Ruling of the Bank's Shariah Advisory Council on the Adoption of Risk-Free Rate

The Shariah Advisory Council (SAC) of Bank Negara Malaysia at its 210^th meeting on 23 December 2020 has ruled that the adoption of risk-free rate (RFR) as an alternative benchmark rate to LIBOR, or as a fallback benchmark replacement rate after the permanent cessation of LIBOR, is permissible based on the following justification:

1. The compounding methodology is merely an arithmetic method in determining the term rate which does not affect compliance of the transactions with Shariah requirements;and
2. Uncertainty (gharar) from the adoption of average RFR or backward-looking term rate at the point of payment is mitigated via proper determination and disclosure of the ceiling price and formula to derive the periodic payment amount to the customer at the inception of the contract.

In transitioning to the alternative RFR, Shariah Committee of each IFI needs to determine the appropriateness of invoking the deemed consent mechanism to signify customers’ consent on the incorporation of the fallback provision in the contract’s terms and conditions.

Please refer to the attachment for more information