The legal framework of conversion from development financial institution to Islamic development financial institution in Malaysia under development financial institution Act 2002

• Main Authors: Hassan, Rusni, Salim, Azlin Suzana
• Format: Conference or Workshop Item
• Language: English; English
• Published: Springer Nature 2022
• Subjects: HG3368 Islamic Banking and Finance
• Online Access: http://irep.iium.edu.my/101053/7/101053_The%20legal%20framework%20of%20conversion%20from%20development%20financial%20institution.pdf; http://irep.iium.edu.my/101053/8/101053_The%20legal%20framework%20of%20conversion%20from%20development%20financial%20institution_Scopus.pdf; http://irep.iium.edu.my/101053/; https://link.springer.com/chapter/10.1007/978-3-031-08090-6_11

Effective on 31st January 2016, Development Financial Institutions (Amendments) Act 2015 (Act 618) introduced major amendments to Development Financial Institutions Act 2002 (DFIA 2002) for enhancement of the legal and regulatory framework for Development Financial Institutions (DFIs) in Malaysia. The new Part IIIA DFIA 2002 inserts Shariah Requirement to realign with the provisions of Part IV Islamic Financial Services Act (IFSA 2013). Prior to these amendments, the conversion of Bank Pertanian Malaysia Berhad (Agrobank) to Islamic DFIs on 1st July 2015was previously regulated under the ambit of Section 129 DFIA 2002. At the date of conversion, the remaining conventional loan assets of Agrobank amounting to RM59.2 million were permitted to be treated as Non-Shariah Assets where its income has to be recorded as liability and to be channelled to charity. This paper tries to analyze the current laws and regulations regulating conversion of DFIs to Islamic DFIs under DFIA 2002 and the legal issues and challenges faced by DFIs on conversion. This study also gathers information from library research and webinars related to this topic. The study finds Bank Simpanan Nasional (BSN), SME Development Bank Berhad (SME Bank), Bank Pembangunan Malaysia Berhad (Bank Pembangunan) and Export-Import Bank of Malaysia Berhad (Exim Bank) have to obtain written regulatory approval from Bank Negara Malaysia (BNM) to convert from Islamic BankingWindow under Section 33B(1)(b) to Islamic DFIs under Section 33B(1)(a) DFIA 2002 with permission that certain percentage of unconverted conventional loan assets remain as Non-Shariah assets and become liabilities after conversion. This study shows that Section 33B(1),(2) and (3) DFIA 2002 incorporate the new stringent requirements for conversion of entire business of DFIs with literal interpretation that 100% of its assets must be in accordance with Shariah.