Reference no: EM131069280 , Length: 3990 Words

APA reference style 

QUESTION 1 (1000 words)                                                    

Bak Al-Iman is an up and coming Islamic bank established about 5 years ago.  Currently, there are about 10 Islamic bank competing quite aggressively for the market share.  In a recent board meeting of the bank, the Board of Directors (BOD) have suggested to the introduction of some form of innovation in the form of financial engineering.  As a person responsible for the implementation of the 'innovative scheme' you are required to prepare a paper for the next BOD meeting.  This paper will highlight,

i. In what form will this innovative take place;

Lecturer guide "Yes, Mudharabah sukuk can be used. For an example of Pasir Gudang Municipality with two tier Mudharabah sukuk.
This was considered innovative structure when this sukuk structure was first introduced."" Yes you can use the two tier sukuk using Mudhrabah structure. If you are planning to use this two tier sukuk structure, maybe it will be very good to identify the purpose of such sukuk. In the case of Pasir Gudang Municipality Sukuk, the structure was designed in such way the income stream from the quit rent backed the sukuk structure. The sukuk money was used only for halal purposes only."

ii.  What are the challenges that financial engineering entailed in Islamic finance?

Lecturer guide "Please take note Financial Engineering here refers to Mathematics. For an example structuring house financing using Daily Rest rather than monthly rest." "Challenges of Financial Engineering in Islamic finance can be tackled from risk aspects like Credit Risk of the newly created product, what are the operational Risk for the product from people aspects, product, systems, process and strategies.Market risk and liquidity risk perspective."

Lecturer guide "For assignment Question No 1 as a guide, you can be innovative by creating a product that can a retail, corporate or investment banking products. The product must be based on Islamic contracts being it debt based or equity based contracts."

Lecturer tips/hints "What could be the possible benefit structuring Islamic Home finance under Daily Rest as compared to the traditional Monthly Rest structure? Which one will definitely benefit a customer Daily rest or Monthly Rest?"

Lecturer example guide "For an example, if a customer make payment more than the amount specified for their monthly installment then the additional amount paid will definitely reduce the outstanding principal provided the information system of the bank accepts such prepayment transaction.By reducing the outstanding principal amount will provide the customer an opportunity to early settle the home finance, much earlier than the specified tenure of the original home finance.This will be a good marketing or promotion strategy to attract certain customer's segments who wish to pay more than the specified installment amount and subsequently settle the financing prior to the determined duration. If we detail out this initiative, it will benefit the customer and the bank. To reward the customer who settles the financing earlier, banks can grant Ibraa for the outstanding profit portion."

Lecturer guide "Few areas to be innovative: 1. Product, 2. Process, People, & 4. Programs (Systems)"                                                                          

QUESTION 2 (1000 words)                                                                

It had been observed during recent financial crisis, the financial system based on the Islamic framework is said to be more stable than their conventional counterparts.  As a researcher, elaborate on the reasons why this is so?                                   

QUESTION 3 (1500 words)

After serving as a banking correspondence over several years, you would like to prepare an article between the dual banking systems in this country.  This report will be in two parts namely,

  i. To highlight the differences both between the Islamic and conventional banking systems;

Lecturer advice "Yes, it is a comparison between the financial system and you can support your arguments why you believe that Islamic Financial system is better than conventional system or otherwise making reference to Credit crisis and liquidity crisis that has taken place in 2008. You also can bring in arguments related to risk management from the perspective of credit, operational, market and liquidity risk"

ii.  The theoretical structure of the Islamic financial intermediation and banking which is based on three models.

a.      Full Fledged Islamic Banking

b.      Subsidiary of conventional Banking

c.       Window based Islamic Banking where you have both Islamic and Conventional banking in a branch.

Prepare this two-part report. (you can answer them in report format)

Lecturer guide"The models here is referring to the way how an Islamic bank is being operated.
Banks normally dont run on mudharabah model except the depositors deposit placement with the bank can be performed via mudharabah model. On Wakalah, It is on the basis of Wakalah Bil Istithmar(Agency Investment Contract). Please explore further on this."

Lecturer advice "Anyway I trust at the Masters level, most of the assignment markers will look forward how are the argument and points being put forth to support the understanding. This is more important." "For Question No 3, I would like to suggest to include the purpose of the product/services, value propositions of the products or services for the financial Institutions and customers, Islamic Contracts used, You may want to draw diagram(s) to explain about the structure of the product/services, any example of computation related to the product/services, challenges in designing and developing the product/services from market perspective as well as shariah challenges, any future improvements/recommendations and conclusion. Be creative."