Legal systems struggle to keep up with Islamic finance

The issue is that Islamic economics have a different premise from conventional banking and applying the same legal principles to decide disputes for both markets does not work. MALAYSIA launched the world’s first syariah interbank money market and popularised interest-free bonds to establish itself as a leading centre for Islamic finance, but its legal system is struggling to keep up.

Malaysia is not alone. Rival Middle East centres in the US$1 trillion sector are also finding that their legal systems are ill equipped to deal with Islamic finance cases as the market grows at a furious pace.

The issue, bankers and lawyers say, is that Islamic economics have a different premise from conventional banking and applying the same legal principles to decide disputes for both markets does not work.

Unlike conventional banking’s capitalist conviction that winner takes all, Islam argues for a fair distribution of profit and loss and bans purely speculative activity.
“Strong legal systems give birth to strong banking, strong corporate markets and that will then be able to attract more foreign direct investment (FDI),” Rafe Haneef, managing director of Fajr Capital in Kuala Lumpur, said.

“FDI will come to markets where there is strong corporate governance and therefore a strong legal system is required.”

To be sure, few legal disputes have reached Malaysia’s high courts. In fact, only 20 cases have come before them in as many years, estimates Megat Hizaini Hassan, a Kuala Lumpur-based lawyer.

The government has not announced any specific steps to deal with the issue, but there are signs it is rising up the political agenda.

“Dispute resolution mechanisms should also be more accommodative to the application of Islamic legal rules and methods in order to avoid embarrassment to Islamic banking cases as a result of incoherent and anomalous legal judgments,” Deputy Prime Minister Datuk Seri Najib Tun Razak told an industry forum in November, making him the highest ranking government official to sound an alarm over the problem.

Malaysia has carved out a position as the world’s largest Islamic bond market, with US$66 billion, or 62.6 per cent, of global outstanding sukuk issuance as of the end of June.

CONTEXT

Islamic finance is based on the syariah, or Islamic law.

It avoids the interest-based formula of conventional banking and argues that gains must be derived from ethical investing and for profits and losses to be shared between venture partners.

Most Middle East Islamic financial centres use the syariah as one element of their law. They also use other sources of law, such as French law.

But Malaysian law does not draw on syariah. Islamic banking matters are heard in civil law courts staffed by judges who are not formally trained in syariah.

Jal Othman, a Kuala Lumpur-based Islamic banking lawyer, estimates that no more than 10 of Malaysia’s 12,000 or so lawyers are experts in Islamic finance. Fewer than 10 judges, or less than a tenth, are skilled in the subject.

“You don’t have sufficient precedent which means there may be time bombs ticking,” Jal said.

A 2006 mortgage case, the outcome of which was reaffirmed in a recent judgment, highlights the clash between two sets of legal principals confronting Malaysia’s court system.

A Malaysian court ruled that if an Islamic home mortgage is terminated prematurely, the lender cannot claim for the unaccrued instalments because they have not fallen due yet.

The loan was given based on a popular Islamic finance structure in Malaysia called bai bithaman ajil in which a bank first purchases a house before selling it to the client at a profit.

Islamic finance experts argue the civil court decision did not reflect the principles of the Islamic finance agreement, which created a contract from the outset where the customer has to repay the bank the entire sum, including the cost of the asset and the profit margin.

“This bai bithaman ajil concept is very heavily used in the housing loan market,” said Rasheed Khan, a lawyer. “The sooner this is resolved the better because otherwise it creates a bit of uncertainty.”

But reflecting the fractured nature of the Islamic finance market, the bai bithaman ajil structure is not used in the Middle East because it is viewed as too closely resembling interest-based financing.

WHAT SHOULD BE DONE?

Lawyers and academics have suggested Malaysia employ judges skilled in syariah banking law or create special courts to hear Islamic finance cases.

Some Islamic bankers suggest courts should be required to seek the guidance of Malaysian central bank syariah advisers when deciding Islamic finance matters. The central bank has not commented.

“Decisions of the civil court, however powerful they may be, must consider the fact that the underlying basis of the Islamic banking raison d’etre is to observe the syariah,” Ahmad Hidayat Buang, an Islamic law expert wrote in a law journal.

Even in the Middle East, where the legal system is much more sensitive to syariah, other issues arise.

In Saudi Arabia, which uses syariah as the only basis for its legal system, Islamic banking disputes are dealt with by a central bank panel, not a syariah court.

This was because of a view that the court may be expert in syariah, but judges are often not expert enough in banking, said Ayman Khaleq, a Dubai-based Islamic finance lawyer.

“Syariah knowledge alone is not the answer. Civil and commercial law knowledge is not the answer. A combination of the two is,” he said.

Malaysian Blogger Fights a System He Perfected

KUALA LUMPUR, Malaysia — In a vast office at the top of one of the world’s tallest buildings, former Prime Minister Mahathir Mohamad sits at a broad, glass-topped desk, scribbling his thoughts on a pad of unlined paper.

For 22 years, Mr. Mahathir was the most powerful person in this land, and his thoughts were commands as he reshaped the country in his own image.

But he has become an irritant and a spoiler five years after stepping down, turning against his handpicked successor, Abdullah Ahmad Badawi, and falling victim to the press controls he perfected as prime minister.

“Where is the press freedom?” he asked two years ago, apparently surprised at being suddenly ignored. “Broadcast what I have to say! What I say is not even accurately published in the press!”

This May, though, he discovered the power of the Internet. Like many other inconvenient critics, he joined what seemed to be a political wave of the future, creating his own blog — www.chedet.com — where he vents in English and Malay several times a week.

Around the region bloggers are becoming a Fifth Estate, challenging the government’s monopoly on information in Singapore, evading censors in Vietnam, and influencing events in places like Thailand, Cambodia and China.

In March, political experts said, Malaysia’s bloggers helped influence elections, contributing to the biggest upset that the governing party, the United Malays National Organization, had suffered since independence in 1957. For the first time in decades, it held fewer than two-thirds of the seats in Parliament, and it lost control of 5 of the 13 states.

Among the opposition winners in the national and state governments were several bloggers, most prominently Jeff Ooi, who claimed to have prodded Mr. Mahathir into starting his own blog.

“The government doesn’t have a clue how to handle bloggers,” Mr. Ooi said in an interview. “If I were a dictator, I would be despairing. What do you do against this?”

The Internet has become the main battleground against censorship in Malaysia, where a system of self-censorship in an atmosphere of government pressure and intimidation has produced a constricted press.

Mr. Mahathir, 82, seems to be reveling now in challenging the system he once controlled, and he is as acerbic as he was during his days as prime minister.

“It is time the so-called intellectuals realize they were being duped by the Master of Spin,” he wrote on Aug. 21, referring to his bitter enemy, Anwar Ibrahim, who was his deputy prime minister and now leads the main opposition party. He also accused Mr. Anwar of being “the pious Muslim, who is also the bosom pal of Paul Wolfowitz, the neo-con Jew,” referring to the former United States deputy secretary of defense.

Blogging on Sept. 3, he offered a sort of mission statement. Many are with him as he harasses the government, he asserted. “But they are not prepared to say it openly,” he wrote. “That was why I started my blog. About six million had visited my blog site, and tens of thousands have commented and supported me.”

In case anyone doubts this, he posts comments to his blog by the dozens and hundreds, page after page, day after day. It turns out he has a lot of fans.

“Amazingly brilliant!” reads one comment. “I can’t stop laughing...you made my day Sir!”

And just to clear up any possible misunderstanding, another writes, “You, sir, are the most brilliant politician Malaysia has ever been blessed with.”

Mr. Ooi, 52, a former advertising copywriter who was one of Malaysia’s first political bloggers, started in 2003 and built a loyal following at www.jeffooi.com.

The government began an assault on Mr. Ooi that included threats of imprisonment without trial, attacks in the government-friendly press and defamation lawsuits, which are popular among leaders in Southeast Asia.

But that seemed only to make him a hero, and when he decided to run for Parliament as an opposition candidate, he already had a big head start.

“As a person that has consistently faced threats as a blogger, I had a kind of iconism and imagery that this is someone you can trust, someone the government fears, someone you need to put into Parliament,” Mr. Ooi said.

But he said it was much harder to blog from the inside. “The trade-off is that I have to write with measured words,” he said.

Earlier this year, Mr. Ooi said, he attended a public forum with Mr. Mahathir. It was there that he claimed he persuaded Mr. Mahathir to begin a blog.

“I threw him a challenge,” Mr. Ooi said. “A blogger shares a few prerequisites. One, he is strongly opinionated. Two, he could be controversial. And, thirdly, he is an agent provocateur on issues.

“I thought Mahathir fulfilled all three.”

The result, Mr. Ooi said, was “a miracle, he scored about 10 million visitors within months.”

Now, a convert to free speech, Mr. Mahathir is using his blog to champion the most recent victim of government censorship, Raja Petra Kamaruddin, the country’s most prominent blogger, who posts on www.malaysia-today.net, his Web site. The site has been blocked, but readers are redirected to another Web site, which continues to be updated.

The government has fallen back on the kind of tactics that Mr. Ooi faced. It charged Mr. Petra with sedition and jailed him for two years without trial for comments he had posted.

Mr. Mahathir sounded almost like Che Guevara when he said in his blog that the arrest showed “a degree of oppressive arrogance worthy of a totalitarian state.”

Furthermore, jailing people is futile, he said in an interview in his office. There is no way the government can arrest all the bloggers, even if it wants to.

At least, he said, “I hope so. Otherwise I’ll be in, too.”

Malaysia's Centralised Federal System

There are three factors that have contributed towards Malaysia’s centralised federalism.

First, the constitutional design clearly favours the central over the state governments, both in terms of legislative jurisdictions as well as in terms of revenue assignments. The Ninth Schedule of the Federal Constitution details the distribution of legislative powers and responsibilities between the federal and state governments. Apart from foreign affairs, defence, internal security, and law and order, the purview of the federal government includes trade, commerce and industry, physical development such as communication and transport and human development such as education, health and medicine. By contrast, the state government’s purview is restricted to areas such as lands and mines, Muslim affairs and customs, native laws and customs, agriculture and forestry, local government and public services, burial grounds, markets and fairs, and the licensing of cinemas and theatres. The concurrent list covers social welfare, scholarships, town and country planning, drainage and irrigation, housing, culture and sports, and public health.

The Tenth Schedule of the Federal Constitution elaborates on revenue assignment, in part based on the division of jurisdiction spelt out in the Ninth Schedule. In the Tenth Schedule, income taxes, property and capital gains taxes, international trade taxes, as well as production and consumption taxes are all assigned to the federal government. The state government is allowed to collect natural-resource related taxes such as revenue from lands and mines, as well as forests.

But under the Petroleum Development Act (PDA) 1974, all states give up their rights to petroleum resources found within their states. Ownership and control of petroleum and gas, though natural resources, are transferred to the federally owned and controlled company, Petronas, which is tasked with exploiting and mining the resource. In exchange, Petronas pays the state and federal governments five per cent royalty each - Petronas receives 49 per cent while the producer-company receives the remaining 41 per cent - of the gross value of petroleum production. In addition, the federal government taxes the producer company (Sarawak Shell, Sabah Shell or Esso). Consequently, the federal government receives far more revenue from petroleum than do the petroleum-producing states.

The Constitution also stipulates that the federal government is obliged to provide two major grants to the state governments, namely the ‘capitation grant’, which is based on the population size, and the ‘state road grant’, which helps the states to maintain their network of roads, but is in effect also a grant that takes into consideration the geographical size of the state. Apart from these two, there are about 10 other tax-sharing taxes and levies that the state is allowed to collect or where the federal government has to reimburse the state. The petroleum royalty is one such case. In the past, ten per cent of the export duties on tin, iron and other minerals were also transferred to the states from which the mineral was derived.

At any rate, the federal government has sole jurisdiction, though perhaps not sole discretion over the disbursement of all development funds. The end result is a very uneven distribution of revenue assignment, and therefore financial resources between the federal and state governments. This fact highlights a major anachronism in fiscal federalism in Malaysia. In most countries, a fairer and more balanced distribution of revenue collection and resources has evolved through constitutional reform. The reverse has occurred in Malaysia.

What this means is that the federal BN government can, technically speaking, deny development funds to the five PR-state governments. However, since the federal government would not like to irk the wrath of voters in opposition-led states, who might further turn against them in future elections, the federal government usually continues to provide funds to these states with the proviso that these are channelled through federal agencies and the Federal Development Offices of each state. This was what happened in the cases of Sabah and Kelantan in the past.

Recall that the Pas-led Terengganu government was denied royalty payments from Petronas during 1999-2004, on the basis that the petroleum resources which the Terengganu government claimed were located beyond the state’s territorial waters. That said, the federal government continued to fund development projects in Terengganu under the basis of wang ehsan for the state.

Second, apart from the federal-bias in the constitutional design, the political process that has allowed a single political party, the BN, to control the centre for 50 years, has further facilitated a centralised federalism. This domination coincides with the increased role of the Executive in decision-making which has been legitimised in terms of the need to ensure Malaysia’s security and to preserve ethno-religious harmony in multi-ethnic, multi-religious Malaysia. The abolition of local authority elections in the 1970s has allowed the BN to further penetrate into the third tier of government where their appointed councillors dominate the municipalities, town councils and district councils.

Hence, not only can the federal government dictate the pace and direction of development in the states, including in opposition-controlled states. The federal Executive may also invoke party discipline to remove the Menteri Besar (MB) of constituent states whenever they challenge the prerogatives of the centre. In the early 1990s, several opposition leaders calling for greater autonomy for Sabah were detained without trial on the grounds of fostering secession while two Umno MBs who questioned or disobeyed their federal leaders were put into political limbo during the 1970s.

Third, the development process underscored by the implementation of the New Economic Policy (NEP) further contributed to the expansion and consolidation of the federal government. For in pursuit of the NEP, the federal government established numerous statutory bodies and public corporations. Implementation and monitoring of the NEP required the expansion of the public sector and tight control by the central authorities which shifted even more power from the states to the federal authorities. A case in point is the establishment of the Commercial Vehicles Licensing Board (CVLB), a federal authority, charged with ensuring bumiputera participation in the transportation industry while licensing commercial vehicles. Consequently, the licensing and even the routing of buses providing public transport in the states and local authority areas came under the purview of federal authorities, in this case, the CVLB.

As well, through the auspices of Felda and regional development authorities, the federal authorities also penetrated into the states. Hence although the goal was to create a ‘bumiputera commercial and industrial community’ to reduce inequalities and thereby foster national unity, the NEP also enhanced the powers of the federal over the state governments, indeed, the local authorities too.

Confidence In Malaysia's Banking System

APRIL 21 – Sometime earlier this year, Bank Negara summoned bank officials from every institution in the country to its offices and subjected each one to rigorous stress testing.

The upshot was that some banks, including Maybank, Public Bank and EON Capital, have announced plans to raise Tier One capital. Clearly, the lessons of the

1998 Asian financial crisis have not been forgotten and the central bank has decided that the price to be paid for banking stability is constant vigilance.

That can only be a good thing, because asset quality in the banking sector will undoubtedly deteriorate as the global financial crisis ripples through the Malaysian economy in the coming months.

International ratings agency Fitch expects Malaysia’s non-performing loans (NPL) ratio to rise to 6-6.5 per cent this year while the Rating Agency of Malaysia has projected a more pessimistic 9 per cent on a worst-case basis.

But it is nowhere near the 16 per cent seen in 2001 during the dot-com bubble – where all the banks survived unscathed – and the 19 per cent in 1998, when two banks went bust and had to be rescued.

However, asset quality at the banks will get worse because the sectors that will be hardest hit are the small and medium scale industries and consumers facing sudden unemployment. Loans disbursed to the SMEs constitute 17.2 per cent of total loans while the household sector accounted for 27 per cent of total financing.

But it won’t be so bad, because Malaysia’s corporate sector isn’t over-geared. The corporate debt to equity ratio, according to BNM figures, was around 39 per cent last year, way down from the 55 per cent level in 1998. And post-East Asian crisis, companies have resorted to private debt securities to raise money rather than depend on traditional bank loans.

Meanwhile, household debt has also declined to 63 per cent of gross domestic product from 69 per cent five years ago.

Adding comfort to borrowers is the fact that interest rates are at historic lows. Bank Negara cut its overnight policy rate by 150 basis points to 2 per cent last month: it has brought down the base lending rate to 5.55 per cent.

By contrast, the effective lending rate during the East Asian crisis was a whopping 20-odd per cent. To help the banks further, BNM, in January, relaxed the mark-to-market requirement that rules the trading portfolios of all banks: that has helped to shield balance sheets from volatilities in the share market.

Finally, the banks have helped themselves with tighter lending policies and improved risk management departments. The average loan-deposit ratio for the banking sector is around 72 per cent compared to the wild-west days of 1998 when ratios of over 90 per cent held sway.

Bank stocks have been trending upwards. This signals that despite the troubles ahead, there remains a degree of confidence in Malaysia’s banking system. – Business Times Singapore

Malaysia Telephone System

Telephone system: general assessment: modern system; international service excellent
domestic: good intercity service provided on Peninsular Malaysia mainly by microwave radio relay; adequate intercity microwave radio relay network between Sabah and Sarawak via Brunei; domestic satellite system with 2 earth stations; combined fixed-line and mobile cellular teledensity exceeds 110 per 100 persons
international: country code - 60; landing point for several major international submarine cable networks that provide connectivity to Asia, Middle East, and Europe; satellite earth stations - 2 Intelsat (1 Indian Ocean, 1 Pacific Ocean) (2007)

Definition: This entry includes a brief general assessment of the system with details on the domestic and international components. The following terms and abbreviations are used throughout the entry:


Arabsat - Arab Satellite Communications Organization (Riyadh, Saudi Arabia).


Autodin - Automatic Digital Network (US Department of Defense).


CB - citizen's band mobile radio communications.


Cellular telephone system - the telephones in this system are radio transceivers, with each instrument having its own private radio frequency and sufficient radiated power to reach the booster station in its area (cell), from which the telephone signal is fed to a telephone exchange.


Central American Microwave System - a trunk microwave radio relay system that links the countries of Central America and Mexico with each other.


Coaxial cable - a multichannel communication cable consisting of a central conducting wire, surrounded by and insulated from a cylindrical conducting shell; a large number of telephone channels can be made available within the insulated space by the use of a large number of carrier frequencies.


Comsat - Communications Satellite Corporation (US).


DSN - Defense Switched Network (formerly Automatic Voice Network or Autovon); basic general-purpose, switched voice network of the Defense Communications System (US Department of Defense).


Eutelsat - European Telecommunications Satellite Organization (Paris).


Fiber-optic cable - a multichannel communications cable using a thread of optical glass fibers as a transmission medium in which the signal (voice, video, etc.) is in the form of a coded pulse of light.


GSM - a global system for mobile (cellular) communications devised by the Groupe Special Mobile of the pan-European standardization organization, Conference Europeanne des Posts et Telecommunications (CEPT) in 1982.


HF - high frequency; any radio frequency in the 3,000- to 30,000-kHz range.


Inmarsat - International Maritime Satellite Organization (London); provider of global mobile satellite communications for commercial, distress, and safety applications at sea, in the air, and on land.


Intelsat - International Telecommunications Satellite Organization (Washington, DC).


Intersputnik - International Organization of Space Communications (Moscow); first established in the former Soviet Union and the East European countries, it is now marketing its services worldwide with earth stations in North America, Africa, and East Asia.


Landline - communication wire or cable of any sort that is installed on poles or buried in the ground.


Marecs - Maritime European Communications Satellite used in the Inmarsat system on lease from the European Space Agency.


Marisat - satellites of the Comsat Corporation that participate in the Inmarsat system.


Medarabtel - the Middle East Telecommunications Project of the International Telecommunications Union (ITU) providing a modern telecommunications network, primarily by microwave radio relay, linking Algeria, Djibouti, Egypt, Jordan, Libya, Morocco, Saudi Arabia, Somalia, Sudan, Syria, Tunisia, and Yemen; it was initially started in Morocco in 1970 by the Arab Telecommunications Union (ATU) and was known at that time as the Middle East Mediterranean Telecommunications Network.


Microwave radio relay - transmission of long distance telephone calls and television programs by highly directional radio microwaves that are received and sent on from one booster station to another on an optical path.


NMT - Nordic Mobile Telephone; an analog cellular telephone system that was developed jointly by the national telecommunications authorities of the Nordic countries (Denmark, Finland, Iceland, Norway, and Sweden).


Orbita - a Russian television service; also the trade name of a packet-switched digital telephone network.


Radiotelephone communications - the two-way transmission and reception of sounds by broadcast radio on authorized frequencies using telephone handsets.


PanAmSat - PanAmSat Corporation (Greenwich, CT).


SAFE - South African Far East Cable


Satellite communication system - a communication system consisting of two or more earth stations and at least one satellite that provide long distance transmission of voice, data, and television; the system usually serves as a trunk connection between telephone exchanges; if the earth stations are in the same country, it is a domestic system.


Satellite earth station - a communications facility with a microwave radio transmitting and receiving antenna and required receiving and transmitting equipment for communicating with satellites.


Satellite link - a radio connection between a satellite and an earth station permitting communication between them, either one-way (down link from satellite to earth station - television receive-only transmission) or two-way (telephone channels).


SHF - super high frequency; any radio frequency in the 3,000- to 30,000-MHz range.


Shortwave - radio frequencies (from 1.605 to 30 MHz) that fall above the commercial broadcast band and are used for communication over long distances.


Solidaridad - geosynchronous satellites in Mexico's system of international telecommunications in the Western Hemisphere.


Statsionar - Russia's geostationary system for satellite telecommunications.


Submarine cable - a cable designed for service under water.


TAT - Trans-Atlantic Telephone; any of a number of high-capacity submarine coaxial telephone cables linking Europe with North America.


Telefax - facsimile service between subscriber stations via the public switched telephone network or the international Datel network.


Telegraph - a telecommunications system designed for unmodulated electric impulse transmission.


Telex - a communication service involving teletypewriters connected by wire through automatic exchanges.


Tropospheric scatter - a form of microwave radio transmission in which the troposphere is used to scatter and reflect a fraction of the incident radio waves back to earth; powerful, highly directional antennas are used to transmit and receive the microwave signals; reliable over-the-horizon communications are realized for distances up to 600 miles in a single hop; additional hops can extend the range of this system for very long distances.


Trunk network - a network of switching centers, connected by multichannel trunk lines.


UHF - ultra high frequency; any radio frequency in the 300- to 3,000-MHz range.


VHF - very high frequency; any radio frequency in the 30- to 300-MHz range.

How Does The Court System of Malaysia Work?

The hierarchy of courts of Malaysia starts with the Magistrates Court as the first level followed by the High Court, Court of Appeal and the Federal Court of Malaysia, which is the highest level.

The High Court, Court of Appeal and the Federal Court are superior courts, while the Magistrates Court and the Sessions Court are subordinate courts.

There are also various other courts outside of the hierarchy. There are the Penghulu's Courts, the Syariah Courts and the Native Courts. A court, which is paralleled in jurisdiction with the Magistrates' Court, is the Juvenile Court.

Generally, there are two types of trials, namely criminal and civil.

(a) The Federal Court The Federal Court hears appeals from the Court of Appeal.

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(b) The Court of Appeal The Court of Appeal hears appeals from the High Court relating to both civil and criminal matters.

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(c) The High Court

A) CIVIL JURISDICTION The High Court has jurisdiction to try all civil matters but generally confines itself to matters on which the Magistrates and Sessions Courts have no jurisdiction. These include matters relating to divorce and matrimonial cases, appointment of guardians of infants, the granting of probate of wills and testaments and letters of administration of the estate of deceased persons, bankruptcy and other civil claims where the amount in dispute exceeds RM250,000. B) CRIMINAL JURISDICTION The High Court may hear all matters but generally confines itself to offences on which the Magistrates and Sessions Courts have no jurisdiction, for instance, offences which carry the death penalty. C) APPELLATE JURISDICTION The High Court may hear appeals from the Magistrates and Sessions Courts in both civil and criminal matters.

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(d) The Sessions Court

(A) CIVIL JURISDICTION A Sessions Court may hear any civil matter involving motor vehicle accidents, disputes between landlord and tenant, and distress actions. The Sessions Court may also hear other matters where the amount in dispute exceeds RM25,000 but does not exceed RM150,000. (B) CRIMINAL JURISDICTION A Sessions Court has jurisdiction to try all criminal offences EXCEPT those punishable by death.

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(e) The Magistrates Court The Magistrates Courts deal with the vast majority of cases, both civil and criminal, and sit in almost all major towns in Malaysia.

A) CIVIL JURISDICTION A Magistrates Court may hear a civil case when the amount in dispute does not exceed, RM25,000. Where the amount claimed does not exceed RM5,000 you may wish to file your claim in the small claims division of the Magistrates Court. If you do so however, you must be prepared to conduct the case yourself, as legal representation is not permitted. (B) CRIMINAL JURISDICTION A Magistrates Court may hear criminal matters of the following nature: - where the offence is punishable by a fine only - this would cover the majority of traffic offences. where the offence provides for a term of imprisonment not exceeding ten (10) years. A Magistrate may not, however, impose a term of imprisonment exceeding five (5) years.

The Banking System in Malaysia

Banking, Finance and Exchange Administration

1. The Banking System in Malaysia

The banking system, comprising commercial banks, investment banks, and Islamic banks, is the primary mobiliser of funds and the main source of financing to support economic activities in Malaysia. The non-bank financial intermediaries, comprising development financial institutions, provident and pension funds insurance companies, and takaful operators, complement the banking institutions in mobilising savings and meeting the financial needs of the economy.

1.1 The Central Bank

Bank Negara Malaysia (the Bank), the Central Bank, is the apex of the monetary and banking structure of the country. Its main objectives as defined in the Central Bank of Malaysia Act 1958 are to:

• Issue currency and keep the reserves safeguarding the value of the currency;

• Act as a banker and financial adviser to the Government;

• Promote monetary stability and a sound financial structure;

• Promote the reliable, efficient and smooth operation of national payment and settlement systems and to ensure that the national payment and settlement systems policy is directed to the advantage of Malaysia; and

• Influence the credit situation to the advantage of Malaysia.

To meet its objectives, the Bank is vested with legal powers under various laws to regulate and supervise the banking institutions and other non-bank financial intermediaries. The Bank also administers the country's foreign exchange control regulations and act as the lender last resort to the banking system.

1.2 Financial Institutions

The following table provides and overview of the number of financial institutions as at end-September 2008:

Financial Institution	Total	Malaysian - Controlled Institutions	Foreign - Controlled Institutions
Commercial Banks	22	9	13
Investment Banks/ Merchant Banks	15	15	-
Islamic Banks*	15	10	5
International Islamic Banks	1	-	1
Insurers	41	25	16
Islamic Insurers (takaful operators)	8	8	-
International Takaful Operators)	1	-	1
Reinsurers	7	3	4
Islamic reinsurers (retakaful operators)	3	1	2
Development financial institutions	13	13	-

*Includes one foreign Islamic bank that commenced operations in October 2008

Banks, including Islamic banks, operate through a network of more than 2,200 branches across the country. Six Malaysian banking groups have presence in 18 countries through branches, representative offices, subsidiaries and joint ventures. There are also 21 foreign banks which maintain representative offices in Malaysia. They do not conduct normal banking business but provide liaison services and facilitate information exchange between business interests in Malaysia and their counterparts.

The introduction of the framework for investment banks in 2005 provided for the development of full-fledged investment banks through consolidation and rationalisation between merchant banks, stockbroking companies and discount houses. Investment banking activities mainly include capital raising activities such as underwriting, loans syndication and corporate financing, management advisory services, arranging for the issue and listing of shares, as well as investment portfolio management. The development of investment banks will enhance the capacity of financial institutions in Malaysia to better serve its corporate customers through a wider range of financial and advisory activities on par with the services provided by international investment banks.

Malaysia also has a comprehensive Islamic banking system. Presently, Malaysia has fifteen full-fledged Islamic banks, three of which are from the Middle East, providing a broad spectrum of financial products and services based on Shariah principles. At the same time, there are five conventional banks three of which are major foreign banks, offering Islamic banking products and services via the Islamic banking window set up.

The entry of the three foreign Islamic banks enhances the competition and stimulates innovation among the Islamic banking players, and at the same time complements the Malaysian players in tapping into strategic growth areas such as investment banking and wealth management. In addition, these institutions also have plans to make Malaysia as their financial hub for this region.

In terms of product offering, more than 60 Islamic financial products and services are made available in the market. The emergence of new innovative products and financial instruments that incorporate globally accepted Shariah principles such as commodity murabahah deposits, Islamic profit rate swap, musyarakah mutanaqisah home financing and sukuk musyarakah in the industry have further elevated the domestic Islamic financial sector to the next stage of advancement.

Malaysia has several development financial institutions (DFIs) that were set up with specific objectives to develop and promote strategic economic sectors, including the manufacturing and export sectors, small and medium enterprises (SMEs), as well as the agriculture, infrastructure and maritime sectors. These DFIs complement the banking institutions by providing an array of financial and non-financial services to support development of the strategic sectors. These include the provision of medium to long-term loans, equity capital, guarantees for loans and a range of supplementary financial and business advisory services. ‘Bank Perusahaan Kecil & Sederhana Malaysia Berhad' or the SME Bank, which was established in October 2005, offers financial products such as term loans and working capital including start-ups and SMEs in new growth areas, particularly to those in professional services, export-oriented activities and franchise businesses. Bank Pertanian Malaysia has recently been corporatised to Bank Pertanian Malaysia Berhad (Agrobank) in order to strengthen its role to be more effective in meeting the needs of the entire value chain of agricultural activities, including the agro-based industries.

1.3 Malaysia as an International Islamic Financial Centre

Malaysia's continuous efforts in strengthening the Islamic financial system domestically and internationally have gained acceptance and recognition by the international financial fraternity. An important initiative that has been introduced is to enhance the position of Malaysia as a leading international Islamic financial hub.

On August 2006, the Malaysian Government launched the Malaysia International Financial Centre (MIFC) initiatives. The MIFC initiative is a collaborative effort formed by Malaysia's financial and market regulators together with top officials from relevant Government agencies and participants from the banking, takaful and capital market sectors. The establishment of the MIFC as one of the key intermediation linkages in the global market place, has an important role in accelerating the process bridging and strengthening the relationship between international Islamic financial markets and thereby expand the investment and trade relations between the Middle East , West Asia and North Africa with East Asia . Situated centrally in the Asian time zone, Malaysia presents itself as a meeting place for those with surplus funds and those who seek to raise funds from any part of the world.

Under the MIFC initiatives, Malaysia offers strong value propositions as a key provider of Islamic financial services, with five focus areas:

Sukuk Origination

A platform for sukuk origination, distribution and trading.

Islamic Fund and Wealth Management

A destination for financial investment with a wide range of world class capital market and treasury instruments.

International Islamic Banking

A centre for the establishment of Islamic banks providing international currency financial services.

International Takaful

A centre for international takaful and retakaful businesses.

Human Capital Development

A centre of excellence and thought leadership in education, training, consultancy and research in Islamic finance to create a supply of talent for the Islamic finance industry.

Major incentives introduced to attract more participants to MIFC include:

•	Issuance of new International Islamic Banking (IIB) licences under the Islamic Banking Act 1983 to qualified foreign and Malaysian financial institutions to conduct the full range of Islamic banking business with residents and non-residents in international currencies either as a subsidiary or a branch. The entity will enjoy full income tax exemption for ten years up to year assessment 2016 under the Income Tax Act 1967.
•	Issuance of new International Takaful Operator (ITO) licences to qualified foreign and Malaysian financial institutions to conduct full range of takaful business with non-residents and residents in international currencies, either as a subsidiary or a branch. The entity will enjoy similar income tax exemption as the IIB entity.
•	Islamic fund management companies (IFMC) are allowed to invest all their Shariah funds abroad. The entity will enjoy tax exemption on all fees for managing Islamic funds for foreign and Malaysian investors up to year of assessment 2016 under the Income Tax Act 1967.
•	Provision of start-up fund by Employees Provident Fund (EPF) for the establishment of foreign IFMC.
•	Up to 100% foreign equity ownership is allowed for IIB, ITO and IFMC.