Bank Negara issues Exposure Draft of Policy Document on Islamic Banking Window

19 February 2024

1. licensed banks and licensed investment banks approved under section 15¹ of the Financial Services Act 2013 (“FSA”); and
2. a prescribed institution approved under section 33B(1)(b)² of the Development Financial Institutions Act 2002 (“DFIA”), 

1. General requirements for IBW operations (domestic and overseas);
2. Specific requirements for IBW domestic operations; and
3. Specific requirements for IBW operations by overseas branches. 

1. Eligibility criteria and submission requirements: The criteria to be complied with by an applicant seeking BNM’s approval to carry on IBW operations and the documents and information to be submitted in support of the application.⁴ 


2. Post approval requirements: These requirements include the following: 

• the requirement to set up an Islamic Banking Division (IBD) at the head office;⁵
• completing an operational readiness assessment to the satisfaction of BNM before commencing its IBW operations;⁶
• having a robust mechanism in place to ensure that the implementation of its IBW operations promotes end-to-end compliance with Shariah requirements;⁷ and
• designating a member of its senior management having authority, professional competence, knowledge and skill sets in areas relevant to Islamic banking to manage the overall IBW operations.⁸ 

3. Islamic Banking Fund: The requirement to establish an Islamic Banking Fund (“IBF”), with the prescribed minimum amount at the point of entry, which shall be maintained throughout the IBW operations, to have a clear segregation of IBF from capital funds designated for conventional operations, restrictions in the application of income generated from the IBW operations and permitted source of funding for the IBF.⁹ 


4. Shariah compliance and governance: An IBW institution is required, among others, to: 

• comply with rulings issued by BNM’s Shariah Advisory Council (SAC) and any standards, order, direction, requirement, condition, specification, restriction or otherwise specified, made or imposed pursuant to the Islamic Financial Services Act 2013 (“IFSA”) and the DFIA in relation to its IBW operations, including the policy documents on Shariah Governance and any relevant Shariah standards;¹⁰ and
• ensure full compliance with BNM’s policy document on Shariah Governance, including integrating Shariah governance considerations within the business and risk strategies of the IBW institution for a smooth implementation of its IBW operations; for this purpose, an IBW institution must ensure that the necessary support is provided by relevant divisions/departments within the IBW institution and sufficient resources are provided that commensurate with the expected costs and profitability of the IBW operations.¹¹ 

5. Systems and controls: An IBW institution must have sound and robust internal controls to ensure effectiveness of its IBW operations and compliance with Shariah, legal and regulatory requirements, and ensure its reporting system is able to address the separation between Islamic and conventional banking transactions. An IBW institution must also ensure proper reporting and disclosure of its IBW operations under BNM’s policy documents on Financial Reporting, Financial Reporting for Islamic Banking Institutions and Financial Reporting for Development Financial Institutions, as applicable.¹² 


6. Financial protection for Islamic financing facility: Subject to prescribed exceptions, an IBW institution is required to offer takaful coverage as the first option to its customers who apply for Islamic financing facilities that require coverage.¹³ 


7. Cessation of IBW operations: An IBW institution which decides to cease its IBW operations is required to submit written notification to BNM within 60 working days prior to the cessation.¹⁴ The written notification to BNM must include the prescribed documents and information, which includes information on the manner in which the cessation will be conducted and the plan on managing the affected stakeholders.¹⁵ 

1. Scope of business: An IBW institution must ensure that the scope of its IBW operations in Malaysia is confined to, in the case of a licensed person, the permitted scope of its conventional business and in the case of a prescribed institution, its mandated role.¹⁶ 


2. Separate compliance on prudential requirements: An IBW institution shall fully comply with all regulatory requirements including prudential requirements and any directives issued by BNM in relation to the IBW operations.¹⁷ It must also observe separate compliance from its conventional operations on prudential requirements, including, inter alia, the minimum total capital ratio, statutory reserve requirement and liquidity requirements and single counterparty exposure limit (“SCEL”).¹⁸ The SCEL computation of its IBW operations is to be based on its IBF.¹⁹ 


3. Statistical reports: An IBW institution is to submit complete and accurate statistical reports on its IBW operations to BNM in a timely manner and in compliance with the requirements in other standards, order, direction, condition, specification, restriction or otherwise specified, made or imposed by BNM.²⁰ 


4. System and clearing network: Upon obtaining approval from BNM to set up its IBW operations, an IBW institution must apply to be a participant in the Real-Time Electronic Transfer of Funds and Securities System (RENTAS) system and open an Islamic IBW MYR Settlement Account with BNM.²¹ 

1. Submission requirements: A licensed person or prescribed institution intending to conduct IBW operations in an overseas branch is required to submit an application to BNM with information and documents set out in paragraph 8.2 of the Exposure Draft, and the regulatory framework (including Shariah regulatory framework, if any) adopted by the host country in regulating Islamic banking business.²² 


2. Scope of business: An IBW institution with IBW operations at overseas branches is allowed to carry on Islamic banking business as defined in section 2(1) of the IFSA and section 33(A) of the DFIA.²³ However, the scope of the IBW operations must be consistent with the scope of activities permitted by the host regulator or host jurisdiction.²⁴ 


3. Management of business and risk by subsidiary: An IBW institution which has within its banking group an existing subsidiary carrying on Islamic banking business or Islamic financial business in the home jurisdiction may optimise its resources by leveraging on the existing subsidiary to manage both the business and risks arising from such expanded scope.²⁵ 


4. Separate compliance on prudential requirements: IBW operations conducted at overseas branches are not required to observe separate compliance to regulatory prudential requirements. However, the IBW institution shall ensure that all risk exposures are appropriately observed in the overall compliance with the prudential requirements at both the entity and consolidated levels.²⁶ In accordance with the requirements outlined in BNM’s policy document on Shariah Governance, the Shariah committee of an IBW institution is required to provide objective and sound advice to the IBW operations conducted at overseas branches to ensure that its aims and operations, business, affairs and activities are in compliance with Shariah.²⁷