CHAPTER 3: ISLAMIC

FINANCIAL SERVICES
ACT 2013
Law of Islamic Banking and Takaful
MDBM 3103
 Malaysian Comprehensive Legal
Infrastructure on Islamic Banking and
Takaful
Legal
Infrastructur
e

Shariah
Legal Dispute
Advisory
Framework Resolution
Council

Outside
Enabling Laws on Court
Court
Laws Transactions Systems
System
Legal Framework of Islamic Banking and
Takaful in Malaysia

Legal
Framework

Enabling Laws on
Laws Transaction
- Central Bank of
Malaysia Act
2009 - National Land
- Islamic Code 1965
Financial
- Contracts Act
Services Act 1950
2013
- Hire Purchase
-Financial Act 1967
Services Act
2013
 Legal Infrastructure
 Main statutes which provide for the regulation of
Islamic banking and Takaful in Malaysia

- Islamic Financial Services Act 2013

- Financial Services Act 2013
- Central Bank of Malaysia Act 2009
Islamic Financial Services Act 2013

 The Act provides for:

- the regulation and supervision of Islamic financial
institutions, payment systems and other relevant
entities.
- the oversight of the Islamic money market and
Islamic foreign exchange market.
-promote financial stability and compliance with
syariah.
 Important Provisions of IFSA 2013

Sec 2 Definition
Part III Div. 1 & 2 Licensing and Approval
Sections 8-16
Part IV Div. 1 & 3 Shariah Requirements
Sections 27-36
Part V Prudential Requirements
Part IV Business Conduct & Consumer
Protection
Sections 83-96, 140-142, 286- Takaful Provisions
287, Schedule 8,9 & 10
Part XVI Enforcement & Penalties
 What is Islamic bank?
 Section 2 of IFSA 2013
- Licensed Islamic bank means a person licensed
under Section 10 to carry on Islamic banking
business and includes a licensed international
Islamic bank.
 What is Islamic banking business?

 Section 2(1) of IFSA 2013

- Islamic banking business means the business of:
(a) accepting Islamic deposits on current account, deposit
account, savings account or other similar accounts, with or
without the business of paying or collecting cheques drawn by
or paid in by customers; or
(b)accepting money under an investment account; or
(c )provision of finance; and
(d)such other business as prescribed under Section 3
Note:
Sec. 3: any business or activity prescribed by the Minister as an
additional to the definition of Islamic banking business.
 What is provision of finance?
 “provision of finance” means entering into, or making an arrangement for
another person to enter iinto, the businesses or activities which are in
accordance with Shariah including:
(a) equity or partnership financing, including musyarakah, musyarakah
mutanaqisah and mudarabah;
(b) lease based financing, including al-ijarah, al-ijarah muntahia bi al tamlik
and al ijarah thumma al bai’;
(c ) sale based financing, including istisna’, bai bithman ajil, bai’ salam,
murabah and musawamah;
(d) currency exchange contracts;
(e) fee based financing including wakalah;
(f) purchase of bills of exchange, certificates of Islamic deposit or other
negitiable instruments; and
(g) the acceptance or guarantee of any liability, obligation or duty of any
person
Statutory Requirements for Licensing of an
Islamic Bank

1. Must be a public company. {Sect.21(1)}

2. Maintain the minimum capital fund or surplus of assets

over liabilities as prescribed by the Minister [Sect.12(1)
& Sch. 1 & 2 of IFSA (Minimum Amount of Capital
Funds or Surplus of Assets over Liabilities (Licensed
Person) Order 2013.

3. Must pay an authorization fee or annual fee &

processing fee as prescribed by BNM {Sect.23(1)}
 Procedure for Licensing
 Sect. 8
- No person/institution shall carry on any authorized business
unless licensed by Minister upon recommendation BNM.

 Sect. 9
- Application to BNM
- Supporting documents as required by BNM

 Sect. 10
- Approval by Minister upon recommendation by BNM
- Upon the grant of license, the licensed person/institution shall
commence business within the prescribed period.
 Shariah Requirements
Statutory Duties of an Islamic banks
Sect. 28 (1) & (2) -Ensures that its aims & operation,
business affairs and activities are in
compliance with Shariah at all times.
- Compliance with Shariah i.e compliance
with the ruling of the SAC.
Sect. 28(3) - Notifies BNM any non Shariah
compliant activity, immediately stop from
such activity & submit rectification plan
to BNM within 30 days.
Sect. 29(3) - Complies with the Shariah standards
specified by BNM.
Sect. 29(4)(a) - Ensures its internal policies are
consistent with the standards specified by
BNM.
Sect.29(4)(b) - Manages its business, affairs and
activities in a manner which is not
contrary to Shariah.
Sect. 29(5) - Complies with its internal policies &
procedures adopted by the institution to
Penalties for Non-Compliance with Shariah

 Sect. 28(5) & Sect. 29(6)

- Imprisonment for a term not more than 8 years; or
- a fine not exceeding 25 million ringgit; or
- both.
Prudential Requirements Sect. 56-58

BNM may specify Prudential standards All the times, an Islamic

standards on prudential include: bank must:
matters to promote:
• The sound financial • Standards relating to • Comply with the
position of an capital adequacy, standards
institution; or liquidity • Ensure its internal
• Integrity, • Corporate governance policies and procedures
professionalism and • Risk management are consistent with the
expertise in the conduct • Related party standards
of business, affairs and transactions • Manage its business,
activities of an • Maintenance of reserve affairs and activities in
institution. funds a manner consistent
• Takaful funds with sound risk
• Prevention of an management and
institution from being governance practices
used for criminal which are effective,
activities. accountable and
transparent.
 Business conduct & Consumer Protection Sect. 135 (1)

BNM may specify standards The standards include standards relating to:

on business conduct to • Transparency & disclosure requirements

ensure that a financial including the provision of information to
financial consumers that is accurate, clear,
service provider is fair, timely and not misleading;
responsible • Fairness of terms in a financial consumer
contract for financial services or products;
& professional when • Promotion of financial services or products;
dealing with financial • Provision of recommendations or advice
including assessments of suitability.
consumers.
Further Consumer Protection
Sect.136 (1)
Sect. 138(2)
A financial service provider
Establishment of Financial
must not engage in any
ombudsman scheme (FOS)
prohibited business conduct
Regulations may be
Penalties: made to require a
financial service
Imprisonment for a term provider to be a member
not exceeding 5 years or of FOS to ensure
a fine not exceeding effective & fair handling
RM10 mil or both – of complaints and to
Sect. 136 (4) enable the resolution of
disputes. – Sect. 138(1)
 Enforcement & Penalties – Part XVI

 Powers of BNM:
- to investigate
- to take administrative action
- to impose monetary penalty
- to take civil action in court
- to compound
- to publish information in relation to any
enforcement action taken under the Act & the outcome
of the actions.
 Financial Services Act 2013
(FSA)
 FSA repeals the following Acts:
- Banking and Financial Institutions Act 1989
(BAFIA),
- Exchange Control Act 1953,
- Insurance Act 1996,
- Payment System Act 2003
 Provides for the regulation and supervision of the

conventional financial institutions and related matters.

 Before FSA, conventional banks participating in

Islamic banking business were governed by BAFIA.

 Conventional bank operating Islamic banking
business

 Sect. 15 of FSA:
- provides for approval for a conventional bank (a licensed bank
or licensed investment bank) to carry on Islamic banking business.
- the banks shall be subject to:
- the provisions of IFSA relating to Islamic
banking business
- any standards, notices, directions, conditions,
specifications or requirements specified or made under IFSA
relating to Islamic banking business.
- In addition to its duties relating to Islamic banking business under
IFSA, the bank must observe prudential requirements prescribed
by BNM.
 Shariah Compliant Requirement for FSA bank
operating ‘IBB’

 The Islamic banking fund shall:

- be funded from the capital funds of the bank & other sources of funds
specified by BNM
- be segregated from the capital funds of the bank for the operation of its
conventional banking business
 The assets of the Islamic banking fund shall not be

- used for the operation of bank’s conventional banking business

- subject to the debts or other obligations of the bank in relation to its
conventional banking business
 The board of director of the bank must respect the advice of its Shariah

Committee in relation to its Islamic banking business

 Penalties for operating Islamic banking business without obtaining

approval – imprisonment for a term not exceeding 10 years or a fine not

exceeding RM50 mil or both.