Malaysia’s Islamic Banking Act 1983 (IBA) was enacted 24 years ago and came into force on the 10th March 1983. This Act was the culmination of the desire and effort of the Muslim community in Malaysia to avoid riba-based conventional banking and embrace Muamalat in harmony with Islam as a complete way of life.
The IBA provided the licensing regime and the overall regulation of Islamic banks in Malaysia, paving the way for the Islamic banking industry to grow and to become what it is today.
The Islamic banking industry has evolved greatly since 1983, when just one Islamic bank was in existence. In March 1993, Bank Negara Malaysia (BNM) introduced the Islamic Banking Scheme (IBS), whereby existing financial institutions were allowed to operate Islamic windows; and, those participating in the scheme are known as IBS banks. Subsequently, six IBS banks have converted their “windows” into Islamic banking subsidiaries with their own Islamic banking license. As at the end of 2006, Malaysia had 10 Islamic banks operating under the provisions of the IBA.
In general, BNM is vested with comprehensive legal powers to regulate and supervise the financial system of the nation. Specifically, section 3 of the IBA states that BNM is conferred with the power to be the regulator of Islamic banks.
No bank can obtain an Islamic banking licence unless they fulfil the criteria set out in section 3(5) of the IBA as follows:
“The Central Bank shall not recommend the grant of a licence, and the Minister shall not grant a licence, unless the Central Bank or the Minister, as the case may be, is satisfied: (a) that the aims and operations of the banking business which it is desired to carry on will not involve any element which is not approved by the Religion of Islam; and (b) that there is, in the articles of association of the bank concerned, provision for the establishment of a Shariah advisory body to advise the bank on the operations of its banking business in order to ensure that they do not involve any element which is not approved by the Religion of Islam.”
Section 2 of the IBA interprets Islamic banking business as “banking business whose aims and operations do not involve any element which is not approved by the Religion of Islam.” This definition is quite general, reflective of the Islamic legal maxim for Muamalat that all transactions are permissible except those that are specifically forbidden. Perhaps it is also to provide a more open and conducive environment for the operation of Islamic banks.
Accounting for Islamic banks
An Islamic bank, as a company incorporated under the Companies Act 1965, is legally bound to present its audited financial statements at its Annual General Meeting for the shareholders to approve. In addition to shareholders, there are also other users of the Islamic banks’ financial statements, such as investors, rating agencies and academics. Given this diversity of users, standardization of accounting becomes a necessity in order to enable the drawing of fair comparisons between the Islamic banks.
Accounting standards
A point to note is that the IBA is silent on the accounting standards that are applicable to Islamic banks. Nonetheless, BNM has issued guidelines for the regulation of Islamic banks.
The Guidelines on the Specimen Reports and Financial Statements for Licensed Islamic Banks – or GP8-i – were first issued by BNM in August 2003. They state: “The objective of the GP8-i is to provide the basis for presentation and disclosure of reports and financial statements of the Islamic banks. GP8-i is also aimed at ensuring consistency and comparability of the reports and financial statements amongst the Islamic banks in complying with the provisions of the Islamic Banking Act 1983, Companies Act 1965, Shariah requirements and other BNM guidelines. As a comprehensive guideline, GP8-i also incorporated the new requirements of standards set by the Malaysian Accounting Standards Board (MASB), specifically the MASBi-1: Presentation of Financial Statements of Islamic Financial Institutions. The standard, which came into effect in 2003, was issued to streamline the disclosure and presentation of financial statements of the Islamic banks and the conventional banks that participate in the Islamic Banking Scheme (IBS banks).” Thus, the accounting standards for Islamic banks were set.
Subsequently, MASBi-1 was revised to adjust to the revision of Financial Reporting Standards 101 (FRS 101) and the MASB issued the Financial Reporting Standards i-1 (FRSi-1) in 2004 to be the applicable standard “for the presentation of financial statements of Islamic Financial Institutions that conducts Islamic banking.” The instrumental role played by the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) in codifying accounting and auditing norms and rules was also duly recognised by the MASB. In formulating the FRSi-1, “MASB has given careful consideration to the substance of the AAOIFI Standards.” (See accompanying article on page 13.)
In June 2005, BNM revised the GP8-i. The revision was substantial, requiring the Islamic banks to disclose more details of their operations and accounting. The new guidelines provide many illustrations for the Islamic banks to comply with and are applicable to all Islamic banks licensed under the IBA.
In conclusion, the IBA has surely provided the foundation of the Islamic banking industry as we see it today. Whilst the IBA has served its purpose well, BNM as the regulator has plenty to do to shape the Islamic banking industry further. Having resolved the issue of accounting standards, BNM must anticipate that differences are bound to emerge as the Islamic banks are only just beginning to implement the GP8-i and FRSi-1. The practical interpretation of accounting and reporting transactions must be undertaken by the Islamic banks and their auditors. As Islamic banking products continue to evolve, further issues will arise and the guidelines will need further refinements.
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. Uda Iskandar Sidek is a lawyer by profession.