BNM’s Shariah Advisory Council issues ruling to prohibit the compounding of profit for restructuring and rescheduling of Islamic financing

On 27 October 2021, Bank Negara Malaysia (‘BNM’) announced a ruling made by its Shariah Advisory Council (‘SAC’) made at the 214th Meeting of the SAC held on 30 June 2021 whereby the SAC 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 any Restructuring and Rescheduling (‘R&R’) of Islamic financing. Accordingly, in executing R&R financing, IFIs are required to ensure that: 

  1. the new principal amount of the R&R financing shall be equivalent to the outstanding principal amount of the original facility, if there no additional financing is involved; 

  2. 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; and 

  3. the prohibition is applicable to R&R financing with all customers. 
The aforesaid ruling is in accordance with guidelines to be issued by BNM and is applicable to the following IFIs: 

  • licensed persons under the Islamic Financial Services Act 2013; 

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

  • prescribed institutions approved to carry on Islamic financial business under section 33B(1) of the Development Financial Institutions Act 2002. 
According to the SAC, an injustice will be caused to the customer if the IFIs compensate themselves at the customer’s expense for the latter’s failure to settle their financial obligations according to the terms of the original financing. Such injustice is contrary to the principles of maqasid Shariah (objectives of Shariah) which is to achieve property preservation alongside the attainment of justice for the contracting parties. Thus, the aforesaid ruling seeks to ensure that the execution of any R&R of Islamic financing is in line with the maqasid Shariah principles.
IFIs are required to comply with the above ruling as compliance with any ruling of the SAC in respect
of any particular aim and operation, business, affair or activity of IFIs shall be deemed to be in compliance with Shariah.

It is to be noted that this ruling is a continuation of a ruling made by the SAC in its 30th special meeting on 14 July 2020 (revised on 16 October 2020) which prohibits the practice of compounding profit in R&R of Islamic financing during the COVID-19 pandemic period.
The ruling made by the SAC on 30 June 2021 can be accessed here.
Alert by Muhammad Suhaib b. Mohamed Ibrahim (Senior Associate) of the Dispute Resolution Practice of Skrine.

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