«Legal Aspects of Islamic Banking: Malaysian Experience Norhashimah Mohd.Yasin∗ Introduction Malaysia is the forerunner in Islamic banking. The ...»
Legal Aspects of Islamic Banking:
Malaysia is the forerunner in Islamic banking. The world is looking to
this country and trying to learn from its experience in developing modern and
sophisticated instruments which are said to be Shari[ah c ompliant. This is the
first country in the world to introduce and promote an Islamic inter-bank
money market to link all the market players and promote short-term liquidity.
The main contributing factor leading to its success is the undeniable support of the Government. To further spur its growth, Bank Negara Malaysia (BNM) in 2001 introduced the Financial Sector Master Plan (FSMP), which includes the aim of a 20 percent market share for Islamic Banking and Takaful vis-à-vis conventional by 2010.
In Malaysia currently there are two Islamic banks, Bank Islam Malaysia Berhad (BIMB), which commenced operation in July 1983 and Bank Muamalat Malaysia Berhad (BMMB) in 1999, a relatively new bank as the result of a merger and takeover exercise.1 They were established by virtue of an act of Parliament; the Islamic Banking Act 1983 (IBA), which is considered as the beginning of the effort to assimilate Islam into the Malaysian economic system. Thereafter, more statutes were enacted to ∗ Advocate & Solicitor - High Court of Malaya, Ph.D (Warwick), LLM (Warwick), MCL (IIUM), LLB (Hons) (IIUM), Postgraduate Diploma, Islamic Banking & Finance (IIUM). External Adviser (Islamic Banking & Financial Services), Azmi & Associates. Also, Associate Professor, Ahmad Ibrahim Kulliyyah of Laws (AIKOL), International Islamic University Malaysia (IIUM). E-mail: email@example.com Norhashimah Mohd.Yasin govern and regulate the financial sector in Malaysia. For instance, the Government Investment Act 1983 (GIA),2 and the Takaful Act 1984 (TA).3 The full monopoly of BIMB in Islamic Banking lasted for ten years until 1993, when three commercial banks, i.e., Maybank, Bank Bumiputera and United Malayan Banking Corporation were given the opportunity to participate in the pilot project of the Interest-free Banking System (IBS),4 probably to test the market as to the profitability and viability of Islamic banking offered by conventional banks. Certainly, the project has been shown to be a remarkable success with many commercial banks getting on the bandwagon of IBS. Now almost every commercial bank offers Islamic banking which attracts both Muslim and non-Muslim customers.
The Islamic banking system without the law is futile and meaningless.
The legal system is supposed to regulate and license the Islamic banking business, besides imposing control and supervision of the affairs of the Islamic banks. With the rapid development of the Islamic banking system in Malaysia, the law must also be able to keep up with the speedof that development. As such, the study on the development of the legal regime becomes an important area to be understood. Realizing that purpose, the article intends to delve into the various legal issues relating to Islamic banking in Malaysia.
2. Statutory Provisions In Malaysia, there are two laws governing Islamic banking. One is the IBA 1983 which exclusively governs BIMB and BMMB and the other is the Banking and Financial Institutions Act 1989 (BAFIA) which regulates conventional banks and Islamic Banking Divisions (IBDs) or SPI banks.5 The nature of these laws is somewhat different as the IBA was enacted with the intention of Islamic banking in mind while BAFIA was enacted to govern conventional banking.6 Section 124(6) of BAFIA specifically provides that “The Act shall not apply to Islamic banks.” As such, one can loosely say that the IBA, as the name implies, is an Islamic statute while BAFIA is a conventional or civil statute to govern their respective banks. The nature of the dual banking system; a full-fledged Islamic banking system operating in parallel with a sophisticated conventional banking system is unique. So far, Malaysia is the only Muslim country to implement such a model with both types of banking working hand-in-hand or side-by-side utilising essentially the same banking infrastructure.
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2.1 IBA 1983 Versus BAFIA 1989 IBA 1983 was the first law in Malaysia covering Islamic matters that deals with economic activity and is a good attempt to enhance the role of Islamic law by not being only restricted to family and matrimonial matters per se.
Nevertheless, this Act is substantially modelled on the Banking Act 1973 (repealed and replaced by BAFIA). Having a first look at the said Act, one could feel that there is nothing Islamic about it except where it states “...aims and operation not contrary to the religion of Islam.” It could be said that the IBA is merely a piece of legislation to permit the establishment and operation of an Islamic bank in Malaysia. This is probably why the Act is relatively brief and simple compared to BAFIA, its civil law counterpart.7 The Act, for example, only defines ‘Islamic banking business’ to mean “banking business whose aims and operation do not involve any element which is not approved by the religion of Islam.” This blanket definition seems to be very ambiguous and may carry farreaching implications. This definition surely poses the question: What is Islamic banking business? Shari[ah contracts used by Islamic banks and SPI banks, such as mudarabah, musharakah, ijarah, murabahah and wakalah, are not mentioned in the Act. The definition seems to be very simple and openended, literally “everything under the sky and above the soil of Islam” is a permissible (halal) type of Islamic banking. In other words, legally an Islamic bank is allowed to engage in all types of business which are lawful in the eyes of Shari[ah. In fact, the generality of the definition of Islamic banking business8 could benefit the Islamic banks in Malaysia as they can practise 'Universal banking.' 'Universal Banking' can be defined as the conduct of a range of financial instrument services comprising deposit taking and lending, trading of financial instruments and foreign exchange, underwriting of new debt and equity issues, brokerage, investment management and insurance. In brief, Universal Banking is similar to the concept of the ‘financial supermarket’ which offers every financial need under one roof.9 On the negative side, in the absence of a statutory definition of ‘banking business’ in the Act, it is the practice, and the law (by virtue of Sections 3 and 5 of the Civil Law Act 1956), to have regard to the English law to determine its meaning. In the case of interpreting what would be “Islamic banking business”, the Civil Court and the practitioners could define it in similar terms as conventional banks in the Common law jurisdictions. The only exception is that the aims and operations of such banking business should not involve any element that is not approved by the religion of Islam.
Probably due to this, Islamic banks have emulated the ‘Anglo-Saxon’ style of − 217 − Norhashimah Mohd.Yasin banking by having co-companies to undertake various financial functions, even though the IBA 1983 allows an Islamic bank to run Universal Banking.
It is acceptable fact that the conventional banks have no choice but to have subsidiaries to undertake various financial businesses because they are
legally constrained under BAFIA. Section 2 of BAFIA states:
“ ‘Banking business’ means:
a) the business of –
i) receiving deposits on current account, deposit account, savings account or other similar account;
ii) paying or collecting cheques drawn by or paid in by customers; and iii) provisions of finance; or
b) such other business as the Bank (Central Bank of Malaysia (CBM)) with the approval of the Minister, may prescribe.” From the above, BAFIA has restricted conventional banks to 3 main businesses; viz. (i) receiving deposits (ii) paying and collecting cheques and (iii) giving loans. Furthermore, Section 32 restricts conventional banks from engaging in trade, either retail or wholesale, except in connection with the realisation of security given to or held by it for the purpose of carrying on its licensed business. Section 66 prohibits conventional banks from being involved in investment.10 Both these sections are absent in IBA on purpose so as to give effect to the operation of Islamic banking business which is centrally based on trade and investment, albeit as mentioned above. IBA is basically a carbon copy of the conventional Banking Act 1973, a predecessor of BAFIA. This is the example where the exceptions were done in order to comply with “the aims and operations must not involve any elements which are not approved by the Religion of Islam”. This would easily distinguish Islamic banking from that of conventional, as while the latter earns most of its profits against a fixed interest rate for the granting of loans, the former earns the profit from trading and investment activities.
Besides being brief and general, the IBA has limited licensing to
companies under the Companies Act 1965. Section 3 of the IBA states:
“Islamic banking business shall not be transacted in Malaysia except by a company which is in possession of a licence in writing from the Minister authorising it to do so.” − 218 − Legal Aspects of Islamic Banking: Malaysian Experience The above provision limits the licensing of an Islamic bank to a company only. According to the definition section of the IBA (Section 2), a ‘company’ means a company enacted under the Companies Act 1965 and therefore, only companies enacted under the Companies Act can operate Islamic banking. As a result, statutory bodies or companies enacted under different laws, cannot operate an Islamic bank. Mainly due to this legal constraint, Bank Kerjasama Rakyat Malaysia (Bank Rakyat) was unsuccessful in its attempt to be the second full-fledged Islamic bank, although its operations have been Islamised.
Bank Rakyat is actually de facto an Islamic bank but de jure it is not as it was
enacted under the Co-operative Societies Act 1948. As one expert observed:
“The establishment of Bank Muamalat Malaysia (sic) as the country’s second Islamic bank caught many by surprise since Bank Kerjasama Rakyat Malaysia had been tipped to be the second of such banks after Bank Islam Malaysia Bhd. It is surprising as Bank Rakyat was always having the idea that it would be the (country's) second Islamic bank…but most probably the plan was somewhat delayed as Bank Rakyat was still under the Co-Operative Act.” 11 This limitation should be removed and the rule applicable in BAFIA adopted. This is of wider application as BAFIA extends to “any individual, corporation, statutory body, local authority, society, trade union, co-operative society, partnership and any other body, organisation, association or group of persons, whether corporate or unincorporated.” IBA has also posed legal uncertainties when it comes to the conflict of
laws. Section 55 of the IBA reads:
“An Islamic bank which is incorporated under the Companies Act 1965 shall be subject to the provisions of the Act as well as the provisions of this Act, save where there is any conflict or inconsistency between the provisions of that Act and the provisions of this Act, the provisions of this Act shall prevail.” The above section is quite clear that when there is a conflict between the IBA and the Companies Act, the IBA shall prevail, but the effect could be far-reaching. What about other laws that an Islamic bank is subject to, such as the Contracts Act, National Land Code, Hire Purchase Act and Sale of Goods Act? If there is a conflict between any of these other Acts, which law shall prevail? Would the court apply the legal maxim of expressio unius est exclusia alterius (the express mention of one thing implies the exclusion of another). Since the legislature’s intention is to limit the scope only to cover the Companies Act, as such, in other situations where there are conflicts − 219 − Norhashimah Mohd.Yasin between Islamic law and other statutes, the former will not necessarily prevail.
This oversight should be rectified. Perhaps a lesson could be taken from
Pakistan where the Islamic banking law has been constructed as follows:
“The provisions of this ordinance shall have effect notwithstanding anything contained in the Companies Act 1913 (VII of 1913), or any other law for the time being in force.”12 The above provision overrides all other laws so that if there is a conflict between the Islamic banking law and any other law currently in force in Pakistan, the provision of the former shall prevail.
One interesting statutory requirement for an Islamic bank in Malaysia which is not present in BAFIA is the establishment of an in-house Shar i [ ah Advisory Body (SAB) to advise the bank management as to Shar i [ ah
compliance. Section 3(5)(b) provides:
“That there is, in the articles of association of the bank concerned, provision for the establishment of a Syariah advisory body to advise the bank on the operations of its banking business in order to ensure that they do not involve any element which is not approved by the Religion of Islam.” The details of the SAB is not elaborated in the Act. It is to be detailed by the bank’s Articles of Association. The IBA only provides that the statutory duty of the SAB is to “advise the bank on its banking business in order to ensure that they do not involve any element which is not approved by the Religion of Islam”. The Islamic Banking (Amendment) Act 2003 has been recently passed.13 It incorporates a new section 13A on the “Advice of
Shar i [ ah Advisory Council” which provides:
“An Islamic bank may seek the advice of the Syariah Advisory Council on Syariah matters relating to its banking business and the Islamic bank shall comply with the advice of the Syariah Advisory Council.
In this section, “Syariah Advisory Council” means the Syariah Advisory Council established under subsection 16B (1) of the Central Bank of Malaysia Act 1958.” However, there still exist some legal uncertainties as to the legal position
of the SAB which needs to be resolved urgently, such as: