Murabahah (Operational Requirements) · PDF fileBNM/RH/CP 008-11 Islamic Banking and Takaful...

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)


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]

[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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S S S

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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S S S S S S

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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S S PG S S S

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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S PG S S

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

S

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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S S PG S

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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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.

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