1. SHARI’AH GOVERNANCE FRAMEWORK AND THE EFFECT OF THE CENTRAL BANK OF MALAYSIA ACT 2009 ZULKIFLI HASAN DURHAM UNIVERSITY MALAYSIA GLASGOW DOCTORIAL COLLOQUIUM 20 th -21 st JANUARY 2010

2. CONTENTS 1.0 Introduction 1.0 Introduction 2.0 What does Shari ’ ah governance mean? 2.0 What does Shari ’ ah governance mean? 3.0 The Existing Regulations on Shari ’ ah Governance in IFIs 3.0 The Existing Regulations on Shari ’ ah Governance in IFIs 4.0 Background of Chapter 1 of Part VII of the CBA 4.0 Background of Chapter 1 of Part VII of the CBA 5.0 The Effect of the Chapter 1 of Part VII of the CBA 5.0 The Effect of the Chapter 1 of Part VII of the CBA 6.0 Concluding Remarks 6.0 Concluding Remarks

3. Introduction The philosophical foundation of corporate governance in Islam requires additional layer of governance for purpose of Shari’ah compliance. The philosophical foundation of corporate governance in Islam requires additional layer of governance for purpose of Shari’ah compliance. With this aspiration, corporate governance in IFIs needs for a set of institutional arrangement to oversee the Shari’ah compliance aspects of their business and operations. With this aspiration, corporate governance in IFIs needs for a set of institutional arrangement to oversee the Shari’ah compliance aspects of their business and operations. In the absence of any model of corporate governance in Islamic literatures, IFIs has introduced Shari’ah governance system as part of their corporate governance framework. In the absence of any model of corporate governance in Islamic literatures, IFIs has introduced Shari’ah governance system as part of their corporate governance framework. In this regard, Shari’ah governance system is peculiarly exclusive and unique to corporate governance framework in IFIs unlike with their conventional counterparts. In this regard, Shari’ah governance system is peculiarly exclusive and unique to corporate governance framework in IFIs unlike with their conventional counterparts.

4. What does Shari’ah governance mean? The set of institutional and organizational arrangement: Shari’ah board and its related institution such as internal audit department and Shari’ah division. The set of institutional and organizational arrangement: Shari’ah board and its related institution such as internal audit department and Shari’ah division. Effective independent oversight of Shari’ah compliance: This indicates the aims and objectives of the Shari’ah governance system to provide efficient mechanism for purpose of Shari’ah compliance. Effective independent oversight of Shari’ah compliance: This indicates the aims and objectives of the Shari’ah governance system to provide efficient mechanism for purpose of Shari’ah compliance. Shari’ah pronouncements, dissemination of information and an internal Shari’ah compliance review: This involves the overall Shari’ah governance processes that covers both ex-ante and ex-post aspects of Shari’ah compliance. Shari’ah pronouncements, dissemination of information and an internal Shari’ah compliance review: This involves the overall Shari’ah governance processes that covers both ex-ante and ex-post aspects of Shari’ah compliance.

5. How Shari’ah governance complements the existing corporate governance?

6. Shari’ah Governance Credit RiskCredit Risk Equity Investment RiskEquity Investment Risk Market RiskMarket Risk Liquidity RiskLiquidity Risk Rate of Return RiskRate of Return Risk Operational RiskOperational Risk Board and Senior Management Operational Risk Shari’ah Board

7. The Existing Regulations The Islamic Banking Act 1983 The Islamic Banking Act 1983 The Takaful Act 1984 The Takaful Act 1984 The BAFIA 1984 The BAFIA 1984 The Securities Commission Act 1993 The Securities Commission Act 1993 The Central Bank of Malaysia (Amendment) Act 2003 The Central Bank of Malaysia (Amendment) Act 2003 The BNM/GPS8-i The BNM/GPS8-i The BNM/GPS1 The BNM/GPS1 The Registration of Shari’ah Advisers Guidelines 2009 The Registration of Shari’ah Advisers Guidelines 2009 Direction No.1/2003, all cases muamalat cases will be registered and heard in the Muamalat Bench Direction No.1/2003, all cases muamalat cases will be registered and heard in the Muamalat Bench

8. The Central Bank of Malaysia Act 2009 The CBA was passed by the Parliament in July 2009 which received royal assent on 19 August and gazetted on 3rd September 2009 The CBA was passed by the Parliament in July 2009 which received royal assent on 19 August and gazetted on 3rd September 2009 The CBA consists of 100 sections divided into 15 parts. The CBA consists of 100 sections divided into 15 parts. Unlike the Central Bank of Malaysia Act 1958, the CBA inserts new provision in Part VII which covers provision pertaining to Islamic financial business. Unlike the Central Bank of Malaysia Act 1958, the CBA inserts new provision in Part VII which covers provision pertaining to Islamic financial business. S 51-58 of Part VII of the CBA exclusively provide framework of Shari’ah governance for IFIs in Malaysia S 51-58 of Part VII of the CBA exclusively provide framework of Shari’ah governance for IFIs in Malaysia

9. Why? The aim of provisions in Chapter 1 of Part VII is to resolve issues pertinent to Shari’ah matter as evidenced in several cases involving IFIs in Malaysia The aim of provisions in Chapter 1 of Part VII is to resolve issues pertinent to Shari’ah matter as evidenced in several cases involving IFIs in Malaysia Arab Malaysian Finance Bhd V Taman Ihsan Jaya Sdn Bhd & Ors (Koperasi Seri Kota Bukit Cheraka Bhd, third party) [2008] 5 MLJ 631. Arab Malaysian Finance Bhd V Taman Ihsan Jaya Sdn Bhd & Ors (Koperasi Seri Kota Bukit Cheraka Bhd, third party) [2008] 5 MLJ 631. Potential Implication of Shari’ah non-compliance risk. Potential Implication of Shari’ah non-compliance risk. The Central Bank of Malaysia (Amendment) Act 2003 seems failed to resolve the issue since the decision made by the SAC is only binding upon the arbitration and not the court. The Central Bank of Malaysia (Amendment) Act 2003 seems failed to resolve the issue since the decision made by the SAC is only binding upon the arbitration and not the court.

10. The Effect 1. It grants authority to the BNM to establish the SAC and to specify its distinctive functions as well as secretariat to assist the SAC in carrying out its definitive roles. 1. It grants authority to the BNM to establish the SAC and to specify its distinctive functions as well as secretariat to assist the SAC in carrying out its definitive roles. 2. In parallel with the status of the SAC as the highest authority in matters pertaining to Islamic banking, finance and takaful, the appointment of the SAC members shall be made by the Yang di- Pertuan Agong. The SAC’s remuneration and the terms of reference then shall be determined by the BNM. 2. In parallel with the status of the SAC as the highest authority in matters pertaining to Islamic banking, finance and takaful, the appointment of the SAC members shall be made by the Yang di- Pertuan Agong. The SAC’s remuneration and the terms of reference then shall be determined by the BNM.

11. The Effect 3. It sets the minimum fit and proper criteria of the SAC members. The candidate must at least knowledgeable and qualified in Shari’ah or has appropriate knowledge and experience in banking, finance and law. 3. It sets the minimum fit and proper criteria of the SAC members. The candidate must at least knowledgeable and qualified in Shari’ah or has appropriate knowledge and experience in banking, finance and law. It allows expert in other related disciplines as well as judges of the civil court and shari’ah court to be the SAC members. This provision is unique as combination of mixed expertise amongst the SAC members would potentially contribute towards more solid and sound Shari’ah rulings. It allows expert in other related disciplines as well as judges of the civil court and shari’ah court to be the SAC members. This provision is unique as combination of mixed expertise amongst the SAC members would potentially contribute towards more solid and sound Shari’ah rulings.

12. The Effect 4. The defunct of section 16B of the CBA (Amendment) Act 2003 merely provides that the Shari’ah rulings issued by the SAC are binding upon the arbitrator. The CBA affirms the legal status of Shari’ah pronouncement issued by the SAC to be binding upon both. 4. The defunct of section 16B of the CBA (Amendment) Act 2003 merely provides that the Shari’ah rulings issued by the SAC are binding upon the arbitrator. The CBA affirms the legal status of Shari’ah pronouncement issued by the SAC to be binding upon both. 5. The court or arbitrator is not obligated to refer the SAC to resolve any Shari’ah issue in the previous regulation. S 58 makes it mandatory for the court or arbitrator to refer the SAC for deliberation on any Shari’ah issue as well must take into account its existing Shari’ah rulings. 5. The court or arbitrator is not obligated to refer the SAC to resolve any Shari’ah issue in the previous regulation. S 58 makes it mandatory for the court or arbitrator to refer the SAC for deliberation on any Shari’ah issue as well must take into account its existing Shari’ah rulings.

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

14. Limitation Despite of the recent legal development, it is worth noting that the CBA has jurisdiction to only in matters fall under the auspices of the BNM, so as to exclude the Shari’ah board in the Securities Commission. Despite of the recent legal development, it is worth noting that the CBA has jurisdiction to only in matters fall under the auspices of the BNM, so as to exclude the Shari’ah board in the Securities Commission. The Securities Commission of Malaysia has its own Shari’ah board and in August 2009, it issued the Registration of Shari’ah Advisers Guidelines under section 377 of the Capital Markets and Services Act 2007. The Securities Commission of Malaysia has its own Shari’ah board and in August 2009, it issued the Registration of Shari’ah Advisers Guidelines under section 377 of the Capital Markets and Services Act 2007.

15. Concluding Remarks Shari’ah governance adds additional values to the existing corporate governance framework in IFIs. Shari’ah governance adds additional values to the existing corporate governance framework in IFIs. With this motivation, Malaysia has extensively facilitated the implementation of Islamic finance by enhancing regulatory framework pertinent to Shari’ah governance. With this motivation, Malaysia has extensively facilitated the implementation of Islamic finance by enhancing regulatory framework pertinent to Shari’ah governance. The CBA was passed to further enhance and improve Shari’ah governance framework in IFIs particularly in the aspect of reference for Shari’ah rulings, functions of the SAC, method of appointment and fit and proper criteria of the SAC members and legal status of the SAC’s Shari’ah pronouncements. The CBA was passed to further enhance and improve Shari’ah governance framework in IFIs particularly in the aspect of reference for Shari’ah rulings, functions of the SAC, method of appointment and fit and proper criteria of the SAC members and legal status of the SAC’s Shari’ah pronouncements.

16. Zulkifli Hasan School of Government and International Affairs University of Durham, United Kingdom University of Durham, United Kingdom E-mail: zul361977@yahoo.com zul361977@yahoo.com Blog: http://zulkiflihasan.wordpress.com Tel: 07761457686