BNM asking banks to provide rebate

By Habhajan Singh

Bank Negara Malaysia (BNM) is now asking banks to provide rebate for early settlement of financing based on Bai Bithaman Ajil (BBA), a move seen to protect the interest of consumers who have in the past been jolted by banks demanding the full price of the financing.

In another move, the central bank's Shariah Advisory Council (SAC) also decided that compensation may be imposed on late payment of financial obligation arising from exchange contracts like the BBA and hire purchase and also interest-free loans known as qard.

The issue of rebate, or ibra in Arabic, would be a welcome relieve for individual and corporations that have made avail the Islamic financing as it was previously left to the discretion of the banks.

"In line with the need to safeguard maslahah (public interest) and to ensure justice to the financiers and customers, Islamic banking institutions are obliged to grant ibra' to customers for early settlement of financing based on buy and sell contracts (such as bai' bithaman ajil or murabahah ).

"In order to eliminate uncertainties pertaining to customers' rights in receiving ibra' from Islamic banking institutions, the granting of ibra' must be included as a clause in the legal documentation of the financing," the SAC decided at its meeting on Jan 28, according to a BNM statement released yesterday.

It said SAC had decided that tawidh (compensation) may be imposed on late payment of financial obligation arising from exchange contracts (such as buy and sell and hire purchase) and qard (loan).

"Nevertheless, ta'widh may only be imposed upon the lapse of the repayment period agreed by both contracting parties. The amount of t a'widh received may be recognised as income by the seller/financier/creditor on the basis that it is imposed as compensation for actual loss incurred by the seller/financier/creditor," it said, adding that the rate will be determined by BNM.

On ibra, the SAC ruled: "In line with the need to safeguard maslahah (public interest) and to ensure justice to the financiers and customers, Islamic banking institutions are obliged to grant ibra' to customers for early settlement of financing based on buy and sell contracts (such as bai' bithaman ajil or murabahah ).

"In order to eliminate uncertainties pertaining to customers' rights in receiving ibra' from Islamic banking institutions, the granting of ibra' must be included as a clause in the legal documentation of the financing . The determination of ibra' formula will be standardised by Bank Negara Malaysia."

On April 19, The Malaysian Reserve reported on a recent High Court judgement that ruling that Islamic banks 'must grant' a rebate even if the BBA contract is silent on the issue when a default occurs.

The judgement, in four BBA cases heard together by High Court Judge Datuk Rohana Yusuf in Bank Islam Malaysia Bhd v Azhar Osman, brought to the fore an issue that has been a bone of contention for consumers making avail of Islamic home financing as Islamic banks deem rebate as discretionary. Consumers, on the other hand, would want more certainty in that matter.

(This story appeared in The Malaysian Reserve on June 28, 2010. The Malaysian Reserve is a daily business/finance newspaper published out of Kuala Lumpur, with a sectoral page on Islamic finance on Mondays, edited by Habhajan Singh)