The Shariah Advisory Council (SAC) of Bank Negara Malaysia has taken significant strides in marrying the convenience of modern financial mechanisms like Buy Now Pay Later (BNPL) facilities with the rigorous principles of Shariah law.
Through its comprehensive deliberations during the 220th, 228th, and 231st meetings, the SAC has meticulously sculpted guidelines that harmonise these modern financial solutions with the rich traditions of Islamic finance.
Understanding the SAC rulings
In its 220th meeting on 24th January 2022, the SAC ruled that BNPL facilities are permissible under Shariah principles, provided they adhere to appropriate Shariah contracts. Islamic financial service providers must obtain written approval from their respective Shariah committees to ensure compliance.
Subsequent meetings, the 228th and 231st, clarified that BNPL facilities enabling the purchase of gold and silver must be conducted on a spot basis, with a settlement period of up to T+2. The SAC also emphasised the importance of responsible practices to protect consumers’ financial well-being.
These rulings became effective immediately upon publication on Bank Negara Malaysia’s website on 24th January 2024.
They apply to licensed Islamic banks, licensed banks, and licensed investment banks operating under the Islamic Financial Services Act 2013 (IFSA) and the Financial Services Act 2013 (FSA), as well as prescribed institutions governed by the Development Financial Institutions Act 2002 (DFIA).
The context of BNPL facilities
Before delving into the SAC’s rulings, it is crucial to understand the context and significance of BNPL facilities in Malaysia’s financial landscape.
BNPL facilities enable consumers to make purchases, defer payments, or split purchase prices into manageable instalments. From a Shariah perspective, BNPL facilities can be considered extensions of traditional sale contracts, provided they adhere to Shariah principles.
Currently, non-bank BNPL providers operate without regulatory oversight. However, upcoming regulations like the proposed Consumer Credit Act are expected to change this landscape.
BNPL facilities offer several advantages, including expedited merchant settlements and deferred payments, contributing to moderate market growth. While licensed financial institutions have yet to enter the BNPL sector, partnerships with existing non-bank providers hold promise for the future.
Key considerations for Shariah compliance
To ensure Shariah compliance in BNPL facilities, the SAC has outlined a comprehensive set of principles and conditions that Islamic financial service providers must adhere to:
Collective Use of Shariah Contracts: Shariah-compliant BNPL facilities should be structured using relevant Shariah contracts while preserving the primary objectives of these contracts. This approach allows for flexibility and innovation within the boundaries of Shariah principles.
Contractual Rights and Obligations: Shariah contracts used in BNPL facilities must accurately reflect the rights and obligations of all parties involved. This ensures transparency and fairness in all transactions.
Avoiding Riba Practices: The SAC has unequivocally stated that BNPL facilities must not be structured in a way that gives rise to riba practices, which are prohibited in Islam. This is a fundamental requirement for Shariah compliance.
Late Payment Charges: Charges for late payments must be justified based on actual costs incurred and must comply with applicable requirements set by the Bank. These charges should be reasonable and compensate for late payments rather than punitive measures against consumers.
Handling non-Shariah compliant goods
For Islamic financial service providers offering BNPL facilities on platforms selling both Shariah and non-Shariah-compliant goods and services, stringent safeguards must be in place:
Confining BNPL Transactions: BNPL transactions facilitated through Shariah-compliant facilities should be limited exclusively to Shariah-compliant goods and services. This ensures that consumers engaging in BNPL transactions are not inadvertently involved in non-compliant activities.
Shariah Committee Approval: The Shariah committee of the respective Islamic financial service provider must approve the offering of BNPL facilities on such platforms. This ensures that Shariah-compliant BNPL facilities coexist harmoniously with non-Shariah compliant products.
Safeguards: Shariah-compliant BNPL facilities must have appropriate safeguards to prevent transactions involving non-Shariah-compliant goods and services. This separation ensures the integrity of Shariah compliance.
The transaction of gold and silver
The SAC’s rulings also address the specific transaction of gold and silver (ribawi items) within BNPL facilities. It is emphasised that these transactions must strictly adhere to Shariah principles:
Spot Basis Transactions: The purchase and sale of gold and silver with currency must be conducted on a spot basis. This means that the possession of gold and silver must occur at the time of the transaction, either physically or constructively.
Operational Constraints: While spot transactions are ideal, the SAC recognises that operational constraints and customary business practices may necessitate a permissible settlement period of up to T+2. This flexibility is granted to accommodate practical considerations.
Advocating responsible practices
Recognising the potential risks associated with BNPL facilities, the SAC places a strong emphasis on responsible practices to protect consumers’ financial well-being:
Thorough Credit Evaluation: Islamic financial service providers are encouraged to implement a rigorous credit evaluation process to assess consumers’ affordability. This practice ensures that consumers do not accumulate excessive debt beyond their means.
Clear Disclosures: Providers are urged to provide clear and timely disclosures to consumers, enabling them to make informed decisions when using BNPL facilities. Transparency in fees, charges, and terms enhances the responsible and prudent use of these services.
Preservation of wealth: These measures align with the overarching principle of Shariah, which encourages the preservation of wealth (hifz al-mal). Responsible lending and borrowing practices contribute to financial stability and safeguard consumers from undue financial burden.
Charting a future of ethical financial innovation
The SAC’s rulings on BNPL facilities in Malaysia demonstrate a commitment to ensuring that innovative financial products align with Shariah principles. These rulings emphasise the collective use of Shariah contracts, transparent contractual rights and obligations, the avoidance of riba practices, and responsible lending practices.
Furthermore, the SAC provides clear guidance on handling non-Shariah-compliant goods, the transaction of gold and silver, and the importance of safeguarding consumers’ financial well-being through thorough credit evaluation and transparent disclosures.
By adhering to these rulings and principles, Islamic financial service providers can offer BNPL facilities that are both innovative and Shariah-compliant, fostering financial inclusion and responsible financial behavior among consumers.
These developments reflect Malaysia’s ongoing commitment to the growth of Islamic finance while upholding the values and principles of Shariah.
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