Regulation on the parameterization of islamic financial products by abdul ghafar ismail


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International Conference on Islamic Banking & Finance in Mauritius

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Regulation on the parameterization of islamic financial products by abdul ghafar ismail

  1. 1. International Conference on Islamic Microfinance in Mauritius CENTER OF ISLAMIC BANKING & ECNOMICS Organized By :
  2. 2. International Conferences on Islamic Banking and Finance in Mauritius, 5th-6th April, 2011, Gold Crest Hotel, Mauritius Regulation on the Parameterization of Islamic Financial Products Abdul Ghafar Ismail Shofian Ahmad Research Center for Islamic Economics and Finance Universiti Kebangsaan Malaysia
  3. 3. Introduction <ul><li>cross-border activities open up the new challenges for host and home nations </li></ul><ul><li>These activities affect the IFI, which is recognized as an institution that accepts different rules </li></ul><ul><li>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 </li></ul><ul><li>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 </li></ul>
  4. 4. Continued… <ul><li>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 </li></ul><ul><li>this effort has motivated BNM to deviate from the other regulators by introducing a new guideline </li></ul><ul><li>Aim of this paper - to explain the creation process in offering new financial products and to identify the parameters in designing those products </li></ul><ul><li>this paper also will highlight the issues that may arise due to the introduction of those parameters </li></ul>
  5. 5. Reasons to Regulate the Islamic Financial Institutions Reasons Safety and Stability Promote Competition and Efficiency Basis for Monetary Policy
  6. 6. Nature of Current Regulations Guidelines on Regulations Shari’ah Advisory Council Corporate Govern ance Presentation of Financial Statem ent Rate of Return Capital Adequacy Standard
  7. 7. <ul><li>Methodology in Constructing the Shari’ah Parameter Guideline </li></ul>
  8. 8. Item 12 Item 14 Item 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
  9. 9. Appendix: Shari’ah Product Working Paper <ul><li>Items to be covered in this “shari’ah working paper” are as follows: </li></ul><ul><li>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. </li></ul><ul><li>2. New Product Name - The new product name is ........ </li></ul><ul><li>3. Objectives </li></ul><ul><li>4. Structure and Mechanism of product - </li></ul><ul><li>A detailed description of the structure and mechanism </li></ul><ul><li>5. Type of target market </li></ul><ul><li>6. Description of Product </li></ul>
  10. 10. Continued… <ul><li>7. Major differences between our current product and this new product </li></ul><ul><li>8. Propose date to Launch </li></ul><ul><li>9. Risks - The risks need to be identified in relation to this new product and the risk mitigation measures are also stated. </li></ul><ul><li>10. Terms and Condition - The legal agreement attached to this product </li></ul><ul><li>11. Transparency to Customers </li></ul><ul><li>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. </li></ul>
  11. 11. Continued… <ul><li>13. Shari’ah Compliance - Shariah Committee’s endorsement and decision on the new product with regard to Shariah compliance  </li></ul><ul><li>14. Risk Management Infrastructure. </li></ul><ul><li>Approval by the compliance and risk units </li></ul><ul><li>15. Accounting and Reporting Treatment </li></ul><ul><li>16. Capital Adequacy Requirements </li></ul><ul><li>. </li></ul>
  12. 12. Table : Parameter Guideline for Murabahah Contract Parameter Items Purposes Functions 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 habit <ul><li>Product Features </li></ul><ul><li>IFI as wakeel </li></ul><ul><li>Maturity </li></ul>Wakeel for buying and selling <ul><li>Essential conditions: </li></ul><ul><li>Wordings </li></ul><ul><li>Commodities </li></ul><ul><li>Contracting parties </li></ul><ul><li>Additional conditions for (i): </li></ul><ul><li>offer and acceptance must correspond and connect to one another (muwafaqah al-ijab wa al-qabul) </li></ul><ul><li>offer and acceptance must be made in the same contractual session (ittihad al-majlis) . </li></ul><ul><li>Additional conditions for (ii): </li></ul><ul><li>existence </li></ul><ul><li>deliverability </li></ul><ul><li>specification </li></ul><ul><li>legality </li></ul><ul><li>Additional conditions for (iii): </li></ul><ul><li>must possess complete legal capacity ( (ahliyyah) </li></ul><ul><li>competent (e.g. puberty and prudence </li></ul><ul><li>To create ijab and qabul </li></ul><ul><li>To identify the subject matter </li></ul><ul><li>To identify only the qualified and competent person </li></ul><ul><li>To demonstrate the intention of the parties to conclude a specific contract. </li></ul><ul><li>The parties are present to agree on something and it ends when they separate physically </li></ul><ul><li>To determine the legal ownership </li></ul><ul><li>To avoid the uncertainty whether they can be delivered or not </li></ul><ul><li>To determine the nature, quality and quantity </li></ul><ul><li>To determine the commodity that is capable of being traded </li></ul><ul><li>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. </li></ul><ul><li>To understand the transactions (Art 966 of The Mejelle)s </li></ul><ul><li>Legal Documents </li></ul><ul><li>Master agreement </li></ul><ul><li>Supporting agreement </li></ul><ul><li>Shari’ah principles clearly translated into legal language </li></ul><ul><li>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 </li></ul>
  13. 13. Issues Arise No Absolute Authority Legal Maxim & Legal Document Maqasaid Syariah What are the issues?
  14. 14. A. No Absolute Authority <ul><li>Therefore, IFIs must seek a review of their products by shariah scholars who judge each case on its merits </li></ul><ul><li>Our suggestion are: </li></ul><ul><li>harmonization and convergence in the concepts and application among the shariah committee of IFIs to avoid contradiction or inconsistency between the rulings and application </li></ul><ul><li>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 </li></ul>
  15. 15. B. Legal Maxim and Legal Document <ul><li>legal maxim: harm shall be removed ( Al-Darar yuzalu ) </li></ul><ul><li>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 </li></ul><ul><li>Therefore, in this case, the parameters could not tell us on the detailing items that could be translated into the legal documents </li></ul>
  16. 16. C. Maqasid al-Shari’ah <ul><li>The establishment of IFI is not only to comply the shari’ah but to achive the objective of shari’ah ( Maqasid Al Shari’ah ) . </li></ul><ul><li>Authors such as Jasser Auda (2010) argues that maqasid al shari’ah could discussed based on a system approach or institutional approach. </li></ul><ul><li>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 </li></ul>
  17. 17. <ul><li> </li></ul>Thanks
  18. 18. 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 :  [email_address] Web: