Bank Negara issues Exposure Draft Policy Document on Financial Reporting for Takaful Operators

Bank Negara Malaysia (‘BNM’) issued an Exposure Draft of the Policy Document on Financial Reporting for Takaful Operators (‘Exposure Draft’) on 30 September 2021.
 
The Exposure Draft will come into effect on 1 January 2023 and will apply to financial statements for financial years beginning on or after that date. The current Policy Document on Financial Reporting for Takaful Operators (‘Policy Document’) issued by BNM on 2 February 2018 will be superseded upon the issuance of the Exposure Draft as a policy document.
 
As in the case of the Existing Document, the Exposure Draft will apply to licensed takaful operators (including licensed international takaful operators and licensed retakaful operators) and approved financial holding companies under the Islamic Financial Services Act 2013.
 
The Policy Document, inter alia, sets out:

  1. the specific requirements on the application of the Malaysian Financial Reporting Standards (‘MFRS’) to a takaful operator; 

  2. information to be disclosed in the financial statements of a takaful operator; 

  3. requirements for BNM’s approval for dividend payments; and 

  4. requirements on submission and publication of a takaful operator’s financial statements.  
The Exposure Draft will amend the Policy Document in the following respects:

  1. to align the requirements of the Policy Document with the MFRS 17 (Insurance Contracts) and MFRS 9 (Financial Instruments); and 

  2. to address specificities of takaful.  
According to BNM, the proposed amendments under the Exposure Draft will ensure compliance with Shariah requirements and the latest MFRS requirements applicable to takaful business.
 
In particular, the requirements relating to qard (interest-free lending) have been substantially revised (see paragraphs 9.2(e) and 11 of the Exposure Draft).
 
BNM has proposed the following additional disclosures be included in the explanatory notes in annual financial statements of a takaful operator:

  • a description on the role of the takaful operator as a takaful fund manager (wakeel) based on its wakalah (agency) contract and/or investment manager based on its mudharabah (profit-sharing contract) contract with its takaful participants; 

  • any forms of remuneration paid to the takaful operator for the management of the takaful fund (e.g. wakalah fees, commission income, profit sharing and compensation for direct costs); 

  • the amount of surplus distribution, if any, to both takaful participants and shareholders’ fund; 

  • any other forms of financial support received by the takaful fund from the shareholders’ fund pursuant to section 95 of the IFSA (e.g. provision of hibah (transfer of asset by donor to recipient without consideration)); 

  • any hibah provided as additional takaful benefits payable from the shareholders’ fund to the takaful participants as supplementary to the main takaful benefits; and 

  • the required disclosures on qard in paragraph 11.2 of the Exposure Draft.    
The requirement under the Policy Document for a takaful operator to publish an abridged format of its audited annual financial statements in prescribed newspapers will be dispensed with upon the issuance of the Exposure Draft as a policy document.
 
The deadline for submission of feedback on the proposals in the Exposure Draft is 15 November 2021.
 
Alert prepared by To’ Puan Janet Looi (Partner) and Fariz Abdul Aziz (Partner) of the Corporate 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 skrine@skrine.com.