The Shariah Advisory Council of Bank Negara Malaysia (the SAC) 30th Special meetingRelease Date: 10 Aug 2020
The Shariah Advisory Council (SAC) of Bank Negara Malaysia at its 30th special meeting on 14 July 2020 has made a ruling on practices of restructuring of Islamic financing facility during the COVID-19 crisis.
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 is cross referred 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 operational burden on Islamic financial institutions (IFIs).
A new agreement is required if the restructuring involves -
- the application of a different Shariah contract – for example a house financing that is originally based on musharakah mutanaqisah (diminishing partnership) is being restructured using ijarah; or
- a 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 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:
- 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;
- IFIs are allowed to charge a new profit rate on the new principal amount; and
- 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.
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