BNM Sharia Advisory Council issues ruling on Islamic loan restructuring and compounding of profits


KUALA LUMPUR (August 11): Bank Negara Malaysia (BNM) announced that its Sharia Advisory Board (SAC) has made a decision to restructure Islamic financing facilities during the Covid-19 crisis.

The ruling, which was published on the Central Bank’s website, concerns the restructuring of an Islamic financing facility based on original Shariah treaties, the restructuring of the facility into a conventional loan and the compounding of the restructuring profit.

BNM said an Islamic financing facility based on original Shariah treaties could be restructured using an addendum that references the terms of the original agreement.

“There is no need for a new agreement. This is intended to reduce costs and challenges for customers as well as the operational burden for Islamic Financial Institutions (IFIs).

“A new agreement is required if the restructuring involves the application of another Shariah treaty – for example, a house finance originally based on Musharakah mutanaqisah (diminishing partnership) will be restructured with Ijarah; or a combination of several financings based on different Shariah treaties into a new single Shariah treaty as part of a debt rationalization, “it said.

In the meantime, the council had decided that while IFIs were allowed to restructure a conventional loan into an Islamic one, the opposite was not.

“In cases where the customer chooses to transform their existing Islamic financing facility into a conventional loan, it is at the customer’s discretion to do so.

“In this situation, the customer’s decision is beyond the responsibility and control of the IFI,” said BNM.

Regarding the compounding of profit from the restructuring, BNM said the IFIs were not allowed to account for accrued profits from an initial financing as the new nominal amount for the restructured facility.

“Such a practice aims to avoid multiplying the profit burden of debt (collective profits).

“Therefore, when performing a restructuring, the new face value for the restructured facility will be equal to the outstanding face value of the original facility unless additional funding is available and the IFIs are allowed to calculate a new profit rate on top of the new face value.

The central bank also added that the amount of accrued profit and late payment fees (if any) may be carried over to existing funding and added to the bond, but that amount cannot be capitalized when calculating new profit.


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