BNM’s shariah council issues ruling on compounding profit for restructuring of Islamic financing

BNM’s shariah council issues ruling on compounding profit for restructuring of Islamic financing
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KUALA LUMPUR (Oct 27): Bank Negara Malaysia (BNM) said its Shariah Advisory Council (SAC) has made a ruling on the practices of compounding profit for restructuring and rescheduling (R&R) of Islamic financing. 

The council ruled that Islamic financial institutions (IFIs) are not allowed to include and account for any accrued profit from the original financing in the new principal amount of R&R financing, said BNM.

This is because such practice will amplify the amount of profit on debts (compounding profit), the central bank said in a statement on Wednesday, adding that the ruling was made at SAC’s 214th meeting June 30.

“Therefore, IFIs shall ensure that in executing R&R financing the new principal amount of the R&R financing shall be equivalent to the outstanding principal amount of the original facility, if there is no additional financing involved.

“[In addition], the amount of accrued profit and late payment charges (where applicable) from the original financing can be added to the total new debt obligation, but this amount cannot be capitalised in the calculation of the new profit,” said BNM.

It added that IFIs must ensure that in executing R&R financing, the prohibition is applicable to R&R financing with all customers. 

BNM said there were several IFIs that did not compound profits for R&R financing previously. 

The implementation of such practice was based on the decision of the IFIs’ shariah committee, as there was no specific SAC ruling on the matter, the central bank noted.

“However, in light of the challenging economic situation that continues to affect customers during the Covid-19 pandemic, the SAC has ruled to prohibit IFIs from charging compounding profits for R&R financing with the objective to ease the financial hardship of customers affected by the pandemic.

“Although initially, the SAC’s ruling relating to the prohibition on compounding profit was made due to the Covid-19 pandemic, but taking into account the broader aspect of maslahah (benefits) including the dharar (harm) to the customers, there is a basis for the ruling to be retained and extended to all IFIs’ customers under the business-as-usual situation,” it added.

Meanwhile, BNM noted that the financial performance and cash flows of individuals and businesses are expected to gradually improve in line with economic improvements.

It said various initiatives have been carried out to help them to survive in the current situation, in an effort to ease the financial burden of the affected customers.

Among the initiatives is the R&R of existing financing to rearrange customers’ cash flows. With that approach, businesses and individuals can better manage their financial obligations to suit their prevailing financial situation, said the central bank.

“Acknowledging the challenges faced by IFIs’ customers under the difficult situation, the SAC in its 30th Special Meeting dated July 14, 2020 (revised on Oct 16, 2020) outlined the shariah requirements on R&R financing which intend to provide clear shariah guidance to IFIs and customers.

“Following the shariah ruling, the SAC saw the need for a detailed discussion on extending the applicability of such prohibition on the IFIs under the business-as-usual situation (i.e. after the end of Covid-19 pandemic period) to all IFIs’ customers,” it added.

S Kanagaraju