Conversions of a Conventional Bank to an Islamic Bank - Scope of Standard

Transcription

1. Shari ’ah Standard No. (6): Conversion of a Conventional Bank to an Islamic Bank Statement of the Standard 1. Scope of the Standard This standard covers fundamental mechanisms for converting a conventional bank to a bank that complies with Shari’ah rules and principles right after the decision to undertake immediate comprehensive conversion within a particular designated period that is announced, whether such a decision comes from within the bank or from outside the bank to be converted by outside parties interested in converting it. The standard covers the time frame required for the conversion, the effect of conversion on the methods used to solicit and receive deposits, and the method to be used to invest such deposits. The standard provides guidance on how to treat the receivables and liabilities realized by the bank prior to the conversion, whether or not such receivables and liabilities are received or paid. The standard includes a treatment of the prohibited assets that are in the possession of the bank before conversion and the appropriate ways of disposing of them. The standard does not cover activities of the converting bank that are naturally permissible or the profit made by permissible means, as these are not the subject matter of the conversion. This is because there is no Shari’ah objection to the bank continuing such activities or employing them for its own benefit. The standard also does not cover activities of Islamic windows or departments or units in conventional banks. 2. Time Frame for the Conversion 2/1 It is necessary that all Shari’ah requirements be executed in the process of converting a conventional bank to a potential Islamic bank. It is also necessary that the Shari’ah rules and principles be observed in respect of all new transactions after conversion. In principle, the transactions that are concluded before the decision to convert must be ceased or disposed of immediately. It is not permissible to delay clearing out non-permissible transactions 152
2. Shari ’ah Standard No. (6): Conversion of a Conventional Bank to an Islamic Bank unless such delay becomes a necessity or a pressing need. Thus, the circumstances surrounding the conversion must be taken into consideration in order to avoid the risk of failure or a breakdown of the bank’s operations, taking into account that the provisions of this standard will be applied to accommodate the situation. 2/2 If the bank did not decide on an immediate and comprehensive conversion as per item 2/1 and decided to adopt a gradual or partial conversion, then it is not regarded as a converted bank and may not be granted a licence as an Islamic bank unless the conversion process is completed. The shareholders are required to accelerate the process of conversion in order to free themselves from the sin of impermissible activities. This standard may be used as a guideline for identifying the steps of conversion. 2/3 The impermissible profits realised and transactions concluded during the period of conversion can be treated as per the explanation in items 8-11. 3. Necessary Measures for Conversion 3/1 For the success of the process of conversion, it is necessary that the bank set up all necessary procedures, create the required tools, explore alternatives to non-permissible financial practices, and train and promote the personnel required for proper implementation of the procedures of conversion. 3/2 The appropriate administrative arrangements must be in place, including changing the bank’s operating license if required by the supervisory authorities, and amending the bank’s by-laws (memorandum and articles of association) through the required procedures so that they include objectives and operational measures that are appropriate to Islamic banking. The by-laws must be cleansed from anything that contradicts the nature of Islamic banking. 3/3 Restructuring the organizational structure of the bank and its employment procedures, conditions and employee statutes to fit the situation of conversion. 153
3. Shari ’ah Standard No. (6): Conversion of a Conventional Bank to an Islamic Bank 3/4 Formation of a Shari’ah supervisory board and an internal Shari’ah compliance department in accordance with the Governance Standards issued by Accounting and Auditing Organization for Islamic Financial Institutions. 3/5 Reformatting or designing standard contracts or specimens or exemplars of documents that comply with Shari’ah rules and principles. 3/6 Opening accounts with local or international Islamic banks and revamping of the accounts that are maintained with local or corresponding conventional banks [see, item 4 (b)]. Any dealings with conventional banks must be limited to the magnitude of the need to do so. 3/7 Preparing a special programme for preparing personnel and training them to deal with the application of Islamic banking practices. 3/8 Taking necessary measures for the implementation of accounting, auditing, governance, and ethics standards issued by Accounting and Auditing Organization for Islamic Financial Institutions. 4. Dealings with Banks 4/1 Exerting all possible efforts to adapt the ways of dealing with central banks regarding deposits, liquidity needs or otherwise in a way that does not conflict with the rules of Shari’ah, especially rules that govern Riba transactions. The possible alternatives to the reserve amount required by law include, among others, depositing receivables represented by commercial paper to be paid later by customers instead of accepting the freezing of the cash account. The bank can also finance government projects using Islamic instruments. Among the possible alternatives for the purpose of set-off is for the bank to maintain current accounts that accrue no interest or disposing of the interest earned, if that is impossible, and adapting the ways of dealing with the central bank for acquiring liquidity, for example, by the opening of investment accounts for the central bank. 4/2 Revamping the transactions with conventional banks on the basis of Riba free transactions and the application of instruments acceptable by Shari’ah. 154
4. Shari ’ah Standard No. (6): Conversion of a Conventional Bank to an Islamic Bank 4/3 Intensifying transactions with Islamic financial Institutions through bilateral exchange of current or investment accounts and considerable cooperation in the areas of remittances, documentary credits and syndicated financing. 5. Providing Banking Services in Permissible Ways In providing banking services, it is not permissible for the bank to receive interest as compensation for services rendered. It is a requirement that an Islamic alternative be worked out, such as treatment of uncovered documentary credits through Murabahah, Musharakah or Mudarabah in accordance with the rules of Shari’ah. It is not permissible to take a commission for providing a mere facility. However, the commission may be linked to expenses incurred for the execution of the credit facility accordingly. 6. Effect of Conversion on the Interest Based Receivables and Their Shari’ah Alternatives 6/1 All traces of conventional transactions whereby the bank originated monetary assets and is liable to pay interest for them must be liquidated. This is the rule whether such transactions involve individuals, banks or central banks. This liquidation includes, among others, the conditions relating to the deposits, preference shares, investment bonds and interest-based certificates that were issued by the bank before the decision for conversion. [see item 9] 6/2 The bank must confine itself to permissible operations for acquiring the necessary funds to operate or to meet its liabilities. Examples of such operations are: 6/2/1 The shareholders may increase their share capital in order to increase the bank’s capital and provide a basis for attracting investment accounts and current accounts. 6/2/2 Issuance of Islamic certificates such as Mudarabah, Musharakah or Ijarah certificates within the parameters of Shari’ah. 6/2/3 Concluding Salam contracts whereby the bank acts in the capacity of a supplier, or Istisna’a contracts whereby the bank 155
5. Shari ’ah Standard No. (6): Conversion of a Conventional Bank to an Islamic Bank acts in the capacity of a manufacturer or builder with the condition that the contract price of the Istisna’a is paid to the bank in advance, although the deferment of payment of the price in Istisna’a is allowed by Shari’ah. 6/2/4 Concluding a sale-and leaseback deal by selling some of the assets of the bank for liquidity and leasing them back by means of an Ijarah contract. This transaction must take into account the Shari’ah Standards on Ijarah and Ijarah Muntahia Bittamleek whereby the contract of sale must be independent from the contract of lease, i.e. the two contracts must remain separate from each other. 6/2/5 Concluding Tawarruq deals in line with Shari’ah principles by buying a commodity on a deferred payment basis and selling it to a third party, other than the previous seller, for immediate payment. 6/3 If the capital of the bank has increased due to non-permissible transactions or the accumulation of reserves based on non-permissible transactions, then its treatment must be in accordance with the treatment of non-permissible receivables or other non-permissible assets in the possession of the bank as discussed below. [see items 8 and 10] 7. Effect of Conversion on Investments 7/1 All interest-based investment instruments must cease to be used and must be replaced by permissible investment instruments such as Mudarabah, all Shari’ah-nominate partnerships, diminishing Musharakah, sharecropping partnerships (agricultural, planting or irrigation partnership) or financing by way of deferred sales, Murabahah, Salam, Istisna’a, operating Ijarah, Ijarah Muntahia Bittamleek or other permissible financing and investment instruments. 7/2 All possible efforts must be exerted to terminate all interest-based loans that the bank has made before the decision to convert, whether such loans are medium-term or long-term facilities, followed by converting 156
6. Shari ’ah Standard No. (6): Conversion of a Conventional Bank to an Islamic Bank the principal amounts to financing instruments in accordance with the rules and principles of Shari’ah. If the bank is unable to terminate some of these loans, then the bank must dispose of the interest earned in the manner explained in item 10/2. 8. Treatment of the Bank’s Non-Permissible Existing Receivables before the Decision to Convert 8/1 Non-permissible assets of the bank originated or acquired before the decision to convert Starting from the financial period in which the bank decides to convert, the following must be done: 8/1/1 If a conventional bank is acquired with the intention to convert it to an Islamic bank, the new owners are not obliged to dispose of interest and impermissible earnings that have been earned before such acquisition. 8/1/2 If a conventional bank is converted by its existing shareholders into an Islamic bank, then the process of disposing of interest and impermissible earnings should be considered as commencing at the beginning of the financial period in which the conversion starts to take effect. However, for any impermissible earnings that have been distributed prior to conversion, it is necessary, on ethical grounds, for the shareholders and depositors to whom these earnings have been distributed to dispose of them personally. The bank is not bound to do so. 8/1/3 Revenues not yet received that are of doubtful permissibility are not subject to compulsory disposal, whether they were earned before or during the financial period in which the bank decides to convert. The same rule applies to revenues of doubtful permissibility that have been already received because of a belief that they are permissible on the basis of (I) an interpretation of a person who is qualified to perform Ijtihad on issues that are subject to personal juristic interpretation, (II) juristic position of an authoritative school of Shari’ah or (III) the opinion of some eminent and knowledgeable scholars. 157
7. Shari ’ah Standard No. (6): Conversion of a Conventional Bank to an Islamic Bank 8/1/4 If the bank has rights to prohibited non-monetary assets, it may receive them with the intent to destroy them. If the bank is entitled to receive consideration for supplying non-permissible assets or services, the bank may receive the consideration with the intent to donate it to charity. The same rule applies to any income that has been acquired from non-permissible assets during the period in which the bank decides to convert. In both cases, the customer should not be allowed to avoid paying the amount receivable or the consideration, otherwise such a customer would end up being entitled to two counter-values of the same transaction: the good or service supplied and the price payable for it. 8/1/5 If the bank is converted and it has, among its tangible assets, impermissible commodities, the bank is obliged to destroy them. If the bank has sold some of these commodities and is yet to receive the price thereof, the price must be received and be donated to charity. 8/1/6 If the property assets of the bank are locations designated for non-permissible activities, they should be changed to locations designated for permissible operations and services. 9. Treatment of Non-Permissible Liabilities before the Decision to Convert, Whether the Conversion Is Internal or External 9/1 Internal conversion 9/1/1 If the liabilities are in the form of payment of interest, the bank should employ all lawful means to avoid paying such interest. This rule does not apply to the principal amounts of debts or loans. The bank should not pay interest except on the basis of dire need. 9/1/2 If the liabilities are in the form of obligations to provide nonpermissible services, then the bank is obliged to make every effort to terminate such liabilities, by refunding the consideration, even if it has to pay compensation for non-fulfilment of such obligations. 158
8. Shari ’ah Standard No. (6): Conversion of a Conventional Bank to an Islamic Bank 9/2 External conversion through acquisition of the bank by parties interested in converting it. If the purchaser is capable of negotiating a deal that could exclude all non-permissible receivables (e.g. interest and non-permissible assets) from the acquisition deal in a way that will make the seller solely liable for non-permissible liabilities, then the Shari’ah requires that the purchaser do so. However, if the acquisition cannot be concluded unless all assets of the bank including the non-permissible assets and receivables are acquired, then the purchaser is required by Shari’ah to act as quickly as possible to dispose of non-permissible liabilities even if the purchaser has to suggest to the creditors of the bank an earlier repayment for a discount. 9/3 Treatments for impermissible mortgages The shareholders must accelerate the redemption of all impermissible mortgages attached to the assets of the bank. In the case of external conversion, the buyer must stipulate that the seller replaces impermissible mortgages with permissible ones. 10. Disposal of Impermissible Earnings 10/1 All impermissible earnings acquired by the bank before conversion that need to be disposed of as per the rules in this standard must without delay be paid to charity, unless it is difficult to do so, for example, where complete disposal promptly will lead to the collapse of the bank or bankruptcy. In this case, the implementation of conversion can reasonably take place gradually. 10/2 Any interest and other non-permissible earnings should be channelled to charity and general public utilities. It is not permissible for the bank to use this money, directly or indirectly, for its own benefit. Examples of charitable channels include, among others, training people other than the staff of the bank, funding research, providing relief equipment, financial and technical assistance for Islamic countries or Islamic scientific, academic Institutions, schools, anything to do with spreading Islamic knowledge, and 159
9. Shari ’ah Standard No. (6): Conversion of a Conventional Bank to an Islamic Bank similar channels. The charity money must go to these channels in accordance with the resolutions of the Shari’ah Supervisory Board of the bank. 11. Zakah Obligation on the Bank before the Decision to Convert When the conversion is initiated by outsiders who acquired the conventional bank for the purpose of converting it, then they are not obliged to make Zakah payment for the past financial periods because the Zakah for previous periods is the liability of the previous owners. The Zakah liability will start to exist for the new owners from the date of the decision to convert. For the purpose of discharging the responsibility to pay Zakah, the owners may apply the Shari’ah Standard No. (35) on Zakah. However, if the decision to convert was made by the shareholders and the Zakah was not paid for the previous financial periods, the shareholders are obliged to pay Zakah for these periods. They must take into account that they are obliged to pay Zakah even if the revenues and the money earned are impermissible because the shareholders are obliged in the first place to dispose of all accrued interest and impermissible earnings. So, the payment of Zakah is part of the obligation to dispose of impermissible earnings and interest. 12. Date of Issuance of the Standard This Standard was issued on 4 Rabi’ I, 1424 A.H., corresponding to 16 May 2002 A.D. 160