(A) Islamic Banking and Finance
Over the years, we can clearly see the effort of our Government in promoting and developing Islamic Financing. The major element to differentiate Islamic Finance with Conventional Loan is that Islamic Finance is governed by Shariah Principles.
The Islamic Banking Act 1983 was first brought into force in 1983 and subsequently, it was repealed and replaced by the Islamic Financial Services Act 2013 (“IFSA”) which came into force on 30th June 2013.
The preamble of IFSA stated that:
“An Act to provide for the regulation and supervision of Islamic financial institutions, payment systems and other relevant entities and the oversight of the Islamic money market and Islamic foreign exchange market to promote financial stability and compliance with Shariah and for related, consequential or incidental matters.”
As stated in the press release published by Bank Negara Malaysia (BNM) during the introduction of Financial Services Act 2013 (“FSA”) and IFSA, “..the FSA and IFSA is the culmination of efforts to modernise the laws that govern the conduct and supervision of financial institutions in Malaysia to ensure that these laws continue to be relevant and effective to maintain financial stability, support inclusive growth in the financial system and the economy, as well as to provide adequate protection for consumers.”
The main objective of IFSA 2013 aside from encouraging and monitoring financial stability is to ensure Shariah compliance of the Islamic financial services and operations by empowering the Central Bank of Malaysia (CBM) with the right to supervise and enforce the Act on matters that are connected to Shariah in the ordinary course of business of an Islamic financial institution.
IFSA 2013 is to be read together with other related laws, i.e. the Central Bank of Malaysia Act 2009 (“CBMA 2009”) and/or the Shariah Governance Framework of CBM.
Section 7 (2) of IFSA 2013 states that “The powers and functions of the Bank under this Act are in addition to, and not in derogation of, the powers and functions of the Bank under the Central Bank of Malaysia 2009”.
The highest Shariah authority in Islamic finance in Malaysia is Shariah Advisory Council of Bank Negara Malaysia (SAC) established under Section 51 (1) of the CBMA 2009:-
“(1) The Bank may establish a Shariah Advisory Council on Islamic Finance which shall be the authority for the ascertainment of Islamic law for the purposes of Islamic financial business.”
The main duty of SAC is to act as the advisor to Bank Negera Malaysia on all Shariah matters, be it for Islamic banking business, takaful business, Islamic development financial business, or any other business which is based on Shariah principles and to ensure all the licensed Islamic products are complied with Shariah principles.
Functions of SAC is expressly laid out under Section 52 of the CBMA 2009.
Under Section 52 (1), the SAC shall have the following functions:
(a) to ascertain the Islamic law on any financial matter and issue a ruling upon reference made to it in accordance with this Part;
(b) to advise the Bank on any Shariah issue relating to Islamic financial business, the activities or transactions of the Bank;
(c) to provide advice to any Islamic financial institution or any other person as may be provided under any written law; and
(d) such other functions as may be determined by the Bank.
As stated under the general guidelines as published by BNM, “compliance with Shariah requirement is a prerequisite in ensuring the legitimacy of Islamic financial products and services.
The underlying principles under Islamic Finance are that there are certain elements to be avoided under an Islamic Banking. The most noticeable is that Islamic Banks prohibited to trade in riba or to engage in any business activity that is not in compliance with Shariah principle. Other elements are gharar or other transaction involving prohibited commodities.
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