Islamic finance depositors get even more protection

NEW laws governing the local 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. The 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 RM395 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 syariah, where the country is already a global leader. One of the most important changes is to make syariah 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 syariah 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 International Syariah 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 syariah- 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 local lawyer said, with many offences carrying a possibility of up to eight years imprisonment and RM25 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 the finance ministry more powers to further scrutinise 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 said. 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. Reuters http://www.btimes.com.my/Current_News/BTIMES/articles/Islabank13/Article/