Topic 4

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

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.

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.

List of Islamic Banks 1981 Switzerland Dar al-Mal al-Islami 1981 Bahrain Bahrain Islamic Inv. Company 1979 Bahrain Bahrain Islamic Bank 1978 Jordan Jordan Islam Bank 1978 Luxembourg Islamic Banking System International Holding 1977 Sudan Faisal Islamic Bank of Sudan 1977 Egypt Faisal Islamic Bank of Egypt 1975 UAE Dubai Islamic Bank 1975 Saudi Arabia Islamic Development Bank 1972 Egypt Nasser Social Bank Date of Establishment Country Name

Cont… 1982 Turkey Faisal Islamic Bank Kibris 1983 Qatar Qatar Islamic Bank 1983 Sudan Tadoman Islamic Bank 1983 Denmark Islamic Bank International 1983 Bangladesh Islami Bank Bangladesh Ltd 1983 Malaysia BIMB 1982 Saudi Arabia Saudi-Philippine Islamic Development Bank. 1982 Saudi Arabia Al-Baraka Investment & Development Company 1981 Jordan Islamic Investment House 1981 Egypt Islamic International Bank for Inv. & Development

Development of Islamic Banking system in Malaysia
Among the recommendations made by the committee in its report:
The Government should establish an Islamic bank whose operations are in accordance to the principles of Syariah.
The proposed bank is to be incorporated as a company under the auspices of the Companies Act, 1965.
A new Islamic banking act must be introduced to license and supervise the Islamic bank.
The Islamic bank is to establish its own Shariah Supervisory Board whose function is to ensure that the operations of Islamic bank are in accordance to the Shariah.
July 5, 1982 The Government appointed National Steering Committee on Islamic Banking. The secretarial functions were given to the Pilgrimage Board of Malaysia. This committee studied both operations of the Faisal Islamic Bank of Egypt and The Faisal Islamic Bank of Sudan. July 30, 1981 Formal request to set-up Islamic Bank was made during the Bumiputera Economic Congress 1980 Remark Year

Cont… BIMB was incorporated and commenced operations on July 1, 1983. Mac 1, 1983 Central Bank has introduced a scheme known as ‘Skim Perbankan Tanpa Faedah’ or ‘Interest-free Banking Scheme’ (Often known as ‘Islamic windows). Under this scheme, all commercial banks, merchant banks and finance companies are given an opportunity to introduce Islamic banking products and services. The pilot phase of the scheme involved the three largest commercial banks in Malaysia. March 4, 1993 The Government introduced The Government Investment Act in 1983 to enable the government to issue Government Investment Certificates, which are government bonds issued in accordance to Islamic principles. 1983 BIMB commenced operations. July 1, 1983 The Islamic Banking Act came into effect. April 7, 1983 The Islamic Banking Act was gazette. March 10, 1983

Cont..
The Islamic inter-bank market was introduced in Malaysian financial system, which consists of three elements namely,
Interbank trading in financial instruments,
Islamic inter-bank investments
Islamic inter-bank cheque clearing system
January, 1994 The second phase started with 10 more finance institutions joining the scheme. August 21, 1993

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.

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.

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.

Discussion on Islamic Bank Act 1983
Islamic Banking Act 1983 (IBA 1983) was gazetted on 10 th . 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.

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

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

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.

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.

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)

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.

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.

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.

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.

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.

7. Miscellaneous
8. Consequential amendments

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