MALAYSIA

Practical legal issues in Islamic banking

trade/ trading and equity participation. From trading activities and equity participation, they lead to profits, fees etc. Loan is only in the form of Qardh Al Hasan or benevolent loan. Islamic banking essentially is based on certain theoretical concepts and features before they are translated into practical operations. It is this process of translating the concepts and features into practice that creates challenges to the banks as they need to try to blend their traditional roles as financiers in trading activities, leasing activities and fee-based services. transaction cost: One most noted impediment to the growth of Islamic banking is the cost involved, including legal fees, service tax, disbursement and stamp duties. Shortage of expertise: In a report in the New York Times of February 8, 2005 it was stated, there are no more than several dozen scholars with the right combination of knowledge of Islamic law, modern finance and technical English to serve on the Shariah committees of institutions based around the Gulf and beyond. The report went on to deliberate the need to educate more young Shariah scholars as to Western transactional finance. Conversely, it can also be argued that more Western financiers need to be educated on Shariah. Understanding Islamic banking cannot happen overnight. It is a continuous process of understanding and combining the Shariah principles with the complexities of the modern banking and finance. Conclusion: Islamic banking has vast potential and very bright future. A recent report by Standard & Poors Rating revealed that the growth of Islamic banking has outpaced that of conventional banking during the past decade, making it one of the most dynamic areas in international finance.

By ahmad Lutfi abdull Mutalip

There are currently over 260 Islamic banks spread across 40 countries. It is estimated that assets managed according to the Shariah principles by Islamic financial institutions, including Islamic banks, exceed US$250 billion. issues and problems faced by islamic banking: Although the market has recognised the existence and importance of Islamic banking to the global financial system, a uniform regulatory and legal framework supportive of an Islamic financial system has not yet been developed. Existing banking regulations in Islamic countries are based on the Western banking model. Similarly, Islamic financial institutions face difficulties operating in non-Islamic countries owing to the absence of a regulatory body operating in accordance with Islamic principles. insufficient legal protection: Laws relating to companies, commerce, investment, the courts and legal procedures need to be reviewed and reformulated to suit the requirement of the Islamic banks. It is not acceptable that company law continues to talk about bonds and interest while ignoring participation deeds and profits. Investment promotion laws should accommodate rules and regulations which permit Islamic banks to apply their profit/loss sharing modes so that they can participate in partnership businesses. Jurisdiction Shariah or Civil: As an example, the supreme law in Malaysia is the Federal Constitution (Constitution) which guarantees the rights of every citizen. Article 121(1A) of the Constitution sets out the jurisdiction of the courts in Malaysia, where civil courts shall have no jurisdiction over Shariah courts. However, under List I (Federal List) of the Constitution, jurisdiction of civil courts covers mercantile laws which are the basis of banking and finance. Hence, the Shariah courts have no jurisdiction over issues pertaining to banking and finance. difficulties in turning concepts into practice: Economic activities in Islam are principally premised on the basis of

azmi & associates Banking & Financial Services Group 14th Floor, Menara Keck Seng 203, Jalan Bukit Bintang 55100 Kuala Lumpur, Malaysia Tel: (603) 2118 5000 Direct: Fax: (603) 2118 5112 email: alam@azmilaw.com www.azmilaw.com

(603) 2118 5002

w w w. p b p r e s s . c o m

MAY 2008 53