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The Legal and Regulatory Framework of Ibra’ in Islamic Financial

Institutions and Islamic Co-Operatives: A Comparative Analysis

Nuramalina Azman

, Noor Azam Sofian Mohd Sofi, Putri Aisyah Zahirah Zakriya, Muhammad Farhan

Abu Kassim, Syuhaeda Aeni Mat Ali

Faculty of Law, University Technology MARA Shah Alam, Jalan Sarjana 1/2, 40450 Shah Alam,

Selangor, Malaysia

*Corresponding Author

DOI:

https://dx.doi.org/10.47772/IJRISS.2025.910000061

Received: 28 September 2025; Accepted: 03 October 2025; Published: 04 November 2025

ABSTRACT

Malaysia is leading the global Islamic banking and finance industry with a proper and well-designed legal and

regulatory framework for Islamic financial institutions in the area of Ibra’ (rebate). In addition, Islamic co-

operatives are among the providers of some form of Islamic financial service similar to Islamic financial

institutions. An Islamic co-operative conducts activities and business based on Shariah principles. Being a non-

banking financial institution, the legal and regulatory framework of Ibra’ for Islamic financial institutions does

not apply to Islamic co-operatives. Islamic co-operatives instead have their own legal and regulatory framework

of Ibra’ to address the issue. This article embarks on the qualitative and doctrinal approaches involving library-

based research because it reflects the sources that the article analyses and the comparative approach as it

compares the legal and regulatory framework of Ibra’ that is applicable to Islamic financial institutions and

Islamic co-operatives. The current legal framework of Ibra’ indicates that it is applicable in cases of early

settlement. It is noteworthy that nearly all of the SKM Guidelines’ content reflects that of the BNM Guidelines,

but with specific changes to accommodate the co-operative sector’s comparatively lenient and adaptable

characteristics. Despite efforts to rectify the shortcomings in the SKM Guidelines, they remain imperfect. By

emphasising the shortcomings of the SKM Guidelines, regulators can proactively address the issues, and

recommendations are proposed to address the limitations.

Keywords: Ibra’, rebate, guidelines, Islamic banking, Islamic finance, co-operatives, Islamic co-operatives.

INTRODUCTION

Ibra’ (rebate) refers to the voluntary relinquishment or waiver of a right by one party in a contract, specifically

the right to claim a debt (Abdul Hamid Mohamad & Adnan Trakic, 2013b). According to Mohamed Fairooz

Abdul Khir (2013), this act of waiving financial rights, which are established in another person’s liability, results

in the release of the other party from their obligation. Ibra’ is grounded in the principles of fairness, justice, and

good faith, which are fundamental to Islamic law. This principle is reflected in primary sources such as the

hadiths and the Sirah of the Prophet Muhammad, who emphasized the virtue of forgiveness and mercy in

contractual matters, aligning with the principles of Ibra’. For instance, the Prophet’s interaction with a Jewish

merchant in Medina illustrates the application of this concept (Abdul Hamid Mohamad & Adnan Trakic, 2013a

& 2013b). From a jurisprudential perspective, Ibra’ is linked to the principles of maslahah (public interest) and

adl (justice), serving as a mechanism to prevent injustice and undue hardship, ensuring that the spirit of the law

is upheld alongside its letter (Nurlia et al., n.d.).

Prominent Islamic jurists like Imam Al-Shafi’i and Imam Malik have provided in-depth jurisprudential analysis

of Ibra’. The Maliki and Shafi’i schools of Islamic law have distinct interpretations of Ibra’. Maliki jurists view

Ibra’ as a transfer of ownership, based on the hibah (endowment) principle, while the Shafi’i school emphasizes

the dominance of ownership in Ibra’ and maintains that the creditor can retract the waiver (Auwal Adam Saad

& Syed Musa Bin Syed Jaafar Alhabshi, 2019).

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In Malaysia, Ibra’ holds significant importance in the realm of Islamic finance, particularly within the context

of Islamic banking institutions. Following the issuance of guidelines by Bank Negara Malaysia (BNM), the

provision of Ibra’ became widely accepted and practiced within the Malaysian Islamic banking sector. Ibra’ is

implemented as a method of reconciliation (sulh) between contracting parties, serving as a benevolent contract

given at the sole discretion of the creditor without any stipulated conditions. It is often granted by Islamic

financial institutions to their customers as a form of rebate in sale-based financing contracts, where customers

settle their debts earlier than the agreed-upon financing period.

In addition to Islamic Financial Institutions (IFIs), there are a number of non-banking financial institutions that

provide financial services and products based on Shariah principles, including Islamic co-operatives. These co-

operatives operate based on the Shariah principle with a focus on the mutuality principle of goodness. However,

unlike IFIs, Islamic co-operatives do not have a body like the Shariah Advisory Council (SAC) of BNM to issue

guidelines on Ibra’. Instead, the Suruhanjaya Koperasi Malaysia (SKM), the regulator of co-operatives in

Malaysia, has issued guidelines to harmonize the practices of granting Ibra’ among the Islamic co-operatives.

This article will compare the application of Ibra’ in both IFIs and Islamic co-operatives based on their respective

guidelines.

LITERATURE REVIEW

Ibra’ in Islamic Finance

The issue of Ibra’ in Islamic finance is addressed through the concept of dha` wa ta`ajjal, which originated in

the credit trade of the Arabs in the sixth century, offers a debtor the option of a debt reduction in exchange for

an upfront cash payment (Khan, 2003). The idea of dha` wa ta`ajjal was once contentious among Islamic

scholars, both ancient and modern. In the end, modern Islamic scholars began to accept Ibra’ in Islamic financing

contracts that are based on sales. Certain scholars permitted Ibra’ as an exclusive process that is at the seller’s

(creditor’s) discretion (IIFA, 1992). Others mandated that Ibra’ be conditional and bilateral, with the amount

defined at contract inception by a predetermined computation (Bank Negara Malaysia, 2013).

Following the advice of the SAC, BNM adhered to the requirement for a bilateral Ibra’ in sale-based financing

contracts through the inclusion of a pre-specified Ibra’ clause in the contract at the outset and as proposed by

BNM, mandatory pre-specified Ibra’ estimates could be a justifiable and reasonable request. (Islam Kamal,

2021).

In an arrangement like this, adopting Ibra’ without taking into account the differences between charitable and

sale transactions might give rise to some concerns about usury. Therefore, a distinct differentiation between Ibra’

treatments in both contracts would help alleviate these worries. The problem of Ibra’ in charitable and sales

contracts is covered in the section that follows.

Unilateral Ibra’ (Rebate for debts arising from charitable contracts)

The majority of early Islamic jurists rejected the dha` wa ta`ajjal idea, making it illegal to give rebates in

exchange for paying off debts early without making a distinction between debts arising from loans and debts

arising from deferred sales. The argument used to support this ban was that Ibra’ compensations amounted to

accepting the time value of money in loan transactions, which is the same as illegal usury. The majority of

primary Islamic jurists previously held that Ibra’ was prohibited due to it being equivalent to usury, with the

similarity that the amount of debt varies over time in both situations. In the case of usury, the debt amount

increases with the passage of time. In the case of a rebate, the debt amount decreases as time is being reduced

(Ibn Rushd, 2004; Mohamed Fairooz Abdul Khir, 2016; Islam Kamal, 2021).

A minority of early jurists, led by Ibn Taymiyyah and Ibn Qayyim al-Jawziyyah, permitted rebates generally on

the grounds that they did not constitute ordinary usurious transactions. Dha` wa ta`ajjal is advantageous to both

debtors and creditors, in contrast to regular riba (usury) transactions that hurt the debtor for the benefit of the

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creditor (Ibn Qayyim al-Jawziyyah, 2006, pp.3/260-261; Mohamed Fairooz Abdul Khir, 2016; Islam Kamal,

2021).

Current Islamic scholars tend to permit Ibra’ and its acceptance is further stabilised by the Resolution 64(7/2)

of the International Islamic Fiqh Academy (IIFA) in Islamic finance literature that permitted Ibra’ in the fourth

clause of the resolution. Despite that, the following conditions need to be fulfilled before rendering Ibra’ to be

permitted: no previous agreement specifies the amount of the Ibra’ or mandates it; debtors and creditors have a

reciprocal relationship; and third parties are not permitted to intervene (IIFA, 1992; Muhamad Zuhaili Saiman

& Ahmad Dahlan Salleh, 2016; Islam Kamal, 2021).

Even though the IIFA resolution primarily addressed instalment sales, the treatment of Ibra’ involved therein is

considered a unilateral one that left the provision of Ibra’ to the creditor’s discretion, that ought to be more

suitable for charitable, and not sale contracts (Islam Kamal, 2021).

Bilateral Ibra’ (Rebate for debts arising from sale contracts)

Two distinguishing characteristics set a bilateral rebate apart from a unilateral rebate. First, in the event of default

and early settlement, the seller is bound by it. Second, it involves a time-for-money exchange that is part of the

payment deferment (ajal) or grace period (Mohamed Fairooz Abdul Khir, 2016; Islam Kamal, 2021). As a result,

the creditor (seller) is not free to choose the amount of the rebate that is granted at their sole discretion. Since

time value is a major factor in determining price in instalment sales, the bilateral rebate practice makes sense in

sale-based financing contracts. It simply represents the difference between the cash price and the instalment

price, and it is determined and computed by the seller at the beginning of the contract (Saleem, 2016; Islam

Kamal, 2021). It is argued that the time value of money which is permitted and calculated at the contract’s

inception in sale transactions must also be permitted and measured at any other time during the contract’s life as

a reasonable practice to protect the interests of all contract parties and remove any ignorance from the contract

(Muhamad Zuhaili Saiman & Ahmad Dahlan Salleh, 2016; Islam Kamal, 2021).

In general, Ibn Qayyim al-Jawziyyah (2001) accepted Ibra’, contending that it protects the interests of both

parties involved in the transaction. Despite the view that Ibra’ should be accepted in all kinds of contracts, Ibn

Qayyim suggested that, when discussing the problem of Ibra’, it could make sense to make a distinction between

debts arising from loan contracts and debts resulting from deferred (instalment) sale contracts (Ibn Qayyim al-

Jawziyyah, 2001).

The SAC of BNM agreed to legalise a bilateral rebate that would be required in the event that debts arising from

sale-based financing arrangements were settled early. The SAC decided in its 24

meeting that Islamic banking

institutions must incorporate a clause providing Ibra’ to their clients who make an early settlement in the Islamic

financing agreement (Mohd Ab Malek Md Shah et al., 2016; Islam Kamal, 2021). Additionally, BNM presented

a demonstration of rebate computation in various scenarios, which was appended to its Ibra’ guidelines for sales-

based financing (Bank Negara Malaysia, 2013).

Most of the literature advocates bilateral rebate in sale-based debts instead of the unilateral rebate which are in

accordance with BNM’s decision (Saleem 2016; Mohamed Fairooz Abdul Khir, 2016; Islam Kamal, 2021).

Mohamed Fairuz Abdul Khir (2016) believed that the bilateral rebate is the most effective and equitable Islamic

method of resolving injustice in a number of situations that could affect the bank’s liquidity for instances, the

early settlement of debt facilities and the early withdrawal of term deposits. Both transacting parties would have

their interests equally protected in that way. Nevertheless, the study presented an illustrative case that was heavily

influenced by the conventional financing rebate computation facilitated by the conventional loan amortisation

practice as if there are no Shariah issues with this practice. Interestingly, Muhammad Shahrul Ifwat Ishak (2019)

proposed that the structure of Islamic financial products, which have been heavily impacted by the interest rate

used in conventional finance contracts, may be partially responsible for some of the influences of conventional

finance on BNM’s rebate computation.

Despite bilateral rebates have been included in Islamic financing agreements, there is legal controversy regarding

binding conditions at the outset of the agreement due to the fact that the law governing dha` wa ta`ajjal, as

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detailed in the Shafi’i school, which is the fundamental practise in Malaysia, prohibits the setting of rebate

conditions at the outset of an agreement other than during the initial settlement (Asyraf Wajdi Dusuki et al.,

2010). This creates a problem in the event of a bank default and raises questions for the customer regarding the

amount of the rebate they should receive (Muhamad Zuhaili, 2019).

For every customer who settles their financing before the end of the financing tenure, IFIs are required to award

Ibra’. Additionally, the IFIs are required to grant Ibra’ on the difference between the profit amount calculated

based on the contracted profit rate (CPR) and the profit amount calculated using the effective profit rate (EPR)

under the variable rate financing concept (Sherin Kunhibava, 2017). If the profit amount based on EPR is less

than the profit amount based on CPR, Ibra’ must be awarded. Furthermore, IFIs are required to grant Ibra’ to all

current clients who have active financing agreements with them as well as any new clients who sign financing

agreements after the effective date (Sherin Kunhibava, 2017).

The variables in the formula for Ibra’ is as follows:

Ibra’ = Deferred profit – Early settlement charges

And,

Settlement amount = Outstanding selling price – Ibra’ + Late payment charges.

The formula illustrates how the BNM Guidelines now require IFIs to grant Ibra’ even in default situations. The

IFI no longer has discretion on granting Ibra’. On the other hand, as the formula indicates, the quantification of

Ibra’ is subject to late payment fees. The formula for determining the settlement amount in default situations

takes into account not only the outstanding selling price and Ibra’ but also late payment penalties. Two

conclusions can be drawn from this: first, IFIs argued that in foreclosure situations, they should receive the full

purchase price because the rebate that they would provide to the customer would account for late payment

penalties; and secondly, the clarification of the guidelines regarding late payment charges allows the Guidelines

to mandate that IFIs provide Ibra’ to defaulting customers (Sherin Kunhibava, 2017). Bank Negara’s Guideline

on Late Payment Charges for Islamic Banking Institutions, which went into effect on January 1, 2012, has now

established the maximum amount that IFIs can charge defaulters for late payments (Sherin Kunhibava, 2017).

Co-operatives in Malaysia

Co-operatives may appear tiny on an individual basis, but their combined power is truly amazing and based on

the data in the National Co-operative Policy 2011-2020, the number is increasing annually, which has an impact

on the growth of assets and revenues (Muhammad Issyam Itam@Ismail et al., 2016). Over a span of five years,

the average annual growth rate of co-operatives is approximately 9.4%. The rise indicates that people in Malaysia

now trust co-operatives to help them enhance their social and economic conditions (Muhammad Issyam

Itam@Ismail et al., 2016). Moreover, the Ministry of Entrepreneur and Cooperatives Development (MECD)

introduced the Malaysian Co-operative Policy 2030 (DaKoM 2030) in 2023 to enhance the role of co-operatives

as drivers of economic resilience, prosperity, and their establishment as the preferred business model for socio-

economic advancement (Ministry of Entrepreneur and Cooperatives Development, 2025). It was reported that

there were 16,284 co-operatives registered nationwide in 2024, and more than 7.2 million individuals were

members (Ministry of Entrepreneur and Cooperatives Development, 2025). Co-operatives had a total of

RM173.35 billion in assets and RM68.18 billion in revenue which demonstrate the enormous potential of

cooperatives as important forces behind the growth of the national economy, which corresponds with the

Malaysia Madani vision (Ministry of Entrepreneur and Cooperatives Development, 2025).

Nonetheless, the Malaysian co-operatives face numerous shortcomings. Among them are observed by

Muhammad Issyam Itam@Ismail et al. (2016) to be falling behind in terms of skills, knowledge, and technology;

failing to investigate new prospects both domestically and abroad; and not participating in high-value,

competitive enterprises; significant number of co-operatives are small in terms of membership and capital

support; lack networking and synergies among themselves, and have indifferent members. Besides, Siti Maslina

Hamzah & Mohd Nor Hakimin Yusoff (2025) found that the Malaysian co-operatives also continue to struggle

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with governance, digital preparedness, and unequal sustainability integration. In the age of globalisation and

digital transformation, addressing these issues is crucial to enhancing Malaysian co-operatives’ competitiveness

and resilience (Siti Maslina Hamzah & Mohd Nor Hakimin Yusoff, 2025).

Islamic Co-operatives

The “spillover” effect of the Islamic banking and finance sectors may be the reason for emphasising the

significance of Shariah compliance in the context of the co-operative’s business and operation (Muhammad

Issyam Itam@Ismail et al., 2016). Although the phrase “Islamic co-operative” is currently popular, the idea is

not new. The Co-operative Institute of Malaysia (CIM), previously known as the Co-operative College of

Malaysia (CCM) hosted a seminar in 1978 with the theme “Cooperation in Islamic Society.” The seminar

concluded that this nation’s co-operative system needs to be strengthened to comply with Islamic law

(Muhammad Issyam Itam@Ismail et al., 2016). Accordingly, numerous Islamic-oriented co-operatives were

founded in various locations, including Koperasi Belia Islam Malaysia and Koperasi Al-Hilal (Kohilal), among

others (Muhammad Issyam Itam@Ismail et al., 2016).

Yet, it should be highlighted that being an “Islamic co-operative” does not imply that the organisation is officially

recognised as such due to the absence of categorization as an Islamic co-operative during the co-operative’s

registration. Hence, an “Islamic co-operative” only pertains to a co-operative that operates in accordance with

Shariah, emphasising the mutuality principle for goodness (Muhammad Issyam Itam@Ismail et al., 2016).

Malaysian Legislation for the Islamic Co-operative regarding Ibra’

As of right now, the Islamic co-operative is not governed by any particular Act. On the other hand, the Islamic

Financial Services Act of 2013 is the specific act that governs Islamic financial institutions in the banking and

finance sector. It lays out particular specifications for Islamic banking establishments. In situations where the

current regulation may not adhere to Shariah principles or may impede the process of adhering to Shariah, the

lack of a specific act or regulation for the Islamic co-operative may give rise to complications (Muhammad

Issyam Itam@Ismail et al., 2016).

As the regulator, the Malaysia Co-operative Societies Commission (MCSC) or Suruhanjaya Koperasi Malaysia

(SKM) may issue any directives, guidelines, circulars or notices regarding any provision of the co-operatives

Act by virtue of section 86B under the Co-operative Societies Act 1993 (CSA 1993) (Malaysia Cooperative

Societies Commission, 2025). Among the guidelines that have been produced by SKM is Guidelines on the

Granting of Ibra’ (Rebate) for Islamic Financing Based on Sale Contracts (GP07B) which was implemented on

July 2015 to standardize the practice of granting Ibra’ (rebate) to safeguard the interest of the members and

to standardise the financing activities according to the Shariah principle in the co-operative sector (Muhammad

Issyam Itam@Ismail et al., 2016).

METHODOLOGY

In the context of this article, the doctrinal research that was done had involved a rigorous analysis of the

principles and rules of Ibra’ as established in Islamic law and the prevalence regulations pertaining to Ibra’ in

Malaysia in view of IFIs and Islamic co-operatives. Additionally, a comparative analysis was done with the aims

to make comparisons across Ibra’ given in products of IFIs and products of Islamic co-operatives. This includes

examining the regulatory guidelines for each, the practical implications for customers, and the impact of the

jurisprudential perspectives on Ibra’. The data for the comparative analysis will be collected from the primary

sources i.e. guidelines and regulations of IFIs and Islamic co-operatives in Malaysia, as well as from secondary

sources i.e. academic papers and other relevant literature that discuss the application of Ibra’ in these institutions

and in their products. These data will then undergo qualitative analysis to identify similarities and differences in

the application of Ibra' in IFIs and Islamic cooperatives products. The findings from the doctrinal and

comparative research will then be reported in a structured and comprehensive manner, providing a clear

comparison of Ibra’ in IFIs and Islamic co-operatives based on their respective guidelines while also discuss the

implications of the findings for the future of Ibra’ in Islamic finance in Malaysia.

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FINDINGS AND DISCUSSION

Court Decisions on Ibra’

In Bank Islam Malaysia Bhd v Adnan bin Omar [1994] 3 AMR 2291, the court ruled against the defendant,

stating that the rebate (muqassah) was at the discretion of the bank. Since the loan was not a term loan, there

was no question of an early repayment. The plaintiff had the right to terminate the facility and seek full repayment

of the loan as the defendant had breached the terms of the agreement in failing to pay the instalments. Notably,

the issue in this case revolved around the dissatisfaction of the full amount a customer must pay in the event of

default, particularly when compared to a conventional loan of the similar amount and instalment duration. The

defendant attempted to invoke the principle of Ibra’ to decrease the amount but was unsuccessful.

The issue brought to the court in Affin Bank Berhad v Zulkifli Bin Abdullah [2006] 3 MLJ 67 was related to the

actual amount that a customer was obligated to pay to the provider of a Bai’ Bithaman Ajil (BBA) facility in the

event of a default, following the payment of RM33,454.19 in instalments. The court held that if a customer is

required to pay the profit for the full tenure in a financing arrangement, they are entitled to the benefit of the full

tenure. If the customer could be refused tenure while still required to pay the bank's profit margin for the full

tenure, it would conflict with his right to the full tenure. The situation implies that the bank could earn a profit

twice on the same amount simultaneously by earning the expired tenure of the facility. Additionally, the court

acknowledged that charging a profit margin on the unexpired tenure is not actual profit but unearned profits,

which contradicts with the principles of BBA. It is evident from the judgement here that Ibra’ was not mentioned.

Nevertheless, by deducting unearned profit, the learned judge was able to lower the amount due.

In Bank Islam Malaysia Berhad v Mohd Azmi bin Mohd Salleh Civil Appeal No W-02-609-2010, the Court of

Appeal was of the view that the BBA contracts were valid as the parties willingly entered into them and there

are no vitiating circumstances. Consequently, the court would enforce the entire sale price, affirming the bank’s

right to demand payment of the entire sale price as stipulated in the Property Sale Agreement. The outstanding

sale price becomes due and payable upon termination, considering any prior payments made.

The court in the case of CIMB Islamic Bank Bhd v LCL Corporation Bhd & Anor [2011] 7 CLJ 594 addressed

a dispute initiated by the bank for the sum owing under a BBA facility. The court acknowledged the letter of

offer between the parties wherein it was agreed that the first defendant shall be given the right to make early

settlement on the BBA facility, and the plaintiff shall be entitled to grant Ibra’ and the plaintiff’s calculation of

Ibra’ shall be final and binding. It was additionally agreed that the first defendant must provide the plaintiff three

days’ notice to be eligible for an early settlement based on the selling price, and that the early settlement must

be made on a day when profits are paid. In the event that the notification is given in less than three days, the

plaintiff will have the right to a lower Ibra’. The judge in this case ruled in favour of the bank where the first

defendant, despite having the option for voluntary early settlement mentioned in the offer letter, did not make

any effort to settle the outstanding amount on the BBA facility before the end of the tenure.

Essentially, court decisions involving Ibra’ have witnessed a transformation over the years, reflecting factors

such as customer’s default resulting in breach of agreement and the general principles of equity and justice. The

SAC resolutions have further shaped this evolution (Sherin Kunhibava, 2017). Notably, all cases mentioned

above have been decided prior to November 1, 2011, the effective date of the BNM Guidelines on Ibra’ (Rebate)

for Sale-Based Financing (BNM Guidelines). Given the absence of the BNM Guidelines that would have

provided clarification, the court’s interpretation on early settlement excludes default situations and that Ibra’ is

only be granted at the banks’ discretion. The existing legal position on Ibra’ stipulates that it is granted in

instances of early settlement. However, it does not extend to default cases and the decision to grant Ibra’ and the

determination of its amount is within the discretion of the bank (Abdul Hamid Mohamad & Adnan Trakic,

2013a).

BNM Guidelines on Ibra’ (Rebate) for Sale-Based Financing

In 2011, the BNM introduced the BNM Guidelines aimed to address two key issues. Firstly, whether customers

in default of their financing were entitled to Ibra’ or if it was discretionary on the part of the IFIs and secondly,

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to establish a formula for the calculation of Ibra’ (Sherin Kunhibava, 2017). The SAC played a significant role

in addressing these concerns by issuing resolutions in the year of 2000, 2003, 2006, 2002 and 2011, which

ultimately led to the issuance of the guidelines by BNM (Abdul Hamid Mohamad & Adnan Trakic, 2013a &

2013b). Essentially, the BNM Guidelines outline the requirement for applying and implementing Ibra’,

specifying conditions for the granting and incorporating of an Ibra’ clause in financing documents, and

stipulating calculation and disclosure requirements (Bank Negara Malaysia, 2013).

The BNM Guidelines are applicable to Islamic banks licensed under the Islamic Banking Act 1983 (IBA 1983),

banks licensed under the Banking and Financial Institutions Act 1989 (BAFIA 1989) engaged in Islamic banking,

development financial institutions prescribed under the Development Financial Institutions Act 2002 (DFIA

2002) involved in Islamic banking, and Takaful operators registered under the Takaful Act 1984 (TA 1984). IFIs

are obligated to provide Ibra to customers who settle their financing before the designated tenure concludes.

Such settlements encompass early settlement or redemption, prepayments, resolution through financing

restructuring exercises, settlements by customers in cases of default, and settlements resulting from the

termination or cancellation of financing before the maturity date (Bank Negara Malaysia, 2013).

Limitations

The BNM Guidelines has a limitation in that it does not apply to all Islamic financial arrangements (Nurlia et

al., n.d.). In Paragraph 1.1, IFIs may grant Ibra’ to customers involved in sale-based financing, such as

Murabahah and Bai’ Bithaman Ajil (BBA), while Paragraph 3.2 expressly excludes the application of the BNM

Guidelines to Salam and Istisna’ contracts. Conversely, as mentioned in the BNM Guidelines’ footnote number

3, IFIs are not restricted from granting rebates for financing based on other types of contracts, including equity-

based, lease-based, or hybrid financing contracts, where applicable (Bank Negara Malaysia, 2013). This implies

that IFIs can provide Ibra’ for various financing transactions based on different Islamic contracts. Nevertheless,

the BNM Guidelines does not address this aspect and its application.

In Bank Pembangunan Malaysia Berhad v Mensilin Holdings Sdn Bhd & Ors [2015] 1 LNS 442, the plaintiff

initially granted three facilities to the first defendant, namely BBA facility, Bai’ Istisna’ facility and Bai’ Istisna’

second facility. Subsequently, these facilities were restructured into various forms, including a BBA facility,

Private Debt Securities in the form of Redeemable Secured Loan Stock (Islamic), and Private Debt Securities in

the form of Redeemable Convertible Preference Shares (Islamic). The defendant however defaulted on the

restructured facilities. The learned judge at paragraph 55 of the judgement concluded that defendants failed to

establish any early payments made to repay the sum under the Restructured Facilities Agreements, and

consequently, they are not entitled to Ibra’. The judge made reference to the Court of Appeal case of Bank Islam

Malaysia v. Mohd Azmi bin Mohd Salleh in arriving to this conclusion. Notably, the BNM Guidelines was

neither referenced nor applied in this case, despite the breach or default being evident around August 2013

(Nurlia et al., n.d.).

Other limitation of the BNM Guidelines includes that it only takes effect from its effective date onwards and

does not have retrospective effect to transactions that occurred prior to that date (Sherin Kunhibava, 2017). As

provided in Paragraph 5.1, the BNM Guidelines become effective for IFIs, excluding takaful operators, from

November 1, 2011, with immediate implementation of requirements specified under Paragraph 6. For IFIs other

than takaful operators, the requirements under paragraphs 7, 8, 9, and 10 shall be fully implemented from the 1st

of July 2012, with encouragement for earlier implementation. Takaful operators, as per Paragraph 5.3, are subject

to the guidelines from January 31, 2013 (Bank Negara Malaysia, 2013).

SKM Guidelines on the Granting of Ibra’ (Rebate) for Islamic Financing Based on Sale Contracts

The Guidelines on the Granting of Ibra’ (Rebate) for Islamic Financing Based on Sale Contracts (SKM

Guidelines) was issued by SKM in 2015. The SKM Guidelines are issued under Section 86B and subsection

51(1) of the CSA 1993 with the aim to standardize the practice of granting Ibra’ to protect its members’ interests

and further streamlining the financing activities based on Shariah principles in the co-operative sector.

The SKM Guidelines take effect from 1

July 2015 and are applicable to co-operatives that conduct business or

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activities based on Shariah principles. The SKM Guidelines essentially outline the requirement for applying and

implementing Ibra’, specifying conditions for the granting and incorporating of an Ibra’ clause in financing

documents and stipulating calculation and disclosure requirements.

Under the SKM Guidelines, Islamic co-operatives are obligated to provide Ibra’ to customers who settle their

financing before the designated tenure concludes. Such settlements encompass early settlement or redemption,

prepayments, resolution through financing restructuring exercises, settlements by customers in cases of default,

and settlements resulting from the termination or cancellation of financing before the maturity date.

Limitations

Unlike the BNM, the regulator for IFIs in Malaysia, which has the SAC as the highest authority in Islamic

banking and finance, such a body or authority is not present at SKM as the regulator of co-operatives in Malaysia

(Muhammad Issyam Itam@Ismail et al., 2016). The absence of such a body or authority would make it difficult

to ensure end-to-end Shariah compliance in product structuring and implementation.

To address the issue, an amendment was made to the CSA 1993 and the Malaysia Co-operative Societies

Commission Act 2007 (MCSC 2007), where the role of the SAC was mentioned.

Section 84A of the CSA 1993 provides that Islamic co-operatives may, from time to time, seek the advice from

the SAC on the operation of its business or activity to ensure that it is in accordance with Shariah while Section

26(2) of the MCSC 2007 provides that in any proceedings relating to Shariah-based cooperative arrangement,

monitored and regulated by the SKM, any question arising on Shariah matters, the court or arbitrator, as the case

may be, can take into account any written directive issued by SKM or refer such a question to the SAC for its

decision.

The above sections explain the indirect relationship between the SKM and the SAC, in which the SKM and the

co-operatives may be referred to as the SAC. It is interesting to note that there is no provision for the appointment

of the SAC at the SKM level, and thus, it may raise the issue of suitability of the application of the SAC BNM’s

decision in the context of co-operative business (Muhammad Issyam Itam@Ismail et al., 2016).

Another limitation of the SKM Guidelines is similar to the BNM Guidelines; it only takes effect from the

effective date onwards and does not have a retrospective effect on transactions that occurred prior to the effective

date.

CONCLUSION AND RECOMMENDATIONS

The BNM Guidelines have addressed uncertainty regarding Ibra’ matters, specifically the entitlement of

customers in default of their financing and the establishment of a formula for Ibra’ calculation. However, it is

crucial to acknowledge the limitations inherent in these Guidelines namely that it does not apply to all Islamic

financing transactions, the lack of acknowledgement and application of the BNM Guidelines in case laws,

particularly those after the effective date of the BNM Guidelines and how the BNM Guidelines do not have a

retrospective effect. Ultimately, these limitations signify the need for continuous examination and subsequent

revisions of the BNM Guidelines to address all issues related to Ibra’. Recommendations include the

comprehensive application of BNM Guidelines tailored to other Islamic financing contracts beyond the existing

scope and the application of judicial precedent as a means for ensuring the effective implementation of the BNM

Guidelines.

It is interesting to note that most of the content of the SKM Guidelines is similar to the BNM Guidelines, except

with certain modifications to conform to the co-operative sector’s less stringent and flexible nature. Although

attempts have been made to address the issues in the SKM Guidelines, it is not a perfect guideline. By

highlighting the limitations of the SKM Guidelines, regulators can take active steps to address the issues, such

as the establishment of a Shariah panel that plays a similar role to the SAC be placed at SKM as the regulator

for the Islamic co-operatives to ensure certainty in the application of not only the SKM Guidelines, but also

Shariah matters at all co-operatives level.

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