1. Prepared for: Madam Kalimah binti Shahidan
Issues and challenges for Islamic financial institutions in legal perspective after Islamic Financial Services Act (IFSA) 2013
NAME
MATRIX NO.
NURHANIS BINTI MOHD RASHID
221576
NUR NADIRAH BINTI NORIZAN
221736
NAZIFA AQILAH BINTI MOHD ADAM
221991
MIMI ASMIDA BINTI
222021
NOOR AIN BINTI MAT ZALI
225983
Prepared for: Madam Kalimah binti Shahidan

2. To understand the purpose of Islamic Financial Services Act (IFSA) 2013
To examine the key aspects of IFSA 2013
To identify the issues and challenges arises from the establishment of IFSA 2013 to the Islamic financial institutions
To find out the implications of IFSA 2013 to the Islamic financial institutions
Objectives

3. Introduction Came into effect on 30 June 2013
IFSA 2013 are repealed the various laws:
Islamic Banking Act 1983
Takaful Act 1984
Banking and Financial Institutions Act 1989
Insurance Act 1996
Payment Systems Act 2003
Exchange Control Act 1953
To provide a stronger legal foundation to spur the growth of Islamic finance sector
Introduction

4. IFSA 2013, consists of 291 sections, 187 pages, divided to eighteen parts.
Our discussion will focus on only specific parts & sections:
Shariah requirements
Business conduct & consumer protection
Key aspects of IFSA 2013

5. Shariah Requirements Shariah compliance
Section 29 allows BNM to set standards on Shariah matter with advise from Shariah advisory committee
Every director, officer or a member of a Shariah committee of an institution shall at all times comply with Shariah standards
If failed to comply with Shariah, Islamic bank be liable to imprisonment for a term not exceeding 8 years or to a fine not exceeding RM 25 million or to both
Shariah Requirements

6. ii. Shariah Governance
Section 30 states that licensed Islamic financial institutions shall establish a Shariah committee for purposes of advising the institutions to ensure its business, affairs and activities comply with Shariah.
Section 35 states that banks must provide accurate & complete information to Shariah advisors in order to perform their duties.

7. iii. Audit on Shariah compliance
Section 37 states that with approval from BNM, institution can appoint Shariah auditor to carry out an audit on Shariah compliance by the institution
BNM specifies the duties & responsibilities of auditor & auditor shall submit a report to BNM
Section 38 mentions that BNM will appoint Shariah auditor when Islamic bank fail to appoint one, and BNM suspects non-Shariah compliant activities

8. Business conduct & consumer protection
i. Business Conduct
Ensuring that a financial service provider is fair, responsible and professional when dealing with financial consumers ( section 135).
Islamic financial institutions must be transparent and disclose accurate & clear information to financial consumers
Section 137, BNM shall approve takaful brokers, financial advisors & issuer of Islamic payment instruments
Business conduct & consumer protection

9. ii. Consumer Protection
Section 149, no person shall accept Islamic deposits except a license Islamic banks
Section 151, no person shall use the word “Islamic bank” unless such person is licensed under this Act to carry on Islamic banking business
Any person who contravenes these sections, be liable to imprisonment for a term not exceeding 10 years or to a fine not exceeding RM 50 million or to both

10. Promote financial stability and compliance with Shariah
The new Act strengthens regulation of financial institution, Islamic money market and the Islamic foreign exchange market as well as Islamic instruments
Consumers of Islamic financial services are also required to be protected under the Law
The industry players generally support the introduction of IFSA as it would help create greater transparency, governance and accountability
IFSA intends to strengthen the foundations for end-to-end Shariah governance and compliance
IFSA statutorily enforces management of Shariah non-compliance risk and requires Islamic financial institutions to ensure that their aims, operations, business, affairs and activities are in compliance with Shariah principles at all times
PURPOSE OF IFSA 2013

11. ii. To strengthen regulation of financial institutions
IFSA is the culmination of efforts to modernise the laws that govern the conduct and supervision of financial institutions in Malaysia
The laws also provide Bank Negara Malaysia with the necessary regulatory and supervisory oversight powers
It is important that Malaysia's regulatory and supervisory system is adequately equipped to respond effectively to new and emerging risks
IFSA amalgamate several separate laws to govern the financial sector under a single legislative framework for the conventional and Islamic financial sectors

12. iii. To implement recommendations under FSAP
The objectives of the assessment were to review developments in the financial sector, assess and formulate recommendations related to financial stability, financial development and the financial sector oversight framework
One of the issues highlighted in the FSAP is that the current regime does not extend appropriately to the supervision and regulation of Financial Holding Companies (FHC)
During the last financial crisis, Bank Negara Malaysia was not able to hold the directors and management of holding companies accountable for wrongdoing because the companies were not financial institutions
Under the IFSA, as long as the FHC deal in banking or financing activities, they fall under Bank Negara’s jurisdiction

13. Final authority on Shariah related matters in IFI: the Board or SC?
The board as ultimate decision maker including on Shariah related matters
SC’s decisions, views and opinions bind the IFI
Assurance of Shariah compliance: the Board’s or SC’s main responsibility?
The Board has ultimate accountability to ensure Shariah compliance
Does SC share the same accountability as the Board for Shariah non-compliance?
Contravention of IFSA 2013 may result to termination of SC’s membership
Shariah matters unresolved by the SC to be escalated to the SAC
Issues in IFSA 2013

14. iii. Adequate competencies of the SC
Oversight function via Shariah audit and Shariah review
Sufficient knowledge in Islamic finance and general finance
Adequate legal, marketing and sales knowledge
Active participation required of SC
iv. Rectification of Shariah non-compliance events: reporting to CBM and the SAC
Notification of the Shariah non-compliant events to the SC, the Board and CBM
SC to inform CBM of ineffective or inadequate rectification measures

15. v. Protection of the Board against penalties under IFSA 2013: is SC recorded as the same? iv. Public interest as ground of revocation of IFI’s liscense

16. The challenges arises in IFSA 2013
1. Judicial oversight over the Bank Negara Malaysia (BNM).
2. Potential conflict of interest between shareholders and other stakeholders.
3. Cost and efficiency.
4. Innovation of product and services.
The challenges arises in IFSA 2013

17. Judicial Oversight over the Bank Negara Malaysia (BNM)
The BNM has more power to determine the Islamic Financial Institution (IFI) and its holding company
Power not only to advise but also to recommend the decision made by the Minister
There must be certain legal mechanism to limit and restrict such authorities and to find the best avenue to review and oversee the BNM’s action
Judicial Oversight over the Bank Negara Malaysia (BNM)

18. The Board of Director of an institution shall have regard to the interests of depositors and takaful participants
The IFSA seems to promote stakeholders value based approach in Islamic financial institutions rather than the shareholders value model
Potential conflict of interest between shareholders and other stakeholders

19. The element of strict liability in the IFSA will expose IFIs with further cost and expenses
Since precautions and due diligence have to be exercised to prevent the commission of the offence, any measures to mitigate this legal risk will cost additional expenses
Cost and efficiency

20. Innovation of product and services
Heavy regulated business environment- may denied innovation or lack of innovation or influence the market behavior and the players will choose for products of lesser constrains
The effect is concentrating on debt-based products and consistently neglecting the equity-based products both from asset and liabilities sides
Innovation of product and services

21. The Implications of IFSA 2013 to Islamic Financial Institutions (IFI)

22. Introducing new requirements Shariah compliance
Section 52(1) of the Central Bank of Act 2009 mentioned that, The Shariah Advisory Council shall have the following functions:
To determine the Islamic law on any financial matter
Is sue a ruling upon reference made to it
To advise the Central Bank on any Shariah issue relating to Islamic financial business
To provide advice to any Islamic financial institutions
Introducing new requirements Shariah compliance

23. IFSA 2013 restates the matter by introducing new requirements Shariah compliance
According to section 28, the institution must ensure at all times that their goals and operations, business, and affairs are Shariah compliant
The institution must required to inform the Shariah Advisory Council if there is any fraud or non Shariah compliance happened, so that the necessary procedures can be taken

24. A rule that will be announced is quite different penalty clause whereby the institution's failure to follow the rules, will be liable to imprisonment not exceeding eight years or pay the fine which is not exceeding RM 250 million or both.
Compare with the provisions under section 46 Islamic Banking Act 1983 which is the penalty will be determined to the director and manager of an Islamic bank who did not take all reasonable steps to compliance with the requirements of the act
Section 50 which provides a fine not more than RM 50,000

25. Required the Takaful operator with composite business licenses
In Takaful industry, the IFSA required the Takaful operator with composite business licenses to separate the Family takaful and General takaful
The IFSA gives 5 years to the Takaful operate to separate their business of Family takaful and General takaful to became different entities
The intention is to expand the regulator the General Takaful business growth
Required the Takaful operator with composite business licenses

26. Consumer impact in transition of deposits
Takaful operator needs to charge the higher price for their products and services to their customers compared to the conventional insurance
For the consumer impact in transition of deposits, customers whose Islamic deposit account are structured based on Shariah contract with the principal guaranteed they will be notified about with alternative products and supplied with enough information or transparency in making the right decision
The customer will have their choice whether to maintain their Islamic deposit funds with or changes to the product investment account depending on the risk appetite of customers
Consumer impact in transition of deposits

27. Compliance to Shariah is essential to enhance the confidence of the stakeholders of Islamic financial institutions
Provide greater certainty and predictability to the Islamic financial institutions in order to build public confidence in the system
Conclusion

28. THANK YOU…