KUALA LUMPUR: Despite a compound annual growth rate of 20% to 35% and global syariah-compliant assets estimated at US$1.3 trillion (RM4.02 trillion) last year, there is still no comprehensive legal framework for global Islamic finance.
But this will soon change when Malaysia introduces the world’s first comprehensive legal framework for the Islamic finance industry. Called the Islamic Financial Services Act 2012 (IFSA 2012), it is expected to be gazetted next month.
With the introduction of IFSA 2012, Islamic finance players and investors will find some kind of legal certainty when seeking recourse following disputes or disagreements on certain points of law. Currently, their only recourse is through the civil courts, which normally refer to the National Syariah Advisory Council under Bank Negara Malaysia for feedback before making their decisions.
IFSA 2012 is part of Bank Negara Malaysia’s 2011 to 2020 Financial Sector Blueprint to chart a new direction for the Islamic financial system.
According to Hakimah Yaacob, a researcher at the International Syariah Research Academy for Islamic Finance, a foreign investor who wants to invest in Malaysia may want to know the kind of regulatory framework that is in place or what has been done to enable him or her to seek recourse if disputes arise.
“Definitely, when we talk about cross border dealings and transactions, these are issues international investors come across, whether it is regarding the payment system and its safety or how do I deal with disputes,” said Hakimah.
Among the features incorporated in IFSA 2012 are provisions to arbitrate legal and syariah disputes via a mechanism known as the Financial Ombudsman Scheme (FOS), which will act as an intermediary among the parties in a dispute over an Islamic finance transaction, she said.
“Currently, disputes are being heard in civil courts, so the FOS is going to be introduced as part of a mechanism to settle disputes in Islamic finance,” she said.
Hakimah said It is not yet clear how the FOS is going to be implemented as IFSA 2012 does not specify its structure or organisation. All Islamic financial institutions operating in Malaysia will be the members of the FOS.
“I believe the FOS is going to be an alternative to the civil court system, which already has arbitration, intermediation or other types of alternative dispute resolution (ADR). Currently there is no specific mechanism for ADR in Islamic finance.”
Hakimah said FOS decisions will be binding on both parties to the agreement or the contract. Parties who agree to seek recourse through the FOS instead of the court system will not be able to bring their cases back to the civil court for redress.
However, a lawyer who studied the new act said the FOS provision to treat legal and syariah disputes in Islamic finance amounts to an “ouster clause” of the court system. An ouster clause is when the legislator excludes the power of the courts as the final arbiter.
“FOS is not like an arbitrator, whose decisions are binding and recognised by the court. So the kind of scheme that the regulator will implement is not clearly elaborated in the act,” said the lawyer.
Commenting on the new act, Maybank Islamic Bank said strong standards for Islamic finance are continuously needed in order to instil more confidence among current and potential investors in syariah-compliant products and services.
“In terms of attracting more investors to trade in Islamic finance investment products, we believe the act is the right way forward,” said Maybank Islamic in an email reply to questions by The Edge weekly.
According to the International Centre for Education in Islamic Finance, IFSA 2012 seeks to provide for the regulation and supervision of Islamic financial institutions, payment systems and other relevant entities.
It will also cover the oversight of the Islamic money market and Islamic foreign exchange market to promote financial stability and compliance with syariah.
This article first appeared in The Edge Financial Daily, on February 18, 2013.