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Islamic Banking Law 9/9/2015 ISLAMIC BANKING LAW Mohd Johan Lee LLB, MCL (IIUM), MA (Econs) (KCL) Advocate & Solicitor (High Court Malaya) Peguam Syarie Advocate & Solicitor (Supreme Court Brunei) Messrs. J. Lee & Associates (c) Mohd Johan lee 2015 14 & 15/9/2015 ISLAMIC BANKING AND FINANCE : DEFINITION AND OBJECTIVES Islamic banks are to promote, foster and develop the banking services and products based on Islamic principles Islamic banks are also promoting establishment of investment companies or business enterprises so long as their activities are not forbidden by Islam 2 1 9/9/2015 (c) Mohd Johan lee 2015 14 & 15/9/2015 Sec 2 of the IBA “Islamic bank means any company which carries on Islamic Banking business and holds a valid licence……” “Islamic banking business means banking business whose aims and operations do not involve any element which is not approved by religion of Islam” 3 (c) Mohd Johan lee 2015 14 & 15/9/2015 Wide definition allows IB to do all banking business – commercial, finance, merchant Opportunity for innovation in the business and product development Consistent with the principle of “permissibility unless otherwise prohibited” 4 2 9/9/2015 (c) Mohd Johan lee 2015 14 & 15/9/2015 BAFIA confined the “banking business” into : (i) Receiving deposits – CA/SA etc (ii) Paying or collecting cheques (iii) To provide loan/finance 5 (c) Mohd Johan lee 2015 14 & 15/9/2015 Islamic banking business” means the business of— (a) accepting Islamic deposits on current account, deposit account, savings account or other similar accounts, with or without the business of paying or collecting cheques drawn by or paid in by customers; or (b)accepting money under an investment account; and (c)provision of finance; and (d)such other business as prescribed under section 3; 6 3 9/9/2015 (c) Mohd Johan lee 2015 14 & 15/9/2015 SALIENT FEATURES OF IBF Riba free – money does not create money Gharar free – uncertainties to be avoided No Lender – borrower relationship Trading & leasing relationship Profit & Loss sharing Requirement of mutual consent Prohibition of fraud and deception 7 (c) Mohd Johan lee 2015 14 & 15/9/2015 There are 2 modes of financing in IBF Equity financing Debt financing 8 4 9/9/2015 (c) Mohd Johan lee 2015 14 & 15/9/2015 FINANCING NEEDS Financing needs Own financing Financing from others Equity Debt Financing Financing Takes place when the capital/equity of other The financing is effected by debt party is taken to Debt is given to the other party for undertake a commercial specific purpose project 9 (c) Mohd Johan lee 2015 14 & 15/9/2015 FINANCING NEEDS Mode of Financing Equity Financing Debt Financing Uqud al Istirak Al- Bay/al Ijarah/al dayn (profit & loss sharing) (exchange/deferred Al-mudarabah contract) Al- musharakah BBA Murabahah Ijarah Istina’ 10 5 9/9/2015 (c) Mohd Johan lee 2015 14 & 15/9/2015 ISLAMIC BANK VS CONVENTIONAL BANK No . ISLAMIC BANKING CONVENTIONAL BANKING The functions and operating modes of The functions and operating modes of 1. IBF are based on the principles of conventional banks are based on fully Islamic Shari’ah manmade principles It aims at maximizing profit but It aims at maximizing profit without 2. subject to Shari’ah restriction any restriction Participation in partnership business Lending money and getting it back is the fundamental function of the with compounding interest is the 3. Islamic banks. fundamental function of the conventional bank. The status of Islamic bank in relation The status of a conventional bank, in 4. to its clients is that of partners, relation to its client, is that of creditor investors and trader, buyer, seller and debtors. 11 (c) Mohd Johan lee 2015 14 & 15/9/2015 COMMERCIAL BANKING Depositors Deposits Lending Needs for fund FIs IR@ 4% IR@ 7% 12 6 9/9/2015 (c) Mohd Johan lee 2015 14 & 15/9/2015 ISLAMIC BANKING Debt financing fundNeeds for Depositors Wadiah (Numerous principles /current FIs used Depositors Equity investment Mudharaba h financing/Musy/mudh 13 (c) Mohd Johan lee 2015 14 & 15/9/2015 MISCONCEPTION & ISSUES Banking is prohibited in Islam Islamic banking is merely change in name Islamic banking is expensive Imitation of conventional product Legal and political reality Lack of knowledge and information Technical issues 14 7 9/9/2015 (c) Mohd Johan lee 2015 14 & 15/9/2015 DEVELOPMENT OF ISLAMIC BANKING During the time of the Prophet (p.b.u.h) ‘bailtul mal’ (public treasury) – to fund state responsibilities. Did not generally accept deposits from public nor grant loans Baitul Mal have extended loans to Caliph Umar’ son Abd Allah and Ubayd Allah which were used for trading. 15 (c) Mohd Johan lee 2015 14 & 15/9/2015 1963 – Mit Ghamr Local Savings Bank (Egypt) 1971 – Nassar Social Bank (Egypt) 1975 – Islamic Development Bank (Jeddah) & the Dubai Islamic Bank 1977- Faisal Islamic Bank of Sudan & Kuwait Finance House 1978 – Faisal Islamic Bank of Egypt & the Islamic Bank of Jordan 16 8 9/9/2015 (c) Mohd Johan lee 2015 14 & 15/9/2015 Malaysia 1969 – Establishment of Pilgrims’ Fund Board (Lembaga Tabung Haji) 1983 - Bank Islam Malaysia Berhad (public listed on 17 Jan 1992). The Islamic Banking Act 1983 (7 April 1983) supervised and regulated by BNM 1984 - Syarikat Takaful Sdn Bhd (TA 1983) 17 (c) Mohd Johan lee 2015 14 & 15/9/2015 1993 –BNM introduced a scheme known as “Skim Perbankan Tanpa Faedah” (SPTF) & Islamic banking window 1996 – amendment to sec 124 of the BAFIA allowing conventional banks in Malaysia to operate IBF 1997- The establishment of NSAC by the BNM 1998 – Interest- free Banking Scheme (SPTF) was upgraded to Islamic Banking Scheme – setting up of Islamic Banking Divisions replacing Islamic Banking Units to headed by senior level of management 18 9 9/9/2015 (c) Mohd Johan lee 2015 14 & 15/9/2015 1999 – Second Islamic Bank (BMMB) 2002 – Islamic Financial Services Board (IFSB) head office in Malaysia 2004 – establishment of Islamic banking subsidiary for conventional banks 2004 - grant of Islamic banking licenses to 3 other financial institutions (1 foreign & 2 local) 19 (c) Mohd Johan lee 2015 14 & 15/9/2015 2005: Entrance of Kuwait Finance House, Al Rajhi & Asian Finance (a consortium of Qatar Islamic Bank, RUSD Investment Bank Inc. & Global Investment House) 2008: International Islamic Banking licenses were issued to Unicorn International Islamic Bank, First Islamic Investment Bank Ltd (owned by PT. Bank Muamalat Indonesia) and Deutsche Bank Ag (2010), allow the bank to provide Islamic commercial and investment services denominated in foreign currencies. 2010: 5 new Islamic banking licenses to foreign banks (BNP Paribas SA, PT Bank Mandiri, National Bank of Abu Dhabi, Mizuho Bank and Sumitomo- Mitsui Banking Corporation) and the establishment of “Mega Islamic Bank” (to be announced) 2012 – Islamic Financial Services Act 20 10 9/9/2015 (c) Mohd Johan lee 2015 14 & 15/9/2015 STAGE 1 – (1983 STAGE 2 STAGE 3 -1992) (1993-2000) (2000-2010) Institutional Building, activity generation/market Vibrancy . Financial Sector Masterplan (Islamic Enactment of Legislative financial hub) dedicated Act for amendment to allow . Islamic Financial Islamic banking window concepts Services Board Full fledged Islamic NSAC . Liberalization Islamic bank Islamic interbank finance sector money market . Malaysia International Financial Centre 21 (c) Mohd Johan lee 2015 14 & 15/9/2015 FRAMEWORK OF ISLAMIC FINANCE In general, the framework of Islamic finance is the same framework used by the conventional finance practices. These frameworks are, inter alia legal and regulatory framework, taxation framework, accounting and auditing standards, etc. Might have different or additional framework, such as accounting and auditing standard, etc, due to its peculiarity. In certain jurisdiction, Islamic banking and finance might be regulated by different sets of regulations, either separate or additional, e.g. IBA 1983 (Now = IFSA 2013) 22 11 9/9/2015 (c) Mohd Johan lee 2015 14 & 15/9/2015 CONT’D However, Islamic Finance, as the name suggests, has another framework, which is considered the major element that differentiates IBF from the conventional banking and finance. Any violation of this framework will definitely effect the validity of Islamic finance itself. Shariah Compliance Framework 23 (c) Mohd Johan lee 2015 14 & 15/9/2015 THE SHARI’AH FRAMEWORK OF ISLAMIC BANKING AND FINANCE Three main interrelated terminologies: Shariah, Fiqh & Muamalat Shariah, when viewed from legal perspective is the fixed elements of Islamic law, i.e. what has been clearly stipulated and mentioned in the text. E.g. five time prayers, prohibition of riba’, etc. As such, it is revealed in nature 24 12 9/9/2015 (c) Mohd Johan lee 2015 14 & 15/9/2015 SHARIAH & FIQH Shariah, in this sense, is wide and encompassing various branches of Islam Normally, it comes in its generality and it emphasizes only on the principles and not the detailed rules (not all the time) It is the duty of the judge (qadi), mufti and jurisconsult (ulama’) to exert their intellectual efforts in deriving and applying these principles on certain given scenarios. The result of human reasoning and understanding to the shariah is known as fiqh Fixed v. Flexible Agreements v. Differences 25 (c) Mohd Johan lee 2015 14 & 15/9/2015 FIQH MU’AMALAT (ISLAMIC COMMERCIAL LAW) However, in its general usage, it is called al-syariat al-Islamiyyah (Islamic law). Islamic commercial law is one of the components of Islamic law Other components of Islamic law include: Islamic law of purification and worship Islamic family law Islamic criminal law Islamic law of evidence and procedure Islamic law of inheritance, etc The main subjects of Islamic commercial law are commercial contracts and the rules governing them 26 13 9/9/2015 (c) Mohd Johan lee 2015 14 & 15/9/2015 ISLAMIC FINANCE PARADIGM Original rule of permissibility: - Initial legal ruling in commercial contract is permissibility - Contrary to acts of devotion (Ibadat) - No legal injunction is needed in sanctioning new contract - Every contract is considered lawful and acceptable if no principle of shari’ah is violated - Open a very wide door for further innovations Real Economic Activities Transactions-oriented not loan-based.
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