PERDANA LEADERSHIP

FOUNDATION CEO

FORUM 2013:

Taking Malaysia from

Good to Great

LUKMAN SHERIFF ALIAS

Partner of Zul Rafique &

Partners

OBJECTIVE

To provide an overall view on Islamic Banking and Finance development in Malaysia from the legal perspective and the challenges faced in “Malaysia’s bid to become the heavyweight international player.”

CONTENT

WHAT IS GOOD ABOUT MALAYSIA

• Legal framework

• Shariah Governance framework

• Dispute Resolution framework

• Case Laws

HOW TO MAKE MALAYSIA GREATER

• Strengthening further our Legal and Court Framework

• Capacity / Resource Development

• BNM Financial Sector Blueprint 2011-2020

• Product Development

“Since 2006… , Malaysia has further established itself as a leading international and regional hub of Islamic finance in the Asian region” Dato’ Johan Raslan Executive Chairman PricewaterhouseCoopers Malaysia

Contribution of Islamic finance to Malaysian Economy:

being largest sukuk market in the world with 65% share (USD96 billion in 2010)

among the top investment destinations for Islamic funds

second largest takaful market with 26% share

contributed 2.1 % of Malaysia’s GDP in 2009.

being recognized as an international Islamic financial Centre

WHAT WE ARE GOOD AT

WHAT WE ARE GOOD AT Fairly Comprehensive Legal Framework

Institution Statutes

Bank Negara Malaysia Central Bank of Malaysia Act 2009

Securities Commission Securities Commission Act 1993

Labuan Financial Services Authority

Labuan Financial Services Authority Act 1996

Conventional Banks Banking and Financial Institutions Act 1989 / Financial Services Act 2013

Islamic Banks Islamic Banking Act 1996 / Islamic Financial Services Act 2013

Islamic Takaful Takaful Act 1984 / Islamic Financial Services Act 2013

SNAPSHOT OF LAWS GOVERNING THE OPERATION

WHAT WE ARE GOOD AT Fairly Comprehensive Legal Framework

Institution Statutes

Other Financial Institutions Development Financial Institutions Act 2002

Bank Kerjasama Rakyat Malaysia Berhad (Special Provisions) Act 1978

Tabung Haji Act 1995

SNAPSHOT OF LAWS GOVERNING THE OPERATION

WHAT WE ARE GOOD AT Fairly Comprehensive Legal Framework

Laws Matters

Central Markets and Services Act 2007

Issuance of papers / sukuk

Labuan Islamic Financial Services and Securities Act 2007

Issuance of Islamic Offshore Papers / Sukuk

Real Property Gains Tax 1979 Tax on acquisition and disposal of real properties

Contracts Act 1950 Contractual terms

National Land Code 1965 Dealings on the Land

Hire Purchase Act 1967 Hire Purchase

Companies Act 1950 Powers and authorities of Companies

Sale of Goods Act 1957 Pertaining to sale of goods

Stamp Act 1949 Tax on transaction document

SNAPSHOT ON LAWS GOVERNING THE TRANSACTIONS

WHAT WE ARE GOOD AT Fairly Comprehensive Legal Framework

Laws have been amended to achieve tax neutrality

Islamic financing documents are subject to ad valorem stamp duty payable for the principal document.

[Stamp Duty (Exemption) Order 1996, Stamp Duty (Remission) (No. 4) Order 1996, Stamp Duty (Exemption) (No. 6) Order 2003, Stamp Duty (Exemption) (No.2) Order 2004, Stamp Duty (Exemption) (No. 3) Order 2004 and Stamp Duty Remission Order 2004]

any gains made by the bank resulting from the disposal of an asset by

the bank to the customer is exempted from tax.

• Paragraph 3(g) of Schedule 2 of RPGT Act

SNAPSHOT ON LAWS GOVERNING THE TRANSACTIONS

WHAT WE ARE GOOD AT Established Shariah Governance Framework

Banking

Shariah Advisory Council of Bank Negara

(Established pursuant to Section 51 of Central

Bank of Malaysia Act).

Internal Shariah Committee at each Islamic

bank (licensed under IBA), conventional bank

(licensed under BAFIA) & development financial

institution (licensed under DFI)

Capital Market

Shariah Advisory Council of Securities Commission (SAC of SC) (Established pursuant

to s. 316a of CMSA)

Registered Shariah advisors for Shariah-based capital market products. (Registration of

Shariah Advisers Guidelines, 10 August 2009)

WHAT WE ARE GOOD AT Established Shariah Governance Framework

WHAT WE ARE GOOD AT Clear Dispute Resolution Framework

For the banking sector, proceedings can be brought before any court or arbitrator relating to Shariah issues in the Islamic financial business, and such proceedings is subject to reference to the Shariah Advisory Council of Bank Negara (Section 56 of Central Bank of Malaysia Act 2009).

This similarly applies to the capital market industry, where the proceedings is subject to reference of the Shariah Advisory Council (SAC) (section 316G of CMSA.)

A dedicated judge at the High Court to hear cases on Islamic banking.

The Kuala Lumpur Regional Centre of Arbitration provides a customized mechanism for resolution of disputes in the Islamic financial services sector through the Rules for Arbitration of Kuala Lumpur Regional Centre for Arbitration (KLRCA) (Islamic Banking and Financial Services) 2007.

WHAT WE ARE GOOD AT

Decided Case Laws

Arab-Malaysian Merchant Bank Bhd v Silver Concept Sdn Bhd

(2006) 8 CLJ 9

The Islamic banking system, currently co-existing with the Civil banking system in Malaysia, is the extraction of the essence of Islamic Jurisprudence or Syariah, sourcing from the Al-Quran and Al-Sunnah and is here to stay…It was a statutory reality wit the promulgation of the Islamic Banking Act 1983, primarily to provide for the setting up and licensing of Islamic Banks, falling within the jurisdiction of the civil law and applying the civil court procedures. Suriyadi Halim Omar J

Mohd Alias Ibrahim v RHB Bank Bhd & Anor

[2011] 4 CLJ 654

In Malaysia, although Islamic law falls under the jurisdiction of the Syariah Courts, in cases involving banking transactions based on Islamic law principles, it is the civil courts that will have jurisdiction to hear the matters. The reason is that the law relating to finance, trade, commerce and industry falls within the Federal List (List I) in the Ninth Schedule of the Constitution. That notwithstanding, by virtue of Act 701 and the Impugned Provisions, for questions concerning a Shariah matter, the civil court is bound to take into consideration any published rulings of the SAC or refer such questions to the SAC for its ruling and any such ruling made shall be binding on the court. This binding effect came about as a result of the substitution of the word "may" in s. 16 of the repealed Central Bank of Malaysia Act 1958 with the word "shall" in s. 56 of Act 701. Mohd Zawawi Salleh J

WHAT WE ARE GOOD AT

Decided Case Laws

Mohd Alias Ibrahim v RHB Bank Bhd & Anor

[2011] 4 CLJ 654

The issue of whether the facility is Shariah compliant or not is only one of the issues to be decided by the court. And although the ascertainment of Islamic law as made by the SAC will be binding on the court as per the Impugned Provisions, it will be up to the court to apply the ascertained law to the facts of the case. The court still has to decide the ultimate issues which have been pleaded. Consequently, the final decision remains with the court. Mohd Zawawi Salleh J

WHAT WE ARE GOOD AT

Decided Case Laws

WHAT WE ARE GOOD AT

Decided Case Laws

Tan Sri Abdul Khalid Ibrahim v Bank Islam Malaysia Berhad

[2012] 3 CLJ 249

In applying the SAC ruling to the particular facts of the case before the Court, the judicial functions of the Court to hear and determine a dispute remain inviolate. The SAC, like any other expert, does not perform any judicial function in the determination of the ultimate outcome of the litigation before the Court, and so cannot be said to usurp the judicial functions of the Court. Hence, s. 56 and s. 57 are valid and constitutional. Low Hop Bing JCA

WHAT WE ARE GOOD AT

Decided Case Laws

Tan Sri Abdul Khalid Ibrahim v Bank Islam Malaysia Berhad

[2012] 3 CLJ 249

S. 56 and s. 57 contain clear and unambiguous provisions to the effect that whenever there is any Shariah Question arising in any proceedings relating to Islamic financial business before eg, any Court, it is mandatory for the Court to invoke s. 56 and refer it to the SAC, a statutory expert, for a ruling. The duty of the SAC is confined exclusively to the ascertainment of the Islamic Law on financial matters or business. The judicial function is within the domain of the Court ie, to decide on the issues which the parties have pleaded. The fact that the Court is bound by the ruling of the SAC under s. 57 does not detract from the judicial functions and duties of the Court in providing a resolution to the dispute(s) which the parties have submitted to the

jurisdiction of the Court. Low Hop Bing JCA

HOW TO MAKE MALAYSIA GREATER

• Strengthening further our Legal and Court

Framework

• Capacity/ Resource Development

• BNM Financial Sector Blueprint 2011-2020

• Product Development

HOW TO MAKE MALAYSIA GREATER Strengthening Further the Legal and Court Framework

• Parliament has enacted Islamic Financial Services Act 2013. It has yet to be enforced.

• It repeals the Islamic Banking Act 1983 and Takaful Act 1984.

Islamic Financial Services Act 2013

Takaful Act 1984 Islamic Banking

Act 1983

SALIENTS FEATURES OF ISLAMIC FINANCIAL SERVICES ACT 2013 (IFSA)

• Insurance and takaful companies holding composite licences shall not carry on both family takaful business and general takaful business.

Conversion to Single Insurance / Takaful Business

•Auditors shall report to the Bank if there is any breach, fraud, irregularities, weakness in internal controls or material impact of any event, conduct or activity by an institution in the course of carrying out his duties as an auditor.

Reporting Obligation

• Individuals need to pare down their stakes to 10% or below. For corporate, unless with approval, their stakes should not be more than 50%.

Limitation on Individual/ corporate Shareholdings

Financial Holding Company Requirement

•Any company which holds an aggregate interest in shares of more than 50% in a licensed person is subject to BNM supervision.

HOW TO MAKE MALAYSIA GREATER Strengthening Further the Legal and Court Framework

HOW TO MAKE MALAYSIA GREATER Strengthening Further the Legal and Court

Framework

• Currently, we have only one dedicated Court in Kuala Lumpur dealing in Islamic Banking and Finance. Moving forward we need to consider to expand the dedicated courts for every states in Malaysia. There will be capacity issue which needs to be addressed by ILKAP (Judicial and Legal Training Institute).

• Harmonising laws which affect the implementation of Islamic Banking and Finance transaction. Towards this end, BNM has set up a Law Harmonization Committee headed by former Chief Judge.

HOW TO MAKE MALAYSIA GREATER Capacity/ Resource Development

The need to have a continuous development of capacity. Among those undertaken are as follows:

• The Legal Profession Act 1976 was amended in 2012, to permit foreign law firms and lawyers to practice Islamic Banking and Finance in Malaysia.

• Islamic Banks in Malaysia have required certification on Islamic Banking and Finance to undertake legal documentation.

• Bar Council have conducted Islamic Banking and Finance courses on a regular periodic basis.

• Universities have offered Islamic Banking and Finance as part of law degree courses.

HOW TO MAKE MALAYSIA GREATER BNM Financial Sector Blueprint 2011-2020

BNM has prepared a blueprint in promoting Islamic Banking and Finance and achieving 40% share of the domestic financing market. Among the many recommendations are as follows:

Increase the diversity of players in the domestic Islamic Finance industry to support a wider range of Islamic financial products and services that serves the best interest of Malaysia, by facilitating greater cross-border financial business and meeting the increasing demands of a wider and greater spectrum of investors and customer base.

Support the growth of Islamic fund and wealth management industry that can offer innovative financial solutions to meet the more sophisticated investment demands of the increasingly affluent population particularly in Asia and the Middle East, thus positioning Malaysia as a regional and international center for Islamic fund and wealth management.

Optimize the potential of existing Islamic financial market platforms to increase cross-border Islamic financial activities.

Supporting further the development of real estate investment trusts (REITs) and exchange traded funds (ETFs) for the Islamic capital market.

HOW TO MAKE MALAYSIA GREATER BNM Financial Sector Blueprint 2011-2020

Supporting the International Islamic Liquidity Management Corporation (IILM) and the Bursa Suq Al-Sila as key infrastructure for liquidity management by providing facilitative business and operating environment to strengthen their value propositions in meeting the demand of global financial community.

HOW TO MAKE MALAYSIA GREATER BNM Financial Sector Blueprint 2011-2020

Developing the Malaysian legal system to be recognized for International Islamic financial transactions by strengthening the legal framework to ensure effective enforceability of Islamic financial transactions and activities.

Develop Malaysia as a reference center for Islamic financial transactions. To enable this, Malaysia needs to build on the development of human capital in Islamic finance and the establishment of the Shariah, legal, regulatory and supervisory frameworks.

Continuing Incentives

•Corporate tax rate of 3% of audited net profits or a flat rate of RM20,000 every year on income from Labuan trading activities

•Tax exemption on distribution received from a Labuan Islamic Trust

Tax incentives provided by Labuan, includes:

•Fees received by qualified institutions in undertaking activities relating to arranging, underwriting and distribution of non-ringgit sukuk originating from Malaysia; and

•Profits of qualified institutions received from the trading of non-ringgit sukuk originating from Malaysia, provided that such sukuk are approved by the SC or the Labuan Financial Services Authority.

Tax exemption for the year of assessment 2012 until 2014 on

activities related to the issue and trading of non-ringgit sukuk is

given on the following incomes:

•Tax exemption on income received by non-resident experts in Islamic finance.

•Special Employment Pass for Islamic Finance Expatriates under MIFC initiative

Incentives in relation to Human Capital Development

As part of MIFC initiative, International Islamic Bank in Malaysia (IIB) is eligible for full tax exemption

accorded under the Income Tax Act 1967 for 10 years beginning from the assessment year of 2007.

Leading to Less innovation

ISSUE : TAWARUQ

HOW TO MAKE MALAYSIA GREATER Innovative Products

THANK YOU

En. Lukman Sheriff Alias Partner, Zul Rafique & Partners Tel: (60) 3 6209 8228 Fax: (60) 3 6209 8221/8331/8381 lukman@zulrafique.com.my