MALAYSIAN INSTITUTE OF

ACCOUNTANTS & IBFIM

ISLAMIC FINANCE CONFERENCE
Legal Cases on Islamic Finance
Implications on CEOs and CFOs
BY
PROF. DATO MOHAMED ISMAIL MOHAMED SHARIFF
ADJUNCT PROFESSOR, INCEIF
(ADVOCATE & SOLICITOR
MOHAMED ISMAIL & CO.)
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INTRODUCTION
The enactment of the Islamic Financial Services Act 2103 (IFSA)
and the Central Bank of Malaysia Act 2009 by the Malaysian
Parliament has radically altered both the Corporate Governance
(CG) and Shariah Governance (SG) regimes for Islamic financial
institutions in Malaysia.
CG and SG principles are elaborately dealt with in the IFSA and
they are now part of the substantive law of the land.
Both IFSA and CBMA have imposed heavy responsibilities on the
Board of Directors, CEO, senior officers, Shariah Committee
members and, in some instances, on any employee of banks and
financial institutions.
These would have far-reaching implications

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ISLAMIC FINANCIAL
SERVICES ACT 2013
Power of Bank to specify standards on Shariah matters
29. (1) The Bank may, in accordance with the advice or ruling of the Shariah
Advisory Council, specify standards (a) on Shariah matters in respect of the
carrying on of business, affair or activity by an institution which requires the
ascertainment of Islamic law by the Shariah Advisory Council; and (b) to give
effect to the advice or rulings of the Shariah Advisory Council.
(2) In addition, the Bank may also specify standards relating to any of the
following matters which does not require the ascertainment of Islamic law: (a)
Shariah governance including (i) functions and duties of the board of
directors, senior officers and members of the Shariah committee of an
institution in relation to compliance with Shariah;
(ii) fit and proper
requirements or disqualifications of a member of a Shariah committee; and (iii)
internal Shariah compliance functions; and (b) any other matter in relation to
the business, affair and activity of an institution for the purposes of compliance
with Shariah.

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ISLAMIC FINANCIAL
SERVICES ACT 2013
(3) Every institution, its director, chief executive officer, senior officer or member
of a Shariah committee shall at all times comply with the standards specified by
the Bank under subsections (1) and (2) which are applicable to such person.
(4) Every institution shall at all times (a) ensure that its internal policies and
procedures on Shariah governance are consistent with the standards specified
by the Bank under this section; and (b) whether or not standards have been
specified by the Bank under this section, manage its business, affairs and
activities in a manner which is not contrary to Shariah.

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ISLAMIC FINANCIAL
SERVICES ACT 2013
(5) Every director, officer* or a member of a Shariah committee of an institution
shall at all times comply with the internal policies and procedures adopted by
such institution to implement the standards specified by the Bank under
subsection (1) or (2).
(6) Any person** who fails to comply with any standards specified under
subsection (1), commits an offence and shall, on conviction, be liable to
imprisonment for a term not exceeding eight years or to a fine not exceeding
twenty-five million ringgit or to both.
*officer in relation to a body corporate or unincorporate, includes any
employee*** or the chief executive officer of the body corporate or
unincorporate;
**Are lawyers included?

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*** Is this to sweeping a provision?

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CG PROVISIONS IN IFSA
(contd.)
Section
65 (2)

Content of Section
Sets out the functions and duties of board of directors. It says,
without limiting the generality of ss (1) the board of directors shall
a) set and oversee the implementation of business and risk
objectives and strategies and in doing so shall have regard
to the long term viability of the institution and reasonable
standards of fair dealing;
b) ensure and oversee the effective design and implementation
of sound internal controls, compliance and risk management
systems
c) oversee the performance of the senior management
d) ensure that there is a reliable and transparent financial
reporting process within the institution;
e) promote the timely and effective communication between the
institution and the Bank
f) have due regard to the decisions of the SC

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DEFINITIONS IN IFSA (contd.)

Word or Term

Definition

chief executive
officer

In relation to (a) a body corporate or unincorporate, means

an individual, however styled, who, either individually or
jointly with one or more persons, is responsible under the
authority of the directors, for the conduct of the business
and the administration of such body; or (b)

director

includes any person who occupies the position of a

director, howsoever styled, of a body corporate or
unincorporate, and includes
a) a person in accordance with whose instructions the
directors or officers of the body are accustomed to act;
b) an alternate or substitute director; or
c)

officer

In relation to a body corporate or unincorporate, includes

any employee or the chief executive officer of the body
corporate or unincorporated;

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SHARIFF

DEFINITIONS IN IFSA (contd.)

Section
senior officer

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Definition
means a person, other than the chief executive officer or a
director, having authority and responsibility for planning,
directing or controlling the activities of an authorised person
including the chief operating officer, members of decisionmaking committees and other persons performing key
functions such as risk management, compliance, internal
audit or other functions as may be specified by [BNM] but
shall not include a member of a Shariah committee;

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CG PROVISIONS IN IFSA
(contd.)
Section
65 (3)

Content of Section
(a) the board of directors of an institution shall have regard to the
interests of, as the case may be, depositors, investment account
holders and takaful participants of the institution or participants; and

(b) the board of directors of a licensed takaful operator shall, in the

event of conflict between the interest of the takaful participants and
the shareholders, give priority to the interest of the takaful
participants.
In view of the broad wording of s. 65 (3), in the event of a loss, apart from their
contractual rights, depositors, investment account holders and takaful
participants of the institution or participants would appear to have a statutory
right to claim damages against the board of directors for statutory negligence if
the directors had not complied with s. 65 (3).
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CG PROVISIONS IN IFSA
(contd.)
Section
66 (1)

Content of Section
A director of an institution shall at all times
(a) act in good faith in the best interests of the institution;
(b) exercise reasonable care, skill and diligence with
(i) the knowledge, skill and experience which may
reasonably be expected of a director having the same
responsibilities; and

(ii) any additional knowledge, skill and experience which the

director has;
(c) only exercise powers conferred on him for the purposes for
which such powers are conferred;
(d) exercise sound and independent judgment; and
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CG PROVISIONS IN IFSA
(contd.)
Section

Content of Section

66 (1)

(e) comply with any standards specified by the Bank under

subsection 29(2) which are applicable to a director.

66 (2)

Subsection (1) has effect in addition to, and not in derogation of, any
written law or rule of law relating to the duty or liability of a director.

66 (3)

Any director who contravenes paragraph (1)(c) commits an offence

and shall, on conviction, be liable to imprisonment for a term not
exceeding eight years or to a fine not exceeding twenty-five million
ringgit or to both.

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CENTRAL BANK OF
MALAYSIA ACT 2009
59. (1) The Bank may issue such written circulars, guidelines or notices on any Shariah
matter relating to the Islamic financial business carried on by any Islamic financial
institution in accordance with the advice or ruling of the Shariah Advisory Council.
(2) An Islamic financial institution shall comply with any written circulars, guidelines
or notices issued by the Bank under subsection (1) and within such time as may be set
out in the circulars, guidelines or notices.
(3) Any person* who fails to comply with any circulars, guidelines or notices issued by
the Bank under subsection (1) commits an offence and shall, on conviction, be liable to
a fine not exceeding three million ringgit.
*Are lawyers included?

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CASES UNDER IFSA

There have been no court cases (yet) decided under IFSA.
We will consider some cases decided under the Islamic Banking Act 1983 (IBA)
and see what the likely decision(s) might have been if the cases were to be
decided under IFSA.

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ABC ISLAMIC BANK v. XYZ

CORPORATION & ANOR.
(Actual case - facts amended slightly.)
BBA facility of RM50m.
Underlying asset - 16m shares in XYZ Corp. owned by MD. Mkt. value RM 9m.
(approx.). MD made hibah of the shares to XYZ Corp.
Under BBA 1 XYZ sold the shares to the bank for RM12.5m and repurchased it
for RM16m (approx.). XYZ then made a hibah of the shares back to MD.
BBA2, 3 & 4 repeated, on each occasion with a new hibah of the same shares
by MD to XYZ and hibah back.
Thus total facility RM50m. Total SP RM64 m. (approx.).
MD then pledged shares to bank as security.
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ABC ISLAMIC BANK v. XYZ

CORPORATION & ANOR.
Bank instituted action upon default claiming balance of SP due.
Defences raised:
1.BBA transactions were a sham and illegal as BBA1 repeated 3 times and so
null and void and unenforceable.
2. Transactions violated:
a. s. 67, as LCL was dealing in its own shares;
b. s. 67A, as LCL purchased its own shares without going through Bursa.
Issues:
(i)were the transactions done in accordance with the Shariah and the
Guidelines issued by the SC of BNM?
(ii)was there violations of s. 67 & 67A?

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ABC ISLAMIC BANK v. XYZ

CORPORATION & ANOR.
Queries:
On the assumption (i) that the transactions were not done in accordance with the Shariah and the
Guidelines issued by the SC of BNM; and/or
(ii) the transactions were in violation of s. 67 and/or s. 67A,
(a) what, if any, would be the criminal/civil liability of the CEO and
CFO of the bank?; and
(b) what, if any, would be the civil/criminal liability of the solicitors who
handled the transaction for the bank, over and above their liability in
negligence?
if the case fell to be decided under IFSA?

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End

Thank you. Wassalam.

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