IFSA 2013 : RATIONALE, SALIENT FEATURES AND POSSIBLE ISSUES

On the 22nd of March 2013, the Financial Services Act (Act 758) and the Islamic
Financial Services Act (Act 759) were published in the Government Gazette. The new laws
came into effect on the 1st of July 2013. The objective of this paper is to understand the
rationale behind the formulation of the Islamic Financial Services Act (IFSA). The principal
regulatory objective of IFSA is to promote financial stability and compliance with Shariah.

The IFSA is also a landmark law, perhaps the only Islamic finance legislation in the
world. It codifies Shariah governance with regards to Islamic finance, in the legislation. It can
further enhance Malaysia’s profile as the Islamic finance marketplace and it position
Malaysia as a reference centre for laws on Islamic finance services. Due to the establishment
of IFSA 2013, he Acts that have been repealed are the Islamic Banking Act 1983, Takaful
Act 1984, Banking and Financial Institutions Act 1989, Insurance Act 1996, Payment
Systems Act 1996 and Exchange Control Act 1953.

The provisions in place for end-to end Shariah compliance by Islamic financial
institutions from the time of licensing, during operations and until the winding up of the
Islamic financial institution is the most distinctive features of the IFSA 2013. Part IV in the
IFSA are regarding to Shariah Requirements. The examples of provision contained in this Act
are about Shariah Compliance in Division 1, Provision 28(1). Here, it stated all Islamic
financial institutions authorized under the Act shall ensure that their aims, operations and
activities are in compliance with Shariah. Other provision contained are about Shariah
Advisory Council, Notification to regulators on Shariah non-compliance, Accountability and
Penalty, Shariah Standards, Appointment of Shariah Committee and Shariah Governance.

Part VIII in IFSA are on Financial Groups. Holding companies of any financial
institution will come under the purview of Bank Negara Malaysia and be subject to the same
rules as any financial institution in Malaysia. A company may propose another company
within its corporate group to be approved as a financial holding company (FHC) if it can be
shown that the proposed company is in a position to have control over the licensed person
and its proposed financial group.

IFSA 2013 also covered on shadow banking. It refers to institutions that lend money
to the public but are not governed by Bank Negara Malaysia. The IFSA and FSA have
empowered BNM to get the shadow banking industry to comply with its rules on lending.
With the IFSA too, Islamic windows will be subjected to the same rules as standalone Islamic
financial institutions in terms of things like prudential treatment. Another topics covered are
on Takaful. An important change brought about by the IFSA is the separate licenses for life
and general takaful. Next is changes in interest in shares. One of the important uses of the
concept of interest in shares in the IFSA is in the provisions relating to the acquisition and
disposal of shares of a licensed person. One area the Islamic financial institutions are
concerned about regarding IFSA is the clear definition of what constitutes a deposit and what
goes into an investment account. With IFSA the Profit Equalization Ratio (PER) and PIDM
insurance backing is no longer available for Mudharabah investment accounts.

The FSA and IFSA are focused at a greater level of transparency, accountability and
governance in the management and operation of both conventional and Islamic banking in
Malaysia. Under the FSA and IFSA, Bank Negara Malaysia has more empowerment to
dictate what is appropriate for an institution in respect of capital adequacy, liquidity and
corporate governance. The IFSA and FSA give much importance to corporate governance,
with specific approval requirements for directors and chief executive officer.

The industry players generally view the new regulatory regime positively. However,
the implementation of the new Act could also have an impact on industry. Raja Teh
Maimunah, CEO of Hong Leong Islamic Bank, lauds the effort of the regulator to drive the
industry towards risk sharing from risk transfer but is also concerned about losing market
share to conventional products. She also mentioned that Hong Leong Islamic Bank would not
offer any Restricted Mudharabah products tagged to financing assets as it almost always
gives a downside return.

Other operational issues are the proposed new Wadiah contracts restricts Hibah ( gift/
returns) to avoid it becoming Urf or the common norm. Some of the issues that may arise
from the new regulation is a drop in the number of general takaful providers, but this could
also be an opportunity for new players. Companies need to improve on distribution channels
to penetrate the market. The providers must now operate under a financial holding company
which will now be under heightened regulatory oversight. In conclusion, with the
establishment of IFSA 2013, the IFIs can practice the true value proponents of Islam and at
the same time experience growth in their business. Malaysia can become the thought leader
in Islamic finance and spearhead the way towards becoming an Islamic financial hub.