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January 2010 - Finance. Legal Developments by Loo & Partners.

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Monetary Authority of Singapore (“MAS”) advocates that Islamic finance products shall receive similar regulatory treatments as the conventional finance products. However, MAS has not opted to have a separate Islamic finance regulatory regime that exists in parallel with the conventional framework. MAS accordingly serves as the driving force behind the change in the laws and regulations pertaining to the governance, validation and enhancement of Islamic finance transactions.

Prior to the enactment of Regulation 23 of the Banking (Amendment No.2) Regulations 2006, licensed Banks are only permitted to carry out banking business defined as "the business of receiving money on current or deposit account, paying and collecting cheques drawn by or paid in by customers, the making of advances to customers, and includes such other business as the Authority may prescribe for the purposes of the Banking Act, Chapter 19." As such, it was at the material time unlawful to trade in real estate property or asset in capacity of a bank.

In the present regime, all licensed Banks may enter into "sale based" transactions with customer and in particular, Murabaha financing (which is commonly referred to as cost-plus financing). Further, there will be no double payment of stamp duty and goods and services tax for Murabaha financing transaction with a real estate underlying asset.

Pursuant to the Shariah concepts of Murabaha, this contract involves the sale of an item on a deferred payment basis whereby the customer is allowed to pay the sale price by agreed instalments. The relationship between the parties is as "vendor and purchaser" instead of as "creditor and debtor".

Murabaha financing is essentially about "real transactions" which transpired between the bank and its customer. Islamic finance is based on Shariah principles which must be strictly adhered to. It is therefore fundamental to understand that, in Islamic finance documentation, the Islamic finance products do not merely replace interest with profit in its documentation.

Ideally, all Islamic concepts of finance products (given the various interpretations adopted in different financial markets) must be approved by a "qualified Shariah Scholar" or "a board of Shariah Scholars" (both of which are not officially constituted under any legal enactments or by-laws). Further, the parties should execute and perform the transaction "Islamically", in form, substance and spirit throughout the entirety of the transaction.

Given that the fundamental differences between a conventional finance transaction and Islamic finance transaction lie in the Shariah principles, the writers are of the view that the regulatory authority may wish to consider incorporating the following:-

(i) Shariah concepts and its interpretations which should be clear and consistent;


(ii) a statutory Shariah advisory board and an infrastructure for the issuance of fatwa for Islamic financial transactions; and


(iii) guidelines/ directives/ practice notes on implementation, products development and enforcement procedures, to be issued on timely basis.

The writers are mindful that the regulatory authority may have considered and may have decided to only incorporate certain Shariah principles and its related supervisory measurement in the present regime.