Dokumen Polisi Tawarruq LIQA ASAS Mac 2016 Lanai Kijang

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Dokumen Polisi Tawarruq LIQA ASAS 2016 28 Mac 2016 Lanai

1 Dokumen Polisi Tawarruq LIQA ASAS Mac 2016 Lanai Kijang Prepared by: Hamzah Kamaruzaman

2 Outline Overview of Shariah Standards - Contract-Based Regulatory Framework - Enforceability - Support Shariah Compliance Functions - Development Process Shariah Requirements & Optional Practices of Tawarruq - Overview - Essential Shariah requirements - Selected SAC Decisions - Challenges 2

3 Overview of Shariah Standards 3

4 Enforceability of Shariah Standards Contract-Based Regulatory Framework for Islamic Finance Islamic Finance: Islamic financial institutions conduct financial intermediation functions using Shariah contracts Distinct risk and reward profiles based on Shariah contracts End-to-end Shariah compliance under the Islamic Financial Services Act 2013 Licensing Shariah Standards Operational Standards Oversight Functions Resolution Aims and operation must be Shariah compliant. Compliance with fundamental of respective Shariah contracts Strengthened risk management, governance, transparency, and disclosure, market conduct and other operational aspects of applying Shariah standards Codification of the role of the Shariah committee and board of directors of financial institutions in ensuring Shariah compliance Priority payment reflective of underlying Shariah contracts Power of bank to specify standards on Shariah matters 29. (1) The Bank may, in accordance with the advice or ruling of the Shariah Advisory Council, specify standards Slide 15 Power of bank to specify standards on prudential matters 57. (1) The Bank may specify standards on prudential matters to promote Standards on business conduct 135. (1) The Bank may specify standards on business conduct to a financial service provider for the purposes of ensuring that a financial service provider is fair, responsible and professional when dealing with financial consumers. 4

reference Management Board Shariah Committee Shariah Standards: support execution of Shariah compliance functions Shariah principles Responsibility of Shariah Committee & Shariah Management of IFIs

5 reference Management Board Shariah Committee Shariah Standards: support execution of Shariah compliance functions Shariah principles Responsibility of Shariah Committee & Shariah Management of IFIs in Shariah matters Shariah Compliance Functions: Shariah Review Shariah Audit Shariah Risk Oversight and advisory role on Shariah matters to ensure Shariah compliance Oversee implementation of Shariah audit and Shariah review Confirm actual and potential Shariah noncompliances & endorse rectification plan Shariah Research Shariah Governance Framework Shariah Standards Shariah Resolutions & Rulings o Obtaining and making reference to relevant sources (e.g. SAC s published rulings, the Shariah Committee s decisions, etc) o Responsible to observe & implement Shariah decisions & rulings made by SC & SAC 5

6 Shariah Standards Development Process Shariah Requirements Operational Requirements Final Standards Draft Formulation Exposure Draft SAC Sub- Committee SAC Approval Internal Consultation Management Approval Industry consultation Finalisation of policy document Issuance of final policy document Shariah research and literature review. Consultation with the industry. Series of discussions with internal and external parties. Obtain feedback from IFIs, Shariah Industry Focus Group, SC and relevant stakeholders Review and analyses on responses Review & refining of Shariah requirements Decisions on issues arising from industry consultation Review of final draft Finalisation of CP Review by relevant departments o Supervision, Prudential, Market Conduct, Development Financial & Legal Review by AG & DG Presentation to FSWG (if required) Issuance of CP Analysis on responses Finalisation of policy proposals on Shariah & Operational Approval of draft policy document by Management JPIT IFIs SAC sub-comm / SAC JPIT AG & DG IFIs Management ISRA SC Relevant depts. SAC AIBIM IBFIM MTA 6

7 Shariah requirements & Optional Practices of Tawarruq 7

Shariah Requirements & Optional Practices of Tawarruq An Overview DEFINITION ESSENTIAL FEATURES Consists of two sale & purchase contracts; First sale & purchase involves sale of an asset to purchaser

8 Shariah Requirements & Optional Practices of Tawarruq An Overview DEFINITION ESSENTIAL FEATURES Consists of two sale & purchase contracts; First sale & purchase involves sale of an asset to purchaser on a deferred basis; & Second sale & purchase involves sale of the asset to a third party on cash basis PROCESS FLOW Contracting parties Asset Price At least 3 contracting parties customer, IFI & asset trader/ asset exchange Seller in 1 st contract must not be purchaser in 2 nd contract Offer & acceptance Asset owned by the seller Tangible or intangible Valuable, identifiable, deliverable,in existence As musawwamah (price) or murabahah (cost + profit) Paid in any form as mutually agreed e.g. spot, deferred OPTIONAL PRACTICES Dualagency Security Deposit Rebate Seller/buyer may appoint the other party as agent to execute transaction on its behalf i.e. IFI may be appointed as an agent of customer Purchaser provide security deposit (hamish jiddiyah) to seller to secure undertaking to purchase asset Seller may give rebate (ibra ) to purchaser i.e. waive part of selling price 8

9 Essential Shariah Requirements Nature Binding contract No unilateral termination Inherent nature is transfer of ownership for consideration Asset Must not involve: - gold, silver, currencies - Under construction - Debt in nature Specific description if asset not present Transfer of ownership upon valid sale Posession upon qabd (hukmi, haqiqi) through takhliyah Contracting Parties Seller in the first sale not purchaser in second sale May enter through agent Price Restructuring through entering into a new contract but only for solvent debtor Wakalah in Tawarruq Not restrict taking delivery Legal effect on principal Tawarruq deposit, where execution of sale and purchase later than placement of fund: - Fund must be held on amanah & not treated as qard - Except if treatment as qard due to unavoidable incidental circumstances Offer & Acceptance Follow sequence - Seller sells asset - Purchaser in the first sale sells to third party Ensuring true sale Sale and purchase properly evidenced Right to take delivery Payment any amount of price only after entering into sale contract 9

10 Execution of Murabahah Through Dual Agency Arrangement Murabahah transaction may be executed through the followings: 1. Direct contract between seller and purchaser Murabahah contract executed between bank and customer with proper documentation and evidence 2. Murabahah through wakalah Murabahah contract between bank and customer where bank acts as agent to customer to sell/purchase to/from itself. Such conduct must be properly disclosed and and evidenced through notification to customer. First Sale Seller 1 Buyer 1/ Seller 2 Second Sale Asset Buyer 2 Asset Cashflow SAC 146 A dual-agency in the tawarruq may involve the following: (a) an action of one of the contracting parties who acts as an agent to purchase an asset on behalf of the other contracting party; and subsequently acts as an agent to sell the asset on behalf of the same contracting party to himself; or (b) an action of one of the contracting parties who acts as an agent to purchase an asset from himself on behalf of the other contracting parties; and subsequently acts as an agent to sell the asset on behalf of the same contracting party to a third party. Pursuant to paragraph 17.2, the execution of the sale and purchase contracts between the principal and the agent shall comply with the following requirements: (a) essential criteria or specification of the authorised task, such as price, tenure and asset specification, shall be mutually agreed by the contracting parties; and (b) the transaction shall be in a proper sequence as provided in paragraph 17.2 and supported by proper evidence. 10

11 Execution of Murabahah Later than Fund Placement Date (para ) Resolution of 151 st SAC Meeting a. Where the murabahah sale in tawarruq is executed by the agent on a date later than the date on which the fund is accepted from the principal, the Islamic bank must fulfil the following requirements: i. The fund/deposit must be held based on trust (amanah) by the agent; ii. Both the agent and principal must ensure that funds/deposits accepted from the principal/depositor shall not be treated as qard to the agent prior to the execution of tawarruq between the agent and principal. Such usage of the fund as a qard may be tantamount to combining between loan and a sale (bai` wa salaf) which is prohibited; and iii. Notwithstanding paragraph (i) and the prohibition enumerated in paragraph (ii) above, in situation where the funds/deposits need to be treated as qard to the agent due to necessary and unavoidable incidental basis (tabi ) such as operational infrastructure constraints, such treatment may be allowed. b. In the case where the seller requires the purchaser to provide a security deposit (hamish jiddiyyah) to secure an undertaking to purchase the asset, such security deposit shall not be treated as qard from the purchaser; and the seller shall not utilise it prior to the execution of the sale and purchase contract under tawarruq. Basis & Explanation - In principle, tawarruq must be executed immediately after receipt of fund from customer - It is deposited for the purpose of tawarruq, thus it must kept for the interest of the customer - Given the nature of tawarruq arrangement that is a combination of sales, provision of qard by customer will lead to issue qard with condition of sale This is based on the fiqh legal maxim; يغتفرفي الشيء ضمنا ما ال يغتفر فيه قصدا - Qard is seen as tabi` as the initial purpose of the customer is to execute tawarruq immediately and not giving qard to the bank. However due to unavoidable constraint, it is held as qard. - Hamish jiddiyyah is for the purpose of securing a purchase. It must be held as amanah. It shall be used as compensation for loss due to breach of wa`d; or may be treated as part of selling price 11

12 Debt Restructuring (para ) Collateral (Rahn) of Mixed Asset (para ) Debt Restructuring (SAC 160) The SAC ruled that debt restructuring may be carried out through a new financing contract; in which the proceeds from the financing maybe be utilised to settle the existing debt. However, debt restructuring can only be carried out with customers who have been categorised by the Islamic financial institution as solvent. Collateral of Mixed Asset (SAC 160) The SAC ruled the followings: (a) shares of companies with mixed asset may be accepted as collateral provided that the core business of the company is recognised as Shariah compliant; and (b) a mixed asset may be used as collateral provided that the Shariah compliant assets and Shariah non-compliant can be segregated. The value of the collateral is limited only to the portion of the assets that are Shariah compliant. In this respect: (i) the collateral value of interest bearing debt based asset such as conventional fixed deposit certificate and conventional bonds is limited to the principal amount of the instrument; and (ii) the collateral value of Shariah non-compliant unit trust is limited to the value of the investor's initial and subsequent/additional investment. - Qalb dayn specifically with a solvent (musir) debtor is a debatable issues among scholars compared to insolvent debtor - One of the criteria to determine a solvent debtor is through assessment of his credit risk to incur new debt. - For mixed shares, emphasis is on Shariah compliance status of the core business. Whilst the Shariah non-compliant part usually is incidental (tabi`) in nature. - For mixed financial asset, the general principle in allowing it as collateral; the Shariah compliant part can be separated from the Shariah non-compliant 12

Challenges Drafting Modern practices require new ijtihad Meeting the expectation of both Shariah scholars and practitioners Limitation of prescribing detailed rulings Implementation Practical

13 Challenges Drafting Modern practices require new ijtihad Meeting the expectation of both Shariah scholars and practitioners Limitation of prescribing detailed rulings Implementation Practical challenges - Migration into a new contract may require changes in system Understanding gaps - Differences between documentation of BBA and tawarruq Shariah Compliance Issue Issues on Shariah compliance vs. Shariah-based - both must lead to compliance with Shariah Addressing the long-term solutions for tawarruq 13

14 Thank You 14

compliance with Shariah in respect of that aims and operations, business, affair or activity. Ruling passed by the SAC Communication & Dissemination of SAC ruling to stakeholders 29.

15 Shariah Standards gives effect to SAC rulings 28. (2) For the purposes of this Act, a compliance with any ruling of the Shariah Advisory Council in respect of any particular aim and operation, business, affair or activity shall be deemed to be a compliance with Shariah in respect of that aims and operations, business, affair or activity. Ruling passed by the SAC Communication & Dissemination of SAC ruling to stakeholders 29. (1) The Bank may, in accordance with the advice or ruling of the Shariah Advisory Council, specify standards (a) on Shariah matters in respect of the carrying on of business, affair or activity by an institution which requires the ascertainment of Islamic law by the Shariah Advisory Council; and (b) to give effect to the advice or rulings of the Shariah Advisory Council. Issuance of SAC meeting statement Issuance of written circular, guidelines or notices on the SAC rulings Specify standards to give effect of the rulings by the SAC 15

16 1 Tawarruq for the purpose of deposit Role of IFI: 1 st Buyer, 2 nd Seller Role of customer: 1 st Seller 1 Customer 2 IFI BSAS Supplier 1 1 st agency arrangement 2 nd agency arrangement IFI BSAS Supplier 2 5 Dual agency role by the IFI IFI acting as seller & buyer on behalf of customer Bursa Suq As-Sila (BSAS) transactions are conducted concurrently and payment is settled net Asset flow Cash flow A customer makes a fixed deposit placement of RM100,000 with the IFI for a 90- day period. Upon this request, the IFI executes the tawarruq arrangement. 1. The customer appoints the IFI as its agent to purchase the asset from Asset Supplier 1 with selling price of RM100, The IFI uses the cash deposit placed by customer to pay for the purchase. 3. Subsequently, the customer appoints the IFI as its agent to sell the asset to the IFI itself at an agreed selling price of RM100,863 (RM100,000 + profit RM863 i.e. 3.5% per annum) 4. The IFI makes deferred lump sum payment to customer upon maturity of the deposit placement. 5. Subsequently, the IFI sells the asset to Asset Supplier 2 on spot at selling price of RM100, The IFI obtains cash of RM100,000 as per the deposit placement. 16

17 2 Tawarruq for the purpose of financing Role of IFI: 1 st Seller Role of customer: 1 st Buyer & 2 nd Seller 1 st agency arrangement Customer 2 nd agency arrangement Bursa Suq As-Sila (BSAS) transactions are conducted concurrently and payment is settled net IFI BSAS Supplier 1 2 IFI BSAS Supplier 2 Asset flow Cash flow A customer requires financing of RM100,000 from the IFI. Upon this request, the IFI executes the tawarruq arrangement. 1. The IFI purchases the asset with selling price of RM100,000 from Asset Supplier 1. (Wa`d from the customer + agency contracts) 2. The IFI pays cash to Asset Supplier Subsequently, customer appoints IFI to purchase the asset on its behalf from the IFI. The IFI sells the asset to the customer at an agreed selling price of RM120,000 (RM100,000 + profit RM20,000). The customer makes deferred payments through monthly instalments for a period of 5 years. 4. Subsequently, the customer appoints the IFI as its agent to sell the asset to Asset Supplier 2 on spot at selling price of RM100, The customer obtains a cash of RM100,000 required for the financing. 17

Issued on: 23 December Istisna`

Issued on: 23 December Istisna` Istisna` BNM/RH/PD 028-1 Islamic Banking and Takaful Department Istisna` PART A OVERVIEW... 1 1. Introduction... 1 2. Policy objectives... 1 3. Scope of policy document... 2 4. Applicability... 2 5. Legal