When parties seek to engage in Islamic finance in a jurisdiction, that jurisdiction must make a determination as to whether, and how, to regulate Islamic finance. Beyond those issues arising in conventional finance, Islamic finance requires dimension of compliance with Sharīʿah principles that various financial centers have approached in different ways. This commentary examines a centralized model for the regulation of Islamic finance. The term ‘centralized model’ describes an approach involving the presence of a single authority that makes substantive determinations on whether a particular financial activity or instrument is Sharīʿah compliant.
The regulation of Islamic finance in Malaysia, with the exception of Labuan International Offshore Financial Centre, falls under the purview of two principal authorities: the Bank Negara Malaysia (the “Bank”) and Malaysia’s Central Bank, and the Securities Commission of Malaysia (the “Commission”). Both the Bank and the Commission may issue compulsory guidelines on Sharīʿah compliance, and both have their own Sharīʿah Advisory Council (“SAC”) for the purpose of advising and ruling on matters related to Islamic finance.
Generally, Malaysian SACs are responsible for determining Sharīʿah compliance with regards to different types of market actors. For instance, the SAC of the Bank has authority over “Islamic financial businesses,” covering entities subject to laws enforced by the Bank. This category includes a variety of Islamic Financial Institutions (“IFI”s) including Islamic banks, takāful operators (Islamic insurance operators), Islamic financial advisory businesses, and Islamic payment system operators. In contrast, the SAC of the Commission has authority over “Islamic capital market businesses and transactions.” This category includes parties issuing, listing, or offering securities, operating stock and derivatives markets, dealing in securities and derivatives, fund management, corporate finance advice, investment advice, financial planning, and private retirement schemes. For instance, this would cover any domestic or foreign issuer of ṣukūk.
In particular, IFIs may refer matters to the SAC of the Bank for a ruling on whether its operations are Sharīʿah-compliant. Similarly, anyone licensed by the Commission including stock and derivatives exchanges, clearing and depository institutions, listed corporations, and any other person (for example issuers, underwriters or fund managers) may refer matters to the SAC of the Commission. These rulings are binding on the party referring the matter. Furthermore, courts and arbitrators must take into account the published rulings of the SACs in proceedings brought before them, and where necessary, may refer matters to the SACs for a ruling. As with referrals by market actors, such rulings are then binding on the court or arbitrator. In fact, several cases have upheld the validity of referral to the SAC for a ruling, against objections that such referral was an unconstitutional usurpation of a court’s power and that it violated a party’s substantive right to call expert witnesses on Sharīʿah issues.
Not unlike the SSBs in the Dubai International Financial Centre (“DIFC”), IFIs must appoint a Sharīʿah Committee for the purposes of ensuring Sharīʿah compliance. Likewise, issuers of ṣukūk must appoint a Sharīʿah Advisor to issue a fatwā on whether a particular issuance complies with Sharīʿah. However, unlike the autonomy provided to SSBs in the DIFC, the main role of Sharīʿah Advisors seems to be ensuring that the transaction complies with rulings of the SAC, as opposed to making an independent determination on Sharīʿah compliance. To the extent that a fatwā given by the Sharīʿah Committee of an IFI or a Sharīʿah Advisor to the transaction is inconsistent with a ruling of the SACs, it is pre-empted by the SAC ruling and thus rendered invalid. Furthermore, the respective SACs must approve the appointment of a Sharīʿah Committee member or the registration of a Sharīʿah Advisor, as well as any new Islamic financial products (except for those that meet certain requirements for a “launch-and-file” system).
The ability of the SACs to issue binding rulings on matters of Islamic finance, which must be followed not only by the actor making a referral but by courts, arbitrators, and Sharīʿah Committees and Advisors generally, creates a uniform framework for the conduct of Islamic financial activities. The SAC resolutions on Islamic finance lay out not only the types of transactions which may be deemed Sharīʿah-compliant and are therefore permissible, but may also contain substantive requirements or define the rights of parties for each type of transaction.
For example, the Bank’s SAC resolutions lay out certain conditions for an “ijārah-plus-sale” (al-ijārah thumma al-bayʿ) contract, for instance that such a contract must include a “will purchase” clause for the asset at the end of the lease. This is an example of a substantive requirement for a Sharīʿah-compliant transaction. The resolutions also provide for circumstances in which an ijārah contract may be terminated by the parties, such as if the leased asset loses its usufruct. This is an instance where the SAC has defined the rights of the transacting parties in accordance with Sharīʿah. In this way, the SAC as a central authority, rather than the Sharīʿah Supervisory Boards (“SSB”s) of various entities, is the final arbiter of Sharīʿah compliance. By contrast in the systems-based model (see this author's post, The Dubai International Financial Centre and a Systems-Based Model of Islamic Finance Regulation), the SSBs of the relevant entities would determine substantive requirements on a transaction-by-transaction or activity-by-activity basis, and the relevant contractual documents and their enforcement would determine the respective rights of the parties.
Regardless, a jurisdiction will need to make some choice as to where it will locate itself along the spectrum of systems-based versus centralized model. That is, it must choose whether to establish a centralized authority, and decide to what extent the fatāwā of that authority will be binding. Different models carry with them different advantages and disadvantages (read more here). Regulators, as well as international investors and issuers selecting a jurisdiction in which to issue or invest in securities, would be well advised to carefully consider what approach best suits their needs.
 This set of commentaries explores three different models of Islamic finance regulation: (1) systems-based model, (2) centralized model, and (3) a model of competitive equality. These are derived in part from an International Organization of Securities Commissions (“IOSCO”) report on Islamic securities. IOSCO, Analysis of the Application of IOSCO’s Objectives and Principles of Securities Regulation for Islamic Securities Prodcuts at 17 (Sep. 2008) available at http://www.iosco.org/library/pubdocs/pdf/IOSCOPD280.pdf
 See, e.g., Nik Norzrul Thani, Legal Aspects of the Malaysian Financial System 233-82 (2001). The Labuan IOFC was originally established by a combination of the following pieces of legislation: Offshore Banking Act 1990, Offshore Companies Act 1990, Labuan Trust Companies Act 1990, Labuan Offshore Business Activity Tax Act 1990, Offshore Insurance Act 1990, Income Tax Amendment Act 1990. See id. at 240. Its principal regulator is the Labuan Offshore Financial Services Authority. See id. at 236, see also Labuan Offshore Financial Services Authority Act 1996, art. 4. Labuan IOFC has its own securities and Islamic finance laws, which will not be discussed here. See Labuan Offshore Financial Services and Securities Act 2010, Labuan Islamic Financial Services and Securities Act 2010. Also, it should be noted that in some instances Malaysian laws apply in Labuan, see, e.g., Islamic Financial Services Act 2013, art. 280.
 Central Bank of Malaysia Act 2009, art. 59, Capital Markets and Services Act 2007, art. 316 & 377.
 Central Bank of Malaysia Act 2009, art. 51 & 52, Capital Markets and Services Act 2007, art. 316A & 316B (as amended 2012).
 Central Bank of Malaysia Act 2009, art. 51.
 Central Bank of Malaysia Act 2009, art. 2.
 See, e.g., Islamic Financial Services Act 2013, art. 8 & sched. 2 pt. 1.
 Capital Markets and Services Act 2007, art. 316.
 Capital Markets and Services Act 2007, art. 2, 212 & sched. 2 pt. 1.
 Central Bank of Malaysia Act 2009, art. 55(2).
 Capital Markets and Services Act 2007, art. 316E.
 Central Bank of Malaysia Act 2009, art. 57, Capital Markets and Services Act 2007, art. 316G(a).
 Central Bank of Malaysia Act 2009, art. 56, Capital Markets and Services Act 2007, art. 316F.
 Central Bank of Malaysia Act 2009, art. 57, Capital Markets and Services Act 2007, art. 316G(b).
 See Adnan Trakic, The Adjudication of Shari’ah Issues in Islamic Financial Contracts: Is Malaysian Islamic Finance a Litigation Solution?, 29 Humanomics 260, 272 (2013) (discussing the cases of Tan Sri Abdul Khalid Ibrahim v. Bank Islam Malaysia Bhd., 3 CLJ 249 (2012) and Mohd Alias Ibrahim v. RHB Bank Bhd & Anor 4 CLJ 654 (2011)).
 Islamic Financial Services Act 2013, art. 30. See also Shariah Governance Framework for Islamic Financial Institutions (as amended 2010).
 Ṣukūk is defined to mean securities issued following the principles of Sharīʿah. Sukuk Guidelines, art. 2.01 (as amended 2014).
 Sukuk Guidelines, art. 5.01. These guidelines are compulsory and issued pursuant to Capital Markets and Services Act 2007, art. 377.
 Sukuk Guidelines, art. 5.01(c).
 Central Bank of Malaysia Act 2009, art. 58, Capital Markets and Services Act 2007, art. 316H.
 Bank Negara Malaysia, Guidelines on the Governance of Shariah Committee, art. 8 (2005).
 Securities Commission, Registration of Shari’ah Advisor Guidelines, art. 1.02 (Aug. 10, 2009).
 See Bank Negara Malaysia, Introduction of New Products (Mar. 7, 2014); see also Tun Abdul Hamid Mohamad, Malaysia as an Islamic Finance Hub: Malaysian Law as the Law of Reference & Malaysian Courts as the Forum for Settlement of Disputes (Dec. 7, 2011) available at http://www.bnm.gov.my/index.php?ch=en_lhc&pg=lhc_newsroom&ac=979&lang=en.
 See Bank Negara Malaysia, Shariah Resolutions in Islamic Finance, 2nd ed. (2010); Resolutions of the Securities Commission Shariah Advisory Council (2007).
 A form of financing where the lender, for instance a bank, purchases the property, leases it to the borrower, then sells to the borrower at the end of the lease at a predetermined price. See, e.g., Mahmoud A. El-Gamal, Islamic Finance: Law, Economics, and Practice at 98-99 (2006).
 Bank Negara Shariah Resolutions, at 3-4.
 Id. at 6-7.
 Id. at 6-7.