Overhaul of Islamic finance sector in Malaysia gives depositors a boost

KUALA LUMPUR/DUBAI: New laws governing Malaysia’s Islamic finance industry will strengthen depositor protections by making religious advisers legally responsible for financial products and subject to heavy fines and prison sentences for wrongdoing.

The new rules also include a plan to force Islamic life insurers to separate the life branch from other parts of their business. Regulations could also stimulate takeovers in the Islamic insurance industry through capitalization provisions that encourage larger participants.

Malaysia’s new Islamic Financial Services Act (IFSA) gives regulators greater scrutiny as the country seeks to retain its position as the world’s second largest Islamic banking market, with 395 billion ringgit ($124 billion) in assets in May.

Although there have been no major problems resulting from lax standards, the new law – which came into force last week – is seen as a broad means of boosting compliance with Sharia laws, where Malaysia is already a world leader.

One of the biggest changes is to make Shariah advisers legally responsible for the financial products they endorse, analysts and industry experts have said. Islamic scholars are hired by banks to ensure that financial products meet Sharia standards.

The rule change would encourage advisers to conduct greater inspection of the financial products they endorse, holding them more accountable, said Mohamad Akram Laldin, executive director of the International Shariah Research Academy for Islamic Finance, based in Malaysia. “It’s a step forward, everyone involved will know their duties and what is expected of them,” he said.

Previous rules governing Shariah compliance were only guidelines. The IFSA elevates them to legal obligations, the violation of which could expose approved financial entities to sanctions. Penalties will be tougher, a Malaysia-based lawyer told Reuters, with many offenses carrying up to eight years in prison and 25 million ringgit ($7.86 million) in fines.

Investor protection should also be reinforced by another provision which requires banks to distinguish between deposits intended for savings and those intended for investment. Banks will also have to guarantee the principal amount of savings deposits.

The IFSA also gives the Malaysian Ministry of Finance more powers to further scrutinize financial holding companies and unregulated entities if they pose a risk to financial stability. “From my point of view, it is quite complete. The challenge is to ensure enforcement and get people to understand,” Akram added.

IFSA could also reshape the takaful (Islamic insurance) sector by requiring the separation of life and general business lines, the latter covering property and automobiles. Under the new rules, companies with composite licenses covering the two sectors will have five years to separate the two.


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