National and Global Islamic Financial Architecture:
Prolems and Possible Solutions for the OIC Member Countries
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Derivatives Exchange Market, Malaysian Exchange of Securities Dealing and Automated
Quotation, Malaysian Bond Market, Ratings Agencies and Islamic Capital Market.
Tax regimes and impact on Islamic finance
The Malaysian tax system provides tax neutrality to Islamic financial transactions approved by
any Shariah Advisory Council (SAC) of the regulatory bodies (i.e., BNM, SCM or Labuan
Financial Services Authority). The returns/profits on Islamic financial transactions are
considered similar to interest for taxation purposes (PWC 2102: 60). As such, all the tax related
issues applying to interest such as interest withholding taxes and tax exemptions equally apply
to profits in Islamic finance. Similarly, tax neutrality is also provided in sukuk structures
whereby the tax implications of buying, selling or leasing of assets are ignored. A Tax
Neutrality Committee was set up by the Inland Revenue Board, Ministry of Finance to examine
and resolve tax neutrality issues for new Islamic financial products (BNM 2013b, PWC 2012:
63).
Furthermore, the tax regime in Malaysia provides certain positive tax incentives to promote
investment in capital markets and also the development of specific Islamic financial products
(Krasicka and Nowak 2012, PWC 2012). For example, Islamic banks and takaful companies
were exempted from income taxes on transactions conducted in international currencies from
2007 to 2016 (MIFC 2016a). For the same period, the stamp duty was exempted on Islamic
banking products undertaken in foreign currencies by international Islamic banks. Similarly,
expenses incurred on issuance of sukuk that are approved by BNM, SC and Labuan FSA could
be deducted from taxes until the end of 2015 (PWC 2012: 64).
Dispute Settlement/Conflict Resolution Framework and Institutions
Being a common law country, the commercial disputes including those related to the financial
sector are adjudicated in the federal level civil courts. Since the courts consider the laws and
statutes of the country when dealing with cases related to Islamic banking and finance, judges
face difficulties to interpret the Shariah related issues arising in Islamic financial contracts
(Hasan and Asutay 2011). The Central Bank Act 2009 resolves this problem by giving the SAC
of BNM a prominent role and authority in dealing with Shariah related issues in disputes.
Section 58 of the Act requires a judge to refer Shariah issues to the SAC and Section 57
stipulates the rulings made by SAC in reference to any case in a court or arbitral tribunal to be
binding on them (Oseni and Ahmad 2015). Furthermore, a dedicated judge in the High Court
is assigned to deal with the disputes related to Islamic finance (Hasan and Asutay 2011: 66).
Similarly, the Securities Commission Act 2015 (Part IIIC, 31ZN) stipulates that in cases
involving Islamic capital market businesses or transactions, the ruling of SAC of SCM must be
consulted by a court/arbitrator or the matter must be referred to the SAC for a ruling.
Furthermore, the ruling of the SAC will be binding on the court or arbitrator and other capital
market stakeholders such as licensed persons, stock exchanges, clearing houses, listed
corporations, etc.
The Kuala Lumpur Regional Centre for Arbitration (KLRCA) was established in 1978 as the
first regional arbitration centre under the umbrella of the Asian-African Legal Consultative
Organization (AALCO) to carry out domestic and international arbitration in Asia. The
government enacted the Arbitration Act of 2005 modeled after the UNCITRAL model law (Jiet
2015) and KLRCA adopted the revised UNCITRAL Rules for Arbitration in 2010. In 2012