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)