Islamic Finance - combining traditional and shari'ah-compliant payment and settlement methods1/24/2023 Islamic Finance - combining traditional and shari'ah-compliant payment and settlement methods
To prevent the clearance of Islamic and conventional checks from being confused, the question of whether an IFI has to have dual payment and settlement systems in a jurisdiction with a dual-banking structure emerges. The separation of the payment and settlement systems is not required from a Shari'ah perspective. This is so because the system's purpose is to make it easier to pay who is owed money and deduct money from whom it is owed money. Whether a payment comes from a traditional or an Islamic source, it makes no difference to the system. Having internally separated transaction and reporting systems is important for banks using dual banking systems or windows. Consider Malaysia's dual banking system as an illustration. Here, in order to expedite check-clearing operations, Islamic banks and conventional banks with window services are required to keep a Wadiah current account with Bank Negara Malaysia (BNM). The aforementioned banks are required to give BNM the authority to square their financing position during the automated check-clearing procedure in accordance with the Al-Wakalah principle. If a deficit develops, BNM will use Islamic securities and documents to fund the deficit bank through a "repurchase agreement (repo)-like" facility. Islamic banks have previously deposited at BNM Islamic securities/papers (typically produced by BNM). The deficit bank will sell the securities or papers to BNM when the deficit develops, and BNM will then use the proceeds to balance the deficit bank's position. When a price has been reached, the erstwhile deficit bank will repurchase the identical securities/papers from BNM and deposit them back there. Every time a shortfall is triggered, the same procedure will be carried out again.
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