Mahyuddin Khalid

emkay@salam.uitm.e du.my

ISLAMIC FINANCIAL LEGAL FRAMEWORK

DEVELOPMENT OF THE MALAYSIAN Click to edit Master subtitle style ISLAMIC FINANCIAL SYSTEM

CONTENT
22

MALAYSIAN ISLAMIC FINANCIAL SYSTEM HISTORICAL DEVELOPMENT OF ISLAMIC BANKING NSC REPORT ON BANK ISLAM MALAYSIA 1ST PHASE OF DEVELOPMENT 2ND PHASE OF DEVELOPMENT 3RD PHASE OF DEVELOPMENT CONCLUSION
12/14/12

33

MALAYSIAN ISLAMIC FINANCIAL SYSTEM

Comprehensive Islamic financial system covering all financial sectors

operating

in parallel with conventional financial system full-fledged Islamic banking institutions

Diversities of players
Twelve

2 domestic Islamic banks 3 full-fledged foreign owned Islamic banks 7 Islamic banking subsidiaries
12/14/12

9 takaful operators

HISTORICAL LANDMARKS IN ISLAMIC FINANCE DEVELOPMENT

44

12/14/12

HISTORICAL DEVELOPMENT OF ISLAMIC BANKING

55

Traditional Malay Muslim society is very cautious in involving themselves in riba transactions In order to avoid interest-based transactions in getting cash or liquidity, they practice a local customary transaction known as jual janji (conditional sale). The Courts recognize jual janji as a Malay customary transaction arising out of religious consideration
12/14/12

HISTORICAL DEVELOPMENT OF ISLAMIC BANKING

66

In Malaysia, Islamic banking can be traced back to its root in 1963, with the establishment of the Lembaga Urusan dan Tabung Haji (LUTH), which was the first Islamic savings institution for the special purpose of performing hajj. Islamic resurgence in the Middle Eastern countries had initiated the call for the establishment of an Islamic financial system that would allow Muslims to practice their banking and finance according to Shariah principles. 12/14/12

HISTORICAL DEVELOPMENT OF ISLAMIC BANKING

77

Move towards establishing an Islamic bank in Malaysia was initiated by various private parties
e.g

during the Kongres Ekonomi Bumiputera (The Bumiputera Economic Congress) in 1980 and at the National Seminar on Konsep Pembangunan Dalain Islam (the Concept of Development in Islam).

A resolution was passed calling off the Government to allow LUTH to establish an Islamic hank in Malaysia12/14/12 in order to

HISTORICAL DEVELOPMENT OF ISLAMIC BANKING

88

LUTH undertook a study on the establishment of an Islamic bank in Malaysia. The government accepted the proposal by LUTH and appointed a National Steering Committee on Islamic Bank (NSC) to study various proposals for the establishment of an Islamic bank. The NSC was given the following tasks:
To

study and identify various critical aspects of Islamic banking such as the 12/14/12 basis of the establishment, areas of

NSC REPORT ON BANK ISLAM MALAYSIA

99

An Islamic bank, which operates according to the rules of Shariah, should be established; provide services and operating profitably. Only one Islamic bank should be established. The proposed Islamic bank should be incorporated as a limited company under the Companies Act 1965. The Islamic Banking Act needs to be legislated in order to provide for the 12/14/12

STAGES OF DEVELOPMENT
10 10 Gradual and pragmatic
Milestones
1969
Pilgrimage Fund Board Full-fledged Islamic banks
Bank Islam Malaysia Bhd. Bank Muamalat Malaysia Bhd. Foreign Islamic banks

1983

1993

200 3

Conventional banks offer Islamic window Islamic subsidiary

Islamic money markets Takaful Operators

Syarikat Takaful Malaysia Bhd. Takaful Nasional, Mayban Takaful, Takaful Iklhas, Commerce Takaful

..achieved significant milestones in building 12/14/12 comprehensive and integrated Islamic financial

DEVELOPMENTAL FOCUS

1111

12/14/12

12 12

1st PHASE OF DEVELOPMENT

All recommendations of the NSC Report were accepted by the Government. The Islamic Banking Bill was passed and the IBA came into force on 7th April 1983. Consequently, the Islamic bank was incorporated and officially launched on July 1, 1983. The establishment of BIMB marked a new milestone for the development of the Islamic financial system12/14/12 in Malaysia.

LEGISLATION OF THE ISLAMIC BANKING ACT (IBA) 1983

13 13

To enable an Islamic bank to be established and operated in Malaysia, a suitable legal framework according to the Shariah principles should be provided. The existing Banking Act 1973 (now replaced by BAFIA 1989), did not conform with the principles of Islamic banking because :
It

required all banks to operate on the basis of interest

12/14/12 all types of trading

Prohibited

THE ESTABLISHMENT AND DEVELOPMENT OF BIMB

14 14

BIMB was incorporated as a public limited company to enable the Bank to conduct its activitics freely without being constrained by regulations imposed on statutory bodies. Even though BIMB was a private company, the largest portion of its shares should be held by the Government to generate the publics confidence in the bank. BIMB was established with the initial 12/14/12 paid-up capital of RM80 million consist

THE ESTABLISHMENT AND DEVELOPMENT OF BIMB

15 15

The corporate objective of the Bank was to provide banking facilities and services in accordance with Islamic commercial law. In order to supervise its operations to ensure its compliance with the principles of Shariah, the Bank had to set up a Shariah Supervisory Council. BIMB was listed on the main board of the Kuala Lumpur Stock Exchange (KLSE) on 17 January 1992
12/14/12

LEGISLATION OF GOVERNMENT INVESTMENT ACT 1983

16 16

BIMB was required to undertake shortterm investments, as well as a fund management measure to meet its liquidity requirements prescribed by BNM. The existing avenue for short-term investments was by way of purchases of Government papers in the form of Malaysian Government Treasury Bills (MGTB) and Malaysian Government Securities (MGS) that bore interests and BIMB could not invest in them. 12/14/12

ESTABLISHMENT OF SYARIKAT TAKAFUL MALAYSIA BERHAD

17 17

The NSC was of the view that the Islamic bank was responsible in ensuring the safety and security of its own assets and securities against loss, damage and destruction and recommended that an Islamic Insurance company should be established Takaful Act were enacted in 1984 based on the Insurance Act 1973, with such modifications and amendments to conform with the Shariah and takaful business practices. 12/14/12

18 18

2nd PHASE OF DEVELOPMENT

The government decided that for the first 10 years there should be only one Islamic bank before establishing other Islamic banks. This decision was to enable BIMB to focus on the growth of Islamic banking and to develop as many Islamic banking products and services as possible without any competition By the mid of December 1993, BIMB had developed 21 Islamic banking 12/14/12 products and instruments covering a

19 19

2nd PHASE OF DEVELOPMENT

During the first ten years, the development of Islamic bank emphasis on creating a large number of different types of Islamic financial instruments. Although BIMB was established in 1983. the Bank was still not able to serve the entire needs of the population, due to several constrained of the limited number of branches and resources. The establishment of a large number of institutions offering Islamic financial 12/14/12 services is necessary to further develop

20 20

SKIM PERBANKAN TANPA FAEDAH (SPTF)

BNM introduced a scheme named Interest-Free Banking Scheme (Skim Perbankan Tanpa Faedah) (SPTF) in March 1993 to allow the existing conventional banking system to offer Islamic banking services Through SPTF, conventional banks were allowed to introduce and offer Islamic banking services and facilities at their counters using their existing infrastructure, including staff and branches. 12/14/12

21 21

SKIM PERBANKAN TANPA FAEDAH (SPTF)

BNM has introduced various measures and policies to meet up the requirements:
To To

establish an Islamic Banking Unit (IBU) to be headed by a senior Muslim banker create an Islamic Banking Fund (IBF) with the minimum allocation of RM1 million open separate current/clearing accounts for Islamic banking operations with BNM
12/14/12 register as Indirect Members under the

To

To

22 22

SKIM PERBANKAN ISLAM (SPI)

In 1998, BNM replaced the SPTF with Islamic Banking Scheme (IBS) or known as Skim Perbankan Islam (SPI) effective from 1st December 1998. All banking institutions participating in the SPI were required to upgrade their Islamic Banking Unit (IBU) to Islamic Banking Division (IBD) and headed by a Muslim senior management officer of the bank and reports to the Chief Executive Officer (CEO)
12/14/12 The minimum funds of Islamic banking

23 23

ISLAMIC INTER-BANK MONEY MARKET

The establishment of the Islamic money market on 3 January 1994 was the last element for the Islamic banking system to function as a full-fledged banking system. BNM decided to implement the Islamic Money Market based on the concept of mudharabah or profit- sharing The development of an Islamic money market was crucial as an essential avenue to provide a ready source of 12/14/12 short-term investment based on Shariah

ISLAMIC CAPITAL MARKET

24 24

Islamic capital market is one of the components in the overall capital market in the country. It functions as a parallel market to the conventional capital market for capital seekers and providers, and plays a complementary role to the Islamic banking system in broadening and deepening the Islamic financial markets in Malaysia. The government established the Securities Commission (SC)12/14/12 sole as the

ISLAMIC CAPITAL MARKET

25 25

The SCs efforts to develop the ICM by setting up of the necessary infrastructure:
Establishing

(ICMU)
to

an Islamic Capital Market Unit

carry out research and development of ICM instruments the existing securities from Shariah perspectives

analyzing

Establishing

Islamic Instruments Study

Group (IISG)
to

12/14/12 advise the SC on development ICM

ISLAMIC CAPITAL MARKET

26 26

The SCs efforts to develop the ICM by broadening and strengthen the market such as:
Analyzing

existing conventional capital market instruments to determine its validity from the Shariah perspective, and developing new financial instruments based on Shariah principles Reviewing and identifying the activities companies listed on the KLSE for the issuing of the Shariah approved counter list. 12/14/12

Formulating

SHARIAH ADVISORY COUNCIL (SAC) OF THE BNM

27 27

BNM established its Shariah Advisory Council (SAC) on Islamic Banking and Takaful on 1 May 1997 to streamline and harmonise the Shariah interpretations among banks and takaful companies. The SAC took over the role of SAC of Bank Islam as the consultant to the IBS banks pertaining to Shariah issues. Prior to the establishment of SAC, there were some differences in opinion among Shariah consultants 12/14/12 on similar

SHARIAH ADVISORY COUNCIL (SAC) OF THE BNM

28 28

The primary objectives of NSAC are as follows:

To

act as the sole authoritative body to advise BNM on Islamic banking and takaful operations co-ordinate Shariah issues with respect to Islamic banking, finance and takaful analyze and evaluate Shariah aspects of new products/ schemes submitted by the banking institutions and takaful companies.
12/14/12

To To

ESTABLISHMENT OF THE SECOND ISLAMIC BANK

29 29

The second Islamic bank in Malaysia, Bank Muamalat Malaysia Berhad (BMMB) was established on 1 October 1999. The establishment of BMMB arose from the merger of Bank Bumiputra Malaysia Berhad (BBMB)and Bank of Commerce (M) Berhad (BOC). Under the merger arrangement, the Islamic banking assets and liabilities of BBMB, BOC and BBMB Kewangan 12/14/12 Berhad (BBMBK) were transferred in

DEVELOPMENT FINANCIAL INSTITUTIONS (DFIS)

30 30

The aspiration of BNM to develop a comprehensive Islamic banking system had stimulated the non-banking financial intermediaries to offer Islamic banking products and services includes:
Bank Bank

Simpanan Nasional (BSN) Kerjasama Rakyat Malaysia (BR)

Development

Finance Institutions (DFIs) i.e. Bank Pembangunan dan Infrastruktur Malaysia (BPIM) and Bank Pertanian Malaysia (BPM).
12/14/12

31 31

3rd PHASE OF DEVELOPMENT

With the rapid development of the Islamic financial industry on the global front, the Government has promoted Malaysia as a regional Islamic financial centre. The government has declared Labuan as an International Offshore Financial Centre (IOFC) to promote Malaysia as an international Islamic financial centre. BNM has participated actively to enhance the development of Islamic 12/14/12 banking and finance such as the

32 32

LABUAN AS AN ISLAMIC IOFC

Government has made a decision to promote Labuan as an International Offshore Financial Centre (IOFC) to position itself as an international center for offshore Islamic banking and finance with the objectives:
To To

complement domestic financial activities in Kuala Lumpur strengthen the contribution of the financial services sector in the gross national product of Malaysia
12/14/12 promote the economic development of

To

INTERNATIONAHSLAMIC FINANCIAL MARKET (IIFM)

33 33

Labuan Offshore Financial Services Authority (LOFSA) was established and responsible for setting national objectives, policies and priorities for the development and administration of offshore financial services in Labuan. In its efforts to develop Labuan as an Islamic IOFC, LOFSA worked with Islamic scholars to identify potential offshore activities as well as to develop viable Islamic financial instruments which would attract Islamic investors to the 12/14/12

INTERNATIONAHSLAMIC FINANCIAL MARKET (IIFM)

34 34

LOFSA initiated the establishment of a global network of Islamic financial markets known as International Islamic Financial Market (IIFM) with the objectives:
To To

establish a structured global financial market that is based on Shariah principles enhance the cooperative framework among Islamic countries and financial institutions generate the liquidity, creation and trading of financial instruments, thus 12/14/12

To

FIRST SOVEREIGN GLOBAL ISLAMIC SUKUK

35 35

Malaysia successfully launched the first Sovereign Global Islamic Sukuk, structured on the principle of ijarah on 25 June 2002. The launching of the global Islamic bond signified Malaysias strong commitment in supporting the development of Islamic banking and finance on the global front. The move to access the international Islamic capital market would give 12/14/12 impetus to the development of the

ISLAMIC FINANCIAL SERVICES BOARD (IFSB)

36 36

Islamic Financial Services Board (IFSB) was established in 2002. The establishment of the IFSB will set the stage for the adaptation, harmonization and development of the international regulatory and supervisory standards as well as best practices for the governance of all financial institutions offering Islamic financial services and products. The nine founding members are 12/14/12 Bahrain, Indonesia, Iran, Kuwait,

LICENSING OF FOREIGN ISLAMIC BANKS AND ISLAMIC BANKS SUBSIDIARIES

37 37

The financial liberation of the Islamic banking sector was introduced on 2007 with the issuance of three new Islamic bank licenses under the Islamic Banking Act 1983 (IBA) The new entries of the foreign Islamic banks were in line with the recommendations of the Financial Sector Master plan (FCMP) to position Malaysia as an international Islamic financial hub.
12/14/12 The presence of foreign players will

LICENSING OF FOREIGN ISLAMIC BANKS AND ISLAMIC BANKS SUBSIDIARIES

38 38

In 2004, BNM also continued to further strengthen the overall infrastructure development of the Islamic banking system as the Islamic banking industry entered a more advanced stage of development. The window-based institutional structure was reviewed to further strengthen and elevate the development of domestic Islamic banking industry through a new enabling institutional structure. 12/14/12

FINANCIAL SECTOR MASTER PELAN FOR ISLAMIC BANKING

39 39

Financial Sector Master Pelan was launched on March 2001 incorporates 10 years master plan for Islamic banking a FSMPs aim is to create an efficient, progressive and comprehensive Islamic financial system that contributes significantly to the effectiveness and efficiency of then Malaysian financial sector. FSMP provides recommendations which focus on three main areas: 12/14/12

VISION OF ISLAMIC BANKING AND TAKAFUL

40 40

Constitute 20% of the banking and insurance market share with an effective contribution to the financial sector of the Malaysian economy Represented by a number of strong and highly capitalized IBIs and takaful operators offering a comprehensive and complete range of Islamic financial products and services Underpinned by a comprehensive and conducive Shariah and regulatory 12/14/12 framework;

CONCLUSION
41 41

Islamic banking system has experienced a rapid growth and tremendous development since its first debut in 1983 Various measures have been adopted by the authorities in implementing the Islamic banking system with a step by step and open-minded approach with each step taken after careful consideration of all implications. In order to he a viable Islamic banking 12/14/12 system, all the basic elements towards

4242

END OF CHAPTER

12/14/12