BNM Shariah parameter on Musharakah

Bank Negara Malaysia (BNM), the central bank, has published the draft of its latest Shariah parameter – “Draft of Shariah Parameter Reference 4: Musharakah contract (SPR4)” – the general aim of which is to provide a standard guidance on applying respective Shariah contracts in Islamic finance.

Bank Negara has already issued consultative concept papers for Ijarah (SPRC 2) and Murabahah   (SPRC 1) in July and August 2009. In fact, BNM in December 2009 published its latest draft concept paper – “A Shariah Parameter Reference 3 (SPRC 3) – on the Mudarabah contract. This paper was sent to various market players in the Islamic finance industry for feedback. This follows the publishing in October 2009 of “Concept Paper – Guidelines on Takaful Operational Framework,” which outlines the parameters governing the operational processes of Takaful business.

The Malaysian central bank is also finalizing work on the development, consultation and launching of further Shariah parameters on Istisna (construction financing) and Wadiah (current accounts), whose primary aim is to promote the harmonization of Islamic finance market practices in Malaysia.

Malaysia has championed the development of a modern scientific and systemic approach to the Shariah governance process in the Islamic finance industry.

The SPR4 will serve as guidance for Musharakah transactions and to ensure Musharakah business activities and innovations are within their risk management capacity and do not compromise the long-term sustainability of the business. The guidelines also aim to promote operational efficiency and best practices that would safeguard the interests of stakeholders and in particular participants.

The essential features attributable to a Musharakah contract, according to the draft SPR4, are capital, management, profit sharing, loss sharing and joint ventures.

The purpose of this Shariah parameter for Musharakah, says BNM, “is to provide a reference on the nature and features of the contract to the Islamic financial services industry, for the various financial instruments including Musharakah financing, Musharakah investment and Musharakah Mutanaqisah.”

As with all SPRs and guidelines, this latest parameter on Musharakah contracts is endorsed by the Shariah Advisory Council (SAC) of Bank Negara Malaysia. “Specific definition and guidelines on the basis of legitimacy in adopting the Musharakah contract are described to facilitate the understanding of the Shariah contract requirements. The features identified in this parameter shall serve to assist the Islamic financial services industry to identify, understand, apply and distinguish the contract from other contracts prevalent in the industry. The features identified and described in this parameter are extracted from the text of fatwas opined by Shariah boards or committees of financial authorities and financial institutions. For each of the fatwa, on a particular conditionality, activity, situation or context relating to the contract, the underlying concepts and principles were deduced and synthesized to guide the development of the Shariah parameter.”

BNM Shariah parameter on Musharakah

Bank Negara stresses that the features outlined in this parameter may serve as general guidance for the application of the Musharakah contract. Any practice by the Islamic financial institutions (IFIs) that are not specified in the parameter may be conducted as long as it does not contradict the features outlined in the parameter.

In other words, the guidelines that will become the actual Shariah Parameter, once adopted, will be the guidelines of last resort or the apex guidelines, which will be applicable to the Malaysian Islamic banking sector per se. The draft allows for other structures as long as they do not contradict the features of Musharakah principles outlined in SPR4.

The scope of the parameter, according to BNM, is confined to the Musharakah contract as endorsed by the SAC of BNM and adopted by the Islamic financial institutions under the purview of the central bank.

This parameter also takes into consideration pertinent mechanisms and contracts such as Ijarah, Wa’d, Wakalah, Kafalah and Rahn where relevant. These are identified as secondary features mentioned in this parameter.

The draft SPR4 defines Musharakah as an Arabic word that literally means sharing. The origin of Musharakah is Shirkah, which connotes engagement of two or more parties who have a common interest to form a partnership.

Technically, Musharakah is a contract between the partners to contribute capital to an enterprise or a venture, whether existing or new, or to owner of a real estate or moveable asset, either on a temporary or permanent basis. Profits generated by that venture or real estate or asset are shared in accordance with the terms of the Musharakah agreement, while losses are shared in proportion to each partner’s share of capital. Musharakah is a joint capital contribution by a number of parties to share in the profit and loss. – M.P