ISLAMIC FINANCIAL LEGAL FRAMEWORK

Mahyuddin Khalid

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ISLAMIC BANKING ACT 1983

(ACT 276)

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CONTENT

INTRODUCTION LICENSING OF ISLAMIC BANKS ISLAMIC BANKING BUSINESS SHARIAH ADVISORY BOARD INTERNATIONAL ISLAMIC BANKS GOVERNANCE CONCLUSION

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LICENSING OF ISLAMIC BANKS

Islamic banks’ are licensed and regulated by BNM under a separate legal framework - the Islamic Banking Act (IBA) of 1983.

This is due to the differences in their operational aspects whereby Islamic banks have to comply with Shariah principles.

Several requirements had to be fulfilled before IB licence granted by the BNM.

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LICENSING OF ISLAMIC BANKS

Section 3(1) : Islamic banking business shall not be conducted except by a company that possesses a written licence from the Minister of Finance .

The act specifies only a company can engage in Islamic banking business.

Statutory body or a cooperative society cannot be granted a licence.

Issues: Bank Rakyat could not be granted Islamic banks license because of its status as a cooperative bank.

Section 3(5) :BNM or the Minister shall not recommend the grant of a licence, unless he is satisfied: The aims and operations of the banking business will not

involve any element which is not approved by Islam Provision for the establishment of Shariah advisory body in

the article of association of the bank to advise the bank

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ISLAMIC BANKING BUSINESS

Section 2 provides the following definition: “Islamic bank” means any company which

carries on Islamic banking business and holds a valid licence

“Islamic banking business” means banking business whose aim and operations do not involve any element which is not approved by the Religion of Islam.

“International Islamic bank” means any company or an office of any foreign institution which carries on international Islamic banking business and holds a valid licence under section 30B

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ISLAMIC BANKING BUSINESS

It is clear that IBA does not state clearly the concepts and principles behind the operations of the bank’s business in order to fulfil its aim.

The absence of definition of “banking business” in the IBA thus makes the need to look into the common law for its meaning.

Therefore, the definition of Islamic banking business is to commence banking business using the model of the conventional banking business and then to Islamise its operations by removing elements which are prohibited and not approved by the Shariah principles.

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ISLAMIC BANKING BUSINESS

Prof Ahmad Ibrahim asserted: “Where the normal banking practices do not clash with

Islamic principles, the Islamic banks have adopted the current banking practices and procedures.

Where any clash arise the Islamic banks have devised their own practices and procedure to accomplish their banking activities.”

However, the general definition may have some positive aspects such as: To give much flexibility and scope as possible to enable IB

to grow, expand their operations and evolve into viable competitors to conventional banking.

Would also allow the adoption and application of different Islamic commercial laws from the various madhabs, thus making it broader and the resulting proposition of the law more widely acceptable.

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ISLAMIC BANKING BUSINESS

The banking business provided by the Islamic bank in general similar to the business provided by other commercial banks.

IBA does not stipulate clearly the concepts of its business, a so that IB can engage in such trade and commerce as long as it does not contravene Islamic principles.

This is due to the fact that principles of Islamic banking which prohibit any involvement with interest.

Instead, an Islamic bank should derive its income from profit through trade or business.

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SHARIAH ADVISORY BODY (SAB)

Islamic bank under the IBA 1983 must set up the Shariah Advisory Body (SAB) to advise the bank on the operations of its banking business in order to ensure that the business does not contravene the principles of Shariah.

The provision for the establishment of SAB clearly stated in Section 3(5) of the IBA.

However, the IBA do not mention how the SAB will perform its role and duties.

Section 13A (1) : Islamic bank may seek the advice of the SAC on Shariah matters relating to its banking business and the Islamic bank shall comply with the advice of the SAC.

In this section, “SAC” means the Shariah Advisory Council established under subsection 16B(1) of the CBA 1958.

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SHARIAH ADVISORY BODY (SAB)

For the banks and financial institutions licensed under the BAFIA which carry Islamic banking business, there is no requirement to establish their own SAB.

Section 124(3) of the BAFIA requires any licensed institution carrying on Islamic banking and financial businesses to seek the advice of the SAC of the BNM.

It is not mandatory for the conventional banks and financial institutions that offer Islamic banking products and facilities to have an internal SAC to advise the banks.

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INTERNATIONAL ISLAMIC BANKS

Section 30A (1) : No person shall carry on international Islamic banking unless it is: Islamic bank; or company or a foreign institution and holds

a valid licence to carry on such business. Section 30A (2) : Any person who

contravenes the provisions commits an offence and be liable to a fine not exceeding RM20K or to imprisonment not exceeding three years or to both

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GOVERNANCE

Section 31 : The Central Bank shall investigate, under conditions of secrecy, the books, accounts and transactions of each Islamic bank and of any branch, agency or office outside Malaysia opened by an Islamic bank.

Section 55 : Islamic bank is incorporated under the Companies Act 1965 subject to the provisions of that Act and IBA.

Where there is any conflict or inconsistency between the provisions of Companies Act and the provisions of IBA the provisions of IBA shall prevail.

IBA prevail over Companies Act.

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