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Istisna - Overview

Yahya Massoud
By Yahya Massoud
1 month ago
Istisna - Overview

Islamic banking, Shariah, Takaful, Bank

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  1. BNM /RH/PD 028-1 PART A Islamic Banking and Takaful Department Istisna` Page 1 / 44 OVERVIEW 1. Introduction 1.1 Compliance with Shariah requirements is a prerequisite in ensuring the legitimacy of Islamic financial products and services. In meeting this expectation, it is essential for an Islamic financial institution (IFI) to establish the necessary operational framework and infrastructure to ensure that the conduct of Islamic financial transactions is consistent with Shariah. 1.2 The Shariah contract-based regulatory policy is intended to ensure end-toend compliance with Shariah and therefore, enhance the integrity and sustainability of the IFI. 1.3 The policy document contains two distinctive parts, namely the Shariah requirements and the operational requirements. The former highlights the salient features and essential conditions of istisna` contract. The latter outlines the operational requirements, which consist of core principles of good governance and oversight, robust documentations, effective risk management, transparent disclosure to customers, fair business and market conduct. These operational requirements are aimed at complementing and promoting sound application of the Shariah principles. This policy document will be applicable to all products and services that are structured based on istisna` contract. For the avoidance of doubt, the requirements set out in this policy document must be observed by an IFI who acts as a seller or purchaser. 2. Policy objectives 2.1 This policy document aims to− (a) set out the Shariah rulings associated with the istisna` contract; (b) set out key operational requirements with regard to the implementation of the istisna` contract; and (c) promote end-to-end compliance with Shariah requirements which include adherence to sound banking practices and safeguarding customers’ interest. Issued on: 23 December 2015
  2. BNM /RH/PD 028-1 Islamic Banking and Takaful Department Istisna` Page 2 / 44 3. Scope of policy document 3.1 Part B sets out Shariah requirements that are mandatory to ensure validity of the istisna` contract as well as permissible optional practices. 3.2 Part C provides operational requirements on governance and oversight, documentations, risk management, business and market conduct. It describes 5 key principles for sound management and operationalisation of istisna` as follows: (a) Principle 1: The IFI must establish a comprehensive governance and oversight framework to ensure that an istisna` transaction is conducted based on sound banking practices and complies with Shariah requirements. (b) Principle 2: The IFI must ensure that the implementation of istisna` is supported by comprehensive policies, procedures, processes, adequate infrastructure and robust documentation. (c) Principle 3: The IFI must identify and establish legal documentation to ensure the transaction is valid and executed in accordance with Shariah. (d) Principle 4: The IFI must implement a sound and integrated risk management system to effectively manage risks throughout the life cycle of the istisna` transaction. (e) Principle 5: The IFI must undertake istisna` transaction in a fair and transparent manner in line with the Shariah to protect stakeholder’s interest. 4. Applicability 4.1 This policy document is applicable to all IFIs defined in paragraph 7.2. Issued on: 23 December 2015
  3. BNM /RH/PD 028-1 Islamic Banking and Takaful Department 5. Legal provisions 5.1 The requirements in this policy document are− (a) Istisna` Page 3 / 44 specified pursuant to sections 29, 57(1), 135(1) and 155 of the Islamic Financial Services Act 2013 (IFSA); and (b) specified pursuant to sections 41(1) and 116 of the Development Financial Institutions Act 2002 (DFIA) and constitutes as a direction to section 129(3) of the DFIA. 5.2 The guidance in this policy document is issued pursuant to section 277 of the IFSA and section 126 of the DFIA. 6. Effective date 6.1 The policy document comes into effect on 1 July 2016, except for paragraph 36 which must come into effect immediately upon issuance of this policy document. 7. Interpretation 7.1 Terms and expressions used in this policy document must have the same meanings assigned to them in the Financial Services Act 2013 (FSA), IFSA and DFIA, as the case may be, unless otherwise defined in this policy. 7.2 For the purpose of this policy document− “S” denotes a standard, an obligation, a requirement, specification, direction, condition and any interpretative, supplemental and transitional provisions that must be complied with. Non-compliance may result in enforcement action; and “G” denotes guidance which may consist of statements or information intended to promote common understanding and advice or recommendations that are encouraged to be adopted. Issued on: 23 December 2015
  4. BNM /RH/PD 028-1 Islamic Banking and Takaful Department Istisna` Page 4 / 44 “Islamic financial institution” or “IFI” means− (a) a licensed Islamic bank and a licensed takaful operator; (b) a licensed bank and licensed investment bank approved under section 15(1)(a) of the FSA to carry on Islamic banking business; and (c) a prescribed institution approved under section 129(1) of the DFIA to carry on Islamic banking business or Islamic financial business. 7.3 A glossary of terms used in this policy document is set out in Appendix 2. 8. Related Shariah rulings and policy documents 8.1 This policy document must be read together with other relevant legal instruments, policy documents or guidelines that have been issued by the Bank, in particular: (i) Shariah Advisory Council (SAC) rulings published by the Bank1; (ii) Guidelines on Product Transparency and Disclosure (BNM/RH/GL 0003); and (iii) Guidelines on Ibra’ (Rebate) for Sale-Based Financing (BNM/RH/GL 012-5). 1 Including Shariah resolutions in Islamic Finance, standards, circulars or any directive pertaining to Shariah matters issued by the Bank. Issued on: 23 December 2015