SHARI’AH GOVERNANCE SHARI’AH GOVERNANCE FRAMEWORK AND THE EFFECT OF FRAMEWORK AND THE EFFECT OF THE CENTRAL BANK OF MALAYSIA THE CENTRAL BANK OF MALAYSIA

ACT 2009ACT 2009 ZULKIFLI HASANZULKIFLI HASAN

DURHAM UNIVERSITYDURHAM UNIVERSITYMALAYSIA GLASGOW DOCTORIAL COLLOQUIUMMALAYSIA GLASGOW DOCTORIAL COLLOQUIUM

2020thth-21-21stst JANUARY 2010 JANUARY 2010

CONTENTSCONTENTS 1.0 Introduction1.0 Introduction 2.0 What does Shari’ah 2.0 What does Shari’ah

governance mean?governance mean? 3.0 The Existing Regulations on 3.0 The Existing Regulations on

Shari’ah Governance in IFIsShari’ah Governance in IFIs 4.0 Background of Chapter 1 of 4.0 Background of Chapter 1 of

Part VII of the CBAPart VII of the CBA 5.0 The Effect of the Chapter 1 of 5.0 The Effect of the Chapter 1 of

Part VII of the CBAPart VII of the CBA 6.0 Concluding Remarks6.0 Concluding Remarks

IntroductionIntroduction The philosophical foundation of corporate The philosophical foundation of corporate

governance in Islam requires additional governance in Islam requires additional layer of governance for purpose of layer of governance for purpose of Shari’ahShari’ah compliance. compliance.

With this aspiration, corporate governance With this aspiration, corporate governance in IFIs needs for a set of institutional in IFIs needs for a set of institutional arrangement to oversee the arrangement to oversee the Shari’ahShari’ah compliance aspects of their business and compliance aspects of their business and operations. operations.

In the absence of any model of corporate In the absence of any model of corporate governance in Islamic literatures, IFIs has governance in Islamic literatures, IFIs has introduced introduced Shari’ahShari’ah governance system as governance system as part of their corporate governance part of their corporate governance framework. framework.

In this regard, In this regard, Shari’ahShari’ah governance system is governance system is peculiarly exclusive and unique to corporate peculiarly exclusive and unique to corporate governance framework in IFIs unlike with governance framework in IFIs unlike with their conventional counterparts. their conventional counterparts.

What does Shari’ah What does Shari’ah governance mean?governance mean?

The set of institutional and organizational The set of institutional and organizational arrangementarrangement: : Shari’ahShari’ah board and its board and its related institution such as internal audit related institution such as internal audit department and department and Shari’ahShari’ah division. division.

Effective independent oversight of Effective independent oversight of Shari’ahShari’ah compliance: compliance: This indicates the This indicates the aims and objectives of the aims and objectives of the Shari’ahShari’ah governance system to provide efficient governance system to provide efficient mechanism for purpose of mechanism for purpose of Shari’ahShari’ah compliance.compliance.

Shari’ahShari’ah pronouncements, dissemination pronouncements, dissemination of information and an internal of information and an internal Shari’ahShari’ah compliance review:compliance review: This involves the This involves the overall overall Shari’ahShari’ah governance processes that governance processes that covers both ex-ante and ex-post aspects of covers both ex-ante and ex-post aspects of Shari’ahShari’ah compliance. compliance.

How Shari’ah governance How Shari’ah governance complements the existing complements the existing

corporate governance?corporate governance?

Shari’ah GovernanceShari’ah Governance

The Existing RegulationsThe Existing Regulations

The Islamic Banking Act 1983The Islamic Banking Act 1983 The Takaful Act 1984The Takaful Act 1984 The BAFIA 1984 The BAFIA 1984 The Securities Commission Act 1993 The Securities Commission Act 1993 The Central Bank of Malaysia The Central Bank of Malaysia

(Amendment) Act 2003(Amendment) Act 2003 The BNM/GPS8-i The BNM/GPS8-i The BNM/GPS1The BNM/GPS1 The Registration of The Registration of Shari’ahShari’ah Advisers Advisers

Guidelines 2009 Guidelines 2009 Direction No.1/2003, all cases muamalat Direction No.1/2003, all cases muamalat

cases will be registered and heard in the cases will be registered and heard in the Muamalat BenchMuamalat Bench

The Central Bank of Malaysia The Central Bank of Malaysia Act 2009 Act 2009

The CBA wasThe CBA was passed by the Parliament passed by the Parliament in July 2009 in July 2009 which received royal assent which received royal assent on 19 August and gazetted on 3rd on 19 August and gazetted on 3rd September 2009 September 2009

The CBA consists of 100 sections divided The CBA consists of 100 sections divided into 15 parts. into 15 parts.

Unlike the Central Bank of Malaysia Act Unlike the Central Bank of Malaysia Act 1958, the CBA inserts new provision in 1958, the CBA inserts new provision in Part VII which covers provision Part VII which covers provision pertaining to Islamic financial business. pertaining to Islamic financial business.

S 51-58 of Part VII of the CBA S 51-58 of Part VII of the CBA exclusively provide framework of exclusively provide framework of Shari’ah governance for IFIs in Malaysia Shari’ah governance for IFIs in Malaysia

Why? Why? The aim of provisions in Chapter 1 of Part The aim of provisions in Chapter 1 of Part

VII is to resolve issues pertinent to VII is to resolve issues pertinent to Shari’ah matter as evidenced in several Shari’ah matter as evidenced in several cases involving IFIs in Malaysia cases involving IFIs in Malaysia

Arab Malaysian Finance Bhd V Taman Arab Malaysian Finance Bhd V Taman Ihsan Jaya Sdn Bhd & Ors (Koperasi Seri Ihsan Jaya Sdn Bhd & Ors (Koperasi Seri Kota Bukit Cheraka Bhd, third party)Kota Bukit Cheraka Bhd, third party) [2008] 5 MLJ 631. [2008] 5 MLJ 631.

Potential Implication of Shari’ah non-Potential Implication of Shari’ah non-compliance risk.compliance risk.

The Central Bank of Malaysia The Central Bank of Malaysia (Amendment) Act 2003 seems failed to (Amendment) Act 2003 seems failed to resolve the issue since the decision made resolve the issue since the decision made by the SAC is only binding upon the by the SAC is only binding upon the arbitration and not the court. arbitration and not the court.

The EffectThe Effect 1. It grants authority to the BNM to 1. It grants authority to the BNM to

establish the SAC and to specify its establish the SAC and to specify its distinctive functions as well as distinctive functions as well as secretariat to assist the SAC in carrying secretariat to assist the SAC in carrying out its definitive roles. out its definitive roles.

2. In parallel with the status of the SAC 2. In parallel with the status of the SAC as the highest authority in matters as the highest authority in matters pertaining to Islamic banking, finance pertaining to Islamic banking, finance and takaful, the appointment of the SAC and takaful, the appointment of the SAC members shall be made by the Yang di-members shall be made by the Yang di-Pertuan Agong. The SAC’s Pertuan Agong. The SAC’s remuneration and the terms of remuneration and the terms of reference then shall be determined by reference then shall be determined by the BNM. the BNM.

The EffectThe Effect 3. It sets the minimum fit and proper 3. It sets the minimum fit and proper

criteria of the SAC members. The candidate criteria of the SAC members. The candidate must at least knowledgeable and qualified must at least knowledgeable and qualified in Shari’ah or has appropriate knowledge in Shari’ah or has appropriate knowledge and experience in banking, finance and law. and experience in banking, finance and law.

It allows expert in other related disciplines It allows expert in other related disciplines as well as judges of the civil court and as well as judges of the civil court and shari’ah court to be the SAC members. This shari’ah court to be the SAC members. This provision is unique as combination of provision is unique as combination of mixed expertise amongst the SAC members mixed expertise amongst the SAC members would potentially contribute towards more would potentially contribute towards more solid and sound Shari’ah rulings. solid and sound Shari’ah rulings.

The EffectThe Effect 4. The defunct of section 16B of the CBA 4. The defunct of section 16B of the CBA

(Amendment) Act 2003 merely provides (Amendment) Act 2003 merely provides that the Shari’ah rulings issued by the that the Shari’ah rulings issued by the SAC are binding upon the arbitrator. The SAC are binding upon the arbitrator. The CBA affirms the legal status of CBA affirms the legal status of Shari’ahShari’ah pronouncement issued by the SAC to be pronouncement issued by the SAC to be binding upon both. binding upon both.

5. The court or arbitrator is not obligated 5. The court or arbitrator is not obligated to refer the SAC to resolve any Shari’ah to refer the SAC to resolve any Shari’ah issue in the previous regulation. S 58 issue in the previous regulation. S 58 makes it mandatory for the court or makes it mandatory for the court or arbitrator to refer the SAC for arbitrator to refer the SAC for deliberation on any Shari’ah issue as well deliberation on any Shari’ah issue as well must take into account its existing must take into account its existing Shari’ah rulings.Shari’ah rulings.

The EffectThe Effect

6. It clarifies the status of 6. It clarifies the status of Shari’ahShari’ah ruling issued by the SAC ruling issued by the SAC in the event it contradicts with in the event it contradicts with Shari’ah pronouncement of Shari’ah pronouncement of Shari’ah committee at individual Shari’ah committee at individual IFIs. The Shari’ah rulings of the IFIs. The Shari’ah rulings of the SAC shall prevail and have SAC shall prevail and have binding force over the Shari’ah binding force over the Shari’ah resolutions of Shari’ah committee resolutions of Shari’ah committee of IFIs.of IFIs.

LimitationLimitation Despite of the recent legal Despite of the recent legal

development, it is worth noting that development, it is worth noting that the CBA has jurisdiction to only in the CBA has jurisdiction to only in matters fall under the auspices of the matters fall under the auspices of the BNM, so as to exclude the BNM, so as to exclude the Shari’ahShari’ah board in the Securities Commission. board in the Securities Commission.

The Securities Commission of Malaysia The Securities Commission of Malaysia has its own Shari’ah board and in has its own Shari’ah board and in August 2009, it issued the Registration August 2009, it issued the Registration of of Shari’ahShari’ah Advisers Guidelines under Advisers Guidelines under section 377 of the Capital Markets and section 377 of the Capital Markets and Services Act 2007. Services Act 2007.

Concluding RemarksConcluding Remarks Shari’ahShari’ah governance adds additional governance adds additional

values to the existing corporate values to the existing corporate governance framework in IFIs. governance framework in IFIs.

With this motivation, Malaysia has With this motivation, Malaysia has extensively facilitated the extensively facilitated the implementation of Islamic finance by implementation of Islamic finance by enhancing regulatory framework enhancing regulatory framework pertinent to Shari’ah governance. pertinent to Shari’ah governance.

The CBA was passed to further enhance The CBA was passed to further enhance and improve and improve Shari’ahShari’ah governance governance framework in IFIs particularly in the framework in IFIs particularly in the aspect of reference for Shari’ah rulings, aspect of reference for Shari’ah rulings, functions of the SAC, method of functions of the SAC, method of appointment and fit and proper criteria appointment and fit and proper criteria of the SAC members and legal status of of the SAC members and legal status of the SAC’s Shari’ah pronouncements. the SAC’s Shari’ah pronouncements.

Zulkifli HasanZulkifli HasanSchool of Government and International School of Government and International

AffairsAffairs University of Durham, United KingdomUniversity of Durham, United Kingdom

E-mail: E-mail: zul361977@yahoo.comzul361977@yahoo.comBlog: http://zulkiflihasan.wordpress.comBlog: http://zulkiflihasan.wordpress.com

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