Malaysia's Islamic Finance Overhaul Boosts Protection For Depositors
KUALA LUMPUR/DUBAI: New laws governing Malaysia's Islamic finance sector will boost protection for depositors by making religious advisers legally accountable for financial products, and liable to steep fines and prison time for wrongdoing.
The new rules also include a plan to require Islamic life insurers to separate the life arm from other parts of their business. The regulations also could spur takeovers in the Islamic insurance sector through capital-base provisions that encourage larger participants.
Malaysia's new Islamic Financial Services Act (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.
While there have been no major problems arising from lax standards, the new law - which went into effect last week - is seen as a broad way of enforcing closer adherence to sharia laws, where Malaysia is already a global leader.
One of the most important changes is to make sharia advisers legally liable for the 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 rule-change would encourage advisers to conduct a closer inspection of the financial products they approve, holding them more accountable, said Mohamad Akram Laldin, executive director of the Malaysia-based International Sharia Research Academy for Islamic Finance.
"This is a step forward, everyone who is involved will know their duties and what is expected of them," he said.
Previous rules governing sharia compliance were just guidelines. The IFSA elevates them to statutory duties, a breach of which could expose licensed financial entities to punishment.
Penalties will be more severe, a Malaysia-based lawyer told Reuters, with many offences carrying a possibility of up to eight years imprisonment and 25 million ringgit ($7.86 million) in fines.
Investors' protection should also be boosted by another provision that requires banks to distinguish deposits made for savings from those made for investments. Banks will also need to guarantee the principal amount on savings deposits.
The IFSA also gives Malaysia's finance ministry more powers to further scrutinize financial holding companies and non-regulated entities if they pose a risk to financial stability.
"From my view, it is quite comprehensive. The challenge is to ensure the enforcement, and to make people understand it," Akram added.
The IFSA may also reshape the takaful (Islamic insurance) sector by requiring the separation of life and general business lines, the latter covering property and automobiles. Under the new rules, firms with composite licenses that cover both sectors will have five years to separate the two.
Malaysia had 12 direct takaful operators with a combined 19 billion ringgit in assets as of December 2012, central bank data showed. The majority of those assets - 85 percent - were in family insurance, up 13.3 percent from a year earlier.
Companies need to establish a new board and capital base for each business under the IFSA, making operations more capital-intensive. This could favour companies with large balance sheets, spurring consolidation as smaller players struggle for scale, analysts said.
The IFSA is set to affect two-thirds of companies within the takaful sector with composite licenses, with bigger players such as Etiqa Takaful Bhd, Syarikat Takaful Malaysia Bhd and Takaful Ikhlas possibly spared, according to a report by investment bank RHB.
The top three operators hold roughly 90 percent of assets, while several of the smaller firms have suffered losses or shrinking profit.
Bigger operators will be eyeing smaller ones. "If their portfolio is attractive, we could be buying up business," said Hassan Kamil, group managing director of Syarikat Takaful Malaysia, the sector's second-largest after Etiqa Takaful.
Takaful Malaysia will be able to raise funds on the capital market for new acquisitions, being the only listed company among its peers, said Kamil.