The new Islamic Financial Services Act of 2012 (PDF)
in Malaysia currently
awaiting royal
asset after passing Parliament does not on its own make dramatic changes to
the Shari’ah governance system within Malaysia.
However, there is not much specifically outlined in the law that defines
the responsibilities of a Shari’ah board.
However, within the few significant changes from current law
(the Islamic Banking Act of 1983) is in the provision of both civil and
criminal penalties for Shari’ah-noncompliance by an Islamic financial
institution. The law provides a maximum
penalty for Shari’ah-noncompliance by an Islamic financial institution of up to
8 years imprisonment and a RM25 million ($8.1 million) fine.
Malaysia is a relatively unique case in the Islamic finance
industry because it has two national Shari’ah Advisory Councils (one housed in
Bank Negara, the country’s central bank, and the other within the Securities
Commission). This provides a baseline of
what is compliant and what is not which is lacking in many other countries that
have Islamic finance. In those
countries, it is left to the free market to determine what constitutes
Shari’ah-compliance.
Each company offering Islamic finance has a responsibility
(albeit not a legal duty except where regulations specifically mandate it) to
have a Shari’ah board of competent scholars.
The AAOIFI rules say the Shari’ah board must be composed of at least 3
scholars, but only some countries (e.g. Bahrain) make compliance with AAOIFI
rules mandatory for Islamic financial institutions. In general, the bounds of Shari’ah-compliance
are determined mostly by what scholars will sign off on and investors/consumers
of Islamic finance will accept.
So why the tangent into the differences between different
regions? The law as it is described in
the law doesn’t specifically link the potential of jail terms to compliance
with the Shari’ah Advisory Councils (SACs) rules. Instead, the civil and criminal penalties are
laid down for “Any person who contravenes subsection (1) or (3) commits an
offence”. Subsection 1 requires that the
institution maintain Shari’ah-compliance in its “aims and operations, business,
affairs and activities” while subsection 3 requires the Islamic financial
institution notify the central bank immediately, cease the non-compliant
activity and within 30 days present a plan to the central bank for how it
expects to regain compliance.
The differences are not so much apparent within Malaysia,
where there has been a relatively long-standing practice of regulating the
Shari’ah governance of Islamic finance at the national level. (e.g. see the guidelines that became
effective in 2005 [PDF]). The progress in Malaysia to incrementally
formalize the regulatory system for Shari’ah-compliance within the overall
regulatory system has put it ahead of most other regions on the basis of how
much oversight there is over the process of determining Shari’ah-compliance,
especially the aspects relating to oversight of the operational details
associated with products.
Whether a national Shari’ah board is the best solution or
not (opinions vary on that aspect), there is definitely greater scope in
countries where there are specific Islamic banking laws for greater
formalization of the regulation of Shari’ah boards and Shari’ah audits (both
are covered by the new Malaysian law, although the particular standards still
have to be determined by Bank Negara). For countries with Islamic banking laws
(and those thinking about drafting specific laws for Islamic financial
services), the continued evolution of the regulatory structure as it relates to
Shari’ah governance are important to consider.
Sign up for the ThomsonReuters Islamic Finance Gateway (it's free) and come chat with me on this subject and others Thursday at 9:30am Mecca Time (GMT+3)
More Information:
Presentation by Gopal Sundaram of Abdullah Chan at INCEIF
event, The Islamic Financial Services Act
of 2012, 5 February (PDF)
Full Text: The Islamic
Financial Services Act of 2012 (via CLJ Law [PDF])
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