International Conference onIslamic Microfinance in Mauritius

CENTER OF ISLAMIC BANKING & ECNOMICS

Organized By :

International Conferences on Islamic Banking and Finance in Mauritius,

5th-6th April, 2011, Gold Crest Hotel, Mauritius2

Regulation on the Parameterization of Islamic

Financial Products

Abdul Ghafar IsmailShofian AhmadResearch Center for Islamic Economics and FinanceUniversiti Kebangsaan Malaysia

Introduction cross-border activities open up the new challenges

for host and home nations These activities affect the IFI, which is recognized

as an institution that accepts different rules but lately gaining acceptance in global financial

markets due to the set up of new institutions such as AAOIFI and IFSB, plus research institutions such such as Fiqh Academy, al-huda, ISRA and EKONIS

The response from each jurisdiction has been to attempt an Islamic integration into the international financial system and expand the contribution of Islamic finance to real economy – How? - by having accounting standards and prudential regulation

3

Continued… in designing and offering new products and

services – IFI are exposed to several obstacle such as legal origins; differences in rulings; sound and prudent regulations

this effort has motivated BNM to deviate from the other regulators by introducing a new guideline

Aim of this paper - to explain the creation process in offering new financial products and to identify the parameters in designing those products

this paper also will highlight the issues that may arise due to the introduction of those parameters

4

Reasons to Regulate the Islamic Financial Institutions

Reasons

Safety and Stability

Promote Competitio

n and Efficiency

Basis for Monetary

Policy

5

Nature of Current Regulations

Guidelines on

Regulations

Shari’ah Advisory Council

Shari’ah Advisory Council

Corporate GovernanceCorporate

Governance

Presentation of Financial Statement

Presentation of Financial Statement

Rate of ReturnRate of Return

Capital Adequacy Standard

Capital Adequacy Standard

6

Methodology in Constructing the

Shari’ah Parameter Guideline

7

8

Item 12 Item 14Item 13 Item 15 Item 16

Diagram : Flow chart of Product Approval

Product Section

Submit

No Submit

Shariah Committee

Legal

Board

BNM

System Development: (Including risk management and mitigation)

Submit Yes

Appendix: Shari’ah Product Working Paper

Items to be covered in this “shari’ah working paper” are as follows:

1. Purpose - The purpose of this letter is to seek specific approval from Bank Negara Malaysia (BNM) for (name of institutions) to launch (name of product) product.

2. New Product Name - The new product name is ........

3. Objectives4. Structure and Mechanism of product - A detailed description of the structure and

mechanism 5. Type of target market6. Description of Product

9

Continued…7. Major differences between our current product

and this new product8. Propose date to Launch9. Risks - The risks need to be identified in relation to

this new product and the risk mitigation measures are also stated.

10. Terms and Condition - The legal agreement attached to this product

11. Transparency to Customers 12. Skill, expertise and resources -To brief and

trained the related parties such as front line, training and product manager, a legal counsel, and also to address any issues/concern by the staff in understanding the product.

10

Continued…

13. Shari’ah Compliance - Shariah Committee’s endorsement and decision on the new product with regard to Shariah compliance 

14. Risk Management Infrastructure. Approval by the compliance and risk units15. Accounting and Reporting Treatment16. Capital Adequacy Requirements.

11

Table : Parameter Guideline for Murabahah Contract

12

Parameter Items PurposesFunctions of Products To execute the real sector economic transactions that facilitate the exchange, sale and

trade of goods and services

Objectives of Products Encourage savings habitProduct Features(i)IFI as wakeel(ii)Maturity

Wakeel for buying and selling

Essential conditions:(i)Wordings(ii)Commodities(iii)Contracting partiesAdditional conditions for (i):(i)offer and acceptance must correspond and connect to one another (muwafaqah al-ijab wa al-qabul)(ii)offer and acceptance must be made in the same contractual session (ittihad al-majlis).Additional conditions for (ii):(i)existence(ii)deliverability(iii)specification(iv) legalityAdditional conditions for (iii):(i)must possess complete legal capacity ((ahliyyah)(ii)competent (e.g. puberty and prudence

To create ijab and qabulTo identify the subject matterTo identify only the qualified and competent personTo demonstrate the intention of the parties to conclude a specific contract.The parties are present to agree on something and it ends when they separate physicallyTo determine the legal ownershipTo avoid the uncertainty whether they can be delivered or notTo determine the nature, quality and quantityTo determine the commodity that is capable of being tradedTo execute or discharge his rights and duties emanating from the contract that he has entered, i.e., to understand the legal consequences of any contract that he has entered into.To understand the transactions (Art 966 of The Mejelle)s

Legal Documents(i)Master agreement(ii)Supporting agreement

Shari’ah principles clearly translated into legal language To satisfy the needs of economic agents through various phases of economic activity, right from the purchase or sale of goods, to arrangements for collaterals and guarantees, to arrangements for financing and investment

Issues AriseWhat are

the issues?

No Absolute Authority

Legal Maxim & Legal Document

Maqasaid Syariah

13

A. No Absolute Authority

Therefore, IFIs must seek a review of their products by shariah scholars who judge each case on its merits

Our suggestion are: harmonization and convergence in the concepts and

application among the shariah committee of IFIs to avoid contradiction or inconsistency between the rulings and application

Helping/sharing the developments of shari’ah approved products and in enabling IFIs to cope with the developments taking place in products and formulas in fields of finance, investment and other banking services

14

B. Legal Maxim and Legal Document

legal maxim: harm shall be removed (Al-Darar yuzalu)

Example: when A buys a car and then discovers that it is substantially defective, he has the option to revoke the contract - this option only appears in the legal documents

Therefore, in this case, the parameters could not tell us on the detailing items that could be translated into the legal documents

15

C. Maqasid al-Shari’ah

The establishment of IFI is not only to comply the shari’ah but to achive the objective of shari’ah (Maqasid Al Shari’ah).

Authors such as Jasser Auda (2010) argues that maqasid al shari’ah could discussed based on a system approach or institutional approach.

if we treat Islamic financial institutions as an institution to perform certain function or as a system (which comprises several agents that behave accordingly). Does the maqasid al shari’ah will converge in both approaches

16

http://ekonis-ukm.my

17

Thanks

CENTER OF ISLAMIC BANKING & ECNOMICS

Head Office: 192- Ahmad Block, New Garden Town , Lahore, Pakistan 

Ph: +92-42-35913096-8, 35858990, 38407850 Fax: +92 -42-35913056

E-mail : info@alhudacibe.comWeb: www.alhudacibe.com