Accommodation of concepts
Mudarabah – profit sharing partnership separating responsibility for capital investment and management.
As part of its efforts to ensure that the practices and procedures adopted by market players conform to shariah standards, the BNM is responsible for, and issues from time to time, policy documents setting out various ‘standards’ (ie, requirements that must be complied with by licensed institutions where failure to comply may result in enforcement action being taken), and ‘guidance notes’ (ie, recommendations intended to promote common understanding and sound industry practice which are encouraged to be adopted). The policy documents issued by the BNM were in respect of various Islamic principles including mudarabah, murabahah, musharakah, ijarah and wadiah.
Under the Guidelines on Unlisted Capital Market Products under the Lodge and Launch Framework issued by the SC on 9 March 2015 (revised on 11 October 2018), the SC explicitly recognises mudarabah, murabahah, musharakah, ijarah and wadiah as approved shariah principles and concepts for unlisted capital market products.
The BNM issued a policy document in April 2015 to provide reference on the shariah rulings associated with mudarabah and set out key operational requirements with regard to the implementation of mudarabah, such as governance and oversight, structuring, risk management and financial reporting.
The BNM recognises two types of mudarabah: the unrestricted mudarabah, which permits the mudarib to manage the mudarabah capital without any specific restrictions; and the restricted mudarabah, where the rab-al-mal imposes specific restrictions on the mudarabah terms.
In a mudarabah contract, profit is shared between a rab-al-mal and a mudarib based on a ratio mutually agreed between them. Loss, if any, is borne by a rab-al-mal up to the capital value. A mudarib shall not be liable for any impairment of asset unless such loss is due to its misconduct, negligence or breach of specified terms of the contract. A mudarib is not permitted to guarantee the capital or the profit. However, the rab-al-mal may request collateral from the mudarib, which can only be enforced in the event of the mudarib’s misconduct, negligence or breach of terms of the contract.
The mudarabah contract is widely used in structuring products that are classified as investment accounts. Under the IFSA, the investment account is distinguished from an Islamic deposit and is defined as an account under which money is paid and accepted for the purposes of investment in accordance with shariah principles on terms that there are no express or implied obligations to repay the money in full. The BNM issued a policy document on investment accounts in October 2017 setting out specific requirements on the structuring, risk management and market conduct of investment accounts, and the oversight requirements over the management of investment account funds and investment assets.
In venture capital funding, an Islamic financial institution may share both profit and risk in a participatory arrangement provided that the investors are fully informed of all the risks inherent in such venture.
Murabahah – cost plus profit agreement.
The policy document issued by the BNM in December 2013 recognised both the murabahah contract and murabahah to the purchase orderer arrangement (MPO). Murabahah is expressly defined as a sale and purchase of an asset where the acquisition cost and mark-up are disclosed to the purchaser. The MPO is defined as an arrangement whereby the purchase orderer promises to purchase an identified and specified asset from a seller on murabahah terms upon the latter’s acquisition of the asset. Pursuant to the policy document, a bank may buy an asset and resell it at a profit, while allowing the buyer to settle the bank’s selling price on a cash or deferred (instalment) basis.
The bank can also ask for collateral to secure the purchaser’s payment obligations. Based on the policy document, the collateral must be a shariah-compliant asset, although an interest-bearing debt-based asset such as conventional fixed deposit certificates may be used as collateral provided that it is valued up to the principal amount.
In November 2015, the BNM issued a policy document on tawarruq recognising the concept of tawarruq in the provision of finance via two sale and purchase contracts. The first involves the sale of an asset by a seller to a purchaser on a deferred basis. Subsequently, the purchaser of the first sale will sell the same asset to a third party on a cash and spot basis. The concept of tawarruq is widely used in structuring sukuk in Malaysia, whereby the underlying assets are generally the commodity sourced from the commodity trading platform, Bursa Suq Al-Sila’. See question 3 for more information on Bursa Suq Al-Sila’.
In December 2018, the BNM re-issued the policy document on tawarruq removing the submission requirements to Jabatan Perbankan Islam dan Takaful, which is an arm of the BNM on the implementation plan of tawarruq.
In terms of the tax implications, any gains or profits received and expenses incurred pursuant to the disposal of an asset by or to a person, pursuant to a scheme of financing approved by the SC, are exempted from tax provided that the scheme is in accordance with the principles of shariah and such disposal is required for the purpose of complying with those principles.
Musharakah – profit sharing joint venture partnership agreement.
The BNM issued a policy document in April 2015 on musharakah, recognising two types of musharakah, namely:
- partnership in joint ownership (shirkah al-milk), pursuant to which each partner’s ownership to the asset is mutually exclusive and that one partner cannot deal with the other partner’s asset without the latter’s consent; and
- contractual partnership (shirkah al-aqd), whereby a partner is an agent of the other partner and the conduct of one partner in the ordinary course of business represents the partnership.
A musharakah venture may be managed by a single managing partner, or by a third-party manager. There are no formalities for the appointment of the managing partner.
The profit sharing ratio in the musharakah must be proportionate to each partner’s contribution unless mutually agreed otherwise. The musharakah contract is not permitted to stipulate a fixed amount of profit to any partners. The expected return in the form of a percentage that is attributable to the capital amount is only permissible in indicative form. As such, no floating rates of return can be linked to a customer’s profit unless it is used as a benchmark for indicative return.
The concept of musharakah mutanaqisah (diminishing musha-rakah) is also widely used in structuring sukuk in Malaysia. Under this principle, a musharakah is entered into by two or more parties on a particular asset or venture that allows one of the partners to gradually acquire the shareholding of the other partner through an agreed redemption method during the subsistence of the musharakah contract.
Ijarah – lease to own agreement.
The BNM issued a policy document in June 2018 on ijarah, which was set to come into force on 1 August 2018. The policy document explicitly recognises that an Islamic financial institution can make available or transfer the usufruct of an asset to another person for a fixed period in exchange for a specified consideration. Ijarah contracts are not caught by the general consumer law for hire purchase. Notwithstanding this, to ensure that a customer under an ijarah financing contract is accorded with the same standard of protection provided under the hire purchase laws in the event of a repossession, the policy document issued by BNM incorporates requirements to ensure that the consumer protection elements in the hire purchase laws relating to repossession are reflected in an ijarah financing contract.
Wadiah – safekeeping agreement.
The BNM issued a policy document in August 2016 on wadiah, which is set to come into force on 31 July 2018. Based on the policy document, wadiah refers to a contract where an asset is placed with another party for safekeeping. As such, the wadiah asset is held on trust by the custodian, for the benefit of the depositor. The custodian will not be liable for any loss or damages to the wadiah asset, except for that arising from his or her own misconduct, negligence or breach of specified terms of the wadiah contact.
In Malaysia, most of the banks offer savings accounts based on the concept of wadiah. Gifts (hibah) to depositors are possible in lieu of interest, except for investment accounts. In cases where the manager or custodian breaches his or her fiduciary duty or misuses the funds, he or she would be liable to return in full all the depositors’ money.
Based on the policy document issued by the BNM, unlike Islamic deposits, a deposit protection scheme does not extend to cover investment accounts that are based on the concept of risk- and profit-sharing.