legal framework of islamic banking

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GROUP 5 : MARIAH MOHAMED FAUZI NOR HAMIEZAH AZIEZ ANIS AMIZA MAZLAN SITI FATIMAH `ATIQAH SAAD PREPARED FOR : ASSOC.PROF WAN ASMA’ WAN ABU BAKAR

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Page 1: Legal Framework of Islamic Banking

GROUP 5 : MARIAH MOHAMED FAUZINOR HAMIEZAH AZIEZANIS AMIZA MAZLAN SITI FATIMAH `ATIQAH SAAD

PREPARED FOR : ASSOC.PROF WAN ASMA’ WAN ABU BAKAR

Page 2: Legal Framework of Islamic Banking

CONTENTS

04/10/23 2Chapter 3 : LEGAL FRAMEWORK OF ISLAMIC BANKING

Page 3: Legal Framework of Islamic Banking

Flow of presentation

04/10/23 3Chapter 3 : LEGAL FRAMEWORK OF ISLAMIC BANKING

Page 4: Legal Framework of Islamic Banking

ISLAMIC BANKING ACT 1983 (IBA)

DEFINITION OF ISLAMIC BANK

Section 2 of IBA : ‘Islamic Bank’ means any company which carries on Islamic banking business and holds a valid license and all the offices and branches in

Malaysia of such a 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’.

Page 5: Legal Framework of Islamic Banking

Ambiguities in IBA 1983

Therefore, SAB is needed in Islamic bank to safeguard and ensure Shariah compliance is strictly observed and seek

the advice of SAC of BNM to monitor Islamic banking operation.

NO definition of banking business in IBA. NO definition of term “Religion of Islam” NO definition of banking business in IBA. NO definition of term “Religion of Islam”

04/10/23 5Chapter 3 : LEGAL FRAMEWORK OF ISLAMIC BANKING

Page 6: Legal Framework of Islamic Banking

SHARIAH ADVISORY BODY (SAB)

• A statutory requirement for Islamic bank under IBA 1983 must set up the SAB.

• Purpose : To ensure business does not contravene the principle of

shariah

Need to instil confidence in the Muslim public

04/10/23 6Chapter 3 : LEGAL FRAMEWORK OF ISLAMIC BANKING

Page 7: Legal Framework of Islamic Banking

Cont..• Provision (Sec 3 (5)- IBA 1983)

04/10/23 7Chapter 3 : LEGAL FRAMEWORK OF ISLAMIC BANKING

- The aim and operation of banking business will not involve any element which is not approved by religion of

Islam

2) - provision for

establishment SAB to

advice the bank on

the operation of its

banking business in

order to ensure that

they do not involve

any element that not

approved by religion

of Islam

Page 8: Legal Framework of Islamic Banking

RELIGIOUS SUPERVISORY CONCIL (RSC)

Articles of association of BIMB and BMMB:

•Whose member would be may up of muslim religious scholar in the country, shall be established to advice the company on the operation of its banking business

04/10/23 8Chapter 3 : LEGAL FRAMEWORK OF ISLAMIC BANKING

Member of RSC:

- Must comprise shariah scholars

- minimum 3, maximum 7

- Accepted by minister not exceed 2 year

- each member shall be remunerated for their service and the

remuneration determine by the bank

Page 9: Legal Framework of Islamic Banking

QUIZ

Question: The general definition of Islamic banking business may have some positive aspect. What do you

think of it?

Page 10: Legal Framework of Islamic Banking

ANSWER

A general definition have very wide definition:

i.It gives as much flexibility and scope as possible to Islamic banks to

enable them to growth,

ii.expand their operation and evolve into viable competitors to

conventional banking.

iii.It would also allowed the adoption and application of different Islamic

commercial laws from a various mazhab thus making it broader and

the resulting proposition of the law more widely acceptable.

04/10/23 10Chapter 3 : LEGAL FRAMEWORK OF ISLAMIC BANKING

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BANKING AND FINANCIAL INSTITUTION ACT 1989 (BAFIA)

• BAFIA- conventional banking and finance institutions• BNM realize it was crucial to have a large number of

players (sufficient number of different type institution)

• BNM allow the existing conventional financial to offer islamic banking services.

• Interest free banking scheme was launched

04/10/23 11Chapter 3 : LEGAL FRAMEWORK OF ISLAMIC BANKING

Page 12: Legal Framework of Islamic Banking

DEFINITION OF BAFIA 1989

• SEC 2 “banking business” Receiving deposit on current account,

deposit account, saving account and other similar account

Paying or collecting cheque, drawn by or paid in by customer

Provision of finance such other business

04/10/23 12Chapter 3 : LEGAL FRAMEWORK OF ISLAMIC BANKING

Page 13: Legal Framework of Islamic Banking

Objective ;• Provide new law for licensing and regulation of

institution carrying on banking, finance company, merchant bank, discount house and money broking business

• For regulation of institution carrying on certain other fin businesses

• Matters incidental :- provide integrated supervision of malaysian fin.

System- Provide CBM with power to speedily investigate04/10/23 13Chapter 3 : LEGAL FRAMEWORK OF

ISLAMIC BANKING

Page 14: Legal Framework of Islamic Banking

SCOPE OF THE bafia ACT(SEC124)

04/10/23 14Chapter 3 : LEGAL FRAMEWORK OF ISLAMIC BANKING

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Licensing

A licensed finance company is permitted to carry out the business of:– Receiving deposit– Lending of money, leasing, hire purchase act 1967– Other business

04/10/23 15Chapter 3 : LEGAL FRAMEWORK OF ISLAMIC BANKING

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QUIZ

Question: State 3 different between IBA 1983 and BAFIA 1989

Page 17: Legal Framework of Islamic Banking

Answer :

Element IBA 1983 BAFIA 1989

Field of the act - For Islamic banking only - For conventional financial institutions to offer Islamic banking services.

Operation of banking business

-Not involve in any element which is not approved by religion of Islam

- Not restricted to any business operation

Appointment of SAC

- Requirement to establish SAC for financial institution

- No requirement to establish SAC for financial institution which carry Islamic banking business

04/10/23 17Chapter 3 : LEGAL FRAMEWORK OF ISLAMIC BANKING

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CENTRAL OF BANKING ACT 2009 (CBA)

Development:

Pre 2003 Cases – Attitude Of The Civil Courts

no any provision under CBMA regarding operation of IBF

Pre 2009 : The Central Bank Of Malaysia Act 1958 (Act 509)

Any proceeding relating to IBF, the court or arbitrator may refer to SAC for its ruling

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CBMA 2009 ( ACT 701)

04/10/23 19Chapter 3 : LEGAL FRAMEWORK OF ISLAMIC BANKING

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POST 2009 casesIssue arise:

04/10/23 20Chapter 3 : LEGAL FRAMEWORK OF ISLAMIC BANKING

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SHARIAH ADVISORY COUNCIL (SAC)

• Definition (Sec 51) - SAC on Islamic finance• Authority of BNM to establish SAC and

clarifies its jurisdiction and functions (Sec 52(1)

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Functions of SAC (BNM 2009)Sec 52 (1)

• To ascertain Islamic law on any financial matter and issue a ruling upon reference make to it in accordance with the relevance part of the act

• To advice bank on any syariah issue related to Islamic Financial business, the activities or transaction of the bank

• To provide advice to any IFI or any other person as maybe provided under any written law

• Others functions as may be determined by the Bank.

04/10/23 22Chapter 3 : LEGAL FRAMEWORK OF ISLAMIC BANKING

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MEMBERS OF SAC

• Qualified in the shariah• Knowledge or experience in

shariah and in banking, finance, law

• Appointment made by YDPA• Advice of MOF, after

consultation with CB

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QUIZ

Question: Determine the functions and duties of SAC

Page 25: Legal Framework of Islamic Banking

Answer:

1.Advice management of Islamic financial institution on Shariah matter in its business operations2.To endorse and validate relevant documentation such as proposal form, contract agreement, brochures and etc3.Advice and provide assistance to the related parties of the IFI such as legal council4.Advice IFI to refer to SAC concerning matter which has not been resolved5.To assist SAC by giving explanation and recommendation on any Shariah matter to ensure SAC decision are properly implemented by IFI

04/10/23 25Chapter 3 : LEGAL FRAMEWORK OF ISLAMIC BANKING

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Banking operation of Islamic banks

1. Customer’s deposit

• Current account• Saving account• General investment account• Special investment account

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2. Financing

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Page 28: Legal Framework of Islamic Banking

Issues In Islamic Banking

Page 29: Legal Framework of Islamic Banking

• Governor of central bank said that this legislation will help Bank Negara better regulate the industry

• The legal regulatory and supervisory framework will need to be adjusted to accord greater clarity to the appropriate legal and regulatory treatment.

• The new framework will streamline the legal requirement across the Islamic finance industry, where there is current lack of clarity that potentially hinders its growth ambitions.

• (The star online, Dec 20, 2012 , : New Malaysian law for Islamic banking and takaful products )

04/10/23 29Chapter 3 : LEGAL FRAMEWORK OF ISLAMIC BANKING

Page 30: Legal Framework of Islamic Banking

• Tan Sri Zeti Akhtar Aziz, said new legal framework would not only streamline the legal requirement across sector built would ensure that the law was reflective of the nature and features of shariah contract.

• The greater clarity on legal and prudential requirements under pinned by Shariah principles will enables participants of the Islamic financial system to align to their practices and expectation accordingly when undertaking Islamic financial business and transaction.

( The Star Online, Dec 6, 2012 : Legal Framework For Islamic Banking, Takaful Being Enacted )

04/10/23 30Chapter 3 : LEGAL FRAMEWORK OF ISLAMIC BANKING

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• The Islamic Banking Act had paved the way for the nation to develop IBF industry• Malaysia has received much recognition from the global banking and finance.

• Among the achievement has achieved in the last three decades in term of:

1. Growth in Islamic bank and financial institutions assets.2. Increase market share of products and services in banking and financial system 3. Formulation of legal framework and various standards4. Development of infrastructure and institutional capacity5. Education and training facilities

• On the International IBF front , Malaysia also dominate the global market for sukuk.

( The Star Online, March 12,2013 : Islamic Banking Shine )

04/10/23 31Chapter 3 : LEGAL FRAMEWORK OF ISLAMIC BANKING

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CONCLUSION

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• THANK YOU

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