2015
IFSA
2013; STEPPING STONE FOR MALAYSIAN FINANCIAL INSTITUTIONS DEVELOPMENT
Asmah
Che Wan;
Nur
Akmal Adnan;
Wan
Nur Fatihah Mukhtar;
Nur
Izzati Zafirah Zainal;
Nurulhaffizah
Ahmad;
LLB
(Hons) Students in Universiti Utara Malaysia
Supervised
by Dr Mohd Zakhiri Md Nor[*]
Abstract
The regulatory framework for Islamic financial institution
in Malaysia is perfectly enshrined with the introduction of new law of the Islamic Financial Services Act 2013 on 30
June 2013, replacing the previous legislation which is Banking and Financial
Institution Act (BAFIA) 1989. The new law is anticipating the sophisticated Malaysian
financial industry running both the conventional and Islamic finance. Moreover,
it foreruns the development Islamic financial operation in Malaysia by
promoting financial stability and ensuring end-to-end Shariah compliance in the
business activities[1]. As mentioned by Hakimah
Yaacob in her article, “Cross Border Transaction In Islamic Finance:
Standardisation Does Matter!”, the concept of standardisation is vital to denote on legal
framework as it reflects on the uniformity of legal framework or
interchangeable use with standardisation to govern transaction in Islamic
finance. Therefore, this article would emphasize on the commencement of IFSA
2013 in the legal system and also on its effect towards the financial market in
the country’s financial industry[2].
Introduction
Islamic banking and finance is a financial system
which involves banking and financial dealings such as ethical investing, or ethical lending that is in compliance with the Shariah
requirements. Its
practitioners and clients need not be Muslim, but they must accept the ethical
restrictions underscored by Islamic values[3].
The evolutionary process for the
establishment of Islamic banking and finance system has taken quite some time.
It started with the step taken by the Lembaga Tabung Haji
(LTH) or formerly known as Perbadanan Wang Simpanan Bakal-Bakal Haji (Pilgrims
Management and Fund Board). This is the first institution applying the Islamic
transaction concept[4]. However, the community demanded
for an Islamic bank and financial institution that was free from riba. Hence,
on 30 July 1981, the Government appointed a National Steering Committee of
Islamic Bank to establish an Islamic bank. Furthermore, the Committee proposed
a basic framework of licensing and supervising of an Islamic banking system in
Malaysia a year later[5]. On 7 April 1983, the Government passed
the Islamic Bank Act
1983 (IBA) and this finally resulting into the establishment
of the first model of Islamic bank in Malaysia, namely Bank Islam of Malaysia
in July 1983[6].
The Central Bank of Malaysia (Bank Negara Malaysia)
had undertaken a number of initiatives by introducing strategic and systematic
reforms to the Islamic finance industry in Malaysia. These reforms include, the
establishment of Malaysia International Islamic Financial Centre (MIFC),
Islamic Financial Services Board (IFSB), International Centre for Education in
Islamic Finance (INCIEF), International Islamic Liquidity Management
Corporation (IILM), incorporating a relevant provision in the Rules of Court 2012
(late payment charge on judgment debt arising from financial transactions in
accordance with Shariah), and introducing Legal Profession (Amendment) Act 2013
and the Islamic Financial Services Act 2013 (IFSA 2013). It is commonly
acknowledged that IFSA 2013 provides the foundation for a comprehensive
administration of Islamic financial system in Malaysia. Banking Act 1983 (IBA 1983) and the Takaful Act 1984 and
consequently repealed both of them[7].
Application
of Shariah
Practically,
Malaysia is using dual financial system where it allows financing to be carried
out via both conventional and Islamic methods. Since the Islamic financial
system is still new in Malaysia as compared to the conventional one, the
Islamic financing plays its functions by complementing the existing system and
enacted new laws. At the same time, Malaysia also adopted dual court system,
namely the Civil court and the Shariah court system[8].
The civil court jurisdiction is stated in the Federal List which includes
banking, money lending, pawnbrokers and other similar instruments whereas, the
Shariah court jurisdiction is stated under Item 1 of the State List that
includes personal laws comprising of succession, testate and intestate, family
law matters, gifts, wakafs and the determination of Islamic law and Malay
custom and only practicable upon the Muslims.
Even though at the first glance, one
may concluded that Islamic banking matter should be governs by the Shariah
court, however that is not the situation here. Ironically, matters regarding
Islamic finance are governed by the civil courts for the moment due to certain
reasons. Firstly, issues on
finance, such as banking, insurance and companies are part of the Federal List.
Naturally, the parliament holds the power to enact laws on these matters.
However, conflict arises when Islamic financial product has used the
instruments under the jurisdiction of the State List in carrying out its
transaction. While the whole process of banking should be within the Federal
government power, the use of such instrument is clearly contradicting Article
121(1A) of the Federal Constitution. The issue then arises on which court has
the jurisdiction to hear this kind of Islamic financial transaction?
In regards to this matter, reference should be made to
item 4(k) of the Federal List of the Ninth Schedule. Here, it mentioned on the
power of parliament to enact laws on for ascertainment of Islamic law and other
personal laws for purposes of federal law. Such power granted to the parliament
shows that it is the power of the civil courts to adjudicate the matter. Thus,
it would be best to invoke item 4(k) in answering to the abovementioned
question.
This
is because, it is very clear that any matter relating to Shariah is within the
state jurisdiction, as stated in Item 1 of the State List. Item 1 of the State
List covers very wide area that it gives the state the jurisdiction to
determine any matters of Islamic law. Although it is very desirable to have
such matter to be under the jurisdiction of the state, this would be difficult
with the dual nature of Islamic banking (combination of conventional mechanism
and Islamic principles of Muamalat). Therefore, the best way would be by
invoking Item 4(k) of the Federal List.
Secondly, while the jurisdiction of
Shariah court is restricted only to persons who professed the religion of Islam
(Muslims), one cannot stop non-Muslims, companies, partnership and statutory
bodies from getting involve with Islamic banking activities. That is exactly
the situation at hand right now. Not to mention conventional banks, even
Islamic bank is not to be considered as Muslims since they are not natural
person. Such restrictions make it impossible for the Shariah court to have such
jurisdiction as the nature of the court itself is unable to cover all the
aspects that needs to be catered in order to discuss the problem.
To comprehend this issue, the
Muamalat Bench was set up in 2003[9]. The
bench, presided by a High Court Judge is located at the High Court Commercial
Division 4. The set up marks the gradual fusion of the two systems into single
system. As time goes
by, we may be able to see a court system and procedure that able to handle
cases according to common law, as well as the Shariah law. In addition, there
has been proposal to introduce written substantive laws on Islamic matters.
Duties of Shariah Advisory Council (SAC)
The Shariah
Advisory Council (SAC) was first established under the BAFIA 1989, operates to
give advice to the Bank Negara Malaysia (BNM) and also the Islamic Banking
Products and Services Bank (IBS). However, during the early days of its
operation, the function of the SAC was strictly limited that its jurisdiction
was not applicable to other Islamic finance institution or products such as the
Islamic banks, Takaful operators as well as savings and development
institutions.
The amendment
of CBA 1958 BNM in
2003 gives SAC a wider room to practice its jurisdiction where, there are some new
provisions construed, inter alia, section 16B, section 13A and subsection 16B(1) of the CBA 2003. These gave the council more
power and functions such as providing SAC the right to advise BNM on Shariah
related matters which also bind all Islamic banking and financial matters,
enabling Islamic banks to get advice from the SAC.
The Shariah
Advisory Council had been mentioned in Section 51 to Section 58 of the Central
Bank of Malaysia Act 2003 (CBA). These sections had outlined, among others, the
establishment of the council itself, the council’s functions and also the
effect of the rulings by the council.
The functions
of SAC, as mentioned in Section 52 of the act, are as follows;
(1) to
ascertain the Islamic law on any
financial matter and issue a
ruling upon reference made to it in accordance with Part VII of Central Bank of
Malaysia Act;
(2) to advise
the Central Bank on any Shariah issue relating to Islamic financial
business, the activities or transactions of the Central Bank;
(3) to provide
advice to any Islamic financial institution or any other
person as may be provided under any written law; and
(4) such other
functions as may be determined by the Central Bank.
Section 51
stated that the SAC is the authority that functioned to ascertain the Islamic
rulings which will be referred to by the BNM and IFI. On the other hand,
Section 52 of the act specifically mentioned on the functions of the council
which is to ascertain the Islamic law on any financial matters and issue a
ruling on it and advises the BNM on any Shariah issue relating to Islamic
financial business, activities or its transactions. The section also gives
power to the SAC to give advice to any Islamic financial institution or any
other person.
Since the BNM
is the sole body that regulates and supervises all the Islamic banking activities in
Malaysia, the SAC that worked under the BNM is recognized as the supreme body
in supervising the Islamic banking business of all the financial institutions
that carried out business relating to Islamic financing.
Therefore, it
is clear that the power to make rulings given to the SAC in Islamic Finance is
vast. However, rulings are not always bound in the way that some may have choose
to abandon the rules. Here one may question, whether the ruling made is binding
and if it does, to what extent does it effective?
Section 55
provides that in any matters relating to Islamic finance and its business, the
BNM should turn to the SAC for rulings and advice to ensure that any decision
it made will not contradicts to the Shariah ruling. Apart from that, Islamic
Financial Institutions (IFI) may take into consideration any published rulings
of the SAC on Islamic finance and business matters. But, whether or not the
court, in making decision, is bind to the rulings by the SAC, received
conflicting views as some said that the provisions in Sections 56 and 57
of the Central Bank of Malaysia Act 2009 usurped the court’s judicial
power and were therefore unconstitutional. The disagreement by the court on the ruling of SAC can
be seen in the case of Arab-Malaysian Finance Berhad v. Taman Ihsan Jaya
Sdn. Bhd. & 2 Ors[10]
where it was held that the Bay'
Bithaman Ajil contracts were null and void, which contradicts the
ruling from SAC that approved such transaction. The court had refused to refer
to the SAC by stating that there is no reason for the court to take into
consideration the ruling that is not binding to it while making decision.
On the other hand, in the case of Tan Sri Abdul Khalid bin Ibrahim v
Bank Islam Malaysia Bhd & anor[11],
the defendant provided two murabahah financing facilities to the plaintiff,
enabling him to redeem and acquire more shares in a company. Due to some
breaches by the plaintiff, the defendant offered to restructure the financing
facility into BBA. In default of the first instalment, he then challenges the
validity of the BBA facility agreement, alleging, non-compliance to principles
of Shariah. Upon consultation with the SAC, the court decided in favour of the
bank on matter regarding Shariah-compliant. The SAC has confirmed that BBA is
Shariah-compliant. The learned judge, Rohana J said that there will always be
differences in views and opinions on the Shariah, particularly in the area of
muamalat, there will inevitably be varied opinions on the same subject. This is
mainly due to the permissive nature of the religion of Islam in the area of
muamalat. Such permissive nature is evidenced in the definition of Islamic
banking business in Section 2 of the Islamic Banking Act 1983 itself. Islamic
banking business is defined to mean, banking business whose aims and operations
do not involve any element which is not prohibited by the religion of Islam. It
is amply clear that this definition is premised on the doctrine of 'what is not
prohibited will be allowed'. It must be in contemplation of the differences in
these views and opinions in the area of muamalat that the Legislature deems it
fit and necessary to designate the SAC to ascertain the acceptable Shariah
position. In fact, it is well accepted that a legitimate and responsible
government under the doctrine of Siasah-as-Shariah is allowed to choose, which
amongst the conflicting views is to be adopted as a policy, so long as they do
not depart from the Quran and Islamic injunction, for the benefits of the
public or the ummah. Therefore, the designation of the SAC is indeed in line
with that principle in Islam.
So, at this stage, the court is
still on its discretionary power either to make reference to the SAC or not.
Later, the situation changed with the enactment of the new Central Bank of
Malaysia Act 2009, where Section 56 demanded all proceedings relating to
Islamic financial business to consider the published rulings of the Shariah
Advisory Council[12]. This is
a departure from the previous stand in which the reference to SAC is on the
discretion of the court.
Looking further
into this matter, let us look at the role of the SAC in product development.
Basically, product development is the creation of a new product or instrument
to fulfil certain requirement. Here, the role of SAC is to give approval to the
newly created product, as to whether it is Shariah compliance or not. Normally,
the IFI prefer to present their product at the end of the process, when the
product is almost ready. When presented, the council may make suggestion for
improvement, or instead, suggest for a new product altogether. Following the
suggestion from the SAC, the management is responsible to enhance its product.
Only then, the product will be brought back to Shariah meeting to get the final
Shariah endorsement. In reference
to Section 57 of the CBA, any ruling made by the SAC shall be binding on the
Islamic financial institutions. Therefore, only after the IFI managed to
satisfy the requirement set up by the SAC in the meeting that the product will
get the Council’s approval.
Duties
of Shariah Committee
In 2005, the Central Bank has prepared the Guidelines on the
Governance of Shariah Committee for the Islamic Financial Institutions that
regulates the governance of Shariah Committee of an Islamic financial
institution. These Guidelines shall be applicable to all Islamic Financial
institutions regulated and supervised by Malaysia Central Bank. The guidelines
set the role, scope of duties and responsibilities of the Shariah Committee and
its members and the relationship between the Shariah Committee of the
respective Islamic financial institutions and the Shariah Advisory Board of the
Central Bank.
It must be cognisant that the Shariah Committee (SC) has a
direct duty upon the Banks and it shall be responsible and accountable for all
its decisions, views and opinions related to Shariah matters. Board is expected
to rely on the Shariah Committee on all Shariah decisions, views and opinions
relating to the business of the Islamic financial institution. Also, the
Shariah Committee is expected to disclose sufficient information in the Islamic
financial institution’s annual financial report on the state of compliance of
the institution to Central Bank.
SC is required to be independent within Islamic financial
institutions through Islamic Banking Act 1983 and Takaful Act 1984. In 2004,
the Guidelines on the Governance of Shariah Committee for the Islamic Financial
Institutions has been issued outlining the role, duties and responsibilities of
Shariah committee and its members as well as the relationship and working
arrangement between the Shariah committee at individual institutions and the
Shariah Advisory Council at the national level. The Guidelines, among others,
prohibit individuals from sitting in more than one committee within the same
industry to avoid a conflict of interest. The rule served as a stimulant in
expanding the pool of Shariah talent within the Islamic financial industry and increasing its diversity in terms of the
experience and expertise of Shariah experts. Today, the total number of Shariah
scholars has increased to more than a hundred individuals from a small number
of experts when the Guidelines was first issued on December 2004. Although the
current Shariah governance structure has increased the eminence of the role of
the Shariah committee within the Islamic financial industry, the further improvements
to the Guidelines are needed to take into account the rapid developments in
Islamic finance in this recent few years. These include, the enrichment relating
to the governance arrangements of the board and management in respect to the
Shariah compliance process, the strengthening of internal research capacity, the
independence and accountability of the Shariah committee in the decision making
process, compliance and the risk management processes.
The duties and responsibilities of the Shariah Committee are
commanded by the Shariah Governance Framework for Islamic Financial Institution
issued by the Bank Malaysia (BNM). Among the function of Shariah Committee include
to advice the Board on Shariah matters in its Islamic business operations.
Here, the Shariah Committee have a duty to advise the Board of Directors in
Islamic financial institutions on Shariah matters in order to assure that the
Islamic business operations of Banks always comply with Shariah principles.
Secondly, Shariah Committee has responsibility to endorse Shariah policies and
procedure in each Islamic Banks. This is under the reason to ensure that
Shariah policies and procedures do not contain elements which are not in line
with Shariah. Third, to endorse and validate relevant documentations. The
Shariah Committee shall ensure that the Islamic finance products of Export and
Import Bank (EXIM Bank), in all aspect, comply with Shariah principles. Shariah
Committee must ensure that the terms and conditions contained in the proposal
forms, contracts, agreements or other legal documentations used in executing
the transactions, and also, the product manual, marketing advertisements, sales
illustrations and brochures used to describe the product in line with Shariah
principles.
Apart from that, Shariah Committee also has duty in
assisting related parties on Shariah matters. The Shariah Committee may provide
assistance to relevant parties such as its legal counsel, auditor or consultant
to ensure compliance with Shariah principles. Also, Shariah Committee has a
duty to look over or assess work carried out by Shariah review, research,
compliance and audit functions in order to ensure compliance with Shariah
matters in its Islamic business operations[13].
Furthermore, in order to ensure compliance with Shariah
matters, Shariah Committee also need to assess work carried out by Shariah
review and Shariah audit which forms part of their duties in providing their assessment
of Shariah compliance and assurance information in the annual report. Apart
from that, the Shariah Committee may also advise the Bank to consult the
Shariah Advisory Council of Bank Negara Malaysia (SAC of BNM) pertaining
Shariah matters that could not be resolved. In cases where there are
uncertainties and varieties of opinions, the Bank may seek advice and refer for
a ruling from the SAC. The application for advice shall be communicated through
the Secretariat of the SAC. It must be noted that members of the Shariah
Committee must not act in any manner that would undermine the rulings and
decisions made by the SAC of BNM or the committee they represent. Also, they
are enforced to respect and observe the published Shariah rulings issued by the
SAC, and shall not go against the decisions of the committee that they
represent in public. In cases of disputes and court proceedings relating to
Islamic financial business or any Shariah matters arising from the Bank’s
business operations, both the court and the arbitrator shall take into deliberation
the published rulings of the SAC or refer such issues to the SAC for its
ruling. Any ruling made by the SAC arising from a reference made to them shall
be binding on the Bank and the court or the arbitrator. On the other hand, in
the event where the decision given by the Bank’s Shariah Committee is different
from the ruling given by the SAC, the rulings of the SAC shall prevail.
However, the Shariah Committee is allowed to adopt a more strict Shariah
decision.
In addition to that, Shariah Committee also need to provide
the Bank with guidelines and advice on religious matters to ensure that the
Bank’s overall activities are in line with Shariah and also make decisions on
matters arising from existing and future activities of the Bank which have
religious repercussions. It is also their duty to report to the shareholders
and the depositors that all the Bank’s activities are in accordance with
Shariah as well as represent the Bank or to attend any meetings with the SAC or
other relevant bodies concerning any Shariah issues relating to the Bank. Also,
the Shariah Committee has a duty and responsibility to ensure the quality and
consistency of the Shariah decisions[14].
It is pertinent to know that the role and function of the
Shariah committee has been expanded further from merely advisory in nature to
assume a higher degree of accountability. Throughout the Islamic financial
institution, the Shariah committee will now be accountable for the
implementation of decisions and opinions. Also, the Shariah committee shall
have direct access to the board. The Shariah committee shall also report
directly to the Bank where the committee believes that non-compliances on
Shariah matters in the Islamic financial institution have not been effectively
and sufficiently addressed by the Islamic financial institution.
Shariah
Committee under IFSA 2013
Under Islamic Financial Services Act 2013 (IFSA 2013), the
rule relating to Shariah governance is stipulated under Section 30 until Section
36 of IFSA 2013. These provisions, highlighted the intention of the law maker
in focusing to the matters relating to appointment and qualification of the
Shariah Committees members in Islamic financial institution. Even though Central
Bank of Malaysia Act 2009 (CBA 2009) already touched the Shariah Committee
matters, however it was only merely mentioned by highlighting the general
requirement for financial institution to have a Shariah committee. The current
provision under IFSA 2013 provides a more specific requirement under Section 30
which requires an institution to apply directly to the Central Bank for the
establishment of Shariah Committee. This will enable the Central Bank to have
direct information as to the members of the Shariah Committee in an Islamic
financial institution will give a proper supervision towards the activities
conducted.
On the other hand, a
clear standard of requirement pertaining to the appointment of such committee
is highlighted under Section 31 which is to be crossed referred with Section
29(2)(a). This provision makes it clear that only those who is really fit and
qualified may be appointed as the Shariah Committee members. The qualifications
of the members must meet the requirements as stated by Central Bank. These
requirements is important to ensure the products and services introduced by the
Islamic financial institution in line with the Shariah principles. Meanwhile, Section
32 of IFSA 2013 stated about the importance of Shariah Committees in every
institution through the introduction of the Shariah governance which not only
set out the duties of the Shariah committees in the institutionbut also blend
into the structure of the company itself. It must be noted that by extending
the powers of Shariah governance into certain aspects in a company, we can
understand that Shariah governance would be one of the integral parts in an
institution, not just a minor part.
Apart from that, Section 33 and 34 of IFSA allowing the
Central Bank to continuously be updated by the institution of its Shariah
Committee members. In order to maintain the standard of Shariah Committee
member, the provision set out the clause relating to the cessation of the
members including situations which would disqualifies them from becoming
Shariah committee members. By regulating precise rules and regulations, Section
35 has made it compulsory for management in charge of the company to provide
information to the Shariah committee to exercise its task and duties. In plus,
Section 36 marks the trust which has been given by the legislation over the
Shariah Committee to keep any type of information provided that such
information is not being relayed to the other persons and shall be confidential.
It must be noted that while maintaining the duty of
confidentiality, in the Shariah Proceeding of the World Conference on
Integration of Knowledge, members are vested with the protection under the
qualified privilege to avoid them from being taken a legal action by the
Islamic financial institution. This can only be prevented if it can be proven
that such duties was conducted in good faith. This is to ensure that the
activities of the Islamic financial institution is in accordance with Shariah
compliance, while protecting the qualified members and thus maintaining a good
Shariah governance framework in Islamic financial industry in Malaysia.
The
Importance of Supervision
There are few significants of supervising bank through
Shariah Committee and Syariah Advisory Council. Firstly from all, it must be
cognisant that documents or instruments to be used in Islamic banking
transactions have to be in accordance with Islamic law, existing civil law, and
also to be structure in a way as to be enforceable in the civil courts.[15] Therefore, in order to
strengthen the Shariah governance structure in Islamic financial institutions,
the institution by issuing a new Shariah governance framework, must be
supervised by members of Shariah Committee so that all the products,
transactions and contract is in line with Shriah principles, as well as in
accordance with the civil law itself. This supervision is also to provide comprehensive
guidance to the board. Besides, the duty of Shariah Committee and management of
Islamic financial institutions is important to ensure proper functioning of
Shariah compliance through effective Shariah review and Shariah audit functions[16].
Apart from that, compliance to Shariah is vital to enhance
the confidence of the stakeholders of Islamic financial institutions. In this
regard, the IFSA provides a comprehensive legal framework that is in full
compliance with Shariah in all aspects of regulations and supervisions of the
Islamic financial institutions in Malaysia. It provides from licensing to the
winding up of the Islamic financial institutions. It must be noted that in
order to build public confidence in the system, this is one of the key areas in
the evolution of the legal framework for Islamic finance in Malaysia which aims
to provide greater certainty and predictability to the Islamic financial
institutions. Also, this is essential to allow the Islamic financial system in
Malaysia to face the new challenges and demands for financing associated with
Malaysia's economic transformation programme in the future and the increasing
integration of the Malaysian economy with the region and the world[17].
The
Legal Framework in Malaysia
The regulatory framework in Malaysia has been enhanced and
developed with the objective to promote financial stability and ensure Shariah
compliance in the business activities of the Islamic financial institutions. As
all know, IFSA is the new laws that came into force on 30 June 2013 to replace
the previous legislation which is Banking and Financial Institution Act (BAFIA)
1989.
BAFIA which came into force on 1st October 1989
was legislation with the objectives to provide laws for the licensing and
regulation of the institutions carrying on banking, finance company, merchant
banking, discount house and money-broking business, for the regulation of
institutions carrying on certain other financial businesses, and for the
matters incidental thereto or connected therewith. BAFIA also was a legislation
which provide for an integrated supervision of the Malaysian financial system
and also to provide the Central Bank with the power to speedily investigate and
prosecute, if necessary any illegal activities in an attempt to reduce
white-collar crime[18].
This is different with IFSA which was enacted with the objectives to govern the
matter pertaining to appointment and qualification of the Shariah Committees
members in Islamic financial institution. IFSA also give the opportunity for
the development of an end-to-end Shariah compliant regulatory framework for the
conduct of Islamic financial operation in Malaysia[19].
The operation of the Islamic financial system and Islamic
Banking Business are regulated by the Central Bank of Malaysia through the
Central Bank of Malaysia Act 2009 (Act 701) together with the Islamic Financial
Services Act 2013 (IFSA).
·
The Central Bank of Malaysia Act 2009 (Act 701)
This act was passed to provide for the continued existence
of the Central Bank of Malaysia and for the administration, objects, functions
and powers of the Bank, for consequential or incidental matters. The new
legislation is intended to resolved the issue that arises prior of the Act.
Section 51 until Section 58 in Part VII of the Act explains about the Shariah
Advisory Council while Section 59 to Section 60 mentions on the Powers of the
Bank.
According to section 51 of the Act, the Central Bank of
Malaysia shall appoint the Shariah Advisory Council (SAC) and the SAC will be
the authority to ascertain Islamic law in the Islamic financial business. In
addition, Section 52 and 53 states about the function of the of the SAC and the
appointment of the members of the SAC, respectively.
The Bank shall consult the Shariah Advisory Council on matter relating to Islamic financial
business and for the purpose of carrying out its function or conducting its
business as stated in section 55 of the Act. Section 56(1) expressly states on
the requirements for reference to SAC for purpose of rulling from court. The
provision requires the judge who is conducting any issue arising from Islamic
financial business to refer to the published rulings of the Shariah Advisory
Council or to request for advice from the Council to determine any issue
concerning a Shariah matter before them.
Other than the provisions as provided in the Central Bank of
Malaysia Act 2009, the Bank also provides Shariah Governance Framework as a
guidelines. In 2011, The Central Bank implements the Shariah Governance
Framework for the Islamic Financial Institutions which requires all Islamic
financial institutions to comply with the framework. The framework requires
accountability and responsibility by the Board of Directors to make sure the compliance of the
Shariah governance framework in Islamic financial institutions.
·
Islamic Financial Services Act 2013
IFSA’s principle regulatory objectives are to promote
financial stability and compliance with Shariah (Sec 6 of IFSA). The said
requirements related to Shariah compliance and governance is highlighted under
Part IV. It has three divisions as follows:
I.
Shariah
Compliance: The rules relating to Shariah compliance is provided under section
27 until section 29 of IFSA 2013.
Section 27 of the Act explains on the interpretation of
intuitions which refers to an authorised person or operator of a designated
payment system. Meanwhile, section 28 elaborates about the duty of institution
to ensure compliance with Shariah. Here, the Islamic financial intitution must
ensure at all times their operations, business, affairs or activities are in
compliance with Shariah. Section 29 which is related to power of Bank (BNM)
specifies the standards on Shariah matters. The Central Bank of Malaysia will
issue specific standards on Shariah matters in respect of the carrying on of
business, affair or activity with the advice or ruling of SAC.
II.
Shariah
Governance: The rule relating to Shariah governance is provided under section
30 until section 36 of IFSA 2013.
Section 30(2) provided that, a financial group may apply to
BNM for a single Shariah Committee to oversee its Islamic financial services
and banking business if BNM is satisfied that the Shariah Committee has the
capability to ensure Shariah compliance. Section 31 and 33 of the IFSA 2013
explain the standard of requirements for the appointments of Shariah Committe
in financial intitutions. Any appointment or termination of a Shariah committee
member must be with prior written approval of BNM. Under section 35 of the Act,
all information submitted to the Shariah committee shall be accurate, complete,
not false or misleading in any material particular. Section 36 of the Act, give
the duty of confidentiality towards the Shariah Committee to hold any type of
information including the confidential ones Members of the committee and would
not be liable to defamation suit for any statement made in discharge of its
duties without malice.
III.
Audit:
The rule relating to audit provided under sections 37 and 38 of IFSA 2013.
Under section 37 and 38 of the IFSA 2013, The Central Bank
of Malaysia (BNM) may require the Islamic financial institution to appoint any
person as the BNM may approve to carry out an audit on Shariah compliance by
the Islamic financial constitution. The external auditor may report to BNM on
any findings and cost to be borne by the Islamic bank.
As we can see from the legal framework of IFSA, there are
few special features of the IFSA 2013. Firstly, IFSA is the legislation that
has all the matters contain in several legislation that Malaysia use before
such as, Islamic Banking Act 1983, the Takaful Act 1984, the Payment System Act
2003 and the Exchange Control Act 1953. This can be seen in several sections
under IFSA 2013. For example section 4 of the Act explains about a bank may
with a concurrence of a minister prescribe the (a) qualified financial
agreement; (b) financing facilities and (c) market participant.
Another section is, section 7 of the act which explains a
matter regarding the powers and function of the bank. This section has to be
read together with section 3(5) and section 5 of the Central Bank of Malaysia
Act 2009. Next speciality under the IFSA 2013 is, under section 10, it explains
about a grant of license by minister. If the license was granted, the applicant
shall carry out its licensed business within a period of time that shall be
specified by the minister. There are more sections under the IFSA that make
this new laws are better that the previous one such as section 25 which
explains matter regarding holding out as authorized person, section 26 matter
regarding acting on behalf unlicensed person and section 29 matter regarding
power of bank to specify standard on Shariah matters.
Furthermore, the implementation and administration of the
law is more transparent and clear. The regulatory objectives and accountability
of Bank Negara Malaysia in pursuing its principal object to safeguard financial
stability, transparent triggers for the exercise of Bank Negara Malaysia's
powers and functions under the law, and transparent assessment criteria for authorizing
institutions to carry on regulated financial business, and for shareholder
suitability are also being define clearly under this new statutory[20].
Besides that, IFSA 2013 is focusing on Shariah compliance and governance in the
Islamic financial sector. In other words, the IFSA provides a comprehensive
legal framework which fully consistent with Shariah in all aspects of
regulation and supervision, from licensing to the winding-up of an institution[21].
Legal
Analysis
Looking into a recent case on Islamic
Banking, Bank Kerjasama Rakyat Malaysia
Bhd v. Brampton Holdings Sdn Bhd[22]
where in this case, the court allow this application with costs as the
defendant has failed to discharge its burden to raise a triable issue in this
case. The plaintiff, at the request of the defendant, granted the defendant a
Term Financing-I Facility ('Islamic Financing Facility'). Accordingly, a letter
of offer was issued by the plaintiff to the defendant which provided for two
tranches of Islamic financing ie, (i) tranche 1 of RM35 million
('Tranche 1') based on the Islamic principle of Bai' Bithaman Ajil ('BBA') and (ii) tranche 2 of RM10
million ('Tranche 2') based on the Islamic principle of Bai' Al-Inah ('BAI'). For both tranches, an asset
purchase agreement ('APA (BBA)') and an asset sale agreement ('ASA (BBA)') was
agreed and entered into by the plaintiff and defendant. However, the defendant
failed to make the required payments as agreed ('defendant's breach'), the
plaintiff demanded from the defendant, the total outstanding sum of
RM44,276,675.35 and compensation amount for late payment (ta'widh ) calculated at the rate of 1% per
annum on the sum of RM44,276,675.35.
As the defendant did not reply to the
plaintiff's demand, hence, the plaintiff filed the present suit against the
defendant and claimed the outstanding sum and compensation on the outstanding
sum. The defendant resists this application on few issues. Nonetheless, the
main highlight is on the claim of "extra" sums of RM490,000 (for
Tranche 1) and RM140,000 (for Tranche 2) in which the alleged excess
constitutes interest (riba )
which is prohibited in Islam. Therefore this taints the Islamic Financing
Facility in this case and renders the Islamic Financing Facility unenforceable.
The defendant's failure to deny the plaintiff's demand means that the defendant
admits the defendant's default and the attendant liability as there had never
been an agreement. So, it is reasonable to expect a prompt and vigorous denial.[23]
In Bank Islam Malaysia
Bhd v. Lim Kok Hoe & Anor and Other Appeals[24], at pp.
35, 36 and 39-40, Raus Sharif JCA (as His Lordship then was) mentioned that
there is no hesitation in accepting that riba' or interest is
prohibited in Islam. However, such comparison between a BBA contract and
conventional loan agreement was inappropriate as these two instruments of financing are not alike and have different
characteristics. BBA contract is a sale agreement whereas a
conventional loan agreement is a money lending transaction. The profit in BBA
contract is different from interest arising in a conventional loan transaction.
Some authorities that are used in Lim Kok Hoe in the Court of Appeal's judgment are Section 51(1) of the Central Bank of
Malaysia Act 2009 (CBMA) provides
for the Shariah Advisory Council on Islamic Finance (SAC) to be set up by Bank
Negara Malaysia (BNM) and SAC "shall be the authority for the
ascertainment of Islamic law for the purposes of Islamic financial
business". Also, reference made to few relevant provisions in Islamic Financial
Services Act 2013 (IFSA) such as
under Section 28(1) of
the IFSA, a financial institution "shall at all times
ensure that its aims and operations, business, affairs and activities are in
compliance with Shariah". According to Section 28(2) of
the IFSA, compliance with any ruling of SAC "in respect of
any particular aim and operation, business, affair or activity shall be deemed
to be a compliance with Shariah in respect of that aims and operations,
business, affair or activity". Any person who breaches Section 28(1) of
the IFSA commits
an offence under Section 28(5) of
the IFSA which is
punishable up to eight years imprisonment and a fine not exceeding RM25 million
or both;
Meanwhile, Section 29(1)(a) of
the IFSA states that BNM may in accordance with SAC's advice or
ruling, specify standards on Shariah matters in respect of the carrying on of
business, affair or activity by a financial institution which requires the
ascertainment of Islamic law by the SAC. Any person who fails to comply with
any standards specified under Section 29(1),
commits an offence under Section 29(6) of
the IFSA and
shall, on conviction, be liable to imprisonment for a term not exceeding eight
years or to a fine not exceeding RM25 million or both. Besides that, a
financial institution shall establish a Shariah committee under Section 30(1) of the IFSA to advise the
financial institution so as to ensure that the financial institution's
business, affairs and activities comply with Shariah.
After a review has been made on the case Bank Kerjasama Rakyat Malaysia Bhd v.
Brampton Holdings Sdn Bhd[25],
it can be observed here that the application of IFSA 2013 is evolving. Also, the
initiative taken by the court in order to improve in the interpretation of law finally
gives light at the end of the tunnel particularly on the development of the law
of Islamic Banking and Finance itself. Based on CBMA and IFSA, a court cannot simply
decide that an Islamic financing facility is not Shariah compliant. Instead, the
court should be guided by the advice and ruling of the SAC.
Other than that,
Section 32 of IFSA 2013 is extending the powers of Shariah governance into
matters involving the board of directors and internal Shariah compliance. This
proves that Shariah governance would be one of the integral parts in an
institution up to the point that Shariah committee may no longer be treated as
a minor part or division of a company, what more against the idea of abandoning
such governance rules.
Generally, the Section
37 provides that the Bank may appoint for an institution “any person” to
conduct an audit on Shariah compliance. Since there is no specific requirement
is needed for a person to do the audit, it is said to be a loopholes in this
law. This is because any person would not have an adequate knowledge on Shariah
matters. Looking this as an essential aspect, it is brilliant if Malaysia can
produce more experts in this field. As for us as law students, we are in our
view that every law school in Malaysia need to make Islamic Banking subject as
a compulsory subject rather than an elective subject. This is for the benefit
of all especially financial institution.
Conclusion
Malaysia's Islamic banking and finance industry has been in
existence for over 30 years, starting with the establishment of the first
Islamic bank in 1983. Thereupon, IFSA 2013 is a great stepping stone to enhance
the development of financial industry in Malaysia and this shifted the legal
framework and legislation in Malaysia to the next level. It
provides comprehensive law governing on Islamic Banking and Finance which
therefore indirectly promotes financial stability and ensures end-to-end
Shariah compliance in the business activities.
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[*] LL.B(Hons),LL.B(Shariah)(Hons),MCL, Civil & Shariah Law in
International Islamic University; INCEIF,The Global University In Islamic
Finance Education; Ph.D, In Islamic Finance; Legal Advisor; Research Fellow
Institute for Governance and Innovation Studies; Assistant Professor in
Universiti Utara Malaysia.
[2] Hakimah
Yaacob. (2012). Cross Border Transaction In Islamic Finance: Standardisation
Does Matter! Malayan Law Journal Articles.
Vol. 5 (lxxxvi). Retrieved December 10, 2015, from Lexisnexis Malaysia Sdn Bhd.
[3] Islamic
Banking. Institute of Islamic Banking and
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[4] Joni Tamkin Borhan.
(2005). Pelaksanaan Prinsip-Prinsip Syariah Dalam Amalan Perbankan Islam di
Malaysia, in Abdullah Alwi Hj. Hassan (Ed.), Teori dan Aplikasi
Kontemporari Sistem Ekonomi Islam di Malaysia. Kuala Lumpur: Utusan
Publication, p. 44.
[5] Zamri bin Hassan. (2002). Islamic
Banking: Its Legal Impediments and Reformation with Special Reference to
Malaysia. Law Majalla.
Vol. 1, p. 97.
[6] See Nik Norzrul Thani, Mohamed Ridza
Mohamad Abdullah, Megat Hizaini Hassan, 2003, Law and Practice of
Islamic Banking and Finance, Sweet and Maxwell Asia, Selangor p 11.
[7] Tun Arifin Bin
Zakaria. (2013). A Judicial Perspective On Islamic Finance Litigation In
Malaysia. IIUM Law Journal. (21
IIUMLJ 143). Retrieved October 17, 2015, from Ahmad Ibrahim Kulliyyah of Law
Website. p 148.
[8]Ruzian Markom & Norilawati Ismail. The development of Islamic Laws
in Malaysia; An overview. [2014] 1 LNS(A) xxviii
[9] Zulkifli Hasan. (2012). Shari'ah
governance in Islamic banks. Edinburgh University Press. Retrieved on 3th
December 2015, from
[10] [2008] 5 MLJ 631
[12] Mohammad Rizal Salim, K. Sherin & Lim S. H. (2014). The Parallels of Shariah Governance and
Corporate Governance: A Malaysian Case Study. [2014] LR 47. Thomson Reuters
Malaysia Sdn Bhd (trading as
Sweet & Maxwell Asia).
[13] (n.a.). (n.d.). EXIM Bank Malaysia: Roles and responsibilites. Retrieved on 3rd December 2015, from http://www.exim.com.my/about-us/shariah-committee
[14] (n.a.). (n.d.). Duties and resposibilities of the Shariah Committee.
Retrieved on 3rd December 2015, from http://www.muamalat.com.my/downloads/corporate-overview/Duties-and-Responsibilities-of-the-Shariah-Committee.pdf
[15] Mohamed Ismail Shariff. (1998). The development of Islamic banking law in Malaysia. Malayan Law Jurnal Articles.[1998] 1 MLJ cxlv. Retrieved on 3rd
December 2015, from LexisNexis Malaysia Sdn Bhd.
[16] (n.a.). (n.d.). The new Shariah
framework. Retrieved on 3rd December 2015, from http://www.bnm.gov.my/files/publication/fsps/en/2009/cp03_003_whitebox.pdf
[17] Muhammad Amrullah Nasrul, & Surianom, M. (n.d). Shariah governance
in Islamic finance: The effects of
Islamic Financial Services Act 2013. Retrieved on 3rd December 2015, from http://worldconferences.net/proceedings/wcik2013/toc/papers_wcik2013/WCIK%20112%20SURIANOM_read_shahrul.pdf
[18] The Lawyerment | The Banking and
Financial Institutions Act 1989. Retrieved on 26th November 2015, from http://www.lawyerment.com.my/financial/banking2.shtml
[19] See Surianom Miskam and Muhammad Amrullah NasrulShariah governance in
Islamic finance: The effect of the Islamic Financial Services Act 2013, p 98.
[20] (n.a.). (2013). Financial
Services Act 2013 and Islamic Financial Services Act 2013 Come Into Force.
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[23] Refer David Wong Hon Leong v.
Noorazman Adnan [1995] 4 CLJ 155 and JEC
Designabuild Sdn Bhd v. Bunga Kembang Sdn Bhd [2007] 1 AMR 578.
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