Malaysia pushing for Islamic finance legal framework
By MUSHTAK PARKER Available at: http://www.zawya.com/story.cfm/sidZAWYA20101206032219/Malaysia%20pushing%20for%20Islamic%20finance%20legal%20framework
In a timely rejoinder to the world of Islamic finance, Malaysia is pushing for the development of a legal framework for Islamic finance that is “internationally facilitative.”
Given that many jurisdictions are interested in Islamic finance and have taken initiatives to develop the industry through reviewing their legal framework to facilitate the introduction of a range of Islamic financial products, including more recently France, Ireland, Australia, Jordan, Japan, Hong Kong, Korea and Lebanon, this augurs well for sustainable global growth of Islamic finance going forward.
However, one of the key determinants for the successful development of Islamic finance in any jurisdiction is the existence of a conducive legal framework that supports the operations and growth of the industry. These were the strong sentiments of Muhammad Ibrahim, deputy governor, Bank Negara Malaysia, the central bank, expressed at a workshop titled “The Polemics of Governing Law in Islamic Finance: Recent Developments and the Way Forward” in London last week, which was also attended by Alderman Nick Anstee, Lord Mayor of the City of London,
Ibrahim stressed that it is no surprise that jurisdictions that are able to quickly amend their legal framework have managed to achieve significant growth in Islamic finance.
This is only partially true. Saudi Arabia for instance has had significant growth in the sector but its legal framework is seriously lagging. It has no dedicated Islamic banking law; and its mortgage law has been pending for the last three years and is still not adopted. As such in the case of the Kingdom, both banks and customers have lost huge opportunity costs because of the lack of legal framework for the introduction of various Islamic financial products.
However, the Malaysian legal framework for Islamic finance is undoubtedly the most developed and holistic in its approach. The new Central Bank of Malaysia Act 2009 explicitly codifies the duality of the Malaysian financial system which comprises the conventional financial system and the Islamic financial system. The important point is that the governing regulatory laws for Islamic finance are separate from those for conventional finance.
“This approach,” confirmed Ibrahim, “has proven to be successful and critical in instilling public confidence in the Shariah integrity of the industry. Whilst enacting a separate governing law avoids the trap of confining the scope and operation of Islamic finance within the mold of conventional finance, this approach has proven in Malaysia to be the most efficient way possible to regulate Islamic finance.”
Kuala Lumpur earlier this year also established a Law Harmonization Committee with the main objectives to review existing Malaysian Islamic finance laws and to propose necessary amendments to give legal recognition to Islamic financial transactions under the law; and to provide a facilitative legal framework for the Islamic finance industry and develop Malaysian laws as the law of choice for international Islamic financial transactions.
In conjunction with a supportive legal framework, it is equally important to have a robust Shariah governance framework to preserve the sanctity of Shariah in Islamic finance. This is inevitable given that Islamic finance has its roots in Shariah. The overarching requirement for an Islamic financial institution is to ensure that its objectives and operations are in accordance with Shariah.
In Malaysia, the integrity and credibility of the Shariah governance framework is supported by the role of Bank Negara’s Shariah Advisory Council (SAC), a centralized referral body for Islamic finance community, which is by law the Shariah Authority of Last Resort in Shariah matters relating to Islamic finance.
The same applies to an effective adjudication system to give customers, banks, and other stakeholders recourse to law. “An efficient and authoritative adjudication system,” explained Ibrahim, “helps create certainty and establishes the legitimacy of Islamic financial contracts. Islam places great importance on contracts and on parties to a contract. The ability of parties to enforce a contract is thus critical as it constitutes the core of maintaining the confidence of the public at large. Therefore, there is a crucial need for a dispute settlement mechanism that is able and competent to dissect in a judicious manner Shariah matters in contracts, so that issues of dispute in Shariah interpretation could be resolved and enforced accordingly.”
In Malaysia, for adjudication purposes, a dedicated judge in the commercial division of the High Court in Malaysia has been assigned to preside over litigations relating to Islamic banking and finance. The court’s adjudication role in Islamic finance is reinforced by the support from the SAC in its capacity as a consultative body to the Malaysian judiciary system.
Under the law, the Central Bank of Malaysia Act 2009 prevails, if a question concerning a Shariah matter arises in any proceedings relating to Islamic financial business, where the court or the arbitrator shall take into consideration any published rulings of the SAC or refer the matter to the SAC for its ruling. The SAC’s rulings are binding on the courts and arbitrators.
This referral system, explained Ibrahim, preserves and enhances the sanctity of Shariah rulings and the consistency in the interpretation and application of Shariah principles in Islamic financial transactions. To complement the court system, specific arbitration rules for Islamic banking and financial services have also been developed, enabling disputes for both domestic and international cases to be dealt with by the Kuala Lumpur Regional Centre for Arbitration (KLRCA).
Another important legal aspect in the conduct of Islamic finance is in ensuring good documentation of contracts underlying Islamic financial transactions, which forms an integral part of Islamic finance as it provides a critical ‘bridge’ between Shariah and Islamic finance practices. Given the faith-based nature of Islamic finance, documentation must conform to Shariah in such a way that it enables the “operationalization” of Shariah principles into legally enforceable Islamic finance contracts. This is crucial to avoid legal risks arising from the failure to faithfully reflect the principles of Shariah which could undermine public confidence in the industry.
The move toward greater standardization in the legal documentation of Islamic financial transactions is also a major challenge. A more standardized contract creates greater certainty and predictability about the characteristics of the financial contracts.
Ibrahim extolled the value of diversity of Shariah opinion in Islamic finance, which he called “the seed to harness innovation in Islamic finance”. The best way to move forward in this respect is through the concept of mutual recognition of the interpretations and decision of Shariah principles reached by a recognized Shariah body across countries.
“We believe in the need for diversity as it is an impetus for sustainable global growth of Islamic finance…But at another level, facilitating the internationalization of Islamic finance would involve a delicate balancing act in nurturing innovation and pushing for greater Shariah convergence, harmonization and acceptance. One option is to standardize contracts for mature and widely acceptable concepts and structures as it leads to consistency and efficiency and in some instances promote inter-jurisdiction transactions,” he added.