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    BNM Issues Updates on ASEAN Taxonomy, Project Nexus, & Hajah Proposals

    November 15, 2021

    The Bank Negara Malaysia (BNM) announced collaboration on Project Nexus in the real-time payments space and the release of Version 1 of the ASEAN Taxonomy for sustainable finance, along with a discussion paper that proposes the requirements for application of hajah by Islamic financial institutions in the conduct of their business. The discussion paper includes the proposed definition of hajah in the context of Islamic finance and its scope of application. The discussion paper proposes to define hajah as a situation of exigent circumstance that will cause or is likely to cause a detrimental impact to the safety and soundness of the Islamic financial institutions, thus necessitating a temporary exception of a Shariah ruling. The feedback period on the discussion paper ends on January 31, 2022.

    The discussion paper on hajah also sets out enhanced governance expectations on roles and responsibilities of the board, senior management, Shariah committee and the control function of Islamic financial institutions in ensuring the robust assessment of application of hajah. The paper proposes set of requirements and policy guidance to facilitate Shariah deliberation and decision-making on the application of hajah in the Islamic financial institutions. In the announcement on Project Nexus, BNM highlights that it is collaborating with the Payments Network Malaysia Sdn Bhd and certain international partners on a proof-of-concept to improve the cost and speed of cross-border payments. Led by the Bank for International Settlements (BIS) Innovation Hub, Project Nexus is closely aligned with the G20 roadmap for enhancing cross-border payments. Other international partners in the project are Banca d’Italia, the Monetary Authority of Singapore, and the Banking Computer Services Pte Ltd. Project Nexus will explore the feasibility of linking the real-time payment systems in Malaysia, Singapore, and the euro area. The results, expected to be published by the end of 2022, will inform the future development of a global network of real-time payment systems to enable fast and seamless cross-border payments. The prototypes developed under the proof-of-concept will not be available for public use at this juncture.

    With respect to the announcement on the release of Version 1 of the Association of Southeast Asian Nations (ASEAN) Taxonomy, the BNM announcement notes that this taxonomy is a key milestone toward meeting Paris Agreement commitments as this represents the introduction of a common language across ASEAN for financing sustainable economic activities. Version 1 of the taxonomy will provide a frame for discussions with the official sector and private-sector stakeholders to work together on the development of the ASEAN Taxonomy. The ASEAN Taxonomy serves as a reference point to guide capital and funding toward activities that can help promote the systemic transformation needed for the region. To cater to the diversity among the ASEAN Member States, the ASEAN Taxonomy Board has decided on a multi-tiered approach with two main elements: a principles-based Foundation Framework that provides a qualitative assessment of activities and a Plus Standard with metrics and thresholds to further qualify and benchmark eligible green activities and investments. The Plus Standard, which will cover the technical screening criteria and quantifiable thresholds for activities within the selected focus sectors when finalized, can be adopted based on the individual readiness. Version 1 of the taxonomy elaborates on the following key components:

    • Environmental objectives and essential criteria for the assessment of economic activities that act as the foundation to safeguard the environment and promote transition to low carbon and environmentally sustainable practices
    • A list of focus sectors that the Plus Standard will cover as a first step; these include the material sectors in terms of greenhouse gas emissions and gross value-add as well as the enabling sectors whose products and services contribute to achieving environmental objectives.
    • A sector-agnostic decision tree to guide users of the ASEAN Taxonomy in classifying economic activities under the Foundation Framework, with suggestions for additional sector-specific guidance for ASEAN Member States and entities who seek more specific guidance
    • The “stacked approach” that will be used to determine thresholds and technical screening criteria under the Plus Standard, which will be developed in the next phase.

     

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    Keywords: Asia Pacific, Malaysia, ASEAN, Banking, Sustainable Finance, Taxonomy, ESG, Hajah, Islamic Finance, Shariah, Governance, Project Nexus, BIS Innovation Hub, Cross Border Payments, BNM

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