The Islamic Finance and Markets Review: Malaysia
Legislative and regulatory framework
Malaysia currently finds itself just over two years into the tenure of a new government at the helm after the opposition's historic victory in the 14th general election in May 2018, resulting in the country's first change of government following 61 years of rule by the previous Barisan Nasional government. In the Annual Budget 2020 (announced in October 2019), the government identified key priorities to support this year's theme on 'driving growth and equitable outcomes towards shared prosperity'. The government also expressed its ambition to achieve its Vision 2020 goal with a new growth trajectory built on the foundation of the Shared Prosperity Vision 2030.2 In efforts to further promote and develop the Islamic finance ecosystem in Malaysia, a special committee on Islamic finance, JKKI, was established and tasked with drawing up an Islamic economic blueprint and organising various outreach programmes and professional courses to deepen the public's understanding of Islamic finance. It was also announced that tax incentives for sukuk and shariah-compliant funds would be extended.3
However, the prevailing covid-19 pandemic has, as in many other countries, had a substantial economic impact on Malaysia, leading to an increase in short-term unemployment, living costs and household financial obligations. This has been felt most acutely by the poorest 40 per cent of Malaysia's population (the 'B40' class), a low-income group that is particularly vulnerable to economic instability.
In this respect there have been conflicting views on how covid-19 will impact the growth of Islamic finance in Malaysia. The government clearly expects that the country will at the very least maintain its position as, inter alia, the third-largest market for global Islamic finance products, the world's largest sukuk issuer and the country first-ranked (in 2019) for Islamic funds assets under management with 34 per cent of the global share, and even further its lead through the promotion of socially responsible investing. However, local rating agencies have adopted a more conservative outlook, maintaining a stable outlook of the Islamic banking sector due to its robust fundamentals, but anticipating a decrease in sectoral growth for 2020 as compared to 2019. Malaysia has developed a sophisticated Islamic finance sector over the past 30 years, which in turn has generated a vibrant business environment for financial institutions, intermediaries, investors, issuers and service providers alike. In the course of this development, Malaysia has successfully established a mature and robust Islamic finance regulatory framework, and pioneered a dual banking system wherein both Islamic and conventional financial systems operate and co-exist within a single regulatory framework.
Malaysia's financial services industry has always been championed as a key driver of Malaysia's economic development. It is one of the 12 national key economic areas (NKEAs) under Malaysia's economic transformation programme (ETP), the national strategic initiative formulated by the previous government to elevate the country to developed-nation status by 2020,4 and is the foundation of the financial sector blueprint (FSB), the 10-year master plan implemented by the country's central bank (Bank Negara Malaysia (BNM)) for the management of Malaysia's transition towards becoming a high-value-added, high-income economy.5 A key recommendation under the FSB is for Malaysia to consolidate its success and position itself as a leading international centre and global hub for Islamic finance. Further, the government has also committed under its financial services NKEA for Islamic finance in Malaysia to constitute 40 per cent of total financing in Malaysia by 2020. The BNM is currently working on the next blueprint for the financial sector, which the BNM aims to publish by 2021.6
In January 2017, the Securities Commission Malaysia (SC) announced the launch of a five-year Islamic fund and wealth management blueprint (blueprint)7 to drive further development and growth of Malaysia's Islamic capital market. The blueprint envisages leveraging Malaysia's Islamic capital market ecosystem to establish the country as a leading international centre for Islamic fund and wealth management8 (see also Section VI.iii). As of December 2019, there are now 23 full-fledged Islamic fund management companies.9
In July 2017, BNM, in collaboration with certain Islamic banking and finance institutions, embarked on the development of several strategies aimed at strengthening the roles and impact of Islamic banking institutions. These strategies, called value-based intermediation, were to focus on delivering the intended outcomes of shariah through the adoption of practices, conduct and offerings that generate a positive and sustainable impact on the economy, community and environment.10 The (then) new government lost no time in effecting leadership change at BNM and, in July 2018, the Ministry of Finance announced the appointment of Datuk Nor Shamsiah Mohd Yunus as the central bank's new governor.11
Nevertheless, BNM continued to build on the 2017 strategy paper on value-based intermediation (VBI) and issued three guidance documents in October 2018, namely the Implementation Guide for VBI, the VBI Financing and Investment Impact Assessment Framework and the VBI Scorecard to facilitate the practical adoption of VBI, as VBI aims to re-orient Islamic finance business models towards realising the objectives of shariah.12 VBI is also consistent with global finance initiatives in support of achieving the sustainable development goals (SDGs) set by the United Nations (UN). Islamic banks continued to make progress in driving the VBI agenda through enhanced offerings and strong institutional commitments,13 and in September 2018, HSBC Amanah Malaysia Bhd launched the world's first UN SDG sukuk.14 The VBI financing and investment impact assessment framework (VBIAF), issued on 1 November 2019, outlines the framework to facilitate the establishment of an effective risk-management system for financing and related advisory services and investment activities that integrate the VBI considerations. Accompanying the VBIAF is a statement that summarises the feedback received during the consultation period and a clarification note on certain issues raised by the industry. The scope of implementation of the VBIAF will depend largely on the respective technical, operational and financial VBI implementation strategy of individual Islamic financial institutions, which may differ according to risk appetite, capacity and capabilities.15 Additionally, the use of social finance instruments such as endowment (waqf), donation (sadaqah) and alms-giving (zakat) in the provision of financial services for those in greater need has been explored by the Islamic banking and takaful industry as part of its strengthened focus on VBI.16
While it may still be too soon to assess the full impact of the covid-19 crisis, it was reported that in the first half of 2020 (HI 2020) Malaysia continued its leading position in the global sukuk market with a market share of 41.5 per cent17 combined with steady growth within the takaful market and was showing steady growth amid the covid-19 pandemic.18 It was also reported that despite the pandemic and the implementation of a movement restriction order during the first half of the year affecting businesses, Malaysia's Islamic financial sector was predicted to sustain double-digit growth, hitting 3 trillion ringgit.19
i Legislative and regulatory regime
In line with the FSB, the regulatory and supervisory framework in Malaysia in respect of the Islamic banking and finance sector was recently consolidated and updated under the Islamic Financial Services Act 2013 (IFSA),20 the governing law of Malaysia's Islamic finance sector.
As the primary source of legislation governing the licensing and operation of Islamic and international Islamic banking businesses conducted by financial institutions, the IFSA, together with guidelines and circulars issued by BNM,21 contains extensive provisions on end-to-end shariah compliance, governance and enforcement, which include the following basic premises:
- establishing BNM as the shariah regulator over the financial sector;
- providing the legal basis for the rulings of BNM's Shariah Advisory Council (BNM SAC);
- prohibiting financial institutions that conduct Islamic and international Islamic banking businesses from carrying out non-shariah-compliant activities; and
- empowering BNM to direct and penalise financial institutions for breaches of the IFSA and offences committed thereunder.22
Under the IFSA, BNM was conferred regulatory and supervisory powers, and was also empowered to issue guidelines and circulars on shariah requirements to promote financial stability and ensure shariah compliance. Following therefrom, the IFSA provides that the operations, structure and terms and conditions of Islamic financial products and services provided by financial institutions must be shariah-compliant. Any entity that conducts Islamic banking business23 or international Islamic banking business24 must possess the licences granted by the Minister of Finance (Minister) on the recommendation of BNM. Foreign institutions may offer Islamic banking services in Malaysia with a valid licence under the IFSA. Factors that will be taken into consideration when assessing licence applications are whether the aims and operations of a business will involve any element that is contrary to shariah and the reputation of the applicant for being operated in a manner consistent with the standards of good governance and integrity.
There are various measures taken by the authorities to strengthen consumer protection, including:
- the issuance of the revised BNM's Rules on Prohibited Business Conduct in 201625 to supplement the prohibitions on financial institutions from engaging in conduct deemed to be inherently unfair to consumers under Schedule 7 of the IFSA;
- the establishment of the Financial Ombudsman Scheme under the Islamic Financial Services (Financial Ombudsman Scheme) Regulations 2015; and
- the setting up of the Malaysia Deposit Insurance Corporation (MDIC) pursuant to the Malaysia Deposit Insurance Corporation Act 2011 (MDICA), under which the MDIC insures consumers against the loss of their deposits (including Islamic deposits) in financial institutions in Malaysia26 for up to 250,000 ringgit per depositor per financial institution in the event of loss caused by failure of a financial institution holding such deposits.
Islamic capital markets
The Capital Markets and Services Act 2007 (CMSA)27 constitutes a single framework regulating the licensing of both conventional and Islamic capital market services, market conduct and the offering and issuance of securities, including unlisted Islamic securities or sukuk, with the exception of specific laws, regulations and guidelines that apply exclusively to the operation of the Islamic capital market. This marked a major milestone in the SC's continuous efforts to strengthen the capital market regulatory framework.
In this regard, the CMSA provides, inter alia, as follows:
- that Islamic securities are securities for the purposes of securities laws;28
- that any proposal, scheme, transaction, arrangement, activity, product or matter relating to Islamic securities shall comply with the relevant requirements under the securities laws and guidelines issued by the SC;29 and
- that the Minister may, for the purposes of securities laws and on the recommendation of the SC, inter alia, prescribe any instrument, product, or class of instruments or products, to be Islamic securities, Islamic derivatives or Islamic capital market products.30
The following features of the CMSA accord greater protection to investors of securities (including Islamic securities) in Malaysia:
- the SC's power to take civil and administrative actions;
- the SC being allowed to recover three times the amount of losses through a civil action for a wider range of market misconduct;
- the standards of trustees for debenture holders are enhanced; and
- investor protection is extended to clients of financial institutions.
Takaful (Islamic insurance)
Under the IFSA, any companies that are in the takaful business or international takaful business must hold a valid licence granted by the Minister on the recommendation of BNM. Licensed takaful operators must also comply with the relevant BNM guidelines on takaful 31 and must establish and implement a retakaful management strategy that is consistent with the risk appetite of its takaful business, and ensure that risks are ceded to takaful or retakaful operators.32 In addition, licensed takaful operators must not accept reinsurance inwards from an insurer or reinsurer, except for a risk that is permissible under shariah and where the inward arrangement is based on a retakaful contract between the licensed takaful operator and the insurer or reinsurer, as per applicable rulings by the Shariah Advisory Council.33 The Guidelines on Takaful Operational Framework issued by BNM in June 2019, which came into force on 1 July 2020 and which superseded earlier guidelines that were issued on 26 June 2013, provide additional guidance related to the specificities of takaful business, and also seek to strengthen takaful fund management practices to ensure their sustainability and prudent management. Collectively, these Guidelines seek to spur greater innovation in the takaful industry while further safeguarding the position of takaful participants.34 In 2019, the BNM issued a policy document on trade credit insurance and trade credit takaful. Trade credit insurance or takaful refers to insurance or takaful cover that protects businesses against the risk of non-payment of goods and services by buyers. The policy document sets out the approval process and requirements for the offering of trade credit insurance by a licensed insurer and trade credit takaful by a licensed takaful operator, and the treatment of trade credit insurance or takaful as credit risk mitigation by a banking institution under the capital adequacy framework applicable to it.35
Collective investment schemes (funds)
The BNM Guidelines on Investment in Shares, Interest-in-Shares and Collective Investment Schemes for Islamic Banks (BNM Guidelines)36 constitute the main guidelines governing collective investment schemes (CISs) offered by Islamic banks. The BNM Guidelines adopt a more principle-based regulatory approach to enable financial institutions to define the scope of their equity-related investments according to capacity and capability. Other than guidelines issued by BNM, the SC has also issued various guidelines governing CISs.37
Generally, under the BNM Guidelines, there are two categories of investments that may be made by financial institutions: investments in shares or interest-in-shares of any corporation;38 or investment in CISs, which includes unit trusts.39 In addition, the SC has issued various guidelines on the establishment of a variety of CISs that can be invested in by financial institutions.40
Midshore financial centre
Labuan International Business and Financial Centre (Labuan IBFC) is the midshore financial centre in Malaysia and provides a platform for local as well as international financial institutions to offer Islamic financial products or services and Islamic capital market instruments in foreign currencies.
The Labuan Islamic Financial Services and Securities Act 2010 (LIFSSA) is the governing law of the Islamic financial industry in the Labuan IBFC. The LIFSSA provides for the registration of business vehicles used by financial institutions and the licensing of financial institutions to conduct regulated business activities. The LIFSSA must be read together with any guidelines or circulars issued by the Labuan Financial Services Authority (Labuan FSA).
The LIFSSA provides for the establishment of the Shariah Supervisory Council (SSC),41 and for the SSC to ascertain Islamic law for the purposes of any business regulated or supervised by the Labuan FSA and issue rulings, and advise on any shariah issue relating to any business regulated or supervised by the Labuan FSA.42 The SSC, however, may only make rulings upon reference being made to it by licensed or regulated entities under the LIFSSA or as determined by the Labuan FSA.43 While the rulings of the SSC shall, upon issuance, be binding upon the Labuan FSA and the entity making the referral, the rulings shall not be binding on any other licensed entity, entity regulated under LIFSSA or shariah-compliant entity unless specified as such by the Labuan FSA.44
ii Regulatory and supervisory authorities
BNM was established under the Central Bank of Malaysia Act 1958 and continues to operate under the Central Bank of Malaysia Act 2009 (CBA). BNM reports to the Minister and keeps the Minister informed of policies governing the monetary and financial sector.
BNM is empowered to act as the regulator of financial institutions under the IFSA, the Financial Services Act 2013 and the CBA. The CBA confers the necessary powers and instruments on BNM to achieve its mandates effectively and legitimises the duality of both the conventional and Islamic financial systems in Malaysia, and in doing so establishes the legal foundation for development of an Islamic financial system within the overall Malaysian financial system. BNM is also the financial adviser to the government, and its primary objectives include the prudent conduct of monetary policy, financial system stability and the development of a sound and progressive financial sector.45 Other functions of BNM include the monitoring and supervision of payment systems, money markets and foreign exchange markets by adopting a risk-based supervisory approach that monitors and reviews the manner in which all financial institutions identify, control and deal with their respective business risks.
Notwithstanding the above, it is the Minister who is the authority for the issuance and revocation or imposition of conditions of licences to carry on the businesses provided for under the IFSA on the recommendations of BNM.46
The SC is a regulatory body established under the Securities Commission Malaysia Act 1993 (SCMA) that is mandated to regulate the Malaysian capital market (including the Islamic capital market) and that is directly responsible for the regulation, supervision and monitoring of all persons licensed under the CMSA with the main objective of protecting investors. It is also primarily responsible under the CMSA for encouraging and promoting the development of the securities and derivatives markets in Malaysia and for the monitoring and supervision of public listed companies to ensure compliance with securities laws.
Bursa Malaysia Berhad
Bursa Malaysia Berhad (Bursa) operates a fully integrated exchange under Section 15 of the CMSA. It not only provides a complete range of exchange-related services such as trading, clearing, settlement and depository services but also offers various Islamic market products, namely equities, derivatives, commodities and debt securities across all sectors and industries. To perform the tasks and duties assigned under the CMSA, Bursa has set up subsidiaries to handle some of its principal activities. As at 22 May 2020, 77 per cent of securities listed on Bursa are shariah-compliant.47 Aside from conducting commercial activities, Bursa is also empowered to regulate and administer:
- the FTSE Bursa Malaysia Hijrah Shariah Index;
- the FTSE Bursa Malaysia EMAS Shariah Index;
- the FTSE Bursa Malaysia Small Cap Shariah Index;
- the Sukuk Index;
- Bursa Suq Al Sila' (an electronic Islamic commodity trading platform); and
- listed shariah-compliant instruments, such as Islamic exchange-traded funds, Islamic real estate trusts and Islamic unit trusts.
However, SC, not Bursa, is responsible for the screening of companies to determine whether they are shariah-compliant for the purpose of being listed on the stock exchange.
The Labuan FSA was established under the Labuan Financial Services Authority Act 1996 and is solely responsible for the regulation, supervision and development of the Labuan IBFC under the LIFSSA. Aside from issuing licences for financial institutions operating within the Labuan IBFC,48 it is also empowered to make recommendations, investigate, collect and divulge information and conduct entry search and seizure, as well as to establish or participate in any body corporate for the purpose of promoting research and training.
Shariah advisory councils and shariah committees
Other than the establishment of shariah advisory councils (SACs) within BNM and the SC, individual financial institutions are also required to establish their own internal shariah committees to ensure the shariah compliance of their respective business operations.
As mentioned earlier, the BNM SAC was established under the CBA as the authority for the ascertainment of Islamic law for the purposes of Islamic financial business.49 In any Islamic financial business proceedings, the court or arbitrator must refer to the published rulings of the BNM SAC or refer any question concerning shariah matters to the BNM SAC for its ruling, which shall be binding on the court or arbitrator.50
SC Shariah Advisory Council
The SC Shariah Advisory Council (SC SAC) was established in 1996 to advise the SC on shariah matters relating to the Islamic capital market, and is the authority for the ascertainment of the application of shariah principles in respect of Islamic capital markets businesses or transactions.51
The SC SAC has the following functions:
- to ascertain the application of shariah principles on any matter relating to Islamic capital market business or transactions;
- to issue rulings on any matters relating to Islamic capital market business or transactions;
- to advise the SC on any shariah issue relating to Islamic capital market business or transactions;
- to provide advice to any person on any shariah issue relating to Islamic capital market business or transactions; and
- such functions as may be prescribed by the Minister.52
In carrying out the above functions, the SC SAC adopts two significant approaches:
- conducting research or studying the validity of conventional instruments from the shariah point of view, where the focus is on the mechanism and use of the instruments to ensure their compliance with shariah principles; and
- formulating and developing new financial instruments based on shariah principles.
These approaches have formed the basis in developing several key shariah rulings on sukuk issuance.
Shariah committees of financial institutions
Every licensed holder under the IFSA must establish an internal shariah committee to ensure that its business, affairs and activities are shariah-compliant.53 It is an independent body that reports directly to the board of directors. The appointment of the shariah committee members must be done with BNM's prior written approval.54
All Islamic financial products or services offered by a licensed holder must be evaluated and approved by its shariah committee. The shariah committee may consult the BNM SAC for a ruling on any shariah matter, and the latter's ruling prevails over the former's.55
Malaysia International Islamic Financial Centre Initiative
In 2006, the Malaysia International Islamic Financial Centre Initiative (MIFC Initiative) was launched to position Malaysia as an international Islamic financial hub to, inter alia, facilitate Islamic finance business within the Asian region. Pursuant thereto, the MIFC was established as a network of the country's financial sector regulators, including BNM, the SC, the Labuan FSA, Bursa and government ministries and agencies, together with industry participation from the banking, takaful, capital markets, research and talent development institutions and service providers within Islamic finance. The MIFC network has greatly contributed to the development of Islamic finance in Malaysia by building strong ties among key stakeholders locally and abroad.
The following discussion on common structures used by financial institutions in offering Islamic financial products or financing facilities is based on the BNM SAC's rulings, which were published in the second edition of the Shariah Resolutions in Islamic Finance in October 2010. The rulings must be followed by all local or foreign financial institutions offering such products or services in Malaysia.56
i Consumer finance
Deposits typically involve contracts or arrangements under the shariah principle of wadiah, where property is deposited with a financial institution for safekeeping or protection, or mudarabah, which envisages the depositor as investor and the financial institution as entrepreneur, whereby the depositor contributes capital and the entrepreneur contributes expertise and operations. Profit earned is distributed according to agreement, but any losses suffered are borne by the investor.
As such it is permitted for Islamic savings accounts to be established under the shariah principle of mudarabah;57 and Islamic current accounts to be established under the shariah principles of mudarabah, wadiah and wadiah yad dhamanah.58
Under the IFSA, there are two major classifications of products for the acceptance of money from customers, namely:
- Islamic deposits using shariah contracts with principal guaranteed features, applying the shariah principles of wadiah yad dhamanah, qard or murabahah; and
- Islamic investment accounts using shariah contracts with non-principal guaranteed features, applying the shariah principles of mudarabah, musharakah or wakalah.
Given the above, investment accounts would not constitute debt obligations owed by a financial institution to its depositors, whereas in the case of Islamic deposits, whether the same constitute debt obligations owed by a financial institution to its depositors would depend on whether the financial institution's obligation to fully repay is based on a debt obligation, such as in the case of accounts opened under the shariah principles described at (a) above. This duality also enables customers with higher risk appetites to place their funds in investment accounts that will in turn receive higher returns depending on the performance of the underlying portfolio. This is also a new source of funding that may be utilised by financial institutions to fund more entrepreneurial business opportunities.
Islamic credit cards are offered using two shariah concepts, namely bai al inah and wadiah.59 Two separate contracts must be entered into under the concept of bai al inah for sale and buy-back transactions of an asset. Financial institutions will sell an asset at a nominal value plus profit to the customer with an agreed deferred payment term, and the customer will subsequently sell the same asset to the financial institution at a nominal value and payable on a cash basis. The sale proceeds will be credited into the wadiah account to facilitate the purchases of goods or services by the customer.
The concept of ijarah thumma al-bai is applied in vehicle financing and involves two independent contracts: the ijarah contract and the al-bai contract.60 Under the ijarah contract, the financial institution will appoint the customer as an agent to purchase the vehicle identified by the customer, and the former will then lease the vehicle to the latter for a specified period. The customer has the option to purchase the vehicle from the financial institution upon the expiry of the lease period. An al-bai contract will be entered into should the customer opt to purchase the vehicle.
ii Home finance
The principle of bai bithaman ajil (BBA) is commonly used in Islamic home financing facilities. BBA contracts are contracts of sale and deferred payment where a home is sold on a deferred payment basis at an agreed selling price that consists of the actual cost of the home and the profit margin agreed between the financial institution lender and the customer borrower.61
Under BBA home financing, the agreed payment instalments remain fixed throughout the financing period as the selling price is fixed at the outset and the financing is not tagged to base lending rates. The latest Islamic home financing products allow customers to receive ibra (a rebate) on the monthly instalment amount if the home financing is linked to a mudarabah deposit account as long as the cost associated with the ibra is borne solely by the financial institution.62
In addition, the concepts of ijarah mawsufah al-zimmah and musharakah mutanaqisah are used to finance homes that are still under construction.63 Based on the contract of musharakah mutanaqisah, both customer and financial institution share the rights over the home under construction. The financial institution will then lease its portion to the customer under the contract of ijarah mawsufah al-zimmah. The customer is required to pay advanced rent during the construction period of the home and will continue to pay full rent upon completion of the home.
In Malaysia, takaful involves contribution of money based on the tabarru concept (voluntary contribution) by all takaful participants who agree to relinquish all or part of their contribution as a donation to aid other takaful participants who suffer losses or difficulties. This is originated from the concept of ta'awun (mutual assistance). A takaful company will then be appointed as their agent to manage the takaful fund and will in return receive the commission of a fixed service fee under the wakalah contract. A retakaful business model based on tabarru and wakalah or based on the wakalah model with an element of wakaf is permissible.64 However, the concept of hibah bithawab (gift with reward in return) between a retakaful operator and takaful operator is not permissible in a financial retakaful model.65
iv Islamic private equity investments
The common structures used for shariah-compliant private equity or venture capital are musharakah, mudarabah and wakalah. The first Islamic venture capital fund established in Malaysia was based on the concept of musharakah, a risk-sharing partnership.66 In this partnership, the ratio of distribution of profits need not coincide with the ratio of participation in the financing of the business activity, but all parties bear the loss in proportion to their share in financing in the event of loss.
The requirements for the registration of corporations undertaking Islamic venture capital and Islamic private equity activities are provided for in the Guidelines on the Registration of Venture Capital and Private Equity Corporations and Management Corporations dated 9 March 2015.67 Under these Guidelines, an applicant who wishes to undertake Islamic venture capital or private equity activities must appoint a shariah adviser to provide shariah expertise and guidance on all matters pertaining to the Islamic venture capital or private equities activities and ensure that all aspects of the activities are in accordance with shariah requirements, including resolutions issued by the SC SAC.68 In the case of investment in securities of any venture corporation by the registered corporations undertaking Islamic venture capital or private equity activities, the activities of the venture corporations must be shariah-compliant.69
The SC revised the Guidelines on the Registration of Venture Capital and Private Equity Corporations and Management Corporations on 16 April 2020, following the enactment of a corporate liability provision under Section 17A of the Malaysian Anti-Corruption Commission Act 2009 effective on 1 June 2020.70 Under the revised Guidelines, it is now a requirement for corporations undertaking Islamic venture capital or private equity activities to implement anti-corruption policies and procedures as part of the SC's measures to curb corruption in the capital market.71
v Islamic real estate investment trusts
Malaysian Islamic real estate investment trusts (REITs) are governed by the SC but will also fall under the purview of Bursa if they are listed on the stock exchange. The SC revised the Guidelines on Real Estate Investment Trusts on 15 March 2018 (Guidelines on REITs)72 and issued the Guidelines on Listed Real Estate Investment Trusts on 15 March 2018 in relation to listed REITs.73
The number of listed Malaysian Islamic REITs remains at four as at 22 May 2020.74 These Islamic REITs specialise in different classes of assets and are as follows:
- Al-'Aqar Healthcare REIT (healthcare);
- Al-Salam Real Estate Investment Trust (shariah-compliant properties that include retail, office, food and beverage, which consists of restaurant and non-restaurant outlets);
- Axis-REIT (office buildings and industrial properties); and
- Kuala Lumpur City Centre (KLCC) REIT (first shariah-compliant stapled REIT where the existing shares of KLCC Property Holdings Berhad are stapled together with the units of KLCC's three prime properties, namely Petronas Twin Towers, Petronas Tower 3 and ExxonMobil Tower).
For Islamic REITs, tangible assets will be acquired and rented out or leased to generate profits for the investors based on an ijarah contract. The owners of real estate sell assets to the Islamic REITs, and a back-to-back asset lease arrangement will be entered into simultaneously. This helps to mitigate risks, as an income stream is secured and the issue of securing a long-term tenant or buyer is solved.
Under these Guidelines, a shariah advisory committee must be established to oversee the shariah compliance of the REIT's operations. The rental of real estate by Islamic REITs is permissible provided that the property is not used for non-permissible activities.75 Takaful schemes must be purchased to insure real estate, and conventional insurance schemes can only be allowed if the former is unable to provide insurance coverage.
vi Investment funds
The shariah principle of musharakah, a joint venture profit and loss sharing arrangement, is commonly applied in investment and financing activities in Malaysia to provide working capital financing, trade financing and asset financing. There are two commonly used forms of musharakah-based financing:76
- a joint venture partnership where the facility sums will be credited (in a lump sum or in stages) into a joint account that is registered under the customer's name but is managed by the financial institution in accordance with the musharakah principle; and
- an equity participation through the establishment of a private limited joint venture company where the company's management will be appointed by both parties to represent their interests and will be responsible for the development of a project.
For the second form of musharakah-based financing, the financial institution will disburse the facility sums in one lump sum through additional paid-up capital of the private limited company. These financing approaches are allowed provided that there is no element of capital or profit guarantee by any of the partners on the other partners.
Further to the above, the shariah principle of istisna (a type of sale contract where a subject matter is transacted before it comes into existence) is commonly used to finance construction and manufacturing activities in Malaysia. According to istisna, the financial institution enters into an agreement to purchase the project or asset to be developed from the customer (istisna – purchase by order) and will immediately sell it back to the customer at a marked-up price under the principle of al-istisna (sale by order). The purchase price will only be released by the financial institution upon presentation of the requisite documents (such as a valid architect's certificate), whereas the customer is required to settle the selling price by way of instalments within the agreed period or by a redemption exercise. The BNM SAC has previously ruled that a conventional bond can be used as a security for financing of this type as it is not made for the purpose of ownership, but merely as a security.77
vii Other areas: Islamic financial derivative instruments
Forward foreign currency exchange transactions
The concept of wa'd is widely used by the financial institutions to conduct forward foreign exchange transactions, whereby one of the parties to the contract promises to buy from or sell to the other counterparty a specific currency at an agreed exchange rate and settlement date. Aside from wa'd, BBA is also allowed to be used as the underlying concept for forward foreign currency exchange transactions as all the deferred payment sale transactions are conducted independently and not related to each other. The unilateral wa'd mulzim (binding promise) is permissible to be applied in a forward foreign exchange transaction as it is treated as a promise.78 To ensure consistency in the application of wa'd in Islamic financial products, a policy document consisting of the shariah and operational requirements was released by BNM.79
Islamic profit rate swap based on bai al inah
The shariah contract of bai al inah is used for Islamic profit rate swaps (IPRSs),80 and depending on the duration of the swap contract, there are several stages involved in this contract.
First, the financial institutions representing the swap counterparties jointly invest81 in a mudarabah interbank investment (MII) whereupon this investment will be used as the underlying asset in the swap transaction. The financial institutions will enter into an IPRS agreement with a third party to conduct a series of trade transactions on agreed dates82 (e.g., semi-annually during the swap contract period, which in this instance shall be assumed to be two years).
Second, the financial institutions will sell the MII to the third party at a deferred sale price payable every six months (i.e., semi-annually) and the third party will thereafter sell it back to the financial institutions at a sale price based on the fixed profit rate agreed in the swap contract. The settlement of the purchase price due from the third party will be offset against the payable amount due from the financial institutions, which results in the financial institutions being obliged to pay the fixed profit rate to the third party every six months during the two-year period. Third, the financial institutions will sell the MII to the third party at the price agreed in the swap contract, which is based on the prevailing floating profit rate, and the third party will thereafter sell it back to the financial institutions at this agreed price.
The settlement of the purchase price due from a third party will again be offset against the payable amount due from the financial institutions, and thus the financial institutions will only be required to pay the floating profit rate for every six months for the two-year contract period.
The difference between payment obligations of both contracting parties resulting from the final step at the second stage and the final step at the third stage will be paid to the receiving party. Finally, the third stage will be repeated at the agreed reset date, which will be determined every six months until the swap contract matures. This arrangement is allowed, and the issue of the sale of debt with debt (which is prohibited by shariah) does not arise as the transfer of beneficial ownership takes place automatically given that the underlying asset used in the transaction is the MII. The transfer will be reflected in the contract documentation and is shariah-compliant.
Both conventional and Islamic financial products are governed under the same taxation regime. However, tax incentives are offered from time to time by the government to encourage growth in the Islamic finance sector and facilitate Malaysia's aim towards becoming the regional Islamic finance hub. Some of the most significant and recent tax incentives are as follows:
i Malaysian Budgets
The existing tax incentives announced under the Malaysian Budgets in the five years prior to 2020 respectively comprise the following:
- companies enjoy a single deduction on additional expenses83 incurred for the issuance of sukuk under the principles of ijarah and wakalah84 and enjoy double deduction on additional expenses incurred for the issuance of sukuk under the principles of mudarabah, musharakah, istisna, murabahah and BBA based on tawarruq until 2020.85 Under the 2020 Malaysian Budget, the tax incentives for issuance of sukuk wakalah have been extended for a period of five years until the year of assessment, 2025;86
- companies that issue sustainable and responsible sukuk will benefit from a tax deduction on their issuance costs until 2020.87 Under the new 2020 Malaysian Budget, this incentive will be extended for three years until the year of assessment, 2023;88
- companies that provide shariah-compliant fund management services and are certified by the SC will also enjoy a tax exemption on statutory income from the provision of such services until 2020;89
- recipients of green sustainable and responsible investment (SRI) sukuk grants enjoy an income tax exemption for the purpose of financing the external review expenditure until 2020;90
- investors enjoy stamp duty exemptions on contract notes for trading of exchange-traded funds and structured warrants until 2020;91
- a fund manager managing an SRI fund approved by the SC will be given a tax exemption on management fee income from managing conventional and shariah-compliant SRI funds until 2020 to further promote fund management activities globally.92 Under the new 2020 Malaysian Budget, this incentive will be extended for three years until the year of assessment, 2023;93 and
- the following tax incentives that were provided pursuant to the MIFC Initiative from 2007 to 2016 have been further extended until 2020:94
- a full tax exemption on income earned from Islamic banking business or takaful business conducted through the International Currency Business Unit in foreign currencies by licensed financial institutions or licensed takaful companies and takaful units; and
- full stamp duty exemption on instruments executed pertaining to the abovementioned activities.
Tax allowances and exemptions made under previous years' budgets are discussed in Section VI.
ii Malaysian Income Tax Act 196795
While Section 2(7) of the Malaysian Income Tax Act 1967 (ITA) provides that any reference in the ITA to interest shall apply to gains or profits received and expenses incurred, in lieu of interest, in transactions conducted in accordance with shariah principles, Section 2(8) of the ITA provides that any reference in the ITA to the disposal of an asset or a lease shall exclude enabling transactions under a scheme of financing approved by BNM, the SC, the Labuan FSA or the Malaysia Co-operative Societies Commission.
iii Malaysian Stamp Act 1949
Sukuk issuances currently enjoy stamp duty exemptions in Malaysia by way of orders issued under the Malaysian Stamp Act 1949, which include the following:
- Stamp Duty (Exemption) (No. 23) Order 2000, which provides that all instruments relating to the issue of, offer for subscription or purchase of debentures, or invitations to subscribe for or purchase debentures, approved by the SC under Section 32 of the Securities Commission Act 1993, and the transfer of such debentures, are exempted from stamp duty; and
- Stamp Duty (Exemption) (No. 4) Order 2013, which provides that instruments relating to the sale and purchase of retail sukuk as approved by the SC under the CMSA are exempted from stamp duty.
In Malaysia, corporate insolvency is currently governed by the Companies Act 2016 (CA), which repealed and replaced the Companies Act 1965.96 The modes of winding-up proceedings provided thereunder still include compulsory and voluntary winding up and the appointment of receivers and managers over a corporation. However, the CA introduced two new corporate rescue mechanisms, namely corporate voluntary arrangements and judicial management in Division 8 of Part III of the CA, which came into force on 1 March 2018.97 A voluntary winding up under the CA can either be a member's voluntary winding up or a creditor's winding up. A company may be wound up voluntarily if so provided under its constitution and the company has passed a resolution in a general meeting requiring itself to be wound up voluntarily, or a special resolution for its winding up is passed.98 In addition, the CA provides 12 situations99 whereby a court may wind up a company, which include a company being unable to pay its debts, the most commonly occurring scenario.
Over and above the CA, however, a specialised framework addressing the failure of financial institutions licensed to undertake Islamic or international Islamic banking business under the IFSA to pay their debts as they fall due can be found in the IFSA and the MDICA.
In response to the covid-19 pandemic, the Companies Commission of Malaysia has issued several temporary measures to protect companies. The modifications made to existing winding-up laws include increasing the minimum debt threshold for a winding-up notice from 10,000 ringgit to 50,000 ringgit and the time frame to respond to a statutory demand will also be increased from 21 days to six months. These measures will be in place until 31 December 2020.100
The MDICA empowers the MDIC to assume control of a non-viable financial institution and to acquire and take control of non-performing loans that are outstanding between the financial institutions, borrowers and security providers through the appointment of a conservator. The MDICA further provides that upon the appointment of the conservator, a moratorium shall take effect during which, inter alia:
- no action, suit or proceeding may be commenced or continued against the MDIC, the conservator or the financial institution;
- any petition for the winding up of the financial institution shall be dismissed;
- no receiver, receiver manager or liquidator may be appointed over the financial institution; and
- no steps may be taken to enforce any security over the assets of the financial institution.101
Under the MDICA, BNM may provide written notice to the MDIC where BNM is of the opinion that a financial institution has ceased to be viable or is likely to cease to be viable, whereupon the MDIC can exercise, inter alia, the following powers:
- requiring the financial institution to take any step or action or refrain from any act or thing, in relation to itself, its businesses or its officers, to cease soliciting, taking or repaying deposits or carry on its business or such part of its business as the MDIC may direct, or to restructure the whole or part of its business as may be specified by the MDIC;
- acquire or subscribe to the shares of the financial institution;
- assume control over the financial institution, carry on the whole or part of its businesses and manage the whole or part of its assets, liabilities and affairs, including disposal of its assets or businesses or any part thereof, or appoint any person to do so on behalf of the MDIC;
- apply for the appointment of a receiver or manager, or both, to manage the whole or part of the assets, liabilities, businesses and affairs of the financial institution;
- subject to the approval of the Minister, present a petition for the winding up of the financial institution;
- with the approval of the Minister, designate one of its subsidiaries as a bridge institution; or
- transfer such assets and liabilities of the non-viable financial institution to the bridge institution on terms as determined by the MDIC.102
The provisions of the IFSA include measures for addressing the insolvency of Islamic financial institutions. Under the IFSA, BNM acts as a resolution authority that is, with the prior approval of the Minister, empowered to assume control of the whole or part of the business, affairs or property of an Islamic financial institution, manage it or appoint any person to do so on behalf of BNM in the event that BNM is of the opinion that certain circumstances exist in relation to the Islamic financial institution concerned, including the following:
- the assets of the institution are not sufficient to give adequate protection to its depositors, policy owners, participants, users or creditors, as the case may be;
- the capital of the institution has reached a level or is eroding in a manner that may detrimentally affect its depositors, policy owners, participants, users or creditors, or the public generally; and
- the financial institution has become or is likely to become insolvent or is likely to become unable to meet all or any of its obligations.103
Additionally, the IFSA provides BNM with further powers if it is found that an Islamic financial institution is insolvent or is on the verge of insolvency, whereupon BNM may:
- make an application to appoint a receiver or manager, or both, over the whole or part of the business, affairs or property of the financial institution;104
- with the prior approval of the Minister, vest in a bridge institution or any other person the whole or part of the business, assets or liabilities of the financial institution;105
- with the prior approval of the Minister, provide financial assistance to another institution or any other person to purchase any shares, or the whole or any part of the business, assets or liabilities, of the financial institution;106 or
- recommend to the Minister and the Minister may, on that recommendation, authorise BNM to file an application for the winding up of the financial institution.107
Finally, the IFSA further provides that:
- the provisions of the CA shall apply to the winding up of an institution, unless specifically provided otherwise. However, no application for the winding up of a financial institution may be presented by any person without the prior written approval of BNM;108 and
- in the winding up of the licensed Islamic bank or the licensed takaful operator, the assets of that financial institution shall be available to meet all its liabilities to depositors or takaful participants in priority over all other unsecured liabilities, other than preferential debts set out in the CA and debts due and claims owing to the government under the Government Proceedings Act 1956.109
Although Malaysia has a dual judicial system consisting of secular laws (criminal and civil) and religious laws (shariah), each with its own court system, cases involving Islamic finance business disputes fall within the jurisdiction of the civil courts and not the shariah courts. Alternatively, the contracting parties can opt to resolve their disputes by arbitration. The Asian International Arbitration Centre provides specific rules relating to Islamic banking and financial services transactions. 110
Article 121 of the Federal Constitution of Malaysia 1957 (FC) sets out the jurisdictions of the Malaysian civil courts, whereas Article 74(1) of the FC prescribes that Parliament may make laws with regard to the matters contained in the Federal List, inclusive of List I under the Ninth Schedule of the FC (List I), which, inter alia, includes civil and criminal procedure, and the administration of justice and contracts,111 but specifically excludes the constitution and organisation of the shariah courts. As such, Articles 121 and 74(1) read together indicate that the jurisdiction of the civil court is specifically set out in List I.
Article 121(1 A) of the FC states that the civil court has no jurisdiction over matters within the jurisdiction of the shariah court, whereas Article 74(2) of the FC provides that a state legislature may make laws contained in the State List, inclusive of List II of the Ninth Schedule of the FC (List II), which, inter alia, includes Islamic law and personal and family law of persons professing the religion of Islam and the constitution and organisation of the shariah courts.112
Based on the above provisions, jurisdiction over Islamic banking and finance laws lies with the civil court for the following reasons:
- while the term Islamic law in List II is wide,113 its application is only limited to persons professing the religion of Islam and would not be applicable to banks and financial institutions, which cannot be said to profess the religion of Islam;
- laws relating to Islamic banking and finance fall within the category of contract and mercantile law under List I, which is under the purview of the Malaysian federal legislative body. As such, these are subject to the jurisdiction of the civil courts, as civil court judges are bound by laws and regulations that are exclusively federal;114 and
- the judgment of the Malaysian Supreme Court in the case of Mohamed Habibullah bin Mahmood v. Faridah Dato' Talib115 held that the shariah court may only decide matters falling under its jurisdiction, and as such Article 121(1 A) does detract from the jurisdiction of the High Court in respect of the matters in List I.
As stated above, disputes relating to Islamic finance in Malaysia are decided by the civil courts rather than the shariah courts, notwithstanding the application of shariah principles. Bearing this in mind, together with the popular usage of the BNM SAC-approved BBA principle in Malaysian home financing transactions, the following cases are noteworthy in illustrating how the Malaysian courts have progressively dealt with disputes involving Islamic finance transactions.
Initially, the civil courts dealt with disputes through the application of common law principles applicable to conventional banking without discussion of or reference to applicable underlying shariah principles.116 In Bank Islam Malaysia Bhd v. Adnan Omar,117 the court applied common law doctrine that parties were bound by the four corners of their agreement. The defendant was therefore obliged to pay the entire selling price as he had knowingly entered into the contract and was fully aware of its terms. The decision did not examine whether the BBA facility involved non-shariah-compliant elements, expressly referred to the facility as a loan and held that defendants have no right to a rebate, which was at the discretion of the lender. Understandably, this operated to the disadvantage of the defendants who, in defending claims against them, were deprived of an analysis of shariah principles by the court.
Subsequently, the courts took a more interventionist approach in Affin Bank v. Zulkifli Abdullah,118 which concerned a BBA facility wherein the customer had defaulted on instalment payments for the asset sale price and the lender had claimed the outstanding balance of the asset sale price (i.e., minus the payments previously made). In coming to a decision, the courts decided that a critical examination of the underlying shariah principles in the financing was required to ensure justice and equality between the parties.
This approach was subsequently followed in Malayan Banking Berhad v. Marilyn Ho Siok Lin,119 in which the court specifically analysed whether the transaction was contrary to Islam and ruled that Islamic banks could not claim unearned profits on BBA contracts because such contract was similar to a conventional loan and unearned profits were equal to interest calculation. The resulting judgment disallowed lenders claims for unearned profits notwithstanding that the predecessor to the CBA, the Central Bank of Malaysia Act 1958,120 was amended in 2003 to allow for a referral by the court to the BNM SAC for shariah-related issues. However, the court was not bound to make such a referral, and the judge in Affin Bank declined to do so and decided the matter based on a review of the transaction documents.
The Affin Bank judgment was not well received in the Islamic finance industry as lenders became uncertain as to what they could claim in default situations. In addition, shariah scholars were dissatisfied with the decision and viewed it to be defective from a shariah law perspective. Some three years later, the presiding judge in Affin Bank further developed this approach in Arab-Malaysian Finance Bhd v. Taman Ihsan Jaya Sdn Bhd & 11 Ors,121 where Affin Bank was affirmed and the court ruled that a bona fide sale was required in BBA financing for the profit or selling price to be shariah-compliant. In the absence of a bona fide sale, deferred payment of the sale price would be nothing more than a credit or loan extended, and any profit therefrom would be prohibited as riba. The judge rejected the approach in Adnan Omar and held that the parties' agreement alone did not prevent the court from examining and determining the exact nature of a transaction.
The other judges presiding over disputed BBA financing transactions began to adopt differing views by seeking the advice of shariah scholars and the BNM SAC, in contrast to Affin Bank. In Malayan Banking Bhd v. Ya'kup Oje & Anor,122 the court opined that there would be great uncertainty if customers entering into financing contracts approved by both a Islamic financial institution lender's shariah committee and by the BNM SAC were allowed to challenge the shariah compliance of a contract in court, and that this was morally unacceptable from a shariah perspective.
The Malaysian Court of Appeal considered Taman Ihsan Jaya on appeal in Bank Islam Malaysia Berhad v. Lim Kok Hoe & Anor and other appeals123 and held that the High Court judgment in Taman Ihsan Jaya was manifestly wrong and must be set aside for the following reasons:
- the judge in Taman Ihsan Jaya was plainly wrong to equate profit earned as being similar to riba or interest. The two cannot be similar, as a BBA contract is in fact a trade transaction between the customer and the bank and the element of profit is therefore completely distinct from interest in conventional loans;
- judges in civil court should not take it upon themselves to declare whether banking business is in accordance with the religion of Islam; this requires consideration by eminent jurists properly qualified in the field of Islamic jurisprudence; and
- the judge in Taman Ihsan Jaya failed to follow the judicial precedent of superior courts, which clearly favoured the common law approach in Adnan Omar.
In the appellate case of Maybank Islamic Berhad v. M-IO Builders Sdn Bhd & Anor,124 the appellate court opined that the validity of the disputed murabahah overdraft facility agreements should be governed by the law that generally governs the contract between parties in Malaysia, namely the Contracts Act 1950. Therefore, the said agreements were held to be valid notwithstanding their failure to comply with shariah principles. It is interesting to note that most of the claims were filed as an attempt by customers to escape liability as a whole or to reduce the quantum of their liability. If courts were to declare these facilities, which are monitored and approved by BNM, as invalid, the development of the local Islamic banking industry would be adversely affected as Islamic financial institutions would face uncertainty and increased risk in their ability to recover the principal and profit in relation to the granting of these facilities.
Subsequently, BNM and Parliament conclusively laid much uncertainty to rest with the coming into force of the CBA, which provides, inter alia, that:
- the BNM SAC would be the authority for determining Islamic law for the purposes of Islamic finance business;125
- the BNM SAC would be a consultative body to the Malaysian judiciary and, consequently, judges and arbitrators were required to take into consideration published rulings of the BNM SAC or refer to the BNM SAC for its ruling on any shariah issues arising from disputes being adjudicated;126 and
- once a ruling is issued by the BNM SAC in response to a reference, that ruling was binding on the referring financial institution, court or arbitrator.127
In addition to this, the issuance of BNM's Guidelines on Ibra' (Rebate) for Sale-Based Financing obliged Islamic banks to grant ibra to customers of sale-based financing facilities, thus resolving earlier questions of unfairness or injustice. With these developments, the abovementioned cases remain purely of academic interest.
Sections 56 and 57 of the CBA were enacted to mandate the courts to refer to the BNM SAC to answer questions on shariah issues in cases involving Islamic financial institutions. In the case of JRI Resources Sdn Bhd v. Kuwait Finance House (M) Bhd (President of Association of Islamic Banking Institutions Malaysia & Anor, and Central Bank of Malaysia as interveners),128 the Federal Court affirmed that the SAC's ruling is limited to ascertaining the position of Islamic law on financial matters or business applicable to a dispute but does not conclude or settle the dispute between the parties. The final decision on the dispute remains with the court. Moreover, in the case of Tan Sri Abdul Khalid Ibrahim v. Bank Islam Berhad,129 there was an argument that these provisions are unconstitutional and ultra vires, as the courts have to refer to the BNM SAC for answers on shariah questions in Islamic finance, thereby compelling the court to adopt the decision of the BNM SAC as its judgment. In response, the Court of Appeal interpreted the judicial role of the BNM SAC provided in Sections 56 and 57 as a new procedural requirement, and one that does not give judicial power to the BNM SAC.
The following recent developments illustrate Malaysia's continuing commitment to its financial services objectives under the ETP, the FSB and the blueprint. Collectively, they underscore a promising outlook for Malaysia's dynamic and innovative Islamic finance sector and its continuing efforts to lead in the growth and development of Islamic finance globally.
i Islamic indices
To ensure that shariah-based investments continue to grow, the SC and Bursa have acknowledged that Islamic indices serve an essential role in Islamic finance as they identify securities available for investment within Islamic financial markets and facilitate the valuation of shariah-compliant products. These indices also broaden the base of investors and increase shariah-compliant product diversity.
In line with the above, Bursa launched Bursa Malaysia-i, the world's first end-to-end integrated Islamic securities exchange platform, in September 2016.130 The platform's basic function is to enable investors to invest in and trade shariah-compliant products via a shariah-compliant trading platform incorporating the full range of shariah-compliant exchange-related services, including listing, trading, clearing, settlement and depository facilities. Bursa Malaysia-i forms an important part of Bursa Malaysia's plan to position Malaysia as the preeminent marketplace for Islamic-based financial offerings and shariah investing.
Bursa Malaysia has also partnered with FTSE Russell in launching four shariah indices that allow investors to track the performance of shariah-compliant securities:
- FTSE Bursa Malaysia Hijrah Shariah Index;
- FTSE Bursa Malaysia EMAS Shariah Index;
- FTSE Bursa Malaysia Small Cap Shariah Index; and
- FTSE Bursa Malaysia Mid Cap Shariah Index.131
In July 2019, the Bond Pricing Agency Malaysia launched the country's first environmental, social and governance (ESG) bond index series, which will monitor bonds with a market capitalisation of 4.05 billion ringgit and covers long-term Islamic bonds. The index series highlights bond issuers issuing under ESG principles and tracks their performance. It covers bonds that were issued under or aligned with the SC's SRI sukuk framework, ASEAN Green Bond Standards, ASEAN Social Bond Standards, ASEAN Sustainability Bond Standards and the United Nations Sustainable Development Goals.132
ii Islamic pension fund
In August 2016, Malaysia's state pension fund, the Employees Provident Fund (EPF) made available to its members the option of converting their current conventional savings into an Islamic pension scheme option, simply called EPF Simpanan Shariah, which took effect on 1 January 2017, whereby dividend rates would not be guaranteed, but based on the performance of shariah-compliant investments. EPF Simpanan Shariah is open to all members regardless of race, religion and nationality. However, members who have chosen Simpanan Shariah would not be allowed to revert to the conventional scheme after the effective date. According to EPF sources, a total of 59.03 billion ringgit of the initial 100 billion ringgit fund allocated for Simpanan Shariah 2017 have been taken up, and 635,037 members had switched to Simpanan Shariah as at 23 December 2016. As at 31 December 2017, EPF had about 700,000 contributors with a total of 67.76 billion ringgit for Simpanan Shariah, from 100 billion ringgit allocated for the savings as at 31 December 2017.133 EPF allocated 50 billion ringgit as a further injection for Simpanan Shariah 2018.134
The EPF also announced that it had allocated an initial fund size of 100 billion ringgit, equivalent to about 15 per cent of the EPF's total investment assets of 681.71 billion ringgit (as at end March 2016), and that its investment in shariah assets was expected to grow by at least 25 billion ringgit per annum on average, or in tandem with its total asset growth, to maintain a minimum of 45 per cent shariah assets.135 As at 31 December 2017, the shariah assets stood at 47.5 per cent of the fund's total asset exposure and contributed 42.9 per cent of total income in 2017.
In 2019, a total amount of 132.4 billion ringgit was allocated to external fund managers, an increase of 12.6 per cent compared to the 117.6 billion ringgit allotted in the preceding year.136 It was reported that the funds allocated amounted to 14 per cent of the EPF's total investment asset and were aimed at diversifying the state-linked fund's asset. On August 2019, EPF launched an online platform named i-Invest to allow EPF members to make direct investments into unit trust funds offered by EPF-approved fund management institutions (FMIs).137 To date, there are now total of 10 FMI platforms.138 As at 30 April 2020, the EPF had recorded 25,000 transactions with an overall value of 219.3 million ringgit since its launch in 2019.139
iii Islamic fund and wealth management
The SC unveiled the blueprint on 12 January 2017 with the aim of, among other things, establishing Malaysia as a leading international centre for Islamic fund and wealth management.
According to the blueprint, one of the strategic thrusts to achieve this aim is to develop Malaysia as an international provider of Islamic wealth management services. In this regard, focus will be concentrated on efforts to deepen and broaden the suite of shariah-compliant wealth management solutions while enhancing the supporting market infrastructure and creating a more conducive and enabling environment. Efforts will also be directed towards promoting and differentiating aspects of Islamic wealth management across the value chain of wealth generation, accumulation, preservation and distribution by aligning products and services to the tenets of the maqasid al-shariah and by utilising waqf assets and structures. This will enable Islamic fund and wealth management service providers to tap into a target market of affluent investors, especially Muslim investors. Meanwhile, it was reported that BNM is currently working on developing a new financial blueprint where Islamic finance is envisaged to play a more prominent role and expand in innovative ways.140
iv Sustainable and responsible investments
The clear shift in global trends towards business strategies that incorporate sustainable practices, stronger governance and ethics, together with environmental and social concerns, has enabled Islamic finance, which is based on the principles of fairness, social and environmental responsibility, to feature prominently in the rise of sustainable development projects. With this in mind, the SC introduced the SRI sukuk framework in 2014 to facilitate the creation of an ecosystem conducive for SRI investors and issuers.
The framework further enhanced Malaysia's position and reputation as a hub for Islamic finance and sustainable investments and laid the foundation for future market innovation. In June 2015, Malaysia's sovereign wealth fund, Khazanah Nasional Bhd, issued the first tranche of the 1 billion ringgit SRI ihsan sukuk, the proceeds of which were to be utilised for the Yayasan Amir trust schools programme, a not-for-profit foundation that is party to a public–private partnership with the Ministry of Education.141
According to the Global Sustainable Investment Review 2016, Malaysia was the largest SRI market in the region, with a 3 per cent share in Asia (excluding Japan), as Malaysia recognises shariah-compliant funds as part of the SRI universe.142 The SC has developed a framework for SRI funds by issuing the Guidelines on Sustainable and Responsible Investment (SRI) Funds in December 2017 to facilitate and encourage growth of SRI funds in Malaysia. This will build on Malaysia's position as a regional shariah-compliant SRI centre, a strategic thrust that was identified under the blueprint. These Guidelines are applicable for both conventional and shariah-compliant funds.143 Malaysia achieved further success in the SRI space in July 2017 with the establishment of the world's first green SRI sukuk by Tadau Energy (a joint venture between Kagayaki Energy, a Malaysian renewable energy and sustainable technology investment firm, and Edra Solar, owned by the China General Nuclear Power Corporation). This was a significant development in the green financing and global sukuk arena, and the result of a collaboration between the SC, BNM and the World Bank Group aimed at developing an ecosystem to facilitate the growth of green sukuk and to introduce innovative financial instruments to accommodate global infrastructure needs and green financing.144
In November 2017, the Association of Southeast Asian Nations (ASEAN) Green Bond Standards (GBS) were launched at the inaugural ASEAN Capital Market Conference. The ASEAN GBS aim to provide more specific guidance on how the Green Bond Principles are to be applied across the ASEAN to promote transparency and consistency in the ASEAN green bond market framework. Quantum Solar Park (Semenanjung) Sdn Bhd issued the largest green sukuk in the world of 1 billion ringgit, which coincides with the ASEAN GBS. The proceeds are to fund the construction of three large solar power plants with a total capacity of 150 megawatts (MW), which are the largest solar power projects in Southeast Asia. This transaction would assist Malaysia in achieving its renewable energy generation target of 7,200MW by 2020 and propel the nation's objective to be a key driver in the green Islamic financial space. The green SRI sukuk paves the way for more sustainable and responsible financing in Malaysia and ASEAN and coincides with ASEAN GBS, which further supports and assists the establishment of climate-friendly investments.
In December 2017, Permodalan Nasional Bhd issued the first tranche of 690 million ringgit under its 2 billion ringgit and 15-year Merdeka ASEAN green SRI sukuk programme. This was the first green sukuk recognised under both the SC's SRI sukuk framework and the ASEAN GBS.145 In addition, tax incentives were announced in July 2017 to attract green issuers, which included a tax deduction until year of assessment of 2020 on issuance costs of SRI sukuk approved, authorised by or lodged with the SC,146 over and above the measures previously introduced in the 2014 Budget.147 In the 2018 Budget, the former Prime Minister unveiled a series of tax incentives, including an income tax exemption on green SRI sukuk grants, aimed at encouraging the issuance of green SRI sukuk in Malaysia. The SC, through the capital market development fund, will provide a green SRI sukuk grant of 6 million ringgit to finance the external review expenditure incurred by a green SRI sukuk issuer.148 As at December 2019, Malaysia has issued 10 green SRI sukuk, with an amount of 4.77 billion ringgit raised,149 including the issuance of ASEAN Green SRI Sukuk by Pasukhas Green Assets Sdn Bhd to fund a hydropower plant in Sungai Rek, Kelantan, and to explore other renewable energy assets in Malaysia.150 Moreover, there was the issuance of first ASEAN Sustainability SRI Sukuk by Edra Solar Sdn Bhd151 to fund a solar plant project, which is Malaysia's first issuance to be compliant with the collective requirements of the SC's SRI sukuk framework, the ASEAN GBS, the ASEAN Social Bond Standards as well as the globally recognised Green Bond Principles, Social Bond Principles and Sustainability Bond Guidelines. The project is anticipated to create both positive environmental and social effects that are also consistent with the United Nations Sustainable Development Goals.152 Most recently, Leader Energy Sdn Bhd's issuance of Islamic medium-term notes of 260 million ringgit, being the first ASEAN green SRI sukuk in 2020, is in line with the SC's SRI sukuk framework, ASEAN GBS and green bond principles. The proceeds will be utilised to, inter alia, part finance, part reimburse, or both, the total development cost of two solar power projects in Kuala Muda, Kedah.153
In line with the growing importance of sustainable finance in the ASEAN, the ASEAN Capital Markets Forum introduced the ASEAN Social Bond Standards and ASEAN Sustainability Bond Standards at the ASEAN Capital Market Conference in October 2018 to support the ASEAN's sustainable development needs in financing projects that are socially beneficial and to finance a combination of both green and social projects that offer environmental and social benefits.
In addition, in an effort to further promote sustainable practices, the SC launched the five-year Sustainable and Responsible Investment Roadmap for the Malaysian Capital Market on 26 November 2019, containing 20 recommendations with five overarching strategies focused on:
- widening the range of SRI instruments;
- increasing the SRI investor base;
- building a strong SRI issuer base;
- instilling a strong internal governance culture; and
- designing information architecture in the SRI ecosystem.154
The SC and BNM have also set up the Joint Committee on Climate Change (JC3) to pursue collaborative efforts to build climate resilience within the financial sector. Members of JC3 include Bursa Malaysia and 19 industry participants.155
v Financial technology
The role of fintech in Islamic finance as a key enabler for future business and a facilitator for an automated end-to-end Islamic banking system for shariah-compliant banking operations. To this end, six Islamic banking institutions in Malaysia collaborated in February 2016 to launch the Investment Account Platform,156 the first bank-intermediated fintech platform combining Islamic banking services and technology to channel funds from investors to shariah-compliant economic ventures.157 In this regard, BNM and the SC have launched initiatives to boost the development of fintech in Malaysia as elaborated below.
In April 2016, the SC introduced a peer-to-peer (P2P) financing platform to widen the funding avenues for small and medium-sized enterprises. The regulatory framework, registration requirements and obligations of a P2P operator are set out in the Guidelines on Recognised Markets issued by the SC on 11 December 2015 (revised on 17 May 2019). It is stipulated in the Guidelines that when an Islamic investment note is offered, the P2P operator must appoint a shariah adviser that is registered with the SC to ensure that it is shariah-compliant. The P2P operator must establish and maintain a shariah-compliant trust account to deposit the funds raised for the issuer.
BNM has approved seven firms to operate within its regulatory sandbox in accordance with the Guidelines on Financial Technology Regulatory Sandbox Framework dated 18 October 2016.158 This will enable innovation of fintech to be deployed and tested in a live environment within specified parameters and time frames. Islamic financial institutions are encouraged to embrace the movement by coming up with their own fintech innovations or by working with fintech startups, especially those in the digital payments space. In 2018, BNM introduced the specialised sandbox, which uses more focused and standardised testing parameters to allow for a more targeted and efficient testing approach for high-impact innovations.159
In addition, the SC and the Australian Securities and Investments Commission entered into an innovation cooperation agreement on 27 June 2017 to further promote innovation in financial services in their respective markets. This enables both regulators to explore potential joint innovation projects relating to the application of new technologies and to facilitate referrals of innovative businesses seeking to operate in each other's jurisdictions. This marks an important milestone for Malaysia's digital finance sector.160
The government, through the Malaysia Digital Economy Corporation (MDEC), has introduced the Islamic Digital Economy Guide (Mi'yar), a reference guide for startups, venture capital firms and the supporting ecosystem of participants in these areas who wish to explore and understand the various components of the Islamic digital economy, such as Islamic venture capital, business operations, and products and services that are shariah-compliant or conform to a halal perspective.161 According to the MDEC Islamic Fintech Report 2020, Malaysia has the highest number of Islamic fintech service providers compared to other countries.162 In this Report, MDEC identified a few gaps within the market that need to be improved for the market to operate as a conducive regional and global Islamic fintech hub. The report points out that Malaysia has a strategic advantage in building an Islamic fintech niche as well as the ability to lead shariah compliance in the fintech sector. For example, the government mandated JKKI (see Section I) to champion the Islamic fintech agenda, and MDEC has established Orbit, an Islamic fintech cluster, to provide startups with a physical ecosystem and access to a selection of multinationals, financial institutions and regulators through specially curated and moderated programmes.163
To further stimulate the development of Islamic fintech, MDEC's Islamic fintech and digital inclusion report suggests that the government should roll out Islamic fintech-specific incentives to attract startups and grow local business. The report also identifies the potential of Islamic philanthropic tools such as waqf, zakat and saadiq to be digitalised into hybrid models of Islamic digital social finance. It was highlighted that the social aspects of waqf, zakat and saadiq could be used as a social enterprise to generate profit while achieving social justice goals and maintaining shariah-compliance. The report also identifies that traditional Islamic financial institutions and Islamic fintech startups should work effectively in a collaborative and supportive manner to achieve SDGs.
Furthermore, the use of e-money is now a permissible payment instrument under shariah provided that the e-money is structured based on appropriate shariah contracts.164 It was ruled that the applicable shariah contract for e-money is based on the principle of wakalah, whereby an approved issuer will act as an agent to make payment on behalf of the user (wakil bi ad-daf`i) to the merchant.165
vi Securities Industry Dispute Resolution Centre
The Securities Industry Dispute Resolution Centre (SIDREC) is an independent body established by the SC in 2011 for the settlement of disputes between investors and capital market intermediaries. SIDREC offers a free service and aims to ensure that investors have access to an independent, impartial and expert dispute resolution avenue. Commercial and Islamic banks offering capital market services and products became members of SIDREC in September 2017 following the SC's amendment to the Capital Markets and Services (Dispute Resolution) Regulations 2010. With these developments, investors can initiate dispute resolution claims for amounts of up to 250,000 ringgit. SIDREC may also provide mediation for claims exceeding 250,000 ringgit with the consent of both parties.166 In 2018, SIDREC expanded its purview, allowing it to offer its services to investors and capital markets services providers for disputes relating to claims exceeding 250,000 ringgit. The new service, being a voluntary scheme, requires both parties to a dispute to agree to use SIDREC's alternative dispute resolution services.167
Malaysia is recognised by the Islamic Finance Services Board and International Monetary Fund as a systemically important jurisdiction in which 15 per cent or more of its financial sector assets are Islamic,168 and it has maintained its leading position as the most developed Islamic finance market globally, as recognised by the Thomson Reuters's Islamic Finance Development Indicator 2019.169 It is recognised that Malaysia's achievements are attributable to the development of effective market structure, diverse players, a deep Islamic finance talent pool, and robust legal, regulatory and shariah frameworks conducive to the sector's growth and development.170 The BNM SAC has also played an important role in developing Islamic finance in Malaysia through its shariah rulings, which have not only instilled customer and market confidence, but have also catalysed a number of industry innovations (e.g., the BNM SAC's approval to use hybrid contracts, such as musharakah mutanaqisah (diminishing partnership), which enabled the introduction of innovative products).171 Moody's has recognised Malaysia as the largest Islamic issuer in terms of volume, both in the long and short-term market, at 34 per cent of total global issuances. In 2019, Malaysia remained the top sukuk issuer with 34.5 per cent of the global sukuk issuance.172 The SC expects the country's 2020 corporate bonds and sukuk issuance to be between 90 billion ringgit and 100 billion ringgit, compared with 132.82 billion ringgit in 2019, as the covid-19 pandemic and the resulting disruption on businesses have affected fundraising activities.173
Malaysia is once again recognised as a global leader in Islamic finance according to the State of the Global Islamic Economy Report 2019/20.174 During the Shariah Investing Virtual Conference 2020, it was announced by the Bursa chair that as of March 2020, shariah funds stood at 170 billion ringgit, representing 23 per cent of total industry assets under management, while the net asset value (NAV) for shariah unit trust funds stood at 99 billion ringgit, or 23 per cent of total NAV industry.175 As at May 2020, 732 (or 79 per cent) out of the 932 listed companies on Bursa were shariah-compliant, with shariah market capitalisation making up 70 per cent of total market capitalisation.176 The BNM SAC has also played an important role in developing Islamic finance in Malaysia through its shariah rulings, which have not only instilled customer and market confidence, but also catalysed a number of industry innovations, particularly in the digital economy, by recognising payment through e-money as shariah-compliant, introducing digital a waqf management platform177 and launching an online investment platform (i-Invest) for pension fund members.
Despite disruptions caused by the covid-19 pandemic, Moody's Investor's Service expects stable growth for global sukuk issuance of around US$180 billion in 2020.178 RAM rating also predicts that there may be an increase in sovereign sukuk in the global sukuk issuance to support fiscal stimulus in battling the covid-19 pandemic.179 In an effort to rebuild the country's economy once it recovers from the pandemic, the Prime Minister introduced a 35 billion ringgit economic recovery plan on 7 June 2020. Subsequently, on 18 August 2020, the sukuk prihatin programme, the first digital sukuk in Malaysia, was launched as part of the economic recovery plan. The sukuk, which is based on the principle of tawarruq via the commodity murabahah arrangement, has a total target issuance of 500 million ringgit with a maturity period of two years. The proceeds will be used to help micro enterprises in terms of infectious disease research grants, and to improve broadband coverage in schools in rural areas.180
With the government's determination to focus on its shared prosperity vision 2030 to promote Malaysia as an Islamic hub as one of its key economic growth activities,181 there is optimism that Malaysia will consolidate its leadership on and innovation in Islamic finance, and continue doing its part in forging a more sustainable, equitable, socially responsible and environmentally beneficial world.
1 Rodney Gerard D'Cruz and Murni Zuyati Zulkifli Aziz are partners at Adnan Sundra & Low. The authors would like to express their gratitude to Ms Wong Zhi Xin for her contribution in relation to the contents of this chapter.
8 Securities Commission Malaysia Annual Report 2016. See https://www.sc.com.my/api/documentms/download.ashx?id=ef843977-2536-4258-b2b0-8cb7138752bf.
10 The BNM's 'Value-based Intermediation: Strengthening the Roles and Impact of Islamic Finance', See http://www.bnm.gov.my/index.php?ch=57&pg=137&ac=612&bb=file www.bnm.gov.my/index.php?ch=
57&pg=137&ac=612&bb=file; and www.thestar.com.my/business/business-news/2017/07/20/bank-
13 See BNM Financial Stability and Payment Systems Report 2018 (page 48).
14 See https://www.nst.com.my/business/2018/10/418193/hsbc-amanah-launches-worlds-first-un-sdg-
16 See BNM Annual Report 2019 (https://www.bnm.gov.my/ar2019/files/ar2019_en_full.pdf).
20 The IFSA repealed and consolidated the Islamic Banking Act 1983 and the Takaful Act 1984.
21 BNM is empowered under Section 59 of the Central Bank of Malaysia Act 2009 to issue circulars, guidelines or notices on any shariah matter relating to the Islamic financial business carried on by any Islamic financial institutions in accordance with the advice or ruling of the BNM's Shariah Advisory Council (BNM SAC).
22 Section 28(3) of the IFSA provides that any financial institution becoming aware that its activities are not in compliance with shariah or the advice of its shariah committee or the advice or ruling of the BNM SAC shall notify BNM and cease the non-shariah-compliant activity whereas Section 37(1) of the IFSA empowers BNM to compel any financial institution to appoint any person as BNM may approve, to carry out an audit on shariah compliance on the said financial institution.
23 Section 2 of the IFSA defines Islamic banking business as the business of accepting Islamic deposits on current accounts, deposit accounts, savings accounts or other similar accounts, with or without the business of paying or collecting cheques drawn by or paid in by customers; or accepting money under an investment account; and provision of finance; and such other business as the Minister may prescribe, on the recommendation of BNM. For the avoidance of doubt, the provision of finance by itself would not fall under the definition of Islamic banking business unless the provision of finance were specifically prescribed by the Minister under Section 3 of the IFSA.
24 Section 2 of the IFSA defines international Islamic banking business as Islamic banking business in currencies other than ringgit or such other business as the Minister may prescribe on the recommendation of BNM. For international Islamic banking business, see BNM Guidelines on International Islamic Banks.
25 This was issued pursuant to Section 135(3) as well as Section 136(2) of the IFSA and supersedes the previous BNM Rules on Prohibited Business Conduct, which were issued in 2014.
26 Pursuant to Section 42 of the MDICA.
27 The CMSA repealed and consolidated the Securities Industry Act 1983, the Futures Industry Act 1993 and parts of the Securities Commission Malaysia Act 1993 (SCMA).
28 See Section 316B(1) of the CMSA.
29 See Section 316B(2) of the CMSA.
30 See Section 5 of the CMSA.
31 See Section 10 of the IFSA.
32 See Paragraph 12.1, Guidelines on Takaful Operational Framework issued by BNM on 26 June 2019.
33 Ibid, Paragraph 12.11.
35 Trade Credit Insurance and Trade Credit Takaful Guidelines (https://www.bnm.gov.my/index.php?ch=57&pg=137&ac=796&bb=file).
36 BNM Guidelines on Investment in Shares, Interest-in-Shares and Collective Investment Schemes for Islamic Banks (https://www.bnm.gov.my/guidelines/01_banking/04_prudential_stds/14_Investment_in_Shares_IIS_and_CIS_2806.pdf).
37 CISs are broadly defined under the BNM Guidelines as follows: any arrangement made for the purpose, or having the effect, of providing facilities for persons to participate in or receive profits or income arising from the acquisition, holding, management or disposal of securities, futures contracts or any other property, or sums paid out of such profits or income. In such schemes, participants do not have day-to-day control over the management of the schemes' assets.
38 See Paragraph 5.1, BNM Guidelines on Investment in Shares, Interest-in-Shares and Collective Investment Schemes for Islamic Banks (http://www.bnm.gov.my/guidelines/01_banking/04_prudential_stds/14_Investment_in_Shares_IIS_and_CIS_2806.pdf).
39 ibid. Unit trusts include institutional funds, real estate investment trusts, property trust funds and exchange-traded funds.
40 These include Guidelines on Islamic Fund Management 2007 (revised on 18 May 2020); Guidelines for Real Estate Investment Trusts 2018; Guidelines on Unit Trust Funds 2017; Exchange-Traded Funds Guidelines 2018; Guidelines for Public Offerings of Securities of Closed-end Funds; Guidelines for the Offering, Marketing and Distribution of Foreign Funds; Handbook for CIS Operators of ASEAN CISs; and Prospectus Guidelines for Collective Investment Schemes 2019. Note that this also falls under the purview of BNM vide Guidelines on Investment In Shares, Interest-in-Shares and Collective Investment Schemes for Islamic Banks.
41 See Section 7 of the Labuan Islamic Financial Services and Securities Act 2010 (LIFSSA).
42 See Section 8 of the LIFSSA.
44 See Section 9(3) and 9(4) of the LIFSSA.
45 This is an excerpt from page 333, chapter 22 on Malaysia by Rodney Gerard D'Cruz, The Banking Regulation Review, 10th Edition, Law Business Research Ltd, 2019.
46 See Section 10 of the IFSA.
48 See Section 67 of the LIFSSA.
49 See Section 51 (1) of the CBA, and footnote 7.
50 See Sections 56 and 57 of the CBA.
51 See Section 31ZI(1) of the SCMA.
52 See Section 31ZJ of the SCMA.
53 See Section 30(1) of the IFSA.
54 See Section 31 of the IFSA.
55 See Section 58 of the CBA.
56 See Section 59 of the CBA.
57 See BNM, Shariah Resolutions in Islamic Finance (2nd edition, Kuala Lumpur: 2010), at p. 24 (ruling No. 15).
58 ibid., at pp. 26 and 155 (rulings Nos. 17 and 94).
59 ibid., at p. 148 (ruling No. 89).
60 ibid., at p. 3 (ruling No. 1).
61 In this case, legal title to the home is with the customer or borrower.
62 See footnote 57, at p. 128 (ruling No. 80).
63 ibid., at p. 16 (ruling No. 12).
64 ibid., at p. 62 (ruling No. 41).
65 See Ruling of Shariah Advisory Council (SAC) of BNM at its 188th Meeting, https://www.bnm.gov.my/index.php?ch=en_announcement&pg=en_announcement&ac=679&lang=en
66 See Islamic Finance: An Ideal Model for Private Equity and Venture Capital dated 30 September 2015, published by BNM.
67 For more details about the registration requirements, see Part B of the Guidelines.
68 See Chapter 5 of Part B of the Guidelines on the Registration of Venture Capital and Private Equity Corporations and Management Corporations.
69 See Part D of the Guidelines on the Registration of Venture Capital and Private Equity Corporations and Management Corporations.
70 See Guidelines on the Registration of Venture Capital and Private Equity Corporations and Management Corporations (https://www.sc.com.my/api/documentms/download.ashx?id=e5f1198a-1423-44a2-b8fc-dd000aaffd9e).
71 See Paragraph 9.01 of the Guidelines on the Registration of Venture Capital and Private Equity Corporations and Management Corporations.
72 See Guidelines on Real Estate Investment Trusts (https://www.sc.com.my/api/documentms/download.ashx?id=efad9ab2-37fc-489c-9a8a-0e56964f8d66).
73 See Guidelines on Listed Real Estate Investment Trusts (https://www.sc.com.my/api/documentms/download.ashx?id=afacc30c-060e-4cc0-b40f-d4546db74724)
75 Non-permissible activities include financial services based on riba (interest), gambling, conventional insurance, entertainment activities that are not permissible according to shariah principles, manufacturing or sale of tobacco-based products or related products, stockbroking or share trading in non-shariah-compliant securities, hotels and resorts and other activities to which the shariah committee may apply ijtihad (the process of making a legal decision by independent interpretation of the sources of the law, the Quran and the Sunnah) for other non-permissible activities to be included as a criteria in assessing whether the rental income for the Islamic REITs is shariah-compliant or not.
76 See footnote 57, at p. 40 (ruling No. 29).
77 See footnote 57, at p. 21 (ruling No. 15).
78 ibid., at p. 137 (ruling No. 84).
80 See footnote 57, at p. 139 (ruling No. 85).
81 As mudarib or managers for the swap counterparties the FIs invest in the MII, but do not acquire it, to avoid the costs and implications of legal title; and the amount invested by FIs is a notional swap amount contributed by the swap counterparties as prescribed in the swap contract.
82 The dates (described as 'reset dates' in the ruling) constitute determination points of the applicable floating profit rates to be swapped. These dates are set by swap counterparties and may fall quarterly, semi-annually, annually or otherwise.
83 These are: professional fees relating to due diligence, drafting and preparation of prospectus; printing cost of prospectus; advertisement cost of prospectus; SC prospectus registration fee; Bursa processing fee and initial listing fee; Bursa new issue crediting fee; and primary distribution fee. See Appendix 9 of the 2016 Malaysian Budget: www.bnm.gov.my/files/Budget_Speech_2016.pdf.
84 The Income Tax (Deduction for Expenditure on Issuance of Sukuk) Rules 2015 provide that a company shall be given a revenue deduction on an amount equal to the expenditure incurred on the issuance of sukuk under the shariah principles of ijarah or wakalah approved or authorised by, or lodged with, the SC or approved by the Labuan FSA. This is applicable until 2020. See Appendix 10 of the 2019 Malaysian Budget.
85 See Appendix 11 of the 2019 Malaysian Budget.
86 See Paragraph 63 of the Annual Budget 2020, https://www.bnm.gov.my/documents/budget/bs2020.pdf.
87 See Paragraph 72 and Appendix 8 of the 2016 Malaysian Budget.
88 See Paragraph 64 of the Annual Budget 2020, https://www.bnm.gov.my/documents/budget/bs2020.pdf.
89 ibid., Appendix 10.
90 See Appendix 4 of the 2018 Malaysian Budget.
91 See Appendix 8 of the 2018 Malaysian Budget.
92 See Appendix 5 of the 2018 Malaysian Budget.
93 See Paragraph 64 of the Annual Budget 2020, https://www.bnm.gov.my/documents/budget/bs2020.pdf.
95 For more tax incentives that are or were previously offered under the Income Tax Act for various Islamic capital market products or services, see www.sc.com.my/home/special-incentives-2/islamic-capital-market/.
96 See Part IV of the CA, which provides for voluntary and compulsory winding up of a company.
98 Section 439 of the CA.
99 Section 465 of the CA.
101 Sections 161 and 179 of the MDICA.
102 Sections 98 and 99 of the MDICA.
103 Sections 177 and 179 of the IFSA.
104 Section 184 of the IFSA.
105 Section 188 of the IFSA.
106 Section 200(b) of the IFSA.
107 Section 205 of the IFSA.
108 Sections 204, 206 and 207 of the IFSA.
109 Sections 217 and 218 of the IFSA.
111 See Paragraphs 4(a) and 4(b) of List I of the Ninth Schedule of the FC.
112 ibid., Paragraph 1 of List II.
114 This refers to the Malaysian Civil Law Act 1956, the Malaysian Courts of Judicature Act 1964 and the Rules of the High Court 1980.
115  1 CLJ 264. See also the Malaysian High Court judgment in Bank Islam Malaysia Berhad v. Adnan Omar  3 CLJ 735, in which the High Court held that, inter alia, shariah courts can only decide cases that fall under the State List of the Malaysian Federal Constitution, which excludes commercial law matters such as Islamic banking and finance.
116 See Bank Kerjasama Rakyat Malaysia Bhd v. Emcee Corporation  1 CLJ 625, CA, which held that the law applicable to Islamic banking disputes was the same as that applicable to conventional banking disputes. This was followed in Tahan Steel Corporation v. Bank Islam Malaysia Bhd  6 CLJ 25.
117  3 CLJ 735.
118  3 MLJ 67.
119  3 CLJ 796.
120 See Section 16B of the CBA 1958.
121  5 MLJ 631.
122  5 CLJ 311.
123  6 MLJ 839.
124  MLJU 1415.
125 See Section 51 of the CBA.
126 See Section 52(1) (a) of the CBA.
127 See Sections 56 and 57 of the CBA.
128  3 MLJ 561.
129  3 MLJ 269.
132 See https://www.thestar.com.my/business/business-news/2019/07/25/bpam-launches-malaysias-first-esg-
134 See https://www.thestar.com.my/business/business-news/2017/01/18/epf-more-than-half-of-simpanan-
135 See www.thestar.com.my/business/business-news/2016/06/20/epf-shariah-savings-scheme-open-for-registration-on-aug-8/ and www.freemalaysiatoday.com/category/nation/2018/02/10/epf-declares-6-9-dividend-6-4-for-simpanan-shariah/.
136 See https://themalaysianreserve.com/2020/06/19/epf-allocated-more-funds-for-external-fund-
137 See https://www.nst.com.my/news/nation/2019/08/514194/epf-launches-i-invest-online-platform-allow-
143 See https://www.sc.com.my/news/media-releases-and-announcements/the-sc-continues-to-drive-
145 See footnote 8.
146 See https://www.sc.com.my/post_archive/malaysias-first-green-sukuk-under-scs-sustainable-responsible-
148 See Appendix 4 of the 2018 Malaysian Budget, page 63.
149 See Securities Commission Annual Report 2019 (https://www.sc.com.my/api/documentms/download.ashx?id=a0099ceb-8908-44d3-9399-950e83d86f53).
sri-sukuk and see: Securities Commission Annual Report 20198 (https://www.sc.com.my/api/documentms/
155 See Securities Commission Annual Report 2019 (https://www.sc.com.my/api/documentms/download.ashx?id=a0099ceb-8908-44d3-9399-950e83d86f53).
159 See BNM Financial Stability and Payment Systems Report 2018.
160 See https://www.sc.com.my/news/media-releases-and-announcements/sc-and-asic-sign-innovation-
162 See https://mdec.my/wp-content/uploads/FinTech-Report.pdf. See BNM SAC Ruling on E-Money as Shariah Compliant Payment Structure.
164 See BNM SAC Ruling on E-Money as Shariah Compliant Payment Structure (https://www.bnm.gov.my/documents/SAC/03_SAC201_Statement_eMoney_en.pdf).
170 See BNM Financial Stability and Payment Systems Report 2017 (www.bnm.gov.my/files/publication/fsps/en/2017/fs2017_book.pdf).
181 See Shared Prosperity Vision 2030 by Prime Minister Office: https://www.pmo.gov.my/wp-content/uploads/2019/10/SPV2030-summary-en.pdf.