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Starting a business in Malaysia & carrying out Sharia-based financial activities there requires an in-depth knowledge of this jurisdiction’s legislation. So, let's have a closer look at the regulation of Islamic finance in Malaysia, paying particular attention to the different types of contractual agreements.

Malaysia: Drawing up Islamic Finance Contracts

Responsible for ensuring compliance with the practices & procedures of Sharia law, Malaysia’s National Bank (BNM) has published several documents dealing with the regulation of Islamic financial institutions in Malaysia. There are also guidelines of Malaysia’s Securities Commission which highlight some key legal aspects of using different instruments of Islamic finance, including.

Those intending to embark on financial activities in Malaysia should keep in mind that they can make use of the following contractual concepts:

Mudarabah

There’s two types of mudarabah recognized by BNM, namely:

  • unlimited – enables unrestricted management of capital; 
  • limited – provide for certain contractual conditions.

In this type of contract, profits are distributed on the basis of an agreed upon ratio. This form of contractual relations relieves mudaribs of responsibility for the loss of assets, providing that they haven’t violated any terms of the contract. Due to the specifics of regulation of financial activities in Malaysia, these types of contracts are mostly used for the structuring of products that fall under the category of investment accounts.

Murabaha

According to the BNM’s definition, these are contracts in which the cost of acquisition & margin are disclosed to purchasers. Under the terms of these contracts, buyers pledge to purchase a specific asset from sellers on the basis of murabaha following the latter’s purchasing of the said asset.

Musharaka

According to BNM’s definition, there’s two types of musharaka:

  • joint ownership partnerships in which consent of the other partner is required for managing partnerships’ assets; 
  • contractual partnerships in which partners are each other’s agents.

Musharakas are run by single partners or external managers. Appointing managing partners requires following no formalities.

Ijara

Concluding contracts with Islamic finance in Malaysia in the context of Ijara means leasing at will. There’s a BNM-issued policy which regulates the use of this type of agreement. In particular, it states that contracts of this type aren’t subject to the general consumption law with regard to purchase in installments.

Wadia

These are contracts in which assets are transferred to other partners for safekeeping (i.e. they’re held in trust for depositors’ benefit). Wadias’ managers bear no responsibility for wadia’s property loss or damage. The only exception is made for situations in which the loss or damage of wadias’ property occured due to managers’ negligence or misconduct.

Saving accounts offered by the majority of Malaysia-registered banks are based on the concept of wasia. Banks can also issue a khibakh instead of interest, the only exception is made investment-related accounts.

Need more information on the regulation of Islamic banking in Asia? Looking to start an Islamic finance business? Why not reach out to IQ Decision UK? Our legal assistants will be happy to give you a hand with any legal issues you’re facing.