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Islamic Financial Services Act 2013 Malaysia: Investor Friendly

 

July 15, 2013:

Malaysia is known as "Asia's Islamic Finance Hub" and has 12 direct takaful operators with a combined 19 billion ringgit in assets as of December 2012, central bank data showed. The majority of those assets - 85 percent - were in family insurance, up 13.3 percent from a year earlier. Malaysia is one the largest sukuk market in the world and accounts for 68% of the global issuances as on 31st December, 2012[1].  

The development of Islamic Finance in Malaysia had to go through series of evolutions. (See our news piece on 2011 guidelines in Malaysia on Sukuk here). Recently Malaysia has introduced The Islamic Financial Services Act, 2013  

Highlights of this act are as below: 

The Islamic Financial Services Act, 2013 ("IFSA") contains XVIII Parts with 291 Sections and 16 Schedules. It includes all the regulations right from Incorporation, Regulatory Objectives, Powers and Functions of a Bank to its Winding up along with several other clauses. 

Malaysia's new Islamic Financial Services Act (IFSA) gives regulators greater oversight as the country seeks to retain its position as the world's second-largest Islamic Banking market, with 395 billion ringgit ($124 billion)[2] in assets as of May. 

Like any other law, even IFSA is general in nature. However what makes its different from other Malaysian law Islamic law is that it emphasis more on Investors' Protection and has reshaped TAKAFUL. 

Takaful 

In general terms Takaful is a form a type of Islamic insurance, where members contribute money into a pooling system in order to guarantee each other against loss or damage. Takaful-branded insurance is based on Shariah, Islamic religious law, and explains how it is the responsibility of individuals to cooperate and protect each other. 

Section 2 of IFSA states " 'Takaful' means an arrangement based on mutual assistance under which takaful participants agree to contribute a common fund providing for mutual financial benefits payable to the takaful participant or to their beneficiaries on the occurrence of pre-agreed events."

It is now under IFSA that there will be a separation of life and general business takaful. Meaning no license shall be granted for both life and business purpose at the same time.  

Under Section 16 (1) "A licensed takaful operator other than a licensed professional retakaful operator, shall not carry on both family takaful business and general takaful business."

Also provision have been made under Section 286, that even if they have been carry on both family as well as general takaful business, they shall be liable to separate the same within five years. 

Investors' Protection 

As the foundation of IFSA is based on religious beliefs, it becomes important to protect the investors who wish to earn money through Islamic Finance. It is often seen that these Depositors take the route of investment via the religious Islamic Finance Advisors or Shariah Advisors (here in collectively known as "Advisors"). Till date there was no rule that would either curb down the powers of these advisors. And even if there were rules for the advisors, they weren't as strict as in IFSA.  

Under Section 11 it is to be noted that any person approved to carry on business as an advisory shall at all times have to in force a professional indemnity cover of any amounts as the prescribed by the Bank. 

Section 15 says that any advisor contradicting the rules of IFSA shall be liable to imprisonment for a term not exceeding eight years or fine not exceeding twenty-five million ringgit or both. 

Conclusion 

IFSA seems to be more liberal from the investor's point of view and a bit more conservative from the advisory and business point of view. It is expected that IFSA shall affect two-thirds of companies within the takaful sector with composite licenses, with bigger players such as Etiqa Takaful Bhd, Syarikat Takaful Malaysia Bhd and Takaful Ikhlas possibly spared, according to a report by investment bank RHB. The top three operators hold roughly 90 percent of assets, while several of the smaller firms have suffered losses or shrinking profit.  With this new Act Malaysia will now be able to raise fund on capital market at a higher rate.

 

To view the entire IFSA click here

To see our earlier report on Susuk Guidelines in Malaysia click here

Have a look at our customized page on Malaysian Securitisation here

See our page on International Securitisation Laws here

 


[1] The size of the Sukuk outstanding globally  was GBP 160 Billion. The global figure represents a CAGR of 35% for past five years. Source:http://www.sc.com.my/eng/html/resources/speech/2013/sp20130712.pdf

The Malaysian capital market grew by 19% from RM2.1 trillion at end-2011 to RM2.5 trillion at end-2012 and is largely spurred by the strong performance of sukuk and equities.

 

[Reported by: Pooja Rawal]

 
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