Legal Framework of Internet Banking


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Legal Framework of Internet Banking

  3. 3. INTRODUCTION3  Electronic commerce (E-commerce) is simply referred to buying and selling using the Internet.  E-commerce involves much more than electronically mediated financial transactions between organizations and customers.  E-Banking may include ATMs, wire transfers, telephone banking, electronic funds transfers and debit cards.  The Internet offers the potential for safe, convenient new ways to shop for financial services and conduct banking business, any day, any time.  However, safe banking online involves making good choices–decisions that will help you avoid costly surprises or even scams.
  4. 4. INTERNET BANKING4  Internet banking involves consumers using the Internet to access their bank account and to undertake banking transactions.  Internet banking can mean the setting up of a web page by a bank to give information about its product and services.  It involves provision of facilities such as accessing accounts, funds transfer, and buying financial products or services online.  There are two ways to offer Internet banking:  An existing bank with physical offices can establish a web site and offer Internet banking in addition to its traditional delivery channels.  A bank may be established as a branchless, Internet only or virtual bank.
  5. 5. INTERNET BANKING5  The levels of banking services offered through Internet can be categorized in three types:  Basic Level Services:  Use the banks websites which disseminate information on products and services offered  It may receive and reply to customers queries through e- mail  Simple Transactional Websites  Allow customers to submit their instructions, applications for different services, queries on their account balances, etc,  Do not permit any fund-based transactions on their accounts  Fully Transactional Websites  Allow the customers to operate on their accounts for transfer of funds, payment of different bills, subscribing to
  6. 6. REGULATORY FRAMEWORK6  Laws on EFT and Electronic Banking  Although principles of tort, restitution, property law, equity, and even criminal law, may be relevant when considering a problem thrown up by the electronic banking and EFT, the primary source of EFT law is the law of contract and agency.  Law of Contract and Agency  Those contracts regulate the legal problems that result from the use of EFT.  For example, the consumer customer will enter into a detailed written agreement with the bank that gives him access to its ATM or electronic banking facilities.  Unlike the traditional banker-customer contract, which is largely based on implied terms, these written contracts contain detailed express terms.
  7. 7. LAW OF CONTRACT AND AGENCY7  A whole series of contracts exist between banks and their customers, banks and the electronic system provider, and the banks themselves.  The contractual relationship between the banks that participate in the electronic banking system is important.  Some banks enter into bilateral arrangements, for example, where a bank which is a member of the integrated banking system agrees to act as an agent for another institution  Systems such as MEPS or Bankcard depend upon multilateral contracts whereby each member bank is bound by the system rules.  Multilateral contracts may arise where each member contracts with the electronic banking system provider to conform to the system rules; the members are then deemed to have contracted between themselves on the terms of their individual understandings.
  8. 8. REGULATORY FRAMEWORK8  The other laws relevant to EFT and Electronic Banking are the various statutes such as:  Banking and Financial Institutions Act 1989  Digital Signatures Act 1997  Computer Crimes Act 1997
  9. 9. BANKING AND FINANCIAL INSTITUTIONS ACT 1989 (BAFIA)9  Not the whole of the Banking and Financial Institutions Act 1989 is relevant here.  In fact only one section is devoted to EFT which is section 119 of the BAFIA, 1989. This section merely provides for the necessity of written authorization from and control by BNM before any system of EFT can be operated and afterwards.  Section 119 (1) : stated that no person shall commence to operate any EFT system unless he has submitted for the approval of the Bank the scheme of operations, the rules, contract, bye-laws or other documents relating to the rights, duties and liabilities of the persons participating in the system, and obtained the authorization in writing of the Bank to operate the system.  Section 119 (5) : (5) BNM may inspect the premises, equipment, machineries, books or other documents, accounts or transactions relating to the system.
  10. 10. BANKING AND FINANCIAL INSTITUTIONS ACT 1989 (BAFIA)10  Section 116(2)(e) : BNM may make regulations to provide for the imposition of duties, liabilities, responsibilities, restrictions, limitations, prohibitions or sanctions, or the conferment of rights, privileges, benefits or indemnities on the parties to any EFT system set up, or operating, in Malaysia.  Section 116(2)(f): Power for BNM to make regulations to provide for the setting-up, operation, or administration of, or any other matter whatsoever relating to EFT systems.
  11. 11. DIGITAL SIGNATURE ACT 199711  What is a digital signature?  Digital signatures are not handwritten signatures.  A digital signature is a technique that can include more possibilities than just an electronic substitute for a handwritten signature.  A digital signature can also be used to establish the origin and integrity of electronic data.  The Digital Signature Act 1997 sets out a regulatory structure in respect of entities involved in the creation of digital signatures and legalizes private key – public key cryptography.  Under the Digital Signature Act 1997, only certification authorities, which are licensed, are allowed to carry on the business of a certification authority.  Certification authorities may be contractually liable to the subscriber as well as to the world at large by virtue of third parties relying on the certificates issued.  Section 62 : stated that a digital signature is recognized as an authentic signature.
  12. 12. DIGITAL SIGNATURE ACT 199712  The Act does not preclude the use of a symbol from being valid as a signature under any other applicable law, thus preserving the right of a person to use a symbol instead of a handwritten signature.  Effect of a document signed with a digital signature:  the document shall be legally binding as a document signed with a handwritten signature– s.62(2)(a)  the digital signature shall be deemed to be a legally binding signature – s.62(2)(b)  the document shall be deemed to be as valid, enforceable and effective as if it had been written – s.64.  the copy of a digitally signed message shall be valid and enforceable as if it were the original, unless the signer had specifically designated the message to be the original – s.65.  By virtue of section 63 of the Digital Signature Act 1997, the risk of forged digital signatures lies on the recipient, if such reliance is not reasonable under the circumstances.
  13. 13. COMPUTER CRIMES ACT 199713  The Computer Crimes Act 1997 is aimed to “provide for offences relating to the misuse of computers”.  The Act introduced the concept of a crime for the unauthorized access via a computer or other electronic forms into the computer or database of another person.  The Act makes it an offence if there is an unauthorized access to computer systems and the use of computer systems for fraudulent purposes.
  14. 14. COMPUTER CRIMES ACT 199714  Section 3 creates an offence where there has been an unauthorized access to a computer.  For the offence of unauthorised access to be committed, the computer used to secure the unauthorised access to any program or data need not be a different computer from that containing the data or program.  Section 4 creates an offence where there an unauthorized access with ulterior Intent  Section 4(1) creates an offence, is limited to which involve fraud or dishonesty or which cause injury as defined in the Penal Code.
  15. 15. COMPUTER CRIMES ACT 199715  Section 5 creates an offence where there an unauthorized modification of contents of computer  Section 5(1) renders it an offence if a person who does “any act which he knows will cause unauthorized modification of the contents of any computer.” An essential element of this offence is knowledge.  Under Section 7(1), abetments and attempts are punishable as offences. An example of such act would be where an intending “hacker” purchases the necessary equipment in order to perform his deed.  Under Section 10(1), the powers of the law enforcement agency to search and seize evidence are subject to a warrant to be issued by the
  16. 16. BNM GUIDELINES16  Besides these provisions and legislation relating to EFT and electronic banking, Bank Negara Malaysia, pursuant to powers under the Banking and Financial Institutions Act 1989 has also issued two important and extremely relevant guidelines. They are:  BNM/GP11;  Minimum Guidelines on the Provision of Internet Banking  BNM/GP 11, „Guidelines On Consumer Protection On Electronic Fund Transfers‟ provides a basic framework to establish the rights, liabilities and responsibilities of customers and financial institutions relating to
  17. 17. INTERNET BANKING FROM ISLAMIC PERSPECTIVES17  Both Quran and Sunnah proved us guidelines for our everyday life that are applicable at any time and any where.  Islam had provided some basic law that should govern any transaction, including the one online.  Main features of Islamic ethics are: trustworthiness, honesty, equality, mutual consent, respect, sacrifice, caring and sharing, concern on legality.  It has to be emphasized that Islam has never come as an obstacle for any kind of development in any field. But, Islam forbids any kind of violence, exploration or unfair use of any resource.  Since, we are referring to Islamic online Banking; we will refer to few Quranic ayahs where Allah strictly forbids any kind of usury or interest (Riba) but allows free trade.  Islamic banking differs from conventional main because it course of bushiness is conducted in a way to avoid interest involved as much as possible.
  18. 18. CONCLUSION18  Online banking has made its entrance and has gradually gain the customers confidence.  Internet has enable services to be made available anytime and anywhere.  Hence, Muslims or non-Muslims worldwide can enjoy the Islamic Banking Finance provided or at least able to gain and widen their knowledge in Islamic Banking Finance.  However it does not come without total cost. The issue of security will always be there. Yet, it will be confronted and handled by using the best legal framework and measurements to overcome any foreseen danger.  Islamic banking in general, and online in particular is actual an alternative to our Ummah and a way in which our Ummah can prosper on Shariah allowed way.
  19. 19. 19 END OF CHAPTER