The silent but effective contributor to Islamic finance celebrates its 20th year

Malaysia’s central bank celebrates the 20th anniversary of the setting up of the Shariah Advisory Council. It’s time to make some noise


In THE space of Islamic finance around the world, one entity that has been silently but effectively working is the Shariah Advisory Council (SAC) of Bank Negara Malaysia (BNM). This year, the outfit celebrates its 20th year of establishment.

Having steered the industry in Malaysia and provided silent leadership globally, it has much to celebrate.

When met by The Malaysian Reserve in a recent interview, its chairman Datuk Dr Mohd Daud Bakar (picture) was in a chirpy and buoyant mood. He has been spending quite some time with the central bank officials as they prepare for the council’s 20th anniversary celebration.

“The time has come to celebrate the idea mooted back then by central bankers in Malaysia to streamline the need for a centralised Shariah body to oversee not only compliance, but also product development. This is unique because we take charge of both compliance and product development to help the industry. This is normal today, but it was rare two decades ago,” he said. BNM introduced the SAC in May 1997.

Malaysia has two such councils, one for the central bank and another for the Securities Commission Malaysia. Mohd Daud chairs both the councils.

Back then, a centralised Shariah board for central banks was a novel idea. Only Sudan had such a board, though it was not as structured and as developed compared to Malaysia.

“They (Sudan) started everything from the central bank first. The central Shariah board came first, and only then they rolled out the products,” he said. In Malaysia, outfits like Bank Islam Malaysia Bhd began operating first before regulations came about.

“Nowadays, people talk about Bahrain and AAOIFI. Twenty years ago, this idea was exotic, ahead of its time,” he said. AAOIFI refers to the Accounting and Auditing Organisation for Islamic Financial Institutions, a standard setting body for Islamic finance institutions based in Bahrain.

Not many jurisdictions are equipped with such legislative backed by centralised Shariah boards when it comes to managing Islamic finance. Oman and Bahrain count among the few. Pakistan has a quasi Shariah body. Indonesia has Dewan Shariah Nasional created by the Majlis Ulama Indonesia. However, industry players deem it as more of a “loose structure” when compared to Malaysia’s SAC, as the body is not part of the financial structure. The United Arab Emirates has been mulling for years now to set up such a board but it has yet to materialise.

Legislations: CBA, IFSA
The Central Bank of Malaysia Act (CAB) 2009, introduced during the leadership of BNM governor Tan Sri Dr Zeti Akhtar Aziz to replace CAB 1958, has reaffirmed the role and powers of the SAC. This is further reinforced under the Islamic Financial Services Act 2013.

Under CAB 2009, the SAC was accorded the status of the sole authoritative body on Shariah matters pertaining to Islamic banking, takaful and Islamic finance. While the rulings of the SAC shall prevail over any contradictory ruling given by a Shariah body or committee constituted in Malaysia, the courts and arbitrators are also required to refer to the rulings of the SAC for any proceedings relating to Islamic financial business, and such rulings shall be binding.

The CAB 2009 carries an entire section on Islamic finance. Part IV of the regulation is entitled “Islamic Financial Business”. It is broken down into two chapters. Chapter one concerns the SAC, while chapter two is about the powers of the central bank in terms of issuing circulars and guidelines on Shariah matters, and also the promotion of Malaysia as an international Islamic financial centre.

On the establishment of SAC, Section 51 (1) of the CAB 2009 says BNM may establish an SAC on Islamic finance which “shall be the authority for the ascertainment of Islamic law for the purposes of Islamic financial business”.

The SAC’s functions are outlined in Section 52 (1). It states that SAC is set up: a) To ascertain the Islamic law on any financial matter and issue, a ruling upon reference made to it in accordance with this part; b) to advise the central bank on any Shariah issue relating to Islamic financial business, the activities or transactions of the bank; c) to provide advice to any Islamic financial institution or any other person as may be provided under any written law; and to perform d) such other functions as may be determined by the bank.

In Section 52 (2), it states that “ruling” here means any SAC ruling made for the ascertainment of Islamic law for the purposes of Islamic financial business. Under its interpretation section, the new Act defines “Islamic financial business” as any financial business in the ringgit or other currencies, which is subject to the laws enforced by the bank and consistent with Shariah.

Under Section 29 of IFSA, SAC rulings or advice empower the central bank to “specify standards” on Shariah matters in respect of the carrying on of business, affair or activity by an institution, which requires the ascertainment of Islamic law or to give effect to the advice or rulings of the SAC.

Impact on Industry
Hence, the council is pretty much embedded within the financial system, backed by solid legislations. Has it made a difference? Mohd Daud feels that it has brought injected confidence into the system.

“As a practitioner myself, when we have such an apex body, people are more confident — the players, CEOs, Shariah committees at the bank.” said the founder and executive chairman of Islamic finance consultancy Amanie Group, who is also the author of the book “Shariah Minds in Islamic Finance”.

The council also provides a check and balance between the central bank and the industry. Over the years, he said they have come across situations where the Shariah committees of some banks held differing points of view on certain Shariah matters and were adamant upon it.

“We encourage them to prepare papers to articulate their arguments. This provides a healthy environment. It’s not a one-way communication. We allow the industry to come to our board to present their point of views,” he said.

On the flip side of the coin, the board also articulates its views to the industry. “By doing this, we might refine our point of view, we might change where relevant. This can only happen if you have an apex body,” he said.

Looking back, Mohd Daud believes that Malaysia had managed to “get it right” on steering the Islamic finance sector, especially with the positioning of the SAC. In fact, he feels that the time has come for the SAC to be seen as a global outfit articulating the Shariah mind on the global platform.