Overview of Laws, Regulations and Governing Bodies of a Banking System

Inceif Materials

Introduction – Market Economy and the Role of Governance

Basic Issues and Framework for Understanding Business Ethics and Governance

Islamic Ethics and The Role of Character and Virtues

Codes of Corporate Governance in Common Law Countries – Origins and Evolution

Overviews of Laws, Regulatons and Governing Bodies of a Banking System

Shariah Governance and Regularity Framework in Different Jurisdictions

Outline• Introduction• Regulators• The central bank• Banking and financial institutions act Malaysia• The Securities Commission (SC)• The Court• Banking Acts/Laws• Central Bank/Insurance Deposit Laws• Dispute Settlement• Arbitration• The Differences between Arbitration and a Court Case• Meditation• Negotiation• Islamic Financial Laws and Regulations• Islamic Banking Law in Malaysia• Banking and Financial Institutions Act 1989 of Malaysia and Islamic Banking Act 1983

Learning Outcomes

• Identify and explain the objectives of the regualtory authorities and laws in financial system and how sound regulatory framework can improve the efficiency of the financial system;

• Understand the need for Islamic banking laws;• Appriciate the models of settling disputes in a

financial system, and;• Distinguish between Islamic banking laws and

conventional banking laws.

8 Sections of Discussions

1. Introduction2. Different types of regulatory bodies3. Laws & regulations4. Modes of settling disputes5. Legal framework in Malaysia6. Law required7. General laws for Islamic banks8. Summary

Introduction

• Primary targets of financial system are to coordinate an effective flow of surplus funds from the savers to the investors through a credit system and to facilitate payments through a payment system.

• Proper functioning of a financial system entails an effective allocation of scarce resources in the promotion of economic growth and development with the overall effect of improving the lot the people of that nation.

Introduction (2)

• However, through the impropriety of some players in a financial system, various problems can arise which disrupt the proper function of the system and thereby curtail the achievement of its goal.

Different Type of Regulatory Bodies

• Why?– Optimal allocation– Improfe safety and stability of system

3 important factors determine effectiveness of a regulation

• Should provide incentives to encourage market

• Accomodate cross border market• Clear and fairly enforced

The Central Bank

• Issue of legal tender currency• Preservation of internal position and value of the legal

tender currency of the country• Maintenance of external reserves to safeguard the

international value of the legal tender currency• Control and regulation of credit in the country• Promotion of banking development in the country• Acting as lender of last resort• Acting as banker and financial adviser to the

government

Banking and Financial Institutions Act Malaysia (1989)

• By virtue of section 73(1)D, make an order removing any officer or director of the financial institution and make a replacement thereof or appoint a person to advise the institution in relation to proper conduct of its business as stated in section 73(1)(E) of the same act.

• By virtue of section 73(1)B, prohibit the financial institution from extending any further credit facility for such period as may be stated in the order or any steps or any action or to do or not to do anything in relation to its business, directors or officers.

The Securities Commisions (SC)

SC is the apex regulatory organ of the capital market. Its major objective is the promotion of an orderly and active capital market.Major function:• Ensuring adequate protection of securities• Determining the time company securities are to be sold• Approving the volume of such securities and registering all

securities dealers• Investment advisers and market places in order to maintain

proper standards of conduct and profesionalism in the securities business.

The Court

A court is a statutory body established to hear and determine any civil proceedings in which the existence or extent of a legal right, power, duty, liability, privilege, interest, obligation or clain is in issue or to hear and determine any criminal proceedings involving or relating to any penalty, forfeiture, punishment or other liability in respect of an offence committed by any person. In any trial, either civil or criminal, a judge presides over the court.

Banking Acts/Laws

• Banking and Financial Institution Act 1989 Malaysia

• Provisions for procedures to be followed in obtaining operating license to engage in banking and other related business by both the citizens and foreign business enterprises.

Central Bank/Insurance Deposit Laws

The Central Bank of Malaysia Act 1958 is an act to provide for the establishment, administration, powers an duties of the Central Bank of Malaysia.I. PreliminaryII. Establishment, Capital and Administration of the BankIII. CurrencyIV. Reserve of External AssetsV. Business of the BankVI. Relations with Banking and Other Financial InstitutionsVII. GeneralVIII. Extension of Jurisdiction

Dispute Settlement

Alternative Dispute Resolution (ADR)• Arbitration• Mediation• Conciliation

Arbitration

Arbitration is an out of court method to settle commercial disputes through a binding decision.Basics differences between arbitration and court,1. Arbitration agreement2. Selection of arbitrators

Mediation

Mediation is another mode of ADR. In mediation, a neutral person, which is the mediator, examines the claims of the parties and assists them in order to reach negotiated settlement for the dispute.

Negotiation

• It is a consensual bargaining process in which the parties attempt to reach agreement on a dispute or potentially disputed matter. Autonomy experienced by the disputing parties without intervention of third parties.

Islamic Financial Laws and Regulations

• Shariah principles as the backbone of Islamic Banking Laws.

• Special laws that govern the operations of Islamic banks in their respective countries.

• Egypt 1930s, Malaysia 1940s, Pakistan 1950s, Egypt 1963.

Islamic Banking Law in Malaysia

• Islamic Banking Act 1983• Banking and Financial Institutions Act 1989• BAFIA