Malaysia eyes law change to help sharia banks

KUALA LUMPUR (Reuters) - Malaysian courts hearing Islamic finance disputes must refer to national sharia advisors under a proposed change, the central bank chief said on Friday, as the country seeks to boost its image as an Islamic finance hub.

Under proposed changes to the law, judges would be guided by either the central bank or the capital market regulator's sharia advisory body in deciding Islamic banking matters, Zeti Akhtar Aziz said.

"In the new central banking act which is due to be presented in parliament, the court shall refer to the sharia advisory council on sharia matters," Zeti told the Reuters Islamic banking summit.

"It would allow for the consistent application of the interpretation given by the sharia advisory council."

Mostly Muslim Malaysia has the world's largest Islamic bond market and wants be a hub for international sharia banking and insurance and fund and wealth management businesses.

Islamic banking matters in Malaysia are heard in civil law courts staffed by judges who are not formally trained in sharia.

Judges currently can choose whether or not they want to seek the advice of national sharia advisors when faced with Islamic banking disputes.

An earlier court decision casting doubt on the validity of a popular Islamic finance contract sparked fierce debate about judges' ability to handle sharia financial matters.

In the case, the court had said the bai bithaman ajil or deferred payment sale contract, as structured by most Malaysian banks, resembled a conventional banking loan.

A higher court has since ruled that bai bithaman ajil is an Islamic sale transaction which should not be compared with a loan.

Islamic finance is based on sharia, which is open to varying interpretations, resulting in differences of opinion on the permissibility of certain contracts.

Lawyers and academics have suggested Malaysia employ judges skilled in sharia banking law or create special courts to hear Islamic finance cases.

One lawyer said the proposed law change could meet some resistance from lawyers and judges.

"Legally, it would not be right," said Mohamad Illiayas, a Kuala Lumpur-based Islamic banking lawyer. "Judges are vested with the constitutional authority to decide all questions of law, including Islamic questions of law."

Investors generally view Malaysia as adopting a more market-driven approach while the Middle East is seen as taking a more conservative view in sharia interpretation.

But Zeti dispelled suggestions that Malaysia was relatively liberal in its interpretation of the sharia's tenets.

"Very serious research is undertaken to develop products and so on and therefore it is not promoting innovation at all cost," she said. "Attention is being paid to sharia compliance."

(Editing by Erica Billingham)