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Overview on Shariah Governance – Shariah Advisory Council

Centre for Shariah Reference in Islamic Finance - Pusat Rujukan Shariah Bagi Kewangan Islam

Shariah Governance

Governance  is an essential component in ensuring the stability of the Islamic financial system.A well-functioning Shariah governance framework is essential to enhance public confidence in the corporate objectives, management and business operations of Islamic financial institutions.

The Shariah Governance Framework for Islamic Financial Institutions was issued in 2011. The framework plays a critical role in supporting the development of the Islamic financial industry in a structured manner. It coincides with regulatory objectives to ensure continuous and comprehensive Shariah compliance.

In ensuring end-to-end Shariah compliance and that the public interest is safeguarded, Shariah governance in Malaysia comprises two levels. First is the institutional level and second, the regulatory level.

At the institutional level, the Islamic Financial Services Act requires all Islamic financial institutions to ensure that their business objectives and operations are Shariah compliant are at all times.

At the regulatory level, Shariah governance comprises the SAC. The SAC has an important role in ensuring the Shariah decisions made by Islamic financial institutions are credible and compatible with Shariah principles.

Related documents:

1. Shariah I Governance Framework I 2011

2. Shariah Governance Framework Disclosure Draft I 2017

 

LEGAL PROVISIONS ON SHARIAH GOVERNANCE (IN IFSA)

  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—
    1. immediately notify the Bank and its Shariah committee of the fact;
    2. immediately cease from carrying on such business, affair or activity and from taking on any other similar business, affair or activity; and
    3. within thirty days of becoming aware of such non-compliance or such further period as may be specified by the Bank, submit to the Bank a plan 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-five million ringgit or to both.
  1. The Bank may, in accordance with the advice or ruling of the Shariah Advisory Council, specify standards—
    1. 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
    2. to give effect to the advice or rulings of the Shariah Advisory Council.
  2. In addition, the Bank may also specify standards relating to any of the following matters which does not require the ascertainment of Islamic law:
    1. Shariah governance including—
      1. functions and duties of the board of directors, senior officers and members of the Shariah committee of an institution in relation to compliance with Shariah;
      2. fit and proper requirements or disqualifications of a member of a Shariah committee; and
      3. internal Shariah compliance functions; and
    2. any other matter in relation to the business, affair and activity of an institution for the purposes of compliance with Shariah.
  3. Every institution, its director, chief executive officer, senior officer or member of a Shariah committee shall at all times comply with the standards specified by the Bank under subsections (1) and (2) which are applicable to such person.
  4. Every institution shall at all times—
    1. ensure that its internal policies and procedures on Shariah governance are consistent with the standards specified by the Bank under this section; and
    2. whether or not standards have been specified by the Bank under this section, 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).
  6. Any person who fails to comply with any standards specified under subsection (1), 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-five million ringgit or to both.
      1. A licensed person shall establish a Shariah committee for purposes of advising the licensed person in ensuring its business, affairs and activities comply with 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 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.

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.

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).

  1. A member of a Shariah committee shall cease to be a member if—
    1. such member resigns as a member;
    2. the institution, subject to the Bank’s prior written approval under subsection (2), terminates the appointment of such member;
    3. such member is disqualified pursuant to any standards specified by the Bank under subparagraph 29(2)(a)(ii); or
    4. such member no longer meets the fit and proper requirements as may be specified by the Bank under subparagraph 29(2)(a)(ii) to the satisfaction of the Bank.
  2. A member of a Shariah committee who—
      1. resigns as a member; or
      2. 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

  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, remove a member of a Shariah committee if the Bank is of the opinion that—
    1. 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
    2. 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.
  1. Where a person ceases to be a member of a Shariah committee of an institution pursuant to—
      1. paragraph 33(1)(a), (b) or (d); or
      2. paragraph 33(1)(c) if such disqualification is within the institution’s knowledge,

    the institution shall notify the Bank in writing of that fact and the reasons of such cessation immediately or in any case not later than fourteen days from the date of such cessation.

  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.
    1. An institution and any director, officer or controller of such institution shall—
        1. provide any document or information within its or his knowledge, or capable of being obtained by it or him, which the Shariah committee may require; and
        2. ensure that such document or information provided under paragraph (a) is accurate, complete, not false or misleading in any material particular,

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

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

A member of a Shariah committee shall not be liable—

    1. for a breach of a duty of confidentiality between such member and the institution in respect of—
      1. any reporting to the Bank; or
      2. 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 done or made in good faith; or

    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.