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Thursday, August 28, 2014
The issuance of parameters on Islamic commercial and banking products is but a great effort to lay down guidance and settle the arguments and disputes on relevant Islamic banking products in the country
Malaysia's Islamic finance industry has been in existence for over 30 years. Among the main regulations and guidelines issued by the authorities to govern the financial system includes the Banking and Financial Institutions Act, 1989 (BAFIA). However, the Islamic Banking Act 1983 (IBA), is not affected. The BAFIA is a comprehensive Act and extends comprehensive powers to Bank BNM to supervise a larger spectrum of financial institutions, Since then, BNM has introduced numerous regulations and guidelines. The most significant change is brought about by the Financial Sector Master Plan (FSMP). The FSMP comprises measures and a timetable for the liberalization of the conventional and Islamic banking and insurance sectors.
Common problems and challenges
Though there are many products and services with proper procedures and regulations, there are underlying problems in their implementation. We can categorize common problems and challenges that are facing Islamic banking system in Malaysia into three aspects :
i) Muamalat contracts applied;
ii) Too heavily dependent on debt financing; and
iii) To achieve economic of scale.
To overcome muamalat contracts dispute, Islamic banks have to change bay al-inah principle to tawarruq principle in doing trading transaction as suggested by (Abdul Mumin Ab. Ghani & Ahmad Sufyan Che Abdullah, 2006).Tawarruq seems to be more effort to provide alternative loans to users/customers and avoiding the riba element. There must be much effort to enlarge equity financing through musyarakah and mudharabah which its nature is not in fixed determined profit and loss. Even though few initiatives to introduce this contract had been done, but the reality is that it is still far from targeted. Product contract musyarakah munataqisah has a great potential to expand, not only for investment but also for home financing.
Apart from that mentioned earlier, disputes on the compliance of certain products such as a the case involving Kuwait's Investment Dar and BLOM Bank SAL( Blom) has revolved around arguments on the sharia compliance of a certain product, which experts say could leave investors wary of Islamic finance. Blom is a Lebanon-based bank that provides retail, corporate, private and investment banking services, as well as Islamic banking. Dar has refused to pay Blom Bank $10.7 million, arguing that their original deal involving a wakala or agency arrangement -- which was approved by its sharia board -- fell foul of religious laws. Dar's charter prohibits it from entering into non-Islamic transactions. Lawyers say the case has raised several issues including the level of communication between the bank's board and its sharia advisers.
Lawyers have also commented that some banks selectively disclose information to sharia advisers to speed up the approval process for products or push these experts for an endorsement within a short time after supplying them with complicated financial documents.
Another issue refers to BAFIA. The Act is very brief and regulatory in nature, also do not offer substantive law where the bankers or customers would be able to understand how it works for them. Ultimately, the jurisdiction of the courts to hear Islamic banking disputes still lies with the Civil Court due to a few provisions in the Federal Constiution of Malaysia. An important question to be answered is, what extent have the provisions in IBA and BAFIA (Islamic) windoe prevailed over other legal requirements? Section 55 states that in case of conflict between the provisions of the Companies Act, 1965 and the provisions of IBA the latter shall prevail. Does this mean that in all other conflicts, the provisions of IBA shall be put aside?
Given the above issues, BNM in 2010 proposed new rules to tighten sharia compliance at Islamic banks including raising sharia advisers' accountability and independence, and requiring audits on banks. BNM, which oversees the world's largest sukuk market, said Islamic banks must set up sharia review, audit and risk management control functions to reinforce compliance.
"The framework aims essentially to strengthen the sharia governance process, decision-making, accountability and independence," the central bank .
"To reinforce the sharia compliance functions, internal sharia review and audit requirements will be introduced, supported by an appropriate risk management process and research capability." .
Under the BNM rules, the board would be responsible for the overall sharia oversight of Islamic banks but must recognise the independence of sharia advisers.The role of sharia advisers is widened to include ensuring implementation of decisions involving Islamic law and must inform the bank where non-compliance with sharia issues have not been properly addressed. Islamic financial institutions in Malaysia, which include the units of HSBC Kuwait Finance House, Maybank and CIMB must have review functions that continuously monitor shariah compliance of their operations. They must also have annual sharia audits which would provide an independent assessment of compliance with established policies, Bank Negara said, "The senior management is also responsible for ensuring that all submissions to the sharia committee are adequately researched and supported by a thorough study on the sharia issues, product structuring and documentation,"
In 2010 various key initiatives were undertaken by BNM to strengthen Malaysia’s position in Islamic finance. Given this , we will look at those rules that BNM has introduced including those in draft form. These included the introduction of Syariah Governance Framework for Islamic Financial Institutions which will be elaborated further in the next paragraph. Under the Syariah Governance Framework for Islamic Financial Institutions, it provides guiding principles on Syariah governance structure, processes and arrangements to manage Syariah risks. It also sets the standards for board, committee and management in discharging their duties pertaining to Syariah. In addition, the Syariah Parameter References were developed to codify the Syariah principles for commonly used Islamic products contracts, namely Murabahah, Ijarah, Mudharabah, Musharakah, Istisna and wadiah. The purpose of this Shariah contract parameter for Murabahah is to provide reference on the nature and features of the contract to the Islamic financial services industry.
The Principles and Practices of Shariah in Islamic Finance is a collection of a
series of reference documents known as the Shariah Parameter Reference currently issued by Bank Negara Malaysia (BNM). As discussed earlier, the development of Murabahah from a sale-based transaction to a financial instrument has raised a number of issues in the local and international market practices. As such, the benefit of a parameter is to provide a more comprehensive and complete understanding of the nature and features of Murabahah contracts as a guidance to all finance practitioners, finance professionals, academicians, scholars and regulators. Detailed references to specific Shariah fatwas, opinions and standards would facilitate scholars in Islamic finance to expound further the systematic development of Islamic financial products that adopt the Murabahah contract.
The Bank has developed the Shariah governance framework for IFIs with the primary objective of enhancing the role of the board, the Shariah Committee and the management in relation to Shariah matters, including enhancing the relevant key organs having the responsibility to execute t h e Shariah compliance and research functions aimed at the attainment of a Shariah based operating environment. However “banking under Shari’ah supervision” is not practical as this was done through delegating authority for the Shari’ah matters to the respective Shari’ah Boards, absolving Islamic bankers of their responsibility in Shari’ah violations. Of course, in principle, Shari’ah Boards have the authority to impose their viewpoint. But logistic considerations do not permit timely vetting and/or monitoring of all banking operations.
The Shariah Parameter Reference 1 is for the purpose of Murabahah. The purpose of this Shariah contract parameter for Murabahah is to provide reference on the nature and features of the contract to the Islamic financial services industry. Murabahah sale established itself as a mode of asset financing with an agreed and known mark-up. Being the most prevalent financing mechanism in Islamic finance, the Murabahah sale instrument has provided a Sharia-compliant alternative to interest-based financing mechanisms. The Murabahah contract has also been applied for deposit taking and issuance of sukuk. The development of Murabahah from a sale-based transaction to a financial instrument has raised a number of issues in the local and international market practices. The benefit of a parameter is to provide a more comprehensive and complete understanding of the nature and features of Murabahah contracts as a guidance to all finance practitioners, finance professionals, academicians, scholars and regulators. The purpose of this Shariah contract parameter for Murabahah is to provide reference on the nature and features of the contract to the Islamic financial services industry. The features outlined in this parameter may serve as general guidance for the application of Murabahah contract. Any practice by the Islamic Financial Institutions (IFI) which is not specified in the parameter can be conducted as long as it does not contradict the features outlined in the parameter.
With the above introduction, The Principles and Practices of Shariah in Islamic Finance is no longer the issue of not having universally followed terminology for Islamic financing. For example, while majority of Islamic banks use the nomenclature Murabahah to stand for financing via sale on deferred payment, some label it Bai’ Thaman bil Ajil.—Quite interestingly, these latter institutions also offer Murabahah financing products. The Principles and Practices of Shariah in Islamic Finance has managed to overcome this issue.
This concept paper on Shariah Parameters Reference 4: Musharakah Contract (SPR4) sets out the Shariah requirements for application of the Musharakah contract. The purpose of this Shariah parameter for Musharakah is to provide a reference on the nature and features of the contract to the Islamic financial services industry, for the various financial instruments
including Musharakah financing, Musharakah investment and Musharakah Mutanaqisah. The essential features attributable to a Musharakah contract are capital, management, profit sharing, loss sharing and a joint venture.
This concept paper on Shariah Parameters Reference 5: Istisna’ Contract (SPR5) sets out the Shariah requirements for the application of the Istisna’ contract. The Shariah contract parameter for Istisna’ is aimed to become true source of reference on the nature and features of Istisna’ contract for the Islamic financial services industry, and to facilitate the consistent implementation of Istisna’ contract in Malaysia. Specific definitions and the basis for its legitimacy are described to facilitate the understanding of the Shariah contract requirements. The features identified in this parameter shall serve to assist the Islamic financial services industry to identify, understand, apply and distinguish the contract from other prevailing contracts in the industry. Thus with this, we no longer face the situation of selective interpretation of Arabic terms that creates confusion among the bank clients and the public. For example, istisna’ originally means manufacturing and delivery of something against advance payment. But in Islamic banking quarters, istisna’ financing signifies payment by an Islamic bank to the manufacturer of a thing for its delivery to the bank’s client with whom the bank has sale-on-deferred-payment relationship. Thus the term istisna’ financing is somewhat of a misnomer. With the Shariah Parameters Reference 5, it nop longer exist.
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