The Legal Framework of Fintech

in Empowering the Islamic

Financial System
Assoc. Prof. Dr Ruzian Markom
Centre for International Law and Siyar
Faculty of Law
Universiti Kebangsaan Malaysia
Content
• Introduction
• The Islamic Fintech Framework/Ecosystem
• The Fintech Ecosystem Stakeholders
• Regulatory Framework and Incentives
• Case Study 1: Risk Management in Technology (RMiT)
• Case Study 2 : The Framework of Digital Banking in Malaysia: Legal,
Regulatory and Dispute Resolution Aspects

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30/8/2024 Global-Islamic-Fintech-Report-2021.pdf
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© 2020 (January), Alliance for Financial
Inclusion. All rights reserved.
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© 2020 (January), Alliance for Financial Inclusion. All rights reserved.
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https://fintechnews.my/wp-content/uploads/2023/10/Malaysia-Fintech-Report-2023.pdf
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Source : KAF Bank
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 CASE STUDY 1
Risk Management in Technology
(RMiT)

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Source : KAF Bank
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Source : KAF Bank
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Source : KAF Bank
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Source : KAF Bank
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Source : KAF Bank
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Regulator Effort In Strengthening the Governance

• BNM has play a pivotal role in promoting the financial stability, inclusive
the area of information technology.

• The effort can be seen from formulation of several key Policy Document
governing IT-related functionalities and areas:

• Risk Management in Technology (RMiT) – 1 June 2023

• Operational Risk Reporting (ORR) – 1 November 2023
• Outsourcing – 23 October 2019
• Data Management and MIS Framework + Shariah Governance

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 SELECTION OF SAC RULINGS

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Central Bank of Malaysia
Policy Document on Risk
Management in Technology
(RMiT)

• Outline on requirement to be comply by

financial institutions’ management of
technology risk:
1.Third Party Service Provider Management
2. Network Resilience
3. Security of digital services

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https://www.bnm.gov.my/enforcement-actions-regulatees
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 CASE STUDY 2
DIGITAL BANKING

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The Framework of Digital Banking
in Malaysia: Legal, Regulatory and
Dispute Resolution Aspects
HIZRI HASSHAN
LL.B (Hons), LL.M, PhD in Law (UKM),
Exec. Dip. in Islamic Law (Islamic Banking) (IIUM)
Advocate & Solicitor (High Court of Malaya)
Commissioner for Oaths
Partner, Akram Hizri Azad & Azmir
Email: [email protected]
Introduction to Digital Banking
Financial Sector Blueprint 2022-2026

• The blueprint describes the strategic priorities and initiatives of the BNM
to transform Malaysia's financial sector into a more efficient, inclusive,
and technology-driven ecosystem.

• It acknowledges the crucial role that digitalization plays in enhancing

financial services and assuring their availability to all segments of society.

Why BNM opens the doors to digital banks?

• Despite having existing traditional banks, the new digital banks are
expected to address the unmet financial needs of underserved and
unserved customer segments.
• Digital banks are expected to unlock the potential of innovative
technologies to improve access, reduce costs, and increase the utility
and quality of financial services to groups like small medium
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businesses (SMBs), gig economy workers, 22 or students.
and youth
Introduction to Digital Banking
Financial inclusion should include access to financial services and products such as credit, loans,
and insurance.

These services may not be readily available to all. In 2015, only 25% of Malaysia's adult
population had financing accounts, and only 16% had life insurance.

Many informal workers in Malaysia receive cash instead of direct deposits into their bank accounts.
Without verifiable documentation of income, informal workers may not have access to financial
services provided by banks. Additionally, women, micro enterprises, youths, rural households,
low-income individuals, and those with low financial literacy remain unserved or
underserved in a traditional banking framework.

Financial inclusion is one of BNM’s primary goals as it aims to create an inclusive financial system
with convenient accessibility, high take-up rates, responsible usage and high customer
satisfaction. To achieve these outcomes, one of BNM’s strategies is to employ technology-based
innovative channels, products and services, such as digital banking.
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Digital Banks in Malaysia
• On 29/4/2022, Bank Negara Malaysia (BNM) has
announced Five (5) successful applicants for the
digital bank licences as approved by the Minister
of Finance Malaysia.

• Three out of the five consortiums are majority-owned

by Malaysians namely Boost Holdings and RHB
Bank Berhad, Sea Limited and YTL Digital Capital
Sdn. Bhd. and KAF Investment Bank Sdn. Bhd.

• The successful applicants will undergo a period of

operational readiness that will be validated by
BNM through an audit before they can commence
operations. This process may take between 12 to 24
months.

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Regulatory Framework
As at to date, the digital banking business is governed and regulated by the following:

• Financial Services Act 2013 (FSA)

• Islamic Financial Services Act 2013 (IFSA)
• Policy Document on Licensing Framework for Digital Banks - BNM/RH/PD 030-12

Para 5.2 of PD on Licensing Framework for Digital Banks –

“S” denotes a standard, an obligation, a requirement, specification, direction, condition

and any interpretative, supplement and transitional provisions that must be complied with.
Non-compliance may result in enforcement action;

“G” denotes guidance which may consist of statements or information intended to promote
common understanding and advice or recommendations that are encouraged to be
adopted;

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Standards v. Guidance
Under FSA / IFSA, BNM has power to specify various standards:

“specify” means to specify in writing by way of standards or any other forms, and a power
to specify includes the power to specify differently for different persons, payment systems or
payment instruments or different classes, categories or descriptions of persons, payment
systems or payment instruments;

“standards” includes any obligation or requirement as specified by the Bank under this
Act and such standards may contain any interpretative, incidental, supplemental,
consequential and transitional provisions as the Bank considers appropriate;

“guidance” in a policy document is issued pursuant to section 266 of the FSA and section
277 of the IFSA:
“BNM may issue guidance in writing to any person or to any class, category or description
of persons consisting of such information, advice or recommendation as it considers
appropriate”
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Enforceability of BNM Policy Document
Affin Bank Bhd v. Datuk Ahmad Zahid Hamidi [2005] 1 CLJ 521
It cannot be doubted that the BNM guidelines were put in place in order to prevent any debt from spiralling
out of control. It is a matter of policy and it is for the good of the country that all the banks in the country
should adhere to the BNM guidelines since Bank Negara being the Central Bank is the regulatory body
entrusted to put in place and implement the minimum standards for classification of accounts, income
recognition and loan loss provisioning. The BNM guidelines are issued pursuant to s. 126 of the
BAFIA and it has the force of law. And as to whether s. 25 of the BAFIA is applicable to the facts of the
present case, it must remain an issue of law to be determined at the trial proper.
Diana Chee Vun Hsai v. Citibank Bhd [2009] 6 CLJ 774
[14] The Bank Negara Credit Card Guidelines BNM/RH/GL 1014-1, as stated earlier was issued under the
enabling provision of s. 70 of the Payments Systems Act 2003. I am of the opinion that the said guidelines
are piece of subsidiary legislation. "Subsidiary legislation" is defined under s. 3 of the Interpretation
Acts 1948 and 1967 as;
Any proclamation by law, rule, regulation, order, notification, by law or other instrument made under
any Act, Enactment, Ordinance or other lawful authority and having legislative effect.
[15]VISITING
The LECTURER
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Negara Guidelines comes under the category 30/8/2024
of "other instrument"
27 and is therefore a
subsidiary legislation, having legislative effect and force of law.
“Digital Banking Business”
Para 5.2 of PD on Licensing Framework for Digital Banks –

“digital banking business” means banking business as defined in section 2(1) of the FSA
which is carried on wholly or almost wholly through digital or electronic means;

“Islamic digital banking business” means Islamic banking business as defined in section
2(1) of the IFSA which is carried on wholly or almost wholly through digital or electronic
means;

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“Digital Banking Business”
Section 2(1) of the "banking business" means-
FSA (a) the business of-
(i) accepting deposits on current account, deposit account, savings account
or other similar account;
(ii) paying or collecting cheques drawn by or paid in by customers; and
(iii) provision of finance; and
(b) such other business as prescribed under section 3;

Section 2(1) of the “Islamic banking business” means the business of—
IFSA (a) accepting Islamic deposits on current account, deposit account, savings
account or other similar accounts, with or without the business of paying or
collecting cheques drawn by or paid in by customers; or
(b) accepting money under an investment account; and
(c) provision of finance; and
(d) such other business as prescribed under section 3

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Paragraph 12 Policy Document

During the foundational

phase, a licensed digital
bank shall−
(a) maintain at all times a
minimum amount of capital
funds of RM100 million
unimpaired by losses; and
(b) be subject to the
business limitation as
described in paragraph 13
and the
regulatory framework as
described in paragraph 1

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Paragraph 14 Policy Document
A licensed digital bank shall comply with the regulatory requirements applicable to an existing
licensed bank or licensed Islamic bank, except where specified in the Policy Document.

All requirements in the policy document on Shariah Governance shall apply to a licensed
digital bank carrying on Islamic digital banking business, except where stated otherwise
below–

(i) Shariah Committee must comprise at least three members; and

(ii) Shariah Committee must convene at least two times a year

A licensed digital bank shall comply with any additional requirements as specified by the Bank,
after having regard to specific risk profile or business model of a licensed digital bank and the
Bank’s ongoing supervisory monitoring and assessments of the licensed digital bank.

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Paragraph 15 Policy Document

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Paragraph 15 Policy Document

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Paragraph 17 Policy Document

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Collateral and Security

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Any potential legal risks?

What is legal risk?

Legal risk is the likelihood of financial or

reputational loss resulting from a lack of
knowledge (or misunderstanding) of how
the law applies to your business, or
operating with a reckless indifference to
the law and how it applies.

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Types of Legal Risks
The four (4) major categories of legal risk are structural, regulatory, litigation and
contractual risk.

Structural legal risk arises from uncertainty about the future of an industry, a technology,
or a way of doing business. A structural legal risk potential shifts the landscape in
unexpected ways.

The video rental business – CD/DVD – Netflix?

Stock broking companies? Finance companies? Banking institutions? FinTech.

Regulatory legal risk is a greater day-to-day concern for most business entities. The actions
of regulatory agencies (for instance Bank Negara, Securities Commission and etc) may or
may not be predictable, and the consequences of regulatory agency action may or may not
be easy to foresee or to cope with.
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Types of Legal Risks
Litigation risk – the risk of being sued– is inescapable, and the list of
reasons for lawsuits is formidable (negligence, breach of contract,
breach of indemnity, tort of public misfeasance, judicial review,
statutory claim and etc,). Employees can sue for alleged
discrimination, harassment, wage-and-hour violations, or breach of
contract.

Contract risk is perhaps the most difficult kind of legal risk to predict
or quantify. Quality contract drafting is imperative because every
word, every line, and every clause counts.

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Examples of Contract Risks
1. Failure to properly review a contract, resulting in mistakes that could
affect enforcement of its terms;
2. Inadvertent signing up to unlimited indemnities or other terms creating
unexpected liabilities;
3. Products or services not accurately described, leading to a dispute or the
inability to make a claim;
4. Not keeping track of deadlines, which could result in a breach or failure to
close an important deal;
5. Failure to identify changes to laws and regulations (and keep contracts
updated), which may result in a contract being rendered void.
An effective contract management strategy will help to ensure that
contracts are properly executed, deadlines are met, and
contingency plans are in place to mitigate legal risk.
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Risks of Shariah Non Compliance

Conflict of Description
Legislations of Asset

Sequence of
Riba/Interest
Aqad

Mutual
Gharar
Consent

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The Role of SAC in Digital Banking
Section 52(1) CBMA 2009

The Shariah Advisory Council shall have the

following functions:
(a) to ascertain the Islamic law on any
financial matter and issue a ruling upon
reference made to it in accordance
with this Part;
(b) to advise the Bank on any Shariah issue
relating to Islamic financial business, the
activities or transactions of the Bank;
(c) to provide advice to any Islamic
financial institution or any other person
as may be provided under any written
SAC shall be the authority law; and
for the ascertainment of (d) such other functions as may be
Islamic law for the
determined by the Bank.
purposes of Islamic
financial business.
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Effect of Ruling by SAC
JRI Resources Sdn Bhd v. Kuwait Finance House (Malaysia) Bhd; President of
Association of Islamic Banking Institutions Malaysia & Anor (Interveners) [2019] 5 CLJ
569 – Federal Court
The ruling under s. 57 of the CBMA does not conclude or settle the dispute between the parties
arising from the Islamic financing facility at hand. It did not 'determine' the liability of the borrower
under the Islamic facility. The determination of a borrower's liability under any banking facility is decided by
the presiding judge and not the SAC. Hence, an 'ascertainment' exercise which results in a 'ruling' must not
be confused with an act of 'determination' which results in a final decision.

Parliament is competent to vest the function of the ascertainment of Islamic law in respect of Islamic
banking in the SAC and such ascertainment is binding on the court. However, the ascertainment of Islamic
law for banking does not settle the dispute between the parties before the court. The SAC does not finally
dispose of the dispute between the parties and it does not engage in the judicial process of determining the
rights of the parties.

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