LAW738 Islamic Banking and Securities Law

An overview on the Developmemt and Structure of the Islamic Financial System

Outlines
Overview of the Financial System Overview of Malaysian Financial System
Overview of Islamic Financial

system

Introduction
Malaysia

has a modern and comprehensive financial system that continues to evolve in response to the changing domestic and international conditions. Financial reforms, including the structural changes that proceed after the Asian financial crisis, have evolved a more diversified, broader and deeper financial system, supporting Malaysias economic growth through a more efficient intermediation process.

What Is Financial System

Financial

System is a mechanism or a framework in which economics exchange can be done. In modern society, financial system plays an important role in influencing the level economic activities and exchange. It can be simple or complex, free or heavily regulated, efficient or inefficient and is one of the important components of the global economy; it provides essential services to public

Role of the Financial System

1.To develop a steady and balanced economic and social development 2. To create the basic infrastructure for the domestic banks to complement the already strong foreign banking presence in the economy. 3. To provide a financial stability

Structures of Malaysian Financial System

THE BANKING INSTITUTIONS
National Shariah Advisory Council for Islamic Banking and Takaful CENTRAL BANK OF MALAYSIA

Islamic Banks

Commercial Banks

Finance Companies

Merchant Banks

Discount Houses

NON-BANK FINANCIAL INTERMEDIARIES

Takaful Companies

Development Finance Institutions

Housing Credit Institutions

Pilgrimage Fund Board

Savings Institutions

THE FINANCIAL MARKETS Labuan Offshore Financial Services Authority Central Bank of Malaysia

Securities Commission

Kuala Lumpur Stock Exchange Offshore Market: Labuan International Offshore Financial Centre

Capital Markets Equity Market Bond Market -Public Debt Securities -Private Debt Securities Islamic -Private Debt SecuritiesIslamic Government Securities

Money & Foreign Exchange -Islamic money market

Derivatives Markets Commodity Futures KLSE CI Futures KLIBOR Futures

Malaysian Financial System

MFS

is divided into 2 :

1)Financial Institutions 2)Financial Markets

Financial Institutions
Financial institution is a business firm whose principle claims or assets are stocks, bonds and loans instead of real assets such as buildings, equipments and raw materials. They also provide loans to customers or purchase investment services, provision of a mechanism for making payments, transferring funds and storing financial information (Rose, Kolari (1995)

Financial Market
Institutions and procedures that

facilitate transactions in all type of securities (i.e. financial assets) To allocate financial resources within the economy Provide Sources of Funds to Deficit Units Consist of Primary market and Secondary market Firms (includes Banks) receive money from it , while investors (i.e. Firms or Individual) made investment (i.e. shares, bonds, marketable securities, government securities)

Evolution of Islamic Finance

1960s- substantial demand for

Shariah compliant banking, resulting in the establishment of the Mit GhamrLocal Saving Bank in Egypt in 1963. 1970s- Interest free or Islamic banking was given a strong business foundation with the establishment of Islamic Development Bank (IDB) in 1975. 1980s- the beginning of trend of rapid growth and expansion for the emerging Islamic financial services

Evolution of Islamic Finance (cont)

1990s-

market had gained enough momentum to attract the attention of policymakers and of institutions interested in introducing innovative products. Late 1990s and early 2000s- Islamic finance began to catch attention at international Mid 2000s- competition increased and both Islamic and conventional financial institutions began to position themselves aggressively to capture market share.

PROGRESSIVE FINANCIAL INSTITUTION DEVELOPMENT 2003-2010 2003-2010 1993-2002 1993-2002 1983-1992 1983-1992 Issuance of new
SPTF /SPI (93) Islamic Interbank money market (94) AIBIM* (95) ARIL (97) BMMB (99) IFSB (02) MTA (02) FSMP (01) Islamic bank licenses to foreign IFIs (04)

LTH (69) BIMB (83) STMB (84)

Liberation of IB & Takaful industry to allow 49% foreign interest (05)

PROGRESSIVE FINANCIAL INSTITUTION DEVELOPMENT

2003-2010 2003-2010 1983-1992 1983-1992

1993-2002 1993-2002 3 new takaful operators commence operation Launched MIFC initiative Announce tax incentives for MIFC ( 07 budget ) Guidelines issued on establishment of new IIB, 2 retakaful licences approved by BNM (06)

EFFECTIVE & CONDUCIVE LEGAL & SHARIAH FRAMEWORK

2003-2010 2003-2010 1983-1992 1983-1992

1993-2002 1993-2002
Dedicated HC (03)

IBA 83 TA 84 Amendment Central Bank Act of Msia 57to establish SAC at BNM

Shariah Advisory Council at BNM (97)

Tax neutrality policy (03) amendment to - Income Tax Act 67 - RPGT Act 76 - Stamp Act 49 Enactment of Malaysian Deposit Insurance Corporation Act 05 First International Shariah Scholars Dialogue

EFFECTIVE & CONDUCIVE LEGAL & SHARIAH FRAMEWORK

2003-2010 2003-2010 1983-1992 1983-1992

1993-2002 1993-2002
Issuance of Shariah

governance framework Establishment of RM200 mil Shariah endowment fund (05) First Regional Shariah Scholars forum/dialogue (06) Issuance of 2 standards by IFSB : Capital Adequacy Std and Guiding Principles of Risk Management for Islamic bank (06) Introduction Central Bank of Malaysia Act 2009

MALAYSIA AS INTERNATIONAL FINANCIAL CENTRE To strengthen Malaysias position as an International financial centreand to realize its target to become Islamic financial hub in this region..it launched MIFC on 14 Aug 06 What is MIFC? -Diversified range of financial institutions operating from anywhere in Malaysia offering Islamic financial products & services in any currency to resident & non-resident

MALAYSIA AS INTERNATIONAL FINANCIAL CENTRE Under MIFC, Malaysia aims to be : Centre for origination, distribution as well as trading of Islamic treasury and capital market instruments Centre for Islamic fund and wealth management services Centre for international currency Islamic financial services ( including deposit & financing ) Centre for Takaful & Retakaful Centre for Islamic finance education, training , consultancy & research

ISLAMIC FINANCIAL HUB : Msias strengths

Strong foundation in Islamic finance pioneer in global Islamic banking & finance Strong economic growth & international trade Savvy workforce fluent in English Relatively low cost of living Significant attention & resources directed towards human capital development Strong support by the government Strong international connection/communication currently holds the chair of OIC & IFSB

Popularity of Islamic Finance

Recent Growth in the West Gains by the Legal & Accounting Professions Multidisciplinary Criteria Dispute Settlement and Conflict Resolution Coexistence with Western Finance or Absorption by Western Financial Institutions