Mohammad Mahbubi Ali
The COVID-19 outbreak has led to the implementation of the Movement Control Order (MCO) in Malaysia since the 18th March 2020. The MCO has mandated the closure of all government and private premises — except those involved in essential services. This measure has impacted the cash flow of both the general public and SMEs, affecting their capability to fulfill bank obligations.
In view of the aforementioned, the government on the 25th March 2020 announced a six-month moratorium on loan/financing repayments starting the 1st April 2020. According to Bank Negara Malaysia (BNM), this moratorium is expected to ease the cash flow of SMEs and individuals that are mostly affected by COVID-19. This brief article sheds critical light on the repayment moratorium from the perspective of Shariah.
In Islam, the creation of indebtedness — within the capability to repay it, be it resulting from a benevolent loan or deferred sale contracts, is permissible. However, a debtor is responsible for paying his obligation in a timely manner or as demanded by the creditor. Failure to fulfill a timely payment by a solvent debtor is deemed a breach of other rights and may be subject to punishment. However, if a debtor is facing genuine difficulty in paying his obligation in due time, the creditor should grant the debtor a time extension for payment. According to the Quran: “And if someone is in hardship, then [let there be] postponement until [a time of] ease (2:280).”
Muslim jurists agree that a creditor is obliged to provide a postponement of payment to an insolvent debtor until he is financially capable of paying it. They also prohibit any increase over and above the outstanding amount of the obligation as a result of the given postponement of payment, for this will trigger the issue of Riba Jahiliyah or Nasiah.
The BNM’s new release on the 1st May 2020, however, allowed the recognition of accrued profit over the deferment period for hire purchase and fixed-rate Islamic financing. This has invoked various contentions and criticisms on how BNM communicates its policy. Nevertheless, this position was later reversed by the minister of finance on the 6th May 2020, which affirms that the moratorium will not invoke any extra charges, including modification loss.
On the whole, a debtor in Islam is classified into two types: a solvent debtor and an insolvent debtor. A solvent debtor is compelled to fulfill his timely obligation, thus is not entitled for an extension of payment. The debtor’s refusal to make a timely payment, while being able to pay it, might be subject to punishment. In some incidents, the forced selling of collateral and court action are necessary to recover the creditor’s outstanding debt. On the other hand, an insolvent debtor shall be given a sufficient extension of time to settle his obligation until he is financially capable of paying.
The moratorium policy should, therefore, take into consideration the status of bank customers and apply only to insolvent customers, with the exclusion of solvent customers. The banks are, therefore, granted the authority to identify their customers’ eligibility for a moratorium. This approach is line with the ultimate objectives of the shariah on the protection of both life and legally-owned property of customers.
For Islamic banks, the approach on the selective moratorium policy will ensure their financial liquidity and business sustainability amid this extraordinarily challenging time. Applying an automatic moratorium for all customers, irrespective of their financial capabilities, would deepen further the fall in Islamic banking revenues.
This is particularly true since Islamic banks in Malaysia have already suffered from low margins resulting from the slashing of BNM’s base rate to 2.5%, low fee-based income due to lesser demand for certain banking services, slow growth in financing amid COVID-19, lower oil prices and a drop in investment avenues due to a capital market slump.
Besides, COVID-19 has exposed Islamic banks to an increase in non-performing financing or credit default risk due to a high number of business closures and increase in unemployment. Currently, thousands of consumers are being placed under quarantine as part of the Enhanced MCO. As a result, these consumers might lose their ability to pay installments, particularly of mortgages. The closure of businesses would lead to cash flow problems, which in turn will affect their capability to fulfill the bank installments.
The pandemic might also bring liquidity risk to Islamic banks because new depositors have an increasing preference for short-term safe assets and safe haven investment portfolios such as gold. On the other hand, as indicated earlier, credit risk will increase significantly due to the rise in the number of business shutdowns and the unemployment rate. Consequently, demand for liquidity arises. Even existing depositors have now started withdrawing their savings for their daily spending, to sustain their life and livelihood.
Siti Fariha Adilah Ismail, a Masters in Islamic Finance Practice (MIFP) student at the International Centre for Education in Islamic Finance (INCEIF), The Global University of Islamic Finance assisted in authoring this report.
Published in: Islamic Finance News (IFN), 22 May 2020
Syariah is the backbone of Islamic financial institutions (IFIs).Ensuring syariah compliance is essential for maintaining the confidence of stakeholders and the public at large.
Inadequate attention to the whole process of syariah compliance inevitably triggers negative repercussions for IFIs, such as financial loss and massive withdrawals.
Over the last two decades, many cases have been brought to the courts challenging the syariah compliance aspects of some Islamic banking products.
The decision by some judges to annul the underlying contracts of several Islamic banking products has posed the threat of financial losses for the banks.
As a case in point, in the Arab Malaysian Finance Bhd versus Taman Ihsan Jaya Sdn Bhd case, the court declared that bay’ bi thaman ajil (BBA) was invalid on the basis that the BBA facility was a bona fide sale transaction.
Therefore, when the bank recalled the facility at a higher total price, the sale no longer represented a bona fide sale transaction but was merely a financing facility similar to a loan under the conventional system.
Nevertheless, the Court of Appeal in the case of Bank Islam Malaysia Bhd versus Lim Kok Hoe reversed this decision, upholding the validity of the BBA as an enforceable contract.
Against the above backdrop, on Oct 26, 2010, Bank Negara Malaysia (BNM) introduced the Syariah Governance Framework (SGF) for IFIs operating under its purview (notably Islamic banks, conventional banks offering Islamic financial services and takaful companies).
The SGF aimed to strengthen the syariah governance structures, processes and arrangements of IFIs to ensure syariah compliance. The SGF required IFIs to institute clear internal control and remedial rectification measures to address Syariah non-compliant incidents holistically.
In response to emerging IFI business complexity and market maturity, on Sept 20, 2019, BNM issued a new, revised version of the SGF, namely Syariah Governance Policy (SGP), which supersedes the exiting SGF.
This new framework set out to enhance board oversight and the responsibilities of syariah governance, increase the requirements for syariah committees providing objective and sound advice to IFIs, raise the expectation that board and senior management promote a syariah compliance culture, and improve the quality of internal control functions.
This article highlights some of the new, enhanced features of the 2019 SGP in comparison with the 2010 SGF.
FIRST, the new SGP restricts the tenure of syariah committee members to a maximum of nine years in a single IFI, in comparison to the 2010 SGF, which had no limit.
This limit addresses concerns regarding complacency, which may affect the professional
objectivity of syariah committees.
A fresh and new composition of syariah committee members is expected to deepen syariah deliberation and the overall competence of syariah committees.
This particular requirement, however, will only be effective from April 1, 2023, to allow for transitional arrangements and sufficient time for IFIs to reconstitute their syariah committee compositions.
SECOND, the previous SGF allowed syariah committees to adopt more stringent syariah decisions than the published rulings of the Syariah Advisory Council (SAC).
The new SGP, however, mandates that banks notify the BNM about any additional restrictions that go beyond the SAC rulings, together with any documented deliberation and justification by their syariah committees (para 10.7).
THIRD, the preceding SGF was silent about the status of a politically-exposed person acting as a member of a syariah committee. The 2019 SGP, on the other hand, explicitly prohibits active politicians from becoming syariah committee members.
FOURTH, the new SGP mandates that boards establish effective communication with their syariah committees on all matters relating to syariah requirements, syariah governance, or syariah non-compliance risks.
The boards must also regularly review the quality and frequency of their engagement with their syariah committees. This is to enable both the board and syariah committee to discharge their respective responsibilities effectively. The 2010 SGF was, however, silent on this requirement.
FIFTH, the former SGF required that the syariah review function be conducted by a qualified syariah officer, holding at least a bachelor’s degree in syariah, including in ushul fiqh and fiqh muamalat.
The new SGP removes such requirements and situates itself as part of the overall compliance responsibility under the control function.
In this regard, the syariah review function is required to have a sound understanding of those syariah requirements applicable to Islamic financial businesses and operations.
Finally, while the 2010 SGF required the establishment of a dedicated syariah research function by a qualified syariah officer, the 2019 SGP removes this requirement by consolidating its role under the syariah secretariat function.
The approach taken by the new policy places more emphasis on ensuring effective management of syariah non-compliance risks through control function.
From a broader perspective, we can conclude that the new SGP demonstrates BNM’s heightened expectations towards effective syariah governance and culture.
This is yet another step in the impressive development profile of Islamic banking and finance in Malaysia, which it is is hoped will see an increase in public confidence in the often questioned syariah compliance credibility of Islamic banks and financial institutions in this country.
The writer is a research fellow at the International Institute of Advanced Islamic Studies (IAIS) Malaysia
Published in: The New Straits Times, Saturday 05 October 2019
Issues of child abuse, neglect, malnutrition and exploitation are the focus of renewed attention from governments, policymakers and multilateral institutions.
For instance, the United Nations Millennium Declaration 2005 and the Sustainable Development Goals (SDG) 2017 have listed children’s rights to survival, health, and education into their main agendas.
Research has shown that children are the most vulnerable segment of a society and are exposed to abuse and violence. Each year, an estimated 0.5 to 1.5 billion children are involved in physical violence, 150 million girls and 73 million boys are raped or subjected to sexual abuse, 115 million children engaged in dangerous work and 264 million children have no access to school.
In Malaysia, 17.7 per cent of children below the age of 5 are stunted (Health Ministry 2017 records), 22 per cent are underweight and 23 per cent are either overweight or obese (United Nations Children’s Fund [Unicef] 2018).
The Malaysian government and policymakers, therefore, have shifted their attention towards strengthening the social protection system. For example, the Bantuan Sara Hidup (BSH) programme launched in 2018 offers unconditional cash transfers to B40 households to assist with rising costs of living. However, the existing protection schemes are not specifically designed to address the welfare of children during their first 1,000 days — the most vulnerable phase in their life, in which nutrition and beneficial healthcare are paramount.
This article, therefore, proposes the utilisation of corporate zakat — an annual religious obligation paid by business entities under the purview of zakat on wealth — to develop a child grant that seeks to complement existing government programmes.
An ongoing study by the International Institute of Advanced Islamic Studies (IAIS) Malaysia, in collaboration with Unicef and Iman Research, discovered that corporate zakat has the potential to address the required needs of children in Malaysia in terms of survival, nutrition, healthcare and education.
There are 693 Syariah-compliant listed companies under the Securities Commission and 16 Islamic commercial banks in Malaysia that are supposed to pay zakat. However, as of October last year, only 21 companies and 12 Islamic banks disclosed their zakat payment with an average payment of RM4 million accumulating a total collection of RM130 million. This is a far cry from its true potential, which is estimated to reach RM2.9 billion in 2019 and more than RM3.4 billion by 2031. This projection, however, does not include non-public Syariah-compliant firms, sole-proprietorships, Islamic cooperatives and small, medium enterprises in Malaysia.
On the other hand, the total budget of the child grant only amounted to RM1.9 billion, to cater approximately for 832,940 children under the age of 2 in 2019, with each child to be allocated RM150.
In Islam, zakat can be used for various socio-economic purposes such as education, healthcare and humanitarian causes as long as they fulfil the criteria of zakat beneficiaries (asnaf).
The Quranic verse (9:60) listed eight categories deserving of zakat: the poor (al-fuqara’); the needy (al-masakin); zakat collectors; those whose hearts are being reconciled (with Islam); freeing war captives; persons in debt; those who are in the path of Allah; and the wayfarers.
In this regard, the overwhelming majority of jurists from four established schools (Hanafites, Malikites, Syafi’ites and Hambalites) are of the view that children are also eligible to receive zakat if their guardians fall among the above eight categories.
A hadith narrated by al-Daruquthni from Abu Juhaufah reported that the Prophet Muhammad (PBUH) once sent a zakat collector who collected zakat from the rich people and distributed the collection among the poor. At that time, Abu Juhaifah was a young orphan who did not possess any wealth, so the zakat collector gave him a middle-aged camel. Thus, according to the Hanafi school, children of wealthy parents could not receive zakat because they are considered rich if their parents are rich.
In a report attributed to Caliph Umar al-Khattab, it is stated that the first poor (fuqara’) refer to Muslims and the second needy (masakin) to non-Muslims. Difference of religion is thus not a bar to zakat.
In a nutshell, corporate zakat is a high potential source of funding for a child grant programme in Malaysia, particularly for children of households belonging to the B40 category. Other potential avenues such as corporate social responsibility (CSR), sadaqah and waqf, can also be explored as complementary funding sources for the proposed grant.
From an Islamic viewpoint, the use of corporate zakat and other Islamic social finance instruments for a child protection system correspond to the higher objectives of Syariah (maqasid) on the protection of life and mind, and is supportive of the government’s new motto to promote Islam as rahmatan lil ‘alamin (a mercy to all creation).
To achieve corporate zakat’s fullest collection potential, this article proposes that relevant authorities, such as the Securities Commission (SC), Bank Negara Malaysia (BNM), and the Companies Commission of Malaysia (SSM), increase the promotion of zakat among Malaysian companies.
The corporate zakat payment needs to be emphasised as a tax obligation. This is particularly so since the National Fatwa Council of Malaysia (2001) and Selangor Fatwa Council (2003) have resolved that Islamic banks and Syariah-compliant firms are obligated to pay zakat.
It is also recommended that zakat payment becomes one of the determining criteria in achieving Syariah-compliant status for public-listed securities under the SC.
The writer is a research fellow at the International Institute of Advanced Islamic Studies (IAIS) Malaysia
Published in: New Straits Times, Thursday 18 April 2019
Financial inclusion or access to finance at an affordable cost has, since the early 2000s, been a focus of renewed concern for many governments and central banks.
The World Bank’s 2017 Global Findex Database discovered that about 1.7 billion people worldwide remain unbanked — without an account at a financial institution or a mobile money provider. The United Nations Development Programme’s Sustainable Development Goals (SDGs), therefore, seeks to improve financial access into its main development agenda.
A plethora of academic evidence confirms that financial inclusion can support the achievement of broader sustainable development goals.
As a business established within the ambit of Syariah principles, values and goals, Islamic finance aims to promote economic wellbeing and creates socio-economic justice; and serve as a catalyst for development, in line with the spirit of the UN sustainable development agenda.
The International Monetary Fund, in its press release on May 9, also acknowledged that “the growth of Islamic finance presents important opportunities to strengthen financial inclusion, deepen financial markets, and mobilise funding for development by offering new modes of finance and attracting unbanked populations that have not participated in the financial system.”
Islamic finance could contribute to the financial inclusion agenda through two main mechanisms: profit and loss sharing (PLS) or risk-sharing instruments, like musharakah and mudharabah, as an alternative to conventional debt-based financing and risk transfer; and Islamic social finance instruments, such as zakat, waqf (endowment fund), shadaqah, and qard hasan (benevolent loan), which complement PLS instruments.
PLS promotes the financial inclusion agenda because the concept can offer access to finance to low-income segments at an affordable and fair rate: the imposition of cost and the distribution of profit are based on the actual performance of the business.
As a result, the optimum application of PLS will create an equitable distribution of income and wealth among partners or between wealth owners and entrepreneurs, presenting the concept of justice and fairness in financial dealings.
Risk transfer underlying the conventional financial system, on the other hand, implies asymmetric exposures to economic risk, and does not, therefore, promote economic justice and financial inclusion.
Furthermore, social finance, mandated or otherwise, is an integral part of the Islamic financial system to offer equal opportunity to financial access to the low-income segments, that is, the underserved and poor, “so that it may not (merely) make a circuit between the wealthy among you” (QS 59:7).
Islamic social finance instruments help improve financial access via various initiatives, such as microfinance empowerment and poverty alleviation programmes.
Financial technology (fintech) is a perfect device to reinforce the role of Islamic finance in promoting the financial inclusion agenda. The use of digital finance, such as blockchain and crowdfunding, can lower transactional costs and minimise asymmetric information.
Santander FinTech issued a report in 2015 estimating that blockchain could reduce transactional costs attributable to cross-border payment, securities trading and regulatory compliance between US$15 billion (RM62 billion) and US$20 billion per annum by 2022.
Furthermore, the ability of blockchain to transmit and to record the ownership of the digital assets and immutably store information — where all blockchain participants have access to the same information — might significantly reduce information asymmetries.
Fintech can also open financial access to unbanked individuals. According to World Bank estimate, there are approximately 240 million to 334 million people in developing economies that could participate in crowdfunding.
It is also a powerful tool to widen access and outreach of Islamic social finance instruments such as zakah, waqf and sadaqah.
Bank Negara Malaysia Assistant Governor, Datuk Ahmad Hizzad Baharuddin, at the Association of Shariah Advisers’ Shariah Fintech Forum 2017, affirmed that fintech promises to revolutionise finance and bring a broader range of benefits to financial institutions and the public.
The writer is a research fellow at the International Institute of Advanced Islamic Studies Malaysia
Published in: New Straits Times, Friday 19 October 2018
Over the last few years, environmental preservation has been the focus of renewed investor attention, as evidenced by growing interest in socially responsible investment (SRI) instruments. Green sukuk, a syariah-compliant SRI instrument for renewable energy and other environmental sustainability projects, is an important and commendable initiative.
Malaysia, being home to the world’s largest sukuk market, has pioneered the issuance of green sukuk. On July 27, the Securities Commission announced the debut of the world’s first green sukuk under its SRI sukuk framework. This milestone is the result of a joint effort between SC, Bank Negara Malaysia and the World Bank Group to facilitate the development of green financing and investor participation in SRI sukuk.
Issued by Tadau Energy Sdn Bhd, a Malaysian-based renewable energy and sustainable technology investment firm, and structured on the Syariah principles of istisna’ (manufacturing sale) and ijarah (leasing), the RM250 million Green SRI Sukuk Tadau is to finance the construction of large scale solar (LSS) photovoltaic power plants in Kudat, Sabah, with a tenure of two to 16 years.
Following the success of Green SRI Sukuk Tadau, Quantum Solar Park Malaysia Sdn Bhd launched the world’s largest green SRI sukuk — RM1 billion — in October to fund the construction of Southeast Asia’s largest solar photovoltaic plant project in three districts: Kedah, Melaka and Terengganu.
More green sukuk is expected to be issued in Malaysia to support environmentally sustainable infrastructure projects and to strengthen the country’s position as the main catalyst for Syariah-compliant green instruments.
Certainly, the future of green sukuk in Malaysia is promising for a number of reasons. Firstly, the government aspires, as envisioned in the 2014 Budget speech, to position Malaysia as the home for SRI as part of its ambition to make Malaysia a green technology hub by 2030.
In response, SC revised its sukuk guidelines in 2014, incorporating new requirements for the issuance of SRI sukuk. The new sukuk guidelines state that the proceeds of SRI sukuk can be used to preserve the environment and natural resources, conserve the use of energy, promote the use of renewable energy and reduce greenhouse gas emissions.
Also, a number of incentives have been offered to stimulate greater utilisation of SRI instruments as a fundraising channel. These include tax deductions on the issuance costs of SRI Sukuk approved or authorised by SC and tax incentives for green technology activities. The government also introduced a special financing scheme, Green Technology Financing Scheme, with a total fund allocation of RM5 billion until 2022 to support the development of green technology.
Secondly, a substantial increase in the demand for both energy supply and energy financing in Malaysia has opened up room in which green sukuk can grow. The government has put in place a renewable energy generation target of 7,200 megawatts by 2020. Malaysia’s Green Technology Master Plan also aims to boost the growth of its green technology sector, with a targeted revenue of RM180 billion alongside the creation of 200,000 green jobs by 2030.
Thirdly, there is a growing awareness of SRI among both conventional and Muslim investors. Green sukuk facilitates and increases the broader participation of conventional investors in the sukuk market, especially those looking for more ethical and socially responsible investment opportunities. It helps bridge the gap between sustainable investors and sukuk investors who aim to place their money in a scheme that complies with certain values.
Other positive factors include the design of sukuk, which is naturally supportive of green principles because it requires a specific pool of assets. Also, the progress of green sukuk is, and has evolved into, an indispensable part of the natural evolution of the global Islamic financial market.
Islam is fully supportive of the idea of green financing. The Quran and the prophetic traditions emphasise the importance of environmental conservation and sustainability. Islam commands mankind, as the vicegerents of God, to take care of the environment and nature, and to avoid any act that is detrimental to them. This corresponds to the principal purposes of syariah (maqasid al-Syariah) which are intended to realise public benefit (maslahah) and eliminate harm and destruction (mafsadah), outlined under five main headings: protection of life, preservation of religion, upholding the integrity of the human intellect, protecting the family and protection of lawfully-owned property.
Al-Qardhawi, however, added environmental conservation and preservation as another ultimate objective of syariah, having an equally important position as the five goals.
On the whole, green sukuk, like other SRI instruments, is a funding channel that plays an important role in the preservation of the environment and the sustainability of the earth. Islamic finance should, therefore, provide more avenues for the growth of green sukuk as a financial instrument for sustainable development.
The writer is a research fellow at the International Institute of Advanced Islamic Studies Malaysia
Published in: New Straits Times, Saturday 17st March 2018
Islamic financial products have evolved from simple and straightforward structures to highly sophisticated and multifaceted instruments. During the 1980s and 1990s, Islamic financial products were dominated by deposits and savings, syndicated project financing, syariah-compliant stocks and mutual funds.........................Download the full article in pdf attachment (below)
Waqf (an Islamic endowment of property to be held in trust and used for a charitable, or religious purpose; or a Muslim religious or charitable foundation created by an endowed trust fund) has a long history in Islam. It has played — and, in many cases, continues to play — a pivotal role in the advancement of socio-economic well-being of the Muslim community..........................Download the full article in pdf attachment (below)
Islamic finance has witnessed, over the last few years, a remarkable growth at 15 to 20 per cent Compounded Annual Growth Rate (CAGR), emerging as one of the fastest growing financial sectors in the world. The total assets of the Islamic financial industry in 2015 was around US$2 trillion (RM8.3 trillion) and estimated to surpass US$4 trillion by 2020. This industry’s rapid growth undoubtedly creates a huge demand for new expertise.........................Download the full article in pdf attachment (below)