Thursday, March 27, 2014

TMR: IBs given till mid-2015 to fully segregate deposits

By Habhajan Singh

Islamic banks (IBs) have until mid-2015 to fully segregate their deposits into either Islamic deposits or investment accounts as introduced under the Islamic Financial Services Act 2013 (IFSA).

The move will see what could likely be the largest product migration by the 16 IBs to comply with the new set of legislation passed last year.

In the past, IBs operating under the now-repealed Islamic Banking Act 1983 (IBA) had deemed all monies accepted from customers — whether it was classified as deposit or investment products — as Islamic deposits.

As such, those monies were protected under the deposit insurance system administered by Perbadanan Insurans Deposit Malaysia (PIDM), an independent statutory body established in 2005, similar to deposits in the conventional banking system.

The differentiation into Islamic deposits and investment accounts will allow the IBs to develop a wider range of products for both classifications to meet the diverse needs of customers, according to a Bank Negara Malaysia (BNM) statement released on March 19, along with the release of the central bank’s 2013 annual report.

“Consequently, customers will be able to better appreciate the product offerings by the Islamic banking institutions and make an informed decision in respect of the choices of Islamic banking products.”

The two major product classifications — Islamic deposits and investment accounts — will, in future, behave differently.

In the past, investment products by IBs using the Shariah contract of mudarabah came with a guarantee on the capital. In other words, customers did not risk losing their capital when they opted for such products.

In future, once the proper investment products are introduced, capital will no longer be guaranteed. Hence, customers must be willing to take the risk that they may lose their capital.

During the transition period till June 30, 2015, the central bank said all lslamic deposits (accepted under IBA) would continue to be protected by PIDM.

The IFSA came into effect on June 30, 2013, along with the Financial Services Act 2013 (FSA).

To give effect to the clear distinction under the IFSA between “Islamic deposits” and “investment accounts”, BNM said it has published proposals on strengthened oversight and risk management arrangements for the management of investment accounts to uphold compliance with Shariah and provide adequate protection for investors commensurate with the investment risks borne by them.

In 2013, BNM issued Shariah and operational standards for one Shariah contract while concept papers on 11 other Shariah standards and two operational standards have been published for industry feedback.

As at end-2013, BNM reported that the Islamic banking sector, including development financial institutions, recorded a growth in assets of 16.5%, to account for 25.7% of total assets in the overall banking system.

The “sustained momentum” of sukuk issuances maintained Malaysia’s leading position in the global sukuk market with total sukuk issuance close to US$82.4 billion (RM272.51 billion) in 2013 (or 68.8% of global sukuk issuances), which includes issuances made by foreign corporations, the central bank said in its statement for its Financial Stability and Payment Systems Report.

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