INTRODUCTION
1 The scope of this paper is limited; it calls for a discussion of the salient features of the two Acts. Given the overall scope of this seminar the subject will be confined to the salient legal features of the Acts. Many provisions of the Acts are technical, which deal with the banking aspects. Such provisions are not discussed in this paper.

2 Even in the discussion of the legal aspects, especially of the Islamic Banking Act 1983 ("IBA") , more questions will be raised than answered. This is because to the writer's knowledge none of the provisions of the IBA have been brought before the Courts for interpretation. Accordingly, views and opinions expressed herein are strictly those of the writer's and should not be acted upon without further legal advice.
 
ISLAMIC BANKING ACT, 1989

The Islamic Banking Act, 1983 ("IBA") is perhaps an unique piece of legislation. It provides for the setting up and licensing of "Islamic banks". It is unique in the sense that probably for the first time an Act of Parliament has been enacted to deal specifically with Islamic banking. The writer is not aware of similar legislation in any other jurisdiction following the common law system.

Up to the present o­nly o­ne bank has been licensed under the IBA and that is Bank Islam Malaysia Berhad ("Bank Islam").

The IBA is a mercifully brief Act containing 60 sections divided into 8 parts. Brevity is no guarantee of clarity or simplicity. The contents of the IBA give rise to some  legally interesting (and intriguing) issues. The Act came into force o­n 10 March, 1983.

Part 1 - Preliminary

.1 The Act applies throughout Malaysia.

.2 Section 2 defines "Islamic Bank" as "any company which carries o­n Islamic banking business and holds a valid licence;..." and "Islamic banking business" as "banking business whose aims and operations do not involve any element which is not approved by the Religion of Islam". It is to be noted that "banking business" is not defined.

.3 The definition of Islamic banking business appears at first flush to be simple; but in reality it may not be so. What is the meaning, for example, of the expression "any element which is not approved by the Religion of Islam"? Anyone with even a basic knowledge of Islamic law will know that there are even in the sunni branch of Islam (as opposed to the Shi'a branch) 4 madhabs. And opinions among the four do vary o­n many aspects of the law. In the event of differences in opinion o­n the law applicable in respect of any particular matter the law of which madhab is to be applied? Seen from that point of view the wording may seem too general. It might be thought that it would perhaps have been more certain if the definition had been more precise, such as providing that in the event of a difference the law to be applied is to be the law in accordance: with, say, the Shafi'e madhab.

On the other hand, however, the general definition may have some positive aspects. It would allow, for instance, for the reception and application of the law from any of the madhabs or even from the Shi'a branch, thus making it broader-based and the resulting proposition of the law more widely acceptable.
 
.4 The Act by not defining banking business has either left it to be implied by the Courts that the meaning of the term is to be the same as that applied in conventional banking or, alternatively, left the term to acquire a meaning by custom and usage over the years.

.5 The other definitions do not call for much comment here.

Part II - Licensing of Islamic Banks

This part deals with the licensing of Islamic Banks. Sn 3 provides that o­nly a company in possession of a licence from the Minister can transact Islamic banking business. It is to be noted that the Act specifies that o­nly a company can be engaged in that business. But it need not be a public company. It also means that, for example, a statutory body or a co-operative society cannot be granted a licence.

One provision of particular significance is Sn 3 (5) (b) which provides  that  the  Central Bank (ie Bank Negara Malaysia) shall not recommend the grant of a licence, and the Minister shall not grant a licence, unless he is satisfied: "(b) that there is, in the articles of association of the bank concerned, provision for the establishment of a Syar'iah advisory body to advise the bank o­n the operations of its banking business in order to ensure that they do not involve any element which is not approved by the Religion of Islam".

8 This is an important provision. However, its real purport has not been tested in the Courts as yet. The setting up of a Syar'iah advisory body is a statutory requirement and its function, is "to ensure that [the operations of the bank] do not involve any element which is not approved by the Religion of Islam". What is the ambit of this subsection? To take an example, if a particular document used in banking transactions by a bank licensed under the ISA has been approved by its Syar'iah advisory body, can it then be challenged in Court as being contrary to Syar'iah? Can the Court find such a document to be not in accordance with the Syar'iah? If it does so, what is the effect of it o­n the decision of the Syar'iah advisory body?

Put another way, are decisisons of the Syar'iah advisory body open to review by the Courts? This is by no means an easy question to answer. And it is not easy either to venture an opinion o­n the issue since any opinion has to be relative to particular factual situations. The question is best left to be answered at the appropriate time by the appropriate forum.
 
Part III - Financial Requirements and Duties of Islamic Banks

9 This part deals with the maintenance of capital funds, reserve funds, percentage of liquid assets and also
auditing of an Islamic Bank's accounts. It is not thought necessary to discuss these provisions here.

Part IV - Ownership, Control and Management of Islamic Banks

10 These provisions seek to control the ownership of Islamic banks by requiring the obtaining of the approval of the Minister for any changes in the shareholding of the bank that will result in a change in the control or management of the bank.

Part V - Resrictions o­n Business

11 The restrictions dealt with in this part relate to what may be called general banking restrictions (as opposed to restrictions from a Syar'iah point of view). Among the matters regulated are restrictions o­n credit limits, disclosure of interests by directors, etc.

Part VI - Powers of Supervision and Control over Islamic Banks

12 Basically these provisions relate to the supervision of Islamic banks by the Central Bank.
 
.1 Sn 42 deals with moratorium under which the bank may be prohibited from carrying o­n banking business. The power to make the order imposing the moratorium is vested with the Central Bank, with the approval of the Minister.

.2 Another provison worthy of note is Sn 43 which relates to amendments to the bank's memorandum and articles of association. Any amendment requires the prior approval of the Central Bank.

Part VII - Miscellaneous

13 This part contains various miscellaneous provisions including those prescribing penalties for infringing the provisions of the Act. The Central Bank is vested with power to make regulations "for carrying into effect the objects of this Act". Sn 55 calls for some comment. It says that an Islamic bank shall be subject to the provisions of the Companies Act, 1965 and that where there is a conflict between that Act; and the IBA the provisions of the IBA shall prevail. But it does not deal with other Acts, the provisions of which may conflict with those of the IBA. There seems to have been an oversight in this respect which needs to be remedied.
 
BANKING AND FINANCIAL INSTITUTIONS ACT 1989

14 This Act, called "BAFIA" for short, repealed and replaced the Finance Companies Act 1969 and the Banking Act 1973 (Sn 128). The BAFIA came into force o­n 24 August, 1989 but it does not apply to an Islamic bank (Sn 124). Accordingly, Islamic banks are regulated by the IBA o­nly. It is therefore thought not necessary to deal at length with the BAFIA. However, some of the provisions will be considered, especially for comparison with the corresponding provisions of the IBA.

14 As the recital to the BAFIA sets out, it is an "Act to provide new laws for the licensing and regulation of institutions carrying o­n banking, finance company, merchant banking, discount, house and money-broking businesses, for the regulation of institutions carrying o­n certain other financieil businesses, and for matters incidental thereto or connected therewith". Each o­ne of these businesses is defined (Sn 2) but not "other businesses". The latter term would include, for example, factoring business and leasing business.

Part II - Licensing

16.l Sn 4 of BAFIA stipulates that no person shall shall carry o­n banking business, etc without a valid licence. "Person" is defined in Sn 2 to include "an individual, any corporation, statutory body, local authority, society, trade union, co-operative society, partnership and any other body, organisation, association or group of persons, whether corporate or unincorporate".

.2 It will be recalled that the IBA restricts the grant of banking licences to companies, BAFIA however opens it to a wider group.

17 It was noted above that the IBA does not define the term "banking business". The BAFIA defines it as follows:

"banking business" means

(a)  the business of 

(i) receiving deposits o­n current account, deposit account, savings account or other similar account;

(ii) paying or collecting cheques drawn by or paid in by customers; and

(iii) provision of finance; or

(b) such other business as the Bank, with the approval of the Minister, may prescribe;".
 
18 Most commercial banks have what are known as Islamic counters through which they offer a variety of Islamic banking facilities, called the interest-free banking scheme. But a query arises: is that Islamic banking business and if so do they need a licence under the IBA? o­ne view is that they do because of Sn 3(1) of the IBA. The other view is that no such licence is necessary if that business falls within limb (b) of the definition above. The writer had expressed some doubt about the legal position of Islamic banking business carried o­n by such banks in the light of the IBA.¹

19 This uncertainty is about to be cleared up. It was noted in para 12 above that the BAFIA does not apply to an Islamic bank. There is a Bill before Parliament to amend the BAFIA. This is the Banking And Financial Institutions (Amendment) Bill. Sn 66 of the Bill seeks to amend Sn 124 of the BAFIA by substituting for Sn 124 the following section:

"Islamic banking or financial business. Act 276". "124. (1) Except as provided in Section 33, nothing in this Act or the Islamic Banking Act 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 Bank before it carries o­n Islamic banking business or any Islamic financial business.

(2) For the avoidance of doubt, it is declared that a licensed institution shall, in respect of the Islamic banking business or Islamic financial business carried o­n by it, be subject to the provisions of this Act.

(3) Any licensed institution carrying o­n Islamic banking business or Islamic financial business, in addition to its existing licensed business may, from time to time seek the advice of the Syariah Advisory Council  established under subsection (7), 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.

(4) Any licensed institution carrying o­n Islamic banking business or Islamic financial business shall comply with any written directions relating to the Islamic  banking  business or any other Islamic financial business, carried o­n by such licensed institution, issued from time to time by the Bank, in consultation with the Syariah Advisory Council.

(5) Any licensed institution carrying o­n Islamic banking business or Islamic financial business shall be deemed to be not an Islamic bank.

(6) This Act shall not apply to an Islamic bank.

(7) For the purposes of this section -

(a) there shall be established a Syariah Advisory Council which shall consist of such members., and shall have such functions, powers and duties as may be specified by the Bank to advise the Bank o­n the Syariah relating to Islamic banking business or Islamic financial business,

(b) "Islamic banking business" has the meaning assigned thereto under the Islamic Banking Act 1983; and

(c) "Islamic financial business" means any financial business, the aims and operations of which, do not involve any element which is not approved by the Religion of Islam.".

20 Thus statutory sanction would be given to commercial banks and other financial institutions to carry o­n Islamic banking business or Islamic financial business when the BAFIA Amendment Bill is passed by Parliament and receives the Royal Assent.

21 Whilst o­ne problem has been resolved another potential problem area may have been created. It is this: the proposed Sn 124 (7) provides for the establishment of a Syariah Advisory Council "to advise the Bank o­n the Syariah relating to Islamic banking business or Islamic financial business". Now it will be recalled that o­ne of the requirements of an Islamic Bank is to have an in-house Syar'iah advisory body "to advise the bank o­n the operations of its banking business". What would be the position if the advice of these two bodies o­n the same issue differ?

22 Such conflict of opinion is not unforeseeable. And it should be avoided before it arises. There must be some machinery set up to ensure that both advisory bodies consult each other and agree o­n the advice to be rendered o­n any issue of Islamic law. It would be even better if the two bodies are merged into o­ne so that there would be no opportunity for such conflicting advice to be rendered at all.

23 It is apparent from the legislation relating to Islamic banking and other business (both those in force and those that are pending) that the Government is committed to and serious - about promoting Islamic banking in this country.
 
And there can be no clearer testimony that Islamic banking is here to stay. Malaysia is the first country in the common law world to give Islamic banking statutory recognition and its rightful place in the financial structure of the country. It is a matter of time (if it indeed is not already a fact) before the example set by Malaysia is followed by other countries.

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References
1. See, Mohamed Ismail Shariff, "Conveyancing, Banking and Commercial Practice: /Vn Is-air.ic Perspective: Legal Issues in Islamic Banking: The Litigation Angle" a paper presented at thp 10th Malaysian Law Conference held o­n 28-30 January 1994, reprinted in the Business Law Journal, [1994) 4: BI.J lxx1