INTRODUCTION

 Off balance sheet items are also known as contingent

liabilities because the transaction is not complete until certain
conditions or requirements are met.
 These transactions include
Financing commitments
Future and forward contracts
Letter of Credits
 Off balance sheet activities involve the exchange of services
with money, and activities that affect Islamic bank profits but
do not appear on Islamic bank balance sheets.
Motives for Moving Assets Off the
Balance Sheet
Bankers’ concern about profitability and capital adequacy
requirement drive them to engage in off-balance sheet.
When Islamic bank engage in off-balance sheet activities, asset
securitization or debt sales, they restrain asset growth and
increase fee income.
As a result, it increase ROA and lowers EM (equity multiplier)
Given the desire of shareholders and regulators, both want
Islamic banks to improve profitability and produce a stronger
capital position, off balance sheet activities and assets
securitization can serve their requirement/wants.
The concern that securitization might destabilize the Islamic
banking sector.
 Securitization presents a paradox between capital efficiency and capital
adequacy.
Off Balance Sheet Activities
 Financial Guarantee
 Letter of Guarantee
o A letter from an Islamic bank to a third party which states that a
customer ( who had made on order) does indeed own the underlying
assets and the Islamic bank will guarantee delivery of the order is
assigned.
o Another type of guarantee is performance bond
o Letter of Guarantee may also be granted for advance payment,
retention sukuk, bid sukuk, performance sukuk, financing collateral
and customs guarantees.
 Standby Letter of Credit
 An Islamic bank will issue a standby letter of credit on behalf of a
customer to provide assurances of his ability to perform under the terms
of a contract between the beneficiaries.
The standby letter of credit assures the beneficiary of the performance of
the customers’ obligations.
Letter of Comfort and Letter of Awareness
A letter of comfort is essentially an instrument that is used to facilitate
an action or transaction but is constructed with the intention of not giving
rise to legal obligations.
In general, letter of comfort should be avoided.
Remittance
 Standing Instruction
o A standing instruction is a remittance service by which a customer
can instruct an Islamic bank to affect regular fund transfers at pre-set
timings and amounts from the customers’ deposit account to be
designated beneficiary accounts.
 The standing Instruction services can be used to effect :
o Repayment of financing/ hire purchase instalments
o Payment of bills/schools fees/ takaful contributions
o Salary payments
o Inter- accounts transfer of funds
o Payment of safe deposit box rental
o Purchase of cashier’s orders
Securities and Fund Services
 The services cover products such Direct Custody and
Clearing (DCC), Fund Accounting and Administration
Services, and Agency and Trust
 Telegraphic Transfer
 Telegraphic Transfer services is the fastest means for transferring
money from one country to another.
 Tele-Banking
 Tele-banking is a service that helps customers to access
authentic, instantaneous information regarding their
accounts, by using a push button telephone from any
place.
 Travellers’ and Bankers Cheques
 Travellers cheque are cheque issued in fixed denominations
of international currencies by certain banks.
They can be cashed easily, have no specific maturity period
and are a convenient means of payment at hotels or
departmental stores for travelers.
 Cashiers’ Order/ Local Demand Draft
 Cashiers’ Order is an Islamic banker’s cheque. It is a cheque issued by
an Islamic bank branch and drawn on itself and is generally used
within the same locality to effect payment especially of personal
cheques are not acceptable or cash payment is not advisable.
Securitization
 It is the process of transforming dormant, illiquid assets into
tradeable, negotiable and liquid assets.
It is a process of financial intermediation which pools assets
with similar overall characteristics and allows risks to be
diversified and channeled to a large number of investors.
Cross Currency Swap
 A Cross Currency Swap involves an agreement between two
parties to exchange as stream of principal and profits payments
in another currency over multiple specified interest periods.
 SUMMARY
• Generally accepted accounting primciples permit certain kinds
of transactions to be accounted for off the Islamic banks’
balance sheet, and many Islamic banks, as a means of
managing risk and/ or taking advantages of legitimate tax
minimization opportunities, create off balance sheet
transactions.