Chap 2 (Jun 2014) (6)

Saturday, April 22, 2023 2

In Malaysia we have dual banking system namely conventional banking that had established long time ago and also Islamic banking which started in 1983.

Nevertheless, Bank Negara Malaysia (BNM) were party which control all banking activity in Malaysia.

Therefore, this chapter will peel with much further on legislation that linked to Islamic banking activity that

practiced in our country.



PRIMARY SOURCES• AL-QURAN• HADITH & SUNNAH

SECONDARY SOURCESSECONDARY SOURCES•IJMA’•QIYAS•IJTIHAD

SOURCES OF SHARIAH

RULINGS OF SHARIAH

WAJIB (OBLIGATION)

SUNNAT / MANDOOB (RECOMMENDED)

HARUS/MUBAAH (PERMISSIBLE)

MAKHRUH (DISCOURAGED)

HARAM (PROHIBITION)


Al- Quran is the words of Allah revealed to the Prophet Muhammad SAW in Arabic conveyed by angel of Jibrail.

Al- Quran consists of 114 chapters and about 6666 verses It is a miracle in following aspects:

1.Its language is in clear and pure Arabic of the highest.2.Its contains information and stories about peoples of the past.3.It foretells future events which really took place afterwards as

foretold.4.Its all about the creation of life and the universe, the orbits of

the Earth, the sun, moon and the stars, and the formation of clouds and rains

It contains laws and rules on how to regulate political, legal, economic, social and moral matters in society


There are 6666/6236 verses and 350 legal verses (ayat ahkam/judge) in the Quran:◦ 140 verses concern Ibadat (such practical religious duties as

ritual prayer, legal alms and other charities, fasting, pilgrimage, and so forth)

◦ 70 verses concern munahakat (devoted to marriage, divorce, paternity, child custody, inheritance, and bequests)

◦ 70 verses concern muamalat (concerning commercial transactions, such as sale, lease, loan, usury, and mortgage)

◦ 30 verses on crimes and penalties, ◦ 30 verses on justice, equality, evidence, citizens' rights and

duties, and consultation in government affairs. ◦ 10 verses on economic matters.

Al- Quran was first revealed at about 611A.D with the first verse revealed being Surah Al- Alaq verse 1 to 5. Al- Quran was revealed piecemeal over a period of 22 years and the last verse being Surah Al- Maidah verse 3 revealed in 632A.D

Al- Quran was revealed in two periods of the Prophet’s mission: when the Prophet lived in Makkah and Madinah respectively.

Chapters revealed in Makkah are called Mecca’s chapters and those revealed in Madinah are called Medina’s chapters.

During the life of Prophet and until the middle of Othman’s rule, the Quran was memorized by the Prophet and many Sahabats and the verses of the Quran were transcribed on flat pieces of stones, bones wood and date palms.


Al- Hadith is the saying, deeds and approvals of Prophet Muhammad SAW

In Shariah, Hadith describes as Sunnah ( the way or manner) of Prophet Muhammad.

There are three kinds of Sunnah:a. A qaul or a ‘saying’ of the Prophet Muhammad

which has a bearing on a religious question.b. A fi’l which represent an ‘action’ or ‘practice’

of the Prophet Muhammad.c. A taqrir or a ‘silent approval’ of Prophet

Muhammad of action or practice of another.

SECONDARY SOURCES IJMA’:

o IJMA’ is the verbal noun of the Arabic word ajma’a which has two meanings: To determine, To agree upon something.

o The consensus of the jurists in understanding, interpreting and applying the teachings of the Quran and the Sunnah forms the third basic source of the Shariah.

o Ijma’ means a unanimous agreement among the mujtahidun of a Muslim community on any Shariah ruling in a particular period following the demise of the Prophet Muhammad (Peace Be Upon Him).

o However, it is difficult to classify a particular Shariah ruling as ijma’ considering the wide coverage of Islamic territory and the emergence of the various school of thoughts among the Muslim community.

o Therefore, the majority of Islamic scholars are of the opinion that ijma’ only happened during the period of the companions of Prophet Muhammad PBUH before they migrated to other territories.

o As such, the claim that ijma’ had occurred after such period is quite difficult to be accepted.


The 20 rakaat of Tarawwih salah that is prayed in Ramadan from the 1st of Ramadan until the last day of Ramadan every day, and which is prayed after Isyak prayer and in which the whole Quran is recited. This was the Ijma’ of the Sahabat (R.A.) (companions) during the time of Umar(R.A.), this is carried right from the time of Umar(ra) until today.

Another example of Ijma is the second Azan of Jumah(Friday), which was the Ijma’ of sahabat (R.A.) during the time of Uthman (R.A) which is followed through out the world.

This is because of the Sahih Hadith of the Prophet(PBUH) said: "Hold fast to My Sunnah and the Sunnah of the Khulafaa-el-Rashidin" (the Rightly Guided Caliphs). In this hadith two Sunnats are mentioned, one of Rasulullah (Sallallaahu Álayhi Wasallam) and the other of the Sahabat (R.A)


SECONDARY SOURCES Qiyâs

o Qiyâs is a method that uses analogy – comparison – to derive Islamic legal rulings for new developments.

o Qiyâs can be defined as taking an established ruling from Islamic Law and applying it to a new case, in virtue of the fact that the new case shares the same essential reason for which the original ruling was applied.

o Qiyâs, therefore, is a method that Muslim jurists use to derive a ruling for new situations that are not addressed by the Qur’ân and Sunnah, like many new developments of our age and like the customs of people not encountered in Arabia during the time of the Prophet (peace be upon him).

o By way of qiyâs, these issues can be referred back to those that are explicitly mentioned in the sacred texts.

o When we know the reason why something in Islamic Law is obligatory, preferred, permitted, disliked, or forbidden, then if something else shares the same reason, it can be given the same legal ruling.

o In such issues, the scholars have derived law through analogical deduction on the basis of the provisions of Quran and the Sunnah on some similar situation.

o The emphasis of qiyas is identification of a command cause between the original and new case.

o It has been regarded as a legal source, which contributes significantly in deciding new unresolved issues.

o For example, the Quran forbids the use of alcohol but does not mention narcotics. Because alcohol and narcotics are both intoxicating, one may use qiyas to determine that Islamic law forbids narcotics as well. Saturday, April 22, 2023 11

SECONDARY SOURCES IJTIHAD:

o The ijtihad of Islamic jurists is known as the science of Islamic jurisprudence, which is “an endeavor undertaken by the mujtahid in formulating a particular rule and value of a subject matter that is not clearly explained whether by the Al-Quran or Al-Sunnah”.

o Mujtahid, required:o Enough knowledge of Arabic so that the scholar can read and

understand both the Qur'an and the Sunnah.o Extensive comprehensive knowledge of the Qur'an and the Sunnah.

More specifically, the scholar must have a full understanding of the Qur'an's legal contents. In regards to the Sunnah the scholar must understand the specific texts that refer to law and also the incidence of abrogation in the Sunnah.

o Must be able to confirm the consensus (Ijma) of the Companions, the Successors, and the leading Imams and mujtahideen of the past, in order to prevent making decisions that disregard these honored decisions made in the past.

o Should be able to fully understand the objectives of the Shariah and be dedicated to the protection of the Five Principles of Islam, which are life, religion, intellect, lineage, and property. Saturday, April 22, 2023 12

SECONDARY SOURCES IJTIHAD:

o Be able to distinguish strength and weakness in reasoning, or in other words exercise logic.

o Must be sincere and a good person.o In the context of Ijtihad, Shariah and Islamic jurisprudence will be

interpreted to have the same meaning, although from academic perspective there are some differences between the two. Yet, both are in the same discipline which discusses Allah SWT’s rules, regulations and legislation in matters of worship, family, financial, criminal, state administration, international relation and others.

o Since the basis of Islamic jurisprudence is also Al-Quran and Al-Sunnah, the rulings derived through the exercise of ijtihad of Islamic jurists are also considered as Shariah rulings because they are based on the same sources.

o Therefore, Islamic jurists define Islamic jurisprudence as “a science that explains the Shariah rulings which are derived from the detail evidences or authorities”.


Islamic banks Islamic banks or are also known as full fledged Islamic banking is like Bank Islam Malaysia Berhad (BIMB), Bank Muamalat Malaysia Berhad (BMMB), Kuwait Finance House (KFH), Al Rajhi Banking Corporation & Investment Corporation (M) Bhd (al-Rajhi) and Asian Finance Bank (AFB), Affin Islamic Bank Berhad, Alliance Islamic Bank Berhad, Alliance Islamic Bank Berhad, AmIslamic Bank Berhad, Asian Finance Bank (M) Berhad, CIMB Islamic Bank Berhad, HSBC Amanah Malaysia Berhad, Hong Leong Islamic Bank Berhad, Maybank Islamic Berhad, OCBC Al-Amin Bank Berhad, Public Islamic Bank Berhad, RHB Islamic Bank Berhad, & Standard Chartered Saadiq Berhad.

While, Islamic Banking SchemeIslamic Banking Scheme or before are also known as Interest Free Banking Scheme / Islamic Banking windows. Examples: Citibank & Deutsche Bank (Malaysia) Berhad.◦ This Islamic banking scheme sheltering under the larger conventional banking group.◦ Islamic banking subsidiaries shall come under the governance of the Islamic Banking Act 1983 instead of BAFIA

1992.


An Act to provide for the licensing and regulation of Islamic banking business.

Under section 2 of IBA 1983:

◦ “Islamic bank” means any company which carries on Islamic banking business and holds a valid license; and all the offices and branches in Malaysia of such a 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.


It was passed in Parliament and came into force on October 1, 1989.

It has effectively replaced the Banking Act 1973 and the Finance Companies Act 1969.

It is a comprehensive act and extends comprehensive powers to Bank Negara Malaysia (BNM) to supervise a larger spectrum of financial institutions, with the direct responsibilities to regulate and supervise all licensed institutions (commercial banks, finance companies, merchant banks, discount houses and money brokers) and also regulate scheduled and non-scheduled institutions.


Bank Negara Malaysia (BNM) 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.


In the Part B of guidelines, under establishment of Shariah Board it outlines the following requirements:

◦ Every Islamic financial institution is required to establish a Shariah Committee.

◦ In the case of a BAFIA IBS bank, it may establish one Shariah Committee for the banking group.

◦ However, if a takaful operator is part of that group, the tactful operator must establish its own separate Shariah Committee, due to the legal requirement under the TA.


The guidelines clearly uphold the establishments of the SSB in align with relevant laws governing the respective institution.

For instance a single committee is not allowed to act on behalf of both takaful and Islamic bank that part of one group.


Regarding the appointment and reappointment, Part C of the guidelines provides following:

◦ The Board of Directors of an Islamic financial institution upon recommendation of its Nomination Committee shall appoint the members of the Shariah Committee.

◦ The appointment and reappointment of a Shariah Committee member shall obtain prior written approval of Bank Negara Malaysia.

◦ The appointment shall be valid for a renewable term of two years.


BNM guidelines also provide detailed provisions on the restriction imposed on the serving Shariah board members.

The Part D of the guidelines provides that :

◦ (a) In line with section 16B(6) of the Central Bank of Malaysia Act 1958, an Islamic financial institution is not allowed to appoint any member of the SAC to serve in its Shariah Committee; and

◦ (b) To avoid conflict of interest and for reasons of confidentiality within the industry, an Islamic financial institution shall not appoint any member of Shariah Committee in another Islamic financial institution of the same industry.


For this purpose, Islamic financial institutions which are regulated under the IBA, BAFIA and DFIA are classified as of the "Islamic banking industry", whilst Islamic financial institutions that are regulated under the TA are classified as of the "takaful industry".

Memberships in other categories of industry are excluded from the restriction.

*DFIA - Development Financial Institutions Act 2002


With regard to the reporting structure, the Shariah Committee will report functionally to the Board of Directors of the Islamic financial institution.

This reporting structure reflects the status of the Shariah Committee as an independent body of the Islamic financial institution.


Shariah supervision is the single most important element that distinguishes between a conventional and an IFI.

It is the only way of certifying that its services, products, and operations are actually Shariah-compliant.

In the emerging Islamic financial sector, therefore, Shariah supervision is not a matter to be taken lightly.

The corporate governance is the theme of SSB.


While it may be convenient to explain Shariah supervision as a religious audit but its scope is far more comprehensive.

In essence, Shariah supervision is the process of ensuring that a financial product or service complies with Islamic legal precepts and principles, either by its conforming (to one degree or another) to a recognized Islamic legal norm or by its not violating the same.

Ideally, Shariah supervision will be a part of an Islamic product or service from the time of its development, to its launch, and throughout the period it is offered.

At the stage of research and development, or of drafting contracts or offering memorandums, Shariah supervision, in one form or another, should be an active participant.


By including Shariah supervision and advice at the earliest stages, management may save costly legal fees that may be required at a later stage if elements of the proposed business contracts need to be modified to comply with Shariah principles and precepts.

Moreover, once a product is launched, Shariah supervision may take the form of ongoing monitoring through periodic audits. Such audits may be undertaken by means of site visits, document reviews, or consultation with management at regular intervals.


The most obvious and immediate purpose of Shariah supervision is to certify for practicing Muslim consumers and clients that the financial product or service being offered to them is acceptable from an Islamic legal perspective and is therefore lawful to them.

Such certification is generally documented in a formal fatwa (Shariah position paper), may be thought of as a form of due diligence.


The primary beneficiary of Shariah supervision will be Muslim consumers or investors who may not have necessary skills or knowledge to evaluate the Islamic banking products in the light of Shariah teachings.

It also supplies form of guarantee and advocacy that money being invested in the IFIs is duly used in compliance with Shariah rulings and haram elements are eliminated.

From the view point of corporate governance, IFIs embody a number of interesting features since equity participation, risk and profit loss sharing arrangements from the basis of Islamic finance.

SSB functions as an extra layer of governance in IFIs in order to bring transactions under strict conformity with the Islamic law and expectations of Muslim community.


As a legitimate control body SSB consists of a number of members chosen among well qualified men of Islamic jurisprudence and comparative law.

The education and qualification of these members will be dealt in a later section of this paper.

The credibility of the Islamic banking activities is highly dependent on the credibility of the Shariah advisers.

The credibility of Shariah advisers may also depend on the perceptions and confidence of the bank managers in their role. In order to ensure the modern application of banking system is in line with Shariah requirements, it is strongly stressed that the objectives of the establishment of Islamic Bank are to achieve Falaah.

The objectives of Islamic banks may therefore differ greatly from the conventional bank's objectives. Therefore, in order to ensure compliance to the Syariah, IFIs use the service of well-verse Shariah scholars.


The laws governing the functions and operations and other matters of SSB have been detailed in several Acts and guidelines provided by regulators.

The Takaful Act (Malaysia) 1984 is one of the acts of parliament aimed at controlling insurance practices in Malaysia.

A financial institution licensed under the Banking and Financial Institutions Act 1989 (BAFIA) required to comply under relevant laws.

Bank Negara Malaysia has provided a set of guidelines clearly aimed at the SSB. It will be important to discuss the application of these guidelines issued by the Islamic Banking and Takaful Department of central bank of Malaysia.


All Shariah Committee members are expected to participate and engage themselves actively in deliberating Shariah issues put before them.

The BNM document that lays down guidelines for Shariah board stipulates following duties and responsibilities of the Syariah Committee:

◦ To advise the Board on Shariah matters in its business operation ◦ To endorse Shariah Compliance Manuals◦ To assist related parties on Shariah matters for advice upon request ◦ To provide written Shari ah opinion ◦ To assist the SAC on reference for advice


To endorse Shariah Compliance Manuals ◦ The Islamic financial institution shall have a Shariah Compliance Manual.

◦ The Manual must specify the manner in which a submission or request for advice be made to the Shariah Committee, the conduct of the Syariah Committee's meeting and the manner of compliance with any Syariah decision.

◦ The Manual shall be endorsed by the Shariah Committee.


To advise the Board on Shariah matters in its business operation ◦ The Shariah Committee shall advise the Board on Shariah matters in

order to ensure that the business operations of the Islamic financial institution comply with Shariah principles at all times.

To assist related parties on Shariah matters for advice upon request ◦ The related parties of the Islamic financial institution such as

its legal counsel, auditor or consultant may seek advice on Shariah matters from the Shariah Committee.

◦ The Shariah Committee is expected to provide assistance to them so that compliance with Shariah principles can be assured completely


To provide written Shariah opinion

◦ The Shariah Committee is required to record any opinion given.

◦ In particular, the Committee shall prepare written Shariah opinions in the following circumstances:

where the Islamic financial institution make reference to the SAC for advice; or

where the Islamic financial institution submits applications to Bank Negara Malaysia for new product approval in accordance with guidelines on product approval issued by Bank Negara Malaysia


To assist the SAC on reference for advice ◦ The Shariah Committee must explain the Shariah issues

involved and the recommendations for a decision. It must be supported by relevant Syariah jurisprudential literature from the established sources.

◦ The Syariah Committee is also expected to assist the SAC on any matters referred by the Islamic financial institution. Upon obtaining any advice of the SAC, the Shariah Committee shall ensure that all SAC's decisions are properly implemented by the Islamic financial institution


Every Islamic financial institution is required to establish a Shariah Committee.

In the case of a BAFIA IBS bank, it may establish one Shariah Committee for the banking group.

However, if a takaful operator is part of that group, the takaful operator must establish its own separate Shariah Committee, due to the legal requirement under the TA.


The BOD of an IFI shall appoint the members of the Shariah Committee.

The appointment and reappointment of a Shariah Committee member shall obtain prior written approval of BNM. The appointment shall be valid for a renewable term of two years.

In approving the appointment and reappointment, Bank Negara Malaysia may impose necessary conditions it deems fit in addition to the requirements in these Guidelines. The failure to comply with any of such conditions shall nullify the approval.


A member of a Shariah Committee shall be an individual.

A company, institution or body shall not constitute a Shariah Committee for the purpose of these Guidelines.

The proposed member of the Shariah Committee shall at least either have qualification or possess necessary knowledge, expertise or experience in the following areas: ◦ Islamic jurisprudence (Usul al-Fiqh); or ◦ Islamic transaction/commercial law (Fiqh al-Mu'amalat).

The composition of the Shariah Committee shall consist a minimum of three (3) members.


Islamic financial institution is required to have a minimum of one officer, preferably a person with

knowledge in Shariah, who will serve as the secretariat to the Shariah Committee.


The Shariah Committee will report functionally to the Board of Directors of the Islamic financial institution.

This reporting structure reflects the status of the Shariah Committee as an independent body of the Islamic financial institution.

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Shariah Committe

eBoard of

Directors of the Bank

Saturday, April 22, 2023

An Islamic financial institution shall notify Bank Negara Malaysia of any resignation or termination of a member of the Shariah Committee within fourteen days of the date of resignation or termination. The notice shall state the reasons of such termination.


Shari’ah advisors are the backbone of the industry without which the integrity of the whole industry will be at stake.

Advisory services are an amanah (responsibility) and must be discharged with utmost professionalism and integrity.

More interactions is needed between the Shari’ah advisors and the market players so that the supervisory role will be enhanced.

Shari’ah scholars must ensure that all the decisions made are realistic and serve the interest of the ummah.


Chap 2 (Jun 2014) (6)

Documents

Transcript of Chap 2 (Jun 2014) (6)