BACHELOR OF ADMINISTRATION (HONS) IN ISLAMIC FINANCE

WAQF

EBB30503

FINAL ASSESMENT 1

ACADEMIC SESSION

SEMESTER JANUARY 2020

SUBMISSION DATE: (11 JUNE 2020)

PREPARED BY
ZUL IRFAN HAZIM BIN SURURI – 622 1121 9262

PREPARED FOR
MR. MUHAMMAD HILMI BIN ZAKARIA

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TABLE OF CONTENT:

NO. CONTENT PAGES

1 Introduction on the selected area 3

2 Devise a suitable mode of financing to finance the project 4–5

Outline and elaborate the modus operandi of the contract by
3 6
using a diagram
4 Discuss the validity of the contract from Syariah aspect 7-8
Prepare a repayment plan for the financing mode that you
5 8-9
proposes
Justify the possible issue(s) that may arise and ways to
6 9-10
encounter it
7 Express the economic impact towards the selected area 10-11

8 References 12

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1)Introduction on the selected area
I have been appointed as Chief Investment Officer of Kumpulan Waqf Sdn. Bhd.
(KWSB). The proposal regarding the upcoming development of the 100 acres waqf land in
Kulim, Kedah. Kulim is located in the southeast of Kedah and bordering Penang. The 100
acres waqf land is located at Jalan Kelang Lama, Kulim. KWSB see the high potential at the
waqf area to develop and it will give the high return to us. The development that I want to
proposed are mixed development consists of houses, shop houses, shopping complex and a
ten story’s office tower. The waqf area have the big potential because the place is quite
strategic. There is strategic place to make the development because it is located near the
main road in Kulim. Next, there are several residential areas around that waqf land. So, it is
the best choice to build houses there because the demand for houses at there is quite high.

In Kulim, there is only one shopping complex that popular which is Kulim Central. We
must grab the opportunities because there is small number of competitors. The residents
there will be the potential customers to the shopping complex. Kulim is a develop area in
Kedah. So, the development of shop houses is the good choice because Kulim is the
attractive spot to business people for run their business. So, the rental can be collected from
them and it is will be the income for us. Other than that, there are some basic facilities and
public infrastructures in that area such as hospital, police station and others. From this, it
clearly shows that the development at that waqf area will give the benefit to all people there.

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2) Devise a suitable mode of financing to finance the project
To build the residential area, shopping complex, shop house and ten’s story office
required high cost. KWSB need to seek for the financing from others. The most suitable
mode of financing that I want to propose is Istisna’ financing. The definition of Istisna’ is
contract of manufacturing an asset that will be delivered in future. In general, customers will
appoint the contractor to construct an asset such as building and it will be delivered to
customers in the future following the specifications that had been set by the customers.

The repayment can be in lumpsum or by the installments method after the asset had
been delivered to customers. According to this situation, the contract that will be used is
parallel Istisna’. Parallel Istisna’ also known as back-to-back Istisna’. Istisna’ mode allows
waqf management to order the required expansion of the waqf property from the financing
institution through the Istisna’ contract. The bank then signs another deal with other
contractor to supply the same for the bank's order and delivered to the bank but on behalf of
waqf management. For the first agreement, waqf management or buyer appoint financial
institution as a contractor or seller. In the second contract, bank act as a buyer or customer
appoint the other contractor or developer to build the asset. The parties involve in parallel
Istisna’ are customer (waqf management), financial institution and third party (contractor).

The development that I proposed to do at 100 acres waqf land located at Jalan
Kelang Lama, Kulim are houses, shopping complex, shop houses and ten’s story office. For
houses or residential area, 45 acres required for this development. The other 35 acres to
build the shopping complex. For the ten’s story office, 15 acres are needed to build it on that
waqf land. Last 5 acres will be used to develop the shop houses. The target tenant for the
shop houses is small and medium business such as groceries shop. For the development in
the waqf land, the cost needed by KWSB is around RM400 million. The houses that had
been planned to build are 600 houses with the monthly rental amount RM1,000. Next, there
is only one shopping complex that had been planned to build and the total of shop there is
350 units. The rental amount for one unit is RM4500. 80 units shop houses planned to build
and the rental amount is RM3,000. Lastly, ten’s story office tower will consist 120 lots and
the rental payment for one unit is RM4000.

According to the situation, KWSB have been decided to make the financing with
AmBank Islamic Berhad. The total of financing that KWSB need is RM 400 Million. Before
we go further to the financing process with AmBank Islamic Berhad, I need to ask approval
from Mufti of Kedah to obtain Istisna’ financing from AmBank Islam. I act behalf of KWSB do
not have the amount of money. So, I ask for the financing from AmBank Islamic. The
contract that will be used is parallel Istisna’.

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 The first contract is between KWSB and AmBank Islamic. AmBank Islamic as a seller
who undertakes to manufacture a building and KWSB is the buyer for the specific building.
After AmBank Islamic had been approved the financing by the KWSB, AmBank Islamic will
make a new contract with Maju Jaya Construction Berhad. The second contract, AmBank
Islamic as the purchaser would ask another contractor or developer (Maju Jaya Construction
Berhad) to produce the same goods as those specified in the first Istisna’. The second
Istisna’ is the separate contract with the first Istisna’. Therefore, Maju Jaya Construction
Berhad in the second Istisna’ is not responsible in the first Istisna’ to the KWSB. KWSB only
have the relationship with AmBank Islamic and AmBank Islamic have the relationship with
Maju Jaya Construction Berhad. This is separated account and not related at all.

Maju Jaya Construction Berhad will delivered the houses, shopping complex, shop
houses and ten’s story office to the AmBank Islamic in the specific time that had been
agreed in their first agreement. AmBank Islamic will pay on the spot to the Maju Jaya
Construction Berhad in the cost price. After that, AmBank Islamic will deliver the building to
the KWSB. KWSB need to pay the price of building to the AmBank Islamic including the
markup price. The payment will be made by installments following the pre agreed period
which is 30 years with the 1.5% profit rate. After the building had been delivered to KWSB,
we can find the business people that want to rent in our building. The tenant will pay for the
rental by monthly payment to the KWSB. The amount of income get from the building must
be separated which are 44% to the waqf fund and other 56% will be used for repayment of
financing with Ambank Islamic.

The waqf fund is get by KWSB from rental from the mixed development project. The
waqf fund designed for the charitable purpose to help the needy people. Waqf is one of the
charitable funds. KWSB also can use the income to make the investment in order to raise
the waqf funds. The waqf fund also can be used for the development purpose for improve
the selected area. The waqf fund can be used to build school, hospital and other public
facilities. For example, the new project can be made by KWSB in term to get the return for
the distribution to the waqf fund.

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3) Outline and elaborate the modus operandi of the contract by using a diagram

MUFTI OF KEDAH

AMBANK ISLAMIC 2
BERHAD KWSB
6

3
4
MAJU JAYA
5 CONSTRUCTION
BERHAD

1. KWSB get the approval from the Mufti of Kedah to obtain Istisna’ financing from
Ambank Islamic Berhad.
2. KWSB approach AmBank Islamic to construct the specific building shopping complex
in waqf land. The KWSB ask for RM 400 Million financing from bank and the KWSB
sign the first contract with AmBank Islamic.
3. AmBank Islamic do not have the expertise in construction sector. So, bank appoint
Maju Jaya Construction Berhad as a contractor to construct the shopping complex
building. This is the second contract sign by AmBank Islamic and Maju Jaya
Construction Berhad.
4. Maju Jaya Construction Berhad will deliver the shopping complex building to the
AmBank Islamic after the construction had been done by them.
5. After the building had been delivered to AmBank Islamic, they will pay the full amount
to the Maju Jaya Construction Berhad on the cost price following the pre agreed price
between them.
6. AmBank Islamic delivered the shopping complex building to the KWSB following the
first agreement that had been made by them.
7. KWSB will make the payment to the AmBank Islamic with the markup price. The
price is including cost plus markup price according to the first agreement between
them. The method of repayment is by installment for 30 years.

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4) Discuss the validity of the contract from Syariah aspect.

Istisna’ is an Islamic contract of manufacturing an asset that will be delivered in

future. The legality of the contract of Istisna’ derives from the Qur'an and Prophet
Muhammad sunnah. Other than that, the permissibility of Istisna’ also get from consensus of
muslim jurists or Ijma’. In Al-Quran, it is clearly stated that trade transaction is allowed but
the Shariah rules must be followed from the verse “…whereas Allah SWT has permitted
trading and forbidden usury…” (Surah al-Baqarah, verse 275).

The other evidence is from hadith in Sahih Al-Bukhari. The verse reported by Sahl
that the Prophet Muhammad sent for an immigrant woman that had a slave who was a
carpenter. The Prophet Muhammad told to her, "Ask your slave to prepare pieces of woods
for a pulpit." So, she ordered her slave, who went and cut wood from a tamarisk tree and
prepared a pulpit for the Prophet Muhammad. When he finished the pulpit, the woman
informed the Prophet Muhammad that it had been finished. The Prophet Muhammad asked
her to send that pulpit to him so they brought it. Sahl said, “The Prophet lifted it and placed it
at the place in which you see it now.” From this, it clearly shows that Istisna’ had been
practised by Prophet Muhammad.

The assets in Istisna’ contract must involve the finished products that will be
manufacturing according to the customer request. The assets must be homogeneous assets
and commonly traded. The assets must be normally used by the people such as shoes. It is
not suggested to use Istisna’ for the asset that rarely used by people. Next, the
manufacturing of Istisna’ assets must be completed following the specifications based on
agreement to avoid uncertainties or gharar. The quality, quantity and other relevant
characteristics must be clearly stated in the pre agreement by the buyer and seller. The
assets must be the assets that permissible in Islam. For example, the manufacturing for the
alcohol shop is not allowed because it is involving the prohibited activity.

The price of the assets must clearly state at the time of the conclusion of the assets.
In Istisna, there is no compulsory for the seller to stated the production cost. The contactor
cannot charge an additional amount to the buyer for the production cost and they need to
followed the pre agreed agreements. This is because the price of commodities might
increase time by time. Other than that, the contractor must construct the assets with his own
material. If the buyer supplies all raw material to be manufactured it will be considered as
Ijarah contract. Then, the buyer also cannot claim to the seller regarding the reduction of the
production cost. But the seller can provide the Ibra’ to the buyer but this is not compulsory to
the seller. From this, both parties will get the benefit from the Istisna’ contract.

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 The last validity of the Istina’ contract is delivery of the assets. In Istisna’, the assets
will be delivered to the buyer in future. The delivery time must be specifically stated and
agreed by buyer and seller. The delivery is the important to buyer because it will affect to the
buyer if anything happen regarding the delivery time. For the late delivery by the seller
without any acceptable reason, the contractor or manufacturer will bear for the cost of
damages. The buyer has the right to reject the assets if the assets is not followed and
comply with the specifications in pre agreed agreement. If the contractor or seller have been
followed the specifications but the buyer still refused to accept it, the contractor is not liable
at all for it. Istisna’ contract will be acceptable if the conditions are followed wisely by the
buyer and contractor or seller.

5) Prepare a repayment plan for the financing mode that you proposed

Paying back the financing is compulsory in Islam. KWSB approach AmBank Islamic for the
financing. The parties involve are KWSB, Ambank Islamic and Maju Jaya Construction
Berhad. The contract used is parallel Istisna’. The repayment plan is between KWSB and
AmBank Islamic. The strategies must be plan by KWSB to pay the amount of financing in 30
years. KWSB can get the revenues from the rental income at houses, shopping complex,
shop houses and ten’s story office tower. The repayment plan is:

Status : Back to back Istisna’ or Parallel Istisna’

Financer : AmBank Islamic Berhad

Builder : Maju Jaya Construction Berhad

Property manager : Kumpulan Waqf Sdn Bhd (KWSB)

Types of Assets : Mixed development consist of houses, shop

houses, shopping complex and ten’s story office
tower.

Period of Financing : 30 years

Fixed Rate of Financing : 1.5%

Cost of Financing : RM 400 million

Total Payment to Bank (Cost +Profit) : RM400 million + (RM400 million x 30 years x
1.5%

= RM 580 million

Total Profit to Bank : RM 180 million

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Monthly Payment to Bank : RM580 million / 360 months

= RM1, 611,111.11

Total Rental Income per Month : RM 600,000(Houses)+RM1,575,000

(Shopping complex + RM240,000 (Shop
Houses) +

RM480,000(Ten’s Story Office Tower)

= RM2,895,000.

Percentage of rental for monthly repayment =56% from RM2,895,000 which is

RM1,621,200.

Percentage of rental for waqf fund = 44% from RM2,895,000 which is

RM1,273,800

Year Balance of financing Total yearly repayment

(RM1,611,111.11 X 12)
1 RM560,666,666.70 RM 19,333,333.32
2 RM541,133,333.40 RM 19,333,333.32
3 RM522,000,000 RM 19,333,333.32
4 RM502,666,666.70 RM 19,333,333.32
5 RM483,333,333.40 RM 19,333,333.32
…30 RM19,333,333.32 RM 19,333,333.32

6) Justify the possible issues that may arise and ways to encounter it.

The first possible issue that may arise by using the Istisna’ mode of financing is
contractor or manufacturer that appointed by the bank failed to meet the specifications in
term of quality and quantity required by the customer. The assets that had been construct
not followed the pre specification that had been stated in agreement. The way to encounter
the issue is the contractor that appointed by bank must be selected based on their previous
project performance. The phase of selecting contractor must be face wisely by the bank. It
also can be mitigated by doing an agreement on quality control for supplier to rectify defects.

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 The second possible issue is increasing in the cost of production by the manufacturer
which causes the manufacturer to perform by default. The cost has the possibility to increase
time by time. So, the way to mitigate it is the manufacturer need to handle the cost
increases, unless they are due to an unpredicted event. The supplier for manufacturer must
be selected among the cheapest supplier in the market. The next possible issue that will be
faced by using Istisna’ contract is the Islamic bank and manufacturer unable to deliver the
asset on the specific time that had stated in agreement. The way to encounter it is the
customer can ask for the discount regarding the late of delivery. For example, Ambank
Islamic can asked for the discount to the Maju Jaya Construction Berhad if the delivery time
not followed the pre agreement.

Other than that, the possible issue that will happen is the possibility to face the credit
risk. The credit risk can happen when KWSB refuse or fail to meet the obligation to pay for
the repayment or the tenant fail to pay the monthly rental to KWSB. The issue can be
mitigated by the KWSB or AmBank Islamic must construct their own committee to solve
about the credit risk. The background of our potential tenant must be wisely verified by the
KWSB especially in the credit rating. This is the good ways to mitigate the credit risk.

The last issue that will be faced by using the Istisna’ contract is the storage risk
issue. In the parallel Istisna’, the bank will bear the risk once the manufacturer had delivered
the asset to them before the asset had been sale to the buyer. For example, once Maju Jaya
Construction Berhad had completed and delivered the mixed development to Ambank
Islamic, the risk automatically will be transfer to AmBank Islamic. The way to mitigate it is the
Ambank Islamic can buy for the takaful or insurance for the building. The insurance is the
method to transfer the risk and takaful is the method to sharing the risk.

7) Express the economic impact towards the selected area

The mixed development project comprises of houses, shop houses, shopping

complex and a ten story’s office tower in the waqf area located at Kulim will give the huge
impact toward the economic. The first economic impact toward the selected area is offering
many job opportunities. From this, the unemployment rate can be reduced. For example, to
build the building needed need a lot contractor worker. So, the job opportunity is increasing
there in the early phase of construction the building. Then, the shopping mall and ten’s story
office required a lot of new staff. So, it is a lot of job opportunity there. The second impact is
giving the positive flow to the number of production goods in Kulim. It is keep increasing
because the demand for the goods also increasing. If demand of goods increase it is
required the business to increase the production of goods. The high demand is come from

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the purchasing power by the citizen at the selected area. They able to get the monthly
income from the job opportunity.

The next impact of economic toward the selected area is the standard living of Kulim
citizen will be improved. From this, the gap between the rich and poor people will become
narrow. From the job opportunity increase will make them have the monthly income. So, the
gap between the rich and poor will become narrow. Other economy impact is the spending
amount will increase in the selected area. If the houses are builds, the amount of people at
Kulim will increase. So, the purchasing of the goods there also can be increase. For
example, shopping complex will get high profit with the spending of the people there. The
next economic impact toward the selected area is the inflation rate will be decrease because
the goods always be prepared according to the customer’s demand. The people there easily
to get the goods that they want. The spending of the people there will increase and it will
make the citizens life easier and more comfortable. For example, this is not required them to
travel for the long time only for shopping purpose. The development of shopping complex
there will help them so much.

The impact of economic towards the selected area is government revenue will
become increase. The income is from the taxes pay by our company in our mixed
development. It can reduce the government spending because the government already get
the revenues from the businesses. From the income, it will help the government to make
other development such as public hospital. So, the public infrastructure will become
increase. It will improve the government revenues and reduce the government spending.

Besides that, the import and export activities will keep increasing at the selected
area. For export transaction, the businesses at the mixed development will sell their product
to the other countries. So, the export number will increase. For import transaction, the
foreign product will be delivered to Kulim and it will be sells there. For example, Gucci will
import the goods to the selected area for the trade purpose. This is because there are no
Gucci productions in Malaysia. But the export number must be exceeding the import
number.

The Gross Domestic Product for Malaysia will be increase and improve. The
activities of import and export at the selected area will help the Gross Regional Product
(GRP) in Kedah increase. Indirectly, it will help to make the GDP of Malaysia keep stable
and incline. Next, the economic impact toward the selected area is the number of investors
will become increase. The potential investors will attract to invest at that area because the
mixed development shows the economic situation is in stable condition. Lastly, the economic
of Malaysia will become better compare with previous time. The mixed development will be

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contributed to the development of secondary sector in Malaysia’s economy. The secondary
sector is manufacturing and construction. Indirectly, it can promote the third sector which is
services become increase at that area.

8) Reference

1) Central Bank of Malaysia (2015). Istisna. Retrieved from

https://www.bnm.gov.my/index .php?ch=57&pg=137&ac=467&bb=file
2) Dr. Mohammad Tahir (2006). Innovative Modes of Financing the Development of
Waqf Property. Retrieved from http://eprints.utm.my/id/eprint/1560/
3) Investment and Finance. Islamic Finance Product: Parallel Istisna’.( March 1, 2013)
Retrieved from https://www.investment-and-finance.net/islamic-finance/p/parallel-
istisna'a#:~:text=Parallel%20Istisna'a,item%2C%20etc)%20by%20himself.
4) Iqbal Khan. Islamic Finance Past, Present and Future. Islamic Markets (n.d).
Retrieved from https://islamicmarkets.com/education/istisna
5) Mohamed Aslam. Hanira Hanafi. (2015). The Possible Role of Waqf in Ensuring A
Sustainable Malaysian Federal Government Debt. Retrieved from
https://www.sciencedirect.com/science/article/pii/S2212567115012058/pdf?
md5=47c5d3dd1b5b9b4df530d9c49500be07&pid=1-s2.0-S2212567115012058-
main.pdf
6) Pettinger, K. (2019). How the housing market affects the economy. Retrieved from
https://www.economicshelp.org/blog/21636/housing/how-the-housing-market-affects-
theeconomy/#:~:text=Rising%20house%20prices%2C%20generally
%20encourage,can%20contribute%20to%20economic%20recession)

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 EBB30503 WAQF
JANUARY 2020

CASE STUDY RUBRIC

Criteria Ratings
Marks
Q (1) 0 - 1 mark 2 marks 3 - 4 marks 5 marks
It is exceptional in
It is adequate in The information
It generally every way. Well
Introduction on most areas, but given is
needs little research on the
the selected area exceptional in adequate in
explanation selected area
none. most areas
Q (2) 0 - 7 marks 8 - 15 marks 16 - 23 marks 24 - 30 marks
Fail to devise a Able to come out The majority of Main points well
mode of with a model but the answer is developed with
financing. Less lack explanation clear, focused, high quality and
Devise a suitable
to no on the mode. It is and well quantity support.
mode of financing
explanation clear although detailed, but Reveals high
to finance the
regarding the probably lacking there may be a degree of critical
project
propose mode. in both control few areas thinking.
Not detail at all and command. requiring further
development.
Q (3) 1 mark 2- 4 marks 5 - 7 marks 8 - 10 marks
Fail to come The modus Neat and well- Well organized,
out with a operandi is explained. In discuss in depth
modue unclear and lack depth research. and all claims are
operandi. of details. Partial supported.
Outline and No originality of the information Content is
elaborate the is true thorough and
modus operandi lacking in no area.
of the contract by Content indicates
using a diagram synthesis of ideas,
in- depth analysis
and evidence
original thought
and support for
the topic
Q (4) 1 mark 2- 4 marks 5 - 7 marks 8 - 10 marks
Main points Main points are Main points well Main points well
Discuss the lack detailed present with developed with developed with
validity of the development. limited detail and quality high quality and
contract from Ideas are development. supporting quantity support.

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Syariah aspect. vague with Some critical details and Reveals high
little evidence thinking is quantity. Critical degree of critical
of critical present. thinking is

thinking. weaved into thinking.

points

Q (5) 1 mark 2- 4 marks 5 - 7 marks 8 - 10 marks

Shows some Content indicates Content Content indicates
Prepare a thinking and thinking and indicates synthesis of ideas,
repayment plan reasoning but reasoning applied original thinking in- depth analysis
for the financing most ideas are with original and develops and evidence
mode that you underdevelope thought on a few ideas with original thought
proposed d and ideas. sufficient and and support for
unoriginal. firm evidence. the topic.

Q (6) 1 mark 2- 4 marks 5 - 7 marks 8 - 10 marks

Main points Main points are Main points well Main points well
lack detailed present with developed with developed with
Justify the development. limited detail and quality high quality and
possible issue(s) Ideas are development. supporting quantity support.
that may arise vague with Some critical details and Reveals high
and way to little evidence thinking is quantity. Critical degree of critical
encounter them of critical present. thinking is thinking.
thinking. weaved into
points
Q (7) 0 - 5 marks 6 - 10 marks 11 - 15 marks 16-20 marks
Explanation is Adequately Majority of the Clearly identified
very general identified about point is well and analyze and
and lack of the strategy. explained evaluate the
arguments impact on the
Express the strategy it is
economic impact exceptional in
towards the every way with
selected area example (s) and
well organized.
Content is through
and lacking in no
area

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Q (8) 0 - 1 mark 2 marks 3 - 4 marks 5 marks
Fails to follow Meets format and Meets format Meets all formal
format and assignment and assignment and assignment
assignment requirements; requirements; requirements and
requirements; generally correct margins, evidence attention
incorrect margins, spacing, spacing, and to detail; all
Report format / margins, and indentations; indentations are margins, spacing
APA spacing and essay is neat but correct; essay is and indentations
indentation; may have some neat and are correct; essay
neatness of assembly errors. correctly is neat and
essay needs assembled. correctly
attention. assembled with
professional look.

TOTAL MARKS

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