Published August 21, 2009

M'sian Islamic banks launch standard commo contract

Uniform agreement aimed at removing key barrier to sector's growth

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(KUALA LUMPUR) Malaysian Islamic banks yesterday launched a standard agreement for commodity murabaha deposit accounts between banks and corporates, aiming to remove a key barrier to the sector's growth.

The Association of Islamic Banking Institutions Malaysia - which groups banks such as Bank Islam, CIMB Islamic and the Malaysian units of Kuwait Finance House and Al Rajhi - said the master contract would be similar to an interbank murabaha agreement launched earlier.

'Such a standard agreement will certainly promote and uphold the tenets of transparency and consistency in Islamic financial transactions, which eventually will result in product effectiveness and operational efficiencies of Islamic banks,' the association's president Zukri Samat said.

Under a commodity murabaha deposit account, a company that wants to place surplus funds with an Islamic bank will appoint the bank as its buying agent. The bank then buys commodities such as metal or palm oil on behalf of the company.

The bank then offers to buy the commodities from the company on a deferred cash payment basis, with the sale price including a profit to the company from the sale. Murabaha is widely used as an Islamic financing tool.



The International Islamic Financial Market, an industry body backed by the central banks of several Muslim countries, has estimated that the global commodity murabaha market is valued at more than US$100 billion.

But the structure has been criticised as a sham, with some bankers saying deals can be done with no true sale taking place and no real transfer of risk to the buyer of the goods.

'Some jurisdictions actually do not recognise commodity murabaha,' Mr Zukri said. 'This is the responsibility of the various people, the sharia scholars, to try to bring down the gap. Of course we cannot agree on everything.

'Islam allows for different views and different opinions so long as you don't deviate from the main principle of Islam.'

Islamic law is interpreted differently by different religious scholars, resulting in some sharia banking practices being accepted in certain jurisdictions but rejected in some others.

Some regulators and bankers say this lack of uniformity makes it hard to sell products across borders and can raise the cost of transactions. But some practitioners argue that the absence of standardisation helps the industry to innovate.

The murabaha master agreement comes after Bahrain-based industry body Accounting and Auditing Organization for Islamic Financial Institutions said this month it would screen Islamic banking products for sharia compliance to promote uniformity.

Mr Zukri said the murabaha agreement would unlock the potential of the Malaysian Islamic money market which has more than RM6 billion (S$2.5 billion) of average daily transactions. - Reuters