National and Global Islamic Financial Architecture:
Problems and Possible Solutions for the OIC Member Countries
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4.4.1. Legal Infrastructure
Supporting Islamic Finance Laws
Malaysia is a federal country which consists of 13 states and one federal territory. The country
adopted the common law system and federal laws and statutes govern commercial and
financial activities. Malaysian laws and statutes relating to Islamic finance have evolved over
time to address the changing circumstances and the development needs of the industry. After
the enactment of the Central Bank of Malaysia Act of 1958, Bank Negara Malaysia (BNM), the
Central Bank of Malaysia was established in 1959. The act was revised as the Central Bank of
Malaysia Act 2009 (CBA 2009) to cater to the new roles of a modern central bank that
promotes both monetary and financial stability (BNM 2012). The CBA 2009 makes the BNM
responsible for developing a sound, progressive, inclusive and mature domestic financial
sector that can deal with the challenges of a globalized and integrated world. The law entrusts
the BNM with enhanced regulatory and supervisory powers to oversee financial institutions
(banks, insurance and takaful companies) and exercise oversight over money and foreign
exchange markets and the payment systems. CBA 2009 strengthened BNM’s independence and
authority and expanded its surveillance and resolution powers to avert risks that could lead to
crises (CIBAFI 2015: 85). The Act also clearly defines and strengthens the role of the BNM
based Shariah Advisory Council (SAC) in Shariah governance and legal issues.
Malaysia has separate legislations for Islamic financial institutions. While the Banking and
Financial Institutions Act 1989 (BAFIA amended 1993) deals with conventional banking,
Islamic banking has mainly been governed by the Islamic Banking Act 1983 (IBA 1983). BAFIA
1993 permits conventional banks to carry out Islamic banking business through windows.
Similarly, the Insurance Act of 1996 (amended Insurance Act of 1963) provide the legal basis
for the insurance industry, and the Takaful Act 1984 governed the establishment and
regulation of takaful companies.
More recently, the Financial Services Act 2013 (FSA) and the Islamic financial Services Act
2013 (IFSA 2013) were promulgated to provide a sound legal basis for the development of a
stable financial sector. The IFSA 2013 consolidated and updated the legal framework for
Islamic banks and takaful sectors by repealing IBA 1983 and Takaful Act 1984. These new
legislations provide ‘a more cohesive and integrated legal framework that delivers a consistent
and comprehensive treatment of risks, thus minimizing the prospects of regulatory arbitrage
and gaps’ (BNM 2012: 92). These acts not only reinforce the regulatory and supervisory
framework to promote stable banking and insurance industries by fostering soundness of
financial institutions but also strengthen the business conduct, consumer protection, and
integrity of the money and foreign exchange markets (Fen and Tsin 2013).
The Capital Markets and Services Act 2007 (Act 671) (CMSA 2007) governs various aspects of
the capital markets in Malaysia. The act has provisions for Islamic securities and Division 6 of
the Act deals with issues related to the establishment of a Shariah Advisory Council (SAC). The
Securities Commission Malaysia (SCM) was established as a self-funding statutory body under
the Securities Commission Act 1993 which was superseded by the Securities Commission
(Amendment) Act 2015 (SCA 2015). The key role of the SCM is to act as the regulatory body for
the promotion and development of capital markets by streamlining regulations that can
promote a fair, efficient, secure and transparent securities markets (KPMG undated). The
markets under the purview of SC include the Kuala Lumpur Stock Exchange, Malaysia