Islamic banks and takaful operators in Malaysia are now in the middle of its largest product migration to comply with a new set of legislation passed last year, with some quarters fearing there may be a flight of capital to the conventional banking side.
There is concern on the ground that some customers may return to conventional banking products if they are not comfortable with the new products to be released by the Islamic banks to comply with the requirements of the Islamic Financial Services Act (IFSA) 2013.
A key focus for Islamic bankers at the moment is Bank Negara Malaysia’s (BNM) “restrictive” proposed guidelines for Shariah contracts used to structure savings, the mainstay of banks as they pool savings from customers and mobilise them for other productive purposes.
The specific concern, according to Islamic bankers who spoke to The Malaysian Reserve, is the ability for the banks to pay hibah, or gift, to holders of savings accounts structured under the Shariah principle of wadiah (custodian).
“The industry is still exploring the various options. Some changes to the proposed guidelines are required.
We will have to wait and see how this pans out. Until then, there is no real solution for the savings products,” said HSBC Amanah Malaysia Bhd CEO Rafe Haneef (picture).
Without the ability to pay hibah, the savings accounts may no longer be attractive to customers, unlike the savings accounts on the conventional side which promises them a certain amount of return.
CIMB Islamic Bank Bhd CEO Badlisyah Abdul Ghani said Shariah allows for the giving of gifts at the full discretion of the bank including under wadiah.
“Gifts are made by all Islamic banks in charity works, for staff welfares, for customer loyalty and for many other things. Wadiah with deposit customers is just one of many areas that we provide gifts or hibah.
“We are working with the regulator on the new exposure draft on wadiah and hibah to ensure that, for wadiah deposit products, they still function as they do now,” he said.
“Wadiah has been there for many years and has proven to be the best structure for an Islamic savings product. There will be enhancements to it, but I don’t think the hibah framework will be disallowed.”
Wadiah contract is a mechanism that enables a person to entrust his asset to another person for the purpose of safe keeping, according to the BNM Shariah Resolution in Islamic Finance (2nd edition, 2010).
As a reward and token of appreciation for the utilisation of the deposit, the Islamic banking institution, at its discretion, may give hibah to the customer, it added. However, that may see some changes under a new draft exposure and its related guidelines now under review.
The central bank may provide some clarity on the issue when it releases the BNM Annual Report for 2013, scheduled for Wednesday.
On the fears of capital flight to the conventional side, industry sources acknowledge that there was a possibility, but do not expect it to be an issue of major concern. “If replacement of products is in place, then there should be no concern (for capital flight),” said Badlisyah.
It is understood that the central bank is also keeping an eye on the possibility of the capital flight, either among Islamic banks itself, or between the Islamic banking and the conventional banking systems, as Islamic banks start introducing their new products.
“At the moment, there is nothing significant,” said an industry source.
Under the leadership of BNM governor Tan Sri Dr Zeti Akhtar Aziz, the central bank has pushed forward for some major changes in the regulatory landscape of the nation’s financial system.
Aside from IFSA, the other major legislation is the introduction of the Financial Services Act 2013. Earlier, Parliament had also passed the Central Bank of Malaysia Act 2009, which had instituted some significant regulatory changes to the Islamic finance landscape in the country.
Shariah experts in the field of Islamic finance attest to the major changes that are happening, especially with the advent of the IFSA.
“It’s a big shift from what it was to what it’s going to be,” said Dr Mohamad Akram Laldin, the ED of International Shariah Research Academy for Islamic Finance, which was set up by BNM six years ago. He said investment products, for example, are going to behave differently from how it was in the past. “Take mudarabah products.
In the past, such investment products come with a guarantee on the capital. In future, under IFSA, that will no longer be the case. Capital will no longer be guaranteed. Investors must be willing to take the risk that they may lose their capital,” he said.
Source: The Malaysian Reserve