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

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

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International Conference on Islamic Banking & Finance in Mauritius
International Conference on Islamic Banking & Finance in Mauritius

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Published by: alhudacibe on Jul 07, 2011
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International Conference on Islamic Microfinance in Mauritius

Organized By :


Regulation on the Parameterization of Islamic Financial Products
Abdul Ghafar Ismail Shofian Ahmad Research Center for Islamic Economics and Finance Universiti Kebangsaan Malaysia

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

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, alhuda, 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 ² How? - by having accounting standards and prudential regulation

in designing and offering new products and services ² 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


Reasons to Regulate the Islamic Financial Institutions
Safety and Stability


Basis for Monetary Policy


Nature of Current Regulations
Shari·ah Advisory Council Capital Adequacy Standard Corporate Governance

Guidelines on Regulations

Rate of Return

Presentation of Financial Statement


Methodology in Constructing the Shari·ah Parameter Guideline


Diagram : Flow chart of Product Approval

Item 12

Item 13

Item 14

Item 15

Item 16

Submit Product Section No Submit

Shariah Committee Submit Legal Yes




System Development: (Including risk management and mitigation)

Appendix: Shari·ah Product Working Paper
Items to be covered in this ´shari·ah working paperµ 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. Objectives 4. Structure and Mechanism of product A detailed description of the structure and mechanism 5. Type of target market 6. Description of Product


7. Major differences between our current product and this new product 8. Propose date to Launch 9. 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.

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 units 15. Accounting and Reporting Treatment 16. Capital Adequacy Requirements .


Table : Parameter Guideline for Murabahah Contract
Parameter Items Functions of Products Objectives of Products Product Features (i) IFI as wakeel (ii) Maturity Essential conditions: (i) Wordings (ii) Commodities (iii) Contracting parties Additional 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 almajlis). 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 Legal Documents (i) Master agreement (ii) Supporting agreement Purposes To execute the real sector economic transactions that facilitate the exchange, sale and trade of goods and services Encourage savings habit Wakeel for buying and selling

y y y y y y y y y y


To create ijab and qabul To identify the subject matter To identify only the qualified and competent person To 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 physically To determine the legal ownership To avoid the uncertainty whether they can be delivered or not To determine the nature, quality and quantity To determine the commodity that is capable of being traded To 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

y y

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 Arise
No Absolute Authority

Legal Maxim & Legal Document

Maqasaid Syariah


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

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


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



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