Kunhibava 2012
Kunhibava 2012
Kunhibava 2012
SHERIN KUNHIBAVA *
Abstract
A. Background
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3 B.K Grewel, "Islamic Capital Market Growth and Trends," Islamic Finance
News (2007), http://www.islamicfinancenews.com!guide07pdf/icm-
islamic%20capital.pdf., 29.
4 BNM, "Islamic Banking Industry."
5 "Klifd: A Significant Boost to Nation's Leadership in Islamic Finance."
6 Muhammad Ayub, UNDERSTANDING ISLAMIC FINANCE (West Sussex: John
Wiley & Sons, Ltd., 2007), 21.
7 Prohibition of riba is found in the Holy Quran: (30:39), (4: 161), (3: 130) and
(2:275-281) and the Sunnah of the Prophet (pbuh).
8 Ayub, UNDERSTANDING ISLAMIC FINANCE, 54-55.
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2012] SHERIN KUNHIBAVA 193
Having explained Islamic banking briefly, next this paper will focus
on Islamic banking in Malaysia. It will start with an overview of the historical
development of Islamic banking and then it will explain the regulatory and
governance framework of Islamic banking, before concluding.
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194 INTERNATIONAL JOURNAL OF LEGAL INFORMATION [Vol. 40.1-2
B. Historical Development
12 One of the five pillars of Islam. Where a Muslim who is able and has the
means, must perform pilgrimage to Mecca at a specified time in the Islamic calendar,
at least once in their lifetime
13 ISRA, Islamic Financial System Principles and Operation (Kuala Lumpur:
ISRA, 2011), 114.
14 Nik Norzul Thani, Mohamed Ridza Abdullah, and Megat Hiziani Hassan, LAW
AND PRACTICE OFISLAMIC BANKING AND FINANCE, 2nd ed. (Petaling Jaya: Sweet &
Maxwell Asia, 2010), 103.
15 Nor Mohammed Yackop, "Developing an Islamic Banking System: The
Malaysian Model," in FROM MONEYLENDERS TO BANKERS: EVOLUTION OFISLAMIC
BANKING INRELATION TO JUDEO CHRISTIAN AND ORIENTAL BANKING TRADITIONS
INTERNATIONAL ISLAMIC BANKING CONFERENCE (PRATO, Italy: 2003).
16 Thani, Abdullah, and Hassan, LAW AND PRACTICE OFISLAMIC BANKING AND
FINANCE., 245.
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2012] SHERIN KUNHIBA V A 195
During the same period foreign Islamic banks were given licenses to
practice Islamic banking in Malaysia. The foreign Islamic banks include,
Kuwait Finance House, AIRajhi bank, and Asian Finance House. 19
The IBA 1983 defines an Islamic bank as any company which carries
on Islamic banking business and holds a valid license. And it defines 'Islamic
banking businesses as any banking business whose aims and operations do not
involve any element which is not approved by the religion of Islam. The
religion of Islam is not defined by the IBA 1983. Instead the IBA 1983 leaves
the religion of Islam and Shariali interpretation through its s. 3.
According to s.3 of the IBA 1983, every bank that wants to practice
Islamic banking must establish a Shariali Advisory body to advise the bank
on the operations of its banking business to ensure that the bank complies
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196 INTERNATIONAL JOURNAL OF LEGAL INFORMATION [Vol. 40.1-2
with the 'religion of Islam' . Thus the Shariah Advisory body ensures that
Shariah is complied with by the Islamic bank.
Further, the recent passing of the Central Bank of Malaysia Act 2009
gives greater clarity to the role of the National Shariah Advisory Council as
the ultimate authority and center for any issues and questions on Shariah by
financial institutions and also the courts of law. Under the Central Bank of
Malaysia Act 2009 any ruling made by the National Shariah Advisory
Council shall be binding on Islamic financial institutions, the court and
arbitrator.
Framework for Islamic Financial Institutions in Malaysia, it came in force on the 1st
of June 2011. Available at BNM, "Shariah Governance Framework," (2011),
http://www.bnm.gov.my/guidelines/05_shariah/02_Shariah_Governance_Framework
_20101026.pdf.
22 Ibid.
23 , "Islamic Banking Industry."
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2012] SHERIN KUNHIBA VA 197
The IBA 1983 also provides that an Islamic bank may seek the advice
of the National Shariah Advisory Council on Shariah matters relating to its
banking business, and the Islamic bank shall comply with the advice of the
National Shariah Advisory Council.
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Under the framework, the Board of Directors are responsible for the
overall Shariah oversight of the IFIs and the effective functioning of the
Shariah governance structure, policies and processes. However, the Board
must recognise the independence of the Shariah Advisory Board and uphold
its decisions on Shariah aspects of the IFI's business operations."
25Ibid.
26Ibid.
27 In the Shariah Governance Framework the Shariah Advisory Board is referred
to as the Shariah Committee.
28 BNM, "Shariah Governance Framework."
29 Ibid.
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2012] SHERIN KUNHIBAVA 199
D. Conclusion
In Malaysia conventional law i.e. the IBA 1983, the BAFIA 1989 and
the Central Bank of Malaysia Act 2009 govern the operations of the Islamic
banking and financial business, but Shariali is left to the Shariali Advisory
boards of each bank and the National Sharian Advisory Councils of the
Central Bank. In this way both conventional laws and Shariali complement
each other to ensure proper governance and proper adherence to Shariali by
Islamic banking and financial institutions in Malaysia. Adding to this is the
new Framework which seeks to ensure proper Shariah governance within
IFls.
Another lesson that can be learnt from the Malaysian regulatory and
Sharian framework is the transparency of the structure and the distinct roles
of every organ in the Islamic financial system. Each Islamic bank is governed
by the IBA 1983, and conventional banks are governed by the BAFIA 1989.
These Acts govern the operational aspect of the banks. Matters of substance
that govern the Shariali compliance of the banks' products and services are
left to the Shariah Advisory Board, and National Sharian Advisory Council.
Each organ in the Islamic financial system has distinct clear roles for which
they are qualified for.
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200 INTERNATIONAL JOURNAL OF LEGAL INFORMATION [Vol. 40.1-2
References
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2012] SHERIN KUNHIBAVA 201
Statutory Legislation
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