UAE Laws and Islamic Finance

Laws of the UAE and Islamic Finance

Bank Negara Malaysia: The Central Bank of Malaysia and the Malaysian Financial System

Bank Negara Malaysia is the sole currency issuing authority and the main regulatory authority of all monetary and non-monetary institutions and Development Finance Institutions (DFI’s) in Malaysia.  DFI’s are enterprises owned largely by the public sector engaged in mobilizing financial resources to supplement the development efforts of the government.  In regards to DFI’s, Bank Negara Malaysia promotes effective and efficient DFI’s with the goal that they will eventually minimize government cost in meeting its policy objectives.

Bank Negara Malaysia is at the core of the Regulatory Framework of the Malaysian Financial System.  Two of the objectives of Bank Negara Malaysia are in fact:

  1. To promote monetary stability and a sound financial structure; and
  2. To influence the credit situation to the advantage of Malaysia.

These objectives give bank Negara Malaysia responsibility over matters affecting monetary and prudential control.  The bank is thus charged with implementing all regulations concerned with these matters as per Malaysian law as well as issuing policies and directives to further implement these regulations.  In addition, Bank Negara Malaysia must formulate new policies and/or correct old policies when needed.  Only one entity stands above Bank Negara Malaysia and that is the Minister of Finance of Malaysia, however, the Minister acts as sort of a puppet of the Bank Negara Malaysia as the Minister only acts after an action is initiated by Bank Negara Malaysia.  Although having the Finance Minister in this role is intended to limit the power of Bank Negara Malaysia, the Bank Negara Malaysia in fact acts as the main regulatory authority of the Malaysian financial system…setting benchmarks and model contracts, which you can find in many of my Islamic finance posts on this website.

Other entities have since been created to regulate various sectors of Malaysia’s financial system.

For example, on the recommendation of Bank Negara Malaysia, the Malaysian government created the Securities Commission, which was established in March 1993 under the Malaysian Securities Commission Act 1993.  The Securities Commission took over the regulation of the securities, options, and financial futures industries and other capital market instruments in Malaysia and complemented Bank Negara Malaysia as the supervisor of the banking industry, the money market, and its participants.

The money market is a market for securities that when originally issued had less than 12 months to maturity.  The money markets comprise the inter-bank market where the lending and borrowing of short term funds take place as well as the market for short- term money market papers.  Short -term money market papers includes negotiable instruments of deposits, bankers’ acceptances, repurchase agreements and bills issued by the Treasury and Bank Negara Malaysia.

The capital market comprises a primary securities market and a secondary securities market and is regulated by the Securities Commission and Companies Act 1965.  In the primary market, new securities are sold, hence its association with initial public offerings while the secondary securities market is where outstanding issues of securities are traded.  The primary market is used to raise new capital for enterprises while the secondary market provides the requisite liquidity for investors to arrange their portfolio to best meet their individual needs.

An Islamic inter-bank money market (IIMM) was introduced in the Malaysian financial system in January of 1994, which linked all institutions and instruments together.  The IIMM covers inter-bank trading in Islamic financial instruments, Al-Mudharabah Inter-bank investment, and an Islamic Inter-bank Cheque Clearing System.    Islamic banks and banks under the IBS are allowed to trade in Islamic financial instruments.  Al Mudharabah Inter-bank investment refers to a mechanism whereby a surplus IBS bank can invest in another IBS bank, which has a deficit on the basis of Al Mudharabah (profit-sharing).  A new cheque clearing system was introduced, which separated Islamic and conventional cheques for clearing purposes and is also based on the principle of Al Mudharabah.

In addition, the Futures Industry Act of 1993 provides for an underlying regulatory framework for trading in options and financial futures.  Self-Regulatory Organizations including the Kuala Lumpur Stock Exchange (KLSE) complement the role of the Securities Commission to ensure the development of a capital market that is in accordance with the commercial aspirations and needs of Malaysia.  (The trading of listed securities in Malaysia takes place mainly on the KLSE and the Malaysian Exchange of Securities and Automated Quotation (MESDAQ)).

Furthermore, Labuan Offshore Financial Services Authority (LOFSA) was set up in 1996 to regulate the Labuan Offshore Jurisdiction and to develop and promote Labuan as an international offshore financial center.  (IOFC)

The Commodity and Monetary Exchange of Malaysia (COMMEX) is a futures and options exchange formed by the merger of the Malaysian Monetary Exchange Berhad and the Kuala Lumpur Commodity Exchange in 1998.  Crude Palm Oil Futures and KL Inter-bank Offered Rate (KLIBOR) interest rate futures contracts are traded on COMMEX.

The Kuala Lumpur Options and Financial Futures Exchange (KLOFFE) is Malaysia’s financial derivatives exchange, which allows the trading of equity-based derivatives contracts such as stock index futures, stock index options, and stock options.  KLOFFE is a wholly owned subsidiary of KLSE.

In June of 2001, the Malaysian Derivatives Exchange Berhad (MDEX) was formed as a subsidiary of KLSE after the merger of KLOFFE and COMMEX.

In addition, to ensure the development of the Islamic Finance industry in Malaysia, the Association of Islamic Banking Institutions Malaysia (AIBIM) was formed to serve as a forum for addressing issues related to Islamic Banking and to chart out future plans for the industry and an Islamic Banking and Finance Institute (IBFIM) was launched to strengthen the industry and its practitioners.  IBFIM was formed in 2001 and  serves as a one-stop shop  for providing education, training and research on Islamic financial services concerning Islamic banking, Takaful and Islamic capital markets at both the domestic and international levels and arenas.

*Information taken from the Law and Practice of Islamic Banking and Finance by Dr. Nik Norzrul Thani; Mohamed Ridza Mohamed Abdullah; and Megat Hizaini Hassan.  (2003)

UAE Laws and Islamic Finance

Laws of the UAE and Islamic Finance

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