Ppt thesis final hearing

Pricing Determinationfor PLS Products

in Islamic BankingA CASE STUDY ON PT ISLAMIC BANK XYZ

RD. Anggara Natura

S.1014.003

Supervisors:

Sugiyarti Fatma Laela, M.Buss(Acc),CMA / Ahmad Rifqi S.E.I

>>> Undergraduate Thesis (Final Hearing)

Final Hearing – Undergraduate Thesis“Pricing Determination for PLS Products in Islamic Banking”Oct 2nd 2014/Dzulhijjah 7th 1435 H

MOTIVATION

Islamic Accounting

Islamic Banking


OUTLINEI

Background

Problems, Objectives, and

Benefits

IILiteratures

Conceptual Framework

IIIType of Research

and Data

Data Collection & Analysis Method

Procedure Analysis

IVPricing

Determination for PLS Contracts

Policy

Cost of Fund Calculation

Practice

Risk Adjustment Practice

Spread Determination for

PLS Contracts

Competitiveness of PLS Contracts

VConclusions

Recommendation & Limitation


BACKGROUNDI

The Growth of IBs

PLS as a substitute for Interest System

Murabahah > Musyarakah/Mudharabah

Price of PLS Products

> The increase of Total Assets of Islamic Banks (BUS, UUS, BPRS) is 34%

> The new mechanism that offers by Islamic Bank in financing products.

> Islamic Bank products is dominated by Murabahah (59, 7%), then Musharakah and Mudharabah (26, 9%)

> One of many factors that affects the selling of product.


PROBLEMS & OBJECTIVES

PROBLEMS• How Islamic Bank determines the price of

PLS products?

• How the competitiveness of PLS products’ price in Islamic Bank XYZ?

OBJECTIVES• Describe how Islamic Bank determines the

price of PLS products.

• Analyze the competitiveness of PLS products’ price in Islamic Bank XYZ.

I


CONTRIBUTION

OF STUDYI

CONTRIBUTION OF STUDY

Islamic Bank

Development of Knowledge

Researcher


LITERATUREII


Focuses on The Nature of Contracts and MechanismPROFIT LOSS SHARING• Al Mudharaba (Usmani (2002), Syafii (2001), Iqbal (2001))• Al Musharakah (Usmani (2002), Syafii (2001), Iqbal (2001))

Focuses on Price Calculation and MeasurementPRICING DETERMINATION

• Nisbah (Rivai & Veithzal (2008), Sadique (2009), 5/7/PBI/2003)• Base Lending Rate (Rivai et al (2007))• Cost of Fund (Rivai et al (2007))• Risks (Febianto (2010), Sholihin (2010), BIMB (2010), Khan & Ahmed (2011))

Focuses on Islamic Literature which Discuss about PricingISLAMIC PERSPECTIVE• Al Qur’an (Al Baqarah: 275, Al Muzammil: 20, An Nisaa: 12, An Nisaa: 29) • Al Hadist

Start

Problem Identification:Describe how Islamic Bank determines the price of PLS products.

Analyze the competitiveness of PLS products’ price in Islamic Bank XYZ (compared with the similar competitors and products).

Data Collection1. Interviewed about the pricing policy of PLS products

in PT Islamic Bank XYZ2. Find the sample of PLS Contracts

Procedure Analyisis:1. Understand the mechanism of price determination

on PLS Contracts in PT Islamic Bank XYZ2. Analyze the Competitiveness of PLS contracts’ price in

PT Islamic Bank XYZ with other similar competitiors and products.

Literature Review

Data1. The result of

Interview2. PLS Contract

(Sample).

Data Collection Method

1. Interview2. Document

Analysis

Conclusion & Advices

End

IICONCEPTUALFRAMEWORK


TYPE OF RESEARCHIII

LOGIC OBJECTIVE

DATA OUTCOME

DESCRIPTIVEDescribe the existing phenomena concerning Price Determination for PLS products in IB

APPLIEDExpected to be applied by IB for empowering the PLS products as a new mechanism that offered by IB.

QUALITATIVEQualitative data is used by a non-statistical research and purposes to exclude an information from the data.

DEDUCTIVEProviding the information from a phenomena then comply the information with relevant theories.

TYPE & SOURCEOF DATA III

DATACOLLECTION METHODTYPESOURCE

TREASURY / BUSINESS UNIT

DIVISION

PRIMARY INTERVIEWPOLICY,

METHODS & MISC. FACTORS

SECONDARY DOCUMENT ANALYSIS

PRICE OF FINANCING, PLS

RATIO


DATA ANALYSIS METHODIII

DATA INFORMATION

CASE STUDYFinal Hearing – Undergraduate Thesis“Pricing Determination for PLS Products in Islamic Banking”Oct 2nd 2014/Dzulhijjah 7th 1435 H

PROCEDUREANALYSIS III

1. Understand the mechanism of price determination on PLS contracts or products in Islamic Bank XYZ

2. Analyze the competitiveness of PLS contracts’ price in Islamic Bank XYZ.


PRICING DETERMINATION FOR

PLS PRODUCTSIV


Cost of FundCost of

Loanable Fund

Cost of Money

Cost of Money Risk Spread Nisbah

Based on Bank and Financial Institution Management: Conventional & Sharia System Rival et al (2007)

Calculate the Cost of Fund Rate Adjust the Risk rate

Determine the Spread for PLS

products

Sum the Cost of Fund, Risk, and the

spread to obtain the Nisbah percentage

PRICING DETERMINATION FOR

PLS CONTRACTS POLICYIV


IV


Cost of Fund

Cost of Loanable Fund

Cost of Money

𝐶𝑜𝑠𝑡𝑜𝑓 𝐹𝑢𝑛𝑑= h𝑇 𝑖𝑟𝑑 𝑃𝑎𝑟𝑡𝑖𝑒𝑠 𝐹𝑢𝑛𝑑× h𝑁𝑖𝑠𝑏𝑎 𝐹𝑢𝑛𝑑𝑖𝑛𝑔𝑅𝑎𝑡𝑒

𝐶𝑜𝑠𝑡𝑜𝑓 𝑀𝑜𝑛𝑒𝑦=𝐶𝑜𝑠𝑡𝑜𝑓 𝐿𝑜𝑎𝑛𝑏𝑎𝑙𝑒𝐹𝑢𝑛𝑑× h𝑂𝑣𝑒𝑟 𝑒𝑎𝑑𝐶𝑜𝑠𝑡

Based on Bank and Financial Institution Management: Conventional & Sharia System Rival et al (2007)

COST OF FUND CALCULATIONPRACTICE AT PT ISLAMIC BANK XYZ

IV


Base Offer Rate

Overhead Cost

Cost of Fund

Analysis between Practice & Theory:• PT Islamic Bank XYZ did not use Cost of Loanable & Cost of Money as a form.• Nevertheless, essentially there is no contradictory between practice & theory.• This action is taken by PT Islamic Bank XYZ as a simplification from theory to the practice.

COST OF FUND CALCULATION (cont’d)PRACTICE AT PT ISLAMIC BANK XYZ

IV


RISK ADJUSTMENTPRACTICE AT PT ISLAMIC BANK XYZ

Credit RiskEquity

Investment Risk

Market Risk

Liquidity Risk Rate of Return Risk

Operational Risk

Based on Adapting Risk Management for Profit Loss Sharing Financing of Islamic Banks Febianto (2012)

IV


RISK ADJUSTMENT (cont’d)PRACTICE AT PT ISLAMIC BANK XYZ

Credit Risk

Affect in Spread Determination• Based on Customer

Performance

Market Risk

Currency Risk• Based on Currency

Fluctuations

Liquidity Risk

Liquidity Premium• Based on Tenors

FUND TRANSFER PRICING TABLEPT ISLAMIC BANK XYZ

TENOR COST OF FUND LIQUIDITY RISKCURRENCY RISK

(IDR/USD)BASE LENDING

RATEO/N 5,88% 0,65% 0,93%/0,23% 6,53%1W 6,31% 0,75% 0,93%/0,23% 7,06%2W 6,56% 0,87% 0,93%/0,23% 7,43%1M 7,86% 1,01% 0,93%/0,23% 8,87%2M 8,20% 1,06% 0,93%/0,23% 9,26%3M 8,36% 1,11% 0,93%/0,23% 9,47%4M 8,54% 1,15% 0,93%/0,23% 9,69%5M 8,55% 1,18% 0,93%/0,23% 9,73%6M 8,56% 1,21% 0,93%/0,23% 9,77%7M 8,57% 1,21% 0,93%/0,23% 9,78%8M 8,57% 1,21% 0,93%/0,23% 9,78%9M 8,59% 1,21% 0,93%/0,23% 9,80%

10M 8,60% 1,21% 0,93%/0,23% 9,81%11M 8,62% 1,21% 0,93%/0,23% 9,83%1Y 8,72% 1,21% 0,93%/0,23% 9,93%2Y 8,77% 1,21% 0,93%/0,23% 9,98%3Y 9,03% 1,21% 0,93%/0,23% 10,24%4Y 9,17% 1,21% 0,93%/0,23% 10,38%5Y 9,32% 1,21% 0,93%/0,23% 10,53%

Final Hearing – Undergraduate Thesis“Pricing Determination for PLS Products in Islamic Banking”

Oct 2nd 2014/Dzulhijjah 7th 1435 H

Source:Fund Transfer Pricing Table per July 4th 2014

PT Islamic Bank XYZ

IV


SPREAD DETERMINATION FOR PLS CONTRACTSPRACTICE AT PT ISLAMIC BANK XYZ

Financial Factors

• The Target of Financing• The Volume of

Financing• Profitability Target• Return on Risk Asset

Non – Financial Factors

• Performance of Customers (Track Record, Collectability, etc.)

Other Factor: Review Nisbah

• Avoid the possibility of Negative Spread

• Maintain the Competitiveness of Bank

• Increase the Profitability of Bank

IV


COMPETITIVENESS OF PLS CONTRACTSPRACTICE AT PT ISLAMIC BANK XYZ

Price Control

Product Innovation

Service Quality

IV


PROBLEMS OF PLS CONTRACTSIN PT ISLAMIC BANK XYZ

Monitoring Legal Risk

CONCLUDINGREMARKSV


• Pricing Determination for PLS products in PT Islamic Bank XYZ:o Nisbah: Spread + Base Lending Rate

o Base Lending Rate: Liquidity Premium + Currency Risk + Cost Of Fundo Cost of Fund: Base Offer Rate + Overhead Cost

• Competitiveness in PT Islamic Bank XYZ:o Competitive Strategy: Price Control, Product Innovation, & Service Qualityo Related Problems : Monitoring and Legal Risk

RECOMMENDATION& RESEARCH

LIMITATIONV


Recommendation• PT Islamic Bank XYZ should distinguish the

terms of Cost of Fund, Cost of Loanable Fund, and the Cost of Money. It’s easier to look the efficiency of Cost of Fund & Overhead Cost since the efficiency in Banking is an important issue which needs to be maintained.

Limitation• This research has a limited access to the

data. PT Islamic Bank XYX cannot clearly emphasize the calculation of cost of fund (method used and simulation) because the restriction to the data (confidential and only for internal user)

CRITICS&

ADVICES

THANK YOU

RD. Anggara NaturaS.1014.003

[email protected]+62-815-1318-1513


Economy & Finance

Ppt thesis final hearing