Guidelines on the Application of Banking Regulations to Islamic Banking
Monetary Authority of Singapore (“MAS”) has issued Guidelines on the Application of Banking Regulations to Islamic Banking (the “Guidelines”) which took effect from 7 May 2009. The Guidelines provide guidance for those financial institutions intending to offer Islamic financial services and/or products in line with the Banking Act (Cap 19) (the “Banking Act”), Banking Regulations* and written directions issued by MAS in exercise of their powers under the Banking Act.
The Guidelines cover two general approaches, namely admission framework for financial institutions; and the regulatory treatment for Islamic banking products.
This update briefly summarises all applicable sections and products mentioned in the Guidelines. However this update is unable to touch on the capital requirements and investments in Sukuk given the need for conceptual clarification and definition of the said subjects.
Admission Framework
MAS re-affirmed the approach that the identical admission criteria shall be applied when considering an application by any bank whether conventional or Islamic. The primary concern will be on the financial stability of the bank seeking such admission, despite the presence of the unique Shariah compliance risks.
MAS has no intention to prescribe what constitutes Shariah compliance or to endorse specific Shariah rulings. It recognises that the burden to manage such risks lie with the management of the Islamic bank given that it is reputational risks to the Islamic bank.
The Guidelines clarify the position on equity exposures within the single capital framework and the applicable provisions of MAS Notice 637.
Regulatory Treatment of Islamic Banking
(i) The section on Funding Structures clarifies the conditions for accepting Murabaha (marked-up profit) deposit. Regulation 4A extends the meaning of deposit by approving the arrangement of sale and purchase of asset via the deposit account. Regulation 23 legalises the transaction of sale and purchase of asset by bank, which the bank shall use its best efforts to minimise the holding period and the price fluctuation of the asset.
(ii) The section on Financing Structures and Investments deals with the commonly used Islamic financing structures to provide greater clarity on the regulatory treatments of such structures and its capital treatment. A brief elucidation is provided below.
a. Murabaha financing is a prescribed alternative financing business where the bank is allowed to purchase the asset to be financed for the customer and then to re-sell to the customer with a marked-up profit in addition to the original price (Regulation 22). The customer shall thereafter repay to the bank based on the re-sell price on a deferred basis.
b. Murabaha Interbank Placement is usually transacted between two banks, thereby allowing an Islamic bank to earn marked-up profit from the deferred payments scheme by entering into any partnership, joint venture or other arrangement (Regulation 23A).
c. Ijara wa igtina functions as a lease agreement where the bank purchases the asset at the request of the customer who in turn repay the bank by way of monthly rentals (Regulation 23B).
d. Diminishing Musharaka is explained as a joint ownership between the bank and its customer. The bank’s share in the asset shall be diminished gradually upon the amount repaid by the customer (Regulation 23C). The total repayments made by the customer must exceed the bank’s original contribution, which the rate of profit must be agreed upon.
e. Spot Murabaha transaction involves the purchase of asset at a marked-up price with immediate repayment (Regulation 23D). The bank has to avoid taking on the non-financial risks. Further, the bank is prohibited from taking physical delivery of the underlying assets and transactional risks.
In summary, the Guidelines are intended to serve as a tool to guide financial institutions in maximising the commercial opportunities to fuel the growth in Islamic banking.
*All Regulations mentioned in the update are referred to the regulations of the Banking Regulations.
(626) words
By Ms Lee How Fen (pictured)
Foreign Counsel,
Legal Associate (Corporate Practice)
Ph: (65) 6322-2205
Fax: (65) 6534-0833
E-mail: leehowfen@loopartners.com.sg
and Ms Ng Siao Hui
Corporate Finance Executive
Ph: (65) 6322-2285
Fax: (65) 6534-0833
E-mail: ngsiaohui@loopartners.com.sg
Loo & Partners LLP
88 Amoy Street, Level Three
Singapore 069907