Dr. Zaharuddin Abd.

Rahman

REGULATORY FRAMEWORK

Regulatory framework refers to the collection of important

rules, standards, processes, and institutions which define
the marketplace within which an industry operates.

In involves the application of rules and guidance as to the

acceptable standards of conduct within the area being regulated.

The

purpose

of

the

regulatory

framework

is

to

protect

consumers, to maintain appropriate standards of conducts

of the market players, and to provide sufficient redress
mechanism for unhealthy conducts.

Good and effective regulatory framework leads to certainty of

outcome for both consumers and providers of capital and increase
in trust and confidence in institutions and sector generally.

MAIN REGULATORS IN MALAYSIA

Securities
Bank

Commission (SC)

Negara Malaysia (BNM)

Bursa

Malaysia

Labuan

Financial Services Authority

REGULATORY AUTHORITY: BIG PICTURE

MINISTER OF FINANCE

OVERVIEW:

ISLAMIC MONEY MARKET &

ISLAMIC CAPITAL MARKET

In general, matters pertaining to money market (e.g monetary policy) are

under the control of Bank Negara (BNM), whereas matters concerning capital
market are under the control of Securities Commission (SC).

Shariah Advisory Council (SAC) is established in both BNM and SC as the

regulator Shariah Board overseeing Islamic law matters for Islamic banking
and Islamic capital market.

In case of dispute resolution, authority is given to the SAC of BNM & SAC of
SC to provide a binding Shariah ruling in any court or arbitration proceedings
involving Islamic banking disputes & Islamic capital market disputes
( *Sections 56 & 57 CBMA, and Sections 316F & 316G CMSA)

CBMA: Central
Bank
of Malaysia
Reference Manual for the court for SAC Bank Negara
Malaysia
to comply
with
Act 2009

the provision in Section 51 dan Section 56 Akta

Bank Capital
NegaraMarket
Malaysia
2009
CMSA:
Services
Act 2007

THE ROLES OF
SECURITIES COMMISSION
(SC)

THE ROLE OF SECURITIES

COMMISSION (SC)

The Securities Commission (SC) was officially set up on 1 st March 1993.

In general, the establishment of SC undertakes the following objectives;

i) To promote the development of capital market in Malaysia;
ii) To take responsibility for streamlining the regulations of the securities market;
iii) To ensure speedy processing and approval of corporate transaction;
iv) To assume ultimate responsibility of protecting investor; and
v) To execute regulatory and investigating powers with regard to compliance
under the Securities Industry Act 1983 and Securities Industry (Central Depositories)
Act 1991

In particular, SC plays the following roles; (i) Regulatory, (ii) Planner, (iii)
Development, (iv) Building of Foundation of Islamic Capital Market, and (v)
Enhancing Corporate Governance.

THE ROLE OF SECURITIES

COMMISSION (SC)

1) REGULATORY ROLE
o

Regulate corporate debt market together with BNM

Sole-regulatory authority over fund-raising activity within the

corporate bond market

Capital Markets and Services Act 2007 (CMSA) regulates matters

related to dealing in securities in Malaysia, which include;
i)

Issuance of Securities in Ringgit or Foreign Currencies;

ii) Offering of Islamic-based securities, and

iii) Fines and penalties

THE ROLE OF SECURITIES

COMMISSION (SC)

2) ROLE AS A PLANNER
o

Initiated various measures with different institutions and market players

to arrange multipartite collaboration to actualize the Capital Market
Master Plan by executing the following tasks;
i) Facilitate the development of a wide range of competitive products
and

services;

ii) Create a viable market for the effective mobilization of Islamic funds;
iii) Ensure that there is an appropriate and comprehensive
accounting, tax, and regulatory framework for the Islamic capital
market; and
iv) Enhance the value recognition of the Malaysian Islamic capital
market

internationally.

THE ROLE OF SECURITIES

COMMISSION (SC)

3) DEVELOPMENT ROLE
o

1994: the Securities Industry Development Centre (SIDC) was

established as part of SCs statutory mandate to promote research and
training in the development of securities and futures market.

SIDCs objectives;
i) To educate investors on matters related to investments, risk and reward;
ii) To enlighten investors with proper financial planning;
iii) To clarify their rights and responsibilities; and
iv) To promote professionalism and expertise among intermediaries such as
investment banks, brokerage firms, etc.

In addition, SC has become a member of the International Organization of

Securities Commission (IOSCO) subsequent to its establishment. This
marked the beginning of an active involvement in various international
discussions on capital market regulations and development.

THE ROLE OF SECURITIES

COMMISSION (SC)

4) TO BUILD THE FOUNDATION OF ISLAMIC CAPITAL MARKET

o

Islamic Capital Market Unit was established within SC in 1994 currently known
as the Islamic Capital Market Department, and the unit was authorized to
conceptualize and propose initiatives for the development of the Islamic capital
market.

In the same year, SC has formed the Islamic Instrument Study Group
(IISG);
i)

Whose members were among Islamic jurists, market practitioners and

regulators;
ii)

To foster greater cross fertilization of ideas and understanding of Islamic

capital market
iii)

issues; and

An avenue for Islamic scholars and industry players to assess existing

capital market

instruments and provide guidance to market participants on

Islamic capital market matters.

THE ROLE OF SECURITIES

COMMISSION (SC)

5) TO ENHANCE CORPORATE GOVERNANCE (CG)

o

Corporate governance is identified as a priority area critical to the

attainment of the Malaysians capital markets aspiration to become a
transparent, accountable and well-performed corporate that is built upon
sound and consistent governance of corporate activity.

Thus, to realize the mission;

March 1998: the government established a High Level Finance Committee to

review and assess the entire framework for the purpose of reforming the state of
CG in Malaysia

February 1999: the Committee passes its report, with recommendations on CG

policies: (i)the reform of laws, regulations, and rules; (ii)training and education;
and (iii)development of a Malaysia code on CG

These recommendations were implemented by an Implementation

Project Team consisting various representatives chaired by SC.

THE ROLE OF
BANK NEGARA MALAYSIA
(BNM)

THE ROLE OF BANK NEGARA

MALAYSIA (BNM)

Bank Negara Malaysia (BNM) is the central bank of Malaysia, it was established
on 26th January 1959 under the Central Bank of Malaya Ordinance 1958, to fulfill
following roles;

Over the years, the roles and responsibilities of BNM have evolved and expanded.
Today, BNM focuses on the three pillars of central banking, namely monetary
stability, financial stability, and the payment system.

In specific, BNM undertakes following roles; (i)Regulation & Legislation roles;

(ii)Planner; (iii)Supervisory; and (iv)Development

THE ROLE OF BANK NEGARA

MALAYSIA (BNM)

1) REGULATION & LEGISLATION ROLE

o

BNM is vested with comprehensive legal powers under various Acts and
Ordinances;

Central Bank of Malaysia Act 1958 (CBA)

Banking and Financial Institutions Act 1989 (BAFIA)
Insurance Act (1996)

Legislation to promote Islamic banking and finance related to Islamic capital

market are such as;

Islamic Banking Act 1983

Takaful Act 1984
Offshore Companies Act 1990
Labuan Offshore Securities Industry Act 1998
Islamic Financial Services Act 2012

With this role, BNM assists Islamic capital market to be known internationally
and locally by both investors and issuers.

THE ROLE OF BANK NEGARA

MALAYSIA (BNM)
2) ROLE AS THE PLANNER
o

In an effort to promote Islamic capital market, BNM works closely with the
SC on projects such as

10 years Financial Sector Master Plan and the

Islamic Securities Guidelines.

o

In February 2001, the Capital Market Master Plan was launched, and it was
formulated by the Capital Market Strategic Committee comprising
representatives from the SC, BNM and foreign professionals.

The objectives of the plan are;

To be the preferred fund-raising centre for Malaysian companies;

To promote an effective investment management industry and more
conducive environment for investors;
To enhance competitive position and efficiency of market institutions;
To develop a strong and competitive environment for intermediation
services;
To ensure stronger and more facilitative regulatory regime; and
To establish Malaysia as an international Islamic capital market centre.

THE ROLE OF BANK NEGARA

MALAYSIA (BNM)
3)
o

SUPERVISORY ROLE

The most important roles of BNM are licensing, registration, regulation,

and supervision of each of the following institutions;

Islamic banking and financial institutions;

Insurance business (including re-insurance), insurance broking

business, and adjusting business; and

Takaful and re-Takaful business and other businesses relating to or

connected with Takaful

THE ROLE OF BANK NEGARA

MALAYSIA (BNM)
4) DEVELOPMENT ROLE
o

BNM plays important role on education and training in Islamic Finance with the
establishment of an academic and research institutions;

International Centre for Education in Islamic Finance (INCEIF)

International Shariah Research Academy for Islamic Finance (ISRA)

To increase the
number of experts
in the field of
Islamic Finance.

BNM also made available Shariah scholarship Award and Shariah Research
Grant- offered to Malaysian and non-Malaysian seeking to pursue studies and
research in Islamic Finance.

Some specific roles of BNM in the area of Islamic capital market include;

To introduce the principal dealer and auction systems to develop the secondary
market for bond
o To develop a market infrastructure for Private Debt Securities
o To perform activities like trading, registering, settlement and redemption of
government securities by using latest ICT like RENTAS, FAST and BIDS
o

OTHER STANDARD SETTING BODIES

& RELEVANT ORGANIZATIONS?

Islamic Financial Services Board (IFSB)

Accounting and Auditing for Islamic Financial Institutions (AAOIFI)

Malaysian Investment Banking Association (MIBA)

Association of Stock Broking Companies Malaysia (ASCM)

Federation of Malaysian Unit Trust Managers (FMUTM)

Other related organizations, e.g.;

Financial Planning Association of Malaysia;

Malaysian Venture Capital and Private Equity Association;

Federation of Public Listed Companies;

Malaysian Association of Assets Managers; and etc.

ISLAMIC CAPITAL MARKET

REGULATION IN
MALAYSIA

ISLAMIC CAPITAL MARKET

REGULATION IN MALAYSIA

In Malaysia, the Islamic Capital Market (ICM) runs as a

parallel market to the conventional capital market for
capital seekers and providers.

Thus, the regulatory frameworks of the Capital Market

are similarly applicable to the Islamic Capital Market;
except in a few exceptional circumstances where
specific

laws,

regulation,

and

guidelines

are

provided specifically for the operation if Islamic

Capital Market.

LEGAL FRAMEWORK FOR

ISLAMIC CAPITAL MARKET IN MALAYSIA:
THE MAIN STATUTES

Capital Market and Services Act 2007

Securities Commission Act 1993

Companies Act 1965

Banking and Financial Institutions Act 1989 (BAFIA)

Islamic Banking Act 1983

Securities (Central Depositories) Act 1991

Federal Constitutions 1957

CAPITAL MARKET AND SERVICES ACT 2007

(CMSA)

CMSA- main legislation for the regulation of Islamic Capital

Market in Malaysia.

Consolidates 3 key legislations on the capital market: Securities

Industry Act 1983; Futures Industry Act 1993; and Part IV of the
Securities Commission Act 1993 .

2 additional regulations that come into effect concurrently with

CMSA: Capital Market and Services Regulations 2007; and
Guidelines on Regulation of Markets.

CMSA marks significant enhancements in the Malaysian capital

market regulation by providing effective measures for investor
protection, market integrity and stability of the market place.

CMSA & INVESTOR PROTECTION

The CMSA accords better protection to investors by:

Enhancing SCs power to take civil action and administrative

actions;

Allowing the SC to recover 3 times the amount of losses through

civil action for a wider range of market misconduct including
market manipulation;

Requiring application monies of sophisticated investors to be held

on trust in fund raising exercise;

Enhancing the standards of trustees for debenture holders; and

Extending investor protection provisions to clients of financial
institutions.

KEY FEATURES OF CMSA 2007

Single licensing requirement for capital market players.

Statutory recognition of Islamic Capital Market: s.s. 316 & 317

of CMSA grant the Minister and the SC with the power to
prescribe modifications to give full effect to the principles of
Shariah in respect of Islamic Securities

The CMSA also recognizes the Islamic banks which carry out
the whole range of capita market activities for all Shariah
based products and services.

Section 76 and Schedule 4 of the CMSA accords those

institutions with automatic status as registered person to
deal with the capital market services.

SECURITIES COMISSION ACT 1993

(SCA)

Prior to 1993, there were multiple agencies who were responsible for
the capital market in Malaysia.

Under the SCA, Sc was officially established to act a single

regulatory body for promotion and development of capital market in
Malaysia.

Under SCA, SC has the responsibility to;

Streamline the regulations of the securities markets;

Speed up the processing and approval of corporate transactions; and

Provide sufficient protection to the capital market investors.

SCA also provides for a full disclosure-based regulation and liabilities

for misleading or inadequate disclosure of information

SCA VIS--VIS CMSA?

With the coming into force of the CMSA, the SCA has
undergone consequential amendment, particularly in respect
of deletion of Division 2 part IV of the Act which deals with
fund raising activities.

Hence, the Securities Commission (Amendment) Act 2007

has been passed to facilitate the CMSA which is now the main
legislation in relation to capital market in Malaysia.

BANKING AND FINANCIAL

INSTITUTIONS ACT 1989 (BAFIA)

S. 124 of BAFIA provides that a licensed institution may carry out

Islamic banking business or Islamic financial business provided that
BNM is consulted before that business is carried out.

S. 124 (3) and (4) of BAFIA further provide that any licensed
institutions carrying on Islamic banking business and Islamic financial
business may refer to BNMs Shariah Advisory Council (SAC) and shall
comply with directions on Islamic banking business and Islamic
financial business issued by BNM in consultation with its SAC.

However, it should be noted that under section 124 (5) of the BAFIA,
the licensed institutions under the Act are not Islamic banks,
but conventional banks offering Islamic banking and financial
services.

BAFIA & CMSA

Institutions licensed under BAFIA may be considered as registered

person that are allowed to deal with the capital market services as
provided by section 76 and Schedule 4 of the CMSA.

CMSA also allows the relevant institutions to act in the capacity of

principal advisers for certain types of corporate proposals under
part VI of the CMSA, subject to the approval of SC.

Investment banks holding merchant banking licensed issued by

BNM under BAFIA as well as Capital Market Services license issued
by the SC under the CMSA have the right to offer a full scope of
integrated capital market and financial services which include
corporate finance, debt securities trading, and dealing in securities.

ISLAMIC BANKING ACT 1983 (IBA)

The first legal infrastructure to facilitate the operations of Islamic

banks in Malaysia

The scope of banking business under IBA (s.2) is universal in

nature-

encompassing

Shariah

compliant

retail

banking,

commercial banking, investment banking and capital activities.

Islamic bank licensed under IBA is deemed as registered person

under CMSA and can be involved in capital market activities,
similar with any person who holds the Capital Market and Services
License (CMSL)

IBA & CMSA

CMSA recognizes the universal nature of Islamic banking business

and activities as prescribed under Schedule 4 of the CMSA.

Part 1, Schedule 4 of CMSA provides that Islamic banks are

allowed to undertake the following capital market activities;

Dealing in securities;

Providing corporate finance advice;

Investment advice;

Fund management

Under IBA and CMSA, the activities conducted must comply with
the principles of Shariah and approved by the SAC of BNM and/or
SAC of SC

IBA & CMSA

In the course of undertaking the permitted capital market

activities, Islamic banks shall ensure that any dealings in Islamic
products are conducted at arms length and the investors
protection requirements; and in its capacity as principal advisers
and making submission to the SC, Islamic banks shall ensure that
Islamic products fulfill the eligibility criteria imposed pursuant to
part VI of the CMSA in respect of the requisite level of resources,
competencies and corporate finance expertise.

In addition, Islamic banks are expected to exercise due care and

diligence in ensuring completeness and accuracy of information
in the corporate proposals submissions in accordance to due
diligenge standards of the SC.

SECURITIES (CENTRAL DEPOSITORIES)

ACT 1991

This Act deals primarily with regulation of central securities

depository, holding, withdrawal and dealings in securities which
have been deposited.

By virtue of this Act, it is a legal requirement that investors

open their accounts with the central depository for depositing
their securities to enable them to trade in the listed securities.

This Act establishes the central depository to;

Protect the interest of depositors;

Protect and control information on deposited securities and

dealing

THE FEDERAL CONSTITUTION

Sets out the jurisdiction of the Courts

Article 121 of Federal Constitution;

Establishes the jurisdictions of courts in Malaysia

Civil Courts have no jurisdiction over Shariah Courts

Jurisdiction of Civil Courts;

All matters conferred by Federal and State Law (except for

personal law of Muslims)

NINTH SCHEDULE OF
THE FEDERAL CONSTITUTION

Civil Court's jurisdiction: List I (Federal List)

Civil and criminal procedure and administration of justice

including contracts, mercantile laws, arbitration.

Shariah Courts jurisdiction: Para 1 List II (State List)

Jurisdiction over persons professing religion of Islam

Jurisdiction only matters in para 1

No jurisdiction over offences except provided by Fed law

Matters in para 1 is matters pertaining to Islamic law and

personal and family law of persons professing the religion of
Islam including divorce, wakaf, succession, offences against
religion of Islam except which is in Fed law

COURTS JURISDICTION OVER

ISLAMIC FINANCIAL SERVICES CASES

Civil Courts have jurisdiction WHY???

Although the term Islamic Law in Para 1, List II of Ninth Schedule

is wide, its application is limited to persons professing the religion
of Islam.

Only federal legislation on IBF- no state legislation on IBF

CASES - Adnan bin Omar, BIMB vs Tinta Press Sdn. Bhd. & Ors and
Dato Nik Mahmud vs BIMB

The Courts used the civil law and procedures in reaching its decisions

The courts did not consider whether the application of the existing
law and procedure have contradicted the Shariah or anyway affect
the validity of the contractual documents.

THE END