CENTRAL BANK ACT 2009

Extracted from MIFC :

The new Central Bank Act 2009, Act 701 of the Laws of Malaysia, which came into force on 25 November 2009, heralds inter alia a new era for the Islamic finance industry in the country.

The Act which received Royal Assent on 19 August 2009 and which was published in the Gazette on 3 September 2009, has direct relevance to the Islamic finance industry in Malaysia in several crucial areas. Malaysia is the only country in the world where such provisions relating to the Islamic finance industry and its regulation and supervisions are specifically included in a central bank act.

What makes Malaysia stand out from other international Islamic financial markets is that under the Central Bank Act 2009 Part VII Chapter 2, Bank Negara Malaysia (BNM), the central bank, is required by law to promote Malaysia as an international Islamic financial centre. Article 60, for instance, requires BNM "shall, in co-operation with the Government or any Government agency, statutory body, supervisory authority or international or supranational organization, develop and promote Malaysia as an international Islamic financial centre".

Under the provisions of Part V1 Chapter 1 of the Act pertaining to 'Financial Stability Functions and Powers of BNM', the central bank is specifically armed with various powers for promoting financial stability in the system.

In a speech to a seminar on Islamic finance at the Banca D'Italia, the central bank, held on 11 November 2009 in Rome, Dr Zeti, Governor of BNM, stressed that from a Central Bank's perspective, "ensuring financial stability of the Islamic financial system is the paramount objective. Integral to the efforts in the development of Islamic finance, is therefore, the strengthening of the regulatory and supervisory framework."

Malaysia already has the legal, regulatory and supervisory framework that takes into account the distinctive features of Islamic finance in place, although it continually strives to put in place a comprehensive infrastructure to deal with the new challenges confronting the international financial system.

"Looking beyond the current crisis, an integrated crisis management framework will be part of this infrastructure. It is recognised that a more facilitative and modernised legal framework is required and that the boundaries of the regulatory framework for Islamic finance would have to be regularly adapted to keep pace with the evolution and transformation of the financial system. The supervisory framework for Islamic finance is being reinforced by a financial safety net framework that comprises the lender of last resort facility and a deposit insurance system. These financial arrangements are now in place in Malaysia. Similarly, the institutional arrangements for the resolution of troubled Islamic financial institutions are of equal importance. In Malaysia, we have in place a mandated resolution mechanism to provide for expedient, effective and cost efficient resolution of Islamic financial institutions," she explained.

Article 27 of the Central Bank Act 2009 stipulates that "the financial system in Malaysia shall consist of the conventional financial system and the Islamic financial system". Malaysia is the only country in the world that has enshrined this Dual Model approach in banking in the Law of the Land. In her speech to delegates at the Banca D'Italia seminar, Dr Zeti further clarified that "in such a dual system attention needs to be given to avoid the potential for regulatory arbitrage that may result in distortions that undermines the environment of a level playing field between conventional finance and Islamic finance. The development of the legal and regulatory framework for Islamic financial services industry is therefore grounded on the principle of neutrality in ensuring no worse off treatment when compared to conventional finance in terms of the taxation, laws and regulations".

Similarly, Part VII Chapter 1 of the Act relating to Islamic Financial Business, comprehensively outlines the important functions and powers of the SAC of BNM. Perhaps the two most important new provisions under Part XI are those relating to the rulings of the SAC. Article 57 stipulates that any ruling made by the SAC pursuant to a reference made under this Part shall be binding on the Islamic financial institutions under section 55 and the court or arbitrator making a reference under section 56. Article 58 further reinforces this by effectively making the SAC the Shariah Authority of Last Resort. "Where the ruling given by a Shariah body or committee constituted in Malaysia by an Islamic financial institution is different from the ruling given by the SAC, the ruling of the SAC shall prevail," it states.

EFFECTS OF DUBAI DEFAULTS ON ISLAMIC FINANCE INDUSTRY

The financial tsunami has finally struck the coast of the Arab Gulf, after it managed to avoid this for more than one year, to the point that many believed that the region had emerged from the crisis without suffering any losses. However the world, and the Gulf States, woke up last Wednesday following the closure of the Dubai markets to the news that Dubai World had requested a six-month halt to debt payments that amount to around $3.5 billion, and this is in the framework of restructuring the company's debts that total around $59 billion.

Dubai was poised to become the financial centre for the Islamic banking industry, and a gateway for Islamic banking in the Middle East, as due to Dubai's position, the Gulf region was able for the first time in 2007 to surpass Malaysia in the issuance of Sukuk. Dubai also sought to make the Dubai International Financial Centre [DIFC] the centre for Islamic finance as well, and last year DIFC sought to make Dubai Gold Securities compatible with the provisions of Shariah, which was through cooperation between the World Gold Council, and Dubai Multi Commodities Centre.

It seems that the endeavour to turn Dubai into a centre for Islamic banking will be strongly affected by the results of the financial crisis that Dubai is suffering from today, and which is due to Dubai World and Nakheel Properties’ inability to pay their debts. This news shook Dubai's financial credibility, and raised many questions over Dubai's financial transparency, as many investors and creditors had received assurances over the past month from officials that Dubai would be able to meet its financial obligations.

Let us see the issues at hand :

a) There could be “contagion”-type effects that could affect the creditworthiness of related entities, particularly those that have lent to Dubai World. Most of those are either UAE-related or European banks

b) Secondary aftershocks too would be entities similar to Dubai — other places in the world that have borrowed a lot Thus many emerging markets are getting hit in this mini-crisis by rising borrowing costs.

c) More borrowing to solve the Dubai crisis makes another one more likely.

d) Risk that an isolated default can spread then rises, as an increasingly leveraged financial system comes more and more to resemble a massive arrangement of dominoes. The more leverage on any entity, the taller that domino. The more leverage in the system, the more tightly the dominoes are spaced. That arrangement collapses when someone knocks over a key domino.

One fact remains - A default by Dubai will put the world of Islamic finance to the test at a time when hard questions are being asked by bankers and lawyers about the protection afforded by financial instruments based on Shariah.

IS THERE A "GOLD" BUBBLE?

Gold has been on a record-breaking climb over the past few months as the dollar weakens. The precious metal is seen as a good hedge against a weak dollar and potential inflation because of its stable store of value.

Just over a year ago, gold prices hit a low of around US$700. That was at the height of the financial crisis, when investors were dumping stocks and commodities across the board. The US Dollar has weakened steadily this year as low interest rates encourage investors to buy assets other than cash, like stocks and commodities, and potentially reap higher returns.

I think there’s a bubble in gold as usually the drive to gold is a flight from currency based on fears of inflation. The gold seems to be becoming the favourite investment around as the traders are afraid of the crisis In such an environment gold looks like a good investment to save one’s assets and to multiply them if you trade with a considerable leverage.

However, there is one problem with investing in the gold now — it’s already way overbought.