IFSA 2013

Introduction

     New Islamic Financial Services Act (ISA) 2013 will be introduced in order to enforce the management of Syariah non-compliance risk and require Islamic financial institutions. It also to ensure that their aim, operation, business, affairs and activities are Syariah compliance.  The objects of this Act are to promote financial stability and compliance with Syariah and this new Act seeks to consolidate the Islamic Banking Act 1983 and the Takaful Act 1984. This new Act will revamp the existing laws on Islamic banking in Malaysia, inter alia:-

1. Definition of Islamic Banking Business

      Previously, the definition of "Islamic banking business" in the Islamic Banking Act 1983 were defined as banking business whose aims and operations do not involve any element which is not approved by the religion of Islam. This definition is too general because there is no exact definition of banking business. However, in the new Act, under section 2 of the Islamic Financial Services Act 2013 (IFSA), "Islamic banking business" means the business of a) accepting Islamic deposits on current account, deposit account, saving accounts,....; b) accepting money under an investment account; c) provision of finance; d) such other business as prescribed under section 3. This new Act has defined the Islamic banking business transactions thoroughly. 

2. Shariah Compliance

     Furthermore, the new Act adds new feature which is important for Syariah compliance. According to section 28(1), states that an institution shall at all times ensure that its aims and operations, business, affairs and activities are in compliance with Shariah. Any ruling of the Shariah Advisory Council in respect of any particular aim and operation, business, affair or activity shall be deemed to be a compliance with Shariah.  If the financial institutions breached this provision, it will invite a penalty.   

         According to section 28(5) of the IFSA provides that any person who contravenes this Act shall be liable to imprisonment for a term not exceeding eight years or to a fine not exceeding twenty-five million ringgit or both. Nevertheless, under the section 46 of the Islamic Bank Act 1983 only gives penalties for the directors and managers of an Islamic bank who fails to take all reasonable steps to secure compliance with the requirements of this Act and Central Bank of Malaysia Ordinance 1958. In the other words, the new Act highlight the duty of institution to ensure Shariah compliance and it is an offence under the law for the financial institutions who infringed it. Another thing is, the punishment for the IFSA is more severe rather than in the Islamic Banking Act, an offender shall be liable to a fine not exceeding twenty thousand ringgit or to imprisonment for a term not exceeding three years or to both such fine and imprisonment.

     Besides that, where the financial institution aware that its business, affair or activity which is not in compliance with Shariah or the advice of its Shariah committee or the advice of the Shariah Advisory Council, the institution  and within that has duty to notify the Bank and its Shariah committee, cease from carrying such business and within thirty days of becoming aware of such non-compliance, submit to the Bank a plan on the rectification of the non-compliance. It has been provided under section 28 (3) of the IFSA. The Act empowers the regulator to carry out an assessment to determine the rectification has been carried through. 

     As most of Islamic financial institutions are aware, the rectification normally resorted to is to annul the transaction where possible and in any case, to donate any profits made under the transaction to charity.   However, under section 13A of the Islamic Banking Act 1983 states that an Islamic bank may seek the advice of the Syariah Advisory Council on Syariah matters relating to its banking business and the Islamic bank shall comply with the advice of the Syariah Advisory Council. Under this provision clearly states that the Islamic bank has no obligation to notify any Shariah Committee or Syariah Advisory Council when there are matters of Syariah non-compliance. Due to the word, 'may' signifies the Islamic bank has an option whether to seek advice or to neglect the matters.

3. Standards Issued by the Regulator 

     Moreover, under the section 29 of the IFSA stipulates that Islamic financial institutions under the Act required to comply with Shariah standards issued by the regulator in accordance with the advice of the Shariah Advisory Council, Bank Negara Malaysia. This requirement to comply with the Shariah standards issued by the regulator also are imposed on the directors of the financial institution, the chief executive officer, senior officers and members of the Shariah committee of the financial institutions.  Any person, who fails to comply with any standards specified, commits an offence and shall be liable for imprisonment for a term not exceeding eight years or to a fine not exceeding twenty-five million ringgit or both. This proposed provision allows the Bank to specify standards on Shariah matters including on Shariah governance, principles and practices of Shariah in relation to the business and affairs of an Islamic institution. These standards will ensure that all financial institutions has the same operations pursuant to Shariah principles.

4. Shariah Committee

      Furthermore, Islamic finance has different feature in the governance and level of scrutiny which is not found in conventional finance i.e. the Shariah Committee. Originally, Islamic Banking Act 1983 would be regulated like conventional banks except that the governance, business and operations of these institutions should not contain any element which is contrary to the religion of Islam. Originally, the role of Shariah Committee is treated as a part-time body which meet when the Board or the CEO needs them to meet.  In this new Act, it is statutory requirements for the institution to set up Shariah Committee whereby the role to ensure that the governance, business and operations of the institution were consistent with Shariah.

     According to section 30(1) of the New Financial Services Act 2013 states that a licensed person shall establish a Shariah Committee for purposes of advising the licensed person in ensuring its business, affairs and activities comply with Shariah. For instance, due to weak supervision on Shariah governance, it is found that BCC has misappropriated the funds obtain from IFIs in non-Shariah portfolio. Where there is more than licensed person within a financial group, one of the licensed person may apply to the Bank for the establishment of a single Shariah committee within the financial group and the Bank may approve the application in writing if the Bank is satisfied that the Shariah committee is capable of ensuring compliance with Shariah as provides under section 30 (3) of the IFSA. 

      The feature of Shariah Committee is important where they may be expected to advise the Board, Management including the financial institution's subsidiaries and provide input to the financial institution on Shariah matters in order for the financial institution to comply with Shariah principles at all times. Another role of Shariah Committee is to endorse Shariah policies and procedures prepared by the financial institution and to ensure that the contents do not contain any elements which are not in line with Shariah. 

     Nevertheless, in this new Act, it does not specify the qualification of the Shariah Committee. The Shariah Governance Framework BNM sets some criteria of the qualification of the shariah committee such as a member of a shariah committee shall be a muslim individual, the majority of members in the shariah committee shall at least hold bachelor's degree in Shariah, it is reasonable to expect that the majority members of the shariah committee should be able to demonstrate strong proficiency and knowledge in written and verbal Arabic and another qualifications. Even though there is framework issued by the Bank Negara, however, it is only a guideline which does not invite the legal penalty for financial institutions who breached it.

5. Qualified Privilege and Duty of Confidentiality

     In addition, the Shariah Committee has qualified privilege and duty of confidentiality as states under section 36 of the IFSA. Shariah committee members enjoy statutory protection for actions for breach of confidentiality provided they have acted in good faith in the course of the discharge of their duties and performance of their functions. Shariah committee members are also statutorily protected from actions for defamation in respect of any statement made by them without malice in the discharge of their duties.

    Just an appointment to the Shariah committee is subject to various considerations, cessation as a member of the Shariah committee is subject to several statutory requirements under the IFSA. According to section 33(1) of the IFSA states that a member of a Shariah committee shall cease to be a member if (a) member resigns as a member; (b) the Bank's terminates the appointment subject to the written approval; (c) such member is disqualified pursuant to any standards specified by the Bank; (d) such member no longer meets the fit and proper requirements as may be specified by the Bank. In addition, the law requires resignations and proposals to terminate a Shariah committee member to be notified to the regulator.

6. Auditor

     Shariah audit is important to ensure and facilitate transparency and accountability in the conduct of business according to Shariah. The following verse of Quran illustrates the validity of Shariah audit:

"Verily Allah commands that you should render back the trusts to those whom they are due; and that when you judge between men, you judge with justice. Verily, how excellent is the teaching which He (Allah) gives you! Truly, Allah is Ever All-Hearer, All-Seer" (4:58).

     Another new element that been inserted under the new IFSA is the regulator may itself appoint a person to carry out the Shariah compliance audit if the Islamic financial institution fails to appoint a person to carry out the Shariah compliance audit as provides under section 38(1) (a) of the IFSA. The regulator may appoint the auditor under any other circumstances, as the Bank deems appropriate for the purposes of compliance with Shariah by the institution. The auditor appointed by the regulator shall have duties and functions as may be specified by the regulator and shall submit a report to the regulator. 

       In addition, according to section 38(3) of the IFSA gives protection to the auditor that his shall not be liable for breach of duty of confidentiality between such person and the institution in respect of matters reported to the regulator pursuant to an audit on Shariah compliance. Whereas, under the Islamic Banking Act 1983, the regulator has no power to appoint the auditor but the Minister has power to appoint the auditor on the recommendation of the Central Bank if the Islamic bank fails to appoint an auditor as states under section 17(2) of the Islamic Banking Act 1983.

7. Duties of Board of Directors

Islamic financial institution shall have adequate system of controls including Shariah governance system. Shariah governance is a set of institutional and organizational arrangements through which Islamic Financial Institution's ensure that there is independent oversight of Shariah compliance. Every institution shall have in place a Shariah board to review and ensure that all financing proposals are Shariah compliant at all times.

            However, in the institution, only the directors have a power to make any decision relating to the affairs of the institution. In order to ensure that the board of directors are in line with Shariah compliance, the new IFSA provides that the business and affairs of an institution shall be managed under the direction and oversight of its board of directors subject to this Act and any other written law which may be applicable to the institution as provides under section 65(1) of the IFSA.  

            Besides that, according to section 65(2)(f) of the IFSA states that the board of directors shall have due regard to any decision of the Shariah committee on any Shariah issue relating to the carrying on of business, affairs or activities of the institution. In addition, according to section 66(1) (c) of the IFSA states that a director of an institution shall at all times only exercises powers conferred on him for the purposes for which such powers are conferred. It further states that any director who contravenes paragraph (1)(c) commits and offence shall be liable to imprisonment for a term not exceeding eight years or to a fine not exceeding twenty-five million ringgit or to both as provides under section 66(3) of the IFSA. 

8. Transparency Requirements

            Another new feature that been introduced in the new Act is the transparency requirement. The word transparent can be used to describe high-quality financial statements. When financial statements are not transparent, investors can never be sure about a company's real fundamentals and true risk. Thus, under the division 3 of the IFSA, it requires the institution to be transparent. According to section 73 of the IFSA states that an institution shall maintain or cause to be maintained proper accounting records and information in such manner as will sufficiently enable the institution to prepare its financial statements and shall cause those records to be kept in such manner as to enable them to be conveniently and properly audited. Besides that, according to section 74(1) of the IFSA provides that an institution shall prepare its financial statements in accordance with the approved accounting standards subject to any standards as may be specified by the Bank. Subsection (2) further states that where the financial statements of an institution are prepared, such financial statements are deemed to have been prepared in accordance with the approved accounting standards.