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Zulkifli Hasan

Islamic banking has emerged as an alternative and competitor to the commonly used conventional banking system. Since its establishment, the system has been slowly adapted into the existing banking system and has proven its effectiveness and sustainability. In fact, it is reported that Islamic banking sector grew 50% faster than the overall banking sector. In 2011 alone, Islamic banking assets with commercial banks grew to USD1.3 trillion and expected to grow to USD2 trillion by the end of 2014. With the experience of more than 30 years, Malaysia is now witnessing tremendous development in Islamic banking and considered as one of the fast-growing and leading countries in the sector particularly in terms of growth of demands, regulatory reforms, corporate governance framework and Shari’ah advisory.

Islamic finance will grow with rapid pace in the year 2014 and its volume will pass through USD2 trillion, with Islamic banking dominating at 78%, sukuk at 16%, takaful at 1%, Islamic funds at 4% and Islamic microfinance with 1%. In 2013, global Islamic banking asset with commercial banks alone reach USD1.8 trillion representing 17% average annual growth. It is estimated that Islamic finance will be able to tip USD6.5 trillion by the year 2020 with the current growth rates.

In line with the consistent growth globally, Islamic banking in Malaysia is also experiencing considerable growth. In 2013, Malaysia has 16 full-fledged Islamic banks, 12 Takaful operators, five international Islamic banks and six development financial institutions that offering Islamic financial services and products. With the additional players including foreign Islamic banks, the Islamic banking industry in Malaysia has shown significant progress with market share increased up to 24.4% of the total banking system. Total Islamic financing continued to grow 16.6% and represented 26.9% of total loans in the banking system with the household sector continuing to account for the bulk of Islamic financing at 65.9%. Not only that, 799 Shari’ah-compliant securities were listed on Bursa Malaysia, representing 87.7% of the total listed securities, with a market capitalization of RM995.7 billion or 63.7% of the total market capitalization.

The legal framework of Malaysia’s Islamic finance system has undergone a tremendous change with the enforcement of the Islamic Financial Services Act 2013 (IFSA) and the Financial Services Act 2013. These laws, which came into force in June 2013, have replaced the existing Banking and Financial Institutions Act 1989 (BAFIA), Islamic Banking Act 1983 and Takaful Act 1984. The new laws provide BNM with the necessary regulatory and supervisory oversight powers to fulfill its broad mandate within a more complex and interconnected environment, given the regional and international nature of financial developments. The law is also expected to place Malaysia’s financial sector, on a platform for advancing forward as a sound, responsible and progressive financial system. The IFSA contains 291 sections which covers numerous aspect of Islamic banking system from the establishment of an Islamic bank or financial institution and its winding up until the enforcement framework for any offence under such law. The IFSA has provided the BNM with statutory duty to foster fair, responsible and professional business conduct amongst financial service providers. The IFSA is expected to promote robust financial consumer protection regime particularly in the aspect of unfair and deceptive business conduct and disclosure obligations and to provide clear demarcation between conventional and Islamic banking.

In discussing the recent development of corporate governance in Malaysia, it is important to highlight the legal consequence of the IFSA on corporate governance framework for IFIs. Generally, the IFSA provides a clearer and more comprehensive set of provisions for corporate governance for IFIs. The IFSA vests the BNM with wide ranging powers to issue standards, which are binding upon every director, officer or Shari’ah committee member of the institution. More importantly, section 28(6) of the IFSA provides that a failure to comply with the standards issued is an offence under the Act and carries with a maximum penalty of eight years imprisonment or a fine of 25 million ringgit or both. In other words, this provision potentially exposes board or directors, management, officers and even Shari’ah committee members with heavy penalties including imprisonment. Therefore, IFIs are required to be more vigilant and diligent in carrying their business which failure may lead to potential jail terms and heavy fine to their personnel.

Shari’ah governance is one of the most developed areas of Islamic finance in Malaysia. Numerous efforts either top down initiatives by the BNM or bottom up endeavor by the practitioners shape the practice of Shari’ah governance. The International Shari’ah Research Academy for Islamic Finance (ISRA) and various Institutions of Higher Learning have been at the forefront in improving the Shari’ah governance related matters including research and development. The establishment of the Association of Shari’ah Advisors initiated by members of Shari’ah scholars further stimulates the degree of professionalism and talent development in Islamic finance. The level of awareness in the grass roots on Islamic finance is also increasing whereby Shari’ah scholars are now actively engaging the communities and civil society entities. To complement this, the mass media also have been very supportive by producing and publishing news, documentary, talk show and information on Islamic finance even during prime time hours.

Another interesting development of Shari’ah governance in Malaysia refers to potential exposure of Shari’ah scholars to jail terms for rule breaches as stipulated under the IFSA. As the only legislation of its kind in the world at this point of time, the IFSA makes Shari’ah scholars accountable and liable for their duties. This is very significant to the practice of Shari’ah governance as any Shari’ah committee members may be jailed for up to eight years or fined up to RM25 million which is equivalent of approximately USD7.6 million if they fail to comply with the rules. This latest development also raises another issue of having professional indemnity Islamic insurance as in the case of advocate and solicitor or medical practitioners.

Malaysia as one the Islamic finance leaders in the world has extensively facilitated the implementation of Islamic finance by enhancing their policies to suit with the domestic and global market behavior. With the understanding that strong, efficient and robust regulatory framework and balance with certain degree of flexibility will lead to market stability, Malaysian financial authorities are consistently enhancing and improving the Islamic banking framework through comprehensive means and various initiatives. These formulae seem working well as we can clearly witness the tremendous development in term of growth in market share, banking asset including the increase of domestic and global players. Year 2014 evidences another true potential of Islamic finance in Malaysia as it contributes not only to the economic development but also stimulates human capital initiatives and generates more opportunities. As Malaysian market is relatively small, Islamic finance players have no other options but to venture into more dynamic and competitive global market. In this regard, we must be ready to compete by offering competitive and universally accepted products and services.

Zulkifli Hasan
Tokyo, Japan


  1. Bryan Tan says:

    I would like to ask you few questions dr, I wanted to know what is the legal challenges that faced by Islamic Bank. Is there any law cases that you can share with me?

    Hope you will reply me. Thank you.

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