KUALA LUMPUR: Bank Negara Malaysia said it would finalise operating standards for all major Islamic finance contracts by the end of this year, creating the first comprehensive set of practical guidance for the industry.
The set of 11 standards will complement existing syariah guidelines issued by Bank Negara, as the central bank aims to address inconsistencies in the use of Islamic contracts.
Market practices can vary across the industry partly because many standards are not legally enforceable.
For example, guidelines issued by the Bahrain-based Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI) are influential around the world but in most countries are not enshrined in law.
Malaysia’s current syariah standards are enforceable and have been in place for years, but they are technical rather than practical and still open to interpretation, Mohamad Akram Laldin, deputy chairman of the Sharia Advisory Council of Bank Negara, told Reuters.
“Even AAOIFI doesn’t have operational standards, so people in the market have a tendency to understand things differently. We want to avoid this.”
The new standards could help regulators in other countries that are seeking day-to-day guidance for their own markets, said Akram, also executive director of the International Shari’ah Research Academy for Islamic Finance here.
Bank Negara has issued drafts for Islamic contracts including ijara and istisna, which would add to its lone operating guidance covering murabaha, issued in 2013.
The regulator has sought wide industry feedback and is expected to update the new standards regularly to keep up with changing market practices, said Adhha Abdullah, chief executive of Standard Chartered Saadiq.
“The proposed concept papers will cover all available contracts offered in the market so far and the benefits would be for all…whilst revision of the current standards would be inevitable.”
Inconsistencies can arise in the use of contracts such as bai inah, which involves the sale and subsequent repurchase of an asset on a deferred-payment basis.
The syariah standard states the two legs must be executed and completed separately; some interpret that to mean they cannot be mentioned in the same contract, but some have linked them in the transaction via a separate document, Akram said.
In ijara, a sale and lease-back contract, the current syariah standard doesn’t address the various types of maintenance costs of the rental asset and who must bear them.
The current sharia standard for mudaraba, where assets are managed by a bank on behalf of a client, doesn’t allow capital to be “guaranteed”, but this can be interpreted to mean capital could be “protected” instead, Akram added. – Reuters