The Maybank Islamic Bhd logo is displayed on a sign inside a branch at the company’s headquarters in Kuala Lumpur (file). The country’s Law Harmonisation Committee is working to encourage use of Malaysian rules for cross-border Islamic deals instead of English law.
Bloomberg
Malaysia, which pioneered Islamic finance more than 30 years ago, will face an uphill battle in its attempt to make itself an international centre for Shariah dispute resolution, say local and foreign law firms.
The Law Harmonisation Committee is working to encourage use of Malaysian rules for cross-border Islamic deals instead of English law, Badlisyah Abdul Ghani, a member of the panel and the chief executive officer of CIMB Islamic Bank Bhd, said at an October 7 briefing in Kuala Lumpur. Regulations are being amended to remove loopholes that discourage Shariah deals to make the nation the preferred place to settle disputes, Abdul Hamid Mohamad, the committee’s chairman, said at the briefing.
Malaysia, accounting for around 60% of outstanding sukuk worldwide, is counting on a complete set of professional services to cement its lead in the Islamic finance industry, which will more than double to $2.67tn in assets by 2017, according to PricewaterhouseCoopers. Foreign lawyers may be resistant to the shift as they aren’t familiar with Malaysian law, said Megat Hizaini Hassan, head of the Islamic finance practice at Lee Hishammuddin Allen & Gledhill in Kuala Lumpur.
“We are at the centre of the Islamic finance world at the current moment,” Baiza Bain, managing director at Amanie Advisors Sdn, a Kuala Lumpur-based Islamic finance consultancy, said in an interview on Wednesday. “How do you consolidate that position further? The only way is to have a legal system that will inspire confidence in the players to come and do business.”
The country had $148bn of sukuk outstanding at the end of June, the Malaysia International Islamic Financial Centre said. Shariah-compliant assets stood at 420bn ringgit ($133bn) in August, or 21% of Malaysia’s total banking holdings, central bank data show.
The Southeast Asian nation has a single set of laws that govern both Shariah-compliant and non-Islamic commercial contracts, and they can sometimes render Islamic deals less competitive, the committee’s Abdul Hamid said. The aim is create a comprehensive system for Islamic financial investors, he said.
“That is a very tall order, an extremely ambitious plan,” Jawad I Ali, the Dubai-based global deputy head of King & Spalding’s Islamic finance practice, said in an interview on Wednesday. “What is almost impossible to reverse is the dominance of English law in international transactions, whether it’s a Shariah-compliant transaction or not.”
Worldwide sales of bonds that comply with the Shariah ban on interest fell 18% so far this year to $32.2bn, according to data compiled by Bloomberg. In Malaysia, the slowdown has been more pronounced with ringgit-denominated issuance dropping 69% to 25.8bn ringgit.
The committee has proposed changes to laws relating to land matters and money-market instruments, Abdul Hamid said.
“We hope that by doing that we are in the position to offer to people all over the world, if you really want a Shariah-compliant product, you come here,” he said. “If you want any dispute to be settled according to Shariah-compliant law, come here. We have all the facilities.”
Malaysian law may find some acceptance among offshore investors who have businesses or investments in the country, although it is unlikely to displace English legislation in other deals, said Davide Barzilai, the Hong Kong-based Asia-Pacific Islamic finance head at law firm Norton Rose Fulbright.
“English law has been used in world trade for hundreds of years,” he said in an October 21 interview. “From the international perspective, it’s a very reliable source of law with lots of expertise globally.”
