The SAC gave the initial go-ahead for the application at its 102nd meeting held in June 2010, but they were officially introduced by Bank Negara Malaysia at the end of August 2010.
According to the SAC, Islamic financial institutions are allowed to enter into a forward foreign currency transaction for hedging purposes based on an unilateral wa'd (promise) that carries a binding effect on the promisor.
Nevertheless, the SAC warns that "no consideration (or fee) is allowed to be charged on the promisee in view of the fact that upfront cash payment for forward currency transactions would lead to a bilateral wa'd which is not allowed by the Shariah." This, the SAC continues, is in line with the view of the majority of scholars who agree that an unilateral binding wa'd without any consideration is permissible in a forward currency transaction.
The concept of wa'd has gained prominence over the last few years as the Islamic finance industry has sought to innovate derivative products and in the context of the proliferation of the global Sukuk market. Wa'd in the context of commercial and financial dealings is generally accepted to denote a unilateral promise. It is this unilateral nature of the wa'd, according to international law firm, Allen & Overy, that potentially makes it a very useful and flexible tool in structuring Shariah-compliant transactions. The Shariah distinguishes a contract ('aqd) which is legally binding, from a promise (wa'd) which is not binding, except in the case of a vow or a promise made under oath before God, and therefore morally binding on the basis of faith.
According to the International Shariah Research Academy in Islamic Finance (ISRA), the Shariah research entity of Bank Negara Malaysia, generally, a binding unilateral promise has been applied in many Islamic banking products which are based on sale (bai'), leasing (ijarah) and partnership (shirkah) contracts. The promise or wa'd in this aspect is relevant in various respects. It can show the parties' commitment to complete the transaction according to their ultimate intention. It can be used as an alternative to put option and call option. In Islamic financing documents, wa'd concept is applied in a supplementary document to the master agreement, or is commonly known as purchase undertaking (an alternative to put option). Wa'd can also be used as a risk mitigation technique in the event of default or total loss. Wa'd is also widely adopted in Islamic capital market products as a tool for liquidity payment, as an exit mechanism, i.e., to redeem a Sukuk at maturity, and also for risk management and hedging purposes.
At the same time, the SAC also resolved that the payment of Takaful benefits from Participants' Risk Fund (which pools participants' tabarru' (voluntary donation) contributions to meet claims by participants), can be made contingent upon specific events beyond those arising from a defined financial loss or a misfortune. This is allowed subject to the agreement by the contracting parties.
"The decision," stressed the SAC resolution, "is made in line with the feature of the Takaful contract which is established based on the concepts of Tabarru' and Ta'awuni amongst the participants. These two concepts allow participants to agree on the events leading to payment of the Takaful benefits."
However, the resolution stipulates that the terms and conditions outlining the respective events must be made transparent to all the contracting parties in the Takaful contract. Thus, with the agreement from the participants, the scope of events prompting payment of Takaful benefits from the Participants' Risk Fund is not only limited to death, disability or calamity, but can also be extended to cover attainment of the contracted mandate. The features of the Takaful product shall be consistent with the principles of Shariah and meet the requirements issued by Bank Negara Malaysia.
Malaysia's Shariah governance process in Islamic finance is the most developed and institutionalised in the world. Bank Negara's Shariah Advisory Council (SAC) is perhaps the most proactive such Council in the world. In the last few months it has also deliberated on important issues such as Ta'widh (compensation), Ibra'(rebates) and Late Payment Charges in Islamic finance.
The 10-member Shariah Advisory Council is chaired by Dr. Mohd Daud Bakar, a prominent Shariah advisory in global Islamic finance, and includes seasoned and experienced scholars. The SAC is also unique in that it includes the prominent female Shariah advisory Dr Engku Rabiah Adawiah Engku Ali, who is also Associate Professor at the International Islamic University Malaysia.
What distinguishes Malaysia from other jurisdictions where Islamic finance is practiced is that in Malaysia the status and functions of the SAC and Islamic finance policy in general is enshrined in law. Bank Negara, for instance, is governed by the new Central Bank Act 2009 which came into force in November 2009 and which has direct relevance to the Islamic finance industry in several areas including the institutionalisation of BNM's Shariah Advisory Council (SAC) as the Shariah Authority of Last Resort for the Malaysian Islamic finance sector.
Similarly, the Securities Commission of Malaysia (SC), the securities regulator, is governed by the new (amended) Capital Market Services Act 2009, which strengthened the Commission's SAC by recognizing it in law as the central authority for the ascertainment of Shariah principles for the Islamic capital market. The new provisions also enable a licensed person, the stock exchange or a PLC or other persons to refer matters to the SAC for its advice and ruling which shall be binding on the person or entity concerned.
However, even Malaysia can occasionally get things confused. The Securities Commission Malaysia (SC), for instance, appointed a new Shariah Advisory Council (SAC) comprising eleven members who are serving for a period of two years effective 1 July 2010. The SAC is the central authority responsible for determining Shariah principles pertaining to the Islamic capital market in Malaysia.
The appointment of the eleven SAC members was officially announced by the Seri Paduka Baginda Yang di-Pertuan Agong (the Malaysian monarch) following amendments to the Capital Markets and Services Act 2007 (CMSA), which came into force on 1 April 2010.
The eleven members of the SAC comprise largely prominent and experienced Shariah scholars, academics and the sole market player in Rafe Haneef, Managing Director, HSBC Amanah, the Islamic finance division of the HSBC Group. While Haneef is an outstanding Islamic banker and has an Islamic legal background in terms of his education, there is a clear conflict of interest given that he represents a major market player in the capacity as a banker.
If for instance, the SAC has to rule in a Shariah matter which relates to a product or contention from HSBC Amanah or that of a rival bank of HSBC Amanah, Haneef's presence on the Council could be compromised from a conflict of interest issue. This has nothing to do with an individual's integrity but purely to do with the principle of conflict of interest. As such it is surprising that the Malaysian securities regulator did not consider the above in compiling its latest Shariah Advisory Council.
