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Bank Negara revises Policy Document on Islamic Banking Window

25 November 2024

Bank Negara Malaysia (“BNM”) issued a revised Policy Document on Islamic Banking Window (“Policy Document”) on 11 November 2024.
 
The Policy Document will come into effect on 1 January 2025. It will enhance and supersede the Guidelines on Skim Perbankan Islam issued by BNM on 1 July 1993 and is to be read together with other relevant legal instruments and policy documents that have been issued by BNM, including any amendments or reissuance thereof, in particular the 13 legal instruments and policy documents set out in paragraph 6.1 of the Policy Document.
 
The Policy Document applies to: 
  1. a licensed person under the Financial Services Act 2013 (“FSA”) or a prescribed institution (“prescribed institution”) under the Development Financial Institutions Act 2002 (“DFIA”) that intends to offer and carry on Islamic banking business or Islamic financial business in addition to its conventional business excluding International Currency Business Unit; and  

  2. a licensed bank or licensed investment bank approved under section 151 of the FSA and a prescribed institution approved under section 33B(1)(b)2 of the DFIA (severally a “IBW institution”) to carry on Islamic banking business or Islamic financial business in Malaysia or overseas (“IBW operations”). 
A licensed investment bank that undertakes only fee-based Shariah compliant activities, e.g. conducting only lead arranging activities for sukuk, will not be subject to the Policy Document.3
 
The Policy Document is divided into three main parts, namely: 
  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. 
General requirements for IBW operations (domestic and overseas)
 
An applicant proposing to carry on IBW operations and an IBW institution shall comply with the applicable requirements set out in paragraph 8 of the Policy Document. Among others, these requirements include the following: 
  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 upon approval of the application referred to in paragraph (a) above;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 
  1. Islamic Banking Fund: The requirements include: 
  • establishing an Islamic Banking Fund (“IBF”) for the purpose of funding the IBW institution’s domestic IBW operations;
  • ensuring the prescribed minimum amount9 in the IBF at the point of entry shall be maintained throughout the IBW operations;
  • clearly segregating IBF from capital funds designated for conventional operations;
  • complying with the restrictions in the application of income generated from the IBW operations and the permitted source of funding for the IBF;
  • complying with the restrictions in relation to the funding of the IBW operations of its overseas branch10; and
  • having a clear mechanism for attributing expenditures associated with the IBW operations to the IBF if the IBW institution leverages on shares services arrangement.11 
  1. 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;12 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.13 
  1. 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.14 

  2. 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.15 

  3. 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.16 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.17 
Specific requirements for IBW domestic operations
 
The specific post approval requirements applicable to an IBW institution’s IBW operations in Malaysia include the following: 
  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.18 

  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.19 It must also observe separate compliance on prudential requirements from its conventional operations, including, inter alia, the minimum total capital ratio, statutory reserve requirement and liquidity requirements and single counterparty exposure limit (“SCEL”).20 The SCEL computation of its IBW operations is to be based on its IBF.21A prescribed institution carrying on IBW operations is required to comply with applicable prudential requirements specified by BNM under the DFIA22. 

  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, orders, directions, conditions, specifications, restrictions or otherwise specified, made or imposed by BNM.23 

  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.24 
Specific requirements for IBW operations by overseas branches
 
The requirements that apply specifically to an IBW institution that seeks to conduct IBW operations in an overseas branch include the following: 
  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 Policy Document, and the regulatory framework (including Shariah regulatory framework, if any) adopted by the supervisory authority in the host country regulating Islamic banking business where the proposed branch is to be established.25 

  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.26 However, the scope of the IBW operations must be consistent with the scope of activities permitted by the supervisory authority in the host jurisdiction.27 

  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.28 

  4. Separate compliance on prudential requirements: An IBW institution that carries on IBW operations at an overseas branch is not required to observe separate compliance to regulatory prudential requirements from its conventional operations. However, the IBW institution shall ensure that all risk exposures arising from its IBW operations at an overseas branch are appropriately observed in the overall compliance with the prudential requirements at both the entity and consolidated levels.29 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 its overseas branches to ensure that its aims and operations, business, affairs and activities are in compliance with Shariah.30 
Comment
 
The issue of the revised Policy Document is timely as the guidelines that it supersedes were first issued in 1993 and last updated on 2 November 2012, that is, before the enactment of the FSA and the IFSA in place of the Banking and Financial Institutions Act 1989 and the Islamic Banking Act 1983 respectively, and prior to the amendments to the DFIA in 201631 to permit prescribed institutions to carry on business or activity in accordance with Shariah.
 
Article by Sharifah Shafika Alsagoff (Partner) and Hafidah Aman Hashim (Partner) of the Islamic Finance Practice of Skrine.
 
 
1 Section 15 of the FSA, inter alia, permits BNM to grant its written approval to licensed banks and licensed investment banks to carry on Islamic banking business, subject to the provisions set out in that section of the FSA.
2 Section 33B(1)(b) of the DFIA, inter alia, permits a prescribed institution to carry on business or activity in accordance with Shariah in addition to its existing conventional business provided that it obtains the prior written approval of BNM, subject to the provisions set out in Part IIIA of the DFIA.
3 Paragraph 2.2 of the Policy Document.
4 Paragraphs 8.1 and 8.2 of the Policy Document.
5 Paragraph 8.3 of the Policy Document. This requirement does not apply to IBW operations by overseas branches.
6 Paragraph 8.5 of the Policy Document.
7 Paragraph 8.6 of the Policy Document. Refer to sub-paragraphs (a) to (c) of paragraph 8.6 for further details.
8 Paragraph 8.7 of the Policy Document. Refer to paragraphs 8.8 and 8.9 of the Policy Document for further responsibilities of the designated member of senior management.
9 The minimum amount prescribed under paragraph 8.10 of the Policy Document is RM20 million for a licensed bank under the FSA and a prescribed institution under the DFIA, and RM6 million for a licensed investment bank under the FSA. Under paragraph 8.13 of the Policy Document, BNM may impose a higher minimum amount of IBF for the overseas IBW branches as the IBW scale up in size.
10 Paragraphs 8.11 and 8.12 of the Policy Document.
11 Paragraphs 8.10 to 8.21 of the Policy Document.
12 Paragraph 8.22 of the Policy Document.
13 Paragraph 8.23 of the Policy Document.
14 Paragraphs 8.24 to 8.26 of the Policy Document.
15 Paragraphs 8.27 to 8.30 of the Policy Document.
16 Paragraph 8.31 of the Policy Document.
17 Paragraph 8.32 of the Policy Document.
18 Paragraph 9.1 of the Policy Document.
19 Paragraph 9.3 of the Policy Document.
20 Paragraph 9.4 of the Policy Document. Refer to paragraph 9.4 for further details.
21 Paragraph 9.5 of the Policy Document.
22 Paragraph 9.4 of the Policy Document.
23 Paragraph 9.6 of the Policy Document.
24 Paragraphs 9.7 and 9.8 of the Policy Document.
25 Paragraph 10.1 of the Policy Document.
26 Paragraph 10.3 of the Policy Document.
27 Paragraph 10.4(a) of the Policy Document.
28 Paragraph 10.4(b) of the Policy Document.
29 Paragraph 10.5 of the Policy Document.
30 Paragraph 10.6 of the Policy Document.
31 The amendments were introduced under the Development Financial Institutions (Amendment) Act 2015 which came into operation on 31 January 2016.

This alert contains general information only. It does not constitute legal advice nor an expression of legal opinion and should not be relied upon as such. For further information, kindly contact skrine@skrine.com.

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