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Issued on: 25 April 2013
Concept Paper
Murabahah (Operational Requirements)
BNM/RH/CP 008-11 Islamic Banking and Takaful Department
Concept Paper –Murabahah (Operational Requirements)
Issued on: 25 April 2013
Table of Contents
PART A Overview .......................................................................................... 4 1. Introduction ................................................................................................ 4
2. Legal provisions......................................................................................... 5
3. Applicability................................................................................................ 6
4. Issuance date ............................................................................................ 6
5. Effective date ............................................................................................. 6
6. Related Policies ......................................................................................... 6
7. Definition and Interpretation ...................................................................... 7
PART B SHARIAH REQUIREMENTS ........................................................... 9
PART C OPERATIONAL REQUIREMENTS ............................................... 10 8. Oversight Functions ................................................................................. 10
9. Documentation, Internal Policies & Procedures ...................................... 13
10. Information Disclosure ............................................................................. 20
11. Risk Management.................................................................................... 21
Appendices ...................................................................................................... 26 Appendix 1 General parameter on underlying assets ..................................... 26
Appendix 2 General guidance on the components of acquisition costs ......... 27
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As part of the objectives to strengthen the Shariah-compliance culture among
Islamic financial institutions (IFI), Bank Negara Malaysia (the Bank) embarks
on the initiative to develop a Shariah-based regulatory framework. The
purpose of the framework is to ensure that the IFI comply with Shariah.
In this regard, the Bank is issuing a series of Standards on Shariah contracts
to enhance the end-to-end compliance with Shariah. These Standards consist
of two components, Shariah and Operational requirements. The Shariah
requirements highlight the salient features and essential conditions of specific
Shariah contracts to facilitate sound understanding of a particular contract.
This Concept Paper (CP) focuses on the Operational requirements of
Murabahah contract, which sets out the expectations with respect to the
oversight function, legal documentation, internal policies and procedures, risk
management, and information disclosure. This CP aims to ensure that the
Murabahah transactions undertaken by IFI comply with Shariah and does not
pose significant risks to financial stability and protects stakeholders’ interest.
The Bank invites IFI to provide written feedback on specific questions set out in
this CP as well as any general comments. In addition, IFI may seek
clarification on specific issues/areas and highlight alternative proposals for the
Bank to consider. The feedback must be supported with clear rationale,
accompanying evidence or illustration, as appropriate to facilitate effective
review of the framework.
Responses shall be submitted to the Bank by 24 May 2013:
Pengarah Jabatan Perbankan Islam dan Takaful Bank Negara Malaysia Jalan Dato' Onn 50480 Kuala Lumpur Email: [email protected]
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PART A Overview
1. Introduction
1.1 Compliance with Shariah requirement is a prerequisite for legitimate
Islamic financial products and services. Therefore, it is essential for IFI to
establish the necessary operational framework and infrastructure in
ensuring the conduct of Islamic financial transactions is consistent with
Shariah. In this regards, IFI must ensure that the entire intermediation
process is carried out holistically with good governance, prudent and
transparent manner. This will ensure the integrity of Islamic finance
transactions continue to be preserved and sustained.
1.2 Murabahah is a type of “trust sale” contract under Shariah. The primary
objective of Murabahah is to facilitate acquisition of Shariah compliant asset. Under Murabahah arrangement, IFI as financial intermediary will
acquire a specific asset as requested by the customer. Thereafter the
asset is sold to the customer with full disclosure of the asset’s acquisition
cost and profit margin. IFI may appoint an agent to undertake the asset
acquisition and sale process under Murabahah to purchase orderer
(MPO) arrangement. In terms of risk profiling, the execution of
Murabahah would expose IFI to several types of risks that would
transform its nature throughout various stages of the transaction. Risks
inherent in Murabahah transaction include market risk arising from the
holding of asset and credit risk following sale of asset to the customer on
deferred payment terms. IFI are also exposed to various types of
operational risks throughout the execution of Murabahah transaction. As
such, it is pertinent for IFI to establish holistic and robust financial
infrastructures to support effective management of the risks exposures
and the processes associated with Murabahah.
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Policy Objectives 1.3 The CP outlines key operational requirements governing the
implementation of Murabahah that are in line with Shariah, and in
ensuring sound banking practices and consumer protection throughout
the life cycle of Murabahah.
Scope of policy 1.4 The CP covers Murabahah and Murabahah to Purchase Orderer.
1.5 The CP complements the relevant existing regulatory framework on risk
management, capital adequacy and governance issued by the Bank. This
policy document describes four key principles for sound management
and operationalisation of Murabahah as follows:
a) IFI must establish comprehensive policies and procedures to
facilitate proper oversight arrangement and ensure Murabahah
transaction are conducted with sound practices and compliance with
Shariah;
b) IFI must ensure the implementation of Murabahah is supported with
robust documentations, adequate systems and holistic processes;
c) IFI must undertake Murabahah transaction with fair and transparent
manner in line with Shariah and protect stakeholder’s interest; and
d) IFI must institute and implement sound risk management system to
effectively manage risks associated with Murabahah
2. Legal provisions
2.1 The CP is issued pursuant to the following provisions:
a) subparagraph 29 (2)(b) of the Islamic Financial Services Act (IFSA)
2013;
b) subparagraph 15 (2) of the Financial services Act (FSA) 2013; and
c) section 126 of the Development Financial Institutions Act (DFIA)
2002
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3. Applicability
3.1 The CP is applicable to:
a) licensed Islamic banks under the IFSA 2013;
b) licensed banks or licensed investment banks approved under
section 15 of the FSA 2013 to carry on Islamic banking business ;
and
c) prescribed development financial institutions under the DFIA which
carries on Islamic banking business or Islamic financial business
provided under section 129 of the DFIA.
All these institutions hereafter are referred to as Islamic Financial
Institutions (IFI).
4. Issuance date
4.1 The CP is issued on 25 April 2013
5. Effective date
5.1 The CP will be finalized and shall take effect from 1 July 2013
6. Related Policies
6.1 The CP complements and shall be read together with relevant policies
issued by the Bank, which include the following:
a) Shariah Parameter Reference 1 Murabahah
b) Shariah Governance Framework for Islamic Financial Institutions;
c) Guidelines on Corporate Governance for Licensed Islamic Bank;
d) Guidelines on Corporate Governance for Development Financial
Institutions;
e) Risk Governance;
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f) Capital Adequacy Framework for Islamic Banks (Risk-Weighted
Assets);
g) Capital Framework for Development Financial Institutions;
h) Capital Adequacy Framework for Islamic Banks (CAFIB) -
Disclosure Requirements;
i) Guidelines on Product Transparency and Disclosure;
j) Guidelines on Financial Reporting for Islamic Banking Institutions;
k) Guidelines on Financial Reporting for Development Financial
Institutions ;
l) Guidelines on Property Development and Property Investment
Activities by Islamic Banks;
m) Guidelines on the Imposition of Fees and Charges on Financial
Products and Services;
n) Guidelines on Ibra’ (Rebate) for Sale-based Financing;
o) Guidelines on Late Payment Charges for Islamic Financial
Institutions;
p) Guidelines on Responsible Financing; and
q) Guidelines on Product Transparency & Disclosure
7. Definition and Interpretation
7.1 For the purpose of this policy, the following definitions shall have the
following meanings.
“Guidance” refers to as Practice Guides, which the provision intend to
promote common understanding among the players in the industry,
improve industry practices, provide interpretative guidance and examples
of possible approaches and practices that can be adopted or
implemented to meet specified requirements. This guidance do not have
the force of law and is labeled as “Practice Guides” (PG) in the policy
documents and consultative documents issued by the Bank.
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“Murabahah” refers to contract of sale under which the seller sells
specific asset to the purchaser and which the seller discloses the asset’s
acquisition cost and profit margin that form the selling price.
“Murabahah to Purchase Orderer” refers to a type of Murabahah
contract where the subject matter of sale is acquired by the seller based
on the purchase order or requisition provided by the purchaser.
“Requirement” is set out pursuant to substantive provisions in the
relevant laws administered by the Bank and are binding on IFI to comply
with this provision. In the event of non-compliance, the Bank may take
enforcement actions, for example, administrative actions, civil actions,
offer to compound or pursue prosecution provided that the Bank is
empowered to take such actions under the relevant laws. Requirement is
labeled as “Standards” (S) in the policy documents and consultative
documents issued by the Bank.
“the Bank” means Bank Negara Malaysia, a body corporate which
continues to exist under the Central Bank of Malaysia Act 2009.
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PART B SHARIAH REQUIREMENTS
The Shariah requirements on Murabahah shall be cross-referred to the Shariah
Parameter Reference 1 Murabahah. This document is available in the Bank’s
website1
1 http://www.bnm.gov.my/guidelines/05_shariah/01_murabahah_02.pdf
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PART C OPERATIONAL REQUIREMENTS
The regulatory expectations set out in Part C emphasize on instituting effective
policies and procedures to facilitate oversight function, conduct of Murabahah
transaction, information disclosure, and risk management. The policy intent of
these Operational requirements is to provide adequate safeguard to
stakeholders’ interest, promote cohesive implementation of business and risk
management strategies and drive the development of necessary systems,
processes and control measures while preserving Shariah requirement.
8. Oversight Functions Principle 1: IFI must establish comprehensive internal policies and procedures to ensure Murabahah transaction are conducted with sound practices, comply with Shariah and facilitate proper oversight arrangement
S
8.1 The Board of Directors (the Board) must ensure:
a) application of Murabahah is aligned with IFI’s business and risk
management strategies
b) relevant internal policies governing Murabahah transaction are
established, approved and adhered to at all times by IFI. Policies
that address Shariah matters must be endorsed by the Shariah
Committee. These policies shall cover the following aspects:
i) Asset procurement and sale;
ii) Inventory management;
iii) Risk management; and
iv) Information disclosures;
c) the internal policies are reviewed regularly (at least annually) in
order to remain relevant, current and effective in managing the
overall operational conduct and risk profile of Murabahah.
d) independent reviews are conducted regularly to assess
compliance with the standards issued by the Bank and internal
policies established by IFI.
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S S
8.2 The Shariah committee (SC) is responsible to:
a) endorse the application of Shariah in relevant internal policies
and procedures governing application of Murabahah;
b) validate and endorse that the terms and conditions stipulated in
legal documentation and other documents such as product
manual, marketing advertisement, sales illustrations and
brochures are in compliance with Shariah; and
c) perform oversight role on Shariah compliant aspect of
Murabahah application.
8.3 The senior management shall:
a) formulate and implement internal policies, processes and
procedures governing Murabahah transaction. At minimum the
internal policies must:
i) identify the applicable legal documentations;
ii) identify the accountabilities to perform approval, asset
acquisition, sales transaction, communication, compliance
monitoring and review function;
iii) set out appropriate assessment methodology and due
diligence process in assessing the capability of contracting
parties (include supplier, IFI’s agent and customer) in
fulfilling contractual obligations;
iv) set out procedures for appointment of agent;
v) outline eligibility criteria of asset2 that qualify for Murabahah
transaction;
vi) outline parameters to determine direct expenditures that
forms part of Murabahah acquisition cost;
vii) specify valuation methodology for inventories;
viii) set out procedures for disposal of inventories;
2 Appendix 1 highlight the general qualifying parameter on permissible asset under Shariah
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ix) provide reference to applicable Shariah rulings3; and
x) provide cross reference to relevant existing policies, such as
policy on credit.
b) clearly communicate the approved internal policies within the IFI;
c) undertake regular review and monitor compliance on the
approved internal policies; and
d) establish risk management policies and maintain adequate
mechanism that are able to identify, measure and mitigate risk
inherent in Murabahah transaction.
Question 1:
Please comment and provide the rationale on whether all internal policies that
govern the application of Murabahah should be endorsed by Shariah Committee.
Question 2:
How frequent does your institution conduct the policy review process?
Question 3:
What are other sound practices implemented by your institution and areas that
should be given due regards in this CP to strengthen the oversight arrangement?
3 Refers to resolution issued by the Bank’s Shariah Advisory Council (SAC) and Shariah
Committee of IFI
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9. Documentation, Internal Policies & Procedures Principle 2: IFI must identify and develop robust legal documentations
that accurately reflect Murabahah transaction and ensure the implementation of Murabahah is supported with adequate systems and holistic processes
S S S S S
Legal documentations 9.1 IFI must develop comprehensive and legally enforceable
documentations for Murabahah transaction. At minimum, the
documentations include the:
a) asset purchase agreement4;
b) asset sale and financing agreement;
c) agency agreement (if applicable);
d) document on promise (wa’d) to purchase (if applicable); and
e) collateral agreement (if applicable)
9.2 IFI must clearly stipulate the rights, duties and obligations of
contracting parties in the Murabahah documentations.
9.3 In relation to paragraph 9.2, agreement on appointment of an agent
must clearly specify the agent’s obligations and liabilities in ensuring
Murabahah asset that is under their custody is in good condition.
9.4 IFI shall ensure the documentation on promise to purchase the asset
provides adequate right for IFI to claim compensation for losses 5
suffered due to the breach of promise by the promisor.
9.5 The asset purchase agreement must reflect a valid transfer of
ownership over the asset from the seller to IFI and at minimum clearly 4 Refers to any type of document that evidencing the acquisition of asset. This may include
purchase order, purchase invoice, delivery orders or others. 5 IFI are allowed to claim the actual cost incurred arising from the disposal of asset, paragraph
75, Shariah parameter reference on Murabahah, Bank Negara Malaysia, 2009
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PG S S S
stipulate the following:
a) Description of asset;
b) Total purchase price;
c) Discount on purchase price (if applicable); and
d) Terms and conditions on warranty, accepted security deposits or
advance payment.
9.6 Asset purchase agreement may incorporate specific terms that allow
IFI to return unacceptable or unsold asset back to the supplier.
9.7 The asset sale agreement shall at minimum stipulate the following:
a) description of the asset;
b) the asset selling price6, acquisition cost7 and profit amount (mark
up)
c) the settlement terms of the selling price;
d) provision on rebate for early settlement of selling price;
e) terms on compensation associated with default events; and
f) terms on asset delivery arrangement8 (if applicable).
9.8 Any terms and conditions that are prohibited9 by Shariah or do not
reflect the nature of Murabahah transaction shall be avoided. Clauses
that waive IFI’s liability on the underlying asset prior to the execution of
sale transaction must not be in Murabahah documentation.
9.9 The use of Arabic terminology in the documents must be sufficiently
clarified or translated to facilitate understanding of the contracting
6 Asset selling price is equivalent to the summation of total acquisition cost and profit amount.
Appendix 2 provides general guidance on the component of acquisition costs. 7 Total acquisition cost is equivalent to the asset’s purchase price plus direct expenses incurred
for asset acquisition minus any discount received from the supplier 8 This may refer to the date & venue of delivery 9 This include inter conditionality provision where the enforceability of the terms and conditions
of particular contract is conditional on the performance of the terms stipulated in another contract. For instance, the execution of the terms and conditions stipulated in the contract of sale are subject to meeting certain conditions in the purchase contract.
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parties.
9.10 The legal documentation on promise to purchase and appointment of
agent must be independent of and separate from the asset purchase
and asset sale agreement.
9.11 IFI are required to ensure the legal documentation is executed in
accordance to the sequence specified by Shariah as follows:
a) Asset purchase agreement must be executed prior to execution of
asset sale agreement10; and
b) Agreement on appointment of agent to perform the acquisition of
asset must be executed prior to execution of asset purchase
agreement.
9.12 IFI must not enter into asset purchase agreement and asset sale
agreement under Murabahah with the same counterparty to supply and
buy back the same asset11 respectively for the purpose of obtaining
cash financing.
Question 4: What type of document that your institution currently uses to reflect its
ownership of the asset? Please highlight other important documents used in
Murabahah.
Question 5: Please comment on the adequacy of the requirements and suggest any
areas of improvement on this aspect?
10 Shariah emphasized that the seller must own the asset prior to selling it to the customer,
paragraph 52 of Shariah parameter reference on Murabahah, Bank Negara Malaysia, 2009 11 Refer to paragraph 59 of Shariah parameter reference on Murabahah, Bank Negara Malaysia,
2009
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S S S S S
Procurement 9.13 IFI shall require the customer to provide written document on the
application to acquire an asset. The document shall at minimum
include the following:
a) Description of the asset to be acquired;
b) Proposed supplier of the asset;
c) Estimated acquisition cost; and
d) Proposed delivery arrangement
9.14 IFI are required to perform due diligence process to assess the
capacity, credibility and capability of prospective customer, supplier
and agent to satisfy their contractual obligations in Murabahah
transactions.
9.15 In performing the due diligence process, IFI shall at minimum assess
the following:
a) existence of the identified supplier and the required asset;
b) operational capabilities of the supplier to timely deliver the asset
as described in the asset purchase agreement;
c) financial capabilities of the customer to settle their obligations
under the asset sale agreement; and
d) capabilities of prospective agent to satisfy their expected
obligations as stipulated in the agency agreement.
9.16 IFI must ensure that the required asset specified by the customer
satisfies the internal qualifying criteria of asset under Murabahah prior
to initiating procurement process.
9.17 IFI are required to ensure the procurement of the required asset is
within the customer’s expected price.
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S S S S PG S
9.18 IFI must have proper mechanism in place to accurately record and
monitor the acquisition process (either conducted directly by IFI or
appointed agent) and ensure effective delivery of the asset. The IFI
must maintain relevant document as supporting evidence to facilitate
their claim on the ownership status of the acquired asset.
9.19 IFI must implement appropriate process to ensure the acquired asset is
delivered in good condition. Asset that is defective must be
immediately rejected and returned to the supplier.
9.20 IFI must establish necessary measures to ensure the asset or
inventory in its custody or their appointed agent is maintained in good
condition to facilitate Murabahah sale transaction.
9.21 IFI are required to establish mitigation measures to minimize risk
associated with the failure of supplier to deliver the asset.
9.22 In relation to paragraph 9.21, IFI may consider to identify and maintain
a list of alternative suppliers.
9.23 IFI shall inform the customer on the status of the acquisition and
appropriate time to enter into asset sale agreement.
Question 6: Please explain your institution’s existing mechanism in place that record
and monitor the acquisition process of Murabahah asset?
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Sale Transaction 9.24 IFI must ensure that it has secured12 the ownership of the purchased
asset prior to entering into asset sale agreement with the customer.
9.25 The total selling price stipulated in the asset sale agreement must be in
the form of absolute amount and have taken into account any discount
received from the supplier.
9.26 The approval on the deferred settlement terms of the agreed total
selling price or financing terms must satisfy the internal credit policies
as approved by the Board.
9.27 IFI must ensure asset sold under Murabahah is effectively delivered to
the customer and the amount due is promptly collected from the
customer. In this regard, IFI must inform customer at the point of
entering the contract, of his obligation to timely meet the payment
requirement.
9.28 IFI shall not increase the agreed selling price following the agreement
to reschedule the original repayment terms.
9.29 IFI must not repurchase and resell the same asset that was sold in
another Murabahah for the purpose of restructuring the original term of
financing.
Question 7: What are other important areas that must be included under the
Procurement and Sales Transaction?
12 IFI are expected to maintain legally enforceable document to support their ownership right
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Inventory management 9.30 IFI must establish appropriate procedures and storage facility or
warehouse to ensure that the acquired asset is securely kept and
properly maintained for the purpose of Murabahah sale transaction.
9.31 IFI are required to establish procedure for custodial arrangement in
cases where Murabahah asset is safe kept by the IFI’s appointed
agent.
9.32 IFI may require the agent to provide warranty on the asset under their
custody to ensure the asset is in good condition.
9.33 The inventory must be valued based on the methodology and
frequency as set out in the asset valuation policy of IFI.
9.34 IFI must conduct regular assessment on the asset under its custody to
ensure the condition of the asset satisfy customer expectation.
9.35 IFI must establish internal policy and procedure for inventories disposal
to ensure that the inventory is actively managed and promptly initiate to
dispose asset in accordance with the approved internal policy. The
policies and procedures for inventories disposal must at minimum
cover the following:
a) Identification of trigger events that indicate the need for IFI to
dispose inventories; and
b) Exit strategy and mechanism to minimize potential losses arising
from holding of inventories
Question 8:
Does your institution undertake inventory exposure under Murabahah?
Kindly comment on the adequacy of the requirement for inventory
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management?
Question 9:
What are the other good practices adopted by your institution to mitigate
inventory risk?
Question 10:
How does your institution ensure the quality of the asset is in good
condition prior to executing sales transaction?
10. Information Disclosure Principle 3: IFI shall provide adequate information to enable relevant stakeholders understand Murabahah transaction
S
10.1 IFI shall provide adequate and accurate information to customer with
regard to the application of Murabahah. At minimum, information to be
disclosed in the product disclosure sheet or marketing materials shall
include the following:
a) Objective of the financial product and Murabahah transaction;
b) Overview of the transaction structure;
c) Roles, responsibilities, rights and obligations of contracting
parties;
d) Key terms and conditions of the contract;
e) Description of eligible asset to be financed under Murabahah
f) Explanation on the parameter to determine the asset acquisition
cost;
g) Compensation following customer’s failure to fulfill the promise to
purchase the asset; and
h) Requirement for security deposit or advance payment (includes
terms and conditions as well as rights and obligation of
contracting parties)
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10.2 On the requirement to disclose the mark-up or profit margin to
customer, IFI must disclose the profit in absolute value and where
appropriate, the applicable profit rate.
10.3 IFI may provide illustration on the computation of profit margin based
on the adopted pricing methodology to the customer.
10.4 In addition, IFI must provide sufficient explanation on the application of
rebate mechanism on outstanding selling price to the customer arising
from early settlement of the amount due from customer.
10.5 IFI must disclose the applicable fees and charges to be borne by the
customer.
11. Risk Management Principle 4: IFI must institute and implement sound risk management system to effectively manage risks associated with Murabahah
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Risk management policies 11.1 At minimum, the risk management policies shall address the following:
a) process and procedures for the identification, measurement,
monitoring, reporting and control of all risks exposure associated
with Murabahah.;
b) internal limits on risk exposure (concentration) in line with IFI risk
appetite and capacity;
c) type of funding source used to finance Murabahah activities;
d) appropriate risk mitigation measures to minimize risk arising from
Murabahah activities; and
e) type, nature and frequency of reporting to the Board, senior
management and SC.
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S S PG S S
Risk identification 11.2 IFI must identify and assess risks inherent in Murabahah transaction.
11.3 IFI shall clearly delineate and document the appropriate methodologies
and parameters to identify risks profile of Murabahah transaction.
11.4 IFI may adopt various established approaches such as the Business
Process Mapping, Risk Control Self Assessments (RCSA) and Scenario
analysis to perform risks identification and assessment process on
Murabahah transaction. The outcome of this process enables IFI to
identify individual risk type, risk interdependencies and assess any
weakness that may exist in the overall risk management and control
system.
Risk Measurement 11.5 IFI must adopt and implement sound methodologies to measure
potential financial losses arising from certain risk events associated with
Murabahah transaction. These methodologies must be documented and
shall commensurate with the nature and complexity of the IFI’s risk
exposures under Murabahah. Potential financial losses relative to
plausible risk events arising from Murabahah include:
a) Losses arising from holding of inventories;
b) Liquidity requirements arising from lack of secondary market of
asset;
c) Losses arising from failed delivery by supplier; and
d) Losses arising from customer failure to settle their obligation.
11.6 IFI must compile relevant internal and external data to quantify
Murabahah risk exposures, which include:
a) Financial losses attributed to operational risk events such as theft,
fraud, natural disaster, failure to fulfill promises and others;
b) Prices of relevant goods or assets;
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c) Holding cost of inventories and time to liquidation
11.7 IFI shall be guided by regulatory guidance on prudent valuation as
specified in the Capital Adequacy Framework for Islamic banks in
performing asset valuation.
Question 11: What are the challenges in observing the requirements outlined under the
prudent valuation guidance?
Risk Controls and Mitigation 11.8 IFI are required to establish strong control environment that uses
policies, processes, systems, appropriate internal controls and risk
mitigation to provide reasonable assurance that the IFI have an effective
operation. The control and mitigation measures must commensurate
with the complexity and materiality of institutions’ risk exposure on
Murabahah.
11.9 IFI may employ risk transfer mechanism such as through Takaful cover
in line with risk appetite approved by the Board. For instance, IFI may
provide Takaful coverage on asset acquired under Murabahah to protect
from potential losses arising from any damage to assets or inventories
owned by the IFI.
11.10 However, any employment of risk transfer mechanism shall:
a) must be consistent with the IFI risk capacity approved by the
Board;
b) must compliment rather than replacement for, internal operational
risk control; and
c) shall effectively reduce the risks exposure to Murabahah and does
not create additional risk.
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S S
Risk monitoring and reporting 11.11 IFI must established robust risk monitoring system to ensure:
a) Murabahah transaction is in compliance with Shariah;
b) the asset and inventory are reasonably valued and maintained in
good condition;
c) collateral and security deposits are sufficient to mitigate expected
losses ;
d) appropriate provisioning is duly allocated on impaired assets;
e) risk concentration is maintained within approved limits;
f) counterparties satisfy their contractual obligations;
g) implication arising from the changes in the operating and economic
environment are adequately measured and assessed against the
capital adequacy of the IFI.
11.12 The reporting to senior management and the Board must be objectively
undertaken and supported with:
a) comprehensive risk assessment and recommendation to enable
IFI in deciding whether the application of Murabahah is consistent
with the IFI risk appetite and capacity;
b) risk analysis on potential changes or migration of risk profiling (e.g.
disruption in the market that may reduce the supply of the asset);
and
c) recommendation to improve or enhance risk management
framework and infrastructure to address risks arising from the
application of Murabahah.
Question 12: What are the additional risk management expectation that requires further
attention and deliberation in this document?
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Question 13: What are the foreseeable challenges and operational enhancement that have
to be undertaken by your institution in implementing the CP on Murabahah?
Do you require transitory arrangement to effectively implement the
requirements set out under this CP? Please propose the reasonable period
and reason justifying the suggestion.
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Issued on: 25 April 2013
Appendices
Appendix 1 General parameter on underlying assets
Minimum criteria that need to be fulfilled to ensure that the underlying asset
complies with Shariah requirement:
1. The asset must exist and identifiable in terms of its location, quantity and
quality. Assets under construction are not eligible for Murabahah contract
2. The asset must be permissible under Shariah, valuable and beneficial to the
buyer.
3. The asset must be transferable (i.e. something that can be delivered to
customers.
4. Debt instruments (e.g. Islamic accepted bills & negotiable Islamic debt
certificates) are not qualified to be traded under Murabahah.
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Appendix 2 General guidance on the components of acquisition costs
1. The acquisition cost refers to direct expenses incurred for the acquisition of
asset by IFI and delivery of the asset to customer, which includes:
a) Transportation;
b) Storage;
c) Assembly. Cost of services such as installation cost;
d) Taxes;
e) Cost arising from insurance or Takaful coverage on the asset acquired
before selling it to customer. The Takaful contribution paid by IFI may
be added to the cost of acquisition; and
f) Any valid expenses established by customary practice. This should be
deliberated and approved by Shariah Committee of IFI.
2. Additional direct expenses that are incurred subsequent to completion of
Murabahah contract and not specified in the legal documentation shall not
form part of the Murabahah selling price.
3. Overhead expenditure or indirect cost shall not form part of the acquisition.
These expenses include staff wages or labour charges that are not due to
asset acquisition activities.