1. Mahyuddin Khalid
emkay@salam.uitm.edu.my
ISLAMIC FINANCIAL
LEGAL FRAMEWORK
BANKING AND FINANCIAL INSTITUTION ACT 1989
CENTRAL BANK OF MALAYSIA ACT 2009

2. CONTENT
2
 BAFIA
 ISLAMIC BANKING BUSINESS
 ISLAMIC FINANCIAL BUSINESS
 SHARIAH ADVISORY COUNCIL
 ACQUIRE IMMOVABLE PROPERTY
 AMENDMENT TO CBA 2003
 CENTRAL BANK ACT 2009
 RECOGNITION TO ISLAMIC FINANCIAL
SYSTEM

3. INTRODUCTION
3
 The establishment of BIMB has paved way
for the implementation of Islamic banking in
wider scope.
 BNM realised it was crucial to have a large
number of institutions participating in the
Islamic banking system.
 Therefore, BNM decided to allow
conventional financial institutions to offer
Islamic banking services using their existing
infrastructure.

4. BANKING AND FINANCIAL INSTITUTION ACT
2009
4
 The Skim Perbankan Tanpa Faedah or the
Interest-Free Banking Scheme (now replaced by
Islamic Banking Scheme) was launched on
March 1993
 BNM issued “Guidelines on Skim Perbankan
Tanpa Faedah (1993)” on July 1993.
 The Guidelines are issued pursuant to section
126 of the BAFIA.
 In 1996, an amendment was made section 124
of BAFIA to the to formalise the carrying of
Islamic banking and financial business by
licensed institutions established under BAFIA
and to establish a Shariah Advisory Council.

5. ISLAMIC BANKING BUSINESS
5
 Section 124(1) : except as provided in section
33, nothing in this Act or the IBA 1983 shall
prohibit or restrict any licensed institution from
carrying on Islamic banking business or Islamic
financial business, in addition to its existing
licensed business, provided that the licensed
institution shall consult the BNM before it carries
on Islamic banking or financial business”.
 Any licensed institution are allowed to conduct
Islamic banking business with approval from
BNM.
 The term „Islamic banking business‟ in BAFIA
has the same meaning as in the IBA which
mean:
 Any banking business, the aims and operations of
which do not involve any element which is not

6. ISLAMIC FINANCIAL BUSINESS
6
 The term „Islamic financial business‟ is
defined as:
 Any financial business, the aims and operations
of which do not involve any element which is not
approved by the religion of Islam.
 In the BAFIA, both terms are mentioned
together but there is no clear distinction made
to distinguish these two terms in the Act.
 Section 124(2) clarify that the IBA shall not
become an authority for regulating the Islamic
banking business carried on by conventional
banks which is based on the BAFIA.

7. SHARIAH ADVISORY COUNCIL
7
 Section 124(3) : Any licensed institution carrying
on Islamic banking or financial business may
from time to time seek the advice of the Shariah
Advisory Council on the operations of its
business in order to ensure that it does not
involve any element which is not approved by the
religion of Islam.
 Legally, it is mandatory for the banks to seek the
advice of the SAC on its Islamic banking or
financial operations, but, it is not mandatory for
the BAFIA licensed institutions to have an
internal SAC.
 However, this does not prevent the BAFIA
licensed institutions from having their own SAC
to advise them on matters relating to the Shariah.

8. SHARIAH ADVISORY COUNCIL
8
 Section 124(4) : The licensed institution carrying
on Islamic banking or financial business must
also comply with any written directions relating to
the Islamic banking business issued from time to
time by BNM, in consultation with the SAC.
 Section 124 governs only any BAFIA-licensed-
institutions carrying on Islamic banking business.
 It does not govern Islamic banks established
under the Islamic Banking Act.
 For the purpose of applying Section 124, any
licensed institution carrying on Islamic banking
business or Islamic financial business is deemed
not to be an Islamic bank.

9. ACQUIRE IMMOVABLE PROPERTY
9
 Section 66 (1) : Except as may be provided in
any regulations , no licensed institution shall
acquire or hold:
 any immovable property or any right or interest
except such as may be reasonably necessary for the
purpose of conducting its business, or of providing
housing or other amenities for its staff, and as may in
either case be approved by the Bank.
 Bank under BAFIA cannot acquire shares of
immovable property.
 Islamic Banks involves with buying and selling of
properties for Islamic banking business.
 Solution S 116 (2) (a) BNM‟s supervision

10. AMENDMENT TO CBA 2003
10
 Prior to 2003, there has been no any provision
under the Central Bank of Malaysia Act (CBA)
regarding operation of Islamic banking and
finance.
 Only in 2003, the CBA 1958 was amended to
includes section 16B which allocates for the
establishment of the Shariah Advisory Council
(SAC) at the BNM for the purpose of advising the
BNM concerning matters related to Shariah
which affect the Islamic banking and financial
industries.
 The new Central Bank of Malaysia Act 2009 was
introduced and explicitly codifies the duality of
the Malaysian financial system which shall
consist of Islamic and conventional financial
system.

11. CENTRAL BANK ACT 2009
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 This was supported by a comprehensive legal
framework for the regulation of Islamic
finance in Malaysia, encompassing the
banking, takaful (Islamic insurance) and
Islamic capital market industries.
 The Act will also enable BNM to manage
emerging risks and challenges in performing
its role and responsibilities as the nation‟s
central bank.

12. RECONGNITION TO ISLAMIC FINANCIAL
SYSTEM
12
 Section 27 : the financial system in Malaysia
shall consist of the dual financial system i.e
conventional and Islamic financial system.
 CBA gives recognition to the Islamic financial
system in Malaysia and provides enhanced
role of the SAC on Islamic financial business.
 Section 2 defines Islamic financial business
as:
 “Financialbusiness in ringgit or other currency
which is subject to the laws enforced by the
Bank and consistent with the Shariah”

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