The LHC, which is chaired by Tun Abdul Hamid bin Mohamad, the former Chief Justice of Malaysia and a current member of the Shariah Advisory Council (SAC) of Bank Negara Malaysia (BNM), the Shariah authority of last resort for the Islamic finance industry, is engaging with the industry and general public for feedback on laws which require harmonization.
Muhammad said the support provided by the legal fraternity to Islamic finance has been instrumental to the industry's progress. The existence of appropriate laws and a well-developed related institutional framework has been fundamental to the orderly and sound development of Islamic finance in Malaysia.
Malaysia has a well-developed legal framework for Islamic finance starting with the BAFIA 1983 which includes the Islamic Banking Act. This Act has since then been amended, strengthened in conjunction with other Acts such as the Takaful Act 1984 and others relating to financial services, taxation, deposit insurance, consumer protection etc. Last year the government introduced two new updated acts — the Central Banking Act 2009 and the Capital Markets and Services Act (CMSA) 2009, which make the respective Shariah Advisory Council (SAC) decisions binding on the courts, and institutionalizes Malaysia’s dual banking system and the final authority of the two SACs in matter relating to Fiqh Al-Muamalat (Islamic Law relating to Financial Transactions) in law. Both Acts serve to provide some consistency to market players and consumers.
Only last month, the Securities Commission Malaysia (SC) appointed a new Shariah Advisory Council (SAC) comprising eleven members who will serve for a period of two years effective July 2010. The SAC is the central authority responsible for determining Shariah principles pertaining to the Islamic capital market in Malaysia.
Crafting legislation to facilitate the growth and development of Islamic finance requires dedication and skill, and the ties between lawyers, regulators, Shariah scholars and industry practitioners.
Malaysian law firms, like their British counterparts, have been at the forefront of advancing the expertise in Islamic finance, enabling and contributing to the dynamism of the industry. Top Malaysian firms such as Zaid Ibrahim & Co (ZICO), which recently published a book entitled “Demystifying Islamic Finance – Correcting Misconceptions, Advancing Value Propositions”, are brimming with self-confidence and are venturing to export their legal expertise in the Islamic finance world. ZICO is the first and only Malaysian law firm to get approval to open an office in Sydney, Australia. Only a few years ago, this was the prerogative of UK and American law firms.
In the other direction, as part of Prime Minister Mohd Najib Abdul Razak’s further liberalization of the Islamic finance sector announced earlier this April, Malaysia is to give approval to five selected international law firms to open offices in Kuala Lumpur, albeit confined to the Islamic finance space.
The contribution of the legal fraternity, emphasized Deputy Governor Muhammed Bin Ibrahim, has been significant given that Islamic financial transactions are driven to some extent of the lawyers’ ability to structure legal documentation to conform and consistent with the principles advocated by the Shariah.
Beyond regulatory and supervisory reforms, there is an increased global emphasis for effective, efficient and responsible financial intermediation that promotes economically, socially and environmentally sustainable development and long-term economic growth.
“It is now generally accepted that the overriding objective of global development must be founded on genuine and productive arrangements, leading to the path of sustainable growth and shared prosperity. Islamic finance is well positioned to meet this objective,” explained the deputy governor.
There is a consensus that Malaysia’s Shariah framework is distinctively robust. Malaysia pioneered the centralized Shariah authority in the form of the consultative role of the Shariah Advisory Council of Bank Negara Malaysia and Securities Commission, complemented by the Shariah board of individual Islamic financial institutions.
This strategy has nurtured innovation whilst ensuring stability in the marketplace. It has also paved the way for other countries such as the UAE, Pakistan, Indonesia and Brunei to emulate the same centralized SAC model.
“This referral system,” maintained the deputy governor, “preserves the sanctity of Shariah rulings and the consistency in the interpretation and application of Shariah principles for Islamic finance transactions in Malaysia.”
In fact Malaysia has gone several steps further, appointing a dedicated judge in the commercial division of the High Court to preside over litigated cases on matters relating to Islamic finance, and introducing specific arbitration rules for Islamic banking and financial services to complement the court system and enable disputes relating to Islamic finance to be dealt by the Kuala Lumpur Regional Centre for Arbitration.
Once again, as part of its human capital development initiative, BNM has launched an initiative to ensure that players within the industry including judges and lawyers are trained in Islamic finance.
The development of the requisite facilitative legal infrastructure is a dynamic and ongoing process. In the early phases of development, Malaysia had looked into the legal impediments that might hinder Islamic finance. What lies ahead is to harmonize existing laws such that it accommodates and facilitates Islamic finance in the most legally efficient way possible.
“These laws,” maintained Deputy Governor Bin Ibrahim, “are not confined to those under financial services acts but to all Malaysian laws. As the future of Islamic finance depends on its agility and innovativeness in developing new products, our laws have to be facilitative and contemporary.”
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