Response of Bursa Malaysia’s Shariah Committee on Comments and Observations of Mr. Ahmad Ali Siddiqui, the Executive Vice President at Meezan Bank's Product Development and Director, IBA Centre for Excellence in Islamic Finance
First and foremost, we sincerely appreciate all comments and observations made on Malaysia’s Bursa Suq Al Sila (BSAS), also known as Commodity Murabahah House, as its main aim is for the overall betterment and improvement of BSAS. Based on the constructive observations made, indeed, there are improvements that have already been implemented. For this occasion, we will share and respond on several points raised by Pakistan-based Meezan Bank (jazakumullah khayran). Our responds are in bold italic below:
(Note: The purpose of sharing these observations is to improve the system at BSAS and not to offend anyone)
Comment: BSAS is a good effort. However, when our delegation visited Bursa Malaysia, met its Shariah Scholars and visited the Palm Oil Supplier, we noted the following observations.
Most of these observations were officially communicated to the Shariah Committee of BSAS on behalf of Shariah Board of State Bank of Pakistan (SBP) who was then headed by Shaikh Mufti Taqi Usmani.
Both the Shariah Board of Meezan Bank and Shariah Board of SBP stated that as per Shariah requirement, when goods are bought or sold on BSAS platform, either the goods sold must be segregated & identified separately or their percentage share (i.e. x% of the total quantity sold - in case of musha) in the total lot available for sale must be mentioned, as it is important to mention the percentage share in the sale document in every case.
Musha Share: We observed that in the case of Palm Oil, it is stored in large tanks where continuous flow (in and out) takes place. Ideally, when a specific quantity is bought say 1000 litre, the buyer must know how much percentage of total oil in the tank belongs to him (for example 10% of the total 1000 litre). However this is not known in BSAS and this fact was acknowledged by the Shariah Scholars.
Response: In storing Crude Palm Oil (CPO) in particular, the tank requires a continuous flow of CPO, as static CPO may damage its quality. Technically, the quality of CPO is maintained by monitoring its temperature. If the quality is in state of deterioration, the newly produced CPO must be added into the tank to address this issue. In other words, the tank cannot be completely closed where there is no inflow and outflow. Therefore, the percentage cannot be determined as the base number will change throughout the day.
Nevertheless, what is required for CPO Provider is to offer the amount of CPO in the particular tank which has not been sold (unencumbered) to anybody on that day. For example, the CPO Provider is fully aware that 2 tonnes of CPO in Tank A (which can accommodate 4 tonnes of CPO) is qualified to be sold on BSAS Platform since it is unencumbered. In this case, the CPO provider must ensure that even though there will be inflow and outflow from Tank A, the quantity will not be below than 2 tonnes offered on BSAS Platform. Due to inflow, it might go up to 3.5 tonnes at 11.00 a.m. and due to outflow; it might go down to 2.5 tonnes at 3.00 p.m. Due to this nature, it is impossible to determine its specific percentage as percentage will differ at 11.00 am and 3.00 p.m. respectively. Therefore CPO is determined by quantity and quality which should be maintained the same as required by the regulator and not by percentage. This is unique for CPO only.
Under this circumstance, and taking the above quantity as an example, if one is buying 1 tonne of CPO from the 2 tonnes offered in the morning from Tank A, we may say that the buyer owned 50% of the 2 tonnes offered by the way of musha. But that 50% may not necessarily be accurate especially with the outflow and inflow activities, even though 2 tonnes will be maintained throughout the day. Therefore, we make our ijtihad under this unique circumstance that 1 tonne is owned by the buyer by way of musha, but the percentage will be calculated whenever required by taking the exact number at the time of the occurrence. For example, if something happened to the tank and the CPO inside it has been spoiled, the percentage of all the owners of the CPO by way of musha’ will be calculated and liability will be distributed accordingly. For example, if this happened when Tank A was filled with 4 tonnes of CPO, the owner of 1 tonne of CPO will take liability of 25% of CPO in the tank (1 tonne out of 4 tonnes) and not 50% like when the tank was filled with 2 tonnes of CPO in the morning. At the end of the day, he is taking the liability of what he owns, not more and not less, which is 1 tonne of CPO.
Apart from the above, BSAS also offer other commodities on its platform such as timber, plastic raisin, etc. There are all determined and tagged by quantity and location without any problem.
In order to become supplier of Bursa Malaysia, every supplier has to agree on Auto Net off clause that takes place at each day end (if a supplier does not agree, he would not be allowed at Bursa). This means he agrees to take back his oil or commodity (sold in the morning) through an auto reset mechanism without any offer or acceptance at day end. Based on this condition, the inventory position is reset at day end to the original
Response: The latest development is that at the end-of-day; the Commodity Supplying Participant (CSP) will offer to sell to original CSP the commodity held and the original CSP has the option to reject the offer. With this function, it is not an auto reset anymore whereby the potential buyer may reject the offer. It also mitigates the issue of no offer and acceptance. The offer to sell must be done accordingly.
Both Shariah Boards have expressed their reservations that at the end of the day, the goods will go back to the original seller with an automatic netting mechanism in place. Hence this is similar to bai’ al Inah or buy-back. Many scholars consider this transaction as ‘inah as the commodity is transferred back to the original supplier even after exchanging multiple layers of buyers.
Shariah Boards are of the view that this mechanism needs to be changed to ensure the goods are not going back to the same seller at day end by design or by practice. One option could be to allow end buyer to hold the commodity overnight and offer the same at the start of next business day.
Response: Conceptually, CSP wants to buy a certain amount of commodity from Bursa Malaysia Islamic Services (BMIS), either the commodity is the same commodity that the CSP sold to a Commodity Trading Participant (CTP) at the first sale transaction, or a portion of it as the case may be. The system should not forbid the CSP from buying the commodity from BMIS. A CSP reserves the rights to purchase from BMIS. In fact, those are two separate and independent transactions.
Secondly, it differs from the debatable ‘inah. In the case of ‘inah, the price of the first sale transaction is normally higher than the sale transaction at the end, however the CSP in BSAS is selling and buying at the exact same price. But do understand that the expectation is for the commodity not to be ‘returned’ to the original CSP. In fact, since the inception of BSAS, BMIS has been taking measures to mitigate the “’inah” risks including through:
In the past:
• Deployment of randomization feature of sale of the commodity by BMIS to CSPs; which means that the sale at the last leg is offered to at least 3 CSPs and the original seller might be one of them. Therefore, the possibility that the CPO will go to the original seller is reduced and if it happened, it is not by design and
• Actively increasing supply base of the commodity to reduce the possibility of the same commodity going back to the original CSP. In other words, more than 3 CSP were there in the randomization system.
Latest development and current practice:
The BSAS platform has successfully enhanced the system to address the so-called ‘inah feature by excluding the original selling CSP from buying the commodity for a particular chain of transaction. This feature is currently applied in the system, i.e. the original seller is excluded in the system to buy the CPO that he has sold earlier. This is currently possible as we have a big number of commodity suppliers which was not the case at the beginning when the platform was introduced.
Ideally, banks and its clients may consider taking physical delivery and selling the commodity to any willing buyer outside the system.
Response: Bursa Malaysia strongly welcomes any participant to request for physical delivery. The process is clearly provided in the Operational Procedures made available to registered members. The rightful owner of the commodity, at any stage, has the full right to take the delivery.
Finally, thank you for all the insightful observations, and we always welcome constructive discussion for the betterment of the industry.
Follow up comments by Mr. Ahmed Ali Siddiqui**
1. In case of Plastic and Timber, can you explain the process of identifying the specific stock or bag sold at Bursa or log of wood sold at Bursa.
2. Excellent to note that Auto Netting clause has been removed. Now by default the commodity is not bound to go back to Supplier One.
3. The removal of Auto Netting clause and improvements in the BSAS system for excluding the Supplier One is a very good improvement.
4. For Physical delivery, we would kindly request for a summary or number of transactions at BSAS during the last 4-5 years, where there have been successful delivery of physical delivery and commodity. (This will address the concerns on physical delivery at BSAS)
**Column Editor Note: The answer to these comments will be added later here or in the comment section below.
Observations from: Mr. Ahmed Ali Siddiqui, Executive Vice President at Meezan Bank's Product development and Director, IBA Centre for Excellence in Islamic Finance
Responses from: Prof. Dr. Ashraf Mohamad Hashim (Chairman, Shariah Committee, Bursa Malaysia), Prof. Dr. Younes Soualhi (Member) and Dr. Shamsiah Mohamad (Member)