Amendments – banking legislation in Malaysia

Amendments were introduced to the Central Bank of Malaysia Act 1958, the Banking and Financial Institutions Act 1989, the Islamic Banking Act 1983 from 1st January 2004. We set out below, a commentary on the salient amendments to the these statutes.



Central Bank of Malaysia Act 1958 ("CBA")


Promotion of payment and settlement systems

The CBA has been amended to provide for the promotion of reliable and efficient operation of national payment and settlement systems as an additional object of the Central Bank of Malaysia, Bank Negara Malaysia ("BNM") (Section 4).



Establishment of Syariah Advisory Council

A new Section 16B has been introduced to provide for the establishment of a Syariah Advisory Council as the authority for the ascertainment of Islamic law for the purposes of Islamic banking business, takaful business, Islamic financial business, Islamic development financial business and any other business based on Syariah principles which is supervised and regulated by BNM (collectively "regulated Syariah based business").


To avoid potential conflict of interest, a member of the Syariah Advisory Council is prohibited from becoming a member of any Syariah advisory body or acting as a Syariah advisor or assuming office of similar effect with any banking or other financial institutions except with the written approval of BNM.


BNM may consult with the Syariah Advisory Council and issue written directives in relation to regulated Syariah based business in accordance with the advice of the Syariah Advisory Council.


The amendments also seek to ratify retrospectively the Syariah Advisory Council appointed on 2nd August 1996 and to validate directives, notices and circulars issued by BNM in accordance with the advice of the Syariah Advisory Council in relation to regulated Syariah based business.



Establishment of Body Corporate for Human Resource Development

The amendments authorise BNM to establish a body corporate for the purposes of training, research and development of human resource in relation to banking and financial services and to finance (by grant, donation, loan or advance) the establishment and operations of such a body corporate (Section 30A).


The amendments also ratify all preparatory work carried out and expenses incurred hitherto for the implementation of Section 30A.


We believe that these amendments relate to the establishment of the International Centre for Leadership in Finance, a company limited by guarantee, established in 2003 to accelerate the development of top management talents for the financial sector and corporations.



BNM's Rescue Powers Widened

The powers of BNM under Section 42 to make loans and advances to any banking institution or other financial institution in circumstances where BNM deems such action is necessary to safeguard monetary stability is extended to authorise BNM to enter into any other transactions with such institution for the aforesaid purposes provided that the proposed transaction does not involve any element which is not approved by Syariah in accordance with the advice of the Syariah Advisory Council.



Debt Securities Market

New Sections 44A to 44D empower BNM to establish and operate systems relating to the debt securities market and to regulate such market. These provisions inter alia confer powers on BNM to –


  • establish and operate systems to facilitate the following -
  • the transfer, clearing and settlement of funds and debt securities;
  • the tendering, issuance, borrowing and lending of debt securities;
  • the dissemination of information relating to the money market or the tender, issue, trading and bidding for debt securities;
  • the handling of debt securities deposited with BNM by means of a scripless trading system;
  • function as a depository and paying agent in relation to the operation of the afore-mentioned systems;
  • make rules, with the approval of the Minister, to regulate the operation of the afore-mentioned systems; and
  • require debt securities holders to submit information, verified by statutory declaration, pertaining to such securities held by them.


Sections 44A to 44D(3) are deemed to have come into operation on 1st January 1990 and ratify actions taken by BNM in relation to debt securities' systems prior to the said date.


The said provisions therefore remove doubt as to the validity of actions taken by BNM in establishing and operating the Real Time Electronic Transfer of Funds and Securities (RENTAS) System, the Fully Automated System for Issuing/Tendering (FAST) and the Bond Information Dissemination System (BIDS) and the central depository of debt securities.



Banking and Financial Institutions Act 1989 ("BAFIA")


Dual Licensing of Financial Institutions

A licensed financial institution is now permitted to apply for and hold two licences, namely a licence to carry on banking business and one to carry on finance company business. An institution which holds these licences is defined as a "banking and finance company".



Change of Regime for Credit Token Business and Electronic Fund Transfer Systems

With effect from 1st January 2004, the regulation of credit token business (including credit cards and charge cards businesses) and electronic fund transfer systems will come under the purview of the Payment Systems Act 2003 which came into force on 1st November 2003.  As such all provisions in BAFIA which relate to these businesses have been deleted.



Islamic Banking Act 1983 ("IBA")


Approval of Syariah Advisory Body

One of the criteria to be fulfilled for a company to be issued an Islamic banking licence under Section 3 of the IBA is that the applicant's articles of association must provide for the establishment of a Syariah advisory body to advise the applicant to ensure that its banking operations do not involve any element which is not approved by the religion of Islam. This provision has been amended so that the Syariah advisory body must now be one that is approved by BNM.


Removal of Restriction on Foreign Ownership or Control

Section 6 of the IBA which prohibited an applicant for or holder of an Islamic banking licence from having majority foreign shareholding or being foreign-controlled has been repealed.


Advice of Syariah Advisory Council

A new Section 13A permits an Islamic bank to seek advice of the Syariah Advisory Council, established under Section 16B of the CBA, on Syariah matters in relation to its banking business and imposes an obligation on the Islamic bank concerned to comply with the advice of the said Council.




The amendments to the CBA are primarily housekeeping in nature and are to ratify certain actions taken by BNM, such as the establishment of a Syariah Advisory Council and the RENTAS, FAST and BIDS systems in relation to private debt securities. The widening of the powers of BNM under Section 42 to safeguard monetary stability is welcomed.


The introduction of a new category of dual licensing under BAFIA that enables licensed financial institutions to carry on banking business and finance company business offers interesting prospects and may facilitate group rationalisation and the creation of one-stop financial centres envisaged under Recommendation 3.7 of BNM's Financial Sector Master Plan.  Dual licensing may also assist in the further consolidation of the financial services industry in Malaysia.


The removal of the restriction in the IBA against majority foreign ownership or foreign control of Islamic banks may be aimed at fulfilling Recommendation 5.5 of the Financial Sector Master Plan which contemplates the issue of Islamic banking licences to qualified foreign Islamic banking institutions that have presence in the global Islamic banking industry.  The liberalisation of ownership and control of Islamic banks in Malaysia offers interesting investment opportunities for qualified international Islamic banking institutions. The issue of new Islamic banking licences would assist the Malaysian Government to achieve its objective of establishing Malaysia as a regional Islamic financial centre.




28 January 2004


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