In our context, the Islamic banking system comprises the Islamic banks and the conventional banks offering Islamic banking products and services. In this regard, the main challenge to the regulator is to formulate a regulatory framework for Islamic banking that is in line with Syariah principles. Our approach is two-fold, firstly to adopt the existing international regulatory standards where it complies with Syariah, and secondly to develop a separate regulatory framework to address the unique characteristics of Islamic banking. As far as the first approach is concerned, the Islamic banks and the conventional banks with Islamic windows observe similar international standards as well as the prudential and supervisory concerns such as the Basel Concordat on minimum RWCR of 8%, statutory reserve requirement, corporate governance standards, risk management standards, financial disclosure and know your customer policy. They are also subject to similar supervision, surveillance and monitoring by the Central Bank. These policies have been implemented efficiently as most of these requirements, if not all, are not against the injunctions of Syariah. BIS Review 35/2002  1  The second approach refers to the implementation of Islamic banking within the conventional set-up. Bank Negara Malaysia has advocated for the “bank within a bank” concept for the conventional banks with Islamic windows to enable the Islamic banking divisions in the conventional bank to provide the strategic focus and autonomy, maximise synergy for economies of scale and capitalise on cost efficiency. These measures would also act as a firewall to ensure strict compliance to Syariah.

As good corporate governance is part of Islamic values, Islamic banking institutions need only to adapt to the code of ethics of the corporate governance to their business. In the Malaysian context, the same good corporate governance practices are applied for both conventional and Islamic banking institutions. To enhance the standard of corporate governance in the banking sector Bank Negara Malaysia has introduce measures including among others, specific guidelines on the code of conduct for directors, officers and employees of the banking institutions and guidelines on the directorship and the prohibition of loans to directors, staff and their interested corporations. The main objective of these guidelines is to engender public confidence in banking institutions and to ensure that the management and board of directors exhibit integrity and professionalism in the running of the banking institutions. Banking institutions are prohibited from the extension of financing and credit facilities to related parties including its directors and staff as well as family members and interested corporations. Such prohibitions are aimed at preventing misconduct and irregular practices in provision of finance whilst ensuring fair and equitable treatment to the public. These governance are universal in nature and therefore, Islamic banking institutions would not be faced with any difficulty in adopting these values. Secondly, the objective is to prevent conflict of interests and accord responsibility on the banking institutions to provide complete and accurate information.