National and Global Islamic Financial Architecture:
Problems and Possible Solutions for the OIC Member Countries
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KLRCA launched i-Arbitration Rules for resolving disputes arising in Shariah compliant
contracts. With i-Arbitration Rules complying with the UNCITRAL Arbitration Rules, KLRCA
provides opportunities for arbitrating both domestic and international Islamic finance
disputes in an efficient and effective manner (Hodges et. al 2012). Rule 8 of the i-Arbitration
Rules stipulates that any Shariah issues would be referred to one of the Shariah Advisory
Councils (SAC) or a Shariah expert, agreed upon by all parties, must be referred to for an
opinion (KLRCA 2102). KLRCA handled 156 cases in 2103, 20% of these being international
cases. The numbers of cases jumped to 226 by the third quarter of 2014 (Jiet 2015, Verghese
2014).
In order to strengthen the legal infrastructure to support the growth and development of
Islamic finance, BNM established the Law Harmonization Committee in 2010 (BNM 2011:
114). The objectives of harmonization of national laws and statutes with Islamic financial
contracts include achieving certainty and enforceability of the latter and help make Malaysia as
a legal reference for the settlement of disputes for international and cross border Islamic
transactions.
Bankruptcy and Resolution of Banks
Bankruptcy laws in Malaysia can be distinguished into two types, one for individuals and the
other for companies. While the Bankruptcy Act 1967 (BA 1967) and Bankruptcy Rules 1969
(BR 1969) govern bankruptcy of the former, the Companies Act 1965 (CA 1965) and Company
Winding-Up Rules 1972 (CR 1972) apply to the insolvencies of companies (Cheah and Yeoh
2009, Kannaperan undated). IFSA 2013 (Part XIV, Division 3) refers to CA 1965 and provides
specific insolvency related stipulations for Islamic banks and takaful companies. Specifically,
Section 217 of IFSA 2013 identifies the priority of payments to different stakeholders in case of
a winding up of a licensed Islamic bank and Section 218 does the same for a takaful company.
4.4.2. Financial System Regulation and Supervision Framework
The CBA 2009 defines the functions of BNM as promoting a sound, progressive and inclusive
financial system and regulating and supervising financial institutions that are subject to the
laws enforced by it. Both FSA 2013 and IFSA 2013 entrust BNM with broad and extensive
authority to ensure good governance and sound risk management practices in the regulated
institutions. BNM has an Islamic Banking and Takaful Department to deal with different issues
related to Islamic finance.
BNM (2015) published the Capital Adequacy Framework for Islamic Banks in October 2015,
detailing, among others, the capital charges for different types of risks (such as credit, market
and operational risks). The guidelines cover various risks arising in different modes of
financing such as murabahah, ijarah, salam , etc. One of the novel features of IFSA 2013 is that
it distinguishes between Islamic deposits and investment accounts. In line with Shariah
principles, returns on investment accounts depend on the performance of assets underlying
the account. As such, repayment of either principal or positive returns cannot be guaranteed.
Given this feature, the law requires that Islamic banks enhance their risk management
practices and also disclose relevant information to protect the investors (BNM 2013: 103).
BNM also issued standards for the sound management of Islamic investment accounts in 2014
which includes fulfilling the fiduciary mandates of good risk management and oversight of the
investments made from funds from these accounts (BNM 2014: 90).