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National and Global Islamic Financial Architecture:

Problems and Possible Solutions for the OIC Member Countries

86

includes issues related to the Shariah Committee and operational matters such as Shariah

review, audit, research and risk management.

One of the ways in which the market efficiency can be increased is to use standardized

contracts and documents among the financial sector's stakeholders. In this regard, BNM’s SAC

has approved Shariah parameters for various contracts. Other than approving Shariah

parameters for eight contracts (

murabahah, mudarabah, musharakah, wadiah bai al inah,

ijarah, tawarruq

and

hibah

), SAC has issued exposure drafts of several others contracts such as

istisna, wakalah, kafalah

and

wad

(BNM 2014: 89).

The Shariah Advisory Council (SAC) was established in 1996 at the SCM to oversee Shariah

issues related to Islamic capital markets. Among other things, the Securities Commission Act

(SCA) 2015 (Part IIIC) defines the various functions of the SAC and the method of appointment

and qualifications of the members of the SAC. Similarly, the SCA 2015 (Part IIIC, 31ZI)

stipulates the SAC at SCM will have ‘authority for ascertainment of the application of Shariah

principles for the purposes of Islamic capital market business or transaction.’ SCM issued a

regulatory note on ‘Registration of Shariah Advisers Guidelines’ in 2009 to ensure the quality

of Sharia advisors engaged with financial institutions dealing with capital markets.

The SAC at SCM plays an important role in the development and innovation of new Islamic

products in the Malaysian capital market by providing advice on Shariah principles and

compliance (CIBAFI et. al 2015: 232). The criterion to screen stocks was changed in 2013 to

align with global Shariah standards (CIBAFI 2015: 216). The new approach adopts two-tier

screening, one at the industry level to discard companies involved in activities considered

impermissible and the other one using financial ratios to vet companies as Shariah compliant.

The goal of the revision is to enhance the competitiveness of Malaysia's stocks and mutual

funds and increase the international appeal of Islamic capital market products and attract

capital inflows from overseas.

4.4.4. Liquidity Infrastructure

BNM has introduced various measures to support liquidity management in Islamic finance.

Other than a sound regulatory, supervisory and Shariah framework, other initiatives of

liquidity infrastructure include introducing a variety of Shariah compliant liquidity

instruments, establishing infrastructure that facilitates the issuance of Islamic financial

instruments, promoting an active secondary market for Islamic financial securities and

instituting a strong financial safety-net (BNM 2011: 62). BNM issued

Guidelines on Islamic

Inter-bank Money Market (IIMM)

in December 1993 and the IIMM was introduced in January

1994. Various instruments are used to manage liquidity of Islamic banks in IIMM. The

instruments include

Mudharabah

Interbank Investment (MII),

Wadiah

Acceptance,

Government Acceptance Issue (GII), Bank Negara Monetary Notes-I (BNMN-i), Sell and Buy

Back Agreement (SBBA), Cagamas

Mudharabah

Bonds (SMC), When Issue (WI), Islamic

Accepted Bills (IAB), Islamic Negotiable Instruments (INI), Islamic Private Debt Structures, Ar-

Rahnu

Agreement (RA-i) and

Sukuk

BNM

Ijarah

(SBNMI) (BNM 2016b). In terms of safety net,

BNM also has lender of last resort facilities for Islamic banks (BNM 2011: 63).

IFSA 2013 also strengthens the legal framework for the operations of Islamic money markets.

Article 153 of the act entitled ‘Prohibited conduct in Islamic money market and Islamic foreign

exchange market’ requires that conduct and activities in these markets should not contradict