Compliance with Shariah requirement is a prerequisite in ensuring legitimacy of Islamic financial products and services. Failure to observe the essential conditions of a specific Shariah contract may render the financial transactions entered between an Islamic financial institution (IFI) and a customer to be invalid and thus, may lead to adverse impact on the institutional safety and soundness. In this regard, Bank Negara Malaysia (the Bank) embarks on the development of a Shariah contract-based regulatory policy to enhance end-to-end compliance with Shariah and therefore, ensure the integrity and sustainability of the IFI.
The Shariah contract-based regulatory policy consists of two components, namely Shariah requirements and operational requirements. The first component highlights the salient features and essential conditions of a specific Shariah contract. Clear stipulation of Shariah rulings pertaining to a particular contract is intended to facilitate sound understanding and cohesive adoption among the IFI. The second component outlines operational requirements encompassing core principles underpinning sound banking practices, expectations for good governance, robust documentations, fair market practices and effective risk management. These regulatory expectations aim to complement and support effective application of the Shariah contract.
Murabahah contract is a type of “trust sale” contract under Shariah in which the purchaser relies upon the integrity of the seller to acquire the desired Shariah compliant asset at a reasonable cost. In line with the underpinning element of trust in murabahah contract, the seller is required to disclose the breakdown of the selling price to the purchaser, which comprises the acquisition cost and the mark-up or profit margin.
In the context of Islamic financial transaction, an IFI perform both roles of a trader and a financier under the murabahah contract. As a trader, the IFI undertake to acquire a specific asset from the vendor or supplier based on the customer’s specification and subsequently sells the asset to the customer with full disclosure of the asset’s acquisition cost and profit margin. Typically, the IFI would accord deferred settlement terms on the agreed selling price to the customer under the murabahah contract to facilitate the financing arrangement.
An IFI may undertake direct dealing with the supplier or appoint the customer as an agent to acquire the asset on its behalf for the purpose of murabahah transaction. Shariah emphasises the need for the seller to secure the ownership and assume the risk associated with ownership of the asset prior to the execution of the murabahah contract, regardless of the preceding undertaking provided by the customer to purchase the asset.
In terms of risk profiling, the execution of murabahah transaction exposes an IFI to several types of risks that include the operational risks arising from the asset ownership, market risk associated with the potential loss in the value of the asset owned by IFI as well as credit risk arising from the losses associated with the potential failure of the customer to settle the outstanding debt obligation. As such, it is pertinent for the IFI to establish a comprehensive risk management framework to support effective management of the risks associated with murabahah transaction.
This policy document aims to:
(a) Provide reference on the Shariah rulings associated with the murabahah contract;
(b) Set out key operational requirements for the implementation of the murabahah contract; and
(c) Promote end-to-end compliance with Shariah requirements, while ensuring that sound banking practices and consumer protection are maintained throughout the life cycle of the murabahah contract.
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
