BNM’s Shariah Advisory Council issues Ruling on Restructuring of Islamic Financing Facility during Covid-19 Crisis

Bank Negara Malaysia (‘BNM’) released an announcement on 10 August 2020 on the ruling made by its Shariah Advisory Council (‘SAC’) at a Special Meeting on 14 July 2020 on the Restructuring of Islamic Financing Facility during the Covid-19 Crisis.
 
The Shariah-related issues raised at the meeting were as follows:
 
  1. Does Shariah allow restructuring of an Islamic financing facility using the original agreement?
  1. Does Shariah allow restructuring of an Islamic financing facility into a conventional loan (and vice versa)?
  1. Does Shariah allow compounding profit for restructuring?
The ruling made by the SAC in respect of the above issues is as follows:
 
Restructuring of an Islamic financing facility based on original Shariah contracts
 
Restructuring of an Islamic financing facility based on the original Shariah contract(s) may be undertaken using a supplementary agreement that cross-refers to the terms and conditions of the original agreement. No new agreement is required. This is intended to reduce the cost and challenges to customers and the operational burden on Islamic financial institutions (‘IFIs’).
 
However, a new agreement is required if the restructuring involves:
 
  1. the application of a different Shariah contract, e.g. a house financing that is originally based on musharakah mutanaqisah (diminishing partnership) is being restructured using ijarah; or
  1. the combination of multiple financing based on various Shariah contracts into a new single Shariah contract as part of a debt rationalisation exercise.
Restructuring of an Islamic financing facility into a conventional loan (or vice versa)
 
IFIs are allowed to restructure a conventional loan into an Islamic financing facility. However, restructuring of an Islamic financing into a conventional loan is not allowed. In cases where the customer chooses to restructure his existing Islamic financing facility to a conventional loan, it is the customer’s prerogative and choice to do so. In this situation, the customer’s choice is beyond the responsibility and control of the IFI.
 
Compounding profit on restructuring
 
IFIs are not allowed to include and account for any accrued profit on an original financing as the new principal amount for the restructured facility. Such practice aims to avoid multiplying of profits charges on debts (compounded profits). Therefore, in implementing a restructuring:
 
  1. the new principal amount for the restructured facility is equivalent to the outstanding principal amount of the original facility, provided there is no additional financing;
  1. IFIs are allowed to charge a new profit rate on the new principal amount; and
  1. the amount of accrued profit and late payment charges (where applicable) on the existing financing can be carried forward and added to the total debt obligation, but this amount cannot be capitalised in the calculation of new profit.
The SAC’s ruling came into effect on 10 August 2020 and applies to the following IFIs:
 
  1. licensed persons under the Islamic Financial Services Act 2013;
  1. licensed banks and licensed investment banks approved under section 15(1) of the Financial Services Act 2013 to carry on Islamic banking facilities; and
  1. prescribed institutions approved under section 33B(1) of the Development Financial Institutions Act 2002 to carry on Islamic financial business.
The detailed analysis and reasoning of the SAC is available here.