Bank Negara’s Shariah Advisory Council issues Ruling on Buy Now Pay Later Facility
14 February 2024
On 24 January 2024, Bank Negara Malaysia (“
BNM”) published the ruling made by its Shariah Advisory Council (“
SAC”) in respect of the Buy Now Pay Later (“
BNPL”) facility (“
the BNPL Ruling”) on its website. The BNPL Ruling can be accessed
here.
Objective and application
The BNPL Ruling seeks to clarify the Shariah requirements on Islamic BNPL facility and came into effect immediately on its publication on
24 January 2024.
The BNPL Ruling applies to the following:
- licensed Islamic banks under the Islamic Financial Services Act 2013 including those carrying on Islamic digital banking business;
- licensed banks and licensed investment banks approved under section 15(1) of the Financial Services Act 2013 to carry on Islamic banking business; and
- prescribed institutions approved under section 33B(1) of the Development Financial Institutions Act 2002 to carry on Islamic financial business,
(severally an “Islamic FSP”).
Ensuring Shariah compliance in Islamic BNPL Facility
An Islamic FSP is required to comply with the BNPL Ruling as compliance with any ruling of the SAC in respect of any particular aim and operation, business, affair or activity of the Islamic FSP shall be deemed to be in compliance with Shariah.
In Shariah, a BNPL facility may be deemed as an extension of the traditional sale contract which is already well-established and permissible in Islam, provided that the sale transaction is conducted in a manner that is consistent with Shariah principles.
While recognising the various types of operational model adopted by different BNPL providers, and remaining supportive of innovation, to ensure that the operational structure and business model of the BNPL facility are consistent with Shariah principles, the SAC requires Islamic BNPL to comply with the following:
- The collective use of Shariah contracts as the underlying structure for the BNPL facility must observe the relevant Shariah requirements which are applicable to each Shariah contract and to the combined contracts1;
- The use of such Shariah contracts under the BNPL facility must preserve the primary objective of the contract (muqtada aqad);
- The Shariah contracts used under the BNPL facility must appropriately reflect the contractual rights and obligations of the contracting parties;
- The use of Shariah contracts as the basis of various features in the BNPL facility must not be structured in a way that gives rise to riba practices; and
- Where late payment charges are imposed, such imposition must reflect the actual cost incurred from such late payment and/or defaults by the consumer as it would be considered as compensation (ta widh); the cost component must be justified according to applicable requirements imposed by BNM and approved by the Shariah committee of the Islamic FSP.
Where a Shariah-compliant BNPL facility is offered on a platform which also sells non-Shariah compliant goods and services, such BNPL facility would not be automatically considered as Shariah non-compliant, subject to the following:
- The transaction conducted using the Shariah-compliant BNPL facility is confined only to Shariah-compliant goods and services;
- The Shariah committee of the Islamic FSP has approved the offering of such Shariah-compliant BNPL facility on such platform; and
- The Shariah-compliant BNPL facility has in place appropriate safeguards to ensure no transaction involving non-Shariah compliant goods and services can be facilitated.
In addition, an Islamic FSP that facilitates the purchase and sale transactions of gold and silver (ribawi items) that have the illah (effective cause) of money, shall comply with the following requirements:
- The transaction must be conducted on spot basis. However, the settlement period of up to T+2 is permitted due to operational constraints and business customary practices (urf tijari); and
- The possession of gold and silver purchased by the consumer must take place at the time of transaction, either physically (haqiqi) or constructively (hukmi).
In line with the principle of maqasid Shariah that encourages the preservation of wealth (hifz al-mal), particularly in striving to avoid causing consumers to incur excessive indebtedness beyond their financial affordability, the SAC urges Islamic FSP to:
- Uphold responsible practices, where the credit and affordability assessment process should be thorough and must take into consideration the consumers’ existing debts and income levels and ensure their processes comply with the relevant requirements imposed by BNM; and
- Adopt responsible practices in offering a BNPL facility, including providing clear and timely disclosures to consumers, that would help consumers to make more informed decisions and encourage the responsible and prudent use of the BNPL facilities.
Bases for BNPL Ruling
The bases under the Shariah for particular aspects of the BNPL Ruling are set out in Part IV of the BNPL Ruling.
Implications of the BNPL Ruling
The BNPL Ruling provides clarity on the key Shariah considerations that must be fulfilled by an Islamic FSP which intends to offer Shariah-compliant BNPL facilities. The BNPL Ruling will also ensure an end-to-end Shariah-compliant product structure is offered by an Islamic FSP.
Non-bank Islamic BNPL providers that intend to offer Shariah-compliant BNPL facility are encouraged to refer to the BNPL Ruling as a guide and educate their consumers on the essence of a Shariah-compliant BNPL facility.
Comments
The BNPL Ruling provides invaluable guidance to both Islamic FSPs and non-bank Islamic BNPL providers on key considerations that must be addressed in ensuring that Islamic BNPL facilities offered by them are Shariah-compliant.
It remains to be seen whether a mandatory obligation will be imposed under the proposed Consumer Credit Act on non-bank Islamic BNPL providers to comply with the BNPL Ruling (or an equivalent ruling) in respect of Islamic BNPL facilities offered by them.
Alert by Sharifah Shafika Alsagoff (Partner) and Hafidah Aman Hashim (Partner) of the Islamic Finance Practice of Skrine.
1 The collective use of several Shariah contracts in one single product is allowed subject to (i) each contract is permissible by Shariah; (ii) there is no clear Shariah injunction on its prohibition to be used collectively; and (iii) there is no contradiction between the Shariah principles governing each contract.
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 skrine@skrine.com.