Compliance with Shariah requirements is a prerequisite for ensuring the legitimacy of Islamic financial products and services. In this regard, Bank Negara Malaysia has embarked on the development of a Shariah contract-based regulatory policy to enhance end-to-end compliance with Shariah. This initiative aims to strengthen comprehensive Shariah compliance and to ensure the integrity and continuity of Islamic financial institutions.
The Islamic Financial Services Act (IFSA) provides the Bank with the power to issue Shariah Standards based on the specific features of each Shariah contract. Shariah-based regulation is required because Islamic financial transactions need to be implemented based on the specificities of various financial contracts, with each contract having its own unique risk-reward profile.
Mandate to Issue Shariah Standard
Section 29 (1) of IFSA :The Bank may, in accordance with the advice or ruling of the Shariah Advisory Council, specify standards—
- on Shariah matters in respect of the carrying on of business, affair or activity by an institution which requires the ascertainment of Islamic law by the Shariah Advisory Council; and
- to give effect to the advice or rulings of the Shariah Advisory Council.
Section 57. (1) of IFSA : The Bank may specify standards on prudential matters to promote—
- the sound financial position of an institution; or
- integrity, professionalism and expertise in the conduct of the business, affairs and activities of an institution.
Section 135 (1) of IFSA : The Bank may specify standards on business conduct to a financial service provider for the purposes of ensuring that a financial service provider is fair, responsible and professional when dealing with financial consumers.
Shariah standards were issued to provide Shariah references, outline operational requirements and set requirements for comprehensive Shariah compliance, good Islamic banking and takaful practices and safeguarding customers.