prof. Dr. Mohd. Ma’sum Billah masum2001@yahoo.com applied-islamicfinance@yahoo.com

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Introduction

Islam has put the tremendous and best applicable system to be use by mankind in order to achieve their main target and purpose. Mankind needs a system to manage their life cycle and their asset. Islamic Asset Management system is established by Islam in achieving this purpose. For example in the time of Prophet S.A.W, Prophet Muhammad has established the asset management of Baitul Mal.

Baitul Mal played an important role in establishing Islamic asset in the time of Prophet Muhammad S.A.W and his companions. This role is the main sources of Islamic Asset Management.

But, there is also Conventional Asset Management system that is widely used by countries in the world. This system has been found by some of the people know as the intellectualist from system of capitalist and also socialist and others.

Our objective in bringing this assignment on differences of Islamic Asset Management System and Conventional Asset Management System is to make ourselves and mankind to understand the basic principles and the advantages of Islamic Asset Management System.

ISLAMIC ASSET MANAGEMENT SYSTEM BAI’ MU’AJJAL: (SALE ON DEFERRED PAYMENT BASIS) A sale in which the parties agree that the payment of price shall be deferred is called a "Bai’ Mu’ajjal". Bai’ Mu’ajjal is valid if the due date of payment is fixed in an unambiguous manner. The due time of payment can be fixed either with reference to a particular date, or by specifying a period, like three months, but it cannot be fixed with reference to a future event the exact date of which is unknown or is uncertain.

If the time of payment is unknown or uncertain, the sale is void. If a particular period is fixed for payment, like one month, it will be deemed to commence from the time of delivery, unless the parties have agreed otherwise. The deferred price may be more than the cash price, but it must be fixed at the time of sale. Once the price is fixed, it cannot be decreased in case of earlier payment, nor can it be increased in case of default. In order to pressurize the buyer to pay the installments promptly, the buyer may be asked to promise that in case of default, he will donate some specified amount for a charitable purpose.

In this case the seller may receive such amount from the buyer, not to make it a part of his income, but to use it for a charitable purpose on behalf of the buyer. The detailed discussion on this subject will be found later in this chapter. If the commodity is sold on installments, the seller may put a condition on the buyer that if he fails to pay any installment on its due date, the remaining installments will become due immediately. In order to secure the payment of price, the seller may ask the buyer to furnish a security whether in the form of a mortgage or in the form of a lien or a charge on any of his existing assets.

The buyer can also be asked to sign a promissory note or a bill of exchange, but the note or the bill cannot be sold to a third party at a price different from its face value.

MURABAHAH Murabahah is a particular kind of sale where the seller expressly mentions the cost of the sold commodity he has incurred, and sells it to another person by adding some profit or mark-up thereon. The profit in Murabahah can be determined by mutual consent, either in lump sum or through an agreed ratio of profit to be charged over the cost. All the expenses incurred by the seller in acquiring the commodity like freight, custom duty etc. shall be included in the cost price and the mark-up can be applied on the aggregate cost.

However, recurring expenses of the business like salaries of the staff, the rent of the premises etc. cannot be included in the cost of an individual transaction. In fact, the profit claimed over the cost takes care of these expenses. Murabahah is valid only where the exact cost of a commodity can be ascertained. If the exact cost cannot be ascertained, the commodity cannot be sold on murabahah basis. In this case the commodity must be sold on musawamah (bargaining) basis i.e. without any reference to the cost or to the ratio of profit / mark-up.

The price of the commodity in such cases shall be determined in lump sum by mutual consent.

Example (1) A purchased a pair of shoes for RM. 100/-. He wants to sell it on murabahah with 10% mark-up. The exact cost is known. The murabahah sale is valid.

Example (2) "A purchased a ready - made suit with a pair of shoes in a single transaction, for a lump sum price of RM. 500/-. A can sell the suit including shoes on murabahah. But he cannot sell the shoes separately on Murabahah, because the individual cost of the shoes is unknown. If he wants to sell the shoes separately, he must sell it at a lump sum price without reference to the cost or to the mark-up.

AL WADIAH Islamic banks in Malaysia mostly use Al Wadiah concept to accept deposits from customers. Under this Islamic scheme of savings and current account, you will enjoy interest free safekeeping services of your money, as well as a share of any profit that the bank makes by utilizing your deposit. The bank uses an Islamic banking principle that is known as "Al Wadiah Yad Dhamanah" which means guaranteed custody. This scheme ensures that Islamic financial institutions acquire deposits under Islamic banking principles.

The core of this arrangement is that the bank has the authority to use your deposits and gives a guarantee to return it to you when you need it. You will periodically obtain a share of the profits earned by the bank when it utilizes your money to invest in its business ventures. The portion of profit to be shared with you is at the absolute discretion of the bank. This reward is your alternative to the interest income that you would otherwise receive from a conventional bank.

AL MUDHARABAH GENERAL INVESTMENT ACCOUNT (AGIA) An Al Mudharabah GIA account offers you an investment opportunity that operates under the Islamic banking principle of Al Mudharabah. An Al Mudharabah transaction is derived from a partnership based on risk and profit sharing. This partnership is a collaboration between an investor (Rabbul Mal) and an entrepreneur (Mudharib) under which the former provides funds to the latter for the purpose of investment and profit sharing. This is how it works in practice - you, the investor will deposit an amount of money with the bank, which acts as the entrepreneur.

This investment is utilized as business capital by the bank. In this contract you have no authority to interfere in the management of your investment. On the other hand, the bank will have the right to manage your investments as it thinks fit by placing it into businesses that are permissible in Islam and which it thinks are profitable. Depending on the tenure of your investment, you will be offered a profit sharing ratio which will form the basis of the agreement made between you and the bank. On the date that your investments mature, the bank will distribute your share of accumulated profit into your investment account.

AL MUDHARABAH SPECIAL INVESTMENT ACCOUNT (ASIA) An Al Mudharabah SIA operates under the same basic principles as an Al Mudharabah General Investment Account (AGIA). However as the name implies, the SIA is more in tune with the requirements of the client. In all other respects, the SIA works just as the GIA does. However, the Bank as the entreprenuer, may specify that the fund from this special investment shall only be utilised to invest in certain sectors of the economy. The bank may also specify that a particular SIA fund will only be utilised to fund the financing of residential properties.

The ASIA return therefore will be restricted to the performance of a particular sector of the economy or a particular financing portfolio. AL BAI BITHAMAN AJIL ASSET FINANCING (BBA) Al Bai Bithaman Ajil means a "deferred payment sale". It is a mode of Islamic financing used for property, vehicle, as well as financing of other consumer goods. Technically, this financing facility is based on the activities of buying and selling. The furnitures that you wish to purchase for example, are bought by the bank and sold to you at an agreed to price, after the bank and you determine the tenure and the manner of the instalments.

The price at which the bank sells you the funitures will include the actual cost of the furnitures and will also incorporate the bank's profit margin. There is no interest charged and the extra price compensates the bank for its profit. Instalments remain fixed over the period of the contract and no adjustment is made if interest rates fluctuate. The fixed monthly instalments are determined by the selling price, repayment period and the percentage margin of financing.

AL IJARAH Al Ijarah means leasing. As in a normal lease transaction, a lessor who owns the leased asset will lease it to the lessee in exchange for rental. The lessee will get the full benefit of using the lease asset within the specified period for as long as he adheres to the lease terms and conditions. At the end of the lease period, the leased asset will be returned to the lessor. There are some other variants of leasing which incorporate the transfer or option to transfer ownership of the leased asset from the lessor to the lessee at the end of the lease period.

These are referred to as; Al Ijarah Thumma Al Bai - Lease Agreement Incorporating Sale of Leased Asset at the end of the lease tenure. Al Ijarah Muntahiya Bil Tamlik - Lease Agreement with option to Own Leased Asset at the end of the lease tenure Al Ijarah Wal Iktina - Lease Agreement with option to Acquire Leased Asset at the end of the lease tenure AL ISTISNA' FINANCING Al Istisna is by definition an order sale used mainly in financing assets that are under construction. It allows the Bank to disburse payments according to the stage of completion.

As a financier, the Bank rarely orders the asset for its own use. Once completed, the asset will be handed over to the customer through a leasing arrangement (Al Ijarah), a deferred sale arrangement (Al Bai Bithaman Ajil), a cost plus arrangement (Al Murabaha) or a profit sharing arrangement (Al Mudharabah or Al Musyarakah).

AL KAFALAH Islamic banks use Al Kafalah to issue Bank and Shipping guarantees. Al Kafalah is a contract made between the Bank and another party whereby the Bank agrees to discharge the liability of a third party in the case of default by the third party. As a surety, the third party will give the bank some form of collateral and pay a small fee for the services. Under the Kafalah Shipping Guarantee, the Bank gives a surety to the owner of the shipping vessel, to discharge goods to the importer pending receipt of the original bill of lading.

Under the Kafalah Bank Guarantee, the bank guarantees the company's standing to facilitate any business endeavors that may require such guarantees. AL MUSYARAKAH FINANCING Al Musharakah a profit and loss sharing partnership. In a Musyarakah financing arrangement, the Bank and the Customer will both contribute their capital as well as expertise in a project. Profit and loss will be shared normally based on the capital contribution. AL MUDHARABAH FINANCING As in Al Musyarakah financing, Al Mudharabah financing is a form of partnership where the Bank will provide the capital and the customer will provide the expertise.

Both will agree on a profit sharing ratio. The customer will be solely responsible for running the business, project or contract without interference from the Bank. All forms of capital loss, if any, will be borne by the Bank and all forms labor loss, if any, will be borne by the customer.

AL MURABAHAH FINANCING Al Murabahah financing arrangement is a trust sale financing arrangement. In this financing arrangement, the customer will first identify the goods to be financed. The bank will then secure the goods, add the mark up profit, deliver the goods and collect the payment from the customer - usually in deferred terms. In a Murabaha transaction, the cost price paid by the Bank must be transparent to the customer. Al Murabaha is widely used in Islamic Trade Finance arrangements. AL WAKALAH Al Wakalah means agency, or the delegating of a duty to another party for specific purposes and under specific conditions.

Under this concept, the bank acts as your agent in completing a particular financial transaction. As your agent, the Bank will be paid a certain amount of fee for the services it provides.

Conventional Asset Management System The Modern Capitalist

The modern capitalist theory does not differentiate between money and commodity in so far as commercial transactions are concerned. In the matter of exchange, money and commodity both are treated at par. Both can be traded in. Both can be sold at whatever price the parties agree upon. One can sell one dollar for two dollars on the spot as well as on credit, just as he can sell a commodity valuing one dollar for two dollars. The only condition is that it should be with mutual consent.

The Islamic principles, however, do not subscribe to this theory. According to Islamic principles, money and commodity have different characteristics and therefore, they are treated differently. The basic points of difference between money and commodity are the following:

Money has no intrinsic utility. It cannot be utilized for fulfilling human needs directly. It can only be used for acquiring some goods or services. The commodities, on the other hand, have intrinsic utility. They can be utilized directly without exchanging them for some other thing.

The commodities can be of different qualities, while money has no quality except that it is a measure of value or a medium of exchange. Therefore, all the units of money, of same denomination, are 100% equal to each other. An old and dirty note of RM. 1000/- has the same value as a brand new note of RM. 1000/-, unlike the commodities which may have different qualities, and obviously an old and used car may be much less in value than a brand new car.

In commodities, the transaction of sale and purchase is effected on a particular individual commodity or, at least, on the commodities having particular specifications. If A has purchased a particular car by pin- pointing it and seller has agreed, he deserves to receive the same car. The seller cannot compel him to take the delivery of another car, though of the same type or quality. This can only be done if the purchaser agrees to it which implies that the earlier transaction is cancelled and a new transaction on the new car is effected by mutual consent.

PERSONAL ASSET MANAGEMENT Personal Asset Management was founded in Switzerland in 1987, mainly as a company to manage family funds. Personal Asset Management founder Thomas Stucki studied economics and started to manage assets in 1973. When he founded the company, he brought with him all portfolios privately managed until then. Today, Personal Asset Management offers clients from around the world a solid alternative to conventional portfolio management by Swiss banks. Well-to-do private persons form Personal Asset Management’s dominant client segment, followed by firms, pension funds and charitable institutions.

At the beginning of a relationship, it is crucial to determine the individual asset management objective together with each client. This may include tax and legal aspects, too. Once the asset management objective is identified, the investment guidelines necessary to achieve it are fixed. Objectives and guidelines can of course be changed at any time according to the client’s wishes and interests. After determining the client’s bank connection in a next step, (compare The Bank Connections of Personal Asset Management), a limited power of attorney then enables Personal Asset Management to manage the client's portfolio according to the guidelines agreed upon.

Such a limited power of attorney precisely specifies the kind of asset management Personal Asset Management is to be entrusted with, and does not empower the entrusted party to make any deductions whatsoever from the account. As soon as all formalities are taken care of and assets are deposited in the client’s custodian bank account, Personal Asset Management commences its management mandate with a view to long-term growth. Once the portfolio is invested, the investments are typically retained unless no longer appropriate.

Whilst every portfolio is updated and surveyed daily, switches take place only when necessary. This approach of continuity helps to keep transaction costs low, too.

Asset Management

Provides portfolio and investments positioning to meet individual needs for growth, income, and tax advantages, through use of asset allocation models and no-load mutual funds. Suitable for wealth preservation, retirement funds, IRA rollovers or accumulation.

Financial Planning

The cornerstone of any financial program is a written review of current positions and recommendations for future actions. Plans can be simple or complex, depending on needs. Based on flat fees and hourly rates there is no pressure to purchase products.

BASIC PLANS • Financial Plan Basic • Retirement Analysis • Estate Planning Comprehensive planning involves on-going assistance and advisory services. Additional services to closely held family businesses and professional practices are available.

Trust Services

Cumberland Security Bank can be called upon by customers to serve in a fiduciary capacity as trustee for both lifetime and testamentary trust. The bank can also provide other custodial actions needed by businesses and individuals. • Personal Trust • Estate Settlement • Charitable Trust • IRA-custodial/self-directed • Conservatorship • Escrow Accounts

Disclosure

Investments and assets handled and managed by the Asset Management Department of Cumberland Security Bank do not provide FDIC insurance and protection. Investments are subject to changing values within the market. Customers should review all investments and understand risk and expenses of recommendation. Disclosure of all fees and expenses are estimated at time service is presented with full disclosure, upon request, at conclusion of services.