8.3 Capital Markets and Services Act (CMSA) & Dispute Resolution

Capital Markets and Services Act (CMSA) & Dispute Resolution

Malaysia's Islamic finance regulatory architecture is characterized by a synchronized dual-regulatory model. While Bank Negara Malaysia (BNM) oversees Islamic banking, money markets, and takaful under IFSA 2013, the Securities Commission Malaysia (SC) regulates the Islamic Capital Market (ICM) under the statutory authority of the Capital Markets and Services Act 2007 (CMSA 2007) (Act 671). Alongside statutory regulation, Malaysia has established specialized judicial and alternative dispute resolution (ADR) mechanisms to ensure that Islamic commercial disputes are adjudicated with jurisprudential fidelity and commercial speed.

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1. Regulatory Framework for the Islamic Capital Market (CMSA 2007)

The Securities Commission Malaysia, established pursuant to the Securities Commission Act 1993, serves as the sole statutory regulator for Malaysia's securities, derivatives, fund management, and Sukuk markets. The primary statutory engine empowering the SC is the Capital Markets and Services Act 2007 (CMSA 2007).

Statutory Division of Regulatory Responsibilities

Malaysia maintains a clear, non-overlapping statutory division between its financial regulators:

• Bank Negara Malaysia (BNM): Governed by IFSA 2013 and CBMA 2009. Regulates licensed Islamic commercial banks, investment banks, international Islamic banks, takaful operators, the Islamic interbank money market (IIMM), and payment systems.
• Securities Commission Malaysia (SC): Governed by CMSA 2007 and the Securities Commission Act 1993. Regulates primary corporate Sukuk issuances, exchange-traded equities, Islamic collective investment schemes (unit trusts, Islamic REITs, Islamic ETFs), Islamic fund management companies (IFMCs), digital asset exchanges, and Shariah advisers.

Shariah Advisory Council of the Securities Commission (SAC SC)

The Shariah Advisory Council of the Securities Commission (SAC SC) was established on 16 May 1996. Its statutory basis is now Part IIIC of the Securities Commission Malaysia Act 1993 (sections 31ZI onwards, inserted in 2015), which makes it the authority for ascertaining the application of Shariah principles to Islamic capital market business or transactions:

• Appointment: Members are appointed by the Yang di-Pertuan Agong on the advice of the Minister of Finance after consultation with the SC. They must be qualified in fiqh muamalah, Islamic jurisprudence, Islamic finance, or a related discipline.
• Statutory Functions:
  1. To ascertain the application of Shariah principles on any matter relating to Islamic capital market business or transactions;
  2. To issue rulings on such matters;
  3. To advise the SC on any Shariah issue relating to Islamic capital market business or transactions; and
  4. To provide advice to any person on such Shariah issues.
• Bursa Malaysia Equity Screening: The SAC SC sets the methodology used to classify Bursa Malaysia securities as Shariah-compliant, and the list is updated each May and November. For financial years ending on or after 31 December 2025, it applies a single 5% business activity benchmark measured against group total income. It also applies two 33% financial ratio benchmarks (conventional cash and interest-bearing debt over total assets) and a qualitative check (see section 2.3).

Powers of the SC in Market Supervision

Under CMSA 2007, the SC exercises sweeping regulatory authority over the ICM:

• Sukuk Issuance Approval: Regulating primary offerings under the Lodge and Launch (LOLA) Framework and Unlisted Capital Market Products Guidelines.
• Licensing & Registration: Licensing Capital Markets Services License (CMSL) holders, including Islamic fund managers, and registering individual and corporate Shariah advisers under the Guidelines for Shariah Advisers.
• Sustainable and Responsible Investment (SRI): Administering the SRI Sukuk Framework (introduced in 2014), under which the world's first green SRI sukuk was issued in 2017.

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2. Judicial Adjudication: The Civil Court System & The Muamalat Court

The Constitutional Demarcation

A common misconception is that Islamic commercial disputes in Malaysia are litigated in the Syariah Courts (Mahkamah Syariah). In the Malaysian constitutional structure, this is legally impossible:

Under the Federal Constitution of Malaysia, Ninth Schedule:

• Federal List (List I): Finance, including banking, is a federal matter (item 7), as is insurance (item 8). Mercantile law falls under item 4. Item 4(k) allows Parliament to legislate for the "ascertainment of Islamic law and other personal laws for purposes of federal law". This is the constitutional basis for giving the SAC its role in federal Islamic finance law, as the Federal Court noted in JRI Resources.
• State List (List II, item 1): The Syariah Courts have jurisdiction only over persons professing Islam, and only in State List matters such as personal and family law, succession, gifts (hibah), and wakaf. They have no jurisdiction over banking contracts or non-Muslim litigants.

Consequently, all Islamic banking, finance, and capital market litigation is adjudicated within the Civil Court system (Magistrates' Court, Sessions Court, High Court, Court of Appeal, and the Federal Court).

The Dedicated Muamalat Court (2003)

To resolve judicial delays and ensure commercial sophistication in Islamic finance litigation, a specialized Muamalat bench was established in 2003 within the Commercial Division of the High Court in Kuala Lumpur:

• Specialized Judiciary: Presided over by civil High Court judges who undergo specialized training in Fiqh al-Muamalat and Islamic financial contracts.
• Case Management: Operates under dedicated practice directions providing expedited case management for Islamic banking debt recovery, asset repossession, and contractual interpretations.
• Integration with Shariah: Serves as the primary judicial conduit for statutory referrals to the BNM SAC on contested Shariah issues.

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3. Mandatory Referral: Sections 56 & 57 of CBMA 2009

The Historical Usurpation Controversy

Prior to 2009, under Section 16B of the Central Bank of Malaysia Act 1958, civil courts had discretionary authority to consult the BNM SAC on Shariah questions. However, SAC rulings were treated as advisory. In notable cases such as Affin Bank Bhd v Zulkifli Abdullah (2006) and Arab-Malaysian Finance Bhd v Taman Ihsan Jaya (2008), judges reached their own conclusions on whether Bai Bithaman Ajil (BBA) profit was legitimate, and those conclusions were later reversed on appeal (section 3.1). This produced deep judicial uncertainty and threatened market stability.

The Statutory Solution: CBMA 2009

To eliminate conflicting interpretations, Parliament enacted the Central Bank of Malaysia Act 2009 (CBMA 2009), introducing mandatory, binding statutory referral mechanisms:

Section 56(1): "Where in any proceedings relating to Islamic financial business before any court or arbitrator any question arises concerning a Shariah matter, the court or the arbitrator, as the case may be, shall— (a) take into consideration any published rulings of the Shariah Advisory Council; or (b) refer such question to the Shariah Advisory Council for its ruling."

Section 57: "Any ruling made by the Shariah Advisory Council pursuant to a reference made under this Part shall be binding on the Islamic financial institutions under section 55 and the court or arbitrator making a reference under section 56."

Under this statutory scheme, whenever a litigant challenges the Shariah validity of an Islamic financing agreement (e.g., alleging that a Tawarruq structure involves fictitious commodities or Inah), the civil judge cannot independently decide the Shariah question. The judge must apply a published SAC ruling or, where none covers the point, refer the question to the BNM SAC. Once the SAC delivers its ruling on the reference, that ruling binds the court.

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4. Constitutional Challenges & Landmark Jurisprudence

The binding nature of Section 57 triggered high-stakes constitutional litigation. Aggrieved borrowers argued that Section 56 and 57 violated Article 121(1) of the Federal Constitution, which vests judicial power exclusively in the civil courts, by delegating judicial power to an executive administrative body (the SAC).

Landmark Case 1: Mohd Alias bin Ibrahim v RHB Bank Bhd [2011] 3 MLJ 26

The High Court held that Sections 56 and 57 of CBMA 2009 were constitutionally valid. The court reasoned that the SAC performs an ascertainment function (determining what the Islamic legal rule is), while the judicial power (interpreting facts, hearing evidence, applying the Shariah rule to the contract, and entering final judgment) remains exclusively with the civil judge. The SAC does not resolve disputes between the parties; it merely ascertains the applicable Shariah standard.

Landmark Case 2: JRI Resources Sdn Bhd v Kuwait Finance House (M) Bhd [2019] 3 MLJ 561

The constitutional question reached the apex court in JRI Resources. The dispute concerned an Ijarah clause requiring the lessee to undertake and pay for major maintenance of leased vessels; on reference, the SAC ruled the clause Shariah-compliant. On 10 April 2019 a nine-judge Federal Court held by a 5–4 majority that Sections 56 and 57 of the CBA 2009 are constitutional:

• Ascertainment vs. Adjudication: The Federal Court held that the SAC acts as a specialized statutory expert tribunal on Islamic jurisprudence, analogous to foreign law experts or medical assessment bodies. Ascertaining Islamic law does not constitute the exercise of judicial power.
• Judicial Integrity Preserved: The civil court retains the sole power to decide the ultimate outcome of the dispute, determine liability, interpret contractual clauses, evaluate witness credibility, and award damages.
• Legal Certainty: The apex court emphasized that centralizing Shariah ascertainment within the SAC is vital for preserving consistency, public confidence, and financial stability across the Islamic financial sector.

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5. Alternative Dispute Resolution (ADR)

Given the cost, commercial exposure, and time associated with civil litigation, alternative dispute resolution plays a vital role in Malaysian Islamic finance:

1. Asian International Arbitration Centre (AIAC) & The i-Arbitration Rules

The Asian International Arbitration Centre (AIAC), based in Kuala Lumpur, was known as the KLRCA until 2018. In 2012 it introduced its i-Arbitration Rules, the first institutional arbitration rules designed for disputes arising from Shariah-based commercial transactions, and it has revised them since:

• Shariah Reference: When a Shariah question arises, the arbitral tribunal can refer it to the relevant Shariah authority, such as the BNM SAC for banking and takaful, the SC's SAC for capital market matters, or an agreed Shariah expert, and take the answer into account in its award.
• International Enforceability: Arbitral awards made in Malaysia can be enforced in the 170-plus states party to the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, which makes arbitration attractive for cross-border sukuk and syndicated facilities.

2. Financial Markets Ombudsman Service (FMOS)

Since 1 January 2025, the Ombudsman for Financial Services (OFS) and the Securities Industry Dispute Resolution Center (SIDREC) have been consolidated into the Financial Markets Ombudsman Service (FMOS). FMOS operates as the approved financial ombudsman scheme under Section 138 of IFSA 2013 and Section 126 of FSA 2013, and BNM and the Securities Commission oversee it jointly:

• Free & Accessible: Financial consumers and investors can file eligible disputes against banks, takaful operators, insurers, development financial institutions and capital market intermediaries free of charge.
• Two-Stage Process: Disputes go through case management and conciliation first; if unresolved, an ombudsman adjudicates.
• Monetary Limit: A single limit of RM250,000 applies to all eligible disputes. It replaced the OFS's lower caps for motor third-party property damage (RM10,000) and unauthorised transactions (RM25,000). A dispute must generally be referred within six months of the provider's final decision.
• Asymmetric Binding Nature: An award is binding on the financial institution if the consumer accepts it. A consumer who rejects it remains free to sue in the civil courts.