The Legal Framework of Islamic Banking and Finance in Malaysia and Iran

Abstract

The legal framework of the Islamic banking and finance in Malaysia is subject to the Civil law. Since the Federal Constitution has clearly provided that matters pertaining to banking and finance including the Islamic ones lie strictly at the Civil Court, the Shari’a Court has been ousted from hearing the matters. The Ninth Schedule, Item 1, List II – State List of the Federal Constitution has narrowed the jurisdiction of the Shari’a Court to Muslims only. It is further tapered that only Islamic personal laws and certain Islamic criminal laws are given to the Shari’a court. Hence, all cases involving Islamic banking and finance are heard before a Civil judge.

On the other hand, all Islamic banking and financial systems in Iran are subject to Islamic law. Unlike in Malaysia, the single legal system in Iran has made it simpler and easier. No conflict of law has taken place.

This paper attempts to analyse the legal framework of both countries by focusing on the interpretations of reported cases. It recommends that certain amendment of laws including the one in the Federal Constitution should be made. As for Iran, banks and financial institutions are not required to establish Shari’a Council. Furthermore, despite the fact that the Shari’a Council of Iran’s Central Bank is the supreme for Shari’a references in Islamic banking, it does not have legal status. Hence, the Council has only the advisory power. Indeed, there are no laws and regulations in relation to the Shari’a supervision.

Keywords: Legal framework of Islamic banking and finance, transactions, court, Islamic bank