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ISB 658
ISLAMIC FINANCIAL
LEGAL FRAMEWORK

Chapter 3

Legal and Shariah

Framework of the
Malaysian Islamic

Wan Asma'- ISB658

Financial System
Assoc. Prof Wan Asma’ Wan Abu
Bakar
wanasma@kedah.uitm.edu.my
 CHAPTER 3:
LEGAL AND SHARIAH FRAMEWORK OF THE MALAYSIAN
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ISLAMIC FINANCIAL SYSTEM

3.1 The position of Islamic law in the Federal Constitution

3.2 The Laws and Regulation which Govern Islamic Finance :

3.2.1-Overview of
■ IFSA and FSA
■ CBMA 2009
■ CMSA 2007

Wan Asma'- ISB658

 INTRODUCTION
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2 laws govern The Islamic Financial systems in

Malaysia :
1. ISLAMIC LAW where the banking and financial

transaction must comply with

2. THE MALAYSIAN LAW which govern banking

and finance.

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 INTRODUCTION
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ISB658

The main principle in business transactions is

PROHIBITION of ALL sources of unjustified
enrichment (bil batil) : Not to acquire each
other’s property wrongfully ; Riba, fraud,
gambling, bribery, etc.

Islamic law provide solution for the above prohibition:

Prohibition Solution : the sources of
Islamic law.

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Sources of Islamic law and its Relation to Islamic
Finance

1. AL-QURAN:
■ 4:29: Do not devour others property by wrongful means & the
importance of mutual consent
■ 2:275: Allah permits trade and forbids riba’
■ 2:280: Leniency for debtors
■ 2:282: Write down in writing

2. Al-Sunnah :
■ Ribawi commodities,
■ Trustworthiness,
■ Generosity,
■ Debt

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Sources of Islamic law and its Relation to Islamic finance

3. IJMA’:
Bay’ salam
BBA
mudarabah contract
4.QIYAS:
muzara’ah
salam contract.
5. ISTIHSAN:
Ijarah
Bay’al-wafa’

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Sources of Islamic law and its Relation to Islamic finance

6.MASLAHAH MURSALAH:
Additional tax on wealthy citizens in emergency,
prohibition of selling grapes to wine maker
prohibition of sale of arms in civil disturbance

7.ISTISHAB:
Certainty may not be disproved by doubt,
ownership is presumed to remain until transfer of it is Proved
freedom of indebtedness is to be presumed

8.‘URF:
Tailoring, renting without telling the purpose
selling without agreeing on time or mode,
payment by installments

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 3.1 The position of Islamic law in the Federal Constitution
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ISLAMIC LAW :
Law of the land before the coming of colonial powers
(defined in ramah v Laton, [1927] 6 F.M.S.L.R.128 (CA).
Risalat Hukum Kanun Malacca
Majalah Ahkam Johor as Malay translation of The
Majelle.
Ahkam Shariyyah Johore Malay translation of Qadri
Pasha of Egypt.
◻ After the coming of The British, English law has
adopted and applied in Malay states and Straits
Settlements (removed Islamic law from Malay
Muslims society except for personal law -before
the independence,
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3.1 The position of Islamic law in the Federal Constitution

Islamic law is applied to Muslims with respect to

personal status matters/Islamic Family law :
▪Marriage & Divorce,
▪maintenance,

▪wakaf,

▪ inheritance,
▪ etc.

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 3.1The Position of Islamic Law in the Constitution
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(1958)

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 Islamic law is a state matter, except in the federal
territories of Kuala Lumpur, Labuan and Putrajaya.

This is clearly stated in item 1 of List 11 (State

List) in the Ninth Schedule of the Federal
Constitution.

This list clearly shows that the state does not have
the full or exclusive power to legislate on Islamic law
in its true sense. The state legislative assembly may
only enact Islamic law if it concerns matters
specified in Item I and Islamic aspects of other
matters in the State and Concurrent lists, and
residual matter are legislated.

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Wan Asma'- ISB658
 The Islamic Banking Act 1983 (Act 276) and
the Takaful (Islamic Insurance) Act 1984 (Act
312) concern the Islamic practice and principles
in banking and insurance. Both fall under the
federal jurisdiction.

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Wan Asma'- ISB658
 3.1 The position of Islamic law in the Federal Constitution
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Q : What is the Position of Islamic law AFTER the

independence day?

Article 3: Islam religion of federation

■ “Ritual and ceremonial purposes”

Article 11: Freedom of religion

Article 11 (4) : Limitations in propagating to
Muslims
Article 160: Malay: Islam, Malay language and
customs ?

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 3.1 The position of Islamic law in the Federal Constitution
(FC)
Wan Asma'-
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◻ Article 160 (2) (interpretation): Law = written law,

common law, customary law or usage having the
force of law in the country.
◻ The FC does not consider Islamic law within the
meaning of the word law p.198.

In Che Omar Che Soh v. PP

Mandatory death sentence for drug trafficking ; vs
with Islamic law.
Held: Islamic law for personal law: marriage, divorce
and inheritence only.But the public law of the
country was secular law.

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 3.1 The position of Islamic law in the Federal Constitution
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HOWEVER, Power to legislate matters related to

Islamic law lies with the State Legislatures
subject to Federal Law State List of the Ninth
Schedule (please refer to Federal Constitution).

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 Federal Constitution
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XV PARTS WITH 183 ARTICLES AND THIRTEENTH SCHEDULEs :

◻ PART I - THE STATES, RELIGION AND LAW OF THE FEDERATION (articles 1-4)
◻ PART II - FUNDAMENTAL LIBERTIES
◻ PART III – CITIZENSHIP (chapter 1-3)
◻ PART IV - THE FEDERATION (chapter 1-6)
◻ PART V - THE STATES
◻ PART VI - RELATIONS BETWEEN THE FEDERATION AND THE STATES (chapter 1-8)
◻ PART VII - FINANCIAL PROVISIONS (chapter 1-2)
◻ PART VIII – ELECTIONS
◻ PART IX - THE JUDICIARY
◻ PART X - PUBLIC SERVICES
◻ PART XI - SPECIAL POWERS AGAINST SUBVERSION,ORGANISED VIOLENCE, AND ACTS AND CRIMES
PREJUDICIAL TO THE PUBLIC AND EMERGENCY POWERS FEDERATION
◻ PART XII - GENERAL AND MISCELLANEOUS
◻ PART XIIA - ADDITIONAL PROTECTIONS FOR STATES OF SABAH AND SARAWAK
◻ PART XIII - TEMPORARY AND TRANSITIONAL PROVISIONS
◻ PART XIV - SAVING FOR RULERS' SOVEREIGNTY, ETC.
◻ PART XV – PROCEEDINGS GAINST THE YDPA AND THE RULERS

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 Federal Constitution
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SCHEDULEs :
FIRST SCHEDULE- THIRTEENTH SCHEDULE
◻ NINTH SCHEDULE

LEGISLATIVE LISTS-
List I - Federal List
List II - State List
List III
Article 160 (2) PART XII - GENERAL AND MISCELLANEOUS
Interpretation at p.200 :
“State" means a State of the Federation'
"State law" means -
(a) any existing law relating to a matter with respect to which the Legislature of a
State has power to make law, being a law continued in operation under Part XIII;and
(b) a law made by the Legislature of a State;
"State List" means the Second List set out in the Ninth Schedule.
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 Summary
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◻ Articles
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11
160 “Law”
160 (2) “Malay”
121 (1A)
◻ List 1 Schedule 9 Para 4 and para 7
◻ List 11 Schedule 9 Para 1
◻ Cases :
Ramah v Laton
Che Omar Che Soh V PP

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What is the position of Islamic law in regard

to trade and commerce?
A: DOES NOT cover any commercial
transaction.
A: State List of Ninth Schedule p.272 provides
practice of ISLAMIC LAW (with certain
exception ) Including family law : marriage
& Divorce, maintenance, legitimacy,
adoption, etc., waqf, Islamic religious and
charitable institutions, etc.

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 ARTICLE 121 (1A) OF FEDERAL CONSTITUTION
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◻ the amendment of 121 1A : the High Court in Malaya

and the High Court in Borneo shall have no jurisdiction
in respect to any matter within the jurisdiction of the
Shariah court.
◻ the purpose ? – A : to prevent the High Court from
exercising its powers of judicial review over decisions
of the Shariah court.
◻ The effect - the High Courts and courts subordinate to
it shall have no jurisdiction in any matters under the
Shariah court jurisdiction.
◻ However, the jurisdiction of the High Court is not taken
away if the jurisdiction of the matter does not fall
within that of the Shariah court.

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 ARTICLE 121 (1A) OF FEDERAL CONSTITUTION
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◻ This issue was raised in Bank Islam Malaysia Bhd v. Adnan bin Omar
& Ors.
◻ The defendant raised a preliminary objection that, as the plaintiff
was an Islamic bank, the court had no jurisdiction to hear the case
following the inclusion of Clause (1A) of Article 121 of the Federal
Constitution.
◻ NH ChanJ overruled the preliminary objection that the civil court
cannot exercise jurisdiction over Islamic banking matters based on
the following grounds:
(para 7 ofList I — the Federal List enumerates various matters in respect
of which the Parliament may make the law; included within its scope
are banking.
List II — the State List courts and stipulates that Shariah courts shall
have jurisdiction only over persons professing the religion of Islam.p.272
◻ Since Bank Islam is a body corporate, it does not have a religion
and, as such, will not be subject to the jurisdiction of the Shariah
court.

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 JURISDICTION FOR ISLAMIC BANKING CASES
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◻ Abdul Hamid JCA : ONLY the civil court has the jurisdiction to hear
cases involving Islamic banking transactions .
◻ The Shariah court is not an adequate forum to decide over Islamic
banking cases. He argued:
1. Disputes over Islamic banking transactions which have arisen so far
do not involve Islamic law only, BUT involve the applications of other
statutes under the civil law such as the NLC , the Companies Act, the
Contracts Act etc., of which the Shariah court has no jurisdiction and
the Shariah court judges are not trained in and not familiar with.
2. The power of enforcement and remedies available in the Shariah
courts are very limited.
3. Islamic banking customers are not only confined to Muslims but also
include non-Muslims. The Shariah court does not have jurisdiction
over non-Muslims and neither can non-Muslim lawyers appear in the
Shariah court.
4. Shariah court has a limited power of imposing a fine which must not
exceed five thousand ringgit in criminal offences.

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 JURISDICTION FOR ISLAMIC BANKING CASES
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On the other hand; The civil courts are not equipped to

decide on Islamic banking disputes due to:
The civil court judges are not trained in Islamic law.
It was suggested that the civil court judge, in hearing
Islamic banking disputes should be assisted by a
Shariah advisor who must be well versed in Islamic
banking. The judge would pose the Shariah issues to
the Shariah advisor for his ruling and the ruling would
be binding on the judge.
◻ Shariah court obviously has no jurisdiction and
sufficient power and legal provisions which would
enable it to hear Islamic banking cases.

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 3.2 The laws and Regulations which Govern Islamic Finance
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◻ FSA 2013
◻ IFSA 2013

◻ CBMA 2009

◻ CMSA 2007

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 3.2 The laws and Regulations which Govern Islamic Banking and Finance
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STATUTES
a. STATUTES which are relevant to IBF:
◻ Companies Act 1965 (Act 125)
◻ Contracts Act 1950
◻ National Land Code 1965 (Act 56)
◻ Sale of Goods Act 1957 (Act 382)
◻ Hire-Purchase Act 1967 ( Act 212)

b. STATUTES Relating to Tax Implications

◻ Income Tax Act 1967 ( Act)
◻ Stamp Act 1949 (Act 378)
◻ Real property Gains Tax Act 1976 ( Act 169)

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 3.2 The laws and Regulations which Govern Islamic Banking and Finance
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Procedural Laws
Rules of the Court:
Rules of High Court 1980
Subordinate Courts Rules 1980

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