2.

5 Shari’ah Non-Compliance Risk

Shari’ah Non-Compliance Risk (SNCR) refers to the possibility that Islamic finance transactions
can be challenged if they do not comply with Shari’ah. Shari’ah risk is related to the structure
and functioning of Shari’ah boardsat the institutional and systemic level. This risk could be of
two types: thefirst is due to nonstandard practices in respect of different contracts indifferent
jurisdictions, and the second is due to the failure to comply withShari’ah rules. Differences in
the interpretation of Shari’ah rules result indifferences in financial reporting, auditing, and
accounting treatment. For instance, while some Shari’ah scholars consider the terms of a
Murabahahor Istisna contract to be binding on the buyer, others argue that the buyerhas the
option to decline even after placing an order and paying thecommitment fee.

Islamic bank operations need to follow the principles of Islamic economics and Shari’ah law.
Any Shari’ah non-compliance can affect their reputation and lower the loyalty of their
customers.

Chapter Summary
The main prohibitions under the Shari’ah law in relation to IFB are: interest, speculative
behavior, financing of certain activities such as gambling, alcohol, pornography, intoxicating
drinks, non-slaughtered animals, entertainment, tobacco-related products, weapons and
conventional insurance. Moreover, investments in unlawful activities and capital guarantees are
avoided.

A contract has basically three elements for the existence of the contract to be declared: the
contracting parties, the subject matter, and offer & acceptance (Ijaab&Qabool).

Islamic banking techniques utilize sales contracts with specific characteristics as the basis of
their product offering. The sale contract involves the transfer of ownership or exchange of the
subject matter/object/asset from a willing seller to an interested buyer.
A failure to comply with the Shari’ah law in Islamic finance results to a Sharīʻah non-
compliance risk.