ISLAMIC UNIVERSITY COLLEGE OF PERLIS (KUIPS)

BFM 4273 ISLAMIC TRADE FINANCE

TASK 1

PREPARED BY:

NO. NAME MATRIC NO COURSE

1 NURFATHIN ANIS BINTI SAARI 0201113015

NURUL HAYATI BINTI MUHD BACHELOR IN

2 0201113036 ISLAMIC BANKING
ILHAM
AND FINANCE
3 NORSARINA BINTI SIRI 0201112109

4 NURIN WAJIHAH BINTI MAZRIZAL 0201113012

PREPARED FOR:

DR. JAMIL BIN RAMLY

QUESTION
It is necessary to have an adequate legal and regulatory framework for Islamic finance but
it must also be understood that there are many things beyond its reach. The Legal and
Regulatory Framework in Islamic Trade Finance. Discuss.

BANK NEGARA MALAYSIA

Non-bank financial intermediaries and financial firms in Malaysia offer trade finance
solutions. Multilateral development banks are crucial for bridging the trade finance gap, which
is the number of requests for trade financing that banking institutions turn down. Since they
are subject to the same micro and macro prudential rules and oversight as their conventional
counterparts, Islamic banking institutions and takaful operators are regulated under the IFSA.
Through four dimensions a shariah governance framework, shariah standards for each contract
used in Islamic financial transactions, and preventative measures to address issues of concern
within IFIs that may affect the interests of depositors and policyholders IFSA has already
established a thorough legal infrastructure to achieve shariah compliance. and lastly is the
effective and efficient functioning of Islamic financial intermediation. IFSA has emphasized
the characteristics of sharia contracts in defining financial provision and financing facilities
compared to the conventional definitions that have been set under the Financial Services Act
2013. Under IFSA it has been allowed to take various forms of sharia-compliant financing such
as equity or any form of partnership, lease and others.

So there are relevant prudential guidelines are available and applicable to Islamic Trade
Finance to ensure proper business conduct and risk management. There are regulation that are
key to ITF which is specific guidelines were issued to facilitate product structuring. Guidelines
on Accepted Bills-I provide a uniform set of procedures and conditions governing the creation
and trading of shariah compliant accepted bills in Malaysia. The bill was introduced in 1991 to
encourage domestic and foreign trade through Islamic financing mechanisms. Bills received
are promised future payments that represent bills of exchange that have been issued by Islamic
Financial Institutions and accepted by banks or buyers to finance the sale and purchase of goods
and commodities. In 2019, the trade credit insurance and trade credit takaful policy documents
were issued to clarify the requirements for the offering of trade credit takaful by licensed
takaful operators as stipulated by the IFSA. This is because to encourage the use of trade credit
takaful as a risk management tool to reduce risk exposure arising from ITF offerings.
 Secondly, KYC and anti-money laundering. Guidelines for Targeted Financial
Sanctions and Countering Financing of Terrorism are applied to reduce trade-based money
laundering. To enable the deployment of electronic identification and verification of
individuals, the e-KYC policy was released in 2020. The criteria apply to fintech solutions for
ITF, such as digital on boarding of clients looking for financing or investing in non-traditional
funding sources.

Thirdly, IFIs must contribute enough capital to cover their ITF exposures. ITF
exposures have the same capital treatment that traditional financial institutions do. For
assessing risk-weighted assets for credit risk, market risk, and operational risk, the capital
adequacy framework for Islamic banks provides measurement procedures and is in line with
basel capital. The majority of ITF exposures are off-balance sheet, and credit conversion factors
(CCF) are used to calculate the capital needed to cover credit risk on these exposures. IFIs can
further minimize the capital needed to be set aside by using shariah-compliant hedging
instruments and trade credit takaful, which are both recognized as credit risk mitigation.

Lastly, Additional foreign exchange regulations apply to ITF exposures in foreign

currencies. 2020 saw the release of a new Foreign Exchange Notice that defines the different
conditions for requesting BNM clearance for financial transactions involving non-residents and
foreign currency, including those connected to the settlement of trade in commodities and
services and export of products. The BNM announced additional liberalisation of the foreign
exchange policy in march 2021 to provide export-oriented companies more flexibility and
better aid the recovery of the economy. Additionally, the change will present chances to
improve trade financing facilitation.
SECURITIES COMMISSION MALAYSIA

The Securities Commission Malaysia (SC) was established on 1 March 1993 under the
Securities Commission Act 1993 (SCA). SC is a self-funded statutory body entrusted with the
responsibility to regulate and develop the Malaysian capital market.

In Islamic Trade Finance, the Securities Commission Malaysia has authority over stock
exchanges and brokers. The SC needs to make all reports about stock exchanges and stock
brokers to the Memorandum of Understanding (MOU) with the cooperation of the Labuan
Financial Services Authority (Labuan FSA). Labuan FSA was created as a unified agency to
register offshore companies and administer and enforce related legislation. Both regulators will
be monitoring the risks and promoting the stability of the capital market.

Besides, the SC regulates the Islamic capital market and is responsible for issuing
licenses to market intermediaries including lending and equity crowdfunding (ECF) and peer-
to-peer (P2P). The SC has issued guidelines to facilitate ECF and P2P lending. Under this
framework, ECF and P2P provide alternative funding options for businesses that may find
difficulties in obtaining finance from financial institutions. From the investor perspective, these
alternative avenues allow diversification opportunities beyond traditional asset classes.
Currently, two of the 21 registered market operators (RMOs) under SC are offering shariah-
compliant P2P solutions that facilitate Islamic Trade Finance via invoice financing and
factoring.
ISLAMIC FINANCIAL SERVICES ACT (IFSA 2013)

The regulatory and supervisory framework of Malaysia enters a new stage of its
development as the Islamic Financial Services Act 2013 (IFSA) and Financial Services Act
2013 (FSA) comes into force on 30 June 2013. According to the press release from Bank
Negara Malaysia (BNM), the FSA and IFSA is the culmination of efforts to modernize the laws
that govern the conduct and supervision of financial institutions in Malaysia to ensure that these
laws continue to be relevant and effective to maintain financial stability, support inclusive
growth in the financial system and the economy, as well as to provide adequate protection for
consumers. One of the key features of the two Acts is greater transparency in the
implementation and administration of the law with clearly defined regulatory objectives and
accountability for BNM as it pursues its principal objective of safeguarding financial stability.

The FSA and IFSA amalgamated several separate laws to govern the financial sector
under a single legislative framework for the conventional and Islamic financial sectors
respectively, namely, the Banking and Financial Institutions Act 1989 (BAFIA), Islamic
Banking Act 1983, Insurance Act 1996 (IA), Takaful Act 1984, Payment System Act 2003 and
Exchange Control Act 1953 which are repealed on the same date. The laws provide BNM with
the necessary regulatory and supervisory powers to fulfil its board mandate within a more
complex and interconnected environment, given the regional and international nature of
financial developments. Both acts (FSA and IFSA) included an increased focus on pre-emptive
measures to address issues of concern within financial institutions that might affect the interests
of depositors and policyholders, and the effective and efficient functioning of financial
intermediation.
 The key features of the acts include providing uniformed acts for the governance and
supervision of the related financial institutions. For instance, BNM is authorized to supervise
financial holding companies (FHCs) that hold more than 50% of the financial institution and
financial entity previously not under the supervision of BNM. The acts also to foster the safety
and soundness of financial institutions, promote the integrity and orderly functioning of the
money market and foreign exchange market. It aids to nurture safe, efficient and reliable
payment systems and payment instruments; fair, responsible and profesional business conduct
of financial institutions; protect the rights and interests of consumers of financial services and
products, and develop a clear focus on Shari’ah compliance and governance in the Islamic
financial sector.

IFSA 2013 is also expected to further consolidate the country’s takaful sector. The
industry will absorb and assess the full impact of IFSA on their businesses and for their future
plans. The takaful operators have been given five years to comply with the new rules, which
require takaful operators with composite licenses to separate life (family takaful) and general
business (general takaful). It also requires each business to have a minimum capital of RM100
million. To date (December 2013), out of the 12 takaful operators, eight are licensed takaful
operators that carry both life and general business. For parent companies that operate composite
takaful operators, the lack of required financial resources, inadequate business scale and
profitability may be considerations that could drive the need to rationalize and dispose one of
their businesses.

Bank Negara Malaysia is also liberalizing the foreign exchange administration rules to
enhance the economy’s competitiveness and further develop the domestic financial market
through the FSA and IFSA. The procedures include allowing residents to freely invest in
onshore foreign exchange market through greater demand for foreign currency denominated
assets to spur the domestic foreign exchange market through greater demand for foreign
currency products and services. Another measure is to allow resident takaful operators to
undertake investments abroad of any amount on behalf of their resident client. This measure
would further promote the development of the Islamic financial intermediaries. This measure
would enhance regulatory efficiency, as resident the ascertainment of Islamic law by the
Shariah Advisory Council. In performing its duties and responsibilities, the Shariah Advisory
Council is to analyse and to certify the validity of application of Shariah in Islamic financial
products which are submitted by Islamic financial institutions under the supervision of BNM.
As the supreme authority in the determination of Shariah in Islamic finance, the SAC has a
central role in safeguarding the purity of Shariah rulings referred by Islamic financial
institutions as well as the court and arbitrator. The SAC consists of prominent qualified
individuals among Shariah scholars, jurists and market practitioners, who have enormous
experience in banking, finance, economics, law and application of Shariah, particularly in the
areas of Islamic economics and finance.

The SAC would also issue Shariah resolutions and decisions to their relevant
jurisdictions from time to time. The resolution issued have been published by BNM and
translated into various languages and are being used as a reference point by industry and
academicians around the globe.

The Council, in their respective capacity as advisory bodies, can make pronouncements;
respond to inquiries and proposals from the industry as well as encourage innovation through
progressive guideline formulation. Definitely the progressive approach of the Shariah Advisory
Council has allowed the banking and takaful industry to prosper by promoting a conducive
environment for product innovation and flexibility while ensuring compliance with the Shariah
principles.
RELIGIOUS SUPERVISORY COUNCIL

In order to determine whether the operations and the products provided by IFIs are
functions, duties, and responsibilities that may differ among them as there are many types of
SSB and various SSB models applied by Muslim countries where the IFIs have been developed,
the Shariah supervisory board (SSB), which is made up of high calibre scholars, is formed.
Since independence and good governance are the cornerstones of auditing, they must uphold
those values if they want to continue to be taken seriously in their work. There might even be
different solutions among them. The methodological approach taken by academics in their
interpretation may account for the discrepancy. Therefore, reaching agreement on a given topic
may be challenging among experts as well as Shariah forums.

The Islamic Banking Act of 1983 mandates that the Religious Supervisory Council
must be established. The Act goes on to state that the Religious Supervisory Council has a
responsibility to advise the bank on the management of its banking business in order to make
sure that the operation does not contain any elements that are prohibited in Islam. It is important
to note that Islamic banks in Malaysia are not just those whose practises do not depend on
interest, but also those whose conduct is governed by Islamic economic and social principles.
As of late, this Act also applies to Islamic trade finance by establishing a list of prohibitions
based on Islamic law.