BNM Council Permits Adoption of Risk-Free Rate as an Alternative Rate
At a recent meeting, the Shariah Advisory Council of BNM has ruled that the adoption of risk-free rate as an alternative benchmark rate to LIBOR, or as a fallback benchmark replacement rate after the permanent cessation of LIBOR, is permissible. This ruling comes into effect immediately upon publication on March 22, 2021 and applies to certain Islamic financial institutions. This ruling enables the orderly transition to alternative risk-free rate (including backward-looking term risk-free rate) by Islamic financial institutions before reliable and widely used forward-looking risk-free rate term rates become available.
This ruling is based on the following justification:
- The compounding methodology is merely an arithmetic method in determining the term rate which does not affect compliance of the transactions with Shariah requirements.
- Uncertainty from the adoption of average risk-free rate or backward-looking term rate at the point of payment is mitigated via proper determination and disclosure of the ceiling price and formula to derive the periodic payment amount to the customer at the inception of the contract.
In transitioning to the alternative risk-free rate, the Shariah Committee of each Islamic financial institution needs to determine the appropriateness of invoking the deemed consent mechanism to signify customer consent on the incorporation of the fallback provision in the contract’s terms and conditions.
Related Links
Keywords: Asia Pacific, Malaysia, Banking, LIBOR, Fallback Provisions, Benchmark Reforms, Shariah Advisory Council, Islamic Financial Institutions, Risk-Free Rates, Islamic Banking, BNM
Previous Article
BDF Publishes Supporting Information for AnaCredit ReportingRelated Articles
ECB Finds Banks Unprepared for Pillar 3 Climate Risk Disclosures
The European Central Bank (ECB) published results of the 2022 supervisory assessment of climate-related and environmental risk disclosures among significant institutions (103) and a selected number of less significant institutions (28).
NCUA Assesses Credit Union Exposure to Climate-Related Physical Risks
The National Credit Union Administration (NCUA) released a Research Note that examines the exposure of credit unions to climate-related physical risks. In a related development
EBA Issues Multiple Regulatory and Reporting Updates for Banks
The European Banking Authority (EBA) is seeking comments, until July 31, 2023, on the draft Guidelines on the proposed common approach to the resubmission of historical data under the EBA reporting framework.
EC Adopts Regulation on Own Funds, Issues Other Updates
The European Commission adopted Delegated Regulations on own funds and eligible liabilities, on requirements for the internal methodology under the internal default risk model
CDP Platform to Report Plastic-Related Impact, Issues Other Updates
The Carbon Disclosure Project (CDP) announced that its global environmental disclosure platform has enabled reporting on plastic-related impact for nearly 7,000 companies worldwide
IASB to Enhance Reporting of Climate Risks, Proposes IFRS 9 Amendments
The International Accounting Standards Board (IASB) updated its work plan to enhance the reporting of climate-related risks in the financial statements,
BIS Addresses Data Gaps and Macro-Prudential Policy for Climate Risks
The Financial Stability Institute (FSI) of the Bank for International Settlements (BIS) published a brief paper that examines challenges associated with the use of macro-prudential policies to address climate-related financial risks.
FCA Sets Out Business Plan, Launches TechSprint on Greenwashing
The Financial Conduct Authority (FCA) published its business plan for 2023-24. The plan sets out details of the work planned for the next 12 months to achieve better outcomes for consumers and markets
UK Committee Sets Out Recommendations for Next Phase of Open Banking
The Joint Regulatory Oversight Committee (JROC), comprising the Financial Conduct Authority (FCA) and the Payment Systems Regulator (PSR) as co-chairs and the HM Treasury and the Competition and Markets Authority (CMA) as members
ECB Publishes Multiple Regulatory Updates for Banking Institutions
The European Central Bank (ECB) published the results of the 2022 climate risk stress test of the Eurosystem balance sheet,