Practice of sell and buy back agreement in Malaysia : an analytical assessment on regulatory and shariah requirements

Abstract

The primary objective of this study is to examine the compliance of the practice of Islamic repurchase agreement (repo) in Malaysia with Shariah principles. In doing so, this study adopts a triangulation approach, consisting of a number of data collection methods namely, library research, document review and semi-structured interviews with experts. While the gap between the Shariah requirements and practicality of Islamic repo remains unresolved in the market, it is found that the opinions among the Islamic jurists on the practice of Islamic repo tend to be mixed. For instance, while it is widely criticized by international scholars, the Shariah Advisory Council (SAC) of Bank Negara Malaysia (BNM) has permitted the use of bilateral promise (muwa’adah) in Islamic repo using a sell and buy back (SBBA) structure. In addition, this study also identifies and discuses key Shariah issues related to Islamic repo, namely, the existence of bay’ al-‘inah elements in Islamic repo and the use of wa’ad in a sale transaction. The novelty of this study lies in the proposed recommendations on alternative structures of Islamic repo which can be potentially adopted in the Malaysian market.