The Capital Protected Islamic Investment Launching Before Year-End
You head product governance at a licensed Islamic bank's wholesale banking arm. From 1 June the bank plans to distribute a three-year 'Capital Protected Islamic Investment' to retail customers through 220 branches. The structure combines: a murabahah commodity deposit placed with an SPV to provide 100% capital protection at maturity; a wa'd-based total return swap referencing a basket of 30 equities; and a purchase undertaking from the bank's wholly owned offshore subsidiary to buy the assets at nominal value if a customer exits early. The Shariah adviser approved the structure last month. The draft brochure prints '100% capital protected', 'target return 8% p.a.' and 'Shariah-compliant' in large type, with the risk section in small print on page 14. Minimum investment is RM10,000, 5,000 customers are targeted, and 60% of them are existing fixed deposit customers over 55. The reference basket includes two conventional banks and a brewery. The launch must happen before the 30 June financial year-end because treasury has a RM500 million funding gap.
1. What product governance and Shariah issues must be resolved before launch? Explain your reasoning.
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Shariah issues. The basket is the return engine. If it contains conventional banks, whose core income is riba, and a brewery, the return is generated from prohibited activity however the wrapper is labelled. The adviser's approval must be tested against the final basket - approvals are structure- and asset-specific, not a blanket 'Islamic' label. Second, capital protection: a guarantee of capital given by the party managing the investment is generally not accepted, because a manager cannot guarantee the capital of a profit-sharing venture; a genuinely independent third-party guarantee is the usual route. Here the purchase undertaking comes from a wholly owned subsidiary, so independence must be demonstrated, and an undertaking at nominal value must not operate as a disguised loan. Third, the murabahah needs a real commodity sale with ownership and risk passing through the SPV; if the SPV is a mere conduit, the structure collapses into a loan.
Product governance. This is a complex product sold to 5,000 retail customers, most over 55 and moving out of fixed deposits - the target market and distribution model do not match. Six weeks is too short for suitability design, branch training, complaint handling and stress testing. The brochure's emphasis is not fair, clear and not misleading: '100% capital protected' and '8% p.a.' in large type with risk buried on page 14 is a mis-selling template.
Sign-off. The bank's own Shariah committee (not only an external adviser), the product approval committee, risk, compliance and the board or board risk committee, plus SC lodgement or approval where the product is a structured product or collective investment scheme.
2. Set out the key disclosures and distribution controls you would require, and say who signs off.
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Disclosures. (1) Capital protection is a promise of the obligor and is subject to its credit risk and that of the SPV - it is not a deposit and is not PIDM-protected. (2) 8% is a target, not a guarantee; show a range and a downside scenario. (3) All fees, including SPV, commodity and swap costs, and their effect on returns. (4) Early exit may be at a discount to principal under the purchase undertaking. (5) The Shariah basis and the purification policy. (6) Cooling-off rights and the complaints route.
Distribution controls. A documented target market; a distribution agreement restricting sales to customers whose risk profile and liquid assets can absorb the product; a concentration cap, for example no more than 30% of liquid savings; recorded suitability assessments; a branch script that cannot use the word 'guaranteed'; mystery shopping and post-sale calls on a sample; a product dashboard to the board covering complaints, lapses and returns.
Sign-off. Product approval committee chair, Shariah committee, chief risk officer and chief compliance officer, with board risk committee approval for a new retail product. Any SC filing must be completed before marketing begins - not in parallel with it.
3. The business head says the Shariah adviser already approved the structure, so governance is done. How do you respond?
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Approval is necessary but not sufficient. The adviser answered a Shariah question about a structure. He did not and cannot approve the target market, the brochure, the incentive scheme, the credit exposure to the SPV or the sales process. Governance is a chain - Shariah committee, product approval, suitability, disclosure, distribution, monitoring, remediation - and every link can fail independently.
Check the scope of the approval. Ask which document the adviser saw. If the final basket and the marketing material were not part of the review, the approval does not cover them. Ask him to reconfirm in writing against the final term sheet, and test whether the conventional banks and the brewery were disclosed to him.
The funding gap is not a control. Compressing testing and training to meet a treasury need converts a product risk into a conduct risk. Escalate with options: launch a simplified compliant version (screened basket, independent guarantor) after year-end, or run a limited pilot with a documented rationale and enhanced monitoring. Put the recommendation in writing to the product committee and the board. If the decision is to proceed, the firm should own it with eyes open - and the record should show who decided and on what basis.