Mahyuddin Khalid emkay@salam.uitm.edu.

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ISLAMIC FINANCIAL LEGAL FRAMEWORK

BANKING AND FINANCIAL INSTITUTION ACT 1989 CENTRAL BANK OF MALAYSIA ACT 2009

CONTENT
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BANKING AND FINANCIAL INSTITUTION ACT 2009 ISLAMIC BANKING BUSINESS ISLAMIC FINANCIAL BUSINESS SHARIAH ADVISORY COUNCIL ACQUIRE IMMOVABLE PROPERTY AMENDMENT TO CBA 2003 CENTRAL BANK ACT 2009 RECOGNITION TO ISLAMIC FINANCIAL SYSTEM

INTRODUCTION
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The establishment of BIMB has paved way for the implementation of Islamic banking in wider scope. BNM realised it was crucial to have a large number of institutions participating in the Islamic banking system. Therefore, BNM decided to allow conventional financial institutions to offer Islamic banking services using their existing infrastructure.

BANKING AND FINANCIAL INSTITUTION ACT 2009

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The Skim Perbankan Tanpa Faedah or the Interest-Free Banking Scheme (now replaced by Islamic Banking Scheme) was launched on March 1993 BNM issued Guidelines on Skim Perbankan Tanpa Faedah (1993) on July 1993. The Guidelines are issued pursuant to section 126 of the BAFIA. In 1996, an amendment was made section 124 of BAFIA to the to formalise the carrying of Islamic banking and financial business by licensed institutions established under BAFIA and to establish a Shariah Advisory Council.

ISLAMIC BANKING BUSINESS

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Section 124(1) : except as provided in section 33, nothing in this Act or the IBA 1983 shall prohibit or restrict any licensed institution from carrying on Islamic banking business or Islamic financial business, in addition to its existing licensed business, provided that the licensed institution shall consult the BNM before it carries on Islamic banking or financial business. Any licensed institution are allowed to conduct Islamic banking business with approval from BNM. The term Islamic banking business in BAFIA has the same meaning as in the IBA which mean:

Any banking business, the aims and operations of which do not involve any element which is not

ISLAMIC FINANCIAL BUSINESS

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The term Islamic financial business is defined as:

Any

financial business, the aims and operations of which do not involve any element which is not approved by the religion of Islam.

In the BAFIA, both terms are mentioned together but there is no clear distinction made to distinguish these two terms in the Act. Section 124(2) clarify that the IBA shall not become an authority for regulating the Islamic banking business carried on by conventional banks which is based on the BAFIA.

SHARIAH ADVISORY COUNCIL

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Section 124(3) : Any licensed institution carrying on Islamic banking or financial business may from time to time seek the advice of the Shariah Advisory Council on the operations of its business in order to ensure that it does not involve any element which is not approved by the religion of Islam. Legally, it is mandatory for the banks to seek the advice of the SAC on its Islamic banking or financial operations, but, it is not mandatory for the BAFIA licensed institutions to have an internal SAC. However, this does not prevent the BAFIA licensed institutions from having their own SAC to advise them on matters relating to the Shariah.

SHARIAH ADVISORY COUNCIL

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Section 124(4) : The licensed institution carrying on Islamic banking or financial business must also comply with any written directions relating to the Islamic banking business issued from time to time by BNM, in consultation with the SAC. Section 124 governs only any BAFIA-licensedinstitutions carrying on Islamic banking business. It does not govern Islamic banks established under the Islamic Banking Act. For the purpose of applying Section 124, any licensed institution carrying on Islamic banking business or Islamic financial business is deemed not to be an Islamic bank.

ACQUIRE IMMOVABLE PROPERTY

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Section 66 (1) : Except as may be provided in any regulations , no licensed institution shall acquire or hold:

any immovable property or any right or interest except such as may be reasonably necessary for the purpose of conducting its business, or of providing housing or other amenities for its staff, and as may in either case be approved by the Bank.

Bank under BAFIA cannot acquire shares of immovable property. Islamic Banks involves with buying and selling of properties for Islamic banking business. Solution S 116 (2) (a) BNMs supervision

AMENDMENT TO CBA 2003

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Prior to 2003, there has been no any provision under the Central Bank of Malaysia Act (CBA) regarding operation of Islamic banking and finance. Only in 2003, the CBA 1958 was amended to includes section 16B which allocates for the establishment of the Shariah Advisory Council (SAC) at the BNM for the purpose of advising the BNM concerning matters related to Shariah which affect the Islamic banking and financial industries. The new Central Bank of Malaysia Act 2009 was introduced and explicitly codifies the duality of the Malaysian financial system which shall consist of Islamic and conventional financial system.

CENTRAL BANK ACT 2009

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This was supported by a comprehensive legal framework for the regulation of Islamic finance in Malaysia, encompassing the banking, takaful (Islamic insurance) and Islamic capital market industries. The Act will also enable BNM to manage emerging risks and challenges in performing its role and responsibilities as the nations central bank.

RECONGNITION TO ISLAMIC FINANCIAL SYSTEM

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Section 27 : the financial system in Malaysia shall consist of the dual financial system i.e conventional and Islamic financial system. CBA gives recognition to the Islamic financial system in Malaysia and provides enhanced role of the SAC on Islamic financial business. Section 2 defines Islamic financial business as:
Financial

business in ringgit or other currency which is subject to the laws enforced by the Bank and consistent with the Shariah

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END OF CHAPTER