Malaysia's new Central Bank Act strong on Islamic finance

By Habhajan Singh
The strong presence of Islamic finance and the explicit mention of ‘dual banking’ are some of the key changes embedded in the soon-to-be operational Central Bank of Malaysia Act 2009.
An analysis of the new ground rules for Bank Negara Malaysia (BNM), via a copy available at the central bank’s website, shows the strong Islamic finance flavour running through part of the 68-page document, especially in empowering of the Shariah Advisory Council (SAC) which is designated to be the ‘authority for the ascertainment of Islamic law for the purpose of Islamic financial business’.
It now gives the SAC an upper hand over the High Court when it comes to deciding on matters related to Shariah.
The new act, which received the royal assent on Aug 19 and was gazetted on Sept 3, has covered the key bases when it comes to managing Islamic financial institutions, an exciting growth area for Malaysia which today has 17 Islamic banks, two international Islamic banks, eight takaful operators, three retakaful operators, one international takaful operator and four takaful brokers.
"It provides consistency in the application of fatwa across the board. This empowerment is good for the industry," said Affin Islamic Bank Bhd chief executive officer Kamarul Ariffin Mohd Jamil, making specific reference to the SAC, when asked to comment on the new act.
Azrulnizam Abdul Aziz, chief executive Officer and executive director at Standard Chartered Saadiq Bhd, added that the dual banking recognition will ‘further support current legal framework’.
Ernst and Young financial services practices partner Gloria Goh noted that BNM was established under the now-repealed Central Bank of Malaysia Act 1958, to be replaced by the new act.
"This is timely as there has been significant developments in the financial services sector over the past 50 years," she said. Islamic bankers would certainly welcome making SAC the ultimate harbinger on what is Shariah-compliant and what runs foul of the Shariah rules for Islamic banking and takaful products and services.
A High Court judgment by Justice Abdul Wahab Patail in April 2008 had rattled the local Islamic banking fraternity when the court had ruled that widely used Bai Bithaman Ajil (BBA) contracts were contrary to Malaysia’s Islamic banking regulations, putting them on high alert for potential spike in defaults for financing structured around that contract, especially on the home financing front.
On March 31, a three-men bench of the Court of Appeal, chaired by Justice Datuk Md Raus Sharif, had unanimously reversed that decision.
The Court of Appeal judgment brought to closure the much-debated Abdul Wahab’s judgment which probably triggered the central bank into making it mandatory for the courts to refer to the central bank’s SAC when deciding on Shariah matters in Islamic banking and finance cases.
In the past, High Court judges had the option of referring to the SAC for guidance when it was deciding upon Islamic finance matters. But that is no longer the case as the new act has made the Shariah scholar led committee the final arbiter in Shariah matters in view of Section 56.
Entitled ‘Reference to Shariah Advisory Council for ruling from court or arbitrator’, the section states that in ‘any proceedings relating to Islamic financial business before any court or arbitrator any question arises concerning a Shariah matter’, the court or the arbitrator shall take into consideration SAC published rulings or ‘refer such question’ to the SAC ‘for its ruling’.
"While it allows diversity, it sets the grounds rules," added Kamarul Ariffin.

(This story appeared in The Malaysian Reserve on Nov 23, 2009. The Malaysian Reserve is a daily business/finance newspaper published out of Kuala Lumpur, with a sectoral page on Islamic finance on Mondays, edited by Habhajan Singh)

New BNM act seen to introduce ‘dual banking’

by Habhajan Singh
One key area of difference between the old and the new act for Bank Negara Malaysia (BNM) is the reference to the Shariah Advisory Council (SAC), the body set-up under at the central bank itself to bring about order and consistency in the Shariah rulings for Islamic banks and takaful operators operating in Malaysia.
Another key area is the introduction of the 'dual banking' concept. In the old Central Bank of Malaysia Act 1958, Islamic banking comes into play by virtue of Section 16(b) which states that the SAC "shall be the authority for the ascertainment of Islamic law for the purposes of Islamic banking business, takaful business, Islamic financial business, Islamic development financial business, or any other business which is based on Syariah principles and is supervised and regulated by the Bank".
In the new Central Bank of Malaysia Act 2009, which has cleared all hurdles and is set to be underway anytime, a whole new section for Islamic finance has been carved out. Part IV of the new act is entitled 'Islamic financial business' and is broken into two chapters.
Chapter one concerns the SAC while chapter two is about the powers of the central bank in terms of issuing circulars and guidelines on Shariah matters, and also the promotion of Malaysia as an international Islamic financial centre.
On the establishment of SAC, Section 51 (1) of the new act says BNM may establish a SAC on Islamic finance which "shall be the authority for the ascertainment of Islamic law for the purposes of Islamic financial business".
The SAC's functions are outlined in Section 52 (1):
a) to ascertain the Islamic law on any financial matter and issue a ruling upon reference made to it in accordance with this Part;
b) to advise the Bank [read: BNM] on any Shariah issue relating to Islamic financial business, the activities or transactions of the Bank;
c) to provide advice to any Islamic financial institution or any other person as may be provided under any written law; and
d) such other functions as may be determined by the Bank.

In Section 52 (2), it states that "ruling" here means any SAC ruling made for the ascertainment of Islamic law for the purposes of Islamic financial business. Under its interpretation section, the new act defines "Islamic financial business" as any financial business in ringgit or other currency which is subject to the laws enforced by the Bank and consistent with the Shariah, while "Islamic financial institution" means a financial institution carrying on Islamic financial business. The new act also makes explicit mention of dual banking.
A check on the earlier Central Bank of Malaysia Act 1958 shows that the word does not appear anywhere in the regulation. In the new act, Part IV, entitled "Financial stability functions and powers of the bank'" Section 27 states the "financial system in Malaysia shall consist of the conventional financial system and the Islamic financial system'" a direct acknowledgement of the importance of the Islamic banking, along with conventional banking.

With the dual banking underlying thought in the new act, 'financial business' in the act refers collectively to conventional financial business and Islamic financial business.
Ernst and Young financial services practices partner Gloria Goh said the insertion is a reflection that Malaysia now has a dual financial system, the Islamic and conventional financial system, and that the amendments in the new act recognise the role BNM plays in ensuring financial stability in both financial systems.
"Under the Financial Markets Masterplan 2000-2010, Malaysia had planned to develop islamic finance and takaful in tandem with the conventional banking and insurance system.
"As a central bank, BNM is empowered under the Act to supervise the dual financial systems and ensuring financial stability," she said.
The Central Bank of Malaysia Act 2009 is expected to be in operation soon.
In September, BNM governor Tan Sri Dr Zeti Akhtar Aziz had said that the new act will empower the central bank to act decisively in enhancing transparency and accountability.
"The Act will extensively provide greater clarity on the mandates for which we are accountable and provide enhanced powers to undertake these mandates," she said in a Bernama report.
She added it would also provide greater flexibility in monetary policy implementation and allow a diversified range of instruments to be deployed, notig that with the challenges confronting central banks, it must have commensurate capabilities to conduct monetary policy operations to maintain price stability during periods of extreme volatility.
On the local front, among the 17 locally incorporated Islamic banks are Bank Islam Malaysia Bhd, Bank Muamalat Malaysia Bhd, Hong Leong Islamic Bank Bhd, Al Rajhi Banking & Investment Corporation (Malaysia) Bhd and Standard Chartered Saadiq Bhd, while the two international Islamic banks are PT Bank Syariah Muamalat Indonesia Tbk and Unicorn International Islamic Bank Malaysia Bhd.
On the takaful front, the local players include Syarikat Takaful Malaysia Bhd, Etiqa Takaful Bhd and Takaful Ikhlas Sdn Bhd, while retakaful is provided by ACR Retakaful SEA Bhd, MNRB Retakaful Bhd and Munich Re Retakaful. The sole international takaful operator is AIA Takaful International Bhd.

(This story appeared in The Malaysian Reserve on Nov 23, 2009. The Malaysian Reserve is a daily business/finance newspaper published out of Kuala Lumpur, with a sectoral page on Islamic finance on Mondays, edited by Habhajan Singh)

Islamic bonds spur interest in South Korea

Now is the time for Korean companies to tap into the rapidly growing $800-billion Islamic capital market, and Malaysia may be one of the best destinations for such companies hoping to raise capital from Muslim investors, said two top financial regulators from Malaysia, reports JoongAng Daily (Nov 21, 2009).
Dato’ Dr. Nik Ramlah Nik Mahmood, managing director of Malaysia’s Securities Commission, and Dato’ Yusli Yusoff, chief executive of Bursa Malaysia Berhad, Malaysia’s stock market operator, said a growing number of Asian companies, including those in Japan and Korea, are expressing interest in issuing bonds based on Islamic principles, which the two said will open a vast new market for the firms.
The two visited Seoul this week to attend the Islamic Finance Conference, jointly organized by Korea Exchange and Bursa Malaysia to help coordinate more financial cooperation among investors and companies in Korea and in Muslim countries.
“By selling sukuk [Islamic bonds], you will be able to attract not just conventional investors but another group of investors who would not have invested in conventional bonds, because they are required to invest in securities structured in line with Islamic financial principles,” Dato’ Nik Ramlah said in an interview with JoongAng Daily. “You’re not excluding existing investors, but you’re opening up to new groups. That’s a major attraction of Islamic bond issuance.”
Sukuk is an Islamic financial certificate working in a similar way to a bond in Western finance but structured in line with Shariah, Islamic religious law.
Since Shariah prohibits the use of interest-bearing securities, a sukuk issuer sells the certificates to the investors, who then lend the certificates back to the issuer for a predetermined “rental fee.” The issuer then signs a contract to promise to buy back the bonds later at par value.

Oil money
With investors in Western countries still reeling from the recession, a growing number of investors are considering a plunge in the Islamic financial market, which has been hit less severely by the crisis and whose economies still boom with oil.
HSBC recently estimated rising liquidity in Arab regions due to the oil boom would prompt the volume of Islamic bonds issued across the world to jump from about $7 billion this year to $14 billion in 2010.
Dato’ Yusli said he has met with officials from several Korean companies planning to issue sukuk and local stock brokerages trying to take part in the process.
“The companies are quite ready. I’m still waiting for some laws to be changed in Korea, then we will be able to assist them,” he said. “The whole legal, accounting, regulatory and systematic frameworks to issue sukuk are very well established in Malaysia.”
Dato’ Yusli also stressed that the modus operandi of Islamic financial principles offers a fresh antidote to today’s global financial system.
“After the crisis, investors are looking for far safer types of investment, and more of them are allocating funds for companies qualified under the ESG [environmental, social and corporate governance],” he said, referring to the global investment criteria for investing in companies with socially responsible management. “We believe that Islamic financial principles are compatible to these types of criteria, for instance, under Islamic law, investing in gambling, weapons or alcohol is prohibited.”
During the Seoul conference this week, Citigroup said Korean industries like autos, construction, manufacturing, retail, energy, machinery, telecom and transportation will be encouraged to attract Muslim investors.
Around 50 top local companies like Samsung Electronics, GS Caltex, SK Telecom, Lotte Shopping, Posco and Korea Airlines and Hyundai Heavy Industries as such examples.
Dato’ Yusli said he has met with representatives from several companies on the list to discuss possible bond sale deals.
Dato’ Nik Ramlah also echoed the same sentiment, saying the Islamic financial principles, which put more priority in transparency and clarity in financial securities’ underlying assets, will offer more assurance to the global market that learned the lesson through the subprime mortgage crisis.
“In Islamic financial products, every conception or underlying contract should lead to the actual products, so you don’t have products that are derivatives on top of derivatives on top of other derivatives, where you don’t know what’s the real underlying asset,” she said.

Banks moving away from organised tawarruq

Some Middle Eastern banks are avoiding organised tawarruq after a ruling against the practice, an industry official said, a trend that could signal a shake-up for the $1 trillion Islamic financing sector. Shrugging off criticism of the OIC Fiqh Academy’s controversial decree, the organisation’s secretary-general said some institutions have heeded the call to abandon the popular financing arrangement, reports Reuters (Nov 18, 2009).
The report quoted Abdul Salam Al-Abadi, interviewed on the sidelines of a sharia scholars meeting in Malaysia, as saying: "I have been hearing that some banks have agreed that what they were doing is wrong and they have begun changing the method of their tawarruq transaction,’ Abdul Salam Al-Abadi said in an interview on the sidelines of a sharia scholars meeting in Malaysia. They are trying to do it the way it should be done."
He did not identify the banks, it added.
THE REPORT GOES ON:
The International Council of Fiqh Academy, a powerful group of scholars led by the OIC, rocked the industry in April this year with an order forbidding the use of organised tawarruq, a cornerstone of the sharia banking sector.
With the global tawarruq market estimated at more than $100 billion, practitioners had warned of catastrophic results if the rule were to be implemented strictly.
‘If tawarruq were suddenly withdrawn, this would have a dramatic effect because many Islamic financiers routinely use this instrument as a means of liquidity management and to provide their customers with working capital facilities,’ law firm Denton Wilde Sapte had said in a note.
Tawarruq is widely used as a source of financing. It involves the sale of an asset to a purchaser with deferred payment terms. The purchaser then sells the asset to a third party to get funds.
Organised tawarruq is similar, although the transactions are executed through banks. Some scholars say it is wrong to pre-arrange the parties’ contractual obligations although bankers want this for legal protection and commercial certainty.
Al-Abadi said the Muslim World League’s fiqh academy had similarly prohibited the use of organised tawarruq.
‘After all these discussions, the majority of the scholars say it is forbidden,’ said Al-Abadi, a Syria and Egypt-trained sharia expert and former Jordanian government minister.
‘Our council consists of more than 70 scholars and at the meeting, there were more than 20 experts besides these 70 scholars and the majority said it’s forbidden.’ Several influential sharia scholars have defended the use of tawarruq, although some say the structure needs further refinement.
‘It’s the right of any scholar to say ‘That’s my view, it’s not forbidden,’ Al-Abadi said.
‘We say to the people ‘The way in which you deal is not correct’ and let the people decide in future.’ Some scholars have said organised tawarruq is a mere paper shuffle, without assets actually changing hands, violating the sharia’s rule that financial transactions must involve specific assets.
Islamic banks and their clients rarely, if ever, take delivery of commodities used in tawarruq transactions, as their purpose is to use the assets as fund-raising tools. — Reuters

‘Debate on legality of products irrelevant’

Top Islamic banker Badlisyah Abdul Ghani is a contrarian when it comes to the present debate on the Shariah compliance of Islamic bankng products.
The CEO of CIMB Islamic Bank Bhd opines that the ongoing debate on the issue of the legality of products from a Shariah perspective had no real tangible benefits for the industry. "The debate is superfluous and irrelevant," he said, in what seems to challenge conventional wisdom and may even ruffle some feathers. Certainly, we cannot merely brush aside his views, given that in his short three-year stint at the helm of CIMB Islamic, the bank has seen its assets grow to more than RM20 billion from just RM1 billion in 2006. The Malaysian Reserve's Jason Ng speaks to Badlisyah to find out his views on the industry.

TMR : The Islamic finance industry is presently seen as replicating conventional banking products and services. How will the industry move forward beyond replicating into innovation?
Badlisyah: We have to offer what the market wants and the market naturally wants what is available in the conventional market. Where it is possible in Shariah for us to offer the same products, we have to make sure we have all the products because we are here to serve customers' needs. On the overall Malaysian market, I believe we have effectively most of the basic products in the market. For CIMB Islamic, we have gone beyond offering basic products. We have come up with innovative products that even conventional markets do not have in Malaysia. We have gone a long way in coming up with products both replicating and of pure innovation.

TMR : How is CIMB Islamic navigating the different sets of Shariah rules and regulations in different regions as well as countries presently?
Badlisyah: We are not bothered. We provide products based on where we do business. Just like when you are a car manufacturer, you make the car based on the specification and requirements of the laws in the respective markets. So when we market our products in different market, we behave the same way, making sure we meet the requirements of the jurisdiction of the local market we are serving.

TMR : But what about the present ongoing debate on the permissibility of certain products such as bai bithaman ajil (BBA) and derivatives under Shariah laws?
Badlisyah: The debate is superfluous and irrelevant. Shariah works on a jurisdictional basis just like any other laws. So to us, it is wrong to ask for Shariah laws to be an international standard law when other laws in conventional banking are not. You must remember Shariah has been there for more than 1,400 years and operated on a jurisdictional basis. But all of a sudden in the modern era, you want to force Shariah to operate across borders. It is a total waste of time.

TMR : So the current dispute has no benefit to the industry?
Badlisyah: What the industry should be bothered about is making sure their relevant domestic market is properly regulated and supported by the right infrastructure. In this regard, Malaysia has managed Shariah issues in the most efficient manner by having an Islamic Banking Act that says Islamic banking activities are all activities that do not contradict the religion of Islam. What that means is that all Shariah schools of law are applicable. Therefore, we do not waste time debating which one is right and which one is better. We allow market forces to determine which is more popular. Every interpretation based on the Quran and backed by legitimate hadith, is valid and enforcible. That is what Shariah says and Malaysia recognises what the Shariah framework is all about and the principles involved.

TMR : How do you regulate the market when there are elements such as profit sharing, partnership and risk-sharing which exist in Islamic finance?Badlisyah: At the end of the day, we have to identify what exactly we are doing. We are doing financial transactions, so irrespective of the Shariah principles used, it is predominantly a financial transaction. For example, most of our deposit products are under the mudarabah principle. You look at the substance of it and if it is a deposit, then you regulate it as a deposit product. Let's say you have a financing product based on a combination of mudarabah and musyarakah but in substance, if it is a financing product, then you regulate it as a financing activity irrespective of the Shariah principles involved. While a single principle may be applicable for many different activities, you regulate based on the activities undertaken.

TMR : Can you share with us your regional expansion plans?
Badlisyah: CIMB Islamic is present through our franchise across all legal entities within the group in Indonesia, Singapore and Brunei, mostly in the corporate investment banking and asset management segment. From a mere 200 branches selling Islamic products in Indonesia, by the end of the year, we should have more than 500 branches selling Islamic products. We hope to roll that business in the same manner we have grown the business in Malaysia, by adopting a dual banking leverage model, using the same resources and infrastructure that the group has and use some of the successful products that we have in Malaysia. It may be tweaked to fit Indonesian Shariah laws, but we have the intention to export it to Indonesia.

TMR : How do you see the growth of Islamic finance globally?
Badlisyah: It will still be in the double digit growth rate. While we had more than 20% growth year on year for quite a number of years previously, it will now be back to the teens because of the liquidity and credit crunch in the global market. Nevertheless, it will still be a double digit growth and is expected to continue without any slowdown because ultimately new interest shown by many jurisdictions to facilitate the investments and funds coming from many new countries will boost growth.

TMR : With so many other jurisdictions vying to be an Islamic finance hub, what advantage does Malaysia have over the rest?Badlisyah: We have more than 40 years of experience in doing the business. We have the most established legislative, regulatory and Shariah framework. We have put all the necessary infrastructure in place. As a result, we have all sorts of players in the market to spur the activities in the market. Years of existence in the market will result in a high level of awareness among consumers. We have the advantage of a very strong domestic market which would allow it to expand the platform to the international market without really much effort and this differentiates us from other markets.

TMR : Do we have the necessary expertise and skills to support the growth?
Badlisyah: Ever since Malaysia started Tabung Haji, after more than 40 years of developing and doing the business, we have a strong base of people with the necessary skills for all business segments including banking, takaful and the capital market of the Islamic finance industry. The scenario at this moment is that we have an acute shortage of people in the industry because all the relevant educational platforms to address the shortage have just recently been set up. It will take time before they can enter into the market. It's a shortage across the board that creates the core of the industry today. In CIMB, we are undertaking in house programmes to train them in Islamic banking and to be competent in the Islamic banking business. It is a good problem though, because it shows the industry is growing faster than we can cope with.

(This story appeared in The Malaysian Reserve on Nov 17, 2009. The Malaysian Reserve is a daily business/finance newspaper published out of Kuala Lumpur, with a sectoral page on Islamic finance on Mondays, edited by Habhajan Singh)

Britain Looks Forward To Partner With Malaysia In Islamic Finance

The British government is looking forward to partner with Malaysia in Islamic finance due to the country's success in the sector.
British Minister of Trade, Investments and Small Business, Lord Mervyn Davies, said as the world's top financial centre, London was keen to join hands with Kuala Lumpur as the two governments could generate more ideas and schemes together, reports Bernama (Nov 3, 2009).
"Hong Kong and Shangai Bank Corporation (HSBC), a globally famous bank, has moved its Islamic finance headquarters from the Middle East to Kuala Lumpur. This shows the confidence that the economy has in the Malaysian market," Davis said.
He said this at a press meet after his one-day official visit to Malaysia Tuesday. Also present was the British High Commissioner Boyd McCleary.
Davis said Malaysia has been included as one of the top 15 high growth markets as not only big companies are interested in Malaysia but also the United Kingdom's small and medium enterprises (SMEs).
"As the trade minister, I always encourage all our 4.8 million SMEs to invest and move further in countries with emerging markets like Malaysia," he said.
Davis also said that the halal industry in Malaysia has a great future in the UK as there is a demand for the industry there.
"All these efforts will be supported by liberalisation of the service sectors carried out by the government recently, which will encourage other foreign investors, especially financial companies, to extend their services in Malaysia," he said.
"This liberalisation will be also exciting as it will indirectly increase more foreign direct investments."
Total exports of goods and services from the UK to Malaysia was 1.64 billion pounds last year while total exports from Malaysia to the UK was 2.04 billion pounds.
Davis said the UK has good representation in all the emerging sectors in Malaysia, including education, Islamic finance, petroleum and retail.
He advised all sectors contributing to the economy to heed Prime Minister Datuk Seri Najib Tun Razak's suggestion to invest in parts of the economy which have huge potential to recover from the current economic downturn.
"This plan is very similar to what we have been doing in the UK for the past two years," he said. - Bernama

Russia: A Promising Market for Islamic Finance

Following the outbreak of the global financial crisis, the Russian market – in the same manner as other international markets – opened up to Islamic finance, and Vice-Speaker of the upper chamber of the [Russian] Federal Assembly called for effective ties to be established with the Islamic Banking system in order to allow Russia long-term access to Islamic financial resources, reports Asharq Al-Awsat, a pan-Arab daily newspaper,.
Torshen also did not rule out the Central Bank of Russia amending its rules to allow Islamic banks to open in Russia, despite admitting the disparity between the operational mechanism of Islamic finance and the Russian banking system. Russia's largest financial companies are seeking to take advantage of the [financial] liquidity of Islamic banking at a time when there is a lack of financial liquidity in the global financial system, the report said.
This is why FDP Capital, one of the leading financial companies in Russia, is seeking to introduce Islamic financial services in its operations in collaboration with the Liquidity Management House which is affiliated to the Kuwait Finance House, with memorandums of understanding being signed by the two parties to this effect, it added in the article entitled 'Russia: A Promising Market for Islamic Finance'.