UNDERSTANDING OF

ISLAMIC BANKs BALANCE SHEET

Presentation to Dr. Ruqaia, Member of Iraq House of Representative
15 March 2012

STRICTLY PRIVATE & CONFIDENTIAL

OUTLINE OF PRESENTATION
A Snapshot of Bank Islam

Financial Statements & Accounting Equation : Malaysias

Perspective

Balance Sheet of An Islamic Bank

Key Financial Ratios

Wrap Up

Page 1

A SNAPSHOT

Malaysias Pioneer Islamic Bank 1983

3rd Largest Islamic Bank in Malaysia
 Total Assets of about RM32 billion

Total customer base of more than 3.5 mil.

Best Islamic Bank in Malaysia 2011 IFN Award

Rated A1/P1 with stable outlook by Rating Agency Malaysia

Rated 4th Strongest Bank in Malaysia by The Asian Banker (Part of Financial Times Group)

Ranked 53 Asia Pacific 500 Strongest Bank by The Asian Banker

Page 2

BUILDING STRENGTHS TO STRENGTHS

Page 3

MARKET SHARE AS AT DEC 2011

Total Assets

22.5%

14.3%

9.6%

RM75.5b

RM47.9b

RM32.2b

8.8%

RM29.4b

Islamic Banking Assets RM334.9 billion

Page 4

6.7%

RM22.4b

MARKET SHARE AS AT DEC 2011

Net Financing

25.4%

14.7%

9.6%

RM50.9b

RM29.5b

RM19.2b

7.0%

7.6%

RM15.3b

RM14.1b

Islamic Banking Net Financing RM200.3 billion

Page 5

MARKET SHARE AS AT DEC 2011

Deposits

22.1%

11.8%

RM59.1

RM31.6b

10.6%

7.5%

6.4%

RM28.3b

RM20.0b

RM17.0b

Islamic Banking Deposits RM267.0 billion

Page 6

MARKET SHARE AS AT DEC 2011

CASA Deposits

25.0%

RM16.7b

18.4%

11.1%

10.0%

RM12.3b

RM7.4b

RM6.7b

Islamic Banking CASA Deposits RM66.7billion

Page 7

5.2%

RM3.5b

PROFIT BEFORE ZAKAT & TAX TREND

Profit before Zakat and Tax for
12 months to Dec 2010
= RM 344.5 m

* 18 months Financial Period Ended Dec 2010

Page 8

FINANCIAL STATEMENTS & ACCOUNTING

EQUATION : MALAYSIAS PERSPECTIVE
Accounting is like the language of businesses or a
doctors health prescription of a business entity
Page 9

GOVERNANCE
Governance
Liabilities- An illustration
To safeguard interest of Investment Account Holders (IAH)
profit sharing contracts

Ensures compliance
with Shariah rules
& principles

IBIs fiduciary responsibilities in protecting depositors

(profit sharing investment account)
Sound investment & financing strategies to align with
IAH risk & return expectations
Proper disclosure & transparency

Assets
Shariah
Governance

Fiduciary
duties in
Islamic
banking
transaction

Normal
Corporate
Governance

To manage risks associated with Mudharabah (profit-sharing)

& Musharakah (partnership) contracts : equity-based
transactions
Board to ensure IBIs have sufficient expertise & capability
Allow appointment of Board representatives on entities
involved in such transactions as monitoring mechanism
Establishment of dedicated oversight function e.g. inhouse property development/ research department for
property investment & development activities

Strict compliance with corporate & Shariah governance promotes financial stability
Page 10

Source: BNM

GOVERNANCEcont
 The accountancy profession in Malaysia is regulated by the
Malaysian Institute of Accountants (MIA) through the powers
conferred by the Accountants Act, 1967
 The MIA is an agency under the Ministry of Finance and reports
directly to the Accountant General Office.
 MIA sets the By-Laws (On Professional Conduct & Ethic) and auditing
standards for the accountancy profession in Malaysia, which are in
line with the standards issued by the International Federation of
Accountants (IFAC) and the International Auditing and Assurance
Standards Board (IAASB).
 Accounting standards are issued by the Malaysian Accounting
Standards Board(MASB) by virtue of the power conferred by the
Financial Reporting Act, 1997
 The MASB had announced the effort to bring Malaysia to be in full
convergence with the International Financial Reporting Standards
(IFRS) by 2012

Page 11

GOVERNANCE cont
 The Accounting and Auditing Organization for Islamic Financial
Institutions(AAOIFI) is an Islamic international autonomous non-forprofit corporate body that prepares accounting, auditing,
governance, ethics and Shari'ah standards for Islamic financial
institutions and the industry
 The Islamic Financial Services Board (IFSB) is an international
standard-setting organization that promotes and enhances the
soundness and stability of the Islamic financial services industry by
issuing global prudential standards and guiding principles for the
industry, broadly defined to include banking, capital markets and
insurance sectors.
 The standards prepared by the IFSB follow a lengthy due process as
outlined in its Guidelines and Procedures for the Preparation of
Standards/Guidelines, which includes the issuance of exposure drafts
and the holding of workshops and, where necessary, public hearings.
 The IFSB also conducts research and coordinates initiatives on
industry-related issues, as well as organizes roundtables, seminars
and conferences for regulators and industry stakeholders.
Page 12

GOVERNANCE cont
 The Central Bank of Malaysia had issued a Guidelines on Financial
Reporting for Licensed Islamic Banks (GP8-i) is to provide the basis
for presentation and disclosure of reports and financial statements
of Islamic banks in carrying out its banking and finance activities.
 This is to ensure consistency and comparability of these statements
among the Islamic banks in complying with the provisions of the
Companies Act 1965, applicable approved accounting standards and
Shariah requirements, and to facilitate users in their evaluation and
assessment of the financial position and performance of an Islamic
bank.
 With respect to accounting, some standard-setters such as the
Malaysian Accounting Standard Board (MASB) have concluded that it
would not be in conflict with Shariah to apply conventional
accounting standards, namely the International Financial Reporting
Standards (IFRSs), to Islamic financial transactions.
 Conversely, others such as the AAOIFI believe that not all IFRS
principles can be applied, and have formulated alternative
accounting standards for certain transaction
Chapter 18, Islamic Financial System by ISRA
Page 13

DEFINITION OF A BANK MALAYSIAs PERSPECTIVE

 Governed by Banking and Financial Institutions Act 1989 (BAFIA)
 Banking business means:
(a)

The business of;

(i)

Receiving deposits on current account, deposit account, savings account or

other similar account;

(ii)

Paying and collecting cheques drawn by or paid in by customers; and,

(iii)

Provision of finance; or

(b) Such other business as the bank (BNM), with the approval of the Minister may prescribe

Page 14

ISLAMIC BANKING ACT (IBA), 1983

Section 2, IBA 1983 :

 Islamic banking business
means banking business
whose aims and operations
do not involve any element
which is not approved by
the Religion of Islam.

Page 15

ISLAMIC BANKING ACTIVITIES

 Islamic bank main activities:

structure of mobilising and investing capital;

profit sharing institution that invests investment account holders money in Shariah
based financing activities;

investment account holders and their unique position in Islamic financial institutions;

principles and practical operations of current accounts and savings accounts
(mudaraba, wakala and wadiah);

financing through leasing (ijarah), sale based contracts (murabaha, istisnaa, salam) or
profit sharing modes (musharaka/mudaraba);

mechanism of profit and loss sharing with investment account holders

Page 16

BASIC PRINCIPLES OF ISLAMIC FINANCE

 Prohibition of interest (riba). Prohibition of riba a term literally an excess and interpreted
as any unjustifiable increase of capital whether in loans or sales.\
 Money as potential capital. Money is not a commodity, but a medium of exchange, a store
value and a unit of measurement. Money represents purchasing power and cannot be utilised
to increase the purchasing power without any productive activity. Islamic finance advocates
the creation of wealth through trade and commerce.
 Risk sharing. Because interest is prohibited, suppliers of funds become investors, rather than
creditors.
 Prohibition of speculative behaviour. Islamic finance discourages hoarding and prohibits
transactions featuring extreme uncertainties (gharar), and gambling (maysir).
 Sanctity of contracts. Islamic finance upholds contractual obligations and the disclosure of
information as a sacred duty. This feature is intended to reduce the risk of asymmetric
information and moral hazard.
 Shariah approved activities. Only those business activities that do not violate the rules of the
Shariah qualify for investment. For example, any investment in a business dealing with
alcohol or gambling is prohibited.
 Social justice. Any transaction leading to injustice and exploitation is prohibited.
Page 17

Source: IFGFS

KEY THRUST OF ISLAMIC FINANCIAL TRANSACTIONS

 Islamic banking to have high degree of transparency and disclosure in preserving the rights and
responsibilities of the parties to a contract.
 Islamic financial institutions to undertake the appropriate due diligence on the viability of
business proposals and to meet the requirement for transparency and disclosure. Market
conduct disclosure and customer relationship management form the core of these principles.
Addressing the information asymmetry between Islamic banking institutions and the
depositors/investors is of vital importance.
 Disclosure of the true and fair value of the Islamic banking operations in the financial statements
is also essential for depositors to undertake an informed assessment of the banks performance.
Please refer to Bank Islams Annual Report.
 Non-commingling of funds is essential and should be enshrined and expressly stated in the
statutes.
 The role of the Shariah Board in ensuring that all aspects of the business operations of Islamic
financial institutions are in accordance with the Shariah principles, adds another level of
oversight which inherently safeguards against irresponsible practices.
 These inbuilt dimensions of governance and risk management contribute to safeguarding Islamic
finance from the potential risks of financial stress arising from excessive leverage or speculative
Source: IFGFS
activities.
Page 18

SHARIAH CONTRACT DEVELOPMENT MILESTONES

1983 - 1990

Wadiah Current a/c

Wadiah Savings a/c

Mudharabah
Investment a/c

Mudharabah
Financing

Ijarah Financing

BBA Financing

Murabahah LC

Musharakah LC

Wakalah LC

Bai Dayn Trade
Finance

Murabahah
Working Capital
Financing

1991 - 2000

Sarf Forex

Mudharabah
Interbank
Investment

Musharakah
Financing

Bai Inah Credit
Card

Ar Rahn

2001 - 2005

Bai Dayn,
Musharakah ,
Mudharabah ICDO

Wadiah Debit Card

Bai Inah Overdraft

Bai Inah
Commercial Credit
Card

Bai Inah Personal
Financing

Bai Inah
Negotiable
Instrument of
Deposit (NID)

Note This listing is far from being

exhaustive. Although they have been
developed and/or approved, some products
have yet to be rolled out at the time of
publication of this document.

Page 19

2006 - 2008

Commodity
Murabahah Profit
Rate Swap

Commodity
Murabahah Forward
Rate Agreement

Ijarah Rental Swaps-I

BBA Floating Rate

Murabahah Floating
Rate

Istisna Floating Rate

Mudharabah Capital
Protected Structured
Investment

Bai Inah Floating
Rate NID

Mudharabah Savings
Multiplier Deposit

Tawarruq
Commodity
Undertaking

2009
Onwards

Tawarruq Business
Financing

Tawarruq Personal
Financing

Murabahah with
Novation
Agreement

Istisna convertible
to Ijarah

Bai and Ijarah (Sale
& Lease Back)

Musharakah
Mutanaqisah

Istisna with
Parallel Istisna

Wakalah Deposit

Waqf

Tawarruq
Revolving Credit-I

etc

TERMS OF TRADE
 Various features have been identified in classifying contracts as follows:

Price
 Cost Price (Tawliya)/ Mark up price with disclosure (Murabaha)
 Negotiated price (Musawamma)
 Discounted Price (Wadhi)

Payment
 Cash Payment
 Deferred Payment (Muajjal)

Delivery
 Immediate delivery/Deferred delivery (Salam)
 Piecemeal Delivery (Istisnaa)
 These features also influence classification and reporting of types IFI Financing assets.

Page 20

GENERIC BUSINESS MODEL

VALUE PROPOSITIONS
Competitive Pricing

Excellent Services

Innovative Offerings

(Turnaround Time, Hassle Free)

ASSETS
(Fixed vs Float Rates)
Customers &
Assets
(Debt based
Financing vs
Equity based
Financing)

LIABILITIES
(Profit Sharing vs CASA)

REVENUE COST = PROFIT

Profit levels are dependent on the ability to manage risks
and price according to expected returns.

Investors Vs
Depositors

RISK SHARING
Risks associated with the use of funds to finance customers
or to invest in marketable securities. Risk premium should
be factored into the price

SUPPORT FUNCTIONS
Product development and innovation will be key aspect in developing successful offerings.
Page 21

ISLAMIC BANKING LANDSCAPE

Mega Islamic
Banks (Paid Up
Capital of US$1 bil)

STAND-ALONE

17 Commercial
Islamic Banks, 6 FB
windows, 6 DFIs &
4 IIBs.

SUBSIDIARIES OF CONVENTIONAL BANKS

ISLAMIC WINDOWS & DFIs
INTERNATIONAL ISLAMIC BANKS

Page 22

ISLAMIC FINANCE SYSTEM AS AT DEC 2010

Assets

20.8% of total banking system

Total IB asset : RM351 bil (USD116.2 bil)

Financing

Market share 22.7%

Total financing: RM222.3 bil (USD73.6 bil)

Capital Market

57% of the
outstanding PDS

Page 23

Deposits

Market share 22.6%

Total deposit : RM277.5 bil
(USD91.9 bil)

GP8--i
GP8
 The GP8-i sets out the minimum disclosure requirements that should be observed by the
reporting institutions. The reporting institutions are encouraged to disclose additional
information on the accounting policies, new financial instruments and other material
activities of the reporting institutions. This is to ensure that all the above activities are
reported and well understood by readers of the financial statements.
 The financial reports must be prepared in accordance with the provisions of the Companies
Act 1965 and approved accounting standards issued by the Malaysian Accounting Standards
Board. In addition, the listed reporting institutions are required to comply with the
disclosure requirements of the Bursa Malaysia Securities Berhad.
 To further enhance the disclosure and presentation of reports and financial statements,
reporting institutions are required to disclose the overview of performance and corporate
governance. As for the Board committees established, the disclosure on the activities of the
committees and their assessment should be presented in the Statement of Corporate
Governance of the reporting institution.

Page 24

FINANCIAL REPORTING FRAMEWORK

Shariah
Standards

Auditing
Standards

Governance
Standards
Financial
Statements

Financial
Reporting
Standards

Accounting
Standards

Page 25

ISLAMIC ACCOUNTING
 Islamic accounting has been described as the accounting process which provides
appropriate information (not necessarily limited to financial data) to stakeholders of an
entity , to ensure that the entity is continuously operating within the bounds of Islamic
Shariah and delivering its socio-economic objectives
 The importance of accounting is stressed in the Quran, in Surah Al-Baqarah verse 282,
which read:
Oh you who believe! When you deal with each other in transaction involving future
obligations in a fixed period of time, reduce them in writing. Let a scribe write down
faithfully as between parties. Let not the scribe refuse to write: as God has taught him,
so let him write. Let him who incurs the liability (debtor) dictate, but let him fear his
Lord God, and not diminish aught of what he owes. If the party liable (debtor) is
mentally deficient, or weak, or unable himself to dictate, let his guardian dictate
faithfully, and get two witnesses, out of your own men, and if they are not two men,
then a man and two women, so that if one of them errs, the other can remind him.

Chapter 18, Islamic Financial System by ISRA

Page 26

ISLAMIC ACCOUNTABILITY
 Transcendental accountability to Allah SWT (Hablumminallah)
 Social accountability to the society (Hablumminan-nass)
 Individuals as trustees or khalifah
 Success in this world and in the hereafter (al-falah)
 Economic goals beyond purely wealth but include tazkiyah (purification of self and wealth)
 It is conceded that both Islamic and traditional accounting refer to the same process of
providing information to the stakeholders or financial statement users. However,
proponents expound the Islamic accounting aims to create greater transparency and
accountability of the institution to abide by the principles of Shariah in dealings and assess
whether the strategic intent of the institution are being met.

Page 27

KEY DEFINITIONS
Capital

Capital derives its value from real assets in lawful economic activities.
Equity capital - financial claims recognized based on profit & loss sharing
contracts for an expected return derived from exchange transactions
involving real assets.

Shareholders
Equity

It is the amount remaining at the date of the statement of financial

position, from the Islamic banks assets after deducting the banks liabilities,
equity of unrestricted investments and their equivalents

Assets

Capable of generating positive cash flows or other economic benefits in

the future either by itself or in combination with other assets which the
bank has acquired the right to hold (rightful ownership of maal), use of
dispose (rights on manfaat) as a result of past transactions or events
(AAOIFI)
A liability is a measurable present banks obligation to another party to
transfer assets, extend the use of an asset, or provide services to that party
in the future as a result of past transactions or events.

Liability

Islamic banks obligation must not be a reciprocal to an obligation of the

other party to the bank.
Page 28

KEY TERMS COMPARABLE BUT NOT THE SAME

Islamic Banking
 Total Financing (Qard is the only loan)
 Profit Rate
 Fund-based Income
 Non Fund-based Income (Fee-based)
 Net Income Margin (NIM)
 Financing Loss Coverage
 Impaired Financing Ratio
 Financing-to-deposit ratio
 Profit Sharing Ratio
 Profit Sharing Investment Account (with
risk absorbent capability)
 Profit Attributable to Depositors
 Zakat
 Profit After Tax & Zakat
 Sukuk

Conventional Banking
 Total Loans
 Interest Rate
 Interest Income
 Non Interest Income
 Net Interest Margin
 Loan Loss Coverage
 Impaired Loan Ratio
 Loans-to-deposit ratio
 Not Available
 Not Available




Page 29

Interest Expense
Not Available
Profit After Tax (without zakat)
Bonds

ISLAMIC BANKING OPERATION IN A NUTSHELL

Sources of funds

Application of funds

Non-mudharabah
deposits
Mudharabah
deposits
Shareholders
Fund

Profit

Distribution of profit
Depositors

General
Pool

Specific account I

Bank

or
Specific account II

Page 30

Depositors

INCOME STATEMENT : GP8GP8-i

 Finance income is recognized on an accrual basis. Income on cash line, house and term
financing is accounted for on a straight-line basis by reference to the rest periods as stipulated
in the financing agreement.
 Where an account is classified as non-performing, income is suspended until it is realized on a
cash basis. Financing income recognized prior to the non BNM/RH/GL/002-2 JPIT Guidelines on
Financial Reporting for Licensed Islamic Banks (Page 47/111) performing classification is not
clawed-back to the first day of default in conformity with Bank Negara Malaysia guidelines.
 Customers accounts are classified as non-performing where repayments are in arrears for
more than six months (or based on internal policy i.e. 3 months) from the first day of default
for financing, cash line and advances; and three months from the first day of default for trade
bills, bankers acceptances, trust receipts and other instruments of similar nature.
 Financing arrangement, management and participation fees, underwriting commissions and
brokerage fees are recognized as income based on contractual arrangements.
 Guarantee fee is recognized as income upon issuance of the guarantee.
 Fees from advisory and corporate finance activities are recognized net of service taxes and
discounts on completion of each stage of the assignment.
 Dividend income from subsidiary and associated companies and other investments are
recognized when the Banks right to receive payment is established.
Page 31

INCOME STATEMENT : GP8GP8-icont

 Zakat - This represents business zakat. It is an obligatory amount payable by the Bank to
comply with the principles of Shariah. Zakat provision is calculated based on xx% of the net
asset method.
 Income tax on the profit or loss for the financial year comprises current and deferred tax.
Current tax is the expected amount of income taxes payable in respect of the taxable profit
for the financial year and is measured using the tax rates that have been enacted at the
balance sheet date.
 Deferred tax is provided for, using the liability method, on temporary differences at the
balance sheet date between the tax bases of assets and liabilities and their carrying
amounts in the financial statements.
 Deferred tax liabilities are recognized for all taxable temporary differences and deferred tax
assets are recognized for all deductible temporary differences, unused tax losses and
unused tax credits to the extent that it is probable that taxable profit will be available
against which the deductible temporary differences, unused tax losses and unused tax
credits can be utilized.
 Deferred tax is measured at the tax rates that are expected to apply in the period when the
asset is realized or the liability is settled, based on tax rates that have been enacted or
substantively enacted at the balance sheet date.
Source : BNM GP8i
Page 32

PRESENTATION OF INCOME STATMENT

Bahrain Islamic Bank B.S.C

Bank Islam Malaysia Berhad (GP8-i)

Income from Islamic finance

Income derived from investment of depositors funds

Income from Sukuk & Commodities

Income derived from invest. of shareholders funds

Gross return to unrestricted inv. acc.

Allowance for losses on financing

Banks share as Mudarib

Reversal of impairment loss

Return on unrestricted inv. acc.

Profit Equalization Reserve

Banks share of income from joint financing and Direct Expenses

investment accounts
Net income from investments

Total distributable income

(Loss)Gain on sale of available for sale

Income distributable to the depositors

Gain on fair value adjustment - properties

Total net income

Share of results of associates

Personnel expenses

Fee & commission income

Other overhead expenses

Other Income

Impairment loss from property & equipment

Expenses (Staff costs, Depreciation, etc)

Finance cost

Income before provision

Profit before zakat and tax

Provision for impairment

Page 33

BALANCE SHEET OF AN ISLAMIC BANK

MALAYSIAs PERSPECTIVE

...snap shot of stocks at a given point of time financial position

Page 34

ISLAMIC BANKING BALANCE SHEET

Return on Assets

Distinct characteristic
ownership of assets

Investment
Returns

ASSETS

LIABILITIES

Inventory

Current/Demand Deposits

(Real Estates, Automobiles, etc)

(Wadiah (Safe Custody), Wakalah)

Asset-backed Transactions
Akin to loans but legal position of
lender and borrower is replaced by
different contractual relationship

FINANCINGS
Investor entrepreneur relationship

Murabahah (cost plus)/ Ijarah

(leasing)/ Istisna
(manufacture)/ Salam (forward
delivery)

Akin to demand deposit

Unrestricted Investment
Accounts
(Mudharabah-based GIA, SIA)

Restricted Investment Accounts

(Mudharabah PSIAs)

Akin to fixed deposit

but uses profit
sharing basis where
return based on
performance of
assets

Profit Sharing Transactions

Mudharabah (profit sharing &
loss bearing) / Musharakah
(profit & loss sharing)

Profit Equalization Reserves

Distinct characteristic as
prudential tools

Fee Based Transactions

(Ujr, Sarf, Wakalah, etc) i.e. for
Trade Financing
Return on
Financing

Shareholders Equity

Cost of Funds
Page 35

Partly used to set up

infrastructure to
undertake the business

SOURCE & APPLICATION OF FUNDS BALANCE SHEETs PERSPECTIVE

Application of Funding

Source of Funding

Cash (@ branches/placement @ BNM/etc)

Demands Deposit

Financing Assets (Inah, Murabaha, Salam,

Ijarah, Istisna)

Investment Account (Mudarabah)

Investment Assets (Mudharabah, Musharakah) Special Investment Account (PSIA, Mudarabah,

Musharakah)
Fee-based services (juala, kafala, and so forth)

Reserves

Non-banking assets (property, building for

branches, etc)

Equity

 For Islamic banks, the mudarabah contract is the cornerstone of financial intermediation
and thus of banking.
 The basic concept is that both the mobilisation and (in theory) the use of funds are based
on some form of profit sharing among the depositors, the bank, and the entrepreneurs
(users of funds).
 The financial intermediation is merely a pass-through arrangement similar to funds
management, with the difference that there are multiple portfolios on the asset side.

Page 36

CAPITAL MANAGEMENT
Regulatory
Capital

Capital
Buffer

RWCR - 8%

Take into
account
stress test

Allocated to business
Capital lines for organic
Allocationgrowth and for
inorganic growth
Capital for
Infra & To act as Mudarib
Marketing
Allocation for Profit
Capital
Equalization
Reserves
Reserves

Page 37

BALANCE SHEET : GP8GP8-i

 Financing are recognized when cash is disbursed to customers. They are initially stated at cost
including any transaction cost and are subsequently measured at amortized cost using the
effective profit rate method.
 Reporting institution should refer to BNM guidelines on classification of non-performing and
provisioning for financing. Impaired financing shall be measured at their estimated
recoverable amount. Reporting institution should provide additional allowance if the
recoverable amount (present value of estimated future cash flows discounted at original
effective profit rate) is lower than the net book value of the financing (outstanding amount of
financing, advances and other loans, net of specific allowance).
 A general allowance based on a percentage of the financing portfolio is also made. The
percentage is reviewed annually in light of past experiences and BNM/RH/GL/002-2 Islamic
Banking and Takaful Department Guidelines on Financial Reporting for Licensed Islamic Banks
(Page 43/111) prevailing circumstances and an adjustment is made to the overall general
allowance, if necessary. Specific allowance provided for impaired financing had been made in
full compliance with the BNM/GP3. Additional allowances for impaired financing are provided
when the recoverable amount is lower than the net book value of the financing (outstanding
amount of financing, net of specific allowances). Any allowances made during the year are
charged to the income statement. An uncollectible financing or portion of a financing
classified as bad is written off after taking into consideration the realizable value of collateral,
if any, when in the judgment of the management, there is no prospect of recovery.
Page 38

PRESENTATION OF BALANCE SHEET - ASSETS

Bahrain Islamic Bank B.S.C

Bank Islam Malaysia Bhd (GP8-i)

Cash (including deposit with Central Bank)

Cash and short term funds

Murabaha Receivables

Deposits & placement with banks and other

financial institutions

Mudaraba Investments

Securities held-for-trading

Musharaka Investment

Securities available-for-sale

Investments

Securities held-to-maturity

Investment in associates

Financing, advances and others

Investment in Ijarah assets

Other assets

Ijarah Muntahia Bittamleek

Statutory deposits with the Central Bank

Investment in properties

Current tax asset

Ijarah rental receivables

Deferred tax asset

Other assets

Investment in subsidiary
Property & equipment
Prepaid lease payments
Page 39

PRESENTATION OF BALANCE SHEET - LIABILITIES

Bahrain Islamic Bank B.S.C

Bank Islam Malaysia Bhd (GP8-i)

Customers Current Account

Deposits from Customers

Other Liabilities

Deposits and placements of banks

Unrestricted Investment Accounts

Bills and acceptance payable

Financial Institutional Investment Accounts

Other liabilities

Customers Investment Accounts

Zakat
Subordinated financing

Page 40

BALANCE SHEET ANALYSIS

 The structure of a typical balance sheet has demand deposits and investment accounts
from customers on the liability side and Islamic financing and investing accounts (the
equivalent of conventional banks loans to customers) on the asset side
 Types of liabilities present in an Islamic banks balance sheet are nearly universal, their
exact composition varies greatly depending on a particular banks business and market
orientation, as well as the prices and supply characteristics of different types of liabilities at
any given point in time.
 When compared with conventional banks, balance sheet risk profile of Islamic banks is
different. First, the foremost feature of an Islamic bank is the pass-through nature of the
balance sheet. This feature removes the typical asset-liability mismatch exposure of a
conventional bank, as the Islamic banks depositors return is linked to the return on the
assets of the bank.
 Second, the nature of assets of two institutions is different. Whereas a conventional bank
tends to stay with fixed income very low credit risk debt securities, an Islamic banks assets
are concentrated on the asset-based investments which has credit risk but are also backed
by a real asset. As a result, the lending capacity of the Islamic banking sector (at least for
commercial banks) is bound by the availability of real assets in the economy.
-

Source:- Balance Sheet Analysis - Hennie van Greuning and Zamir Iqbal,
senior advisor and lead investment officer respectively at The World Bank Treasury in the US.

Page 41

BALANCE SHEET ANALYSIScont

 Third, the assets of Islamic banks contain financing assets where tangible goods and
commodities are purchased and sold to the customers. This practice creates distinct
exposures.
 For example, in case of conventional banking, the asset is financed by a loan from the bank
to the customer whereas in case of an Islamic bank, the asset and the financing are coupled
together. The bank is not limited to the exposure as a financier but can develop additional
exposures resulting from dealing with physical assets.
 Another feature which distinguishes the risks of an Islamic bank from a conventional bank is
the general lack of liquid securities on the asset side. This feature is not a design issue but is
a temporal phenomenon until a well-functioning securities market for Shariah-based
instruments is developed.
 Finally, due to prohibition of interest, Islamic banks cannot issue debt to finance the assets
which consequently discourages creation of leverage. Due to the lack of leverage, Islamic
banks can be considered less risky during a time of financial crisis.
 The current financial crisis was precipitated by excessive leverage and complexity in the
financial system, which had developed multiple layers of intermediaries. Hence, the
financing or the claims on assets became remote from the underlying assets.
-

Source:- Balance Sheet Analysis - Hennie van Greuning and Zamir Iqbal,
senior advisor and lead investment officer respectively at The World Bank Treasury in the US.
Page 42

CUSTOMER DEPOSITS
Growth
+ 5.3%

RMMillion

RM1.42b

of which
Al-Awfar
703
2.5%

of which
Al-Awfar
414
1.5%

of which
Al-Awfar
81
0.3%

7,875m

2,803

Page 43

of which
Al-Awfar
112
0.4%

CUSTOMER DEPOSITS - CASA

RM million

Dec 2010

Total CASA
% of Total Deposits

10,664

12,283

66,700

39.7%

43.4%

25.0%

Non CASA
RM16,224m

Non CASA
RM16,022m

CASA
RM12,283m

CASA
RM10,664m

Saving
Non-Mudharabah
RM2,577m

Demand
RM7,100m

Dec 2011

Islamic Banking
Industry as at
Dec 2011

Saving
Non-Mudharabah
RM2,599m

Saving
Mudharabah
RM1,264m

Saving
Mudharabah
RM987m
Page 44

WHAT RISKS ARE INEVITABLE?

 In trade transactions, the seller is entitled to the profit from the sales price because he has
to bear the risk of ownership and assume the liability for loss when the subject matter has
actually moved into his possession before selling it to customer.
 Similarly, to ijarah or leasing, the lessor is entitled to rent only when he keeps the asset in
usable form by incurring ownership-related expenses and undertakes the risks associated
with the asset.
 In Mudharabah and Musyarakah-based investments, investors earnings depend on the
result of economic activity undertaken by the venture and they will share the profits as per
agreed ratios and bear the loss as per the share in the capital of the business.
 Therefore, risk is legitimate when it is necessary for value creation.
 In fact, this type of risk is inevitable since it is inseparable from real and value adding
transaction.
 In this regards, any attempts to deliberately separate risk from ownership and thus from
real economic activities, may appear in direct opposition to Shariah principles.
Source: ISRA Dr. Asyraf Wajdi Dusuki
Page 45

KEY FINANCIAL RATIOS

Page 46

KEY FINANCIAL INDICATORS

Audited
FY Dec 11

Islamic
Banking
System

Audited
FY June 07

Audited
FY June 08

Return on Equity Gross

23.3%

26.5%

16.5%

14.5%

17.7%

14.5%

16.5%

Return on Assets - Gross

1.4%

1.45%

0.91%

1.2%

1.5%

1.2%

1.5%

68.2%

60.8%

56.7%

55.4%

53.8%

44.9%

46.7%

9.0%

7.8%

10.3%

10.1%

13.8%

8.6%

20.1%

Gross Non-Performing/Impaired
Financing Ratio (%)

24.7%

21.2%

16.4%

4.5%

2.6%

2.5%

2.7%

Net Non-Performing/ Impaired

Financing Ratio - Less IA & CA (%)

11.4%

7.8%

6.7%

1.1%

-0.3%

-0.05%

0.1%

Financing Loss Coverage Ratio

(%)

67.7%

75.8%

80.8%

76.8%

111.7%

101.8%

96.3%

Financing to Deposits (%)

55.9%

50.4%

42.5%

45.7%

51.5%

76.0%

78.4%

RWCR / CAFIB (%)

12.0%

12.9%

13.6%

16.8%

16.3%

14.7%

14.8%

Cost Income Ratio

Non-Fund Based Income Ratio

Audited
FY June 09

Actual
FYE Dec 2010
(12 months)

^ Annualised (Net is calculated based on profit after tax and before zakat)
* Bank Negara Malaysia Annual Report 2010
# Bank Negara Malaysia Monthly Statistical Bulletin @ Dec 2011

Page 47

Banking
System

INDUSTRY WIDE BENCHMARKING -i

Key Ratios

Formula

Return on Average Equity (ROE)

Pre-tax profits/ Average Equity

(Presented on annualized basis)

Return on Average Assets (ROA)

Pre-tax profits/Average Assets

Net Financing Margin

Net Finance Income/Average Assets

Gross Impaired Financing Ratio

Gross Impaired Assets/Gross Financing

Net Impaired Financing Ratio

Net Impaired Assets/(Gross Financing-Collective

Assessment Individual Assessment )

Financing Loss Coverage

(General provision + Specific Provision + Income In

Suspense)/Gross Financing
Under FRS : (Collective Assessment + Individual
Assessment + General Provision)/Gross Financing

Risk Weighted Capital Ratio

Capital base/Risk-weighted assets

Core Capital Ratio

Core Capital/Risk-weighted assets

Page 48

 




Disclaimer: This presentation material has been prepared by Bank Islam Malaysia Berhad (the Bank) for information purposes only
and does not purport to contain all the information that may be required to evaluate the Bank or its financial position. No
representation or warranty, express r implied, is given by or on behalf of the Bank as to the accuracy of the information or opinions
contained in this presentation. The presentation does not constitute or form part of an offer, solicitation or invitation of any offer,
to buy or subscribe for any securities , nor should it or any part of it form the basis of, or be relied in any connection with, any
contract, investment decision or commitment whatsoever. The Bank does not accept any liability whatsoever for any loss howsoever
arising from any use of this presentation or their contents or otherwise arising in connection therewith.
BANK ISLAM MALAYSIA BERHAD
11th Floor, Wisma Bank Islam
Jalan Dungun, Bukit Damansara
50490 Kuala Lumpur
Tel: 603 2088 8222
www.bankislam.com.my

Hizamuddin Jamalluddin
General Manager, Strategic Planning
Managing Directors Office
Contact: 603 2088 8077
Email: [email protected]

Page 49