Toward truly Halal banking products in Malaysia
Islamic finance has placed Malaysia on the world map. With the industry total assets reaching US$204.4 billion, Thomson Reuters has recognized Malaysia as the most developed Islamic financial market for five consecutive years. Malaysia also placed first in the international Islamic finance leadership rankings, according to the Index of Islamic Finance Countries. The central bank of Malaysia, Bank Negara Malaysia (BNM), has set a target for Islamic finance to form 40% of total banking assets by 2020.
Islamic banking has come a long way since it was first introduced in Malaysia in 1983. The country’s dynamic and harmonized legal, regulatory and supervisory Shariah framework has provided a perfect ground to strengthen the entire Islamic finance ecosystem. As the industry grows and evolves, experts develop more alternatives to broaden the range of products and services offered. Malaysia’s solid, mature and diverse Islamic financial ecosystem has become a catalyst for customers to feel safe to opt for Halal banking.
In essence, Islamic finance aims to foster inclusive growth and support the livelihoods and aspirations of humankind worldwide. It is a sustainable, equity-based and environmentally and socially responsible finance. It promotes risk-sharing and connects the financial sector with the real economy. It emphasizes financial inclusion and social welfare.
Islamic finance principles do not allow participation in ambiguous and uncertain transactions. Investments have to be good and wholesome. The Shariah law considers agreements with excessive uncertainty (Gharar) or speculation (Maysir) to be invalid. Preventable ambiguities and faults in the terms of the contract are also not allowed. Islamic finance benefits from the stability of asset-backed financing. Banks provide funds based on trade that involves actual goods and services. The underlying asset in transactions must be tangible and in line with Islamic principles.
Malaysia’s booming Islamic finance scene has resulted in more discerning and analytical customers who are seeking a truly Halal banking experience. This is where Tawarruq comes in. A Tawarruq transaction consists of two sale and purchase contracts. The first involves the sale of an asset, often a commodity, by a seller to a purchaser on a deferred basis. Subsequently, the purchaser of the first sale sells the same asset to a third party on a cash and spot basis. To ensure that the transaction is truly Halal, the commodity used in the transaction must be compliant to the rules of Tawarruq itself.
First and foremost, concern arises on whether the commodity really exists in its current form in the stated location. Efforts need to be made to verify and authenticate the existence of the commodity. Tawarruq personnel need to take the initiative to visit the location where the commodities are stored to confirm this fact to customers. The commodity used for the transaction should not be obsolete or defective. The personnel have to ascertain the valuation and good order of the commodity before a transaction starts.
Secondly, financial institutions should be able to deliver the commodity to the customer, should a delivery request be made. The customer needs to be allowed to ascertain that the assets being traded are the right physical ones. Banks should enforce a mechanism that allows the customer an option to take delivery of the commodity whenever the customer calls for it, though it is not the main intention. There have been cases where the seller was not prepared to deliver, even if the buyer asked for it.
Thirdly, the commodity should not revert back to the original seller. It has been stated that the commodity will be sold to the market at large. It has also been reported that some brokers refuse to allow the client to undertake an audit. This raises the belief that the commodities are actually sold back to the original broker and are ready to be traded again. An audit is necessary to remove all doubts and increase customers’ confidence.
Another issue is the possible overlapping of the commodity used. How do financial institutions confirm that the same commodity would be sold to only one buyer? Could it have been sold to more than one buyer? This calls for a proper framework and the need for a Shariah audit.
Last but not the least, the commodity’s price tends to fluctuate periodically because an actual live commodity is being traded. Banks have not been able to be precise in its documentation or price disclosures. The price per commodity unit might change later in the day. How could a specific price be locked-in when the purchase and sale of the commodity has not been concluded? Tawarruq guidelines in Malaysia note that an Islamic bank could not hold the commodities for more than two hours. This implies that the issue of price fluctuation is a valid concern for Shariah committees.
These complexities call for a more comprehensive audit at Islamic financial institutions than the one performed at their conventional counterparts. Islamic financial institutions need to perform a regular internal audit of transactions, operations and information systems, particularly at the product implementation stage, to ensure comprehensive compliance with Shariah. BNM enforces the two-tier Shariah governance infrastructure comprising the Shariah Advisory Council of BNM and an internal Shariah committee formed in each respective Islamic financial institution.
In addition to adopting strict governance, Islamic financial institutions also strive to identify new and suitable commodities to address customers’ rising concerns. As-Sidq, a Tawarruq platform provided by Sedania As Salam Capital for example, uses telecommunication airtime as the underlying commodity for Islamic personal financing products. It leverages upon its holding company Sedania’s experience and partnerships with telecommunications companies in providing airtime-sharing services to enable this arrangement. The existence of the airtime can be easily proven using serial numbers. These numbers also provide customers with an easy way to audit the transactions and verify that the trade has happened. Finally, the telecommunication airtime pricing is stable. All of these eliminate the concerns about the Halal status when it comes to the financing processed using As-Sidq.
This automated Islamic banking trading platform is certified by AAOIFI in Bahrain, and the International Shari’ah Research Academy for Islamic Finance. As-Sidq satisfies the strict requirements based on Middle Eastern Shariah regulations and is the only fully Shariah compliant Islamic personal financing product in the world today outside the Middle East.
More effort is needed to keep Malaysia at the forefront of the global Islamic finance stage, especially in churning out more Islamic fintech products that cater to customers seeking a truly Halal financing experience. The system focuses on stability, transparency and justice and propels toward a comprehensive and wholesome industry. As the industry reaches its next stage of progress, it is hoped that more Islamic financial institutions would develop a range of sophisticated commodities to strengthen their Islamic products and better meet the expectations of discerning customers.
Khairul Nisa Ismail is CEO of Sedania As Salam Capital. She can be contacted at (email@example.com).