| KUALA LUMPUR/DUBAI
KUALA LUMPUR/DUBAI May 21 Malaysia's Securities
Commission has tightened rules on bai inah, a popular but
divisive Islamic financing contract, in a fresh sign that
standards in the world's two main centres for sharia-compliant
banking are slowly converging.
Regulators and scholars in Malaysia and the Gulf have
contrasting approaches to Islamic finance; the Gulf tends to be
stricter in defining permissible transactions, and banks in the
region have therefore shunned bai inah.
But under pressure to develop a cross-border industry,
authorities in both centres have shown signs of narrowing their
differences in the past few years. For example, some Gulf
countries have been moving towards centralising supervision of
Islamic banks under a single sharia committee, as Malaysia does.
Treatment of bai inah, which involves the sale and
subsequent repurchase of an asset on a deferred-payment basis,
may now become another area of convergence.
The structure is commonly used in Malaysia, which follows
the Shafi school of Islam, regarded as more flexible in its
interpretation of sharia law. But scholars from more
conservative schools in the Gulf frown on it, arguing that it is
only weakly linked to real economic activity, a key principle in
New rules published by Malaysia's Securities Commission this
month do not ban bai inah, but they stress that the two legs of
the transaction must be executed and completed separately, and
that ownership of the asset must actually be transferred.
"This will enhance the application of inah as required by
the Shafi school and will avert any legal risk on the
application of inah if it is challenged in the courts," said
Mohamad Akram Laldin, executive director at Malaysia's
International Sharia Research Academy for Islamic Finance.
"The main issue is the two legs of the contract must be
totally separated, and it has to be evidenced in all the
By making compliance with the new rules more demanding, the
ultimate effect may be to encourage Islamic banks in Malaysia to
shift away from bai inah to alternative modes of financing,
scholars said. Use of other structures, such as commodity
murabaha, which is similar in some ways, or musharaka, which
many scholars believe more closely follows the Islamic principle
of profit-sharing, could increase.
"Most of the Islamic financial institutions have a problem
complying with the new ruling. The rules are too tight - to
fulfill them they have a problem," said Shamsiah Mohamad, a
member of the sharia advisory council of Bank Negara, Malaysia's
"The interconditionality is hard to meet - first leg and
second leg, the two can't have links."
The presence of bai inah has been one deterrent to the entry
of Gulf-based Islamic banks into the Malaysian market, so if the
practice fades, banking ties between the two regions could grow.
Even before the new rules, some Malaysian banks had been
reducing their reliance on bai inah, and Mohamad made clear that
Malaysia's central bank was comfortable with this trend.
"Bank Negara does not forbid this, but we don't encourage it
because it's not a kind of contract that all mazhabs (Islamic
schools of thought) agree on," she said.
"Indirectly, when Islamic banks don't do it, over time it
will phase out. The appeal will disappear."
(Editing by Andrew Torchia)