SINGAPORE (Tuesday, 24 August 2021) – God willing, Singapore Muslims may soon see the introduction of the country’s first Shariah-compliant home financing facility should all stakeholders involved agree on a financing model that works for the city-state.
In an email response to queries from Halal Universe, Maybank Singapore said Thursday last week it is now in talks with the relevant parties here in the bank’s continuous efforts to provide such a service to the community.
“We are engaging all stakeholders in the hope of a successful launch in due course,” a spokesperson from Maybank Singapore said. The bank, however, would not disclose details.
Demand for a Shariah-compliant home financing facility from the Muslims in Singapore is on the rise, but to this date there hasn’t been a service provider offering such a product. Maybank Singapore has amongst its suite of offerings Shariah-compliant vehicle and commercial property financing, but not home financing.
Maybank Singapore and CIMB Bank first engaged the CPF Board separately some 12 years ago on their proposals to launch Islamic home financing based on the commodity murabaha model, two industry sources with knowledge of the matter said. The banks weren’t successful.
“The problem lies with the underlying operations of commodity murabaha. CPF Board does not like the idea of using the monies to buy and sell commodities,” one of the two industry sources said.
According to the industry source with knowledge of the matter, Maybank Singapore presented last year two home financing models to the CPF Board – commodity murabaha and musharaka mutanaqisah.
The structure of a Shariah-compliant home financing facility has been a bone of contention amongst stakeholders here in Singapore. While banks have been leaning towards a financing structure based on the commodity murabaha model, Singapore’s existing regulatory framework – specifically the Central Provident Fund (CPF) Act – could not accommodate such a structure.
“This is problematic because the commodity murabaha model will utilise the funds for the purchase of a commodity, as a means of financing the property purchase,” said Abdul Rahman BMH, managing director of Abdul Rahman Law Corporation. “This goes against the laws as the utilisation of (CPF) funds is limited to that of immovable property.”
Singapore’s real estate industry is unique in that unlike elsewhere in the world, the majority of Singaporeans utilise their CPF funds meant for their retirement to purchase their homes and their monthly CPF contributions to service their home loans. As things stand, there won’t be many who could tap into a Shariah-compliant home financing based on the commodity murabaha, as they are not likely to be able to make use of their CPF funds for repayments, unless the CPF Act is amended.
Halal Universe wrote in to the CPF Board on 5 August asking if there is a possibility the CPF Act be amended or tweaked to accommodate a Shariah-compliant home financing based on the commodity murabaha model.
The CPF Board said it has forwarded our queries to its parent ministry, The Ministry of Manpower, which is now looking into the questions. Halal Universe will provide an update on the matter when we receive a reply from the Ministry.
What Are These Financing Models? Why Do We Need Them?
Adherents of the Islamic faith ought not to tap into conventional loans for their financing needs whether these are in areas of vehicle purchase, property and personal financing. This arises from the Islamic injunction forbidding the consumption and the incurrence of interest among its adherents but the Law allows trade.
That is because they say: “Trade is like usury,” but Allah hath permitted trade and forbidden usury.
– The Holy Qur’an, 2:275
In their efforts to observe the injunction, proponents of Islamic banking and finance and Shariah scholars developed many trading and financing models such as commodity murabaha, which means the “deferred sale of commodities at cost plus a mark-up,” ijarah muntahiyah bitamlik or “lease-to-purchase” and musharaka mutanaqisah, which means “diminishing partnership.”
Today, financing based on commodity murabaha has proven to be a popular financing method amongst Islamic banks in Malaysia and in the Gulf countries, but increasingly frowned upon by many Shariah scholars as they refined their thoughts over the years. Under the commodity murabaha model, when a customer approaches a bank for an Islamic financing of his property, the bank will first sell him a commodity such as palm oil, cocoa and the like. The bank will sell the commodity to the customer at a price (x+y) equivalent to the bank’s cost of purchase of the commodity (x) plus the bank’s profit margin (y) on deferred payment terms.
Since the customer has no use of the commodity, he will appoint the bank to sell the commodity back to the market on his behalf. The bank will sell back the commodity in the market on a spot/cash basis at cost (x).
The proceeds from the sale of the commodity (x) will then be given to the property seller or developer. The customer repays the bank its principal (cost price of commodity) + bank’s profit (x+y) by way of agreed payment schedule. The property is charged to the Bank as collateral.
Under the ijarah muntahiyah bitamlik or lease-to-purchase model, the customer purchases an asset from a seller by paying down payment. The customer then approaches a bank for an Ijarah financing. Upon approval, the bank purchases the asset from the customer and pays the remaining purchase price of the asset to the seller pursuant to the purchase from the customer.
The bank leases the asset to the customer by executing an Ijarah Muntahiyah Bitamlik Agreement and the customer pays the lease throughout the lease period. The bank will sell the asset to the customer at nominal value upon maturity.
Financing model musharaka mutanaqisah or diminishing partnership has been in existence since the early 1970s. Musharaka means partnership between a person (customer) and a capital provider.
According to renowned Shariah scholar Taqi Usmani, it is a concept whereby a financier and a buyer jointly participate in the ownership of a property or equipment whereby the buyer will purchase the share of the financier until he becomes the sole owner of the asset. (1)
As joint-owners of a property, both the bank and the customer assume the risks and responsibilities that come with ownership, fulfilling the legal maxim of equivalent counter value (iwad) in the transaction. Profit is also distributed based on the equity of the property and in so doing the arrangement caters to a society’s well-being and equal distribution of income. (Nik Yusoff, 2002, p.27). (2)
Accepted by international jurists from all the four schools of thought of Islam, the musharaka mutanaqisah structure seems to tick off all the boxes of the maqasid Shariah (goals of the Shariah) such as socio-economic justice – it does not cause hardship and burden the customers. (Al Ghazalli, 1973). (3)
Financing Model Best Suited For Singapore
“The ijarah muntahiyah bitamlik would suffer from the same problem as the commodity murabaha as the CPF utilisation would go to a lease instead of a purchase,” Abdul Rahman said.
From the perspective of Singapore’s legal framework, musharaka mutanaqisah is a structure that best suits the city-state, according to Abdul Rahman. “The musharaka mutanaqisah would be the best approach because the CPF utilised would still be strictly for the purchase of the immovable asset.”
“I understand however, that the banks prefer to move away from this model due to the risks on the part of the bank,” Abdul Rahman said.
Musharaka mutanaqisah is also the mode of financing practised by many international Islamic financial institutions and cooperatives in the US, the UK, Canada, Middle East, Australia and Pakistan.
It is also a popular structure amongst consumers in Malaysia. However, the number of Islamic banks in Malaysia offering the musharaka mutanaqisah method of financing has declined, in favour of the commodity murabaha model. In 2018, there were only 5 banks in Malaysia offering musharaka mutanaqisah compared to 8 banks in 2017, according to Zaaba and Hassan, quoting Mat Ali and Subky et al. (4)
Banks Lean Towards Commodity Murabaha
Despite Singapore’s regulatory framework, banks in the past were hopeful that the local authorities would be amenable to the commodity murabaha financing structure and that the CPF Act would one day be amended to accommodate.
This is not withstanding that the commodity murabaha structure today is riddled with controversy and frowned upon by many international scholars. There have been recent pronouncements by some scholars that the murabaha arrangement is not permissible as the structure is arranged and therefore not a genuine trade. (5)
“If (the authorities could) change the Banking Act to facilitate Islamic Banking, I cannot see why they cannot amend the CPF Act to facilitate (commodity murabaha),” commented a retired banker. Under the Banking Act, murabaha is permissible, he added. As far as commodity murabaha is concerned, the buying and selling of the commodity is basically to facilitate the attempt to make the transaction Shariah-compliant. “At the end of the day the money will flow to the developers,” he said.
Banks are also in favour of commodity murabaha because they will incur less capital charge, as compared to the other financing models, the second industry source said. Banks’ operational system too is already in place, he added.-/-www.halaluniverse.net
Sources:
(1)(2)(3)(5) – Journal of Islamic Management Studies, Vol. No. 2 Issue No. 1, 2018, pp1-11(4) – Zaaba, Hassan, Why Islamic Banks Are Reluctant to Offer Musharakah Muntanaqisah for Home Financing: The Case of Malaysian Islamic Banks, pg 55
