Commercial laws and statutes
relating to Islamic banking and
finance in Malaysia
By
Dr. Asmadi Mohamed Naim
Objectives
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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.
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1.
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3.
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 interestfree banking.
List of Islamic Banks
Name
Country
Date of
Establishment
Nasser Social Bank
Egypt
1972
Islamic Development Bank
Saudi Arabia
1975
Dubai Islamic Bank
UAE
1975
Faisal Islamic Bank of Egypt
Egypt
1977
Faisal Islamic Bank of Sudan
Sudan
1977
Islamic Banking System
International Holding
Luxembourg
1978
Jordan Islam Bank
Jordan
1978
Bahrain Islamic Bank
Bahrain
1979
Dar al-Mal al-Islami
Switzerland
1981
Bahrain Islamic Inv.
Company
Bahrain
1981
Cont…
Islamic International Bank
for Inv. & Development
Egypt
1981
Islamic Investment House
Jordan
1981
Al-Baraka Investment &
Development Company
Saudi Arabia
1982
Saudi-Philippine Islamic
Development Bank.
Saudi Arabia
1982
Faisal Islamic Bank Kibris
Turkey
1982
BIMB
Malaysia
1983
Islami Bank Bangladesh Ltd
Bangladesh
1983
Islamic Bank International
Denmark
1983
Tadoman Islamic Bank
Sudan
1983
Qatar Islamic Bank
Qatar
1983
Development of Islamic Banking system in Malaysia
Year
Remark
1980
Formal request to set-up Islamic Bank was made during the Bumiputera
Economic Congress
July
30,
1981
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 5,
1982
Among the recommendations made by the committee in its report:
i.
The Government should establish an Islamic bank whose operations
are in accordance to the principles of Syariah.
ii.
The proposed bank is to be incorporated as a company under the
auspices of the Companies Act, 1965.
iii.
A new Islamic banking act must be introduced to license and
supervise the Islamic bank.
iv.
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.
Cont…
Mac 1, 1983
BIMB was incorporated and commenced operations on July 1,
1983.
March 10,
1983
The Islamic Banking Act was gazette.
April 7, 1983
The Islamic Banking Act came into effect.
July 1, 1983
BIMB commenced operations.
1983
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.
March 4,
1993
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.
Cont..
August 21,
1993
The second phase started with 10 more finance institutions
joining the scheme.
January,
1994
The Islamic inter-bank market was introduced in Malaysian
financial system, which consists of three elements
namely,
i.
Interbank trading in financial instruments,
ii.
Islamic inter-bank investments
iii.
Islamic inter-bank cheque clearing system
Islamic view on codification of additional
law related to administration purposes
in Islamic financial system.
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Shari’ah consists two main characteristics in its law:
1. Thabat /Constancy
2. Mutaghayyirat/ changeable
ii.
There are many issues which are unchangeable in
Islamic law such as:
Faith
Issues regarding to worship
iii.
Hudud
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iv.
v.
Islamic financial contract principles.
Other regulations.
Mutaghayyirat/ Changeable
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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 –
i.
Islamic Banking Act 1983,
ii.
Takaful Act 1984 and Regulations; and
iii.
Guidelines on the offering of Islamic Securities.
Discussion on Islamic Bank Act 1983
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1.
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4.
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:
Preliminary.
Licensing of Islamic Banks.
Financial requirements and duties of Islamic
banks
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
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This part discusses about title, commencement,
application, and interpretation.
Under Section 2: Interpretation. This section
consists the interpretation of :
Branch
Company
Depositor
Islamic banking businessliabilities
Licence
Public company
Share
Subsiadiary
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Central bank
Corporation
Islamic bank
Investment account
Other deposit liabilities
Saving account liabilities
Sight liabilities
Time liabilities
Definition
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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.
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2. Licensing of Islamic banking
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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
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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.
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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.
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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’…
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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