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The Paradox Struggle Between Islamic and Conventional Banking Systems created a overrun effect to the non-bank Islamic financial intermediaries which also started to offer Islamic financial products and services under Islamic banking schemes. In its efforts to establish an Islamic Banking system, Malaysia has seen the emergence of the Interest Free Banking Scheme (now replaced with Islamic Banking Scheme, IBS), several Takaful Companies, savings institutions (examples in Bank Simpanan Nasional & Bank Rakyat) developmental financial institutions (examples in Bank Pembangunan dan Infrastruktur Malaysia and Bank Pertanian),the National Shariah Advisory Council on Islamic Banking and Takaful (NSAC), and the second Islamic bank, Bank Muamalat Malaysia Berhad, Islamic Inter-bank Money Market (IIMM). Indonesia, on the other hand, is a good as to how exclusive prerogative afforded to Shariah Courts can be problematic. Islamic banking in Indonesia started to operate from 1992 by virtue of the enactment of the Banking Act No. 7/1992 and amended in 1998, to provide an opportunity to conventional banks to open an Islamic window. Since that time, the growth of Islamic banking in Indonesia has been progressing steady and fast. But the problem was that the jurisdiction of the civil courts did not extend to Shari’ah matters, within which Islamic banking disputes apparently came. On the other hand, the jurisdiction of the religious courts was limited to Personal law matters. This incongruity was rectified in February 2006 expanding the jurisdiction of the Religious courts to cover adjudication of disputes belonging to Islamic economic matters, including Islamic banking. There are several clashes between conventional and Islamic Banking laws. The main focal point of this paper would be on the clashes created due to application of the common law or conventional law based laws to resolve the problems in the Islamic banking system. The impact of this is huge. This is because, Islamic economics have a different premise from conventional banking and applying the same legal principles to resolve disputes for both markets does not work. One encouraging point is that the Central Bank is focusing on strengthening the institutional infrastructure, enhancing the regulatory framework, strengthening the Shariah and legal 190
Aishath Muneeza, Ismail Wisham, Rusni Hassan, International Islamic University Malaysia infrastructure as well as enhancing intellectual capital development and consumer education in Malaysia. Islamic finance is based on the Shariah, 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. The one institution which is entrusted in safeguarding this element is the Shariah Advisory Council sitting at Bank Negara. The Malaysian model on this matter is exemplary. The Central Bank of Malaysia Act 1958 enhanced the role and functions of its Council according sole Shariah authority in Islamic finance. Regardless of this, there is a need for the Council to synergize between Shari’ah requirements with the legal and taxation framework and find a place for innovation in Shari’ah compliance and viable products. And the most notorious dilemma is in balancing the monetary gains and fulfilling of the Shari’ah objectives, with the use of clear and transparent procedure in decision making. An appropriate legal, institutional and tax framework is a basic requirement for establishing sound financial institutions and markets. Islamic jurisprudence offers its own framework for the implementation of commercial and financial contracts and transactions but commercial, banking and company laws appropriate for the enforcement of Islamic banking and financial contracts do not exist in many countries. While countries such as Malaysia, Turkey, Sudan, Yemen and United Arab Emirates they have enacted Islamic Banking laws parallel to the existing conventional banking system; countries like Saudi Arabia, Egypt, Qatar, Pakistan, Iran Jordon and Bahrain have not enacted any new laws to accommodate Islamic banks, but instead operate under the existing legislations which legalize the conventional banks. Malaysia is a good example in illustrating the clashes caused by applying the conventional laws to Islamic Banking. The Islamic Banking Act (IBA) and Islamic law generally are to be applied and implemented within the existing common law system and the regime of all other existing laws. For instance, neither the IBA nor section 124 of BAFIA exclude the application of the civil law to Islamic banking transactions. Alternatively, there is no provision in either Act 191
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Aishath Muneeza, Ismail Wisham, Rusni Hassan,<br />
International Islamic University Malaysia<br />
infrastructure as well as enhancing intellectual capital<br />
development and consumer education in Malaysia.<br />
Islamic finance is based on the Shariah, or Islamic law. It<br />
avoids the interest-based formula of conventional banking<br />
and argues that gains must be derived from ethical investing<br />
and for profits and losses to be shared between venture<br />
partners. The one institution which is entrusted in<br />
safeguarding this element is the Shariah Advisory Council<br />
sitting at Bank Negara. The Malaysian model on this matter<br />
is exemplary. The Central Bank of Malaysia Act 1958<br />
enhanced the role and functions of its Council according sole<br />
Shariah authority in Islamic finance. Regardless of this,<br />
there is a need for the Council to synergize between Shari’ah<br />
requirements with the legal and taxation framework and find<br />
a place for innovation in Shari’ah compliance and viable<br />
products. And the most notorious dilemma is in balancing<br />
the monetary gains and fulfilling of the Shari’ah objectives,<br />
with the use of clear and transparent procedure in decision<br />
making.<br />
An appropriate legal, institutional and tax framework is a<br />
basic requirement for establishing sound financial<br />
institutions and markets. Islamic jurisprudence offers its<br />
own framework for the implementation of commercial and<br />
financial contracts and transactions but commercial,<br />
banking and company laws appropriate for the enforcement<br />
of Islamic banking and financial contracts do not exist in<br />
many countries. While countries such as Malaysia, Turkey,<br />
Sudan, Yemen and United Arab Emirates they have enacted<br />
Islamic Banking laws parallel to the existing conventional<br />
banking system; countries like Saudi Arabia, Egypt, Qatar,<br />
Pakistan, Iran Jordon and Bahrain have not enacted any<br />
new laws to accommodate Islamic banks, but instead<br />
operate under the existing legislations which legalize the<br />
conventional banks.<br />
Malaysia is a good example in illustrating the clashes caused<br />
by applying the conventional laws to Islamic Banking. The<br />
Islamic Banking Act (IBA) and Islamic law generally are to be<br />
applied and implemented within the existing common law<br />
system and the regime of all other existing laws. For<br />
instance, neither the IBA nor section 124 of BAFIA exclude<br />
the application of the civil law to Islamic banking<br />
transactions. Alternatively, there is no provision in either Act<br />
191
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