UAE Laws and Islamic Finance

Laws of the UAE and Islamic Finance

Bank Islam Malaysia Berhad (BIMB) and Bank Muamalat Malaysia Berhad (BMMB)

 

Malaysia’s first Islamic bank, Bank Islam Malaysia Berhad (BIMB) was incorporated as a public company under the Malaysian Companies Act 1965 in March of 1983.  Malaysia’s second Islamic bank, Bank Muamalat Malaysia Berhad (BMMB) was established in 1999.

Guiding Principles of Malaysia’s Islamic Banks:

  1. ‘Prohibition of Riba (Interest) and the sharing of profit and losses.  Profit and loss sharing is the basis of all economic activities involving money, wealth, and labor in Islam.  The concept of profit- sharing should replace interest in the Islamic banking system.
  2. Management of Islamic Banks based on Islamic Acts and Practices (Mu’amalah Islamiah). The success of the Islamic bank is based on the understanding of Mu’amalah Islamiah (Islamic Acts and Practices) by the management, followed by the observation of these practices as required by Islam.  In other words, all management activities should not contravene these Islamic principles.
  3. Avoidance of the activities contradictory to the interest of the Muslim ummah.  Any activity which is not in conformity with the interests of the ummah is tantamount to misuse and abuse of the wealth entrusted by God.

The National Steering Committee on Islamic Banking set up by the Government of Malaysia set up by the Government of Malaysia in July of 1981with the following mandate:

To study and identify various critical aspects of Islamic banking such as the basis of establishment, the areas of operations, and the business relationship with the customers and other financial institutions.

  1. To examine the suitability of Islamic Banking in the Malaysian context from various points of view, including the religious, legal, racial, social and development angles;
  2. To present to the government a proposal to establish Bank Islam Malaysia in a complete report encompassing the following aspects:- the fundamental concepts of Islamic banking, the legal framework, the structure of the company, the areas of operation and the organizational structure.

The Islamic Banking Act 1983 of Malaysia incorporates the following recommendations of the National Steering Committee on Islamic Banking set up by the Government of Malaysia in July of 1981:

  1. An Islamic bank, which operates according to the rules of Shari’ah should be established.  The bank should be able to provide services to Muslims as well as operate on a profitable basis.
  2. Considering that the concept of an Islamic bank is new to this country, the Committee was of the view that only one Islamic Bank be established initially.  The establishment of other Islamic banks would be considered only after the proposed initial Islamic Bank is seen to be able to operate smoothly and efficiently.
  3. The proposed Islamic Bank should be incorporated as a limited company under the Companies Act 1965.  The Committee noted that the Islamic Bank could be established either as a statutory body or a company carrying on banking business.  The Committee considered that it was preferable for the Islamic bank to be established as a company so that it could operate as a business concern and not as a government agency, although the Islamic bank had features of social welfare in line with Islamic teachings.  It should be free to operate alongside the other banks, without being constrained by regulations normally imposed on statutory bodies.  Furthermore, the Committee noted that although the Islamic bank was to have a number of corporate objectives pertaining to the social and spiritual well-being of society, it was still a business institution.  In the final analysis, such a business institution would have to depend for its survival on its business viability and performance as a basis for all business dealings.  The incorporation of the Islamic bank under the Companies Act 1965, therefore, would be more in line with the concept and philosophy of an Islamic Bank.
  4. In order to provide for licensing and supervision of the Islamic Bank, an Act styled the Islamic Banking Act would need to be legislated and consequential amendments made to existing related acts.
  5. Bank Negara Malaysia should administer the Islamic Banking Act.
  6. The Islamic Bank should set up a Religious Supervisory Council to ensure that the bank operates according to the rules of Shari’ah.
  7. The proposed Islamic bank should be named “Bank Islam Malaysia Berhad.”’

*Information taken from the Law and Practice of Islamic Banking and Finance by Dr. Nik Norzrul Thani; Mohamed Ridza Mohamed Abdullah; and Megat Hizaini Hassan.  (2003)

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