Bank Negara’s Shariah Advisory Council issues Ruling on the New Islamic Reference Rate

Bank Negara Malaysia (“BNM”) announced a ruling made by its Shariah Advisory Council (“SAC”) at the 218th SAC Meeting held on 28 October 2021 that the new Islamic reference rate i.e. Malaysia Islamic Overnight Rate (“MYOR-i”) and its calculation methodology for both normal and contingency situations are Shariah-compliant as it includes only Shariah-compliant transactions.
This ruling is effective in accordance with the guidelines to be issued by BNM and is applicable to the following Islamic Financial Institutions (“IFIs”): 

  1. licensed IFIs under the Islamic Financial Services Act 2013; 

  2. licensed banks and licensed investment banks approved under section 15(1) of the Financial Services Act 2013 to carry on Islamic banking business; and 

  3. prescribed institutions approved under section 33B(1) of the Development Financial Institutions Act 2002 to carry on Islamic financial business. 
Pursuant to the Financial Stability Board’s recommendation to develop a nearly risk-free Alternative Reference Rate (“ARR”) and strengthen existing Interbank Offered Rate (IBOR), BNM has, in line with financial benchmark reforms which are underway in various jurisdictions, appointed the Financial Markets Committee to oversee the development of a transaction-based ARR to improve the integrity and reliability of interest rate benchmarks.
Similar to other jurisdictions, the MYOR-i: 

  • will be administered and calculated by BNM as the volume-weighted average rate of unsecured Shariah-compliant overnight Ringgit Malaysia denominated interbank transactions, rounded to two decimal places; and 

  • will run in parallel with the existing Kuala Lumpur Interbank Offered Rate (“KLIBOR”) but the two-month and 12-month KLIBOR tenors will be discontinued with effect from 1 January 20231
As for the Islamic financial market, the existing Kuala Lumpur Islamic Reference Rate (“KLIRR”) will be abolished and replaced by the MYOR-i due to its low usage and lack of compliance with global standards for financial benchmarks.
The key features of MYOR-i are: 

  • nearly risk-free rates; and 

  • represent actual and Shariah-compliant transactions in the interbank money market. 
Eligible transactions comprise the following: 

  • Unsecured placements between interbank institutions (either brokered or direct/bilateral); and 

  • BNM’s Islamic overnight monetary operations, which comprise tenders conducted through Fully Automated System for Issuing/Tendering (FAST) or manual operations, and direct overnight placements between BNM and interbank institutions but excluding standing facilities. 
For now, the eligible instrument which will be used in the computation methodology of MYOR-i is Commodity Murabahah-based instruments transacted in the Islamic interbank money market. New instruments may be added in the future subject to approval by the SAC and meeting all requirements for eligible instruments as assessed by BNM.
The SAC has considered and agreed to exclude the qard-based instrument and its historical hibah from the MYOR-i calculation methodology to avoid creating the perception that there is Shariah non-compliant element. The inclusion of the historical hibah rate on qard transactions may give the presumption that the hibah rate is an indicative rate for future qard transactions and may regularise the practice of granting hibah on qard as a business practice which are prohibited by the Shariah.
Meanwhile the SAC has also stated that in a contingency situation, the MYOR-i will be calculated and published by BNM based on the average MYOR-i adjusted for any changes in the funding facility profit rate (“FFPR”) over the preceding three publication days. The proposed use of FFPR in contingency situation is intended to ensure MYOR-i only comprises Shariah-compliant elements and to avoid using interest rate such as the overnight policy rate (“OPR”) announced by BNM from time to time as per conventional MYOR.
As there is presently no reliable Shariah compliant term reference rate available globally and domestically that can be used as the pricing benchmark for Islamic financial instruments, the SAC has agreed to allow temporary referencing to conventional term reference such as KLIBOR or other conventional term reference rates until a reliable Islamic term reference rate is available.
The ruling made by the SAC on 28 October 2021 can be accessed here.
This Alert is by Sharifah Shafika Alsagoff (Partner) and Hafidah Aman Hashim (Partner) of the Islamic Finance Practice of Skrine. 

1 Paragraph 14.1, BNM's Policy Document on KLIBOR Rate Setting issued on 24 September 2021.

This alert contains general information only. It does not constitute legal advice nor an expression of legal opinion and should not be relied upon as such. For further information, kindly contact