Regulation on the Parameterization of Islamic Financial Products by Abdul Ghafar Ismail

8/6/2019 Regulation on the Parameterization of Islamic Financial Products by Abdul Ghafar Ismail

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International Conference on

Islamic Microfinance in Mauritius

CENTER OF ISLAMIC BANKING & ECNOMICS

OrganizedBy :


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International Conferences on Islamic Banking and Finance in Mauritius,5th-6th April, 2011, Gold Crest Hotel, Mauritius

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Regulation on theParameterization of Islamic

Financial Products

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


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Introductioncross-border activities open up the new challenges for hostand home nationsThese activities affect the IFI, which is recognized as aninstitution that accepts different rules

but lately gaining acceptance in global financial markets dueto the set up of new institutions such as AAOIFI and IFSB,plus research institutions such such as Fiqh Academy, al-huda, ISRA and EKONISThe response from each jurisdiction has been to attempt an

Islamic integration into the international financial system andexpand the contribution of Islamic finance to real economy How? - by having accounting standards and prudentialregulation

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C ontinuedin designing and offering new products and services IFI are

exposed to several obstacle such as legal origins; differences inrulings; sound and prudent regulationsthis effort has motivated BNM to deviate from the other regulators by introducing a new guidelineAim of this paper - to explain the creation process in offeringnew financial products and to identify the parameters indesigning those products

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

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R easons to R egulate the Islamic FinancialInstitutions

Reasons

Reasons

Safety and Stability

Safety and Stability

Basis forMonetary

Policy

Basis forMonetary

Policy

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Nature of Current Regulations

Guidelines onRegulations

ShariahAdvisoryCouncil

Corporate

Govern ance

Presentation of FinancialStatem ent

Rate of Return

Capital Adequacy

Standard

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Methodology in Constructing the

Shariah Parameter Guideline

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App endix: Shariah Product Working Pa per

Items to be covered in this shariah working paperare as follows:1. Pur pose - The purpose of this letter is to seek specificapproval 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 mechanism5 . Ty pe of target market6. Descri ption of Product

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Continued

7 . Major differences between our current product andthis new product

8. Pro pose date to Launch9. R isks - The risks need to be identified in relation tothis new product and the risk mitigation measures are also

stated.10. Terms and C ondition - The legal agreement attachedto this product11. Trans parency to C ustomers

1 2 . Skill, ex pertise and resources - To brief and trainedthe related parties such as front line, training and productmanager, a legal counsel, and also to address anyissues/concern by the staff in understanding the product.

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Continued

1 3 . Shariah C om pliance - Shariah Committeesendorsement and decision on the new product with regardto Shariah compliance1 4. R isk Management Infrastructure .

Approval by the compliance and risk units1 5 . Accounting and R e porting Treatment1 6. C a pital Adequacy R equirements

.

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Table : Parameter Guideline for Murabahah Contract

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Parameter Items PurposesF unctions 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 F eatures(i) IF I 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 (muwafaqahal-ijab wa al-qabul)

(ii) offer and acceptance must be made in thesame contractual session (ittihad al-majlis) .

Additional conditions for (ii):(i) existence(ii) deliverability(iii) specification(iv) legality

Additional conditions for (iii):(i) must possess complete legal capacity

((ahliyyah)(ii) competent (e.g. puberty and prudence

y To create ijab and qabuly To identify the subject mattery To identify only the qualified and competent persony To demonstrate the intention of the parties to conclude a specific contract.y The parties are present to agree on something and it ends when they separate

physicallyy To determine the legal ownershipy To avoid the uncertainty whether they can be delivered or noty To determine the nature, quality and quantityy To determine the commodity that is capable of being tradedy To execute or discharge his r ights and duties emanating from the contract that he

has entered, i.e., to understand the legal consequences of any contract that hehas entered into.

y To understand the transactions (Art 966 of The Mejelle)s

L egal Documents(i) Master agreement(ii) Supporting agreement

y Shariah principles clearly translated into legal languagey To satisfy the needs of economic agents through various phases of economic

activity, right from the purchase or sale of goods, to arrangements for collateralsand guarantees, to arrangements for financing and investment


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Issues A rise

N o Absolute Authority

Legal Maxim & Legal Document

Maqasaid Syariah

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A . No A bsolute A uthority

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

Our suggestion are:harmonization and convergence in the concepts andapplication among the shariah committee of IFIs toavoid contradiction or inconsistency between the rulingsand applicationHelping/sharing the developments of shariah approvedproducts and in enabling IFIs to cope with thedevelopments taking place in products and formulas infields of finance, investment and other banking services

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B . Legal Maxim and Legal Document

legal maxim: harm shall be removed ( A l-Darar yuzalu )Example: when A buys a car and then discovers that it issubstantially defective, he has the option to revoke thecontract - this option only appears in the legaldocumentsTherefore, in this case, the parameters could not tell uson the detailing items that could be translated into thelegal documents

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C . Maqasid al-Shariah

The establishment of IFI is not only to comply theshariah but to achive the objective of shariah ( M aqasid A l Shariah ).

Authors such as Jasser Auda (2010) argues that maqasidal shariah could discussed based on a system approachor institutional approach.if we treat Islamic financial institutions as an institutionto perform certain function or as a system (whichcomprises several agents that behave accordingly). Doesthe maqasid al shariah will converge in both approaches

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Thanks


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