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IFIs REGULATORY

REQUIREMENTS
INTRODUCTION
• Shariah principles are the foundation for the practice of
Islamic finance through the observance of the tenets,
conditions and principles espoused by Shariah.
• Comprehensive compliance to Shariah principles would bring
confidence to the general public and the financial markets on
the credibility of Islamic finance operations.
• TWO-TIER Shariah governance infrastructure  SAC at
BNM and SC at IFI
• Shariah Governance Framework to specify and enhance the
roles of the Board, the Shariah Committee and the
Management in relation to SHARIAH GOVERNANCE.
OBJECTIVES
Shariah Governance Framework is to:
•ensure operational and business activities in accordance to
Shariah.
•Provide comprehensive guidance to the Board.
•Outline functions relating to Shariah matter.
SCOPE OF APPLICATION
The Framework shall be applicable to all IFIs regulated and
supervised by the Bank. Any reference to ‘IFI’ for the purpose
of the Framework means:
 an Islamic bank licensed under Islamic Banking Act 1983
(IBA);
 a takaful and re-takaful operator registered under the
Takaful Act 1984 (TA)
 a financial institution licensed under the Banking and
Financial Institutions Act 1989 (BAFIA)
 a development financial institution prescribed under the
Development Financial Institutions Act 2002 (DFIA)
 ISLAMIC FINANCIAL SERVICES ACT 2013
Superseeded all of the above
Effective Date & Compliance
Deadline
– take effect starting 1st January 2011.
– The IFI shall be given 6 months from the effective date of the
Framework to comply with all the requirements.
– IFI is required to confirm the status of compliance with the
Framework at the end of the 6 month period.
Approach
STANDARDS
OF
BANK NEGARA
SECTION (I) : General Requirements of the SGF

PRINCIPLE (1): The Responsibility of IFI is to Establish a
Robust Shariah Framework and Ensuring Its Implementation

Make sure the operations of the business are Shariah compliance.
The Sh. governance framework, at least comprise of the following:
• Board understanding of the Shariah non-compliance risks,
issues related to it, and the potential implications
• Qualified and capable SC – who can solve Islamic finance issues
• Effective management responsibilities (adequate and capable) :
REGULAR Shariah Review, Shariah Risk Management, and
Shariah Research teams.
• Effective PERIODICAL Shariah Audit (non-management)
• Issuance and dissemination of Shariah decisions to stakeholders
SECTION (I) : General Requirements of the SGF

PRINCIPLE (1): The Responsibility of IFI is to Establish a
Robust Shariah Framework and Ensuring Its Implementation

Reporting:
1.SC functionally reports to the BOD
2.Shariah Review and Shariah Research reports concurrently to SC
and Management
3.Shariah audit findings reported to the Board Audit Committee and
SC
ALL Shariah non-compliance shall be reported to the Board AND
BNM.
Single GSC  each licensed institution within the group may
apply for exemption.
SECTION (II) : Oversight, Accountability &
Responsibility
PRINCIPLE (2): An IFI Shall Set Out the Accountability and
Responsibility of Every Key Functionary Involved in the
Implementation of SGF.
• Board of Directors (BOD)
 The board is ULTIMATELY ACCOUNTABLE AND
RESPONSIBLE on the overall Shariah governance framework
and Shariah compliance of the IFI.
 Upon consultation with SC, to approve and implement all
policies relating to Shariah matters.
 Appoint the SC members upon the recommendation of its
Nomination Committee.
NOT LESS than 5 members of SC and MAJORITY must have
strong knowledge and appropriate qualification in Shariah
• SHARIAH COMMITTEE
1. All decisions, views and opinions related to Shariah matters
2. Advise to the Board and IFI  the Board RELIES on SC
3. Rigorously deliberate issues at hand before decide/propose
corrective measures
4. OVERSIGHT role  through Sh. Review and Sh. Audit
5. Validate Financial report of IFI as per GP8-i and GPT6
6. Endorse Shariah policies and procedures
7. Endorse various documentations e.g. terms and conditions
contained in the forms, contracts, agreements, legal
documentations, product manual, marketing advertisements,
sales illustrations, brochures etc.
• SHARIAH COMMITTEE (2)
8. Assess Shariah Review and Shariah Audit
9. Assist related parties e.g. legal counsel, auditor (external),
consultant, regulator, etc.
10. Advise on matters to be referred to the SAC  if cannot be
resolved
11. Provide written Shariah opinions  for REFERENCE to
the SAC for further deliberation; or for NEW PRODUCT
approval
• Management
 Responsible for observing and implementing Shariah
Rulings by SAC and SC
 Provide information and disclosure, complete and accurate
in a timely manner, and be transparent to SC
 Allocate adequate resources and manpower to support
Shariah governance of the IFI
 Provide continuous learning and training programmes to the
key internal stakeholders.
 Develop and adopt a holistic culture of Shariah compliance
 Ensure policies and procedures accessible at all times
• Management (2)
 Immediately notify the Board, the SC and BNM on non-
compliance
 Cease to take on any new business related to non-compliant
business
 Rectify the state of non-compliance within 30 days, duly
approved by Board and SC
SECTION (III) : Independence
PRINCIPLE (3): Independence of the SC Shall Be Observed at
All Times in Exercising Their Duties to Make Objective And
Informed Judgment.
 Board must recognise the independence of the SC and free SC
from undue influence
 SC shall report directly to the Board and regularly inform the
Board on relevant Shariah matters.
 Decisions made by SC should not be set aside or modified
without SC consent.
 Board shall consider necessary punitive measures against parties
who intentionally failed to extend required info to SC
 Appointment, reappointment, resignation and removal of SC
members shall be made by Board, subject to approval by BNM
and SAC
SECTION (IV) :Competency
PRINCIPLE (4) Officers Shall Possess Necessary Competency,
Continuously Enhance Knowledge and Keep Abreast with Latest
Developments

 The Board, Management and SC to have reasonable cross-
expertise knowledge
 IFI shall develop a set of fit and proper criteria for the
appointment of any SC member, using minimum criteria set by
BNM
 These shall provide assurance to the public
 IFI shall engage other professionals e.g. lawyers, accountants,
economists etc. to assist SC
 IFI must adopt formal process to gauge SC members performance
 Succession planning
SECTION (V) :Confidentiality & Consistency
PRINCIPLE (5): Internal and Privileged Info Obtained by SC
Must Be Kept Confidential and Not Misused

• Confidential and sensitive info cannot be used in detrimental
manner to the IFI
• Confidential information including:
– Development of new products and services
– Decisions of Board and/or Management
– Internal memorandums or reports
– Conversation among members of SC
– Progress status of non-public transaction/action
– Specific non-public matters e.g. internal policies and
procedures
SECTION (V) :Confidentiality & Consistency
PRINCIPLE (5): Internal and Privileged Info Obtained by SC
Must Be Kept Confidential and Not Misused

• Whistleblowing of serious breaches NOT regarded as breaching
confidentiality and secrecy code
• IFI shall not appoint SC member from another IFI of same
industry

PRINCIPLE (6): Professional Ethics, Judgment And Consistency
Shall Be Maintained In Ensuring Shariah Compliance.

• Structured process for SC arriving at Shariah decisions
• SC respect and observe the published Shariah rulings by SAC
• Differences in opinion SC may refer ruling from SAC
SECTION ( VI) : SHARIAH COMPLIANCE & RESEARCH
FUNCTIONS
PRINCIPLE (7): There shall be a robust Shariah compliance
function, comprising review and audit functions, supported by
risk management control process and internal research
capacity

 If any part of function is outsourced, the oversight,
accountability and responsibility over these functions
REMAIN with the IFI
SHARIAH REVIEW
 REGULAR assessment on Shariah compliance on activities by
qualified Shariah Officer(s)

 Qualified Shariah Officer = Bachelor’s degree in Shariah, and
includes study in usul fiqh and fiqh mu’amalat

 Function is examination and evaluation, remedial
rectification, and control mechanism to avoid recurrences

 Scope = overall business operations including end-to-end
product development
IFSB-10
GUIDING PRINCIPLES ON SHARIAH
GOVERNANCE SYSTEMS FOR
INSTITUTIONS OFFERING ISLAMIC
FINANCIAL SERVICES
INTRODUCTION
Definition and Scope of Shariah Governance System

THE GUIDING PRINCIPLES
•Part I: General Approach to the Shariah Governance
System
•Part II: Competence
•Part III: Independence
•Part IV: Confidentiality
•Part V: Consistency
DEFINITION  Shariah
Governance System
…the set of institutional and organisational
arrangements through which an IFI ensures that
there is effective independent oversight of Shariah
compliance over each of the following structures
and processes:
1.Issuance of relevant Shariah
pronouncements/resolutions (juristic opinion on
any matter pertaining to Shariah issues in IF)
2.Dissemination of information on such Shariah
pronouncements/resolutions to the operative
personnel of the IFI
DEFINITION  Shariah
Governance System (2)
3. An internal Shariah compliance review/audit for
verifying that Shariah compliance has been
satisfied, during which non-compliance will be
recorded and reported, addressed and rectified
4. An annual Shariah compliance review/audit for
verifying that the internal Shariah compliance
review/audit has been appropriately carried
out and its findings have been duly noted by the
SC
AAOIFI
•AAOIFI – The Accounting and Auditing Organization for Islamic Financial Institutions.
•Based in Bahrain
•International organization that formulates and publishes accounting, auditing, ethics, governance and Shariah
ESTABLISHMENT standards for the Islamic finance industry

•To develop accounting and auditing thoughts relevant to Islamic financial institutions.
•To disseminate accounting and auditing thoughts relevant to Islamic financial institutions and its applications
through training, seminars, publication of periodical newsletter, carrying out and commissioning of research.
•To prepare, promulgate and interpret accounting and auditing standards for IFIs
OBJECTIVES •To review and amend accounting and auditing standards for IFIs

•To enhance the confidence of users of the financial statements of IFIs
•To encourage the users to invest and deposit their funds in IFIs
INTENTION
AAOIFI Governing Standards
Standard Number Details

Governance Standard for IFIs no 1 Shariah Supervisory Board: Appointment,
(GSIFI-1) Composition and Report

Governance Standard for IFIs no Shariah Review
2(GSIFI-2)

Governance Standard for IFIs no 3 Internal Shariah Review
(GSIFI-3)

Governance Standard for IFIs no 4 Audit and Governance Committee for IFIs
(GSIFI-4)

Governance Standard for IFIs no 5 Independence of Shariah Supervisory
(GSIFI-5) Board
The difference and similarities
Differ: AAOIFI wants the
Same: Importance of implementation of
the role of the SC in annual shariah review
ensuring IFIs comply by SC and external
strictly to Shariah shariah audit of the IFI
financial statements

While BNM: shariah IFSB, wants SC to do
audit to be done by the audit and appoint
Internal auditor external auditors
Islamic Financial Services Act 2013
[PART IV: SHARIAH REQUIREMENTS]

LAWS OF MALAYSIA
Act 759
Division 1: Shariah Compliance
SECTION 28.
(1) An institution shall at all times ensure that its aims and
operations, business, affairs and activities are in compliance with
Shariah.

(2) For the purposes of this Act, a compliance with any ruling of the Shariah
Advisory Council in respect of any particular aim and operation, business,
affair or activity shall be deemed to be a compliance with Shariah in respect
of that aims and operations, business, affair or activity.

(3) Where an institution becomes aware that it is carrying on any of its business, affair or activity in
a manner which is not in compliance with Shariah or the advice of its Shariah committee or the
advice or ruling of the Shariah Advisory Council, the institution shall—
(c) within thirty days of becoming aware of such
(b) immediately cease from carrying on such
(a) immediately notify the Bank and its Shariah noncompliance or such further period as may be
business, affair or activity and from taking on any
committee of the fact; specified by the Bank, submit to the Bank a plan
other similar business, affair or activity; and
on the rectification of the non-compliance.

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Division 1: Shariah Compliance (Continue)
(3) Where an institution becomes aware that it is carrying on any of its business, affair or activity in a
manner which is not in compliance with Shariah or the advice of its Shariah committee or the advice
or ruling of the Shariah Advisory Council, the institution shall—
(c) within thirty days of becoming aware of such
(b) immediately cease from carrying on such
(a) immediately notify the Bank and its Shariah noncompliance or such further period as may be
business, affair or activity and from taking on any
committee of the fact; specified by the Bank, submit to the Bank a plan
other similar business, affair or activity; and
on the rectification of the non-compliance.

(4) The Bank may carry out an assessment as it thinks necessary to
determine whether the institution has rectified the non-compliance
referred to in subsection (3).

(5) Any person who contravenes subsection (1) or (3) commits an
offence and shall, on conviction, be liable to imprisonment for a term
not exceeding eight years or to a fine not exceeding twenty-fivemillion
ringgit or to both.
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Division 1: Shariah Compliance
(Continue)
Sect 29: (1) With the advice (a) on Shariah matters in
respect of the carrying on of
or ruling of the business, affair or activity by
Power of Shariah Advisory an institution which requires
the ascertainment of Islamic
BNM to Council, specify law by the Shariah Advisory
Council; and
specify standards—
(b) to give effect to the advice
or rulings of the Shariah
standards Advisory Council.

on
Shariah
matters (2) In addition, the (a) Shariah governance
including—
(i) functions and duties of the board of
directors, senior officers and members of
the Shariah committee of an institution in
Bank may also relation to compliance with Shariah;

specify standards (ii) fit and proper requirements or
disqualifications of a member of a Shariah
relating to any of committee; and
(iii) internal Shariah compliance
the following functions;
(b) any other matter in relation
matters which does to the business, affair and
not require the activity of an institution for the
purposes of compliance with
ascertainment of Shariah.
Islamic law:

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Division 1: Shariah Compliance
(Continue)
Sect 29: (3) Every institution, its director, chief
executive officer, senior officer or
Power of member of a Shariah committee shall at
all times comply with the standards
BNM to specified by the Bank under subsections
(1) and (2) which are applicable to such
specify person.

standards (a) ensure that its internal policies and
(4) Every institution shall at all times—
on procedures on Shariah governance are
consistent with the standards specified by
Shariah the Bank under this section; and

matters (b) whether or not standards have been
specified by the Bank under this section,
(continue) manage its business, affairs and activities in
a manner which is not contrary to Shariah.

(5) Every director, officer or a member of
a Shariah committee of an institution
shall at all times comply with the internal
policies and procedures adopted by such
institution to implement the standards
specified by the Bank under subsection
(1) or (2).

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Division 2
Shariah governance
1) A licensed person shall establish a Shariah committee for purposes of advising the licensed person in ensuring its business, affairs and
Sect 30: activities comply with Shariah.

Establishment
of Shariah (2) For the purposes of subsection (1), where there is more than one licensed person within a financial group, one of the licensed persons
may apply to the Bank for the establishment of a single Shariah committee within the financial group and the Bank may approve the
committee application in writing if the Bank is satisfied that the Shariah committee so established is capable of ensuring compliance with Shariah by all
licensed persons within the financial group.

(3) The Bank may require an approved person or operator of a designated payment system to establish a Shariah committee for purposes of
advising the approved person or operator of a designated payment system in ensuring their business, affairs and activities comply with
Shariah.

Sect 31: No person shall be appointed, reappointed or accept any appointment as a member of a Shariah committee unless such person meets the
requirements as set out in any standards as may be specified by the Bank under subparagraph 29(2)(a)(ii) and has obtained the prior written
approval of the Bank.
Appointment
of Shariah
committee
member

Sect 32: A Shariah committee and every member of the Shariah committee shall have such duties and functions set out in any standards as may be
specified by the Bank under subparagraph 29(2) (a)(i).
Duties of
Shariah
committee
and its
members
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Division 2
Shariah governance
(1) A member of a Shariah committee shall cease to be a member if— (a) such member resigns as a member;

Sect 33: (b) the institution, subject to the Bank’s prior written approval under subsection (2), terminates
the appointment of such member;

Cessation (c) such member is disqualified pursuant to any standards specified by the Bank under
subparagraph 29(2)(a)(ii); or
(d) such member no longer meets the fit and proper requirements as may be specified by the

as (2) A member of a Shariah committee who—
Bank under subparagraph 29(2)(a)(ii) to the satisfaction of the Bank.

(a) resigns as a member; or

member
of Shariah
(b) becomes aware that he is disqualified pursuant to any standards specified by the Bank
under subparagraph 29(2)(a) (ii) and as such, pursuant to paragraph (1)(c), cease to be a
member, shall notify the Bank of that fact and the reasons thereof immediately or in any case
not later than fourteen days of such circumstance.

committee (3) An institution shall not terminate the appointment of a member of
its Shariah committee unless the institution has obtained the prior
written approval of the Bank to do so.

(4) Subject to section 273, the Bank may, by an order in writing, (a) any of the circumstances set out in paragraph (1)(c) or (d) has occurred in relation to that
member and such member remains to be a member of the Shariah committee; or
remove a member of a Shariah committee if the Bank is of the opinion
that—

(b) such member has contravened any provision of this Act or failed to comply with any
standards applicable to him.

(5) The removal of a member of a Shariah committee under
subsection (4) shall be lawful and valid notwithstanding anything
contained in a contract of service or any other agreement relating to
his appointment and whether or not made or provided for under any
written law, and a person so removed from office shall not be entitled
to claim compensation for the loss of office.

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Division 2
Shariah governance
Sect 34: (1) Where a person ceases to be (a) paragraph 33(1)(a), (b) or (d); or
a member of a Shariah committee (b) paragraph 33(1)(c) if such
Notice of of an institution pursuant to— disqualification is within the
institution’s knowledge, the
cessation institution shall notify the Bank in
as writing of that fact and the reasons
of such cessation immediately or in
member any case not later than fourteen
days from the date of such
of Shariah cessation.
committee
(2) Where a person ceases to be
a member of a Shariah committee
under subsection 33(1) or is
removed by the Bank under
subsection 33(4), the institution
shall appoint a new member of its
Shariah committee in accordance
with section 31 within such period
as may be specified by the Bank.

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Division 2
Shariah governance
(a) provide any document or information within its or
Sect 35: (1) An institution and any
director, officer or controller of
his knowledge, or capable of being obtained by it or
him, which the Shariah committee may require; and

Information such institution shall—

to be (b) ensure that such document or information
provided under paragraph (a) is accurate, complete,
not false or misleading in any material particular, to

provided to enable the Shariah committee to carry out its duties
or perform its functions under this Act.

Shariah (2) Except as provided in section
36, a member of a Shariah
committee committee shall not disclose any
document or information
furnished under subsection (1) to
any other person.

Sect 36: A member of a Shariah
committee shall not be liable—
(a) for a breach of a duty of confidentiality between
such member and the institution in respect of—
(i) any reporting to the Bank; or

Qualified
privilege and (ii) the discharge of his duties and performance of
his functions, pursuant to any standards specified by
the Bank under subparagraph 29(2)(a)(i) which was
duty of done or made in good faith; or

confidentiality (b) to be sued in any court for defamation in respect
of any statement made by the member without
malice in the discharge of his duties under this Act.

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Division 3
Audit on Shariah compliance
Sect 37: (1) The Bank may require an institution to appoint any person
Appointment as the Bank may approve, to carry out an audit on Shariah
of person by compliance by the institution.
institution to
conduct
(2) The person appointed under subsection (1) shall have such
audit on duties and functions as may be specified by the Bank and shall
Shariah submit a report to the Bank on the audit carried out pursuant to
compliance this section.

(3) The remuneration and expenses of the person appointed
under subsection (1) relating to any audit on Shariah
compliance under this section shall be borne by the institution.

(4) A person appointed under subsection (1) shall not be liable
for a breach of duty of confidentiality between such person and
the institution in respect of matters reported to the Bank
pursuant to an audit on Shariah compliance under this section.
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Division 3
Audit on Shariah compliance
Sect 38: (1) Without prejudice to section 37, the (a) if the institution fails to appoint a person under subsection 37 (1);

Bank may appoint for an institution any
Appointment person to conduct an audit on Shariah
(b) in addition to the person appointed under subsection 37(1); or
of person by compliance—

Bank to (c) under any other circumstances as the Bank deems appropriate for
conduct the purposes of compliance with Shariah by the institution, and the
remuneration and expenses relating to such appointment shall be
borne by the institution.
audit on
Shariah (2) The person appointed under
subsection (1) shall have such duties and
compliance functions as may be specified by the Bank
and shall submit a report to the Bank on
the audit carried out pursuant to this
section.

(3) A person appointed under subsection
(1) shall not be liable for a breach of duty
of confidentiality between such person
and the institution in respect of matters
reported to the Bank pursuant to an audit
on Shariah compliance under this section.

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