Issued on: 17 November 2015

Tawarruq

BNM/RH/PD 028-8 Islamic Banking and Takaful
Department

Tawarruq

Issued on: 17 November 2015

Table of Contents

PART A      OVERVIEW 1

1. Introduction ................................................................................ 1

2. Policy objectives ........................................................................ 2

3. Scope of policy document .......................................................... 2

4. Applicability ................................................................................ 3

5. Legal provisions ......................................................................... 3

6. Effective date ............................................................................. 3

7. Interpretation.............................................................................. 4

8. Related Shariah rulings and policy documents .......................... 5

PART B      SHARIAH REQUIREMENTS AND OPTIONAL PRACTICES 6

9. Definition .................................................................................... 6

10. Nature ........................................................................................ 6

11. Contracting parties ..................................................................... 6

12. Ijab (Offer) and qabul (acceptance) ........................................... 7

13. Asset .......................................................................................... 7

14. Price ........................................................................................ 10

15. Requirements of the tawarruq ................................................. 11

16. Arrangement of wakalah in tawarruq ....................................... 12

17. Implementation of a dual-agency in tawarruq .......................... 14

18. Arrangement of wa`d (promise) in tawarruq ............................ 15

19. Arrangement of assurances in tawarruq .................................. 15

20. Arrangement of ibra’ (rebate) in tawarruq ................................ 17

21. Arrangement of tawarruq with ta`widh (compensation) and/or

gharamah (penalty) in tawarruq ............................................... 18

22. Dissolution of sale and purchase contract in tawarruq ............. 18

23. Completion of tawarruq ............................................................ 19

PART C      OPERATIONAL REQUIREMENTS                                          20

24. Governance and oversight ....................................................... 20

25. Structuring ............................................................................... 22

26. Risk management .................................................................... 31

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27. Business and market conduct .................................................. 33

28. Financial disclosure ................................................................. 37

29. Submission requirements ........................................................ 37

APPENDICES                                                                                38

Appendix 1     Legitimacy of tawarruq ...................................................... 38

Appendix 2    Glossary ........................................................................... 39

Appendix 3     Product structures ............................................................. 41

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PART A OVERVIEW

1. Introduction

1.1 Compliance with Shariah requirement is a prerequisite in ensuring the

legitimacy of Islamic financial products and services. In meeting this

expectation, it is essential for an Islamic financial institution (IFI) to

establish the necessary operational framework and infrastructure to

ensure that the conduct of Islamic financial transactions is consistent

with Shariah.

1.2 The Shariah contract-based regulatory policy is intended to ensure

end-to-end compliance with Shariah and therefore, enhance the

integrity and sustainability of the IFI.

1.3 The policy document contains two distinctive parts, namely the

Shariah requirements and the operational requirements. The former

highlights the salient features and essential conditions of the tawarruq

as specific Shariah arrangement. The latter outlines the operational

requirements which consist of core principles of good governance and

oversight, proper product structuring, effective risk management,

sound financial disclosure and fair business and market conduct.

These operational requirements are aimed at complementing and

promoting sound application of the Shariah principles.

1.4 A tawarruq consists of two sale and purchase contracts. The first

involves the sale of an asset by a seller to a purchaser on a deferred

basis.  Subsequently, the purchaser of the first sale will sell the same

asset to a third party on a cash and spot basis.

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2. Policy objectives

2.1 This policy document aims to:

(a) set out the Shariah rulings associated with tawarruq;

(b) set out key operational requirements with regard to the

implementation of tawarruq; and

(c) promote end-to-end compliance with Shariah requirements

which include adherence to sound Islamic banking practices

and safeguarding customers’ interest.

3. Scope of policy document

3.1 Part B sets out mandatory Shariah requirements to ensure the validity

of the tawarruq as well as permissible optional practices.

3.2 Part C provides operational requirements on governance and

oversight, structuring, risk management, financial disclosure, business

and market conduct. It describes 5 key principles for sound

management and operationalisation of tawarruq as follows:

(a) Principle 1: The IFI shall establish a comprehensive

governance and oversight framework to ensure that a tawarruq

is conducted based on sound practices and complies with

Shariah.

(b) Principle 2: The IFI shall ensure that the structuring and

implementation of a tawarruq is supported by comprehensive

policies and procedures and processes, adequate

infrastructure and robust documentation.

(c) Principle 3: The IFI shall implement a sound and an

integrated risk management system to effectively manage

risks throughout the life cycle of the tawarruq.

(d) Principle 4: The IFI shall undertake tawarruq in a fair and

transparent manner in line with the Shariah to protect

stakeholder’s interest.

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(e) Principle 5: The IFI shall provide adequate disclosure and

transparency to facilitate stakeholders understanding and

assessment of the tawarruq.

4. Applicability

4.1 Subject to 4.2, this policy document is applicable to all IFIs as defined

in paragraph  7.3.

4.2 A licensed takaful operator is only required to comply with Part B of

this policy document.

5. Legal provisions

5.1 The requirements in this policy document are:

(a) specified pursuant to sections 29, 57(1), 135(1) and 155 of the

Islamic Financial Services Act 2013 (IFSA); and

(b) specified pursuant to sections 41(1) and 116 and constitutes a

direction pursuant to section 129(3) of the Development Financial

Institutions Act 2002 (DFIA).

5.2 The guidance in this policy document is issued pursuant to section 277

of the IFSA and section 126 of the DFIA.

6. Effective date

6.1 This policy document comes into effect on 1 July 2016.

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7. Interpretation

7.1 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.

7.2 For the purpose of this policy document:

“S” denotes a standard, an obligation, a requirement,

specification, direction, condition and any interpretive,

supplemental and transitional provisions that must be

complied with.

Non-compliance may result in enforcement action; and

“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;

7.3 “Islamic financial institution” or “IFI” means –

(a) a licensed Islamic bank;

(b) a licensed takaful operator;

(c) a licensed bank and licensed investment bank approved under

section 15(1)(a) of the FSA to carry on Islamic banking

business; and

(d) a prescribed institution under the DFIA approved under section

129(1) of the DFIA to carry on Islamic banking business or

Islamic financial business.

7.4 A glossary of terms used in this policy document is set out in Appendix

2.

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8. Related Shariah rulings and policy documents

8.1 This policy document must be read together with other relevant legal

instruments, policy documents or guidelines that have been issued by

the Bank, in particular:

(i) any Shariah Advisory Council (SAC) rulings published by the

Bank1;

(ii) Murabahah (BNM/RH/STD 028-4);

(iii) Shariah Governance Framework for Islamic Financial

Institutions (BNM/RH/GL 012-3);

(iv) Guidelines on Corporate Governance for Licensed Islamic Bank

(GP1-i) (BNM/RH/GL 002-1);

(v) Guidelines on Corporate Governance for Development

Financial Institutions (BNM/RH/GL 005-14);

(vi) Risk Governance (BNM/RH/GL 013-5);

(vii) Capital Adequacy Framework for Islamic Bank – Disclosure

Requirements (BNM/RH/GL 007-18);

(viii) Capital Framework for Development Financial Institutions

(BNM/RH/GL 005-7);

(ix) Guidelines on Product Transparency and Disclosure

(BNM/RH/GL 000-3);

(x) Financial Reporting for Islamic Banking Institutions

(BNM/RH/STD 033-4);

(xi) Guidelines on Financial Reporting for Development Financial

Institutions (BNM/RH/GL 005-16);

(xii) Guidelines on Ibra’ (Rebate) for Sale-based Financing

(BNM/RH/GL 012-5);

(xiii) Guidelines on Late Payment Charges for Islamic Financial

Institutions (BNM/RH/GL 012-6);

(xiv) Responsible Financing (BNM/RH/GL 000-5);

(xv) Personal Financing (BNM/RH/GL 008-19); and

(xvi) Introduction of New Products (BNM/RH/STD 028-5).

1
 Including Shariah resolutions in Islamic Finance, standards, circulars or any directive pertaining to Shariah
matter issued by the Bank.

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PART B SHARIAH REQUIREMENTS AND OPTIONAL PRACTICES

9. Definition

S 9.1 A tawarruq consists of two sale and purchase contracts. The first

involves the sale of an asset by a seller to a purchaser on a deferred

basis.  Subsequently, the purchaser of the first sale will sell the same

asset to a third party on a cash and spot basis.

10. Nature

S 10.1 Each sale and purchase contract in the tawarruq is binding in nature

and shall not be terminated unilaterally by any of the contracting

parties.

S 10.2 The common inherent nature of each sale and purchase contract in the

tawarruq is the transfer of ownership of the asset from the seller to the

purchaser for a consideration.

G 10.3 The sale and purchase contract in the tawarruq may take in the form of

a murabahah or musawamah.

11. Contracting parties

S 11.1 The contracting parties to each sale and purchase contract in the

tawarruq shall be a seller and a purchaser.

S 11.2 In relation to paragraph  11.1, the seller in the first sale and purchase

contract shall not be the purchaser in the second sale and purchase

contract in the same tawarruq.

G 11.3 The contracting parties in each sale and purchase contract in the

tawarruq may enter into the sale and purchase contract through a

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wakil (agent).

S 11.4 The contracting parties in the tawarruq shall be a natural person or a

legal entity that have the legal capacity2 to enter into each sale and

purchase contract in the tawarruq.

12. Ijab (Offer) and qabul (acceptance)

S 12.1 Each sale and purchase contract in a tawarruq shall be entered into

through an offer and acceptance between the contracting parties.

G 12.2 The offer and acceptance may be expressed verbally, in writing or any

other methods which could be evidenced by appropriate

documentation or record.

S 12.3 The offer and acceptance referred to in paragraph  12.1 must be

executed in the following sequence:

(a) the seller sells an asset to the purchaser by entering into a sale

and purchase contract; and

(b) subsequently, the purchaser from the first sale and purchase

contract enters into another sale and purchase contract to sell

the same asset to a third party.

13. Asset

S 13.1 An asset which is eligible to be used as the subject matter of a

tawarruq shall either be a tangible or an intangible asset provided that

the asset is:

2
 Legal capacity of a person, from Shariah perspective, is defined as the capacity to assume rights and
responsibilities; and capacity to give legal effect to his action. Among the important conditions are that the
person must possess sound mind and the capacity to distinguish between what is harmful or beneficial to
one’s interests. Legal capacity of a legal entity is defined as eligibility of an entity to acquire rights and
assume responsibilities. In Malaysia, this legal capacity is also subject to the Contracts Act 1950 and the
Age of Majority Act 1971.

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(a) recognised by Shariah as valuable, identifiable and deliverable;

and

(b) already in existence and owned by the seller in each

respective sale and purchase contracts involved.

G 13.2 The asset which is the subject matter of a tawarruq may either take in

the form of a whole asset or part of the whole asset. In the case of the

latter, the asset may either be divided or undivided.

S 13.3 Pursuant to paragraph  13.2, the undivided asset shall be apportioned

based on practices which are recognised by Shariah.

S 13.4 The following assets shall not be traded in a tawarruq:

(a) gold, silver and currencies;

(b) assets to be constructed or under construction; and

(c) assets which are debt in nature.

G 13.5 The asset may be acquired by the seller through a purchase from a

supplier, or through any other means of transfer of ownership which is

in compliance with Shariah.

S 13.6 In the event where the asset is not present at the majlis al-`aqd

(contract session), the seller shall provide the purchaser with specific

description of the asset.

S 13.7 Transfer of ownership from the seller to the purchaser shall take effect

upon entering into a valid sale and purchase contract; notwithstanding

there is no registration of legal ownership to the purchaser.

S 13.8 The purchaser shall take possession of the asset before the asset can

be sold to a third party.

S 13.9 Possession of the asset shall either be in the form of qabd haqiqi

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(physical possession) or qabd hukmi (constructive possession).

S 13.10 Possession of the asset shall take effect upon takhliyah (the seller

releasing the asset to the purchaser) through any mechanism

permitted by Shariah including `urf tijari (customary business practice)

in order for tamkin (the purchaser would have access to the asset) to

take place and for the purchaser to assume its ownership risk.

S 13.11 The seller shall be liable for any loss or damage of the asset before the

purchaser takes possession of the asset.

S 13.12 Any defect in the asset which occurred before entering into any sale

and purchase contract in the tawarruq discovered by the purchaser

after the execution of the contract shall entitle the purchaser to the

khiyar al-`ayb (defect option).

S 13.13 Where the situation in paragraph  13.12 occurs, the purchaser has the

right to:

(a) terminate the sale and purchase contract;

(b) continue with mutually agreed variation of the terms of the sale

and purchase contract as a result of the defect discovered; or

(c) continue with the sale and purchase contract as it is.

S 13.14 Any defect in the asset which is discovered and consented to by the

purchaser at the time of entering into each sale and purchase contract

in the tawarruq shall disqualify the purchaser from the entitlement to

the defect option with respect to such defect.

G 13.15 The contracting parties may mutually agree to specify the period of the

defect option at the time of entering into the sale and purchase

contract.

G 13.16 Notwithstanding paragraph  13.12, the contracting parties may mutually

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agree for the seller to waive liability for any defect on the asset before

entering into the sale and purchase contract.

S 13.17 In the event that the contracting parties agree to the arrangement in

paragraph  13.16 above, the waiver of liability by the seller shall be

mutually agreed between the contracting parties.

S 13.18 The same asset shall not be the subject matter of multiple tawarruq at

any one time.

G 13.19 The tawarruq may be entered into on a group of assets between the

same contracting parties at the same time.

14. Price

S 14.1 The price used for each sale and purchase contract in the tawarruq

shall be determined and be mutually agreed by the contracting parties

at the time of entering into each of the respective sale and purchase

contract.

S

14.2 Where the sale and purchase contract in the tawarruq is on a

murabahah basis, the requirements on price in the murabahah sale

shall be complied with, including of disclosure of cost and profit.

G 14.3 The price of each sale and purchase contract in the tawarruq may be

paid at any time after entering into the contract and on such terms as

may be agreed by the contracting parties, including spot or deferred

basis, or in instalments or a bullet lump sum payment.

G 14.4 The contracting parties may mutually agree to reschedule the payment

period for the remaining debt arising from the sale and purchase

contract.

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S 14.5 In the event the contracting parties mutually agree to reschedule the

payment period referred to in paragraph  14.4, such agreed

rescheduling shall not lead to any increase of the remaining debt.

G 14.6 The contracting parties may mutually agree to enter into a new

contract that may result in a new debt obligation, whereby the

proceeds of the new contract is to be used to settle the outstanding

debt obligation arising from the sale and purchase contract under the

earlier tawarruq.

S 14.7 Pursuant to paragraph  14.6, such arrangement shall be made only in

relation to a solvent debtor.

15. Requirements of the tawarruq

S 15.1 Each sale and purchase contract in the tawarruq shall satisfy all the

necessary conditions of a valid sale and purchase contract under

Shariah.

S 15.2 All sale and purchase contracts in the tawarruq shall be executed by

entering into a separate and independent sale and purchase contract.

S 15.3 Execution of each sale and purchase contract in the tawarruq must be

respectively evidenced by appropriate documentation or record.

S 15.4 The purchaser in each sale and purchase contract in the tawarruq

shall have the right to take delivery of the asset.

S 15.5 The sale and purchase contract in the tawarruq shall not contain any

terms and conditions that restrict the purchaser from taking delivery of

the asset or create an obligation for the purchaser to sell the

underlying asset.

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S 15.6 Payment of any amount of the deferred selling price including profit

shall not be made to the seller before entering into the sale and

purchase contract.

16. Arrangement of wakalah in tawarruq

G

16.1 The tawarruq may be arranged together with a wakalah contract.

G 16.2 Any contracting party in the tawarruq may appoint an agent to act on

his behalf.

S 16.3 The wakalah contract shall be arranged in a contract separate from the

sale and purchase contract of the tawarruq.

S 16.4 Execution of the wakalah contract in the tawarruq must be respectively

evidenced by legal appropriate documentation or record.

S 16.5 The wakalah contract for the purpose of the tawarruq shall not restrict

the principal or his purchasing agent from taking delivery of the asset.

S 16.6 Ownership of the asset shall be transferred from the seller to the

purchaser even though the sale and purchase contract in the tawarruq

is entered into through an agent on behalf of the seller or the

purchaser.

S 16.7 Roles and responsibilities of the agent shall be clearly specified in the

wakalah contract.

S 16.8 The agent shall not be held liable except in the event of ta`addi

(misconduct), taqsir (negligence) or mukhalafah al-shurut (breach of

specified terms).

S 16.9 The principal shall be held liable for the sale and purchase contract

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entered into by the agent in accordance with specified terms and

conditions agreed upon under the wakalah contract.

G 16.10 The name of the principal in the wakalah contract may be disclosed in

the sale and purchase documentation of the tawarruq between the

third party and the principal.

G 16.11 In relation to paragraph  16.10, the agent and the principal may agree

that only the name of the agent is disclosed in all documents relating to

the sale and purchase contract between the third party and the agent.

S 16.12 In the event that the principal requires the agent to provide several

quotations for the price of the asset, the principal shall clearly specify

to the agent the preferred price quotation.

G 16.13 The agent may advance his own money by way of qard for partial or

full payment of the purchase price of the asset to the third party.

S 16.14 The amount advanced by the agent under paragraph  16.13 shall be

reimbursed by the principal or set-off against the agreed selling price

between the principal and the agent.

S 16.15 Where a sale and purchase contract in the tawarruq is executed by the

agent on a date later than the date on which the fund is received from

the principal, the following requirements shall be observed:

(a) the fund must be held based on amanah  (trust) by the agent;

and

(b) both the agent and principal must ensure that funds received

from the principal shall not be treated as qard to the agent prior

to the purchase of the underlying asset.

S 16.16 Notwithstanding paragraph  16.15, in a situation where the funds need

to be treated as qard to the agent due to necessity and tabi`

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(unavoidable incidental circumstances), such treatment is allowed.

17. Implementation of a dual-agency in tawarruq

G

17.1 Dual-agency may be implemented in a tawarruq.

G 17.2 A dual-agency in the tawarruq may involve the following:

(a) an action of one of the contracting parties who acts as an

agent to purchase an asset on behalf of the other contracting

party; and subsequently acts as an agent to sell the asset on

behalf of the same contracting party to himself; or

(b) an action of one of the contracting parties who acts as an

agent to purchase an asset from himself on behalf of the other

contracting parties; and subsequently acts as an agent to sell

the asset on behalf of the same contracting party to a third

party.

S 17.3 Pursuant to paragraph  17.2, the execution of the sale and purchase

contracts between the principal and the agent shall comply with the

following requirements:

(a) essential criteria or specification of the authorised task, such

as price, tenure and asset specification, shall be mutually

agreed by the contracting parties; and

(b) the transaction shall be in a proper sequence as provided in

paragraph  17.2 and supported by proper evidence.

S 17.4 In the event where:

(a) the sale and purchase contracts in the tawarruq are executed

on a date later than the date on which the funds are received

from the principal; and

(b) the profit of the sale and purchase contract which is on a

deferred basis is calculated from the day the funds are

accepted,

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the selling price shall be disclosed by the agent to the principal.

18. Arrangement of wa`d (promise) in tawarruq

G

18.1 In a tawarruq, the purchaser may provide a promise to purchase the

asset from the seller upon its acquisition from a third party.

S 18.2 The tawarruq shall not contain any condition that requires the

purchaser to promise that the asset will be sold to a third party.

S 18.3 In line with paragraph  11.2, the tawarruq shall not contain any

condition that requires the purchaser to promise that the asset will be

sold to its original seller.

19. Arrangement of assurances in tawarruq

G

19.1 A tawarruq may be arranged with assurances which may be in the

form of other Shariah contracts or concepts such as kafalah

(guarantee), takaful, rahn (pledge) or hamish jiddiyah (security

deposit).

(a) Assurance through kafalah (guarantee)

G

19.2 A guarantee may be arranged on payment of outstanding debt under a

sale and purchase contract in the tawarruq in the event of default by

the purchaser.

(b) Assurance through takaful

G

19.3 The seller may require the purchaser to obtain a takaful coverage to

secure the payment of outstanding debt under the sale and purchase

contract under the tawarruq due to certain events such as death or

total permanent disability of the purchaser.

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(c) Assurance through rahn (pledge)

S

19.4 Any marhun (collateral) pledged to secure the payment of debt under

the sale and purchase contract in the tawarruq shall be an asset which

is recognised by Shariah as valuable, in existence, identifiable, and

deliverable.

S 19.5 Notwithstanding paragraph  19.4, if the collateral used is shares of a

company which are involved in mixed Shariah compliant and Shariah

non-compliant activities, the core business of the company must be

Shariah compliant.

G 19.6 Shariah non-compliant financial assets may be used as collateral

where the collateral can be separated and valued in accordance with

paragraph  19.7.

S 19.7 In accordance with paragraph  19.6, the collateral value for Shariah

non-compliant financial assets shall be limited as follows:

(a) the collateral value for interest-bearing debt-based asset such as

conventional fixed deposit certificate and conventional bonds

shall be limited to the principal amount of the instrument; and

(b) the collateral value for Shariah non-compliant unit trust shall be

limited to the value of investors' initial and subsequent/additional

investment.

S 19.8 The proceeds from the realisation of the collateral shall be utilised only

to recover the outstanding debt under the sale and purchase contract

in the tawarruq.

G 19.9 Notwithstanding paragraph  19.8, the contracting parties may agree to

also utilise the proceeds to recover the actual costs pertaining to the

recovery of the outstanding debt.

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(d) Assurance through hamish jiddiyah (security deposit)

G

19.10 The seller may require the purchaser to provide security deposit to

secure a promise to purchase the asset.

G 19.11 The security deposit may be used to compensate for actual loss

incurred from the purchaser’s failure to purchase the asset from the

seller.

S 19.12 Pursuant to paragraph  19.11, any excess of the security deposit after

compensating for actual loss shall be refunded to the purchaser.

S 19.13 The seller shall not utilise the security deposit prior to the execution of

the sale and purchase contract in the tawarruq.

S 19.14 The security deposit paid to the seller before entering into the sale and

purchase contract shall not be treated as part of the selling price

including profit.

G 19.15 The security deposit may be treated as part of the payment of the

agreed selling price for the sale and purchase contract upon entering

into the sale and purchase contract.

S 19.16 The security deposit shall be refunded in full to the purchaser if it is not

treated as part payment of the selling price.

20. Arrangement of ibra’ (rebate) in tawarruq

G

20.1 The seller may give a rebate on part or the entire outstanding selling

price of the sale and purchase contract in the tawarruq in the form of a

discount to the purchaser upon pre-payment and/or early settlement.

S 20.2 Notwithstanding paragraph  20.1, a rebate clause shall be incorporated

in the sale and purchase contract or other relevant document when it is

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imposed by the relevant authority.

G 20.3 In the event that the sale and purchase contract in the tawarruq

contract involves payment of the deferred price in instalments, the

seller may provide periodic rebate on the instalment amount based on

a formula mutually agreed by the contracting parties.

21. Arrangement of tawarruq with ta`widh (compensation) and/or
gharamah (penalty) in tawarruq

G

21.1 The contracting parties may agree to include a clause in any of the

sale and purchase contracts in the tawarruq stipulating late payment

charges as determined by the relevant authority.

S 21.2 The late payment charges shall consist of:

(a) compensation for actual loss suffered by the seller, which may

be recognised as income to the seller; and/or

(b) penalty, which shall not be recognised as income and shall be

channelled to baitulmal and/or charitable bodies or purposes.

22. Dissolution of sale and purchase contract in tawarruq

S

22.1 The sale and purchase contract in the tawarruq is dissolved when:

(a) the purchaser exercises the defect option to terminate the sale

and purchase contract;

(b) any of the contracting parties exercises mutually agreed

options to terminate the sale and purchase contract within the

agreed time period;

(c) any of the contracting parties exercises the option to terminate

the sale and purchase contract due to breach of the specified

terms; or

(d) both contracting parties mutually agree to terminate the sale

and purchase contract.

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S 22.2 Upon dissolution of any of the sale and purchase contracts in the

tawarruq where the asset has not been sold to a third party, the asset

shall be returned to the respective seller and the price paid shall be

returned to the respective purchaser.

S 22.3 The dissolution of the sale and purchase contract shall be effective

provided that the asset can be returned to the seller. Otherwise, the

seller is entitled to the value of the asset.

23. Completion of tawarruq

S

23.1 The sale and purchase contract in the tawarruq is completed upon

fulfilment of the obligations of the contracting parties which include the

following:

(a) full settlement of the selling price;

(b) transfer of the obligation to pay the selling price to a third party

through hiwalah al-dayn;

(c) waiving of the right to receive the remaining or outstanding

selling price through a rebate by the seller; or

(d) full muqassah (set-off) of debt obligations between the

contracting parties.

S 23.2 Upon completion of the tawarruq the contracting parties are free from

any contractual obligations.

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PART C OPERATIONAL REQUIREMENTS

24. Governance and oversight

S

24.1 This policy document complements the Guidelines on Corporate

Governance for Licensed Islamic Banks and Guidelines on Corporate

Governance for Development Financial Institutions.

S 24.2 While the broad governance and oversight principles can be applied,

specific requirements are needed to manage distinct risks and the

unique nature of the tawarruq. The IFI shall have sufficient

understanding of its risk profile and availability of personnel with the

appropriate knowledge and skill set.

Board of Directors

S 24.3 The board of directors (the Board) shall establish a sound governance

structure to facilitate an effective oversight function on the

management and implementation of the tawarruq. The adequacy of

the governance structure shall commensurate with the nature, scale,

complexity and risk profile of the tawarruq.

S 24.4 The roles and responsibilities of the Board in respect of the tawarruq

shall include the following:

(a) setting the IFI’s business strategy and risk appetite with regard

to the application of the tawarruq;

(b) approving and overseeing policies and procedures governing

the tawarruq and risk management to ensure compliance with

relevant legal and regulatory requirements;

(c) establishing appropriate systems to implement the tawarruq in

compliance with Shariah;

(d) ensuring that the IFI has adequate and qualified personnel with

sufficient knowledge and competency on the concept,

application and risks associated with the tawarruq; and

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(e) ensuring that independent reviews are conducted regularly to

assess compliance with the policy documents issued by the

Bank and internal policies established by the IFI.

Shariah Committee

S 24.5 The Shariah Committee (SC) shall perform the following to ensure that

all activities associated with a tawarruq undertaken by the IFI are

conducted in line with Shariah:

(a) endorse the application of Shariah requirements in the relevant

policies and procedures governing the tawarruq; and

(b) deliberate and endorse that the terms and conditions stipulated

in the legal documentation and other documents such as

information published on promotional materials, product

manuals or other publications are in compliance with Shariah;

(c) assess the work carried out by Shariah review and Shariah

audit, identify issues and propose appropriate corrective

measures; and

(d) advise and provide clarification on relevant Shariah rulings,

decisions or guidelines on Shariah matters issued by the Bank

and, if relevant, any other authorities.

Senior management

S 24.6 The roles and responsibilities of the senior management with regards

to the tawarruq shall include:

(a) developing and implementing business strategies, internal

control and risk management requirements in line with the IFI’s

business objectives;

(b) establishing policies and procedures and processes with

regard to proper management of the tawarruq;

(c) implementing relevant internal systems and infrastructure and

adequate mechanisms to identify, measure, control and

monitor risk inherent in the tawarruq;

(d) identifying, assigning and training key personnel with the

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appropriate skill and ensuring that the roles and responsibilities

are properly delegated to the relevant functions to undertake

the different activities under the tawarruq e.g. asset purchase

and asset sale;

(e) undertaking regular reviews and monitoring of compliance with

the approved policies; and

(f) ensuring timely disclosure of relevant information to the Board

and the SC.

25. Structuring

(a) Shariah compliance

S

25.1 The IFI shall ensure:

(a) the overall structure of the tawarruq is in compliance with

Shariah as provided in Part B of this policy document;

(b) the opinion of the SAC of the Bank is sought to resolve issues

pertaining to Shariah matters as outlined in the Shariah

Governance Framework for Islamic Financial Institutions and

Introduction of New Products issued by the Bank; and

(c) all requirements in paragraph 26 are complied with.

S 25.2 The IFI shall establish an effective management system that is

supported by adequate policies and procedures and competent

personnel to ensure that the tawarruq continuously adhere to Shariah.

(b) Purpose

S

25.3 The purpose of the tawarruq shall be clearly outlined between the IFI

and the customer e.g. for the purpose of deposit taking, provision of

finance or derivatives.

G 25.4 In respect of the structure and purpose of the tawarruq, the IFI may

refer to examples in Appendix 3.

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(c) Contracting parties

S 25.5 The contracting parties in the tawarruq contract shall involve at least

three parties which consist of the customer, the IFI and the asset

trader or asset exchange (e.g. Bursa Suq Al-Sila’).

S 25.6 The contracting parties shall be clearly identified as the seller or

purchaser in each sale and purchase contract in line with the purpose

of the tawarruq.

S 25.7 In the case where a contracting party appoints an agent to act on its

behalf for the purpose of the tawarruq arrangement, the IFI shall

identify the agent appointed by any of the contracting parties.

S 25.8 The IFI shall clearly specify the roles and responsibilities of the

contracting parties and if applicable, the agent, in each sale and

purchase contract based on the purpose of the tawarruq.

(d) Offer and acceptance

S 25.9 Pursuant to paragraph  12.1, the IFI shall specify the date and where

applicable, the frequency of when the offer and acceptance of the first

sale and purchase contract shall be executed (e.g. in the case of

financing, at specified disbursement dates or in the case of deposit, at

specified roll-over dates).

(e) Assets

S 25.10 The IFI shall specify the asset to be traded (the asset) in the tawarruq.

In line with the requirements under paragraph  13, the asset must

satisfy the following conditions:

(a) can be objectively valued in the open market;

(b) of an acceptable contract grade3 as specified by a recognised

commodity exchange (local or global) or an accepted industry

standard (local or global);

3
 Refers to the quality of a commodity that can be delivered against a particular contract, in accordance with

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(c) in a good condition prior to the completion of both sale and

purchase transactions e.g.  in the case of perishable assets, it

has not expired; and

(d) have an active market and not recognised as intangible assets

under applicable Malaysian Financial Reporting Standards

(MFRS) e.g. brand, patents and intellectual property.

Illustration 1: Valid assets for tawarruq

(a) Commercially traded consumer goods which are valued at

available market prices.

(b) Commercially traded airtime coupons 4  which are valued at

available market prices.

(c) Commercially traded crude palm oil (CPO) which meets the

contract grade as specified by the Bursa Suq Al-Sila’ or

specification by the industry standard determined by the

Malaysia Palm Oil Board.

(d) Commercially traded consumer goods with an expiration

period provided that each sale and purchase contract is

completed before the consumer goods expire.

S 25.11 Pursuant to paragraph  13.3, where the asset is undivided5, the IFI shall

ensure the following:

(a) ownership of such asset can be legally enforceable and

executable;

(b) ownership can be identified on a proportionate basis; and

(c) asset selection is consistent with the specification/description

agreed between the contracting parties.

the rules of the respective exchange on which the commodity is traded.
4
 Airtime coupon or telecommunication prepaid card of a certain monetary amount represent the units of
service that can be used by the purchaser e.g. minutes of talk time or unit of internet data. The talk time or
internet data provided by the telecommunication operator is an intangible asset under Shariah.

5
 An undivided asset refers to an asset represented by a single physical form of which rights of ownership to
such an asset may be held by a single or multiple owners who share in the rights, benefits and obligations
of such an asset proportionally to their percentage of ownership.

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Illustration 2: Undivided assets

Crude palm oil (CPO) is stored in 10,000 tonnes storage tanks. Each

sale and purchase contract is carried out per 1,000 tonnes. In the case

of 2 different sale and purchase contracts of 1,000 tonnes and 4,000

tonnes each, the asset trader/ asset exchange records the proportion

of the CPO in the storage tank to identify the ownership of the

respective purchasers. The asset trader/ asset exchange need not

physically divide the CPO into separate storage tanks.

(f) Price

S 25.12 The selling price in the tawarruq shall consist of the acquisition cost of

the asset and profit67.

S 25.13 The acquisition cost of the asset under the tawarruq shall be

determined based on the quoted price in a specified exchange/ trading

platform or available market price.

Illustration 3:  Acquisition cost of the asset

(a) In the case of commercially traded CPO, the acquisition cost

shall be based on the price quoted in specific commodity

exchange (e.g. Bursa Suq Al-Sila’) or available market price as

published by the Malaysian Palm Oil Board.

(b) In the case of air time coupon issued by a telecommunication

service provider, the acquisition cost shall be based on the

available market price published by the telecom service

provider or recognised trading platform.

G 25.14 In addition to paragraph  25.12, if applicable, the IFI may identify other

costs relating to the sale and purchase of the asset which would be

borne by the customer. These costs may include the brokerage fee,

6
 For the avoidance of doubt, the tawarruq may take the form of a murabahah or musawamah in line with
paragraph 10.3.

7
 The profit may be nil.

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wakalah (agency) fee due to the application of agency arrangement as

specified in paragraph  25.20 and relevant taxation requirements.

S 25.15 The costs that are determined based on paragraph  25.14 shall be

consistent with the approved internal policies and procedures that

govern the tawarruq.

S 25.16 If the tawarruq arrangement is undertaken based on murabahah, the

IFIs shall clearly determine the acquisition cost of the asset and the

profit in line with the requirements provided in the policy document on

Murabahah issued by the Bank.

S 25.17 The IFIs as an agent shall specify the absolute value of the agreed

selling price in the legal documentation if the tawarruq transaction is

executed later than the date that the funds are accepted from

customers.

 (g) Settlement

S 25.18 Pursuant to paragraph  14.3 and  23.1, the IFI shall stipulate the

settlement terms that include the following:

(a) commencement date8, duration of the payment, (e.g. 30 days or

5 years), specific payment  due date (e.g. by the 30th day of

every month);

(b) mode of payment (e.g. instalments, lump sum payment(s) or

cash);

(c) payment amount (e.g. fixed amount or minimum amount ); and

(d) where applicable, arrangement of off-setting9  or netting-off10 the

amount due with available deposits, including security deposits.

S 25.19 For the purpose of rescheduling and restructuring of the tawarruq

specified in paragraphs  14.4 and  14.7, the IFI shall comply with the

8
  In line with paragraph 15.3, on payment of selling price.

9
  Refer to paragraph 16.14, on setting-off amount advanced by the agent against the agreed selling price.

10
 Refer to paragraph 19.15, on treating security deposit as part payment of the selling price.

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policy requirements provided under the policy document on the

Classification and Impairment Provisions for Loans/Financing that was

issued by the Bank and the IFI’s internal policies and procedures on

risk management.

(h) Arrangement with wakalah and dual-agency

S

25.20 The IFI shall clearly specify the terms and structure of the arrangement

with wakalah and/or dual-agency in the tawarruq. In this regard, the IFI

shall assess the need for wakalah and/or dual agency, including

further sub-agency arrangements to ensure that such arrangements

will effectively achieve the purpose outlined in paragraph  25.3.

S 25.21 In line with paragraph  16.15, where the IFI as an agent is not able to

execute the tawarruq on the same day, the IFI shall comply with the

requirements of amanah (trust) and segregate the funds received from

other funding sources11.

S 25.22 Notwithstanding paragraph  25.21 and pursuant to paragraph  16.16,

the IFI as an agent shall be allowed to treat the funds received as qard

when the IFI is not able to execute the tawarruq on the same day due

to the following circumstances:

(a) normal close of business/operation including public holidays

and other state holidays;

(b) unexpected disruptions to operation e.g. system breakdown,

force majeure event, unexpected holiday; or

(c) reasonable period required for the processing of tawarruq

application from the customer which shall be no later than 3

working days from the date that the funds were received i.e.

T+2.

11
For the avoidance of doubt, this requirement is applicable where the IFI has received money from the

customer e.g. for the purpose of deposit acceptance or premium payment from customer for the purchase
of a derivative instrument.

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S 25.23 Where the principal requested for the provision of quotations, the IFI

as an agent shall clearly outline the:

(a) minimum number of quotations to be provided;

(b) sources of the quotation; and

(c) duration for the customer or principal to provide decision on

the quotation, and if applicable, the expiration date of the

quotations.

(i) Arrangement with a promise and other assurances

S 25.24 Pursuant to paragraphs  18 and  19, the IFI shall determine the

applicability and terms of the promise and/or any assurances in the

tawarruq. For example, to secure a firm commitment from the

customer to perform the purchase of the asset, the IFI as the seller can

require a placement of security deposit from the customer.

S

25.25 The IFI must outline trigger events which warrant the invocation of the

promise or assurances and recovery of the losses from the contracting

parties.

S 25.26 In the case where the tawarruq is arranged with a promise, the IFI

shall determine the actual loss caused by the customer defaulting on

his promise to purchase the asset in the tawarruq, based on costs

which are directly attributable to non-purchase of the asset such as the

cost of legal action, storage cost of the asset and any shortfall between

the disposal price compared to the purchase price (if any). However,

the actual costs shall not include indirect costs such as allocated

overhead costs or salary or opportunity costs such as cost of funds.

S 25.27 In the case where the tawarruq is arranged with a pledge, securities

that are listed on Bursa Malaysia or other securities exchanges which

are recognised as Shariah compliant securities based on the Shariah

screening criteria set out by the respective regulatory or supervisory

authority shall be accepted as collateral in line with paragraph  19.5.

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S 25.28 In addition to paragraph 25.27, financial assets of non-listed

companies which have been assessed by the IFI to be Shariah

compliant based on the Shariah screening criteria issued by Securities

Commission of Malaysia, and endorsed by the SC shall also be

accepted as collateral in line with paragraph  19.5.

S 25.29 Further to paragraph  19.13 and  19.14, the security deposit shall be

distinguished from the selling price prior to the execution of the sale

and purchase contract.

S 25.30 The amount of security deposit shall be determined based on mutually

agreed terms by the contracting parties.

Illustration 5: Arrangement of tawarruq with security deposit

On 1 May 2015, Bank ABC accepts deposit placement from a

customer based on tawarruq according to the following terms:

Selling price: RM100,000 (principal) + RM5,000 (profit)

Tenure: 6 months (e.g. due date on 30 Nov 2015)

Security deposit: RM1,000

As part of the assurance to purchase the asset from customer, Bank

ABC provides security deposit to the customer on the date of deposit

acceptance. Bank ABC is required to clearly segregate the amount of

security deposit from the selling price prior to execution of tawarruq.

(j) Arrangement of rebate

S 25.31 The IFI shall determine the applicability of rebate e.g. in event of pre-

payment or early settlement of selling price or in a variable rate pricing.

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Illustration 6: Rebate on early settlement

(a) A customer makes a 12-month term deposit placement under

tawarruq. In the 6th month the customer withdraws the entire

deposit. The withdrawal constitutes early settlement of the

outstanding debt by the IFI. Hence, the customer must provide

rebate to the IFI in accordance with the mutually agreed terms

under the deposit contract.

(b) A customer is accorded with house financing, which is payable

over a 30-year period. The customer fully settles the

outstanding debt in the 12th year. The IFI must provide rebate

to the customer in accordance with the terms specified in the

financing contract.

S

25.32 Pursuant to paragraph  20.2, the IFI shall incorporate a rebate clause in

the sale and purchase contract under the tawarruq.

S 25.33 In determining the amount of outstanding debt 12  arising from the

deferred sale and purchase contract under the tawarruq, the IFI shall

calculate the outstanding selling price less any rebate.

S 25.34 In respect of financing, the IFI shall comply with the Guidelines on Ibra’

(Rebate) for Sale-based Financing.

S 25.35 In respect of deposit, the IFI and the customer shall agree on the terms

and computation of rebate under the tawarruq. At minimum, the terms

shall specify eligibility criteria for rebate and the formula for the

computation of rebate.

12
For the avoidance of doubt, as described in paragraph 5.2 of the Guidelines on Late Payment Charges, the
IFI can claim any late payment charges or other direct expenses related to the recovery of the outstanding
debt upon default separately from the customer.

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(k) Arrangement of tawarruq with compensation and/or penalty

S 25.36 In addition to paragraph  21, the IFI must satisfy the requirements set

out in the Guidelines on Late Payment Charges for Islamic Financial

Institutions.

26. Risk management

G 26.1 The tawarruq may expose the IFI to various types of risks, such as

market, liquidity, credit and operational risks. These risks, which

appear at various stages of transactions, may change in nature that

may necessitate the establishment of a comprehensive and sound risk

management infrastructure, reporting and control framework.

S 26.2 The IFI shall establish comprehensive risk management policies and

procedures, processes, systems and internal control to address risks

in line with its risk appetite, throughout the life cycle of the tawarruq

and shall include the following:

(a) the identification and monitoring of risks including, if applicable,

risk exposure to inventories arising from the acquisition and

holding of an asset for the purpose of the tawarruq

arrangement prior to the execution of the sale and purchase

contract;

(b) the formulation of appropriate pricing methodology of the asset

and as applicable, establishing controls to ensure quotations

are obtained in an  independent and objective manner;

(c) the establishment of risk exposure limits including trading or

concentration limits on approved asset, asset trader and/or

asset exchange, as applicable, in line with the IFI’s risk

appetite;

(d) the risk mitigation techniques including establishing;

(i) appropriate eligibility criteria and review process in

identifying a list of approved asset, asset trader and/or

asset exchange to be used in the tawarruq;

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(ii) clear segregation of roles and duties to be performed

under dual-agency e.g. designating separate personnel to

perform each role or implementing appropriate system that

will independently execute dual agency roles e.g. short

messaging systems (sms) or telephone calls; and

(iii) contingency plan that is feasible to facilitate the execution

of the tawarruq in a timely manner e.g. in the event of

inadequate supply of asset; and

(e) the monitoring and reporting mechanism.

Illustration 7: Risk exposure to inventories

Bank ABC purchased asset from Asset Trader Y on 3 March 2014.

Bank ABC subsequently executes the second sale and purchase

contract with Asset Trader Z on 7 March 2014, which is 4 days after

the initial sale and purchase contract. Prior to completion of the

second sale and purchase contract, Bank ABC is exposed to inventory

risk.

S

26.3 The IFI shall ensure that the appointment or selection of the asset

trader and/or asset exchange is subject to comprehensive risk

assessment and has satisfied itself that the arrangement does not

impair the IFI’s ability to monitor and control its activities and adhere to

Shariah and regulatory requirements. When establishing the

appropriate selection criteria to identify the approved asset trader

and/or asset exchange, the IFI shall include the following:

(a) the financial soundness of the asset trader and/or asset

exchange including financial performance, volume of trades

and number of customers;

(b) the operational capability including adequate systems, trading

capacity, delivery capacity, asset, quality specification; and

(c) the availability of Shariah compliance oversight function. If

such function is not available, the IFI must duly inform its SC

for endorsement.

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S 26.4 As part of monitoring the individual arrangement with the asset trader

and/or asset exchange the IFI must:

(a) establish controls to ensure service delivery in a manner

expected in accordance with Shariah and regulatory

requirements e.g. risk of delivery, performance reliability and

processing capacity; and

(b) maintain continuous and effective engagement with the asset

trader/asset exchange to ensure on-going ability to meet the

requirements of Shariah and regulators.

S 26.5 Internally, the IFI shall clearly specify and communicate the policies

and procedures and limits to all its relevant functions.

S 26.6 The IFI shall establish a systematic process to regularly review and

update its policies and procedures, processes and internal limits and

shall ensure consistency with the risk appetite of the IFI and any

changes by the regulators or the industry.

27. Business and market conduct

S

27.1 The IFI shall give due regard to the interests of customers in its

policies and procedures to ensure that the tawarruq is conducted in a

fair, transparent, responsible and professional manner.

(a) Fair dealings

S

27.2 The IFIs’ internal policies and procedures on business and market

conduct for the tawarruq shall reflect the IFI’s fair dealing practices

with its customers, including:

(a) the provision of accurate, clear and not misleading

information;

(b) the fees and charges, if any; and

(c) reasonable care to ensure suitability of advice and

recommendations, if any.

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(b) Disclosure of information

S 27.3 The IFI shall ensure the accuracy of description, nature and feature of

the tawarruq and other Shariah contracts or concepts applicable to the

particular purpose and product structure.

 Illustration 8: Inaccurate description

(a) Promoting the use of hamish jiddiyah to offer “advance profit”

to customers.

(b) Quoting only profit rate and not identifying the selling price in

the documents (or computation of selling price).

S 27.4 At the pre-contractual stage, the IFI shall provide adequate and

relevant information to the customer in the marketing or promotional

materials, product disclosure sheet and any other relevant materials

with regard to the tawarruq. The information shall include:

(a) the name of the product and the objective/ purpose of the

tawarruq;

(b) an overview of the product structure including a description of

the nature and salient features of a tawarruq;

(c) the roles and responsibilities of the contracting parties;

(d) a description of the approved asset and/or asset exchange

used, price and disclosure of cost and profit where murabahah

is applied;

(e) the key terms and conditions of the sale and purchase contract

under a tawarruq arrangement including arrangement with

other Shariah contracts or concepts such as guarantee,

takaful, pledge, security deposit including rights and obligations

of the contracting parties;

(f) fees and charges including rebate, late payment charges,

brokerage fees, agency fee and/or tax if applicable; and

(g) illustration of computation of profit, rebate, late payment

charges based on adopted pricing methodology.

In relation to the product disclosure sheet, the IFI is also required to

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observe the minimum information to be disclosed in the product

disclosure sheet as specified in the Guidelines on Product

Transparency and Disclosure.

S 27.5 Notwithstanding the information provided to the customer in paragraph

27.4, the IFI shall facilitate the customer’s understanding by explaining

to the customer on the following:

(a) the rights and obligations of the customer under the tawarruq

e.g. ability of customer to take delivery of asset, obligation of

the customer to provide rebate to the IFI in a deposit product;

and

(b) the processes involved in a tawarruq which may differ from

other Shariah contracts used in a similar type of product.

S 27.6 At the point of entering into the contract, salient features of the

tawarruq shall be disclosed in the legal documentation to facilitate the

customer’s understanding of the terms and conditions of the contract.

(c) Documentation

S

27.7 The IFI shall develop comprehensive and legally enforceable

documentations 13  for the tawarruq which are in compliance with

Shariah and regulatory requirement.

S 27.8 These documents shall specify the agreed terms and conditions on

asset acquisition, asset sale and other terms of the tawarruq according

to the purpose of the tawarruq e.g. financing, deposit placement,

derivative instrument. At minimum, the legal documentation shall

clearly stipulate the following:

(a) the purpose of the tawarruq;

(b) the contractual relationship between the various contracting

parties;

13
Legally enforceable documentations covers contracts, agreements, master agreements and commercial
documents such as invoices, delivery notes, trade confirmation and other generally acceptable documents
in trade and financial transactions.

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(c) the rights, roles and responsibilities of the contracting parties to

the tawarruq;

(d) a description of asset and/or asset exchange used;

(e) the selling or purchase price including breakdown of cost and

profit, if murabahah is adopted;

(f) the proposed asset trader or asset exchange used and delivery

details;

(g) the settlement terms of the selling or purchase price,

(h) the arrangement with other Shariah contracts or concepts such

as guarantee, takaful, pledge, security deposit including rights

and obligations of the contracting parties; and

(i) the terms, fees and charges including rebate and where

applicable, the late payment charges, brokerage fees, agency

fee and/or tax to be borne by the relevant contracting parties.

S 27.9 The documents shall not contain terms and conditions which are

prohibited by Shariah as specified in paragraphs  15.5,  15.6,  16.5,  18.2

and  18.3.

S 27.10 Pursuant to paragraphs  12.2,  15.2 and  16.3, the IFI shall ensure that

the following conducts are appropriately documented or recorded by

the contracting parties as evidence of their proper execution:

(a) each leg of the sale and purchase contract in sequence14;

(b) asset ownership15;  and

(c) where applicable, appointment of an agent and sub-agent16.

For the avoidance of doubt, where the IFI is performing a dual-agency

role, performance of each role must be evidenced by appropriate

documentation or record.

14
In line with paragraph 12.3, on sequence for offer and acceptance.

15
In line with paragraph 13.8, with regard to possession prior to sale and purchase to third party.

16
In line with paragraph 16.4, where the execution must be evidenced by respective legal document.

BNM/RH/PD 028-8 Islamic Banking and
Takaful Department

Tawarruq

Page 37 / 44

Issued on: 17 November 2015

S 27.11 The use of Arabic terminology in the documents shall be sufficiently

clarified and translated to enhance understanding of the contracting

parties. Any translation shall be consistent with the rulings of SAC.

28. Financial disclosure

S 28.1 The IFI shall maintain adequate accounting and other records that

sufficiently enables the preparation and reporting of the financial

statements in a true and fair view and timely basis.

S

28.2 Requirements stipulated in the Financial Reporting for Islamic Banking

Institutions, Guidelines on Financial Reporting for Development

Financial Institutions, Capital Adequacy Framework for Islamic Banks

– Disclosure Requirements (Pillar 3) issued by the Bank and all

applicable MFRS shall be observed by the IFI.

S 28.3 Where applicable, the IFI shall ensure that the accounting records are

able to reflect the different types of Shariah contract i.e. amanah

and/or qard, adopted prior to the execution of tawarruq.

29. Submission requirements

S 29.1 The Board and the SC shall respectively, approve and endorse the

IFI’s implementation plan to ensure full compliance with the policy

document by 1 July 2016.

S 29.2 The IFI shall submit the implementation plan to Jabatan Perbankan

Islam dan Takaful no later than 31 January 2016.

S 29.3 The IFI shall immediately notify Jabatan Perbankan Islam dan Takaful

if the IFI identifies any cause that will affect full compliance by 1 July

2016.

BNM/RH/PD 028-8 Islamic Banking and
Takaful Department

Tawarruq

Page 38 / 44

Issued on: 17 November 2015

APPENDICES

Appendix 1 Legitimacy of tawarruq

The legitimacy of the tawarruq arrangement is derived from the Quran and

founded on the Sunnah of Prophet Muhammad (peace be upon him).

The Quran

The following verse of the Quran implies the general permissibility of sales

contract including tawarruq:

 رَم الربَاَوَأَحل اللـُه اْلبَـْيَع َوحَ

“Bwhereas Allah SWT has permitted trading and forbidden usuryB” (Surah

al-Baqarah, verse 275)

The Sunnah of Prophet Muhammad (peace be upon him)

There is no direct juristic authority from the Sunnah of the Prophet (peace be

upon him) regarding the legitimacy of the tawarruq. It is deemed permissible

based on the general permissibility of sales in Islamic law.

BNM/RH/PD 028-8 Islamic Banking and
Takaful Department

Tawarruq

Page 39 / 44

Issued on: 17 November 2015

Appendix 2 Glossary

Terms Definition

Amanah Trusteeship

Gharamah Penalty

Hamish jiddiyah A security deposit placed to secure the undertaking to

purchase an asset before execution of the sale and

purchase agreement contract

Hiwalah al-dayn Assignment/transfer of debt from the liability of the

original debtor to the liability of a third person so that

the original debtor becomes free of liability

Ibra’ Rebate

Kafalah A contract of conjoining guarantor’s liability to the

guaranteed party’s liability in a way that the obligation

of the guaranteed party is established as a joint liability

of the guarantor and guaranteed person

Khiyar al-`ayb Option arising from a defect; the option of dissolving or

continuing the contract upon discovery of a defect in

the asset purchased

Majlis al-`aqd Place of the contract session

Marhun Collateral

Mukhalafah al-shurut Breach of terms and conditions

Muqassah Offsetting

Murabahah A sale and purchase of an asset where the acquisition

cost and the mark-up are disclosed to the purchaser

Musawamah Sale contract without the disclosure of the asset cost

price and profit margin to the purchaser

Qard Loan contract

Rahn Pledge

BNM/RH/PD 028-8 Islamic Banking and
Takaful Department

Tawarruq

Page 40 / 44

Issued on: 17 November 2015

Ta`addi Misconduct

Takaful An arrangement based on mutual assistance under

which takaful participants agree to contribute to a

common fund providing for mutual financial benefits

payable to the takaful participants or their beneficiaries

upon the occurrence of pre-agreed events

Takhliyah Relinquishing or abandoning the rights of ownership

Tamkin Enabling the person who has the ownership of an

asset transferred to him to make full use and assume

liability of the asset

Taqsir Negligence

Tawarruq Two sale and purchase contracts where the first

involves the sale of an asset to a purchaser on a

deferred basis and the subsequent sale involves sale

of the asset to a third party on a cash basis

Ta`widh Compensation

`Urf tijari Common business practice which is accepted by the

community and does not contradict Shariah rulings

Wa`d
An expression of commitment given by one party to

another to perform certain action(s) in the future

Wakalah
A contract in which a party mandates another party as

his agent to perform a particular task in matters that

may be delegated voluntarily or with imposition of fee

BNM/RH/PD 028-8 Islamic Banking and
Takaful Department

Tawarruq

Page 41 / 44

Issued on: 17 November 2015

Appendix 3 Product structures

Example 1: Financing

A customer requires financing of RM100,000 from the IFI.  Upon this request, the

IFI executes the tawarruq arrangement.

1. The IFI purchases the asset with selling price of RM100,000 from Asset

Supplier 1.

2. The IFI pays cash to Asset Supplier 1.

3. Subsequently, the IFI sells the asset to the customer at an agreed selling

price of RM120,000 (RM100,000 + profit RM20,000).

4. The customer makes deferred payments through monthly instalments for a

period of 5 years.

5. Subsequently, the customer appoints the IFI as its agent to sell the asset

to Asset Supplier 2 on spot at selling price of RM100,000.

6. The customer obtains a cash of RM100,000 required for the financing.

IFI Customer

Asset Supplier 1 Asset Supplier 2
Asset flow

1 2

3

4
5 6

Cash flow

BNM/RH/PD 028-8 Islamic Banking and
Takaful Department

Tawarruq

Page 42 / 44

Issued on: 17 November 2015

Example 2: Deposit

A customer makes a fixed deposit placement of RM100,000 with the IFI for a 90-

day period. Upon this request, the IFI executes the tawarruq arrangement.

1. The customer appoints the IFI as its agent to purchase the asset from

Asset Supplier 1 with selling price of RM100,000.

2. The IFI uses the cash deposit placed by customer to pay for the purchase.

3. Subsequently, the customer appoints the IFI as its agent to sell the asset

to the IFI itself at an agreed selling price of RM100,863 (RM100,000 +

profit RM863 i.e. 3.5% per annum)

4. The IFI makes deferred lump sum payment to customer upon maturity of

the deposit placement.

5. Subsequently, the IFI sells the asset to Asset Supplier 2 on spot at selling

price of RM100,000.

6. The IFI obtains cash of RM100,000 as per the deposit placement.

Customer IFI

Asset Supplier 1 Asset Supplier 2
Asset flow

1 2

3

4
5 6

Cash flow

BNM/RH/PD 028-8 Islamic Banking and
Takaful Department

Tawarruq

Page 43 / 44

Issued on: 17 November 2015

Example 3: Islamic profit rate swap

A customer has an obligation to pay a variable amount of RM2 million + KLIBOR

payable every quarter for a 2-year period.  The customer wishes to pay an

equivalent of fixed quarterly payments.  The IFI arranges an Islamic profit rate

swap for the customer to swap the variable payments with a fixed rate for the

next 2 years at 3.5% per annum.

1. On payment date, the customer appoints the IFI as its agent to purchase

the asset from Asset Supplier 1 with selling price of RM2 million.

2. Subsequently, the customer appoints the IFI as its agent to sell the asset

to IFI itself at an agreed selling price of RM2 million + KLIBOR x 3 months.

3. The IFI makes lump sum payment and subsequently sells the asset to

Asset Supplier 2 on spot at selling price of RM2 million.

4. Separately, the IFI purchases the asset with selling price of RM2 million

from Asset Supplier 3.

5. Subsequently, the IFI sells the asset to the customer at an agreed selling

price of RM2 million + 3.5% per annum.

6. The customer makes lump sum payment and subsequently appoints the

IFI as its agent to sell the asset to Asset Supplier 4 on spot at selling price

of RM2 million.

Customer IFI

Asset Supplier 1 Asset Supplier 2
Asset flow

1

2

3

Cash flow

IFI Customer

Asset Supplier 3 Asset Supplier 4
Asset flow

4

5

6

Cash flow

BNM/RH/PD 028-8 Islamic Banking and
Takaful Department

Tawarruq

Page 44 / 44

Issued on: 17 November 2015

Example 4: Options

A customer decides to hedge its receivables of USD1 million by buying a

USD/MYR put option.  The IFI as counterparty to the option, quotes a strike price

of USD1 = RM3.10 and premium of USD5,000 with 3 months maturity. The IFI

executes tawarruq arrangement to effect the option agreement and premium

payment.

1. The IFI purchases the asset with selling price of USD1 million from Asset

Supplier 1.

2. The IFI pays cash to Asset Supplier 1.

3. Subsequently, the IFI sells the asset to the customer at an agreed selling

price of USD1 million + USD5,000 (being the premium for the option).

4. The customer then appoints the IFI as its agent to sell the asset to Asset

Supplier 2 on spot as selling price USD1 million.

5. The customer obtains cash and pays the IFI the selling price and premium.

IFI Customer

Asset Supplier 1 Asset Supplier 2
Asset flow

1 2

3

4 5

Cash flow

Settlement Date
- The customer and
the IFI enter into bay
al-Sarf contract to
execute purchase of
FX

Strike Date
- Customer provides
verbal confirmation
to the IFI to either
exercise or lapse
the options

Trade Date
- Premium payment

(to be effected via
tawarruq)

T= 0


Brief Profile
DR. ABDULLAAH JALIL
Faculty of Economics and Muamalat (FEM),
Universiti Sains Islam Malaysia (USIM),
Bandar Baru Nilai, 71800 Nilai,
Malaysia.

Mobile: +6019 223 4502
Office: +606 798 6332
Email: abdullaah@usim.edu.my  / abdullaahjalil@gmail.com

Education

• PhD in Islamic Finance from INCEIF University. “Shariah Non-Compliant Events in the Malaysian
Islamic Banking Industry: Shariah and Legal Analysis.” (2019)

• MBA (Islamic Banking and Finance). International Islamic University of Malaysia (IIUM). “Project
Paper: An Islamic Framework for Project Evaluation: A Theoretical Study”. (Program’s Best Student
Award) (2004)

• Bachelor of Shariah (Fiqh and Islamic Studies). Yarmouk University. (First Class/ Mumtāz) (2001)

• Kolej Islam Sultan Alam Shah (KISAS), Klang, Selangor (SPM & SKK (Mumtāz)) (1997)

• Sekolah Menengah Agama Kerajaan Johor, Kluang, Johor (PMR & SRA (Mumtāz)) (1995)

Professional Certification

• Shariah Leaders Education Programme 2015 (ICLIF: The ICLIF Leadership and Governance Centre)

• Certified Shariah Advisor (CSA): Association of Shariah Advisors in Islamic Finance (ASAS) (2023)

Experiences

Academic

• Tutor. Faculty of Economics and Muamalat, USIM. (April 2002 – September 2004)

• Lecturer. Faculty of Economics and Muamalat, USIM. (October 2004 – July 2011)

• Senior Lecturer. Faculty of Economics and Muamalat, USIM. (Since August 2011)

Administrative Services

• Shariah Panel. World Fatwa Management and Research Institute (INFAD), USIM. September 2006-

2009.

• Shariah Compliance Officer for the application of MS 1900:2005. USIM. March 2008.

• Seminar and Colloquium Coordinator. World Fatwa Management and Research Institute (INFAD),

USIM. July 2005- February 2009.

• Member of Shariah and Islamic Finance Unit. World Fatwa Management and Research Institute

(INFAD), USIM. 2009.

• Member of Shariah Panel, USIM. (Since its establishment in 2016)

Professional Services

• Member of Committee for the Coordination of Muamalat, Takaful, Islamic Banking and Finance

Curriculum (MQA Standard for Muamalat and Islamic Finance). Ministry of Higher Learning. 16th

August 2010 - 15th August 2012.

mailto:abdullaah@usim.edu.my

mailto:abdullaahjalil@gmail.com

• A panel of experts for the development of “Manual Pengurusan Wang Khairat JAWHAR (2014).”

• Shariah (Fatwa) Research Paper for “Madinah Mawaddah Wakaf City (2020),” Yayasan Pahang.

• Shariah (Fatwa) Research Paper for the Accumulation and Investment of Mosque Fund (2021),

Mosque Management Department, Pahang.

Islamic Banking

• A member of Shariah Committee, Mizuho Bank (Malaysia) (since December 2020)

• A member of Shariah Committee, Agro Bank, Malaysia (since June 2021).

• A member of Shariah Committee, Bank Rakyat, Malaysia (ended on 31st March 2021).

Takaful

• Chairman of Shariah Committee at Prudential BSN Takaful Berhad (since 2017) (membership since

2015)

Retakaful

• A member of Shariah Committee, RGA Global Insurance, Labuan Branch Retakaful Window (since

June 2023).

Waqf

• A member of Shariah Committee, Waqf An-Nur Corporation (since August 2021)

Cooperative

• A memberi of Shariah Committee, ANGKASA (Angkatan Koperasi Kebangsaan Malaysia Berhad).

• A member of Shariah Committee, KOPUTRA (Koperasi Pelaburan Kakitangan Bank Muamalat

Malaysia Berhad).

• A member of Shariah Committee, Koperasi Kakitangan USIM (ended in December 2021).

Fatwa & Ahli Sunnah Wal Jama’ah

• Fatwa Research Panel/ A member of Research Committee for Islamic Contemporary Issues, “Jabatan

Mufti Negeri Sembilan” (since 2016)

• Fellow, Nadwah Ahli Sunnah Wal Jama’ah, “Jabatan Mufti Negeri Perak” (2023)

Counter Terrorism and Deradicalization

• Member of Deradicalization Panel, Ministry of Home Affairs. [Formal appointment date: 21st April
2017]

• Expert/Specialist for Violent Cases Investigated under the Security Offences (Special Measures) Act
2012 (Ministry of Home Affairs) [Appointment Date: 13th December 2018]

• A member of research team for the development of Malaysia’s NAPPCVE (National Action Plan for
Preventing and Countering Violent Extremism)

State Religious Teaching Certification (Tauliah)

• ABDULLAAH BIN JALIL. JMKNNS.BF.010-5/2/17/342. Scope: Al-Quran dan Tajwid, Tafsir, Hadis, Fiqh,

Tauhid, Tasawuf, Akhlak & Asas Fardhu Ain. Area: The whole state. Expiry date: Exempted – No expiry

date.

………………………………….

Dr. Abdullaah Jalil

19th October 2023


429 Too Many Requests

nginx


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Wan Mohd. Nazri Wan Osman

Director

Islamic Banking and Takaful Department

Regulatory Framework for Takaful

International Conference on Mutual Insurance and Takaful

Istanbul, Turkey

13 November 2012

2 BANK NEGARA MALAYSIA
CENTRAL BANK OF MALAYSIA

Agenda …

 Snapshot of Malaysia’s Takaful Industry

 Dual Financial System in Malaysia

 Fundamentals for Sound Takaful Development in Malaysia

 Regulatory and Supervisory Framework in Malaysia

 Regulatory Requirements For Takaful

•Takaful Operational Framework

•Shariah Governance

•Risk-Based Capital Framework

 Moving Forward

3 BANK NEGARA MALAYSIA
CENTRAL BANK OF MALAYSIA

MARKET

SHARE

14.2%

PENETRATION

RATE

12.82%

Snapshot of Malaysia’s Takaful Industry

ASSET

Family business - RM 15.3 bil

General business - RM 2.7 bil

NET CONTRIBUTIONS

Family business - RM 2.18 bil

General business - RM 0.67 bil

AVERAGE GROWTH

(2006-2011)

Net contributions – 23.8%

Assets - 19.1%

MARKET

STRUCTURE

12 Takaful Operators

(TOs)

 4 Retakaful Operators

(RTOs)

* as at 30 June 2012

4 BANK NEGARA MALAYSIA
CENTRAL BANK OF MALAYSIA

Takaful

Takaful in Malaysia developed as component of comprehensive Islamic

financial system  operating in parallel with conventional financial system

Dual

system

Islamic

financial system

Conventional

financial system

Islamic

banking

Islamic capital

market

Islamic money

market

Four main

pillars

The mandate for developing dual financial

system explicitly codified in Central Bank of

Malaysia Act 2009

Dual Financial System

Ensure sustained industry viability via

optimised synergies from interlinkages

Underpinned by :

Strong & diversified players

Wide range of products & vibrant

financial market

Comprehensive Islamic Financial

System

5 BANK NEGARA MALAYSIA
CENTRAL BANK OF MALAYSIA

Facilitative Legal Framework

Development of Islamic Financial
Services Act

Fundamentals for sound takaful development in Malaysia …

Inception stage

Instituting foundations of Islamic
finance

Intermediate stage
Institutional building, activity generation

& market vibrancy

Advanced stage
Strategic positioning & international

integration

Facilitative Legal Framework

Takaful Act 1984 (TA) provides platform
for separate regulatory structures

Robust Shariah governance structure

Foundation for Shariah governance setting
in TA :

Business aims & operations must be
Shariah compliant
Takaful operator (TO) to establish
Shariah Committee (SC)

Robust Shariah governance structure
Establishment of Shariah Advisory
Council  of BNM (SAC)
Restrict SAC members to sit in SC of
TOs

Robust Shariah governance structure

CBA amendments:
SAC as a highest authority for the
ascertainment of Islamic law on IF
Rulings of SAC shall be binding on IFIs,
courts or arbitrators

Institutional Capacity Enhancement

Minimum paid-up requirement increase to
RM100 m

Institutional Capacity Enhancement
Risk-Based Capital Framework
Takaful Operational Framework

Strong institutional framework

Dedicated department in Bank Negara
Malaysia for Islamic Banking & Takaful
Establishment of Malaysian Takaful
Association

Strong institutional framework

Increase no. & diversity of players e.g. TO
(12) and RTO (4)

World class talent pool & IF learning
hub

Establishment of IBFIM, INCEIF & ICLIF
Fund for Shariah Scholars in Islamic
Finance

World class talent pool & IF learning
hub

TO to have Appointed Actuary

Creation of ISRA as IF research centre

Publication of Shariah standard

Effective & efficient consumer
protection

Establishment of BNM LINK, Financial
Mediation Bureau & dedicated division in
High Court

6 BANK NEGARA MALAYSIA
CENTRAL BANK OF MALAYSIA

Regulatory framework for insurance broadly applicable… but

requires adaptation to be more takaful-attuned

Regulatory and Supervisory Framework in Malaysia ...

 Preserve financial stability & public confidence

 Prevent risk of contagion & systematic failure

 Ensure good market practices

 Promote high standard corporate & Shariah governance

Objectives

Leveraging on established field of conventional system

Separate rules to address takaful industry peculiarities

o Shariah-compliant in all aspects of the takaful operation

o Balance between interests of shareholders & participants

o Separation of funds between shareholders & takaful fund

Efficient and forward looking supervision under Risk-Based

Supervisory Framework

Pragmatic approach to regulation

Supervisory  Assessment

& Intervention

G
o

v
e

rn
a

n
c

e

P
ru

d
e

n
ti

a
l

M
a
rk

e
t

C
o

n
d

u
c

t

Takaful Operational Framework

Regulatory &

Supervisory

Framework

Legal framework being strengthened by Islamic Financial Services Act to enable more

comprehensive regulation and supervision of the takaful industry

BANK NEGARA MALAYSIA
CENTRAL BANK OF MALAYSIA

7

Regulatory Requirements for Takaful …

Governance

P
ru

d
e

n
ti

a
l

Reporting, market
conduct &

market protection

• Duties & responsibilities of board of directors,
senior management, appointed actuary &
external auditor

• Minimum expectation for TO on outsourcing
of takaful activities, functions or processes

Assets,

Investments

& Liabilities

Solvency

Product
Requirements

• Disclosure & presentation of reports &
statements

• Minimum standard on product transparency
& disclosures

• Separation of funds

• Disclosure on aqad, fees, profit sharing
ratio

• Diversification rules, basis for valuation &
safekeeping  of assets

• Investment limit permissible

• Determination & provisioning of liability

• Invest in Shariah-compliant
instruments

• Management of takaful fund

• Accounting treatments

• Capital adequacy based on risk profiles

• Stress test process that commensurate to
nature, complexity & sophistication of the
business

• Sound risk management practices in
developing, managing & controlling product
risk

• Shariah endorsement on product

• Fees, charges & surplus distribution

• Duties & responsibilities of the  Shariah
Advisory Council & Shariah Committee

• Fiduciary duties of takaful operator (TO)

• Stature of participants in takaful

• Qard to rectify deficit in takaful fund

Effective supervisory assessment on safety & soundness of TOs under Risk-Based

Supervisory Framework

S
h

a
ri

a
h

 c
o

m
p

li
a
n

c
e
 i
n

 a
ll
 a

s
p

e
c
ts

BANK NEGARA MALAYSIA
CENTRAL BANK OF MALAYSIA

8

Takaful Operational Framework …

• Ensure uniformity with Shariah

• Safeguard interests of the participants

• Promote prudent management

• Enhance operational efficiency

• Build healthy takaful funds

• Promote uniformity in practices

Objectives &

Principles

Funds Segregation

Surplus / Deficit

Qard to rectify  deficit
Operating

Costs

Shareholders’

Fund
Takaful Funds

Fiduciary duties & relationship

between TO - participants Establishment of Operational Model

Investment

Underwriting Claims

Liabilities

Valuation
Retakaful

Pricing
Income

• Upfront fees

• Performance

fees from takaful

funds
lead to

Supported by:

Outlines requirements in the following areas….

• Effective governance & oversight

• Adequate disclosure & transparency

• Sufficient & competent resources

• Efficient processes & procedures

9 BANK NEGARA MALAYSIA
CENTRAL BANK OF MALAYSIA

Shariah Governance …

Foster Shariah innovation whilst promoting

stability in marketplace via harmonization of

Shariah interpretation…

   Proper governance provides assurance on Shariah

compliance & confidence on takaful operation:

1. SAC’s legislative stature as highest authority

accorded under Central Bank of Malaysia Act 2009

2. SC of takaful operator accountable on decision,

views & opinions

3. Board & senior management with sufficient

expertise & capability on takaful (Islamic finance)

issues

4. Function of Shariah risk management, research,

review & audit to provide check & balance

5. SC member of another takaful operator shall not be

appointed – avoid conflict of interest & maintain

info confidentiality

6. Shariah parameters provide guidance on main

features, principles & rulings

7. Institutionalise mutual respect by recognising

differences of Shariah interpretations

Shariah as overarching principle in Islamic finance

Shariah Advisory Council (SAC) of BNM

Shariah Compliance Functions :

Review

Audit

Shariah Governance Framework

Shariah Parameters

Shariah Resolutions & Rulings

Management Board
Shariah

Committee

(SC)

Risk Management

Research

10 BANK NEGARA MALAYSIA
CENTRAL BANK OF MALAYSIA

Risk-Based Capital Framework for Takaful Operators (RBCT) ...

Objectives

Credit

Market

Expense Liabilities

Operational

(include risks from

Shariah non-

compliance)

Surrender Value

CAPITAL REQUIRED

RELATES TO THE

FOLLOWING RISKS

Takaful Liabilities

On shareholders’ fund only

 Reflects TO’s:

Own risk profile

Overall risk tolerance & appetite

Quality of risk management

Enable all obligations under a takaful contract & costs of managing the takaful business are met

Provide flexibility for takaful operator (TO) to operate at different risk levels as long as there is

supporting capital

Ensure availability of funds to provide interest-free loan (qard) should the need arise

TOs operating below the STCL will attract

stricter supervisory actions of increasing

intensity

Supervisory Target Capital Level

(STCL)

CAPITAL AVAILABLE TO

ADDRESS THE IDENTIFIED

RISKS

Aggregate of Tier 1 and

Tier 2 capital, minus

deductions for assets not

readily available to meet

policyholders’ obligations

(e.g. goodwill &

investment in subsidiaries)

The capital available

under shareholders’ fund

shall be fully recognised

The capital available

under takaful fund shall be

recognised limited to

meeting takaful funds’ own

capital requirements

TO’s financial strength to support its business

operations & meet potential qard reflected

through two indicators

Individual Target Capital Level

11 BANK NEGARA MALAYSIA
CENTRAL BANK OF MALAYSIA

Moving forward ...

Future development & initiatives under Financial Sector Blueprint

Issue new takaful licenses to institutions with

specialised expertise

Encourage international players to establish

retakaful operations

Promote greater involvement of takaful brokers

Wide range of products & services

A regulatory framework that facilitates the offering of

affordable microtakaful

Increase the diversity of players

Increase market efficiency

Facilitate the development of standard retakaful

documentation

Strengthen Shariah governance framework

Establish a single legislated body as the apex

authority on Shariah matters

Strengthen International Shariah Research

Academy for Islamic Finance to become a premier

international research agency

Regulatory & supervisory regime

Enactment of a comprehensive legislative framework

for the conventional & Islamic financial systems

respectively

Talent development

Promote standards & accreditation of Islamic finance

programmes

Introduce dedicated training programmes for Shariah

graduates

1 2

3

4

5
6