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.