Commercial laws and statutes relating to Islamic banking and finance in Malaysia

1. Commercial laws and statutes relating to Islamic banking and finance in Malaysia By Dr. Asmadi Mohamed Naim

2. Objectives • The history and the development of Islamic banking and finance in the globe. • Islamic view on codification of additional law related to administration purposes in Islamic financial system. • Discussion on Islamic Bank Act 1983. • Discussion on BAFIA 1989 • Discussion on Takaful Act. • Issues on laws, which are governing Islamic instruments in capital market.

3. The history and the development of Islamic banking and finance in the globe. • The Attempts to establish an interest-free bank • The first attempt came in Malaysia mid-1940s. A plan to invest prospective pilgrim savings in real estate and plantations in accordance with Syariah was, however, unsuccessful. • The first experimental local Islamic bank was established in the late 1950s in a rural area of Pakistan that charged no interest on its lending. • The establishment of Mit Ghamr Local Savings Bank marked a new milestone in the revolution of the modern Islamic banking system. The bank was considered to be the most innovative and successful experiment with interest-free banking.

4. List of Islamic Banks

5. Cont…

6. Development of Islamic Banking system in Malaysia

7. Cont…

8. Cont..

9. Islamic view on codification of additional law related to administration purposes in Islamic financial system. • Shari’ah consists two main characteristics in its law: 1. Thabat /Constancy 2. Mutaghayyirat/ changeable • There are many issues which are unchangeable in Islamic law such as: • Faith • Issues regarding to worship • Hudud • Islamic financial contract principles. • Other regulations.

10. Mutaghayyirat/ Changeable • The penalties under the rule of Ta’zir. • Issues which relate to the customs and cultures of the society. • Legal maxim: The changing of rules are not to be denial because of the changing of eras and places.. • Legal maxim: Custom is arbitrator/ arbiter. • Thus, codification of additional law related to administration purposes in Islamic financial system is welcome by Shari’ah as long as the regulation are not contradicted with the teaching of Islam.

11. Laws relating to the Islamic banks. 1. Laws on the establishment of Islamic banks – Companies Act 1965. 2. Special laws governing the operation of Islamic banks, Takaful and Islamic financial system – • Islamic Banking Act 1983, • Takaful Act 1984 and Regulations; and • Guidelines on the offering of Islamic Securities.

12. Discussion on Islamic Bank Act 1983 • Islamic Banking Act 1983 (IBA 1983) was gazetted on 10th. March 1983. • It is the Act to provide for licensing and regulation of Islamic banking business. • This act consists 60 sections, divided to eight parts as follows: 1. Preliminary. 2. Licensing of Islamic Banks. 3. Financial requirements and duties of Islamic banks 4. Ownership, control and management of Islamic banks.

13. Cont’ 5. Restriction on business. 6. Powers of supervision and control over Islamic banks. 7. Miscellaneous 8. Consequential Amendment • This act consists 60 sections.

14. 1. Preliminary • This part discusses about title, commencement, application, and interpretation. • Under Section 2: Interpretation. This section consists the interpretation of : - Branch - Central bank - Company - Corporation - Depositor - Islamic bank - Islamic banking business- Investment account liabilities - Licence - Other deposit liabilities - Public company - Saving account liabilities - Share - Sight liabilities - Subsiadiary - Time liabilities

15. Definition • Section 2 of Central Bank of Malaysia Act 1958 defines ‘bank’, in relation to Malaysia, as a licensed bank as defined in the BAFIA 1989 or an Islamic bank. • Under BAFIA 1989: a bank is defined as “ any person who carries on banking business” that is, “the business of receiving money on current or deposit account, paying and collecting cheques drawn or paid in by customers, and making advances to customers and includes such other business as the Central Bank, with the approval of the Finance Minister”. • See Section 124: Islamic banking and finance business.

16. Definition • Under IBA 1983: ‘Islamic bank’ means any companies which carries on Islamic banking business and holds a valid licence; and all the offices and branches in Malaysia of such bank shall be deemed to be one bank. ‘Islamic banking business’ means banking business whose aims and operations do not involve any element which is not approved by the Religion of Islam.

17. 2. Licensing of Islamic banking • Islamic banking business to be transacted only by licensed Islamic bank. (Sect. 3) • Minister may vary or revoke condition of licence. (Sect. 4) • Licence not to be granted in certain cases. (Sect. 5) • Opening of new branch (Sect. 7) • Islamic bank may establish correspondent banking relation with bank outside Malaysia. (Sect. 8) • Licence fee (Sect.9) • Restriction of use of certain words in an Islamic bank’s name. (Sect.10) • Revocation of licence. (Sect. 11) • Effect of revocation of licence. (Sect. 12) • Publication of list of Islamic banks. Sect. 13) • Advice of Syariah Advisory Council. (Sect.14)

18. 3. Financial requirement & duties of Islamic bank • Maintenance of capital funds. • Maintenance of reserve funds. • Percentage of liquid assets. • Auditor and auditor’s report. • Audited balance sheet. • Statistics to be published. • Information on foreign branches.

19. 4. Ownership, control and management of Islamic banks. • Information on change in control of Islamic banks. • Sanction for reconstruction, etc, of bank required. • Disqualification of directors and employees of banks.

20. 5. Restrictions on Business 24. Restriction on payment of dividends and grant of advance and loans. 25. Prohibition of loan, etc., of bank required. 26. Restriction on grant of loan, advance or credit facility under section 25 (4). 27. Restriction of credit to single customer. 27A. Control of credit limits. 28. Disclosure of interests by directors. 29. Limitation on credit facility for purpose of financing the purchase or holding of shares. 30. Proof of compliance with sections 24, 25, 26, 27 and 29.

21. Powers of supervision and control over Islamic Banks. • Investigation of bank • Special investigation of bank. • Production of books and documents. • Banking secrecy. • Action to be taken if advances are against interests of depositors. • Banks unable to meet obligations to inform Central Bank. • Action by Central Bank if bank unable to meet obligations or conducting business to the detriment of depositors. • Effect of removal of office of director or appointment of a director of a bank by Central Bank.

22. Cont’… • Control of Islamic bank by Central Bank. • Islamic bank under control of Central Bank to co-operate with Central Bank. • Extension of jurisdiction to subsidiaries of banks. • Moratorium. • Amendment of bank’s constitution.

23. 7. Miscellaneous 8. Consequential amendments