New laws governing Malaysia’s Islamic Finance Sector will boost protection for depositors by making religious leaders more legally accountable for financial products, and liable to heavier fines including prison sentence for wrongdoing. The new rules also mandate a plan to require Islamic life insurers to separate the life arm from other parts of their business. The regulations could also spur takeovers in the Islamic insurance sector through capital base provisions that encourage larger participants.
The Parliament of Malaysia enacted the Financial Services Act 2013 and the Islamic Financial Services Act 2013 (IFSA). The acts were published in a gazette notification. The IFSA gives regulators greater oversight as the country seeks to retain its position as the world’s second largest Islamic banking market, with 395 billion ringgit ($ 124 billion) in assets as of May. The new law which has come into effect is seen as a broad way of enforcing closer adherence to Sharia laws, one of the most important changes is to make Sharia advisers legally liable for the consultation and financial products they approve, analysts and industry experts said. The Islamic scholars are hired by banks to assure that financial products abide by Islamic Sharia standards, the change in rules would mean the scholars have to make deeper thought of the products they approve to their customers, previous rules which were in place were just guidelines. The IFSA elevates them to statutory duties, a breach of which could expose licensed financial entities to severe punishment including a prison sentence, a Malaysian advocate said the offences could land the advisors to a possibility of eight years imprisonment and a fine of 25 million ringgit ($ 7.86) in penalties.
Investors protection should also be boosted by another provision which requires banks to distinguish deposits made for savings from those made for investments. Banks will also need to guarantee the principal amount of savings deposits. The IFSA also gives Malaysia’s finance ministry more powers to scrutinize financial holding companies and non regulated entities if they pose a risk to financial stability. The new law may also reshape Takaful (Islamic Insurance) by requiring the separation of general and life insurance with the latter covering property and automobiles. Under the new rules firms having composite licenses covering both the sectors have a 5 year deadline for separating the two entities. Malaysia had 12 direct Takaful operators with a combined 19 billion ringgit in assets as of December 2012, as per data from the central bank.
The IFSA is set to affect two thirds of the companies with the sole consolation being the bigger players in the market such as Etiqa Takaful Bhd, Syarikat Takaful Malaysia Bhd and Takaful Ikhlas being spared according to a report from a leading investment bank. The top three operators hold nearly 90 percent of assets, while several of the smaller firms are either underperforming or with shrinking profit. This has enhanced the prospects of the bigger firms taking over the smaller firms. Hassan Kamil, group managing director of Syarikat Takaful Malaysia said “If their portfolio is attractive, we could be buying up business.” Takaful Malaysia would be able to raise funds on the capital market for new acquisitions, as it is the only listed company among its peers, he said.