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AD-DEEN Muslims believe that religion (ad-deen) is a complete code of conduct, providing guidelines for all aspects of private and public life, including economic and legal affairs. Thus, there is a demand among Muslims for a banking system with proper Shariah regulations and with a Shariah operational framework. Based on this demand, the first Islamic financial institution in Malaysia, Tabung Haji was set up under the Pilgrims Management Fund Board (Lembaga Urusan Tabung Haji) in 1962 which came into operation the following year. Bank Islam Malaysia Berhad was subsequently formed in 1983 followed by Bank Muamalat Malaysia Berhad in 19991.

ISLAMIC BANKING The Islamic Window concept2 was introduced by BNM to allow commercial banks and financial institutions to offer Islamic financial products. However, these institutions were required to have a separate fund for Islamic banking activities.

From a system based on Islamic windows, a shift was gradually made towards financial institutions adopting Islamic subsidiaries and the establishment of full-fledged Islamic banks.

Former Minister of Finance, Tan Sri Nor Mohamed Yakcop in delivering his keynote address during the International Islamic Banking Conference in 2003, emphasised that the implementation of the Islamic financial system in Malaysia placed importance on substance rather than form. Efforts are therefore continuously made by BNM to ensure that regulations pertaining to Islamic finance are consistent with Shariah principles.

SHARIAH ADVISORY COUNCIL In 1997, the Shariah Advisory Council ("SAC") of BNM was established as the highest Shariah authority in Islamic finance in Malaysia. However, it was noted by the High Court in Arab Malaysian Finance Bhd v Taman Ihsan Jaya Sdn Bhd & Ors3, that there is neither necessity nor reason to refer to the SAC for any ruling on the concepts of financing facilities. Nevertheless these rulings ought to be taken into consideration, although they are not binding upon the court.

In the case of Bank Islam Malaysia Bhd v Lim Kok Hoe & Anor and Other Appeals4, Justice Raus Shariff in the Court of Appeal rectified this position by stating that the question whether a bank’s business is in accordance with Islam needs consideration by eminent jurists who are qualified in the field of Islamic jurisprudence5. The IFSA was enacted to answer a critical question, namely whether Malaysian law provides clarity and certainty to Islamic financial institutions for the purposes of compliance and governance.

IFSA & SHARIAH PRINCIPLES Sections 27 to 38 of the IFSA govern the requirements imposed for Shariah compliance of Islamic financial institutions. Section 286 not only requires that Islamic financial institutions comply with Shariah principles and rulings made by the SAC, it also imposes requirements for full Shariah compliance. Based on section 28, any person who fails to uphold these statutory duties will be punished with imprisonment of a term up to but not exceeding eight years and/ or a maximum fine of MYR25 million.

FORMER PROVISIONS The establishment of Shariah advisory bodies was previously governed by the Islamic Banking Act 1983, Takaful Act 1984, Banking and Financial Institutions Act 1989, Development Financial Institutions Act 2002, Bank Simpanan Nasional Act 1974 and Capital Markets and Services Act 2007. However, the powers of the SAC were limited to giving advice and issuance of rulings. There were no available provisions that provided for legal repercussions should the rulings be ignored by the financial institutions.

There are now provisions in the Central Bank of Malaysia Act 2009 that allow the court or arbitrator to refer to the SAC on questions regarding Shariah matters. The rulings passed will then be binding on the financial institution as well as the court or the arbitrator7. However, as far as compliance with rulings of the SAC was concerned, there were no provisions with regard to penalties.

This however has changed with the implementation of the IFSA, with penalties for noncompliance found in sections 28 and 298. With all the statutory duties imposed by the IFSA on operators, it is hoped that a clear message is sent – that Shariah principles and Shariah advisory rulings are to be strictly complied with.

CLARITY? Critics have argued that the legal position enjoyed by the various Shariah advisory bodies are anomalous and that they need further legislative clarification9. This has been dealt with in section 29 of the IFSA. Section 29 of the IFSA empowers BNM to issue and regulate standards pertaining to Shariah matters. Sanctions similar to those imposed for non-compliance pursuant to section 28 of the IFSA, will apply if the standards set by the IFSA are ignored.

Furthermore, institutions are required to establish their own Shariah Committee with audits on Shariah compliance to be carried out by the institution under section 3710 of the IFSA. BNM may also appoint an auditor for the same purpose under section 3911 of the IFSA.

CONCLUSION In a nutshell, the IFSA provides for the regulation and supervision of Islamic financial institutions, payment systems and other relevant entities. Furthermore, it places guidelines on the oversight of the Islamic money market and Islamic foreign exchange market to promote financial stability while complying with Shariah standards for related, consequential or incidental matters
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