1. Mahyuddin Khalid
emkay@salam.uitm.edu.my
ISLAMIC FINANCIAL
LEGAL FRAMEWORK
LEGAL FRAMEWORK OF INTERNET
BANKING

2. CONTENT
2
 INTRODUCTION
 INTERNET BANKING
 REGULATORY FRAMEWORK
 INTERNET BANKING FROM ISLAMIC
PERSPECTIVE
 CONCLUSION

3. INTRODUCTION
3
 Electronic commerce (E-commerce) is simply
referred to buying and selling using the Internet.
 E-commerce involves much more than
electronically mediated financial transactions
between organizations and customers.
 E-Banking may include ATMs, wire transfers,
telephone banking, electronic funds transfers and
debit cards.
 The Internet offers the potential for safe,
convenient new ways to shop for financial
services and conduct banking business, any day,
any time.
 However, safe banking online involves making
good choices–decisions that will help you avoid
costly surprises or even scams.

4. INTERNET BANKING
4
 Internet banking involves consumers using the
Internet to access their bank account and to
undertake banking transactions.
 Internet banking can mean the setting up of a web
page by a bank to give information about its product
and services.
 It involves provision of facilities such as accessing
accounts, funds transfer, and buying financial
products or services online.
 There are two ways to offer Internet banking:
 An existing bank with physical offices can establish a web
site and offer Internet banking in addition to its traditional
delivery channels.
 A bank may be established as a branchless, Internet only
or virtual bank.

5. INTERNET BANKING
5
 The levels of banking services offered through
Internet can be categorized in three types:
 Basic Level Services:
 Use the banks websites which disseminate information on
products and services offered
 It may receive and reply to customers queries through e-
mail
 Simple Transactional Websites
 Allow customers to submit their instructions, applications
for different services, queries on their account balances,
etc,
 Do not permit any fund-based transactions on their
accounts
 Fully Transactional Websites
 Allow the customers to operate on their accounts for
transfer of funds, payment of different bills, subscribing to

6. REGULATORY FRAMEWORK
6
 Laws on EFT and Electronic Banking
 Although principles of tort, restitution, property
law, equity, and even criminal law, may be relevant
when considering a problem thrown up by the
electronic banking and EFT, the primary source of
EFT law is the law of contract and agency.
 Law of Contract and Agency
 Those contracts regulate the legal problems that
result from the use of EFT.
 For example, the consumer customer will enter into a
detailed written agreement with the bank that
gives him access to its ATM or electronic banking
facilities.
 Unlike the traditional banker-customer contract,
which is largely based on implied terms, these
written contracts contain detailed express terms.

7. LAW OF CONTRACT AND AGENCY
7
 A whole series of contracts exist between banks and their
customers, banks and the electronic system provider, and
the banks themselves.
 The contractual relationship between the banks that
participate in the electronic banking system is important.
 Some banks enter into bilateral arrangements, for
example, where a bank which is a member of the
integrated banking system agrees to act as an agent for
another institution
 Systems such as MEPS or Bankcard depend upon
multilateral contracts whereby each member bank is
bound by the system rules.
 Multilateral contracts may arise where each member
contracts with the electronic banking system provider to
conform to the system rules; the members are then
deemed to have contracted between themselves on the
terms of their individual understandings.

8. REGULATORY FRAMEWORK
8
 The other laws relevant to EFT and
Electronic Banking are the various statutes
such as:
 Banking and Financial Institutions Act 1989
 Digital Signatures Act 1997
 Computer Crimes Act 1997

9. BANKING AND FINANCIAL INSTITUTIONS ACT 1989
(BAFIA)
9
 Not the whole of the Banking and Financial Institutions Act
1989 is relevant here.
 In fact only one section is devoted to EFT which is
section 119 of the BAFIA, 1989. This section merely
provides for the necessity of written authorization from and
control by BNM before any system of EFT can be operated
and afterwards.
 Section 119 (1) : stated that no person shall commence to
operate any EFT system unless he has submitted for the
approval of the Bank the scheme of operations, the rules,
contract, bye-laws or other documents relating to the
rights, duties and liabilities of the persons participating in
the system, and obtained the authorization in writing of the
Bank to operate the system.
 Section 119 (5) : (5) BNM may inspect the premises,
equipment, machineries, books or other documents,
accounts or transactions relating to the system.

10. BANKING AND FINANCIAL INSTITUTIONS ACT 1989
(BAFIA)
10
 Section 116(2)(e) : BNM may make
regulations to provide for the imposition of
duties, liabilities, responsibilities,
restrictions, limitations, prohibitions or
sanctions, or the conferment of rights,
privileges, benefits or indemnities on the
parties to any EFT system set up, or
operating, in Malaysia.
 Section 116(2)(f): Power for BNM to make
regulations to provide for the setting-up,
operation, or administration of, or any other
matter whatsoever relating to EFT systems.

11. DIGITAL SIGNATURE ACT 1997
11
 What is a digital signature?
 Digital signatures are not handwritten signatures.
 A digital signature is a technique that can include more
possibilities than just an electronic substitute for a handwritten
signature.
 A digital signature can also be used to establish the origin and integrity
of electronic data.
 The Digital Signature Act 1997 sets out a regulatory structure
in respect of entities involved in the creation of digital
signatures and legalizes private key – public key cryptography.
 Under the Digital Signature Act 1997, only certification authorities,
which are licensed, are allowed to carry on the business of a
certification authority.
 Certification authorities may be contractually liable to the
subscriber as well as to the world at large by virtue of third
parties relying on the certificates issued.
 Section 62 : stated that a digital signature is recognized as an
authentic signature.

12. DIGITAL SIGNATURE ACT 1997
12
 The Act does not preclude the use of a symbol from being
valid as a signature under any other applicable law, thus
preserving the right of a person to use a symbol instead of a
handwritten signature.
 Effect of a document signed with a digital signature:
 the document shall be legally binding as a document signed
with a handwritten signature– s.62(2)(a)
 the digital signature shall be deemed to be a legally binding
signature – s.62(2)(b)
 the document shall be deemed to be as valid, enforceable and
effective as if it had been written – s.64.
 the copy of a digitally signed message shall be valid and
enforceable as if it were the original, unless the signer had
specifically designated the message to be the original – s.65.
 By virtue of section 63 of the Digital Signature Act 1997, the
risk of forged digital signatures lies on the recipient, if
such reliance is not reasonable under the circumstances.

13. COMPUTER CRIMES ACT 1997
13
 The Computer Crimes Act 1997 is aimed to
“provide for offences relating to the misuse
of computers”.
 The Act introduced the concept of a crime
for the unauthorized access via a
computer or other electronic forms into the
computer or database of another person.
 The Act makes it an offence if there is an
unauthorized access to computer systems
and the use of computer systems for
fraudulent purposes.

14. COMPUTER CRIMES ACT 1997
14
 Section 3 creates an offence where there has
been an unauthorized access to a computer.
 For the offence of unauthorised access to be
committed, the computer used to secure the
unauthorised access to any program or data
need not be a different computer from that
containing the data or program.
 Section 4 creates an offence where there an
unauthorized access with ulterior Intent
 Section 4(1) creates an offence, is limited to
which involve fraud or dishonesty or which cause
injury as defined in the Penal Code.

15. COMPUTER CRIMES ACT 1997
15
 Section 5 creates an offence where there an
unauthorized modification of contents of computer
 Section 5(1) renders it an offence if a person who
does “any act which he knows will cause
unauthorized modification of the contents of any
computer.” An essential element of this offence is
knowledge.
 Under Section 7(1), abetments and attempts are
punishable as offences. An example of such act
would be where an intending “hacker” purchases
the necessary equipment in order to perform his
deed.
 Under Section 10(1), the powers of the law
enforcement agency to search and seize evidence
are subject to a warrant to be issued by the

16. BNM GUIDELINES
16
 Besides these provisions and legislation
relating to EFT and electronic banking, Bank
Negara Malaysia, pursuant to powers under the
Banking and Financial Institutions Act 1989 has
also issued two important and extremely
relevant guidelines. They are:
 BNM/GP11;
 Minimum Guidelines on the Provision of Internet
Banking
 BNM/GP 11, „Guidelines On Consumer
Protection On Electronic Fund Transfers‟
provides a basic framework to establish the
rights, liabilities and responsibilities of
customers and financial institutions relating to

17. INTERNET BANKING FROM ISLAMIC
PERSPECTIVES
17
 Both Quran and Sunnah proved us guidelines for our
everyday life that are applicable at any time and any where.
 Islam had provided some basic law that should govern any
transaction, including the one online.
 Main features of Islamic ethics are: trustworthiness, honesty,
equality, mutual consent, respect, sacrifice, caring and
sharing, concern on legality.
 It has to be emphasized that Islam has never come as an
obstacle for any kind of development in any field. But, Islam
forbids any kind of violence, exploration or unfair use of any
resource.
 Since, we are referring to Islamic online Banking; we will
refer to few Quranic ayahs where Allah strictly forbids any
kind of usury or interest (Riba) but allows free trade.
 Islamic banking differs from conventional main because it
course of bushiness is conducted in a way to avoid interest
involved as much as possible.

18. CONCLUSION
18
 Online banking has made its entrance and has
gradually gain the customers confidence.
 Internet has enable services to be made available
anytime and anywhere.
 Hence, Muslims or non-Muslims worldwide can
enjoy the Islamic Banking Finance provided or at
least able to gain and widen their knowledge in
Islamic Banking Finance.
 However it does not come without total cost. The
issue of security will always be there. Yet, it will be
confronted and handled by using the best legal
framework and measurements to overcome any
foreseen danger.
 Islamic banking in general, and online in particular is
actual an alternative to our Ummah and a way in
which our Ummah can prosper on Shariah allowed
way.

19. 19 END OF CHAPTER