Compliance with Shariah requirement is a prerequisite in ensuring the legitimacy and integrity of Islamic financial products and services. In meeting this expectation, it is essential for an Islamic financial institution (IFI) to establish the necessary operational framework and infrastructure to ensure that the conduct of the Islamic financial transactions is consistent with Shariah.
The Shariah contract-based regulatory policy is intended to promote consistency of Shariah contract application in Islamic financial products and services. This policy is envisaged to strengthen legal certainty and Shariah compliance practices by the IFI.
Kafalah refers to a contract where the guarantor conjoins the guaranteed party in assuming the latter’s specified liability. In the context of Islamic financial transactions, kafalah is used by the IFI to provide guarantee services, such as bank guarantee, standby letter of credit and shipping guarantee. It is also being used as one of the contracts to supplement various primary Islamic financial products, predominantly for risk mitigation purposes, such as musyarakah, mudarabah, murabahah, istisna´, ijarah and tawarruq.
This objectives of this policy document are to:
(a) provide reference on the applicable Shariah rulings for kafalah contract;
(b) set out key operational requirements for the implementation of kafalah contract; and
(c) promote end-to-end compliance with Shariah requirements which further promote sound banking practices safeguard consumers’ interests.
This policy document sets out the following:
(a) salient features and essential conditions of kafalah in Part B; and
(b) regulatory and supervisory expectations for the operational requirements on governance and oversight, structuring, risk management, financial reporting and business and market conduct in Parts C and D, where Part C provides general operational requirements for a kafalah contract, whereas Part D provides specific operational requirements where the IFI is in the capacity of a guarantor or a beneficiary.
This policy document covers the application of kafalah contract in financial products and services offered by the IFI.
For the purpose of the policy document, the subject matter of kafalah is confined to financial guarantees (kafalah bi al-mal). Therefore, guarantee on ensuring presence of certain person (kafalah al-nafs) and appearance of certain person (kafalah al-wajh) are excluded from the application of this policy document.
This document belongs to Bank Negara Malaysia (BNM). Full access to the original source is available here: https://www.bnm.gov.my/banking-islamic-banking
