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12 Jan 2024

JC3 SC1 Updates Documents for Implementation of CCPT Classification by Financial Institutions

https://www.bnm.gov.my/-/jc3-sc1-ccpt-docs

https://www.bnm.gov.my/documents/20124/3770663/FAQs-for-BNM-CCPT-10Jan24.pdf, https://www.bnm.gov.my/documents/20124/3770663//DDQ-for-GP3-GP4-10Jan24.pdf, https://www.bnm.gov.my/documents/20124/3770663/Guidance-Notes-DDQ-GP3-GP4-10Jan24.pdf

Reading: JC3 SC1 Updates Documents for Implementation of CCPT Classification by Financial Institutions Share: 2 JC3 SC1 Updates Documents for Implementation of CCPT Classification by Financial Institutions Embargo : For immediate release Not for publication or broadcast before 1037 on Friday, 12 January 2024 12 Jan 2024 The Joint Committee on Climate Change Sub-Committee 1 (JC3 SC1) via the Climate Change and Principle-based Taxonomy Implementation Group (CCPT IG) and technical partner, World Wide Fund for Nature (WWF) Malaysia has updated the following documents to facilitate financial institutions' (FI) effective implementation of CCPT classification.  The updated documents are: Due Diligence Questions (DDQ) for assessment of BNM CCPT Guiding Principles 3 & 4 (GP3 & GP4)  The DDQ contains a foundational set of questions for mandatory adoption by FIs, in assessing compliance with GP3 and GP4, specifically client's negative impact on environment and climate (i.e., no significant harm) and measures undertaken to remediate the negative impact (i.e., remedial measures to transition). First published in April 2023, the DDQ has been refined to include GP3's scope on GHG emissions, as well as improve clarity and user-friendliness.  Guidance Notes (GN) to facilitate adoption of DDQ for GP3 & GP4:  The GN provides detailed guidance to support the adoption of DDQ for GP3 & GP4 assessment.  The document has been updated to include relevant data sources in the Climate Data Catalogue published by the Joint Committee on Climate Change Sub-Committee 5 (JC3 SC5) as well as other relevant assessment tools and references.  Frequently Asked Questions (FAQs):  The FAQ entails commonly asked questions on CCPT assessment. The document has been updated to include clarification on expectations entailed in BNM’s Dear CEO letter (CCPT Review 2023 - Observations and Expectations on Financial Institutions) issued on 14 November 2023.Bank Negara Malaysia 12 January 2024 © Bank Negara Malaysia, 2024. All rights reserved.

FAQs on BNM CCPT Frequently Asked Questions On BNM Climate Change Principle-based Taxonomy CCPT Implementation Group Version 4.0 | January 2024 FAQ on BNM CCPT | Version 4.0 1 Preface Joint-Committee on Climate Change Sub-committee 1 - Risk Management (“JC3 SC1”) was established in September 2019 as part of the Bank’s collective efforts to further strengthen and upskill the financial industry in climate action. In April 2021, Bank Negara Malaysia (BNM) and JC3 SC1 has published the Climate Change Principle-based Taxonomy (“CCPT”), a guidance document to facilitate financial institutions in identifying and classifying economic activities that could contribute to the climate change objectives. The CCPT aims to provide an overview of climate change risk and its impact to the financial system as well as promoting financial flows to activities that will support the transition to low carbon and climate resilient economy. Subsequent to this, as mandated by the JC3 SC1, the CCPT Implementation Group (“CCPT IG”) was established. The CCPT IG was initially co-led by Maybank and AIA Insurance Group, followed by Bank Islam and Etiqa, and represented by members of various domestic and foreign FIs, including banks, insurance companies, takaful operators as well as asset management companies. The CCPT IG serves as a collaborative platform for the financial industry players to share knowledge, experiences and common issues on the operationalisation of CCPT within their institution. This document was developed by the CCPT IG leads comprising of commonly asked queries raised by the CCPT IG members via discussions and deliberations during the CCPT IG meeting. Through this document, the CCPT IG provides its views and recommendations to guide financial industry players on the recommended best practices to effectively implement CCPT reporting requirements with an objective to promote coherent industry-wide adoption. Should there be any further clarification required, please direct your queries to ccptig@bnm.gov.my In January 2024, this document was further updated to provide greater clarification on areas pertaining to BNM’s Dear CEO letter issued 14 November 2023. Changes made are highlighted in green for ease of reference. mailto:ccptig@bnm.gov.my FAQ on BNM CCPT | Version 4.0 2 No. FREQUENTLY ASKED QUESTIONS - GENERAL 1. (a) (b) (c) Guiding Principles Assessment Question In reference to the BNM CCPT document, FIs would need to assess GP1 and GP2 at the transactional level while GP3, GP4 and GP5 at the overall business level. Could the classification be based on assessment conducted only at the overall business level? For example, financing to a solar panel manufacturer would qualify C1 classification for all its transactions. Answer No, FIs would still be required to conduct transactional (for GP1 & GP2) and overall business (GP3 & GP4) assessments on its client prior to deciding the appropriate CCPT classification. This is further explained below: - i. For GP1 and GP2 assessments, FIs should be assessing whether the purpose of financing/investment or use of proceeds support climate change mitigation and/or adaptation objectives. In situations where FIs cannot ascertain the purpose of financing/ investment due to various reasons, including absence of information in prospectus (e.g., for bonds), FIs can fall back to evaluate the primary economic activity of the company to determine whether the core operations of the company have a notable impact on climate change mitigation and adaptation efforts. For example, a bond issued by/working capital loan provided to a solar panel manufacturer can qualify to meet GP1. Conversely, a bond issued by/working capital loan provided to a mining company will not qualify to meet GP1. ii. For GP3 and GP4 assessments, FIs shall be guided by the CCPT IG’s GP3 and GP4 Due Diligence questionnaire. iii. For GP5 assessment, FI should be assessing whether the business activities contravene laws or regulation prescribed by the jurisdiction where the company operates. Question What is the threshold that FIs need to use in determining if the client has made substantial contribution in meeting GP1 and/or GP2? Answer FIs are not required to provide specific thresholds and quantitative justifications to substantiate their GP1 and/or GP2 assessments. If the exposures at the transaction level align with the activities outlined in Appendices 3 and 4 of the CCPT GD, then these activities can be considered as meeting GP1 and/or GP2. Question Is the scope of coverage for GP3 limited to environmental factors? Answer GP3 covers environmental and climate factors. Under environmental factors, FIs should assess clients’ overall business impact on pollution, loss of biodiversity and use of energy, water and other natural resources. Under climate factors, FIs should assess the significant GHG emissions and adverse impact to climate arising from overall business operations. FAQ on BNM CCPT | Version 4.0 3 No. FREQUENTLY ASKED QUESTIONS - GENERAL (d) (e) (f) (g) (h) Question Should the scope of GP3 and GP4 assessment include client’s supply chain? Answer FIs are encouraged to conduct supply chain assessment for GP3 and GP4 where possible, on best effort basis. Question How does transactional level assessment apply to fixed income assets and equities? Answer In general, transactional level assessments are to be conducted by looking at the use of proceeds, i.e., whether the proceeds are being channelled to activities that will contribute to GP1 and GP2 objectives. For fixed income securities, assessments shall be based on information specified in the prospectus. Refer to Q1a(i) for more details. Question Should the guiding principles assessment be expanded to include assessment for facilities that the client has with other FIs? Answer No, the guiding principles assessment shall be conducted only to FIs’ own facility. Question How should FIs justify GP3 and GP4 assessment? Answer The justification to support GP3 and GP4 assessment can be both qualitative and quantitative. Quantitative justification may entail providing data (e.g., GHG emissions, land usage, energy consumption metrics, and the volume of water utilised by their clients). For this purpose, FIs should consider sourcing for relevant data from the SC5 data catalogue. In the absence of available data, FIs to consider using proxy (e.g., relative asset size, revenue, energy consumption), where relevant. More importantly, the justification should be properly documented by FIs. Question Assuming an FI lends to an IHC which owns companies in a myriad of activities, is there an expectation to assess compliance of GP3 and GP4 at the investee company level? Answer Yes, FI should still assess GP3/GP4 at investee company level, but to focus on investee companies with the highest utilisation of funds provided by the IHC, or investees with the most substantial impact to the IHC's performance. Example of proxy info is investees' utilisation of funds, revenue contribution or investment proportion, to IHC. Essentially, the IHC's significant harm to environment and remedial measures are premised based on its most significant investee companies. FAQ on BNM CCPT | Version 4.0 4 No. FREQUENTLY ASKED QUESTIONS - GENERAL 2. (a) CCPT classification table Question How should exposures that do not meet GP1 and/or GP2, but meet GP3 be classified? Answer Such exposures will be reported under C5b. Kindly refer to updated CCPT classification table below: GP1 GP2 GP3 GP4 Classification GP1 or GP2 or both ✓ C1 Supporting GP1 or GP2 or both ✘ ✓ C2 Transitioning ✘ ✘ ✓ C3 GP1 or GP2 or both ✘ ✘ C4 Watchlist ✘ ✘ ✘ C5a ✘ ✓ C5b 3. (a) (b) Classification of exposures in ‘not elsewhere classified’ and ‘excluded’ from reporting Question Under what circumstances that loans/financing and financial investments can be reported under ‘not elsewhere classified’? Answer Loans/financing and financial investment should only be reported under ‘not elsewhere classified’ if the exposures are pending reviews. These exposures should be gradually classified by January 2025. Question What are the exposures that are excluded from CCPT reporting? Answer a. Corporate credit card loans/financing facilities; b. Current account excess that is reported as overdraft loans/financing; and c. Financial investment instruments exempted from CCPT reporting (refer to list provided in reporting template). 4. (a) Certification and Global Environmental Standards Question In reference to the CCPT document, FIs could rely on certification as one of the criteria in assessing GP3. i. Shall GP3 be considered as met if only a small subset of a client’s business is certified? For example, the client is an integrated palm oil company but only its refinery business is certified. ii. Is it sufficient for FIs to rely on certification obtained to decide as to whether the client’s overall business activities are meeting GP3? FAQ on BNM CCPT | Version 4.0 5 No. FREQUENTLY ASKED QUESTIONS - GENERAL (b) Answer i. To be considered as meeting GP3 criteria, assessments are to be conducted on the client’s overall business, rather than a small subset of the client’s business. ii. While certification is not mandatory, the crucial aspect lies in FIs comprehending the certification's content and ensuring its adequacy in addressing the relevant GP3 criteria. In cases where the certification lacks comprehensive coverage, FIs should conduct additional assessments on client’s overall business activities to ascertain whether the client meets GP3 requirements. Question How should FIs conduct assessment for areas where local policy requirements/standards differ from global environmental standards? Answer In instances where local requirements are contradictory to global environmental standards, the local requirements shall prevail. 5. (a) (b) Validation and Reconciliation of CCPT Classification and Exposures Question Would there be any penalty for wrongful CCPT classification? Answer While currently there will be no penalty imposed for wrongful classification, FIs are strongly encouraged to ensure accuracy of the CCPT classification. Question Are there any recommendations for reconciliation of CCPT exposures? Answer The CCPT exposures reported should reconcile with exposures reported in the financial statements for the same period, where relevant. This should also tie in with the numbers reported for statistical submission (total and by sector/segment) to the Bank and the same data governance procedures shall apply. 6. Question How should FIs classify new loans/financing and financial investments under ‘prohibited activities’? Answer It is highly unlikely that FIs will be investing in prohibited activities upfront (during onboarding). However, in the event that customers are subsequently found to be involved in illegal activities (post on-boarding), FIs should then reassess and reclassify these exposures as ‘prohibited activities’ while determining the next course of action. 7. Question Do FIs need to review the classification of existing and additional loans/financing and investments, and how frequent should the review be conducted? Answer Yes, FIs need to proactively review existing loans/financing and investments (for event triggered accounts) and reassess additional loans/financing and investments to ensure that the CCPT classification are reflecting the current state of affairs at reporting date. For normal accounts, CCPT classification review should be conducted at least once a year. FAQ on BNM CCPT | Version 4.0 6 No. FREQUENTLY ASKED QUESTIONS - GENERAL 8. Question In the context of Special Purpose Vehicle (“SPV”), a subsidiary created by a parent company commonly to isolate financial risks, could the parent’s environmental or climate initiatives be considered as part of the SPV’s remedial measures to transition? Answer For a company’s environmental or climate initiatives to be recognized as part of its subsidiary’s remedial measures, the following principles should be evaluated: - i. Depth of relationship between the parent and subsidiary i.e. power of control a parent has on its subsidiary to show evidence that the subsidiary is legally bound to adopt and is adopting its parent’s remedial measures to transition; and ii. Whether or not the parent’s environmental or climate initiatives addresses subsidiary’s harm caused to the environment and other climate risk concerns identified from GP3 assessment. Please note that this principle could be applied to all types of parent-subsidiary relationship other than SPV. - The remaining page is left blank intentionally - FAQ on BNM CCPT | Version 4.0 7 No. FREQUENTLY ASKED QUESTIONS - LOANS & FINANCING (1) & (2) 9. Question In reference to Loans & Financing (1), does the classification of ‘others’ refer to the aggregation of industry sectors other than those listed in the reporting template? Answer Yes, all loans & financing are to be reported based on the industry sectors listed in the reporting template while the remaining are to be aggregated under ‘others’. 10. Question In reference to Loans & Financing (1), tables (a) and (b) refer to the reporting template applicable to Business non-SME and SME loans. If FIs offer loans only to retail customers, would these FIs be required to report their retail mortgages under the real estate sector classification? Answer No, FIs that offer loans to only retail customers are not required to submit reporting for tables (a) and (b). Retail mortgage loans/financing are to be reported under Loans & Financing (2) tables (c) to (f), provided that the loans/financing satisfy FIs’ green/sustainable product criteria. 12. Question In reference to Loans & Financing (1) and (2), does the reporting of off-balance sheet exposures include undrawn commitments? Answer Yes, the reporting of off-balance sheet exposures for loans/financing does include undrawn commitments. 13. Question In reference to Loans & Financing (1) and (2), does the classification of outstanding loans/financing include defaulted/impaired accounts? Answer Yes, the reporting for outstanding loans/financing does include defaulted/impaired accounts that has yet to be written-off. 14. Question Does the scope of CCPT reporting cover exposures from vendor financing program? If yes, how shall the CCPT assessment be conducted? Answer Yes, the scope of CCPT reporting does cover exposures from vendor financing program. Vendor financing program is a form of lending in which FIs grant working capital credit lines to a vendor who then recommends extension of the credit lines (commonly in the form of corporate purchasing cards) to its principal clients. The credit lines shall be utilised to purchase vendor’s products and inventories. In such scenario, CCPT assessment shall be based on the credit lending principles i.e. to whom the FIs has exposure with. 15. Question How should loans/financing to high net worth clients be classified? Should the transaction be reported under Loans & Financing (1) for non-retail or Loans & Financing (2) for retail product? Answer FAQ on BNM CCPT | Version 4.0 8 No. FREQUENTLY ASKED QUESTIONS - LOANS & FINANCING (1) & (2) The best way to determine how CCPT should be classified and treated (whether retail or non- retail) is to look at the segmentation of these clients under FIs’ regulatory reporting. If the client falls under retail segmentation, the exposure should be aggregated at product level and reported under Loans & Financing (2). On the other hand, if the client falls under non-retail segmentation, the transaction should be classified C1 to C5 and to be reported under Loans & Financing (1) accordingly. 17. Question In reference to Loans & Financing (2), does the scope of reporting cover personal unsecured loans/financing and credit card facilities? Answer Yes, only if the above mentioned facilities meet the FIs’ green/sustainable product criteria. 18. (a) (b) (c) (d) (a- c) (d) Loans & Financing (2) – Retail Green/Sustainable Product Question What is the scope of 'sustainable product' in this context? Does it only include environmental factors? For auto loan portfolio, shall fuel efficient vehicles and alternatively-fueled vehicles be considered as meeting green/sustainable product criteria? Shall other retail consumer products such as ASB and unit trust loans be considered as green/sustainable? What should be reported in Loans & Financing (2) if FIs do not provide green/sustainable retail loans/financing? Answer While the Bank does not specify scope or criteria for sustainable financial products, the BNM CCPT guiding principles may be used as a baseline in developing the features of FIs’ green/sustainable financial products. FIs should leave the Loans & Financing (2) blank. - The remaining page is left blank intentionally - FAQ on BNM CCPT | Version 4.0 9 No. FREQUENTLY ASKED QUESTIONS - FINANCIAL INVESTMENT 19. Question What are the figures to be reported for new and outstanding financial investments? Is it based on outstanding amount or approved limit? Answer The reporting figures for new and outstanding financial investments will be based on outstanding amount. 20. Question Would the reporting of new and outstanding financial investments (FVOCI and amortised cost) be based on exposures that are still in the book at the end of reporting period? Answer a) New financial investment for the 6 month period: To reflect the movements in investment assets, the reporting would be based on the change of outstanding amount between two reporting periods (i.e. the difference between outstanding amount for the reporting period and outstanding amount reported for the last reporting period). For example: New financial investments for the 6-month period ended 31 December 2022 = Outstanding financial investments as at 31 December 2022 – Outstanding financial investments as at 30 June 2022 b) Outstanding financial investments as at reporting period: Equivalent to the outstanding amount of exposures that are still in the book at the end of reporting period. 21. Question Would real estate properties purchased by FIs be considered as financial investment asset? Answer No, real estate properties purchased by FIs (regardless of the purpose) would not be considered as financial investment asset. The CCPT reporting template requires FIs to report financial assets as per MFRS 9 financial instruments definition. Real estate properties (physical assets) would not be considered as financial assets as they were not traded on the financial markets and the value was not derived from contractual claims. FIs’ investments in Real Estate Investment Trusts (REITs) on the other hand, would be considered as financial investment assets. In addition, the CCPT IG opined that FIs’ ownership of real estate properties would have been included in its Scope 1 and 2 GHG emissions computation. Hence, the assets should not be reported as part of the CCPT reporting. 22. (a) Scope of Reporting for Financial Investment Assets Question What are the types of financial investment assets subjected to the CCPT classification and reporting? FAQ on BNM CCPT | Version 4.0 10 No. FREQUENTLY ASKED QUESTIONS - FINANCIAL INVESTMENT (b) (c) (d) Answer All financial investment assets in the banking book as reported in the financial statements except those that are exempted as per 20 (b). Question What are the types of financial investment assets exempted from CCPT classification and reporting? Answer The types of financial investment assets exempted from CCPT classification and reporting are as follows:- i. Instruments issued by sovereign entities (including supranational organisations) ii. Instruments issued by Bank Negara Malaysia iii. Collective investment scheme (CIS) iv. Exchange traded funds (ETS) v. Derivatives and structured products vi. Fixed and call deposits/placements with FIs (classified under amortized cost by ITOs) vii. Investment-linked funds (applicable to ITOs only) Question Are corporate bonds guaranteed by sovereign entities, government-owned entities and Bank Negara Malaysia subjected to the CCPT classification and reporting? Answer Yes, corporate bonds guaranteed by these entities are required to be classified and reported. While it is noted that the information to conduct CCPT assessment for financial instruments issued by these entities may not be sufficient or available at this juncture, but in the spirit of ensuring that financial flows are channeled towards climate resilient and low carbon economy, the CCPT classification and reporting for these financial instruments should not be exempted. Question Does the scope of CCPT reporting include financial instruments issued by local and foreign issuers? Answer Yes, the scope of CCPT reporting include financial instruments issued by both local and foreign issuers. 23. Question Should the reporting requirement for financial investment assets be based on MFRS 9 or MFRS 139 requirements? Answer Financial investment assets should be reported based on MFRS 9 requirement for classification of FVTPL, FVOCI and financial investments at amortised cost. Please note that the MFRS 139 requirement is only applicable to licensed insurer that has applied for temporary exemption from the MFRS 9 requirement. 24. Question Are the CCPT reporting requirements for financial investment assets the same for both commercial banks and ITOs? FAQ on BNM CCPT | Version 4.0 11 No. FREQUENTLY ASKED QUESTIONS - FINANCIAL INVESTMENT Answer No, the CCPT reporting requirements for financial investment assets are different for commercial banks and ITOs. The reporting for FVTPL is only applicable to ITOs while investment-linked funds are exempted. 25. Question What is the rationale behind reporting of FVTPL (trading book instruments) for ITOs? Answer The rationale is that ITOs could hold FVTPL instruments up to maturity in contrast to the banking institutions. 26. Question Should soft underwritten exposures be included in the CCPT reporting? Answer No, soft underwritten exposures are to be excluded from the CCPT reporting. 27. Question Is there any reference provided for FIs to classify financial investment assets and instruments to streamline the CCPT classification across financial industry? Answer No, FIs are required to make own assessment on the CCPT classification for financial investment assets and instruments. While the Bank does not have a specific reference for classifying these assets, the CCPT guiding principles may be used as a baseline for assessment and classification. - The remaining page is left blank intentionally - FAQ on BNM CCPT | Version 4.0 12 No. FREQUENTLY ASKED QUESTIONS - INSURANCE / TAKAFUL 28. Question Would life insurers and family takaful operations be required to classify and report investment assets from its investment-linked policy? Answer No, life insurers and family takaful operators would not be required to classify and report investment assets from their investment-linked policies. 29. Question Does the Bank plan to extend the classification of assets by industry sector categorisation to insurance books? Answer As communicated in various platforms, the Bank is currently exploring the applicability of CCPT for insurance and takaful underwriting under Phase 2. 30. Question Does the reporting apply to new products/investments starting from January 2022 onwards? Answer The reporting will be applicable to both new and existing products/investments. Kindly refer to the headings of each table and the Instructions section of the 'Insurance or Takaful Cover' tab. 31. Question Is the information required for Claim Count, Gross Claims Incurred and Net Claims Incurred generated based on the corresponding policy/certificate count for each cover between the corresponding periods or generated based on all claims that occur between the corresponding periods? Answer As per the CCPT Reporting Template Glossary, the Gross Claim Incurred and Net Claims Incurred refer to the claims paid plus increase/less decrease in provisions for outstanding claims liabilities during the 6 month period, gross and net of reinsurance/retakaful recoveries respectively, regardless of the date of occurrence of the claims. 32. Question Do the Gross Claims Incurred and Net Claims Incurred inputs refer to the relevant product claims experience (inclusive of non-flood claims) or confined to the claims related to flood events only? Answer For Crops/Plantations, Electric/Hybrid cars, Solar-energy production, Wind-energy production and Hydro-energy production, the ‘Gross Claims Incurred’ and ‘Net Claims Incurred’ inputs refer to the relevant product claims experience (inclusive of non-flood claims). For Flood under Motor class, Flood under Fire class and Flood under Other class, please refer to the response in question no. 31 below. 33. Question In reference to Insurance or Takaful Cover (1), some FIs are unable to separate the gross earned premium/contribution and net earned premium/contribution for the flood peril and non-flood FAQ on BNM CCPT | Version 4.0 13 No. FREQUENTLY ASKED QUESTIONS - INSURANCE / TAKAFUL perils for the items Flood under Motor class, Flood under Fire class and Flood under Other class. As such, do they include both flood claims and non-flood claims in the Gross Claims Incurred and Net Claims Incurred? Answer For the items Flood under Motor class, Flood under Fire class and Flood under Other class, the Bank’s objective is to monitor the policy/certificate and claims exposure on flood only. However, the Bank takes note of the difficulties for some FIs to separate the Gross Earned Premium/Contribution and Net Earned Premium/Contribution for the flood peril and non-flood perils. In this regard, the items 13, 14, 15 and 17 of Glossary in the reporting template are superseded with the following definitions: Tab No. Data Item Remarks Insurance or Takaful Cover (1) and (2) 13 Flood under Motor class Refers to all Motor policies/certificates (including for electric/hybrid cars) that cover flood and the premium/contribution for flood can be segregated. 14 Flood under Fire class Refers to all Fire policies/certificates that cover flood and the premium/contribution for flood can be segregated. These shall exclude covers for crops/plantations as well as solar- energy, wind-energy and hydro-energy production. 15 Flood under Other class Refers to all other policies/certificates that cover flood. These shall exclude covers for crops/plantations as well as solar-energy, wind-energy and hydro-energy production. For gross earned premium/contribution and net earned premium/contribution only, these may include all basic covers and add- ons/extensions that cover both flood peril and non-flood perils that cannot be separated from the flood peril. In addition, Motor and Fire policies/certificates that cover both flood peril and non-flood perils that cannot be separated from the flood peril shall be reported here. 17 Electric/Hybrid cars Refers to all Motor policies/certificates that cover electric/hybrid cars. FAQ on BNM CCPT | Version 4.0 14 No. FREQUENTLY ASKED QUESTIONS - INSURANCE / TAKAFUL The Gross Claims Incurred and Net Claims Incurred shall exclude non-flood claims. For better clarity, FIs shall report the data items under each class based on the following illustration: The Bank expects FIs to improve their internal capabilities to separate the Gross Earned Premium/Contribution and Net Earned Premium/Contribution for the flood peril and other non- flood perils over time. 34. Question Should Contractors' All Risks policy / Erection All Risks policy be included as part of covers for Flood under other class? Answer Yes, if the above mentioned policies include flood cover. 35. Question Which classes of flood data are required for CCPT reporting? Answer Flood data is only required for ‘Flood Cover under Motor/Fire/Other class’. For other classes, please provide the total exposure for both flood and non-flood covers. 36. Question Would this new CCPT reporting replace the current quarterly flood exposure reporting (i.e. by state)? Answer Yes, the new BNM CCPT reporting (version Sep 2022) replaces the current quarterly flood exposure reporting. 37. Question Which worksheet should be populated for policy with flood coverage attached to the standalone green product and would it be acceptable to indicate the policies attached with the premium for flood (if bundled with other products)? Number of Policies/ Certificates Number of Claims Gross Earned Premium/Contribution (RM) Net Earned Premium/Contribution (RM) Gross Claims Incurred (RM) Net Claims Incurred (RM) Flood under Motor class Flood Only Flood Only Flood Only Flood Only Flood Only Flood Only Flood under Fire class Flood Only Flood Only Flood Only Flood Only Flood Only Flood Only Flood under Other class Flood Only Flood Only All Perils (Flood & Non-Flood) All Perils (Flood & Non-Flood) Flood Only Flood Only Insurance/Takaful cover for For the period from 1 Jan 2022 to 30 Jun 2022 FAQ on BNM CCPT | Version 4.0 15 No. FREQUENTLY ASKED QUESTIONS - INSURANCE / TAKAFUL Answer For policy with flood coverage attached to the standalone green product, FIs are to populate the data in Insurance or Takaful Cover (2). This includes any other additional insurance/takaful products that aid the management of climate-related risks and are not covered by Insurance or Takaful Cover (1). Please provide 'all basic covers and add-ons/extensions that cover flood peril and other non-flood perils that cannot be separated from the flood peril' as per the instructions provided. 38. Question What are the products covered under Insurance or Takaful Cover (2)? Answer Insurance or Takaful Cover (2) is applicable to all Insurance/Takaful products that aid the management of climate-related risks, i.e. not just standalone green products. 39. Question Should environmental liability product be reported under Insurance or Takaful cover (2)? Answer Yes, environmental liability product should be reported under Insurance or Takaful cover (2) if an ITO underwrites this business. 40. Question What is the rationale behind the use of Gross Earned Premium instead of Gross Written Premium? Answer The rationale of using Gross Earned Premium instead of Gross Written Premium is to be consistent with the basis of computing claims ratio (i.e. Gross Claimed Incurred divided by Gross Earned Premium) to assess the adequacy of premium earned for paying claims incurred. Gross Written Premium includes both earned and unearned premium which is deemed not fit for purpose. 41. Question Should the Gross Claimed Incurred count correspond to the policy underwritten during the accounting period? Answer Yes, the Gross Claims Incurred count should be based on all claims that occur during the accounting period. 42. Question Is there any guidance provided on categorizing the data if the required information is unavailable via system? Answer FAQ on BNM CCPT | Version 4.0 16 No. FREQUENTLY ASKED QUESTIONS - INSURANCE / TAKAFUL In reference to the 'Instructions' section, the data should be provided on a best effort basis and an ITO should ensure that requisite efforts are made to obtain the required data. 43. Question If there is a Fire or All Risks policy being arranged to insure solar panel installed on roof top for energy savings or in return, the energy be generated is sold back to TNB, where should we classify the risk? Answer This should be reported under "Solar-energy production". 44. Question Where the Bioenergy risks should be reported? Answer Bioenergy risks should be reported in the Insurance or Takaful Cover (2). 45. Question In reference to Insurance or Takaful Cover (1), where should ‘Directors and Officers Liability’ cover for hydro-energy production be reported? Answer ‘Directors and Officers Liability’ cover for hydro-energy production should be reported under hydro-energy production cover. 46. Question For General Insurance, the largest segment is Motor where it is catered for individuals. How would GP1 and GP2 be applied to individuals? Answer Currently this provision is out of scope, the CCPT reporting template does not require it at the moment. 47. Question Are policy loans required to be classified in the CCPT reporting template? Answer Policy loans are considered individual loans as opposed to retail loans. As such, they are not required to be classified. - The remaining page is left blank intentionally - FAQ on BNM CCPT | Version 4.0 17 Acronyms ASB Amanah Saham Bumiputera CCPT Climate Change Principle-based Taxonomy C1 Category 1 – Climate supporting C2 Category 2 – Transitioning C3 Category 3 – Transitioning C4 Category 4 – Watchlist C5 Category 5 - Watchlist FI Financial Institution FVOCI Financial investments at fair value through other comprehensive income FVTPL Financial investments at fair value through profit and loss GP1 Guiding Principle 1 – Climate change mitigation GP2 Guiding Principle 2 – Climate change adaptation GP3 Guiding Principle 3 – No significant harm to the environment GP4 Guiding Principle 4 – Transition and remedial efforts GP5 Guiding Principle 5 – Prohibited activities GHG Greenhouse Gas ITO Insurance and Takaful Operators MFRS Malaysia Financial Reporting Standards REIT Real Estate Investment Trust SME Small Medium Enterprise FAQ on BNM CCPT | Version 4.0 18 Acknowledgements PRIMARY AUTHORS Commercial Bank Insurance Company ▪ Maybank ▪ AIA Insurance CONTRIBUTORS Commercial Bank Insurance Company ▪ Agrobank ▪ AIA General ▪ Bangkok Bank ▪ AIA Public Takaful ▪ Bank Islam ▪ AIG ▪ Bank of America ▪ Am General Insurance ▪ CIMB Bank ▪ Am Met Life ▪ Hong Leong Bank ▪ Etiqa ▪ Mizuho Bank Malaysia ▪ Gibraltar BSN Life ▪ OCBC Al-Amin Bank ▪ Great Eastern Life Insurance ▪ OCBC Bank Malaysia ▪ Hong Leong Assurance ▪ Public Bank ▪ Hong Leong MSIG Takaful ▪ RHB Bank ▪ Liberty Insurance ▪ Standard Chartered Malaysia ▪ Lonpac Insurance ▪ Malaysian Life Reinsurance ▪ Manulife Insurance Asset Management Company ▪ MCIS Insurance ▪ MPI General ▪ MNRB Holdings ▪ Pacific & Orient Insurance Co ▪ UOB Asset Management ▪ Prudential Assurance Malaysia ▪ Sun Life Malaysia Assurance ▪ Swiss Re Malaysia ▪ Syarikat Takaful Malaysia Keluarga ▪ Syarikat Takaful Malaysia Am ▪ Tokio Marine Life Insurance Malaysia ▪ Tokio Marine Insurance Malaysia ▪ Tune Malaysia ▪ Zurich Insurance A special thanks to BNM Climate Change Team. Due Diligence Questions for BNM CCPT GP3 & GP4 PUBLIC Due Diligence Questions In assessing BNM Climate Change Principle-based Taxonomy’s Guiding Principles 3 and 4 CCPT Implementation Group Version 2.0 | January 2024 2 Preface Joint Committee on Climate Change Sub Committee 1 - Risk Management (hereinafter referred to as the “JC3 SC1”) was established in September 2019 as part of Bank Negara Malaysia (BNM) and Securities Commission’s (SC) collective effort to further strengthen and upskill the financial industry in climate action. In April 2021, BNM and JC3 SC1 published the Climate Change Principle-based Taxonomy (hereinafter referred to as the “CCPT”), a guidance document to facilitate financial institutions (hereinafter referred to as “FIs”) in identifying and classifying economic activities that could contribute to the financial sector’s climate change objectives. The CCPT aims to provide an overview of climate change risk and its impact to the financial system as well as promoting financial flows to activities that will support just transition to low carbon and a climate resilient economy. Subsequent to this, the CCPT Implementation Group (hereinafter referred to as the “CCPT IG”) was established under the purview of the JC3 SC1. The CCPT IG was initially co-led by Maybank and AIA Insurance Group, followed by Bank Islam and Etiqa, and represented by members of various domestic and foreign FIs, including banks, insurance companies, takaful operators as well as asset management companies. The CCPT IG serves as a collaborative platform for financial industry players to share knowledge, experiences and common issues on the operationalisation and implementation of CCPT within their respective institutions. As part of the effort to standardise CCPT classification across the financial industry and promote consistency for reporting and analyses, the CCPT IG Co-Leads in collaboration with WWF-Malaysia, have developed this document that comprises structured due diligence assessments designed to evaluate a client’s impact to climate change and measures undertaken to remediate the negative impact. This is in line with the questions set out in the CCPT Guiding Principle 3 (hereinafter referred to as “GP3”) ‘no significant harm to the environment’ and Guiding Principle 4 (hereinafter referred to as “GP4”) ‘remedial measures to transition’. As such, FIs are required to embed these assessment questions into their existing due diligence and screening criteria. Upon issuance of BNM’s Dear CEO letter on 14 November 2023, this document has been refined to improve its clarity and user-friendliness, and to expand GP3 assessment to cover GHG emissions. Should there be any clarifications required on the content of this document, please direct your queries to ccptig@bnm.gov.my. mailto:ccptig@bnm.gov.my 3 General Guide 1. 2. 3. 4. 5. 6. 7. 8. This document consists of foundational due diligence questions to assess compliance with GP3 and GP4. FIs may also refer to the accompanying guidance notes to support the due diligence assessment process. The following GP3 and GP4 assessments are to be conducted at the borrowing entity/ customer (hereinafter collectively referred to as the “Client”) level only. The due diligence consists of questions covering these 5 categories: i. General ii. Pollution iii. Ecosystem & Biodiversity iv. Efficient Use of Resources v. GHG Emissions The due diligence in each of these 5 categories consists of risk identification and management questions. Response to all risk identification questions is mandatory. If the response to the risk identification question is ‘yes’, the Client is required to proceed to answer the corresponding risk management questions of that category. The Client would be deemed to be in compliance with GP3 ‘no significant harm to the environment’ provided that the Client has commenced1 at least 1 remedial measure for every concern identified from the risk identification questions from each category. This may include having relevant sustainability certifications such as RSPO, MSPO, FSC, PEFC, GRESB, BREEAM or ISO 14001 to address the harm identified. The Client must ensure that all remedial measures are able to address all concerns which have been identified as causing significant harm to the environment for the Client to comply with GP3. For example, if a Client is deemed to cause significant harm in 4 out of the 5 above categories, the Client will only comply with GP3 provided that all remedial measures are able to address all the concerns in the 4 identified categories. Hence, the Client will not be deemed to comply with GP3 should the remedial measures only address say 3 out of the 4 categories with concerns which have been identified as causing significant harm to the environment. Non-compliance with GP3 signifies that the Client is causing significant harm to the environment. Hence, it is mandatory for the Client to proceed in answering all due diligence questions in GP4 to ascertain the remedial plans. Remedial plans need to be time-bound, feasible to implement and effectively monitored to be recognised under GP4. FIs should support their GP3 and GP4 assessments with relevant and adequate justification which have the following attributes: • With documentary evidence. • For assessment that requires quantitative justification, FIs to leverage customers' declaration, coupled with data points already available in SC5’s Data Catalogue. • In instances where data is unavailable, the utilisation of proxies is recommended. • Where possible, to benchmark Client's data against industry standards when assessing its significance. Summary Risk Identification Risk Management Yes/ No Yes/ No General Pollution Ecosystem & Biodiversity Efficient Use of Resources GHG Emissions GP3 – No significant harm to the environment Met/ Not met GP4 – Remedial measures to transition Met/ Not met 1 Where the implementation of the remedial plan has started (i.e., beyond the planning stage), but not necessarily have been completed. For example, where the remedial plan entails the installation of solar panels, the remedial plan would be deemed to have commenced when the installation of solar panels has started but may not have been completed. 4 Due Diligence Questions: GP3 – No Significant Harm to the Environment No Question Answer Remarks Yes No GP3 – General 1.1 Risk identification (General) a) Has there been any legal, compliance issues and/or complaints, negative coverage received from media/NGOs etc. associated with the Client’s environmental performance in the last 3 years? Provide details of the nature of the incident, and whether there was any corresponding regulatory action (enforcement/ prosecution/ quantity of fine). 1.2 Risk management (General) a) Are there any remedial measures which have commenced or are on-going to address the identified issues or complaints above? Provide details of measures undertaken to address the concerns. GP3 – Pollution 2.1 Risk identification (Pollution) a) Are any of the Client’s activities involved in the release, and/or use of: • Hazardous chemicals/materials; and/or • Waste/pollutants (other than the above) that cannot be recovered, reused, and/or disposed of in an environmentally sound manner? Provide details of hazardous chemical/materials and/or waste/pollutants released and/or used. 2.2 Risk management (Pollution) a) Are there any remedial measures which have commenced or are on-going: • to avoid or reduce the use of hazardous chemicals/materials and waste/pollutants within the Client’s operations; and/or • which entail environmentally sound disposal mechanisms? Provide details of measures undertaken to address the concerns. GP3 – Ecosystem & Biodiversity 3.1 Risk identification (Ecosystem & Biodiversity) a) Are the Client’s operations located in or near environmentally sensitive areas (“ESAs”) or key biodiversity areas (“KBAs”)? Provide details of the ESAs and KBAs which are located at the Client’s operating areas. b) Does the Client’s operations create negative impacts on biodiversity and surrounding ecosystem? Provide details of negative impact on biodiversity and surrounding ecosystem. 5 3.2 Risk management (Ecosystem & Biodiversity) a) Are there any remedial measures which have commenced or are on-going on the protection and conservation of biodiversity and surrounding ecosystem which are impacted by the Client’s operations? Provide details of measures undertaken to address the concerns. GP3 – Efficient Use of Resources 4.1 Risk identification (Efficient Use of Resources) a) Does the Client’s core activities involve significant consumption of: • Water • Natural resources (e.g. fossil fuel, minerals, timber, etc.)? Provide details of the significant consumption. 4.2 Risk management (Efficient Use of Resources) a) Are there any remedial measures which have commenced or are on-going to monitor, reduce and improve efficiencies in resource consumption? Provide details of measures undertaken to address the concerns. GP3 – GHG Emissions 5.1 Risk identification (GHG Emissions) a) Do the Client’s core activities lead to significant greenhouse gas (“GHG”) emissions? Provide details of the significant emissions. 5.2 Risk management (GHG Emissions) a) Are there any remedial measures which have commenced or are on-going to reduce GHG emissions and/or in relation to de-carbonisation efforts? Provide details of measures undertaken to address the concerns. 6 Due Diligence Questions: GP4 – Remedial Measures to Transition No Question Answer Remarks Yes No Note: This section consists of questions covering remedial measures which are planned but the implementation has yet to commence at the time of the assessment. Kindly note that measures described should address the specific areas of harm identified in the above GP3 assessment. a) Harm identified in GP3 where: • remedial measures have been identified/ planned but yet to commence; or • no remedial measures have been identified/ planned. To list based on GP3 assessment above. b) Has the Client established time-bound remedial measures to address the specific significant harm identified in (a)? To elaborate details of remedial measures established by the Client. c) Does the Client plan to monitor the progress and effectiveness of the remedial measures against an appropriate set of performance evaluation criteria (including subsequent review conducted post- remediation), indicators and time-bound targets? To explain progress of remedial measures planned at the Client level for the above. d) Does the Client have financial capacity and/or secured financing facilities to fund its remedial measures? Guidance Notes for DDQ for GP3 & GP4 1 Guidance Notes In answering the due diligence questions for Guiding Principles 3 and 4 2 Due Diligence Questions: GP3 – No Significant Harm to the Environment No Guidance Notes GP3 – General 1.1 Risk identification (General) a) Use existing internal databases or any other publicly available source to screen for the Client’s related legal/ negative news vis-à-vis climate/ environmental related issues. see SC5 Climate Data Catalogue Data Items: No.127 - Litigation claims and cases 1.2 Risk management (General) a) The client should list down measures being taken to address the climate/ environmental concerns. This may include obtaining necessary approvals or permits under the jurisdiction where it operates. GP3 – Pollution 2.1 Risk identification (Pollution) a) Hazardous chemicals and materials Hazardous chemicals and materials include Dichlorodiphenyltrichloroethane (“DDT”), Polychlorinated biphenyl (“PCBs”) and other chemicals listed in the Industry Code of Practice on Chemical Classification and Hazard Communication issued by the Department of Occupational Safety and Health Malaysia (“DOSH”), as well as those listed in international conventions such as the Stockholm Convention on Persistent Organic Pollutants, the Montreal Protocol, or Basel Convention (Annex VIII hazardous wastes list). Note: See list of Hazardous Substances under Regulation 15, Environment Quality Act 2014. Waste and pollutants The Client should avoid the release and use of waste and pollutants or, when avoidance is not feasible but still within permissible limits, minimise and/or control the intensity and mass flow of their release to air, water and/or soil. Assessment of waste and pollutions can be considered in accordance with the Environmental Quality Act (1974). Specifically for water pollution: Water quality parameters that can be assessed include, but not limited to the following: • Biochemical oxygen demand (“BOD”) • Chemical oxygen demand (“COD”) • Total suspended solids (“TSS”) • Mass of nutrients (e.g. nitrogen and phosphorous) • Mass of inorganic pollutants (e.g. heavy metals and chemical compounds) Sectoral data can be used as a benchmark in assessing the significance of hazardous chemical/ materials and waste/ pollutants produced by the Client. see SC5 Climate Data Catalogue Data Items: No.84 - Waste Management Indicators (e.g. Solid Waste Disposed) No. 85 - Waste recycled No.86 - Treated Wastewater https://www.jc3malaysia.com/data-catalogue https://www.doe.gov.my/wp-content/uploads/2021/08/list-of-hazardous-substances.pdf https://www.jc3malaysia.com/data-catalogue 3 No.88 - Water management indicators (e.g. water allocation and management) No.89 - Water quality at river basins No. 90 - Marine water quality No. 91 - Water: Standardised Precipitation - Evapotranspiration Index No. 92 - Soil Water Index No. 93 - Groundwater quality No. 103 - Volume of pesticides No. 104 - Volume of plastics No. 105 - Coastal and freshwater eutrophication No. 106 - Air Quality No. 107 - Air pollution index (“API”) 2.2 Risk management (Pollution) a) Hazardous chemicals and materials The Client should implement internal control measures for hazardous waste management relevant to the substances resulting from its business activities, in line with regulatory requirements. This should cover production cycles from hazardous waste generation, transportation, recycling, disposal and treatment. For further reference, can refer to DOE’s Hazardous Substances Management. Waste and pollutants Where waste cannot be recovered or reused, the Client should treat, destroy, or dispose of waste in an environmentally sound manner that includes the appropriate control of emissions and residues resulting from the handling and processing of the waste material. • The Client should demonstrate within its waste and effluent management effort the separation process between hazardous waste (listed by the regulators), characteristic waste (not listed, but nevertheless might still be hazardous due to it being ignitable, corrosive, reactive or toxic) and universal waste. Hazardous waste would require stricter handling than characteristic and universal wastes. • The Client should provide details of the key waste streams generated and how these are managed and disposed of, including any particular waste management initiatives that have been implemented to minimise and/or recycle waste. • The Client should, as best practice, report evidence of reduction in plastic use and waste from operations, identifying the proportion of recycled plastic products and proportion of virgin polymer use and single-use plastics, with indications on reduction targets. • The Client should, as best practice, regularly report air quality parameters of air emissions identified as harmful pollutants by the relevant regulations and international bodies for its industry. This shall include nitrous oxides (“NOx”), sulphur oxides (“SOx”), persistent organic pollutants (“POP”), volatile organic compounds (“VOC”), hazardous air pollutants (“HAP”), particular matter (“PM”) and other standard categories of air pollutants. For further reference, can refer to: DOE’s Environmental Quality Air Regulations 1978 and DOE’s guidelines on emission monitoring systems. • A Client in the agriculture sector should demonstrate that it has implemented an integrated pest management and/or integrated vector management approach, where the use of chemical pesticides has minimal effects on non-target species and the environment. Pest management activities include the use of chemical pesticides, where the Client should select chemical pesticides that are low in human toxicity, that are known to be effective against the target species and have minimal effects on non-target species as well as the environment. The selection of chemical pesticides should consider its packaging (i.e. packaged in safe containers), labelling (i.e. clearly labelled for safe and proper use) and that the pesticides have been manufactured by an entity licensed by relevant regulatory agencies. For further reference, can refer to DOE’s Regulations on Scheduled Waste Management. https://www.doe.gov.my/en/hazardous-substances-management/ https://www.doe.gov.my/wp-content/uploads/2021/11/Environmental_Quality_Clean_Air_Regulations_1978_-_P.U.A_280-78.pdf https://www.doe.gov.my/wp-content/uploads/2021/11/Environmental_Quality_Clean_Air_Regulations_1978_-_P.U.A_280-78.pdf https://www.doe.gov.my/wp-content/uploads/2021/08/Volume-I-Guideline-for-the-Installation-Maintenance-of-Continuous-Emission-Monitoring-Systems-CEMS-Version-6.pdf https://www.doe.gov.my/en/environmental-quality-scheduled-waste-amendment-regulations-2007-p-u-a-158-2007/ 4 GP3 – Ecosystem & Biodiversity 3.1 Risk identification (Ecosystem & Biodiversity) a) Environmentally sensitive areas (“ESAs”) or key biodiversity areas (“KBAs”) typically refer to geographic regions or locations that are recognised for their high ecological significance and the presence of diverse and often unique species of flora and fauna. Such areas are considered important for the conservation of biodiversity due to the richness and variety of life forms they support. These areas are commonly: • Protected areas on national, regional, and international lists • Areas of high biodiversity value and high conservation value (“HCV”) • Biodiversity hotspots • IUCN Protected Area Management Categories • IUCN Green List • UNESCO Man and the Biosphere Reserves • UNESCO Natural World Heritage Sites • Ramsar Convention The Client should disclose the location of its business operations that are in or adjacent to ESAs and KBAs. As best practice, this is to be done by including GPS coordinates in decimal degrees, i.e. Decimal degrees (“DD”): 41.40338, 2.17403. Degrees, minutes, and seconds (“DMS”): 41°24'12.2"N 2°10'26.5"E. Degrees and decimal minutes (“DMM”): 41 24.2028, 2 10.4418. To identify key biodiversity areas, the Client can use data from tools such as Integrated Biodiversity Assessment Tool (“IBAT”) and Global Forest Watch. Maps of ESAs can be referred to those published in the National Physical Plan 3 and 4. see SC5 Climate Data Catalogue Data Items: No. 95 - Map of Biodiversity Risks Hotspots (e.g. high conservation value forests, high biodiversity value ecosystems etc.) No. 97 - Map of ESAs No. 98 - Forest Change (e.g. Forest Loss, Tree Cover Loss, Location of Tree Cover Loss, FAO Deforestation) b) Business activities may impact nature through, but not limited to the following: • Habitat Destruction: Clearing land/ deforestation for infrastructure, agriculture, or other business activities can lead to the destruction of natural habitats, directly impacting the species living there. • Invasive Species: The introduction of non-native species through business activities (intentionally or unintentionally) can disrupt local ecosystems, outcompeting or preying on native species. To gain a comprehensive understanding of the Client's operations, including production processes and distribution channels to identify key activities that may have an impact on biodiversity, the following can be considered: • Lifecycle analysis of the Client's products or services to understand the environmental impact throughout their entire lifecycle. • Land use changes associated with the Client's operations. This includes deforestation, habitat conversion, or changes in land cover. • Threat to endangered or vulnerable species (e.g. protected species on national and regional conservation lists and IUCN Red List) and consider the presence of invasive species associated with the Client's operations. Examples of tools that can be used to include ENCORE, WWF’s Biodiversity Risk Filter1 (“BRF”) and IBAT. 1 WWF’s BRF tool uses location-specific company and supply chain data to help companies screen, assess and respond to biodiversity risks and potential opportunities across direct operations and value chains. The tool launched in January 2023, as part of an integrated WWF Risk Filter Suite, which will also host WWF’s Water Risk Filter tool. https://www.ibat-alliance.org/ https://www.ibat-alliance.org/ https://www.globalforestwatch.org/ https://myplan.planmalaysia.gov.my/www/ https://myplan.planmalaysia.gov.my/www/ https://www.jc3malaysia.com/data-catalogue https://www.encorenature.org/en https://riskfilter.org/ https://www.ibat-alliance.org/ 5 3.2 Risk management (Ecosystem & Biodiversity) a) Internal measures incorporated into the processes by the Client may include the following: • Produce and expand production exclusively on lands that were deforested or converted prior to any agreed cut-off date. • Rehabilitate degraded land and preserve ecosystem services through responsible production practices on already converted land. • Reduce the need for expansion into natural ecosystems by improving smallholders’ yields through the implementation of more sustainable and efficient agricultural practices. • Adopt No Deforestation, Peat, and Exploitation (“NDPE”) policy. • Have science-based metrics that integrate biodiversity (e.g. IUCN Guidelines for planning and monitoring corporate biodiversity performance and Species Threat Abatement and Restoration (“STAR”) metric). GP3 – Efficient Use of Resources 4.1 Risk identification (Efficient Use of Resources) a) Clients with high dependencies on water/other natural resources must show good resource management within their business to ensure the sustainability of the natural resources. Sectoral data can be used as a benchmark in assessing the significance of water/other natural resource consumption within a Client’s business operations. Tools such as ENCORE and WWF’s BRF can be used to identify and assess a Client’s dependence on natural capital based on its geographic location and sector. see SC5 Climate Data Catalogue Data Items: No. 87- Water consumption No. 88 - Water management indicators (e.g. water allocation and management) No. 89 - Water quality at river basins No. 90 - Marine water quality No. 91 - Water: Standardised Precipitation - Evapotranspiration Index No. 92 - Soil Water Index No. 93 - Groundwater quality No. 94 - Water stress area 4.2 Risk management (Efficient Use of Resources) a) Internal measures incorporated into the processes by the Client may include the following: • Use appliances that fulfil requirements of relevant national legislations • Use of additional technically feasible resource conservation measures within the Client’s operations • Use of alternative resource supplies to reduce total demand for resources to be within the available supply • Evaluation of alternative project locations to areas where resources are abundant • Disclose resources and inputs used according to an international standard • Disclose organisms that was exploited for commercial uses, including wild animal and plant species • Disclose remediation measures related to direct exploitation of resources, to avoid overexploitation negative effects on rare, endangered or threatened species GP3 – GHG Emissions 5.1 Risk identification (GHG Emissions) a) Annual GHG assessment must be complete, accurate, transparent, consistent, and relevant. Factors to consider: • The intensity of the company’s GHG emissions in comparison with the industry average or other acceptable benchmark (e.g. sectoral data) • Indicating GHG emission verification or assurance status, if any https://www.jc3malaysia.com/data-catalogue 6 Examples of GHG emission metrics: • Absolute Scope 1, Scope 2, and Scope 3 GHG emissions • Weighted average carbon intensity • GHG emissions per MWh of electricity produced/ per physical unit (e.g. building floor area) / per economic unit (e.g. revenue) The production and consumption of energy contribute significantly to GHG emissions, primarily through the burning of fossil fuels such as coal, oil, and natural gas. The key aspects related to energy usage that are considered in assessing GHG emissions include: 1. Scope 1 Emissions: These are direct emissions from sources that are owned or controlled by the client. This can include on-site combustion of fossil fuels for heating, cooling, or power generation. 2. Scope 2 Emissions: These are indirect emissions associated with the generation of purchased or acquired electricity, heat, or steam. The carbon intensity of the electricity grid in the region where the client operates plays a significant role in determining Scope 2 emissions. Organisations can assess and report these emissions by using factors such as the emissions factor of the grid. 3. Scope 3 Emissions: These are indirect emissions that occur in both upstream and downstream activities of the client. Energy usage throughout the transportation of goods, and the use of products and services by clients fall under Scope 3 emissions. To quantify the GHG emissions from energy usage, client may often use emission factors that represent the amount of carbon dioxide or other greenhouse gases emitted per unit of energy consumed. These factors can vary based on the type of energy source (e.g., coal, natural gas, renewable sources) and the location. see SC5 Climate Data Catalogue Data Items: No. 1 - Greenhouse Gas (GHG) emissions Scope 1, Scope 2 No. 2 - GHG emissions Scope 3 No. 3 - GHG inventory No. 5 - GHG emission intensity No. 6 - Economic sectors’ contribution to gross domestic product (GDP) and GHG emissions No. 7 - Vehicle GHG emissions No. 11 - Emission intensity performance of buildings in Malaysia No. 12 - Emission factors by Scope 1, 2 and 3 No. 13 - Emission intensity per revenue No. 14 - Monitoring of insurance-related emissions No. 16 - Source of the global warming potential (GWP) rates used 5.2 Risk management (GHG Emissions) a) Common measures to reduce emission/decarbonisation strategy, include but not limited to: • Use renewable energy o Onshore and/or offshore wind power generation o Onshore and floating solar photovoltaic (“PV”) power generation • Rehabilitation, retrofitting and/or replacement with energy-efficient technology o Replacement of existing heating/cooling systems in buildings with non-fossil fuel powered systems o Energy-efficient vehicles and transport (e.g. hybrid cars) • Restoring, maintaining, conserving, and strengthening of natural land-based carbon stock and sinks (for LULUCF only) o Avoidance/ suspension of deforestation o Afforestation and reforestation o Restoration or rehabilitation of forests, croplands, peatlands, grasslands and wetlands o Sustainable forest and agricultural management o Forest and peatland conservation https://www.jc3malaysia.com/data-catalogue 7 Due Diligence Questions: GP4 – Remedial Measures No Guidance Notes Plans undertaken for remediation of significant harm to the environment b) The planned remediation measures should be significant enough to address the issues in concern and commensurate with the Client’s capital structure, risk appetite, complexity, activities, size, and other appropriate risk-related factors. The plan should have a clearly defined and realistic timeline for completion. For instance, the Client’s net zero target can include the following criteria: • Targets should have clear and detailed plans outlining the specific steps and strategies to achieve them. • Targets should be designed in consideration of the Client’s strategy and risk management processes. The Client should set targets at the level (e.g. aggregate, sector, portfolio) that best suits its business activities and strategy. • Targets should be linked to defined metrics in order to measure and track progress against targets. c) The Client should engage relevant impacted stakeholders for better responsiveness, coordination and effectiveness of risk reduction and management policies targeted at addressing the identified significant harm.

Public Notice

08 Jan 2024

Exposure Draft on Skim Pembiayaan Mikro

https://www.bnm.gov.my/-/ed-spm

https://www.bnm.gov.my/documents/20124/938039/ed_Skim_Pembiayaan_Mikro_Policy.pdf

Reading: Exposure Draft on Skim Pembiayaan Mikro Share: 8 Exposure Draft on Skim Pembiayaan Mikro Embargo : For immediate release Not for publication or broadcast before 1210 on Monday, 8 January 2024 8 Jan 2024 This exposure draft outlines the revised requirements and guidance on Skim Pembiayaan Mikro (SPM), Micro Enterprises Facility (MEF) and other microfinance-related policies. These include strategic enablers to complement the SPM framework, policy requirements to provide a more enabling and fit-for-purpose regulatory framework for the implementation of SPM as well as the revised operational requirements that must be complied with by financial institutions prior to and during their participation in SPM and for the utilisation of MEF. Bank Negara Malaysia (BNM) invites written feedback on the proposals in this exposure draft, including suggestions on areas to be clarified or elaborated and any alternative proposals that BNM should consider. The written feedback should be supported with clear rationale, accompanied with evidence or illustrations as appropriate, to facilitate BNM’s assessment. Responses must be submitted electronically to BNM by 5 April 2024 to microfinance@bnm.gov.my. Submissions received may be made public unless confidentiality is specifically requested for the whole or part of the submission. Issuance Date 5 January 2024 Issuing Department Financial Inclusion Department Document Exposure Draft on Skim Pembiayaan Mikro Bank Negara Malaysia 8 January 2024 © Bank Negara Malaysia, 2024. All rights reserved.

Issued on: 05 January 2024 BNM/RH/ED 028-26 Skim Pembiayaan Mikro Exposure Draft Applicable to: 1. Licensed banks, including licensed digital banks 2. Licensed Islamic banks, including licensed Islamic digital banks 3. Prescribed development financial institutions Skim Pembiayaan Mikro Issued on: 05 January 2024 As part of the Financial Sector Blueprint 2022-2026 (FSBP) initiative to reinforce the finance ecosystem for microentrepreneurs (MEs), Bank Negara Malaysia (BNM) is holistically reviewing the microfinance ecosystem, including the Skim Pembiayaan Mikro (SPM) and Micro Enterprises Facility (MEF). The review seeks to ensure these policy measures remain relevant and effective in providing access to loan/financing for the unserved or underserved MEs. This exposure draft sets out BNM’s proposed requirements and guidance on SPM that aims to better serve the needs of the MEs and to attract greater participation of financial institutions to achieve greater financial inclusion. BNM invites written feedback on the proposed requirements of this exposure draft, including suggestions on areas to be clarified or elaborated and any alternative proposals that BNM should consider. The written feedback should be supported with clear rationale, accompanied with evidence or illustrations as appropriate, to facilitate BNM’s assessment. In addition to providing general feedback, respondents are also requested to respond to the specific questions set out in this exposure draft. Responses must be submitted by 05 April 2024 to: Director Financial Inclusion Department Bank Negara Malaysia Jalan Dato’ Onn 50480 Kuala Lumpur E-mail: microfinance@bnm.gov.my Electronic submission is encouraged. Submissions received may be made public unless confidentiality is specifically requested for the whole or part(s) of the submission. In the course of providing your feedback, you may direct any queries to the following officers: 1. Sherina Supartin (sherina@bnm.gov.my) 2. Wan Nur Lyana Md Yusof (lyana@bnm.gov.my) 3. Anas Naqieb Muda (anasmuda@bnm.gov.my) 4. Thum Chiean Tien (chieantien.thum@bnm.gov.my) Skim Pembiayaan Mikro Issued on: 05 January 2024 TABLE OF CONTENTS PART A OVERVIEW ............................................................................................... 1 1 Introduction...................................................................................................... 2 2 Applicability ..................................................................................................... 4 3 Legal provisions .............................................................................................. 4 4 Effective date................................................................................................... 4 5 Interpretation ................................................................................................... 4 6 Related legal instruments and policy documents ............................................ 7 7 Policy document and and circulars superseded .............................................. 8 PART B POLICY REQUIREMENTS ....................................................................... 9 8 Skim Pembiayaan Mikro (SPM) .................................................................... 10 9 Incentives for Participating Financial Institutions .......................................... 14 10 Microfinance delivery channels .................................................................... 16 11 Digitalisation and technology-driven innovations .......................................... 18 12 Microfinance logo and client charter ............................................................. 19 PART C OPERATIONAL REQUIREMENTS ........................................................ 22 Application and notification procedures related to SPM, MEF and microfinance branches ................................................................................ 23 14 Reporting requirements ................................................................................ 25 Appendices ............................................................................................................. 26 Appendix 1 Guiding Principles of Unserved and/or Underserved MEs ..................... 26 Appendix 2 Application Template to Classify Product under SPM ........................... 29 Appendix 3 Report Template for Microfinance Access Points .................................. 35 Appendix 4 National Microfinance Logo ................................................................... 37 13 Skim Pembiayaan Mikro 1 of 37 Issued on: 05 January 2024 Skim Pembiayaan Mikro 2 of 37 Issued on: 05 January 2024 PART A OVERVIEW 1 Introduction 1.1 Skim Pembiayaan Mikro (SPM) is a scheme that was launched in 2006 to enable viable microentrepreneurs (MEs) to have easy, fast and convenient access to business financing without collateral from participating financial institutions (PFIs). Prior to 2006, the microfinance ecosystem was mainly spearheaded by Amanah Ikhtiar Malaysia (AIM) and Tabung Ekonomi Kumpulan Usaha Niaga (TEKUN) Nasional. The microfinance landscape in Malaysia has evolved and continues to grow with wider options in terms of financial service providers, financial instruments and product range. SPM has, thus far, positively contributed to the sustained rise in microfinancing supply by PFIs over the years. To date, a total of 11 PFIs offer more than 30 microfinancing products under SPM, providing access to financing to more than 300,000 MEs. This initiative has also expanded the accessibility of microfinancing to the unserved or underserved (U/US) segments of the MEs, such as informal businesses, B40 and low income MEs, as well as young businesses as outlined in Appendix 1. 1.2 The Financial Sector Blueprint 2022-2026 (FSBP) has introduced various initiatives to reinforce the finance ecosystem for MEs while promoting an inclusive and sustainable microfinance sector within Malaysia’s financial system. BNM is introducing an enhanced SPM framework with strategic enablers that aims to achieve the following desired outcomes: (a) higher access to and take up of financing by MEs from PFIs; (b) better outreach and service quality by PFIs to MEs, particularly to the U/US segments; (c) wider options of financing products and non-financial services (e.g. capacity building programmes) for MEs to support upward migration; Skim Pembiayaan Mikro 3 of 37 Issued on: 05 January 2024 (d) improved capability of MEs to secure loan/financing and to allow PFIs to accurately assess the MEs; and (e) more vibrant landscape with greater participation by financial institutions (FIs) and players within the microfinance ecosystem (e.g., Credit Guarantee Corporation Malaysia Berhad (CGC), CGC Digital Sdn Bhd (CGC Digital), Agensi Kaunseling dan Pengurusan Kredit (AKPK)) offering innovative products and non-financial services. 1.3 This policy document outlines the enhanced SPM framework, which contains requirements which must be complied with by FIs, as follows: (a) Part B – consolidated, revised and proportionated policy requirements to provide a more enabling and fit-for-purpose regulatory framework for the implementation of SPM; and (b) Part C – revised operational requirements to be undertaken by FIs before and during their participation in SPM and for the utilisation of MEF. 1.4 The SPM framework is complemented by six identified strategic enablers. The strategic enablers are designed to play a pivotal role in ensuring the success and resilience of the SPM initiative, fostering a robust and sustainable environment within the broader microfinance landscape. Diagram 1: Strategic Enablers for Enhancement of Microfinance Ecosystem Skim Pembiayaan Mikro 4 of 37 Issued on: 05 January 2024 2 Applicability 2.1 This policy document is applicable to all FIs as defined in paragraph 5.2. 3 Legal provisions 3.1 The requirements in this policy document are specified pursuant to: (a) sections 47, 123, 143 and 144 of the Financial Services Act 2013 (FSA); (b) sections 57, 135, 155 and 156 of the Islamic Financial Services Act 2013 (IFSA); and (c) sections 41, 42C and 116of the Development Financial Institutions Act 2002 (DFIA). 3.2 The guidance in this policy document is issued pursuant to section 266 of the FSA, section 277 of the IFSA and section 126 of the DFIA. 4 Effective date 4.1 This policy document comes into effect on [the issuance of the final policy document]. 5 Interpretation 5.1 The terms and expressions used in this policy document shall have the same meanings assigned to them in the FSA, IFSA and DFIA, as the case may be, unless otherwise defined in this policy document. 5.2 For the purpose of this policy document- “S” denotes a standard, an obligation, a requirement, specification, direction, condition and any interpretative, supplement and transitional provisions that must be complied with. Non-compliance may result in enforcement actions; “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; Skim Pembiayaan Mikro 5 of 37 Issued on: 05 January 2024 “collateral” refers to collateral to be pledged by a customer with an FI as security to the SPM loan/financing and claims are enforceable under the Law of Malaysia. This may include property, cash, unit trust, gold and deposit; “credit guarantee provider” refers to an institution that assists MEs to gain access to loan/financing facilities from PFIs, by providing guarantee cover on such facilities such as CGC and Syarikat Jaminan Pembiayaan Perniagaan Berhad (SJPP); “financial institution” or “FI” refers to the following: (a) a licensed bank under the FSA (including a licensed digital bank); (b) a licensed Islamic bank under the IFSA (including a licensed Islamic digital bank); and (c) a prescribed development financial institution under the DFIA; “licensed digital bank” refers to- (a) a person licensed under section 10 of the FSA to carry on banking business which is carried on wholly or almost wholly through digital or electronic means; or (b) a person licensed under section 10 of the IFSA to carry on Islamic banking business which is carried on wholly or almost wholly through digital or electronic means; “Micro Enterprises Facility” or “MEF” refers to a facility under BNM’s Fund for SMEs (the BNM Fund) that is channelled through PFIs of SPM with the objective of increasing access of collateral-free loan/financing for MEs; “microentrepreneurs” or “MEs” refer to: (a) microenterprises as defined in the Guideline for SME Definition1 issued by SME Corporation Malaysia; and 1 Guideline for SME Definition issued by SME Corporation Malaysia is available at www.smecorp.gov.my http://www.smecorp.gov.my/ Skim Pembiayaan Mikro 6 of 37 Issued on: 05 January 2024 (b) self-employed individuals who undertake his/her own business activities to earn a living and his/her business is not registered with any authorities outlined in the Guideline for SME Definition. This may include gig workers on digital platforms2, participants of the iTEKAD programme3 and social enterprises4; “microfinance access point” or “MAP” refers to a place or designated location, either physical or virtual that at a minimum, displays information, provides marketing and/or facilitates an application for an SPM product. This includes: (a) a PFI’s bank branch, business centre, microfinance centre or digital channels (e.g., internet banking, website); (b) an appointed agent or strategic partner; and/or (c) a third-party digital channel such as imSME platform5; “participating financial institution” or “PFI” refers to an FI that is participating in SPM by offering SPM products to MEs; “SPM products” refer to the products offered by a PFI which fulfils the eligibility criteria stipulated in paragraph 8.1; “unserved or underserved segment” or “U/US segment” refers to a group of MEs whose needs for financial products and services are not adequately served or met, amongst others, as determined in accordance with the guiding principles in Appendix 1. 5.3 For the purposes of sections 121(b) and 121(c)(ii) of the FSA, 133(b) and 133(c)(ii) of the IFSA and 42A(b) and 42A(c)(ii) of the DFIA, BNM specifies that a financial consumer means microentrepreneurs as defined in paragraph 5.2. 2 Gig workers on digital platforms as defined by PENJANAGIG (i.e., individuals involved in carrying out tasks or work through a service provider platform on digital applications to earn income). 3 Participants of the iTEKAD programme refers to eligible low-income micro entrepreneurs, subject to the terms and conditions outlined by respective participating FI. 4 Refers to social enterprises that comply to the definition of microenterprises. 5 imSME (www.imsme.com.my) is an online SME financing platform which identifies suitable financing solutions offered by FIs for SMEs and connects them via one platform. http://www.imsme.com.my/ Skim Pembiayaan Mikro 7 of 37 Issued on: 05 January 2024 6 Related legal instruments and policy documents 6.1 This policy document must be read together with other relevant legal instruments, policy documents, guidelines or circulars issued by BNM, as amended from time to time, in particular: (a) Circular on Fair Debt Collection Practices issued on 1 October 2007; (b) Dear CEO Letter on Update on Khidmat Nasihat Pembiayaan @ CGC and AKPK issued on 20 September 2023. (c) eFIRST Participation and Operational Rules issued on 30 June 2016; (d) Guidelines on Basic Banking Services issued on 10 December 2004; (e) Guidelines on Basic Banking Services for Islamic Banking Institutions issued on 16 December 2004; (f) Guidelines on Basic Banking Services for Development Financial Institutions issued on 15 April 2009; (g) Guidelines on Complaints Handling issued on 17 December 2009; (h) Guidelines on Imposition of Fees and Charges on Financial Products and Services issued on 10 December 2004; (i) Operational Guidelines on BNM’s Fund for SMEs issued on 1 December 2020; (j) Policy Document on Agent Banking issued on 16 June 2022; (k) Policy Document on Anti-Money Laundering, Countering Financing of Terrorism and Targeted Financial Sanctions for Financial Institutions (AML/CFT and TFS for FIs) issued on 31 December 2019; (l) Policy Document on Central Credit Reference Information System (CCRIS) issued on 15 December 2022; (m) Policy Document on Financial Technology Regulatory Sandbox Framework issued on 18 October 2016; (n) Policy Document on the Introduction of New Products issued on 7 March 2014; (o) Policy Document on Personal Financing issued on 15 December 2023; (p) Guidelines on Product Transparency and Disclosure issued on 31 May 2013; (q) Policy Document on Prohibited Business Conduct issued on 15 July 2016; (r) Policy Document on Responsible Financing issued on 6 May 2019; Skim Pembiayaan Mikro 8 of 37 Issued on: 05 January 2024 (s) Specification on Enhancing Access to Financing for Small and Medium Enterprises (SMEs) through imSME, an Online SME Financing Platform issued on 19 January 2018; and (t) Specification on Product Submission for Development Financial Institutions issued on 1 March 2023. 7 Policy document and circulars superseded 7.1 This policy document supersedes the following documents that have been issued by BNM: (a) Dear CEO Letter on Eligible Products that Meet the Bank’s Definition of a Microfinance Product issued on 16 July 2007; and (b) Circular on Establishment of Microfinance Branches by Locally Incorporated Foreign Banks issued on 27 April 2007. Skim Pembiayaan Mikro 9 of 37 Issued on: 05 January 2024 Skim Pembiayaan Mikro 10 of 37 Issued on: 05 January 2024 PART B POLICY REQUIREMENTS 8 Skim Pembiayaan Mikro (SPM) Eligibility Criteria for SPM Product S 8.1 An FI with one or more product(s) that in aggregate fulfils all the following criteria is eligible to classify its product as microfinance product(s) under SPM, thus to be recognised as a PFI of SPM. (a) minimum loan/financing amount of RM5,000; (b) maximum loan/financing amount of up to RM50,000; (c) the purpose of the loan/financing is for business activities, which includes working capital and/or capital expenditure; (d) the loan/financing is offered to MEs; and (e) collateral shall not be required from MEs as a pre-condition to obtain the loan/financing. An FI intending to classify its product as SPM product must comply with the application procedures as set out in paragraph 13.1 and 13.5. Existing products approved by BNM under SPM shall be deemed classified as SPM products and the PFIs offering such SPM products shall be subject to all requirements of this policy document. Question 1: BNM is reviewing to relax the requirement on the minimum loan/financing amount. Based on this, we would like to seek feedback from: (a) MEs – If RM5,000 is no longer the minimum loan/financing amount that must be offered by PFIs under SPM, would this hinder you from obtaining microfinancing? Please provide your views and rationales as well as the proposed minimum loan/financing amount that suits your needs. (b) FIs – How would this impact your institution’s appetite in participating in SPM and offering SPM products? Please provide your views and rationales. Skim Pembiayaan Mikro 11 of 37 Issued on: 05 January 2024 Question 2: BNM is reviewing the adequacy of the current RM50,000 loan/financing limit in meeting the needs of MEs. Based on this, we would like to seek feedback from: (a) MEs – Do you view this amount as sufficient to fulfil your business financing needs? Please provide your views and rationales as well as to illustrate situations when the amount of loan/financing required is beyond the RM50,000 limit. (b) FIs – Based on past experiences in dealing with MEs, does your institution view that the current loan/financing limit of RM50,000 for SPM is sufficient for the MEs? If no, please illustrate: (i) the profiles of such MEs, and their estimated percentage from total volume of ME business; and (ii) the purpose of loan/financing and propose new limit for cases where their needs exceed the limit. G 8.2 Notwithstanding the minimum loan/financing amount set out in paragraph 8.1(a), FIs are encouraged to offer an SPM product with a minimum loan/financing amount of lower than RM5,000. G 8.3 With respect to paragraph 8.1, for the purpose of classifying a product of an FI under SPM, the product can either be a new or existing product. S 8.4 Once the product is classified as SPM product, the PFI shall ensure that the product features of the SPM product continue to fulfil the eligibility criteria stipulated in paragraph 8.1 at all times. A PFI shall notify BNM should the PFI discontinue or change the features of any SPM product(s) or product line(s) in accordance with paragraph 13.3. Illustration for Question 2(b): Ali is an ME who would like to expand his road-side stall business by purchasing a food truck. However, the average price of food trucks is above RM50,000. With the purchase of supplies, equipment fittings and refurbishment of the truck, the total start-up capital required exceeds the current financing limit of RM50,000. Hence, he would not be eligible for financing under SPM. Skim Pembiayaan Mikro 12 of 37 Issued on: 05 January 2024 Source of Funding G 8.5 A PFI has the discretion to determine its source of funding to finance SPM customers, including but not limited to social and/or commercial funds, and MEF. Notwithstanding this, a PFI is highly encouraged to utilise funding sources that could deepen its reach to the U/US segment and/or lower the cost of financing for MEs. De-risking instruments G 8.6 A PFI may establish a financial or credit guarantee arrangement with third parties for risk sharing of the SPM loan/financing on individual or portfolio basis to enhance access to financing. This may include the use of guarantee from credit guarantee providers such as CGC and Syarikat Jaminan Pembiayaan Perniagaan Berhad (SJPP). G 8.7 A PFI may establish and use risk-absorbent funds to provide more accessible, affordable, and flexible SPM loan/financing to vulnerable segments that face challenges in accessing or fulfilling obligations as customers of commercially driven microfinance. Examples of customers within these vulnerable segments are zakat recipients (asnaf) and low-income MEs. The aforesaid risk-absorbent funds may include: (a) funds sourced from social finance instruments (e.g. donations, corporate social responsibility (CSR) contributions, zakat and cash waqf) as the funding sources for microfinance; (b) social impact investment funds that are sourced from investment accounts6 as the funding sources for microfinance; and/or 6 For example, an investment account based on the concept of two tier Mudarabah, a contract between the capital provider (rabbul mal) and the entrepreneur (mudarib) whereby: • Returns are based on performance of the underlying asset. Any investment profit generated from the Mudarabah venture is shared between the capital provider (rabbul mal) and the entrepreneur (mudarib) according to mutually agreed upfront profit-sharing ratio. • Any investment losses will be borne by the capital provider up to the amount invested and provided that such losses are not attributed by the entrepreneur’s willful misconduct, negligence, fraud or breach of specified terms. Skim Pembiayaan Mikro 13 of 37 Issued on: 05 January 2024 (c) zakat wakalah fund7 for the settlement of microfinance debt to ease the burden of the indebted zakat recipient (asnaf al-gharimin) MEs after all efforts to recover their business are exhausted. Business conduct S 8.8 A PFI that requires its prospective SPM customers to open a dedicated business bank account is not regarded as engaging in prohibited business conduct8 under the Policy Document on Prohibited Business Conduct. S 8.9 The features and terms of the dedicated business bank account referred to in paragraph 8.8 shall be equivalent to or not less favourable than the features and terms of basic current accounts specified under the Guidelines on Basic Banking Services issued on 10 December 2004, Guidelines on Basic Banking Services for Islamic Banking Services issued on 16 December 2004 and Guidelines on Basic Banking Services for Development Financial Institutions issued on April 2009 as may be amended from time to time. G 8.10 A PFI may require its existing and prospective SPM customers to: (a) utilise non-financial value-added services9 as a condition before or after obtaining microfinance under SPM; and (b) report data or information on business performance for impact monitoring by the PFI. S 8.11 Notwithstanding paragraph 8.10(a), any cost arising from the non-financial value- added services, if passed on by PFIs to SPM customers, shall be made affordable10. 7 Refers to the portion of zakat being refunded for the purpose of self-distribution by the zakat payers (on behalf of zakat authorities) directly to asnaf. This is subject to specific rulings and approval by the respective zakat authorities. 8 As set out in Paragraph 5 of Schedule 7 of the FSA and IFSA and paragraph 5 of the Second Schedule of the DFIA. 9 For examples, capacity building programmes, business management solutions. 10 For examples, advanced capacity building programmes and business management solutions (e.g., all- in-one business management solutions that includes e-payments and bookkeeping). Skim Pembiayaan Mikro 14 of 37 Issued on: 05 January 2024 G 8.12 The Policy Document on Responsible Financing issued on 6 May 2019 and Policy Document on Personal Financing issued on 15 December 2023 as may be amended from time to time does not apply to loan/financing under SPM which is solely for business purposes, whether the loan/financing is under an individual’s name or a company’s name. S 8.13 Notwithstanding paragraph 8.12, for loan/financing under an individual’s name, a PFI shall perform due diligence to establish that such loan/financing is for legitimate business purposes and conduct credit assessment on the viability of the customer to make repayment based on the income of the business. S 8.14 In line with the Dear CEO Letter on Update on Khidmat Nasihat Pembiayaan @ CGC and AKPK issued on 20 September 2023, a PFI shall provide adequate explanation, and refer the unsuccessful ME applicants, to Khidmat Nasihat Pembiayaan (MyKNP)@CGC. The MyKNP@CGC platform provides advisory services and alternative sources upon rejection of ME applications to have access to loan/financing. Disclosure of Financing Rate S 8.15 A PFI shall specify the type of financing rate chargeable11 in advertisements, marketing materials and the Product Disclosure Sheet (PDS). In addition, the PFI shall disclose an indicative effective financing rate based on a loan/financing amount of RM50,000 and tenure of five years to facilitate comparison and informed decisions by customers. 9 Incentives for Participating Financial Institutions Micro Enterprises Facility (MEF) S 9.1 An FI intending to utilise MEF as its source of funding for SPM shall comply with the application procedures as set out in paragraph 13.1 and 13.5. 11 Examples of types of financing rates are flat rate, fixed rate or floating rate. Skim Pembiayaan Mikro 15 of 37 Issued on: 05 January 2024 S 9.2 A PFI that obtains funding at concessionary rate under MEF shall ensure that the cost savings from the lower funding cost of MEF is passed on to SPM customers through the loan/financing to be extended to the SPM customers. G 9.3 With respect to paragraph 9.2, a PFI may take into consideration the following in determining the financing rate chargeable to SPM customers for loan/financing funded by MEF, which may vary from time to time: (a) operational costs associated with the usage of MEF; and (b) funding rate of MEF. G 9.4 A PFI may apply for MEF either through individual application (per customer basis) or upfront fund placement (portfolio basis). S 9.5 A PFI that utilises MEF must comply with the following operational requirements issued by BNM, as may be amended from time to time: (a) Operational Guidelines on BNM’s Funds for SMEs; (b) eFIRST Participation and Operational Rule12; and (c) other relevant requirements that BNM may specify from time to time. Stamp duty exemption G 9.6 A PFI is eligible for stamp duty exemption for the instrument of agreement for a loan/financing between the customer and the PFI under SPM for an amount not exceeding RM50,000 in accordance with the Stamp Duty (Exemption) (No. 4) Order 2011 [P.U.(A) 446]13. S 9.7 The information on the exact product name(s) that will be used in the loan/financing agreement between an SPM customer and the FI shall be submitted to BNM as part of the information to be submitted together with the application to classify the FI’s product as an SPM product as set out under item 1(b) of Appendix 2. 12 BNM’s Electronic Funds Integrated System (eFIRST) is an online financing administration system that allows access to FIs to facilitate the approval, disbursement, repayments and interest/profit computation of the financing and advances made by BNM via the BNM Fund. 13 The Stamp Duty (Exemption) (No. 4) Order 2011, and the list of PFIs and their approved Micro Financing Scheme products for stamp duty exemption are available at www.hasil.gov.my/en/stamp- duty/stamp-duty-order. http://www.hasil.gov.my/en/stamp-duty/stamp-duty-order http://www.hasil.gov.my/en/stamp-duty/stamp-duty-order Skim Pembiayaan Mikro 16 of 37 Issued on: 05 January 2024 G 9.8 Upon obtaining confirmation from Lembaga Hasil Dalam Negeri (LHDN) that the product listing eligible for stamp duty exemption on LHDN’s website has been updated, BNM will notify PFIs via email accordingly. S 9.9 A PFI shall ensure that the name of the SPM product in the loan/financing agreement is the same as the information submitted to BNM and the product listing published on LHDN’s website14. 10 Microfinance delivery channels Microfinance branches G 10.1 Following the liberalisation measures announced for the financial services sector on 27 April 2009, a participating locally incorporated foreign bank (participating LIFB) is allowed to establish up to ten microfinance branches in Malaysia, subject to BNM’s prior approval under section 25 of the FSA and section 22 of the IFSA respectively. This is to accord greater branching flexibility for participating LIFBs in promoting financial inclusion by establishing microfinance branches in Malaysia and to expand their outreach in supporting viable MEs and cater to the needs of the U/US. S 10.2 A participating LIFB with microfinance branch(es) is subject to the following requirements: (a) the microfinance branch can only offer SPM products as outlined under paragraph 8.1; and (b) the establishment of additional branches are subject to the effectiveness of the existing ten branches in serving microenterprises. S 10.3 The Chief Executive Officer of a participating LIFB shall provide an annual declaration to BNM on the microfinance branch’s compliance with the requirements stipulated in paragraph 10.2(a). 14 This is to be verified by LHDN for all stamp duty exemption requests received via stamp duty office or Stamp Assessment and Payment Systems (STAMPS). Skim Pembiayaan Mikro 17 of 37 Issued on: 05 January 2024 S 10.4 BNM reserves the rights to revoke the approval granted for the establishment of microfinance branches under section 25 of the FSA and section 22 of the IFSA, as the case may be, should any participating LIFB fail to comply with the requirements stipulated in paragraph 10.2. Leveraging on agents G 10.5 In addition to the services specified under paragraphs 8.6 and 8.8 of the Policy Document on Agent Banking issued on 16 June 2022 as may be amended from time to time, other microfinance-related services that may be provided by agents on behalf of a PFI without BNM’s prior approval, electronically or otherwise, to improve the accessibility of SPM are as follows: (a) act as an alternative customer interface15; (b) provide referral/leads on microfinance application to PFI; and (c) facilitate due diligence on customer identity for microfinance application via devices/system connected to PFI’s back-end system on behalf of PFI. S 10.6 In leveraging on its agent to provide microfinance-related services as stipulated in paragraph 10.5, a PFI shall comply with the following requirements: (a) relevant requirements which include, but not limited to paragraphs 8.14, 9 and 10.2.3(d) of the Policy Document on Agent Banking issued on 16 June 2022 as may be amended from time to time, and other relevant guidelines and policy documents; (b) all potential risks from such arrangement are mitigated with appropriate action plans; (c) PFI shall ensure that there are internal policies and procedures in place to assess the suitability and feasibility of these agents in offering such services; and (d) only agents that facilitate the opening of saving account services are allowed to offer the service stipulated in paragraph 10.5(c), subject to the 15 For example, advertising of SPM product at agents’ premises, postal and courier services to PFI, facilitate or guide customers to apply to the PFI via devices/ system connected to the PFI’s back-end system and facilitate collection of information or data on applicant/ business on behalf of PFI via devices/ system connected to PFI’s bank-end system. Skim Pembiayaan Mikro 18 of 37 Issued on: 05 January 2024 requirements in section 16 of the Policy Document on AML/CFT and TFS for FIs issued on 31 December 2019 as may be amended from time to time. S 10.7 Where agents are appointed to provide microfinance-related services as stipulated in paragraph 10.5, the PFI shall ensure that the agent and agent’s staff do not undertake the following services on the PFI’s behalf: (a) market and provide explanations regarding the SPM product beyond the marketing materials provided by the PFI; (b) receive physical documents from customer; and (c) conduct SPM loan/financing appraisal. S 10.8 In addition to the requirements under paragraphs 10.6 and 10.7, a PFI shall comply with the following requirements: (a) the PFI shall put in place an awareness programme for MEs on the importance of understanding their rights and responsibilities before signing the loan/financing agreement as well as precautionary measures to be taken when dealing with agents; and (b) the PFI shall ensure that agents who facilitate microfinance-related services prominently display the contact details of the PFI’s customer service centre for SPM to facilitate any further inquiry on SPM products and lodging of complaints on agent’s services and misconduct (e.g. the imposition of unauthorised additional charges on MEs). 11 Digitalisation and technology-driven innovations G 11.1 To enhance the efficiency and effectiveness of SPM, a PFI is encouraged to: (a) scale up technology driven innovations in their microfinance business model and products; (b) accelerate and promote adoption of e-payments via business bank accounts among its ME customers, to improve MEs’ traceability and track record building; (c) adopt use of fintech in microfinancing application, origination and processing, such as through the use of automated credit decision and disbursement; and/or Skim Pembiayaan Mikro 19 of 37 Issued on: 05 January 2024 (d) introduce digital microfinancing products 16 with greater outreach capabilities and service quality to provide convenient access to SPM, particularly by the U/US segments. G 11.2 With respect to paragraph 11.1(c), a PFI is highly encouraged to leverage on the imSME platform 17 to ensure that MEs are adequately supported in obtaining loan/financing and to facilitate the loan/financing application process. G 11.3 A PFI is encouraged to adopt alternative data or credit scoring methods to facilitate onboarding of SPM customers and supplement credit decisioning for a more informed decision. G 11.4 A PFI may also adopt digital solutions for self-reporting by SPM customers to facilitate progress and impact monitoring. 12 Microfinance logo and client charter S National Microfinance Logo 12.1 To promote awareness on the availability of SPM products, a PFI shall ensure that the following steps are taken: (a) the national microfinance logo as set out in Appendix 4 (the Logo) for door stickers is displayed at the PFI’s bank branches that offer SPM products. The Logo shall be clearly visible to all customers; (b) the Logo is printed on all new documents and materials related to the PFI’s SPM products, such as application forms, promotional materials, and other applicable materials; and (c) the Logo is displayed at other MAPs that accept SPM loan/financing applications or display information related to SPM, including digital channels18. 16 Digital microfinancing product refers to microfinancing products that are delivered fully via digital channels. 17 imSME (www.imsme.com.my) is an online SME financing platform which identifies suitable financing solution offered by FIs for SMEs and connect them via one platform. 18 For examples, PFI’s website/portal, PFI’s internet banking, imSME platform. http://www.imsme.com.my/ Skim Pembiayaan Mikro 20 of 37 Issued on: 05 January 2024 G 12.2 In addition to the requirements in paragraph 12.1, a PFI is encouraged to: (a) distribute the Logo stickers to customers of SPM; and (b) encourage customers of SPM to display the Logo at their business premises. S 12.3 A PFI shall reproduce the Logo as stickers as per the requirement in paragraph 12.1 based on the following specifications: (a) Colour (i) the Logo shall appear in green19; and (ii) the background of the Logo that forms the frame shall be in white. (b) Logo size and wordings (i) the minimum size of the Logo for stickers to be displayed at a PFI’s physical MAPs20, a strategic partner’s business premises or a SPM customer’s business premises shall be 15.0 cm x 18.5 cm; and (ii) the words “PEMBIAYAAN MIKRO” shall be in capital letters. S 12.4 For the purpose of using the Logo in other documents and materials mentioned in paragraph 12.1(b) and 12.1(c), a PFI shall ensure that the colour and aspect ratio of the Logo are duly observed. G 12.5 With respect to paragraph 12.3, a PFI may request for the softcopy of the Logo by emailing to microfinance@bnm.gov.my. S 12.6 The Logo is the property of BNM and shall not be used otherwise than as stipulated in this paragraph 12 without the prior written permission of BNM. Microfinance Client Charter S 12.7 A PFI shall prepare a Microfinance Client Charter (the Client Charter) which emphasises on the easy, fast and convenient features of the SPM product and states, at least, the following salient features: 19 Colour coding of ‘Pantone 3165’ for coated and ‘Pantone 322’ for uncoated materials respectively. 20 For examples, bank branches, business centres, microfinance centres, agents. mailto:microfinance@bnm.gov.my Skim Pembiayaan Mikro 21 of 37 Issued on: 05 January 2024 (a) Easy (i) collateral is not required for SPM loan/financing up to RM50,000; (ii) the application form is simple and easily understood; (iii) the eligibility criteria; and (iv) the necessary documents which must be provided by applicants. (b) Fast (i) the duration for a PFI to approve an application is subject to the receipt of complete documentation from the applicants. A PFI shall ensure that the target approval time21 of an average of six working days is met; and (ii) the duration for a PFI to disburse the loan/financing is subject to acceptance of all parties of the relevant legal documentation and/or completion of training. A PFI shall ensure that the target disbursement time22 of an average of four working days is met. (c) Convenient (i) The SPM product is available at all MAPs that display the Logo. S 12.8 To improve customers’ awareness on SPM, a PFI shall display the Client Charter at relevant MAPs, either through physical and/or digital means to ensure high visibility and accessibility by MEs. 21 Approval time refers to the number of working days upon receipt of complete documentation from the applicants until approval of loan/financing by the PFI. 22 Disbursement time refers to the number of working days from acceptance of all parties (e.g., borrower, guarantor) of the relevant legal documentation and/or completion of training until disbursement of loan/financing. Skim Pembiayaan Mikro 22 of 37 Issued on: 05 January 2024 Skim Pembiayaan Mikro 23 of 37 Issued on: 05 January 2024 13 Application and notification procedures related to SPM, MEF and microfinance branches Application and notification procedures related to SPM and MEF S 13.1 For applications to classify a product of an FI as an SPM product and/or to utilise MEF, an FI shall submit an official letter addressed to the Director of Financial Inclusion Department together with complete information as set out in Appendix 2. G 13.2 In completing the information as set out in Appendix 2, FIs may refer to the examples of existing SPM products of PFIs that are available at www.bnm.gov.my/microfinance. S 13.3 With respect to the requirement in paragraph 8.4, a PFI shall notify BNM in the following events: (a) A PFI that wishes to discontinue any SPM product(s) or product line(s) shall submit an official letter addressed to the Director of Financial Inclusion Department and provide justification for the discontinuance at least 14 working days prior to the discontinuation date. (b) A PFI that wishes to change the features of any SPM product(s) or product line(s) shall provide BNM with updated information as set out in Appendix 2 by emailing to microfinance@bnm.gov.my at least 14 working days before the effective date. S 13.4 A new PFI shall submit a copy of the Client Charter via official letter addressed to the Director of Financial Inclusion Department by emailing to microfinance@bnm.gov.my within 14 working days upon receiving notification from BNM that the application to classify its product as an SPM product is successful. http://www.bnm.gov.my/microfinance Skim Pembiayaan Mikro 24 of 37 Issued on: 05 January 2024 S 13.5 The application and/or notification letters to be submitted by a PFI based on the requirements of paragraphs 13.1, 13.3(a) and 13.4 shall be addressed to: Director Financial Inclusion Department Bank Negara Malaysia Jalan Dato’ Onn 50480, Kuala Lumpur Application procedures for microfinance branch S 13.6 Applications for opening of a microfinance branch shall be submitted by a PFI via the Regulatory Approval (eApps portal). The application letter shall be addressed to: Director Banking Supervision Department (JP2) Bank Negara Malaysia Jalan Dato’ Onn 50480 Kuala Lumpur Application to participate in Financial Technology Regulatory Sandbox G 13.7 PFIs may submit an application to participate in BNM’s Financial Technology Regulatory Sandbox to test out new microfinance related technology-led innovations and business models that meet the eligibility requirements as set out in the Policy Document on Financial Technology Regulatory Sandbox Framework issued on 18 October 2016 as may be amended from time to time. Skim Pembiayaan Mikro 25 of 37 Issued on: 05 January 2024 S 13.8 Applications to participate in BNM’s Financial Technology Regulatory Sandbox shall be addressed to: Director Financial Development and Innovation Department Bank Negara Malaysia Jalan Dato' Onn 50480 Kuala Lumpur Email: fintech@bnm.gov.my, cc microfinance@bnm.gov.my 14 Reporting requirements S 14.1 In monitoring the growth of the microfinance industry, a PFI shall submit the following information to BNM: (a) monthly status report of SPM, Lending Financing Rate/Lending Financing Rate Islamic (LFR/LFRI) and MEF through STATSmart ISP Platform no later than 15 days after each reporting month unless otherwise specified by BNM; and (b) information regarding the MAPs addressed to the Director of Financial Inclusion Department via microfinance@bnm.gov.my no later than 15 days after 30 June and 31 December of each year. The information required shall be submitted using the template in Appendix 3. S 14.2 In addition to the requirements in paragraph 14.1, a PFI shall submit and update the information pertaining to SPM and MEF (previously known as Micro Enterprise Fund) in the Central Credit Reference Information System (CCRIS) in accordance with the requirements of the Policy Document on Central Credit Reference Information System (CCRIS) issued on 15 December 2022 as may be amended from time to time. S 14.3 A PFI shall submit any other information on SPM or MEF as may be required by BNM from time to time. mailto:fintech@bnm.gov.my mailto:microfinance@bnm.gov.my Skim Pembiayaan Mikro 26 of 37 Issued on: 05 January 2024 APPENDICES Appendix 1 Guiding principles of unserved and/or underserved MEs23 Guiding principles of unserved and/or underserved segments Examples of unserved and/or underserved segments Limited geographical accessibility to financing • Self-employed individuals or micro enterprises living in areas with inconvenient accessibility to microfinance access points (MAPs) where the nearest MAPs are located more than 10km travelling distance away. • Hard-to-reach areas such as rural/remote areas with no proper transportation infrastructure or inaccessible via normal mode of transportation. Low financial take-up or usage or awareness of loan/financing products by FIs • Self-employed individuals or micro enterprises without business banking account or low usage of business banking products. • Self-employed individuals or micro enterprises with low awareness/understanding on business banking products and services. • Individuals or businesses who are discouraged from visiting bank branches. 23 The guiding principles in this policy document are aligned with the principle-based guidance on the financially unserved and underserved under BNM’s Strategy Paper on Financial Inclusion Framework 2023-2026. Skim Pembiayaan Mikro 27 of 37 Issued on: 05 January 2024 Guiding principles of unserved and/or underserved segments Examples of unserved and/or underserved segments • Individuals or businesses conducting transactions or having loan/financing with informal or illegal platforms and financial service provider. Unable to conduct digital/online banking/mobile transactions due to lack of digital literacy, capability or connectivity • Communities who are not technology-savvy or due to physical disabilities. • Micro business owned by persons with disabilities and require assistance to perform financial transactions. • Does not have or use business’s mobile or internet banking for banking and payment transactions. • Resides in areas with poor internet connectivity and unable to subscribe to internet services. Profiles of MEs – high risk, less agile, vulnerable due to personal circumstances • Less agile to adapt to changes in circumstances or life events and falls into financial hardship easily. • Low ability to withstand financial shocks. • Lack of capacity to make own decision and requires assistance to deal with financial institutions. • New business which is less than 3 years in operations. Skim Pembiayaan Mikro 28 of 37 Issued on: 05 January 2024 Guiding principles of unserved and/or underserved segments Examples of unserved and/or underserved segments • Lack of credit history/income history/collateral/document, e.g. audited accounts. • Has limited understanding of the formal processes and procedures to obtain financial services. • Has adverse financial/credit track records. • Business owned by low income individual and gig worker. • Home based business and business without a permanent business location/premise (e.g., night market sellers, hawkers) Difficulty in accessing financial products due to information asymmetry or concerns on commercial viability especially in new growth areas • Not typically suited to traditional bank-based financing and/or risk protection solutions. • Difficulty in accessing loan/financing and/or protection solutions due to information asymmetry or commercial viability concerns given the infancy stage of development. Skim Pembiayaan Mikro 29 of 37 Issued on: 05 January 2024 Appendix 2 Application Template to Classify Product as an SPM Product The application to BNM must be sent to the Financial Inclusion Department via official letter addressed to Director of the Financial Inclusion Department at microfinance@bnm.gov.my. The application must be sent together with information on the product containing at minimum, the information included in the template below: Criteria to fulfil or information to be provided to classify product as an SPM product Details 1) Product/Programme Name To state: a) The name of product/programme for the following application to be classified as an SPM product; and b) The exact names of the product/programme that will be used in the loan/financing agreement between the SPM customer and PFI. 2) Contract type (for Islamic product only) To state the Islamic contract type i.e. tawarruq, mudharabah etc. Skim Pembiayaan Mikro 30 of 37 Issued on: 05 January 2024 Criteria to fulfil or information to be provided to classify product as an SPM product Details 3) Compliance to the requirements of the Policy Document on the Introduction of New Products and/or other relevant requirements specified by BNM 24 Please indicate ‘Yes’/‘No’, product status (e.g., existing product, new product, material or immaterial change of an existing product) and the date of approval or confirmation obtained from the Chief Risk Officer or other designated senior risk officer identified by the FI. 4) Source and size of fund To clearly indicate the source of fund for the product i.e., FI’s own internal fund/Micro Enterprises Facility (MEF), Others (please specify). If there is a specific allocated fund size, state the amount and whether it is a one-off allocation or on revolving basis. 24 E.g., Specification on Product Submission for Development Financial Institutions issued on 1 March 2023. Skim Pembiayaan Mikro 31 of 37 Issued on: 05 January 2024 Criteria to fulfil or information to be provided to classify product as an SPM product Details 5) Credit Default Risk To indicate who will bear credit risk in case of default e.g., solely by FI, shared between FI and 3rd party. If the risk is shared with 3rd party, please indicate the name of the 3rd party (e.g., CGC, SJPP, Government) and details of risk sharing (e.g., ratio of risk sharing between FI and the 3rd party, threshold of guarantee by 3rd party). 6) Collateral Requirement No collateral shall be imposed for loan/financing under SPM, including SPM funded by MEF 7) Loan/financing Amount – Maximum loan/financing amount of up to RM50,000, with a minimum loan/financing amount of RM5,000 Please specify: • Minimum loan/financing amount; and • Maximum loan/financing amount. Skim Pembiayaan Mikro 32 of 37 Issued on: 05 January 2024 Criteria to fulfil or information to be provided to classify product as an SPM product Details 8) Financing rate chargeable to SPM customer (p.a), inclusive of guarantee fee (if any) 25 For SPM funded by MEF, please specify the distinction of financing rate chargeable to SPM customer for financing funded by FI's own internal fund against MEF (Note: FIs are required to pass the cost-saving from MEF lower funding cost to SPM customer). 9) Purpose of loan/financing - for business activities E.g., working capital; and/or capital expenditure. 10) Target segments To list down: • Target segments (e.g., microenterprises as defined in the Guideline for SME Definition issued by SME Corporation Malaysia and/or self-employed individuals); and 25 FI to specify the type of financing rate chargeable and disclose an indicated effective financing rate p.a. (based on financing amount of RM50,000 for 5 years). Skim Pembiayaan Mikro 33 of 37 Issued on: 05 January 2024 Criteria to fulfil or information to be provided to classify product as an SPM product Details • Target sub-segment, if any (e.g., B40 MEs, startup, women entrepreneurs). 11) Tenure The tenure of loan/financing to SPM customer. 12) Committed approval time26 BNM’s requirement: loan/financing to be approved at an avg. of six days. 13) Committed disbursement time27 BNM’s requirement: loan/financing to be disbursed at an avg. of four days. 14) Eligible economic sector 26 Approval time refers to the number of working days upon receipt of complete documentation from the applicants until approval of loan/financing by the PFI. 27 Disbursement time refers to the number of working days from acceptance of all parties (e.g., borrower, guarantor) of the relevant legal documentation and/or completion of training until disbursement of loan/financing. Skim Pembiayaan Mikro 34 of 37 Issued on: 05 January 2024 Criteria to fulfil or information to be provided to classify product as an SPM product Details 15) Eligibility criteria to apply To list down the criteria of applicants that is considered for the product. 16) List of common documents required To provide the list of necessary documents which must be provided by applicants. 17) Application procedures To list down the microfinance access point for the application of this product e.g., branch, online etc. 18) Public Hotline Numbers To list down the contact numbers to the dedicated officers managing application queries from the public. Skim Pembiayaan Mikro 35 of 37 Issued on: 05 January 2024 Appendix 3 Report Template for Microfinance Access Points All PFIs are required to update and submit the following bi-annual report to BNM no later than 15 days after 30 June and 31 December of each year. Name of financial institution: _________________________ Report of month: (Jun / Dec) Year: _________________________ (A) Microfinance access point (by type) Type of Microfinance Access Point Functions or Services Provided e.g. inquiry only, marketing only, referral or leads on application/product, accept application, conduct credit assessment, facilitate loan repayment/collection PFI’s bank branches Business centres Microfinance centres Agents Strategic partners (please specify) E.g., State Islamic Religious Council Other physical channels (please specify) PFI’s own digital channels (please specify) E.g., website/portal, internet banking Third party’s digital channels (please specify) E.g., imSME platform Skim Pembiayaan Mikro 36 of 37 Issued on: 05 January 2024 (B) Number of microfinance access points (by state) Type of Microfinance Access Points State PFI’s bank branches Business centres Microfinance centres Agents Strategic partners Others (please specify) Johor Kedah Kelantan Melaka Negeri Sembilan Pahang Perak Perlis Pulau Pinang Sabah Sarawak Selangor Terengganu W.P. Kuala Lumpur W.P. Putrajaya W.P. Labuan Total Skim Pembiayaan Mikro 37 of 37 Issued on: 05 January 2024 Appendix 4 National Microfinance Logo

Public Notice

05 Jan 2024

BNM Shariah Advisory Council's Ruling on Ceding Out of Takaful Risk to Insurance Companies under Hardship Situation

https://www.bnm.gov.my/-/sacbnm-226mtg-ruling

https://www.bnm.gov.my/documents/20124/38335/sacbnm-mtg-226.pdf

Reading: BNM Shariah Advisory Council's Ruling on Ceding Out of Takaful Risk to Insurance Companies under Hardship Situation Share: 7 BNM Shariah Advisory Council's Ruling on Ceding Out of Takaful Risk to Insurance Companies under Hardship Situation Embargo : For immediate release Not for publication or broadcast before 1630 on Friday, 5 January 2024 5 Jan 2024 Applicability Licensed takaful operators (including professional retakaful operators) under the Islamic Financial Services Act 2013 Summary The Shariah Advisory Council (SAC) of Bank Negara Malaysia at its 226th meeting on 26 October 2022 ruled that item (ii) of the SAC ruling at the 113th meeting dated 23 June 2011 and 114th meeting dated 28 July 2011 on “Takaful Semula dengan Syarikat Insurans dan Insurans Semula Konvensional” (the Existing Ruling) is revised as follows: (ii) A licensed takaful operator (including a licensed professional retakaful operator) is not allowed to distribute takaful risks through a ceding out arrangement to an insurer (including a licensed professional reinsurer), except under the following circumstances: i. existing licensed takaful operators do not accept or are not able to accept the risk; ii. existing licensed takaful operators do not have the capacity or expertise to accept the risk; or iii. a ceding out arrangement with another licensed takaful operator causes or may cause detrimental effect to the takaful funds of the licensed takaful operators. This ruling supersedes item (ii) of the Existing Ruling, while the remaining part of the Existing Ruling would continue to apply. This ruling comes into effect immediately upon its publication on Bank Negara Malaysia’s website on 5 January 2024. Issuance Date 5 January 2024 Effective Date 5 January 2024 Issuing Department Jabatan Sistem Kewangan Islam Document The Shariah Advisory Council of Bank Negara Malaysia (SAC) Ruling on Ceding Out of Takaful Risk to Insurance Companies Under Hardship Situation   Bank Negara Malaysia 5 January 2024 © Bank Negara Malaysia, 2024. All rights reserved.

SAC BNM 226th Meeting SAC 226th Meeting 2022 1 The Shariah Advisory Council of Bank Negara Malaysia (SAC) Ruling on Ceding Out of Takaful Risk to Insurance Companies Under Hardship Situation 226th SAC Meeting dated 26 October 20221 Part I: SAC Ruling, Its Effective Date and Applicability Pursuant to section 52 of the Central Bank of Malaysia Act 2009, the SAC at its 226th meeting dated 26 October 2022 ruled that item (ii) of the SAC ruling at the 113th meeting dated 23 June 2011 and 114th meeting dated 28 July 2011 on “Takaful Semula dengan Syarikat Insurans dan Insurans Semula Konvensional” (the Existing Ruling) is revised as follows: (ii) A licensed takaful operator (including a licensed professional retakaful operator) is not allowed to distribute takaful risks through a ceding out arrangement to an insurer (including a licensed professional reinsurer), except under the following circumstances: i. existing licensed takaful operators do not accept or are not able to accept the risk; ii. existing licensed takaful operators do not have the capacity or expertise to accept the risk; or iii. a ceding out arrangement with another licensed takaful operator causes or may cause detrimental effect to the takaful funds of the licensed takaful operators. In the above circumstances, the need (hajah) to distribute the takaful risks through ceding out arrangement to an insurer to address any hardship situation faced by a licensed takaful operator must be assessed and affirmed by the Shariah committee of the licensed takaful operator. This ruling supersedes item (ii) of the Existing Ruling, while the remaining part of the Existing Ruling would continue to apply. Note: Please refer Appendix 1 for the Existing Ruling. 1.1. This ruling comes into effect on 5 January 2024 and applies to licensed takaful operators (including professional retakaful operators)2 under the Islamic Financial Services Act 2013 (IFSA) to carry on takaful business. Any reference to “insurer” in this ruling shall include a reference to “reinsurer”. 1.2. In line with sections 28(1) and (2) IFSA, licensed takaful operators are required to comply with this ruling. Compliance with any ruling of the SAC in respect of any particular aims and operations, business, affairs and activities of Islamic financial institutions (IFIs) shall be deemed to be in compliance with Shariah. Part II: Background 2.1. A retakaful arrangement refers to the sharing of takaful risks between a licensed takaful operator with another licensed takaful operator. With an effective retakaful arrangement, a licensed takaful operator may increase its capacity and stabilise its underwriting performance, as well as safeguard the takaful fund from significant financial burden should there be unexpected adverse claims experience. 1 Issuance of this statement is subsequent to the issuance of Hajah and Darurah Policy Document to provide additional guidance and clear expectation on the effective application of hajah. 2 Reference to “licensed takaful operators” shall include reference to “professional retakaful operator”, where appropriate. SAC 226th Meeting 2022 2 2.2. The SAC had previously ruled3 that licensed takaful operators are not allowed to cede out takaful risks via outward retakaful arrangement to insurers except in the face of hardship. In such situation, the licensed takaful operators are required to seek views and endorsement from the Shariah committee on the need (hajah) to cede out the takaful risks to an insurer. The board of directors of the licensed takaful operator has oversight responsibility on the implementation of the Shariah committee’s decision relating to the ceding out arrangement. 2.3. In light of the prevalent issues in takaful industry relating to cession of takaful risk to insurer, Bank Negara Malaysia (the Bank) has observed that there are ceding out arrangements made by a licensed takaful operators which do not fall within the circumstances stipulated in the Existing Ruling. These include ceding out arrangements with insurer arising solely from the licensed takaful operator’s business considerations given the licensed takaful operators’ risk of losing business opportunity or risk to profitability4 (please refer to Illustration 1). Shariah Issue 2.4. The SAC deliberated on whether a licensed takaful operator’s decision to cede out its takaful risks to an insurer due to business consideration could fall within any of the circumstances stipulated in the Existing Ruling. Illustration 1: Ceding out arrangement of takaful risk to insurer due to business consideration 3 The SAC ruling was decided in 113th (23 June 2011) and 114th meeting (28 July 2011). The ruling was issued in Kompilasi Keputusan Syariah dalam Kewangan Islam Edisi Ketiga Terbitan 2017. 4 For example, losing profit commission from ceding out arrangement or financial loss arising from the effort to rectify the Shariah non-compliance incident. These examples are non-exhaustive and should not be construed as the only example available. SAC 226th Meeting 2022 3 Part III: Key Discussion Risk to IFI’s profitability does not fall under hardship situation 3.1. In principle, a licensed takaful operator is prohibited from being involved in Shariah non- compliant activities such as providing takaful protection for Shariah non-compliant activities. 3.2. Involvement in Shariah non-compliant activities can also occur from the sharing of takaful risks with an insurer. Licensed takaful operators are not allowed to share the takaful risks with insurers as the business and operations of insurance contain prohibited elements such as ambiguity (gharar), element of gambling (maysir) and interest (riba). As an IFI, licensed takaful operators must avoid elements that will affect the Shariah permissibility of their activities. 3.3. However, a licensed takaful operator is allowed to distribute its risks via ceding out arrangement to an insurer on the basis of needs (hajah) where: (i) existing licensed takaful operators do not accept or are not able to accept the risk; (ii) existing licensed takaful operators do not have the capacity or expertise to accept the risk; or (iii) a ceding out arrangement with another takaful operator causes or may cause detrimental effects to the takaful funds of the licensed takaful operator. 3.4. As the permissibility of ceding out arrangement is premised on hajah as outlined in the above three (3) circumstances, any ceding out arrangement with insurer that is not justifiable under hajah is deemed to be a Shariah non-compliant activity. 3.5. The SAC emphasises on the proper application of hajah in which assessment must be carried out adequately and comprehensively supported with clear justifications and impact analysis, among others. Part IV: Basis of Ruling Shariah prohibits any form of direct involvement in conventional insurance activities 4.1. In principle, ceding out arrangement of takaful risks to an insurer is strictly prohibited as the arrangement will directly cause the takaful business’ involvement in practices of riba and other forbidden activities by Shariah. The takaful funds transferred to an insurer will be managed according to insurance practices and operations which may involve Shariah non-compliant activities or businesses. 4.2. Additionally, through the ceding out arrangement to an insurer, the licensed takaful operator is perceived to recognise the conventional insurance contract and its activities as permissible under Shariah. 4.3. This is clearly in contrary to the basic principles and objectives of Shariah as per the following verse of al-Quran: نِ 5 ْثِم َوٱْلعُْدَوٰ َوتَعَاَونُو۟ا َعلَى ٱْلبِر ِ َوٱلتَّْقَوٰى َوََل تَعَاَونُو۟ا َعلَى ٱْْلِ “…and to help one another in furthering virtue and God consciousness, and not in what is wicked and sinful...” 5 Surah al-Ma’idah, verse 2. SAC 226th Meeting 2022 4 Strict application of hajah under hardship situation 4.4. The SAC allows ceding out arrangement of takaful risk by a licensed takaful operator to an insurer that is due to either one of the stipulated circumstances under this ruling, and it should not be practiced loosely beyond hardship situations, such as to manage risk of the licensed takaful operator's existing business relationship or profitability. This approach is based on the following fiqh maxim: الضرورة تقدر بقدرها 6 “Necessity is to be assessed and treated proportionately.” إن األمر إذا ضاق اتسع وإذا اتسع ضاق7 “When a matter is constricted (by the hardship) flexibility is accorded but when the hardship is addressed, the flexibility is rescinded.” Terms and conditions of a contract imposed shall not contravene Shariah principles 4.5. Based on the principle of freedom to contract, both contracting parties are free to stipulate mutually agreed contractual terms and conditions. However, the conditions stipulated must be in line with Shariah principles and do not lead to any Shariah prohibitions. In cases where any terms and conditions agreed between the contracting parties contravene Shariah principles, such terms and conditions shall be deemed unenforceable and shall not be fulfilled. This is in line with the following hadith of Rasulullah SAW: شرطا المسلمون على شروطهم إَل : ملسو هيلع هللا ىلصقال رسول هللا ،عن أبي هريرة رضى هللا عنه قال أحل حراما أو حرم حالَل 8 “Abu Hurairah RA narrates that Rasulullah SAW said: Muslims are bound by the conditions in which they agreed upon, except for the one that permits the haram (forbidden) and forbids the halal (permissible).” Part V: Implication of the SAC Ruling 5.1. This ruling provides clarity and certainty to the industry on the applicability of the ruling and the roles of the parties involved in ceding out arrangement to ensure its conformity with Shariah. 5.2. In addition, this statement also provides clear message to the industry to take the necessary measures in ensuring proper application of hajah as outlined in this ruling, policy documents or frameworks issued by the Bank. 5.3. Additionally, this ruling clarifies that the previous ruling on ceding out arrangement (item ii of SAC ruling on Retakaful with Conventional Insurance and Reinsurance Companies) is superseded by this ruling. 6 Ibnu Nujaim, Al-Ashbah wa Al-Naza’ir, Dar Al-Kutub Al-`Ilmiyyah, 1999, p. 73. 7 Ibid, v. 1 p. 72. 8 Abu Daud, Sunan Abi Daud, Bait al-Afkar al-Dawliyyah, 1999, p. 398, hadith no. 3594. SAC 226th Meeting 2022 5 Appendix 1 Takaful Semula dengan Syarikat Insurans dan Insurans Semula Konvensional Keputusan MPS Berhubung Alir Keluar Risiko Takaful Kepada Syarikat Insurans / Insurans Semula Merujuk kepada perkara (ii) dibawah, MPS pada mesyuarat ke-113 bertarikh 23 Jun 2011 dan mesyuarat ke-114 bertarikh 28 Julai 2011 telah memutuskan: (ii) Pengendali takaful (dan takaful semula) tidak dibenarkan untuk mengagihkan risiko secara takaful semula alir keluar kepada syarikat insurans (dan insurans semula) kecuali untuk kes- kes yang tidak dapat dielakkan iaitu: (a) Pengendali takaful (dan takaful semula) sedia ada tidak menerima risiko tersebut; (b) Pengendali takaful (dan takaful semula) sedia ada tidak mempunyai kapasiti atau kepakaran untuk menerima risiko tersebut; dan (c) Pengaturan takaful semula dengan pengendali takaful (dan takaful semula) yang bersedia menerima risiko tersebut akan lebih memudaratkan dana takaful. Sekiranya berlaku kes-kes di atas, keperluan untuk mengagihkan risiko secara takaful semula alir keluar kepada syarikat insurans (dan insurans semula) perlu mendapatkan penilaian dan pengesahan daripada jawatankuasa atau penasihat Syariah dan diluluskan oleh lembaga pengarah pengendali takaful (dan takaful semula) tersebut. Reference: Resolusi no. 10 - Takaful Semula dengan Syarikat Insurans dan Insurans Semula Konvensional, Kompilasi Keputusan Syariah Dalam Kewangan Islam Edisi Ketiga Terbitan 2017

Public Notice

03 Jan 2024

Policy Document on Hajah and Darurah

https://www.bnm.gov.my/-/pd-hajah-darurah-en

https://www.bnm.gov.my/documents/20124/938039/pd-Hajah-Darurah-Jan2024.pdf, https://www.bnm.gov.my/documents/20124/938039/faq-Hajah-Darurah-Jan2024.pdf

Reading: Policy Document on Hajah and Darurah Share: 2 Policy Document on Hajah and Darurah Embargo : For immediate release Not for publication or broadcast before 1500 on Wednesday, 3 January 2024 3 Jan 2024 This policy document outlines the requirements and expectations of Bank Negara Malaysia (BNM) on the application of exception in complying with Shariah, based on hajah (needs) and darurah (dire necessity) by Islamic financial institutions (IFIs) in carrying out Islamic banking and takaful business. The following are the key requirements and expectations: (a) outline the definition of hardship, preconditions, the scope of prohibited application and parameters of different categories of hajah and darurah; (b) clarify and strengthen the accountability of individuals responsible for the assessment, deduction as well as implementation of hajah and darurah; and (c) outline the operational requirements and guidance in facilitating Shariah deliberation and decision-making on the application of hajah and darurah. This policy document aims to strengthen the current methodology and processes of the IFIs in addressing the hardship faced, while offering Islamic financial business, so that the application of hajah and darurah is in accordance with BNM’s expectations. Issuance Date 3 January 2024 Effective Date 2 January 2025 Issuing Department Jabatan Sistem Kewangan Islam Documents Hajah and Darurah Policy Document Frequently Asked QuestionsBank Negara Malaysia 3 January 2024 © Bank Negara Malaysia, 2024. All rights reserved.

Hajah and Darurah Policy Document Issued on: 3 January 2024 BNM/RH/PD 028-129 Hajah and Darurah Applicable to: 1. Licensed Islamic banks 2. Licensed takaful operators and professional retakaful operators 3. Licensed banks and licensed investment banks approved to carry on Islamic banking business 4. Prescribed development financial institutions approved to carry on Islamic financial business Hajah and Darurah TABLE OF CONTENTS PART A OVERVIEW ...................................................................................................... 1 1 Introduction ....................................................................................................... 1 2 Applicability ...................................................................................................... 2 3 Legal provisions................................................................................................ 3 4 Effective date .................................................................................................... 3 5 Interpretation .................................................................................................... 3 6 Related legal instruments and policy documents .............................................. 4 PART B SHARIAH REQUIREMENTS FOR HAJAH AND DARURAH APPLICATION .. 5 7 Compliance with this part .................................................................................. 5 8 Aspects of hardship .......................................................................................... 5 9 Hajah and darurah parameters ......................................................................... 6 Part C OPERATIONAL REQUIREMENTS ................................................................ 10 10 Compliance with this part ................................................................................ 10 11 Governance and oversight .............................................................................. 10 12 Decision-making process ................................................................................ 12 13 Implementation plan ....................................................................................... 16 Appendix 1 Definition of Hajah and Darurah .................................................................. 17 Appendix 2 Decision Tree in Applying the General Parameters ................................... 19 Appendix 3 Summary of Criteria and Parameters in Dealing with Hajah and Darurah 20 Appendix 4 Process Flow in Applying Hajah and Darurah ............................................ 21 Hajah and Darurah 1 of 21 PART A OVERVIEW 1 Introduction 1.1 The Islamic financial system in Malaysia has seen significant advancement in scale, diversity and sophistication of institutions and financial offerings in recent years, reflective of a maturing market. As the Islamic banking and takaful industry continues to develop, challenges in the business and operating environment would require attendant risks to be well-managed. This framework aims to clarify parameters on hajah and darurah1 to facilitate contemporary application in Islamic financial business in accordance with Shariah. 1.2 Hajah and darurah concepts have been applied in Islamic financial business to address hardship2 or difficulties in executing financial transactions or arrangements based on Shariah principles. The application of hajah and darurah arises during unfavourable circumstances or distress situations facing an Islamic financial institution (IFI) to prevent harm3 (mafsadah) and ultimately attain benefit (maslahah) of effective financial intermediation. 1.3 The Shariah Advisory Council of Bank Negara Malaysia (the SAC) has, on case- by-case basis, issued several Shariah rulings4 that outline broad Shariah parameters5 relating to the application of hajah and darurah. Taking into consideration the implementation of these rulings by IFIs, a more robust governance process and assessment approach are warranted to promote effective application of hajah and darurah by IFIs. 1.4 This policy document sets out the Shariah and operational requirements and expectations concerning the application of hajah and darurah, as follows: (a) outline the definition, preconditions, scope of prohibited application and parameters of different categories of hajah and darurah; (b) clarify and strengthen the accountability of individuals responsible for the assessment, deduction as well as implementation of hajah and darurah6; and 1 Refer to Appendix 1 for general definition of hajah and darurah from perspectives of classical and contemporary scholars. 2 Refer to paragraph 8.1 for definition of hardship. 3 For example, in the context of Islamic finance, flexibility permitted by Shariah may be used to prevent failure of an IFI which causes systemic impact to the financial system. 4 Examples of the Shariah rulings, among others are as follows: (a) the permissibility for a licensed takaful operator to cede out its risks to a licensed insurer or a professional reinsurer in the absence of the capacity or expertise of a licensed takaful operator or a professional retakaful operator to underwrite takaful risks; (b) the application of bai` istijrar (sale of supplies with deferred price) for Islamic trade finance; and (c) the permissibility to benchmark interest rate in the pricing component of Islamic financial products. 5 The Shariah rulings focus on main principles without outlining the detailed processes, where some would be supported with requirements and guidance in relevant policy documents. For instance, the SAC ruling on the application of hajah with regard to the ceding out of takaful risk to a licensed insurer or professional reinsurer is supplemented with relevant policy expectation in the policy document on Takaful Operational Framework, but it does not comprehensively cover additional operational guidance as outlined in this policy document. 6 Refers to paragraphs 9.3, 9.5 and 9.7 for the categorisation of hajah and darurah. Hajah and Darurah 2 of 21 (c) outline the operational requirements and guidance in facilitating Shariah deliberation and decision-making on the application of hajah and darurah. 1.5 Given the specific nature of hajah and darurah, Bank Negara Malaysia (the Bank) expects all governance organs in IFIs to play their role in supporting effective implementation of hajah and darurah by ensuring– (a) a comprehensive assessment is being carried out and supported with clear justifications and business impact analysis; (b) robust deliberation and informed decision-making are performed by the Shariah committee; and (c) appropriate ex-ante and ex-post assessment as well as review are performed by the control functions to serve as a check and balance to the implementation of the Shariah rulings and decisions or advice of the Shariah committee. Overview of hajah and darurah 1.6 Hajah and darurah have been widely discussed by both classical and contemporary Shariah scholars. However, these discussions are mostly focused on the hardships experienced by a person aiming to preserve life when facing a hardship situation. Both concepts have generally been divided into the following two (2) categories: (a) usuliyyah7; and (b) fiqhiyyah8. 1.7 This policy document introduces hajah type 1, hajah type 29 and darurah under the fiqhiyyah perspective to ensure relevancy and rigour in the application of hajah and darurah by the IFIs. 1.8 The application of hajah and darurah under usuliyyah perspective is permitted10 and not subject to the requirements in this policy document. Such application is allowed permanently by Shariah to address public needs11 and therefore, the permissibility does not require further deduction12 by the Shariah committee nor the SAC. For instance, the permissibility of the application of ijarah (lease) and salam (forward sale). 2 Applicability 2.1 This policy document is applicable to IFIs as defined in paragraph 5.2. 7 Usuliyyah means a circumstance faced by a scholar where there is an established Shariah principle on the application of hajah and darurah and it has been allowed permanently by Shariah. 8 Fiqhiyyah means a circumstance faced by a scholar where it requires a new deduction of a Shariah requirement on the application of hajah and darurah, and its permissibility of the period and quantum will be determined based on the severity of hardships faced by the people. 9 Refer to paragraphs 9.3 and 9.5 for the parameters of hajah type 1 and hajah type 2. 10 The permissibility has been allowed through the Bank’s policy documents on relevant Shariah standards and issuance of the SAC meeting statement on Shariah rulings. 11 May not only be confined to the needs related to Islamic finance sector. 12 The Shariah evidence for hajah usuliyyah and darurah usuliyyah have been used as basis to deduce the Shariah legal judgment (hukm shar`i) from fiqhiyyah perspective. Hajah and Darurah 3 of 21 3 Legal provisions 3.1 The requirements in Part B of this policy document are specified pursuant to– (a) sections 29(1) and 155 of the Islamic Financial Services Act 2013 (IFSA); and (b) sections 33E(1) and 116 of the Development Financial Institutions Act 2002 (DFIA). 3.2 The requirements in Part C of this policy document are specified pursuant to– (a) sections 29(2), 57(1) and 155 of the IFSA; and (b) sections 33E(2), 41 and 116 of the DFIA. 3.3 The guidance in this policy document is issued pursuant to section 277 of the IFSA and section 126 of the DFIA. 4 Effective date 4.1 This policy document comes into effect on 2 January 2025 except for paragraph 13 which takes effect immediately upon issuance of this policy document. 5 Interpretation 5.1 The terms and expressions used in this policy document shall 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 document. 5.2 For purposes of this policy document– “S” denotes a standard, an obligation, a requirement, specification, direction, condition and any interpretative, supplemental and transitional provisions that shall be complied with. Non-compliance may result in enforcement action; “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; “Islamic financial institutions” (IFIs) refer to– (a) licensed Islamic banks; (b) licensed takaful operators including professional retakaful operators; (c) licensed banks and licensed investment banks approved under section 15(1)(a) of the FSA to carry on Islamic banking business; and (d) prescribed development financial institutions approved under section 33B(1) of the DFIA to carry on Islamic financial business; “hajah” refers to specific categories of hajah type 1 and hajah type 2 parameters in the context of Islamic finance application which can be referred in paragraphs 9.3 and 9.5; Hajah and Darurah 4 of 21 “Shariah principle” refers to any existing ruling specified under the recognised sources of Islamic law, or any legal judgment (hukm shar`i) deduced by a qualified jurist (a mujtahid) via the ijtihad13 process; and “Shariah ruling” refers to any ruling made by the SAC in accordance with its functions under section 52(1)(a) of the Central Bank of Malaysia Act 2009 for the ascertainment of Islamic law for the purposes of Islamic financial business. 6 Related legal instruments and policy documents 6.1 This policy document shall be read together with– (a) other relevant legal instruments and policy documents that have been issued by the Bank, including any amendments or reissuance thereafter, in particular– (i) Corporate Governance issued on 3 August 2016; (ii) Corporate Governance for Prescribed Development Financial Institutions issued on 13 December 2019; (iii) Shariah Governance issued on 20 September 2019; (iv) Fit and Proper Criteria issued on 28 June 2013; (v) Fit and Proper Criteria (for prescribed development financial institutions) issued on 14 June 2017; (vi) Recovery Planning issued on 27 July 2021; (vii) Stress Testing issued on 15 June 2017; (viii) Risk Governance issued on 1 March 2013; (ix) Takaful Operational Framework issued on 26 June 2019; and (b) Manual Rujukan Institusi Kewangan Islam kepada Majlis Penasihat Shariah issued on 15 March 2016. 13 Refers to rigorous thinking and efforts by scholars who have attained the degree of mujtahid in order to issue certain Shariah ruling definitely in a matter which is not clearly provided in al-Quran or Sunnah (as defined in Shariah Resolutions in Islamic Finance: Second Edition) Hajah and Darurah 5 of 21 PART B SHARIAH REQUIREMENTS FOR HAJAH AND DARURAH APPLICATION 7 Compliance with this part S S 7.1 An IFI that applies hajah and darurah shall ensure that such application is in compliance with Part B of this policy document. 7.2 The Bank retains its discretion in assessing whether an IFI is in compliance with this policy document to the satisfaction of the Bank. 8 Aspects of hardship Definition of hardship G 8.1 Hardship is a situation of unfavourable circumstances, severe adversity or intolerable levels of distress, arising from internal or external factors that require a person to resort to a different solution(s) which may permit an exception in applying existing Shariah principles or Shariah rulings. G 8.2 Generally, if the hardship is not addressed, it may detrimentally affect the five (5) main objectives of Shariah (maqasid Shariah) which are the preservation of religion, life, intellect, lineage and wealth (property). In the context of fiqh muamalat or Islamic finance, the hardship experienced by a person predominantly involves Shariah rulings aiming at preserving wealth (hifz al-mal) (as provided in Illustration 1). Illustration 1 As part of a general takaful operator’s risk management strategy, it may decide to cede out certain specialised risks such as oil and gas, and aviation covers to another takaful or retakaful operator in managing its risk exposure. However, in cases where there is insufficient retakaful capacity and expertise to fully absorb the particular risk and/or it creates detrimental effects to the takaful funds, the takaful operator is allowed to cede out the risks to an insurer or a reinsurer on the basis of difficulty/hardship. This would ensure preservation of the takaful fund managed by the general takaful operator. Preconditions in applying hajah and darurah S 8.3 An IFI shall ensure that the following preconditions are fulfilled in evaluating the application of hajah and darurah to address hardship: (a) Certainty – there is certainty (al-yaqin) or high possibility (ghalib al-zann)14 on the materialisation or occurrence of hardship, and it is not based on mere assumption; (b) Deviation from Shariah principle or Shariah ruling – the elimination of hardship requires deviation from existing Shariah principles or Shariah ruling whether temporarily or permanently; 14 Certainty (al-yaqin) can be achieved based on undisputable evidences and high possibility (ghalib al- zann) can be achieved with clear leading of signs and indicators but with insignificant dispute. Hajah and Darurah 6 of 21 (c) Absence or impracticality of Shariah compliant alternatives – there is an absence of a Shariah compliant alternative, or there is an available Shariah compliant alternative to address the hardship, but such alternative is impractical to be implemented given the prevailing situation(s); and (d) Impact – the application of hajah and darurah does not cause greater or equal harm to stakeholders related to the hardship, and the impact shall be assessed based on fiqh al-muwazanah15. S 8.4 In relation to paragraph 8.3, an IFI is prohibited from applying hajah and darurah to address hardships arising solely from the risk to its profitability or due to weakness in the IFI’s governance and internal control environment16. G 8.5 In relation to paragraph 8.3, the following method may be adopted by an IFI in applying hajah and darurah in accordance with the severity of the hardship: (a) Reducing obligation – compliance with Shariah is achieved by reducing the appropriate level of a person’s capability, e.g., in ensuring the sustainability of a takaful fund particularly to prevent the situation of fund deficit which requires continuous loan (qard), a licensed takaful operator may be allowed to cede out a certain percentage of its takaful risk to reinsurers instead of fully retaining the risk; or (b) Exemption/exception – allow the utilisation or adoption of transactions that are not in compliance with Shariah in view of the absence of a Shariah compliant alternative for such transactions or widespread public needs, e.g., subscription to insurance protection in the absence of takaful protection for a particular risk or application of settlement in two (2) days after the transaction (T+2) in currency exchange (bai` al-sarf) in the absence of immediate exchange practices. 9 Hajah and darurah parameters Application of hajah and darurah G 9.1 Hajah and darurah that may be applied by an IFI can be divided into the following categories: (a) hajah type 1; (b) hajah type 2; or (c) darurah. S 9.2 In line with paragraph 10.6 of the policy document on Shariah Governance, an IFI shall refer to the SAC for a ruling in the case of any hardship with no prior Shariah rulings that warrants the application of hajah and darurah. 15 Fiqh al-muwazanah is a structured method and processes applied by jurist in making Shariah decision through weighing up between multiple benefits (to attain), harms (to avoid), and/or to determine which between the two (2) shall prevail and be prioritised. 16 For examples, losing profit commission from ceding out arrangement, downside risk in meeting top line and bottom line, hardship resulted from poor risk management control, business decision or negligence by the IFI or financial loss arising from the effort or as measure to rectify Shariah non- compliance events. These examples are non-exhaustive and should not be construed as the only examples available. Hajah and Darurah 7 of 21 Hajah Type 1 S 9.3 In addition to paragraph 8.3, an IFI shall categorise any hardship under hajah type 1 if such hardship meets all of the following parameters: (a) the hardship arises due to practices or situations which are difficult to avoid (`umum al-balwa) or are widely accepted as a customary commercial practice (`urf tijari); (b) the SAC issues a ruling on the permissibility of the application of hajah type 1 without stipulating specific conditions or limitations; and (c) the Shariah ruling remains applicable until it is overridden by a later Shariah ruling. G 9.4 Examples of application of hajah type 1 are provided in Illustration 2. The examples are subject to the fulfilment of the parameters in paragraph 9.3. Illustration 2 (a) Practice of T+2 for foreign currency exchange (bai` al-sarf) The Shariah principle for foreign currency exchange (bai` al-sarf) transaction requires contracting parties to conclude their transaction on an immediate basis. However, in the context of the current financial system, the conclusion of a contract or settlement could not be done on an immediate basis due to difficulties and operational constraints. Therefore, an IFI may conduct the settlement in two (2) days after the transaction date (T+2) as it has been accepted and recognised as a customary commercial practice. (b) Use of a conventional nostro account In the event where an IFI needs to perform international trade or foreign exchange transactions, it may use a conventional nostro account if there is an absence or lack of Shariah compliant nostro accounts in other jurisdictions. Typically, the nostro account balances earn zero or minimal returns. Therefore, the IFI may use the conventional nostro account to address frictions in its transactions with international counterparts on need basis and be recognised as a difficult situation to avoid. Hajah Type 2 S 9.5 In addition to paragraph 8.3, an IFI shall categorise any hardship under hajah type 2 if such hardship meets all of the following parameters: (a) the hardship does not arise from practices or situations which are widely accepted as customary commercial practice (`urf tijari); (b) the hardship is experienced by a specific person(s) and the severity of the hardship does not reach the stage of darurah; (c) the SAC issues a ruling on the permissibility of the application of hajah type 2 with specific conditions or limitations; and Hajah and Darurah 8 of 21 (d) the Shariah ruling needs to be applied temporarily and proportionately depending on the complexity of the hardship by considering the appropriate duration and quantum17. G 9.6 Examples of application of hajah type 2 are provided in Illustration 3. The examples are subject to the fulfilment of the parameters in paragraph 9.5. Illustration 3 (a) Insurance coverage for Islamic financing In a wakalah financing deal, an IFI has appointed a client as its agent (wakil) to source for a takaful coverage to mitigate oil and gas risk. The client has exhausted all reasonable endeavours to source for a takaful coverage, in fulfilling his duty as an agent. However, due to the huge coverage amount needed to mitigate the risk and limited accessibility due to location constraints i.e., such oil and gas businesses located outside Malaysia, the client faces difficulty in getting takaful protection for the project. Hence, the IFI as principal (muwakkil) has allowed the client to obtain insurance coverage to fulfil the project financing requirements. (b) Liquidity risk management A full-fledged licensed Islamic bank has been receiving huge capital support to develop its Islamic banking business, and it has translated into better capital and asset position for the Islamic banking business. However, during a financial crisis or stress event, its banking group is in need of financial assistance. The licensed Islamic bank, as an entity within the group, can be well positioned to provide financial assistance such as transferring its funds or excess high quality liquid assets (HQLA) to the group18. The assistance provided is important to avoid the contagion risk to the licensed Islamic bank should the stress scenario become more serious and severe to the detriment of the group. This considers interdependencies on critical shared services, access to financial market infrastructures as well as the reputation of its conventional parent bank to obtain funding and carry out banking business. (c) Financing Shariah non-compliant business by a prescribed institution A prescribed institution performs its role based on mandates determined by the government. For a full-fledged Islamic prescribed institution, the institution should not perform any Shariah non-compliant transaction or dealing such as financing Shariah non-compliant industry. However, in the event where there is no other commercial banking institution or prescribed institution that could provide the financing and the financing has been mandated by the government, the full-fledged Islamic prescribed 17 This is based on Islamic legal maxim: "الضرورة تقدر بقدرها" (Dire necessity is to be assessed and treated proportionately), Ibnu Nujaim, Al-Ashbah wa al-Naza’ir, Dar al-Kutub al-`Ilmiyyah, 1999, p. 73. 18 The IFI funding shall be the last resort arrangement i.e., the banking group must first exhaust the funding available at its conventional counterpart or its parent before soliciting funding from the IFI. Hajah and Darurah 9 of 21 institution may execute the Shariah non-compliant transaction to fulfil its mandate. Darurah S 9.7 In addition to paragraph 8.3, an IFI shall categorise any hardship under darurah if it meets all of the following parameters: (a) the hardship does not arise from practices or situations which are widely accepted as customary commercial practice (`urf tijari); (b) the hardship experienced by a specific person(s) may or may not cause systemic impact, but trigger recovery or resolution actions19; (c) the SAC issues a ruling on the permissibility of the darurah application with specific conditions or limitations in light of the extreme stress situation; and (d) the Shariah ruling needs to be applied temporarily and proportionately based on the complexity of the hardship by considering the appropriate duration and quantum17. G 9.8 Example of application of darurah is provided in Illustration 4. The example is subject to the fulfilment of the parameters in paragraph 9.7. Illustration 4 An IFI has been identified to undergo a resolution phase by a resolution authority (RA). During that phase, the RA has exhausted all possible funding options in the resolution actions to avoid systemic risk to the financial industry. However, additional funding is still required, and the only possible solution to address the issue is to obtain funding from an international body – which can only be offered through a conventional loan arrangement. In this situation, the RA may execute the only possible solution due to the dire necessity of the situation. G 9.9 The hardship situations which warrant for the categories of hajah and darurah in paragraph 9.1 are not permanent and may change depending on the nature and severity of the hardship as stated in the fiqh legal maxim “a necessity possibly falls under the category of dire necessity whether it is in general or specific form20”. For instance, any of the Shariah rulings which are considered as hajah type 1 may be recategorised to hajah type 2 in the event where the hardship is no longer considered as a customary commercial practice (`urf tijari) of the Islamic finance industry, and vice versa. 19 Refer to policy document on Recovery Planning. Muhammad Al-Zuhaili, Al-Qawaid al-Feqhiyyah wa Tatbiqatuha fi" احلاجة تنزل منزلة الضرورة عامة كانت أو خاصة " 20 al-Mazahib al-Arba`ah, Dar al-Fikr, 2006, v. 1 p. 288. Hajah and Darurah 10 of 21 PART C OPERATIONAL REQUIREMENTS 10 Compliance with this part S S 10.1 Part C of this policy document shall be applicable to the hardship that meets the parameters of hajah type 2 or darurah as described in paragraphs 9.5 and 9.7 respectively. 10.2 The Bank retains its discretion in assessing whether an IFI is in compliance with this policy document to the satisfaction of the Bank. 11 Governance and oversight G 11.1 The requirements under Part C focus on the roles and responsibilities of key organs of the IFIs to promote effective governance arrangements and sound Shariah compliance culture within the IFIs, guided by the intended outcomes of this policy document. It complements the existing policy documents issued by the Bank which promote the long-term safety and soundness of the IFIs. G 11.2 Given the specific nature of the application of hajah type 2 and darurah, the Bank expects heightened oversight and strengthened responsibilities of every key organ of the IFIs to ensure rigorous assessment, deliberation, implementation and monitoring. The board S 11.3 The board, in overseeing the application of hajah type 2 and darurah within the IFI, shall have the overall responsibility to ensure an appropriate governance system is established to facilitate effective implementation of hajah type 2 and darurah that reflects the importance of strategy formulation and risk management practices and promotes end-to-end compliance with Shariah. In doing so, the board shall– (a) oversee the implementation of the decisions and advice of the Shariah committee and ensure that appropriate internal controls are in place; (b) approve internal policies and procedures relating to the decision-making process on hajah type 2 and darurah, including policies on dissemination of decisions or advice of the Shariah committee as well as their implementation monitoring; and (c) constructively challenge the IFI’s proposed application of hajah type 2 and darurah, including providing inputs on the adequacy of plausible scenarios, stress testing results, and key assumptions used in justifying the application of hajah type 2 and darurah, and give due consideration to the applicable duration and exit strategy, with due regard to the decision or advice of the Shariah committee. Shariah committee S 11.4 The Shariah committee in providing objective and sound decision or advice to the IFI on the application of hajah type 2 and darurah shall– (a) ensure that assessment on the proposed application of hajah type 2 and darurah by the IFI are in compliance with the requirements as specified in paragraphs 8.3, 8.4, 9.5 and 9.7 of this policy document; Hajah and Darurah 11 of 21 (b) ensure rigour in deliberating hajah type 2 and darurah application, highlight any significant concerns and dissenting views, and provide proper justifications for any decision or advice; and (c) satisfy that all possible efforts which have been demonstrated by the IFI prior to applying hajah type 2 and darurah could not address the particular hardship in line with the established internal policies and procedures on application of hajah type 2 and darurah. S 11.5 An IFI shall ensure that all Shariah committee members shall deliberate the proposed application of hajah type 2 and darurah and must ascertain views and insights on such matters, except under exceptional circumstances21. S 11.6 In relation to paragraph 11.5, an IFI shall ensure that views of the Shariah committee members who are not in attendance are obtained in writing. S 11.7 In line with paragraph 11.8 of the policy document on Shariah Governance, an IFI shall, at minimum, ensure that any decision of the Shariah committee is made on the basis of simple majority. S 11.8 In line with paragraph 11.14 of the policy document on Shariah Governance on the responsibility of the IFI to ensure clear and accurate minutes of Shariah committee meetings, the Shariah committee shall ensure that the minutes prepared relating to the proposed application of hajah type 2 and darurah are accurate, comprehensive and clear. In this regard, the Shariah committee has the responsibility to ensure the deliberations, considerations and justifications on the decision or advice, including assessment on the relevant parameters provided in this policy document for allowing the application of hajah type 2 and darurah, as well as any significant concerns and dissenting views are reflected appropriately. S 11.9 Where the Shariah committee is unable to finalise its decision or has reasonable doubt on the robustness of hajah type 2 and darurah assessment performed by an IFI, as provided in paragraph 11.11 of the policy document on Shariah Governance, the IFI shall provide the Shariah committee with access to the advice from third party experts to enable the Shariah committee to make an informed decision. Senior management S 11.10 In discharging the primary responsibility over the day-to-day management of the IFI on the application of hajah type 2 and darurah, the senior management shall– (a) ensure that the differences in the application of hajah type 2 and darurah (against normal operating environment) are properly understood and reflected effectively in its policies, processes and practices. This includes putting in place a robust communication plan on hajah type 2 and darurah; (b) implement effective policies and procedures for the application of hajah type 2 and darurah based on the rulings of the SAC and the decision or advice of the Shariah committee; (c) provide balanced assessment and opinion to the Shariah committee, supported with the relevant information during the identification and 21 This would include unavailability of a Shariah committee member due to medical reasons. Hajah and Darurah 12 of 21 assessment stage as outlined in paragraphs 12.4 to 12.11 of this policy document; and (d) ensure a robust internal control framework is in place to effectively monitor the application of hajah type 2 and darurah by the IFI. Control functions S 11.11 An IFI shall ensure the effectiveness and independence of control functions22 in reviewing and monitoring the application of hajah type 2 and darurah implemented by the business organs as described in paragraph 12.22 of this policy document. This includes assessment on areas for improvements that can prevent an IFI from resorting to apply hajah type 2 and darurah continuously. 12 Decision-making process S 12.1 An IFI shall establish a comprehensive internal policy and procedure on the application of hajah type 2 and darurah, to facilitate a more structured approach of decision-making by the Shariah committee and ensure effective implementation by the IFI. S 12.2 An IFI shall ensure that the internal policies and procedures relating to the decision-making process on the application of hajah type 2 and darurah to include the following: (a) identification of the scope of hardship; (b) assessment on the severity of the hardship and categorisation as described in paragraphs 9.5 and 9.7, as well as its impact on financial position and operations of the IFI; (c) robust and objective deliberation of possible solutions by the Shariah committee and the board; and (d) monitoring of hajah type 2 and darurah implementation by the appropriate control functions, as well as reporting to the Bank in line with paragraphs 12.13 to 12.18 of this policy document as and when hajah type 2 and darurah are being applied. S 12.3 In the event where an extended period is needed for the application of hajah type 2 and darurah, an IFI is required to comply with the decision-making process requirements as described in paragraphs 12.4 to 12.22 and provide compelling justifications on the need for such extension and a feasible exit plan for deliberations by the Shariah committee and the board. Identification S 12.4 In relation to paragraphs 8.1 and 8.3(a) to 8.3(c), an IFI shall prepare a comprehensive description of the hardship experienced by its stakeholders by gathering information on: (a) the nature of the hardship; and (b) the efforts performed by the IFI in complying with Shariah principles or rulings prior to proposing for the application of hajah type 2 and darurah, as well as the outcome of its efforts. 22 Roles and responsibilities of respective control functions (i.e., Shariah risk management, Shariah review and Shariah audit) as outlined in the policy document on Shariah Governance. Hajah and Darurah 13 of 21 G 12.5 In relation to paragraph 12.4(a), the comprehensive description on the nature of the hardship may include but not limited to the following perspectives: (a) institutional – issues that may affect operational resiliency of the IFI; (b) legal and regulatory – issues that may affect the effectiveness of regulations in achieving policy objectives; (c) macroeconomic – a condition that stems from, or relates to, a large aspect of an economy; (d) customer – issues that may deteriorate customers experience or cause inability to meet customers’ needs and expectations; and (e) external event – incidents outside the control of the IFI. Assessment S 12.6 An IFI shall demonstrate the severity of the hardship(s) based on its internal parameters taking into consideration the requirements and guidance set out by the Bank in this policy document and shall support the severity analysis by covering both qualitative and quantitative aspects. S 12.7 Notwithstanding paragraph 12.6, in the case where there is difficulty in assessing the quantitative aspect of the severity, the IFI shall ensure that the absence of quantitative assessment is supported with compelling justifications. G 12.8 In determining the certainty and severity of hardship in relation to paragraphs 8.3(a) to 8.3(c) as well as its categorisation in relation to paragraphs 9.3 to 9.8, an IFI may assess the certainty of the occurrence and adversity of the hardship situation based on its existing overall risk appetite framework, stress severity analysis or recovery planning components (as described in Illustration 5) or any relevant data that could provide a comprehensive perspective on the accurate level of hardship experienced by the IFI. Such integration in the assessment process is essential for timely identification of stress events and the formulation of actionable and credible options to ensure the IFI is well-positioned to respond to viability threats, regardless of their origins. Illustration 5 Integration between assessment on certainty and adversity of hardship in the application of hajah type 2 and darurah level into stress severity analysis, risk appetite framework and recovery planning components of the IFI. Hajah and Darurah 14 of 21 G 12.9 In relation to paragraphs 8.3(d) and 12.6, a comprehensive assessment to support the severity analysis and impact on internal and external stakeholders may include the following: (a) impact on customers and relevant stakeholders (e.g., counterparties related to main customers, service providers, suppliers, market utilities, public services and government) which stems from Shariah principles or Shariah rulings, taking into account– (i) the impact and speed of disruption to financial health, customers, businesses, and short-term liquidity needs of customers and relevant stakeholders; and (ii) the capacity or speed of reaction to the disruption by counterparties, customers and the public; (b) impact on other financial institutions and financial markets, taking into account the magnitude and speed at which such disruption would materially affect market participants or market functioning (e.g., liquidity, operations and structure of other financial institutions, financial markets concerned); (c) impact on economy, taking into account the lack of financial resources for an IFI to continue its operations as its customers or other stakeholders become negatively affected, both directly and indirectly (e.g., defaults which may cause further financial repercussions); and (d) impact on environment, social and infrastructure, taking into account the non-availability of Shariah compliant options to fulfil societal and environmental needs. S 12.10 An IFI shall develop proposed solutions supported with comprehensive assessment, consisting of options available in dealing with hardship circumstances, facts and rationale, Shariah justifications, impact assessment and assumption, unintended consequences, applicable duration, mitigation measures and exit strategy for each proposed solution23. S 12.11 In relation to paragraph 9.2, an IFI shall ensure that any reference for ruling of the SAC is supported with comprehensive assessment and proposed solutions as described in paragraphs 12.6, 12.7 and 12.10. Deliberation S 12.12 In reinforcing sound decision for the application of hajah type 2 and darurah, an IFI shall ensure completeness and robustness of the following: (a) information provided in the identification and assessment steps as specified under paragraphs 8.3 and 12 of this policy document; (b) deliberation of the Shariah committee and the board, particularly on the appropriateness of the proposed solutions and duration to address the risks and vulnerabilities identified in the hajah type 2 and darurah assessment as well as its exit strategy; and (c) consistency in providing views on the application of the Shariah rulings. 23 For example, an IFI is expected to identify the profit/loss (such as profit commission on risk ceded to the reinsurers) which may arise in a situation where hajah is adopted and establish a proper treatment/plan to manage such profit/loss, for instance purifying the impermissible profit via charity. Hajah and Darurah 15 of 21 Reporting S 12.13 In the event where the Shariah committee decides that the hardship falls under the category of hajah type 2 and the board agrees with the proposal to pursue such application, an IFI shall notify the Bank of that fact and submit a report in line with paragraph 12.16 within 14 working days after such decision is being made. S 12.14 In the event where the Shariah committee decides that the hardship falls under the category of darurah and the board agrees with the deliberations of the Shariah committee, an IFI shall refer to the SAC for a ruling and write to the Bank within 14 working days after such decision is being made. G 12.15 The SAC, with advice from the Bank or a resolution authority, will advise the IFI on the appropriate ruling and period for the application of darurah. S 12.16 In relation to paragraphs 12.13 and 12.14, an IFI shall ensure that notification on application of hajah type 2 to the Bank to be submitted to Jabatan Penyeliaan Konglomerat Kewangan, Jabatan Penyeliaan Perbankan or Jabatan Penyeliaan Insurans dan Takaful, as the case may be, and shall submit reference for darurah application to the SAC24 via Jabatan Sistem Kewangan Islam. S 12.17 In relation to paragraph 12.16, an IFI shall ensure that submission to the Bank includes the following information: (a) detailed description and assessment as described in paragraphs 12.4 to 12.11; (b) record of deliberations of the Shariah committee meeting(s), including resolutions, rationale and any significant concerns and dissenting views; and (c) record of deliberations of the board. S 12.18 An IFI shall report to the Shariah committee and the board on a timely basis the progress of the application of hajah type 2 and darurah, and its exit strategy. G G G Application 12.19 An IFI that meets the requirements stipulated in Part B may proceed to apply the hajah type 2 and darurah to address its hardship upon the notification to the Bank and the complete submission of information pursuant to paragraph 12.17. 12.20 In relation to paragraphs 9.2, 12.14 and 12.19, for situation of hardship with no prior Shariah rulings that warrants urgent application of hajah type 2 and darurah, the IFI may apply the exceptional rule prior to obtaining the Shariah ruling, based on the Shariah committee’s decision and the board’s approval. 12.21 In relation to paragraph 12.20, upon completion of review by the SAC, the IFI shall ensure that the relevant application of hajah type 2 and darurah to be consistent with the new Shariah ruling, which may include reversing any application that is deemed impermissible by the SAC. 24 As per Manual Rujukan Institusi Kewangan Islam kepada Majlis Penasihat Shariah. Hajah and Darurah 16 of 21 Monitoring S S S S 12.22 An IFI shall perform periodic assessments on the compliance of the implementation of hajah type 2 and darurah with the rulings of the SAC and decision or advice of the Shariah committee with due regard by the board, as well as requirements set out by the Bank. 13 Implementation Plan 13.1 An IFI is required to submit an implementation plan to comply with this policy document to Jabatan Sistem Kewangan Islam latest by 30 April 2024. 13.2 An IFI must conduct an assessment on impact of complying with the requirements in this policy document. An IFI must immediately notify Jabatan Sistem Kewangan Islam if the IFI identifies– (a) any cause that will affect full compliance of the requirements set forth under this policy document; and (b) any material adverse impact on the IFI’s business or operational matters. 13.3 In relation to paragraph 13.1, the board and the Shariah committee must respectively approve and endorse the IFI’s implementation plan to ensure compliance with this policy document. Hajah and Darurah 17 of 21 APPENDIX 1 DEFINITION OF HAJAH AND DARURAH Definition Classical scholars Hajah Hajah consists of what is required by the people for the realisation of their interests and the proper execution of their affairs. The social order would not, in fact, collapse, but will not function properly, if it is ignored25. Darurah A situation where one needs to consume forbidden items to prevent death or severe harm26. Contemporary scholars Hajah A situation where a need of a person or a community to be met by lifting the distress situation temporarily or permanently. If it is not addressed, it may reach the darurah (dire necessity) situation27. Darurah A dire necessity that permits the forbidden except for what is excluded (such as murder and adultery)28. Shariah basis of hajah and darurah The following verse of the al-Quran and the hadith imply the general permissibility for application of hajah: Allah intends ease for you, not hardship. (Surah Al-Baqarah, 2:185) هللا عنهما يللزبري وعبد الرمحن بن عوف رض ملسو هيلع هللا ىلصرخص رسول هللا :هللا عنه قال يعن أنس رض .رواه البخاري ومسلم .يف لبس احلرير حلكة هبما Anas (may Allah be pleased with him) reported: The Messenger of Allah (peace and blessing of Allah be upon him) permitted Zubair and `Abd al-Rahman bin `Auf (may Allah be pleased with them) to wear silk because they were suffering from an itch. 25 Al-Syatibi, al-Muwafaqat, Dar al-Kutub al-`Ilmiyah, 2004. على -احلرج واملشقة الالحقة لفوت املطلوب فإذا مل تراع دخل على املكلفني أهنا مفتقر إليها من حيث التوسعة ورفع الضيق املؤدي يف الغالب إىل يبلغ مبلغ الفساد املتوقع يف املصاحل العامة. احلرج واملشقة ولكنه ال -اجلملة 26 Al-Suyuti, al-Ashbah wa al-Nazair, Dar al-Kutub al-`Ilmiyah, 1983. .يتناول املمنوع هلك أو قارب، وهذا يبيح تناول احلرامفالضرورة: بلوغه حّداً إن مل 27 Ahmad Kafi, Al-Hajah al-Syar’iyyah Hududuha wa Qawaiduha, Dar al-Kutub al-Ilmiyah, 2004. - على اجلملة -دخل على املكلفني احلاجة هي ما حيتاجه األفراد أو حتتاجه األمة للتوسعة ورفع الضيق إما على جهة التأقيت أو التأبيد، فإذا مل تراع احلرج واملشقة وقد تبلغ مبلغ الفساد املتوقع يف الضرورة. 28 Abdullah bin Bayyah, Sina`ah al-Fatwa wa Feqh al-Aqalliyat, al-Muwatta Center, 2018. .ضرورة قصوى تبيح احملّرم سوى ما اسُتثن Hajah and Darurah 18 of 21 The following verse of the al-Quran and the hadith imply the general permissibility for application of darurah: But whoever is forced [by dire necessity], neither desiring [it] nor transgressing [its limit], there is no sin upon him. Indeed, Allah is Forgiving and Merciful. (Surah Al-Baqarah, 2:173) عن أيب واقد الليثي قال: قلت: اي رسول هللا، إان أبرض تصيبنا هبا خممصة، فما حيل لنا من رواه أمحد وصححه . (إذا مل تصطبحوا، ومل تغتبقوا، ومل حتتفئوا بقال، فشأنكم هبا)امليتة؟ قال: .احلاكم Abu Waqid al-Laithi said, "Messenger of Allah, we live in a land where we are afflicted by hunger, so when may we eat animals which have died a natural death?" He replied: "As long as you do not have a morning drink or an evening drink or gather vegetables, you may eat them." The following Islamic legal maxims provide basis for the general permissibility of hajah and darurah application, and the list is non-exhaustive: (a) hardship begets flexibility29; (b) harm must be removed30; (c) dire necessity lifts prohibitions31; (d) the greater harm is to be removed or replaced by the lesser harm32; and (e) when a matter is constricted/constrained (by the hardship), flexibility is accorded but when the hardship is addressed, the flexibility is rescinded33. .Al-Suyuti, Al-Ashbah wa Al-Naza’ir, Dar Al-Kutub Al-`Ilmiyyah, 1983, p. 76 " املشقة جتلب التيسري " 29 .Ibid, p. 83" الضرر يزال " 30 .Ibnu Nujaim, Al-Ashbah wa Al-Naza’ir, Dar Al-Kutub Al-`Ilmiyyah,1999, p. 73 " الضرورات تبيح احملظورات " 31 األخف " 32 ابلضرر األشد الضرر -Muhammad Al-Zuhaili, Al-Qawaid Al-Feqhiyyah wa Tatbiqatuha fi Al " يزال Mazahib Al-Arba`ah, Dar Al-Fikr, 2006, v. 1 p. 219. .Ibid, v. 1 p. 272 " إذا ضاق األمر اتسع وإذا اتسع ضاق " 33 Hajah and Darurah 19 of 21 APPENDIX 2 DECISION TREE IN APPLYING THE GENERAL PARAMETERS Hajah and Darurah 20 of 21 APPENDIX 3 SUMMARY OF CRITERIA AND PARAMETERS IN DEALING WITH HAJAH AND DARURAH Types Hajah Type 1 Hajah Type 2 Darurah Parameters 1. Preconditions • Ensure certainty of the hardship • Deviation from Shariah principle or ruling • Absence or impracticality of Shariah compliant alternatives • Does not cause greater or equal harm to stakeholders 2. Specific parameters a) Nature of hardship Difficult to avoid (`umum al-balwa) / customary commercial practice (`urf tijari) Not a customary commercial practice (`urf tijari) b) Coverage of hardship For general needs For specific needs, but has yet to reach darurah level For specific needs, may or may not cause systemic impact, but trigger recovery or resolutions actions c) Applicability and conditionality of ruling Shariah ruling is applicable to all without specific condition or limitation Shariah ruling is applicable to specific institution with specific condition or limitation Shariah ruling is applicable to specific institution or all with specific condition or limitation d) Time and quantum Allowable until revision of current Shariah ruling Temporary and proportionately based on complexity of the issue Example T+2 in currency exchange (bai` al- sarf), nostro account Ceding out of takaful risk to reinsurance company Loan from International Monetary Fund (IMF) during resolution Hajah and Darurah 21 of 21 APPENDIX 4 PROCESS FLOW IN APPLYING HAJAH AND DARURAH FAQs on Hajah & Darurah Policy Document Page | 1 Hajah and Darurah Policy Document Frequently Asked Questions and Answers (FAQs) FAQs issued on: 3 January 2024 Introduction This document is intended to provide clarification to the requirements that are specified in Hajah and Darurah Policy Document (the PD), and it does not replace or supersede the requirements. Any updates to the document will be notified to Islamic financial institutions (IFIs) from time to time. If you have any further inquiries regarding implementation of the PD, kindly direct the queries to the following email address: shariahstandard@bnm.gov.my No. Question Answer Applicability 1. Is the PD applicable to digital banks? Yes, the PD is applicable to licensed digital banks that carry on Islamic digital banking business. Definition of Hardship 2. Context setting i. Why does Bank Negara Malaysia (the Bank) define “hardship” instead of hajah in the PD? • “Hardship” is the central concept for the PD. Subject to preconditions as specified in paragraph 8.3 of the PD, IFIs may apply hajah or darurah to depart from the current Shariah principle or Shariah ruling to address hardship in executing financial transactions or arrangements. • Instead of defining hajah and darurah, these concepts are reflected as the categories of the application of exceptional rules, which comprise of hajah type 1, hajah type 2 and darurah, and such categories are differentiated by parameters, including nature of hardship, degree of severity, etc. 3. Scope of the definition i. Does the definition of hardship cover the application of hajah and darurah? • Yes. The definition of hardship specified in the PD intends to cover application of hajah and darurah based on the relevant parameters on hardship (as specified in paragraphs 9.3, 9.5 and 9.7). • Use of words such as “unfavourable circumstances”, mailto:shariahstandard@bnm.gov.my Page | 2 “severe adversity” and “intolerable levels of distress” aim to reflect the different nature and severity level of the hardship, which are reflected in the application of hajah and darurah. ii. Does the PD only focus on hardship of the IFIs, or should the assessment also cover hardship that is experienced by other stakeholders of the IFIs? • As specified in paragraphs 12.6 and 12.9 of the PD, the assessment on the nature, severity and impact of the hardship may include hardship experienced by other stakeholders such as customers, counterparties related to the IFIs’ customers, service providers, suppliers, market utilities, public services, government, other financial institutions and financial markets, overall economy, environment, social and infrastructure. • In other words, hajah or darurah may be applied to alleviate hardship of other stakeholders that has an adverse impact to the safety and soundness of the IFIs. For instance, hajah may be applied in the event where Shariah compliant solutions are not available to fulfil societal and environmental needs. iii. Does the coverage of the PD extend to hardship situations that are classified as potential Shariah Non-Compliance (PSNC) events? • The PD does not cover situations of hardship that are due to poor risk management control, bad business decision or negligence by the IFIs. • However, Shariah committee may review and assess the root cause of the PSNC event and may categorise such situation under application of hajah or darurah subject to fulfilment of the hardship definition, the preconditions, and the parameters of hajah or darurah as specified in the PD, as well as within the permissibility of existing Shariah ruling. Page | 3 iv. What is the definition of a “person” in the PD? “Person” in the definition is similar to interpretation of a “person” in Islamic Financial Services Act 2013, which includes an individual, any corporation, statutory body, local authority, society, trade union, co- operative society, partnership and any other body, organization, association or group of persons, whether corporate or unincorporate. Interpretation of “Shariah Principle” and "Shariah Ruling” 4. “Shariah Principle” Does the scope of “Shariah principle” in the PD cover ruling in classical or contemporary texts, as well as whether the ruling is based on either weak or strong Shariah opinion? “Shariah principle” in the PD intends to cover any existing ruling from source(s) other than Shariah rulings made by the Bank’s Shariah Advisory Council (SAC), which may cover both classical and contemporary ruling and comprises of strong or consensus Shariah opinions (excluding weak Shariah opinions). 5. "Shariah Ruling” Does the scope of “Shariah Ruling” in the PD also cover the SAC rulings that are published as policy documents, for instance Shariah Contracts PD? “Shariah ruling” refers to all decision made by the SAC regardless of its medium of publication. The Shariah ruling may be documented as the published SAC resolutions and statements, related policy documents, dear CEO letters or any other issuance(s) by the Bank. Preconditions for application of hajah and darurah 6. Precondition: Certainty i. Can hajah or darurah be applied to address new situation i.e., without precedent or without existing Shariah ruling? Current preconditions cover possible “new situation” since it also includes situations of hardship with a high probability of occurrence (ghalib al- zann), which is supported with adequate quantitative and qualitative evidence. ii. Does “certainty” mean that a situation of hardship must be backed with historical evidence (precedent)? 7. Precondition: Deviation from Shariah Principle or Shariah Ruling Whether the precondition refers to Shariah non-compliant (SNC) event? • The precondition does not refer to SNC event since the presence Page | 4 of hardship has necessitated the deviation from Shariah principle or Shariah ruling, which is not similar to SNC event that is due to other root causes and not due to hardship as defined in the PD e.g., human error or operational lapse. • All preconditions must be fulfilled for an application of hajah or darurah to be deemed permissible. 8. Precondition: Impact Seeking further guidance regarding application of fiqh muwazanah in impact assessment of the identified hardship, considering that the assessment will also be conducted by non-Shariah team e.g., the business team. • The Bank provides discretion to Shariah committee to apply fiqh al- muwazanah in assessing impact of applying hajah or darurah and whether such impact creates greater or equal harm to relevant stakeholders. • Relevant stakeholders (including the non-Shariah team) may be further guided by the internal policy and procedure relating to decision-making process on application of hajah type 2 and darurah endorsed by the Shariah committee. For instance, development of internal impact assessment framework that is based on fiqh al-muwazanah as well as internal parameter or indicator for situation of high possibility (ghalib al-zann). Parameter of hajah type 1, hajah type 2 & darurah 9. Parameters i. Does a situation need to meet all parameters to be classified under certain category i.e., hajah type 1, hajah type 2 or darurah? • Yes, it is necessary for a situation to fulfill all the parameters to be classified under certain category. • On the availability of the Shariah ruling, and particularly for situation(s) that has yet to be covered by the existing Shariah ruling, paragraph 9.2 of the PD specifies that the IFIs shall refer to the SAC to obtain Shariah ruling, based on guidance provided by Manual Rujukan Institusi Page | 5 Kewangan Islam kepada Majlis Penasihat Shariah. ii. What is the key difference between hajah type 2 and darurah? The key differentiating parameter between hajah type 2 and darurah relates to the triggering of recovery or resolution actions (i.e., paragraph 9.7(b)) 10. How should the Development Financial Institutions (DFIs) determine whether the hardship situation has triggered recovery or resolution actions, considering that the Recovery Planning Policy Document does not apply to them? Paragraph 12.8 of the PD provides guidance on how to assess the certainty of the occurrence and severity level of the hardship situation, where the IFIs may leverage on its existing overall risk appetite framework, stress severity analysis or recovery planning components. In the absence of these internal framework and analysis, the DFIs can use any relevant data that could provide a comprehensive perspective on the hardship situation. For instance, the DFIs may use data from capital adequacy framework, liquidity management, business continuity management etc. 11. Hardship arising from fulfilling mandate by the government i. In view that it is common for all DFIs to fulfil the government’s instruction that may involve financing of Shariah non- compliant activities, is it possible to categorise such hardship under hajah type 1? • Hardship arising from fulfilling mandate from the government, particularly involvement in Shariah non-compliant activities such as financing of Shariah non- compliant industry falls under the category of hajah type 2. • Such situation of hardship is unique for each DFIs, based on the following observations: o different DFIs have different mandated roles i.e., serving different business segments; and o different structure (i.e., full- fledged Islamic or Islamic window) has different way to address such hardship e.g., DFIs with Islamic window operation can fulfil their Page | 6 mandate via the conventional side. • Given the specificity of such hardship, it is important to assess it on a case-by-case basis. ii. What are the examples of hardship situation faced by the DFIs that may be triggered while fulfilling the government’s mandate? • The examples include financing of e-sport or movie production that consists of any Shariah non- compliant element. • Financing of such activities with Shariah non-compliant element may be permitted based on hajah type 2 since Shariah acknowledges that fulfilling the mandated role by the government can be justified under the concept of siyasah syar’iyyah (public policy) in serving multi-religion community. 12. Permissibility with specific condition or limitation In accordance with Illustration 3, if a situation exceeds the established threshold or limit determined by the Shariah committee of IFIs or the SAC, would it still fall under the classification of hajah type 2? • A situation of hardship must meet the conditions or the parameters specified in relevant Shariah ruling to be categorised under hajah type 2. • Any deviation from the existing Shariah ruling would require different deliberation and, in some cases, new rulings, depending on the significance of the deviation. • IFIs are encouraged to consult the SAC’s secretariat on such matters. • In the event where the IFIs exceed the Shariah committee’s internal thresholds or limit, such situation may be categorised under hajah type 2 if it is still within the parameter of the Shariah ruling. 13. Hajah type 2 or Darurah i. Is the SAC’s decision regarding darurah application subject to recommendations or suggestions from the industry? • In general, Shariah rulings consider feedback and input provided by the IFIs. • Also, the SAC may deliberate and make decision on issues arising Page | 7 from the Bank’s surveillance on the IFIs’ safety and soundness. ii. Who determines the appropriate duration and quantum of temporary and proportionate application of Shariah rulings categorised as hajah type 2 and darurah? With advice from the Bank or a resolution authority, the SAC will advise the IFI on the appropriate ruling as well as the duration and the proportionality of application of hajah type 2 and darurah, considering the IFIs’ data and justification 14. Recategorisation i. Is it possible to recategorise hajah type 1, hajah type 2, or darurah based on data gathering and the Shariah committee's decision? Yes, paragraph 9.9 of the PD acknowledges the possibility for categorisation of hajah and darurah to change due to either change(s) in the situation of hardship, the IFIs’ internal factors or other external factors. It is possible to recategorise hajah type 1, hajah type 2, or darurah based on Shariah committee’s decision supported with relevant data and the change is still within the existing Shariah ruling. ii. What is the regulatory expectation for a situation of recategorisation? Recategorisation of hajah type 1, hajah type 2 or darurah is subject to similar Shariah and operational requirements specified in the PD. These include expectation for the IFIs to report/notify the Bank on the change in category and monitor its implementation. For recategorisation that falls beyond/ outside the permissibility of existing Shariah ruling, the IFIs are required to request for a ruling. Governance and Oversight 15. Board i. What is the rationale of imposing the heightened oversight expectation to the board? • Application of hajah and darurah involves deviation from compliance to Shariah principle or Shariah ruling, which is considered as Shariah non-compliance under normal circumstance. Therefore, the Bank expects the board to pay closer attention to such proposed application. • Such heightened oversight expectation to the board has been similarly imposed to situation Page | 8 where a financial institution goes beyond the approved risk appetite as well as on matters related to the safety and soundness of the financial institution e.g., Recovery Planning Policy Document. ii. Should IFIs establish internal hajah and darurah parameter that reflect their risk appetite? Paragraph 12.8 of the PD guides that an IFI may assess the certainty of the occurrence and severity level of the hardship situation based on its existing risk appetite framework, stress severity analysis and recovery planning components or any relevant data that could provide comprehensive perspective on the hardship situation. 16. Shariah Committee i. Should the written opinion of Shariah committee member(s) who did not attend the meeting deliberating the proposed application of hajah or darurah be considered in determining a simple majority decision? • Yes, the written opinion received from the absent Shariah committee member(s) must be considered in determining the simple majority. • Although the absent Shariah committee member(s) did not have access to Shariah deliberation during the meeting, their views will be formed based on the information and other meeting materials provided by the secretariat. ii. Should the Shariah committee members be allowed to request for information or advice from third parties to obtain clarity and to make an informed decision? As specified in paragraph 11.11 of Shariah Governance Policy Document and paragraph 11. 9 of the PD, Shariah committee members should have access to relevant information or advice from third party experts to enable the Shariah committee to make informed decision, particularly where the Shariah committee is unable to finalise its decision or has reasonable doubt on the robustness of hajah type 2 and darurah assessment performed by the IFI. iii. Does the Shariah committee have the authority to make immediate implementation decisions regarding hajah or darurah As specified in paragraphs 12.19, 12.20 and 12.21 of the PD, in an urgent situation of hardship with no prior Shariah ruling, an IFI may Page | 9 issues, prior to issuance of Shariah ruling by the Bank? proceed to apply hajah or darurah, subject to the Shariah committee's decision and the board’s approval. However, the IFI shall realign the relevant application with the new Shariah ruling, and such realignment may include complying with additional conditions or limitations as well as reversing current application that is prohibited by the SAC. 17. Control Functions Who should be assigned with the functions and activities required under the decision-making process? In view that each IFI has different organisational structure, it is practical to leave such matter to the IFIs’ discretion – subject to the roles and responsibilities of respective control functions (as specified by Shariah Governance Policy Document). Decision Making Process 18. Effective date of Shariah ruling In the event where an IFI chooses to apply hajah or darurah to address urgent and critical situation of hardship prior to obtaining the Shariah ruling, and later the SAC rules that such application is impermissible, when will the effective date of the new Shariah rulings be? Will it be retrospective? and therefore should the IFI report to the Bank of its previous decision and application as an SNC event? • Effective date of the Shariah ruling is not retrospective and therefore, the IFI will be given sufficient time to realign its application of hajah or darurah to be consistent with the newly published Shariah ruling. • Such situation will not be immediately considered as an SNC event due to the PD provides flexibility to an IFI to apply the exceptional rules to address urgent situation of hardship prior to obtaining the Shariah ruling, subject to the Shariah committee’s decision and the board’s approval (as specified in paragraph 12.20 of the PD). 19. Assessment Notwithstanding paragraph 12.6, please provide an example of cases where there is difficulty in assessing the quantitative aspect of the severity of the hardship. Examples of difficulty in assessing the quantitative aspect of the severity of the hardship include the following (but not limited to): • the availability of or accessibility to data or information • limited resources that are required to obtain the data or information Page | 10 (e.g., time, capital, labour) given the urgency of the hardship situation 20. Reporting Please confirm that the IFIs are required to notify the Bank within 14 working days after obtaining approval from the Shariah committee as well as the board on the proposed application of hajah type 2 and darurah. • Yes, paragraph 12.13 of the PD specifies that the IFIs are required to submit to the Bank the required information specified in the PD within 14 working days after obtaining both Shariah committee’s decision and board’s approval. • For application of hajah and darurah that has yet to be deliberated and decided by the SAC, paragraphs 9.2 and 12.14 of the PD specify that the IFIs are expected to submit a referral to the SAC’s secretariat to request for a ruling within 14 working days after obtaining both Shariah committee’s decision and board’s approval. 21. Public Disclosure Does the PD require IFIs to publicly disclose the application of hajah and darurah? • The PD does not specify any disclosure requirement in view that information relating to specific application of hajah and darurah might be market sensitive, and therefore can affect public confidence in the integrity of the Islamic financial system. • However, any application of hajah and darurah resulting in material financial impact may still need to comply with applicable reporting standards and listing requirements.

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