SHARIAH COMPLIANCE UNDER ISLAMIC FINANCIAL …kliff.com.my/wp-content/uploads/2014/12/Dr-Aznan.pdf · the Shariah Advisory Council ... 9 Similar description of the SAC’s as the

11th Kuala Lumpur IslamicFinance Forum 2014

10 November 2014 * Hotel Istana Kuala Lumpur CIty Centre

MUZAKARAH PENASIHAT SYARIAH KEWANGAN ISLAM KALI KE-9

Prof. Madya Dr. Aznan HassanAhli Majlis Penasihat SyariahSuruhanjaya Sekuriti

SHARIAH COMPLIANCE UNDER ISLAMIC FINANCIAL SERVICES ACTS 2013 AND ITS CHALLENGES

MUZAKARAH PENASIHAT SYARIAH KEWANGAN ISLAM KALI KE-9 10 November 2014

Bersempena KLIFF 2014

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SHARIAHCOMPLIANCEUNDERISLAMICFINANCIALSERVICESACTS2013ANDITS

CHALLENGES.

Assoc.Prof.Dr.AznanHasan

Introduction

The Islamic Financial Services Act 2013 (“IFSA 2013”) received the royal assent and

gazettedinMarch2013andsubsequentlytookeffectinJune2013.1Themainobjective

of IFSA 2013 aside from encouraging and monitoring financial stability, is to ensure

ShariahcomplianceoftheIslamicfinancialservicesandoperationsbyempoweringthe

Central Bank ofMalaysia (“CBM”)with the right to supervise and enforce the Act on

matters thatareconnected toShariah in theordinarycourseofbusinessofanIslamic

financial institute (“IFI”).2The said objective is concisely recorded in the preamble of

IFSA2013whichstipulatesthepurposeofIFSA2013as,“toprovidefortheregulation

and supervision of Islamic financial institutions, payment systems and other relevant

entities and the oversight of the Islamicmoneymarket and Islamic foreign exchange

market topromote financial stabilityandcompliancewith theShariahand for related,

consequentialorincidentalmatters.”(emphasisadded).

Itmust,however,benotedthatdespiteassumingtherolesandfunctionsofthemainAct

forIslamicbanking,IFSA2013isnon‐exhaustiveandistobereadtogetherwithother

relatedlawswhenevernecessarywhicharetheCentralBankAct2009(“CBA2009”)and

the ShariahGovernance Framework of CBM (“CBMSGF”). This is clearly stipulated in

section7(2)of IFSA2013whichreads; “Thepowersandfunctionsof theBankunder

thisActareinadditionto,andnotinderogationof,thepowersandfunctionsoftheBank

undertheCentralBankofMalaysia2009”.Further,section95oftheCBMA2009accords

thepower to the “Bank3to issueguidelines,by‐laws, circulars, standardsornotices in

1IFSA2013 repeals the IslamicBankingAct1983andTakafulAct1984as stipulated in section282ofIFSA2013.2The opening speech by Deputy Governor Muhammad bin Ibrahim at the Muzakarah CendekiawanSyariah Nusantara Kali Ke‐7 taken fromwww.bnm.gov.my/index.php?ch=en_speech&pg=en_speech_all&ac=467on16September2014.3Itshallberemindedthattheterm‘theBank’intheselawsreferstoCBMatalltimesandthesameshallbeapplicabletotheprovisionsreferencedthroughoutthispaperwork.Section2(1)ofIFSA2013provides



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order to give effect to its objects and carryingout its functionsor to anyprovisionof

CBMA2009ortobetterimplementtheprovisionsofCBMA2009aspersection95ofthe

CBMA2009”.

It is irrebuttable that IFSA 2013 is an immense and applaudable effort towards

promotingandadvancingMalaysiaasthehubof Islamicfinancing.However, thereare

several provisions of the said Act that may benefit from further clarification or

elaborationintheinterestofclarityandconsequentiallytheeffectivenessofIFSA2013.

Thispaperwork,nonetheless,shallfocusontherelevantprovisionsthatmaycontribute

to several selected Shariah challenges thatmay potentially be encountered by an IFI

fromtheangleofIslamicbankingfromthepointofviewofSCi.e.ofattainingcomplete

Shariah compliance in an IFI. Relevant provisions of the Acts and other related laws

referredtowillbehereinfurnishedwhenevernecessarytoeaseandassistthereaders.

ShariahChallengesofIFSA2013

InembarkingthepursuittounraveltheidentifiedShariahchallengesunderIFSA2013,

it is meritorious to firstly establish the prevalent aim of the Act namely Shariah

compliance via the provisions of IFSA 2013 and other relevant laws aswell as other

cardinalprinciplesorregulatoryrequirementsinconnectedtotheShariahcompliancy

which includes the establishment of an internal Shariah Committee (“SC”) under

separateheadingsasfollows.

i)Shariahcomplianceasprincipalregulatoryobjective

ApartfromtheemphasisfortheaboveinthepreambleofIFSA2013asbrieflystatedin

theIntroduction,thesameisfurtherelaboratedinsection6ofIFSA20134,detailedout

below:

the definition of “Bank” as ‘has the samemeaning as defined in subsection 2(1) of the CentralBank ofMalaysiaAct2009’andSection2(1)oftheCBMA2009definestheBankas ‘meansBankNegaraMalaysiaorinEnglish,the“CentralBankofMalaysia”’.4A more detailed elaboration on the imposition of Shariah compliance and governance unto IFIs arefoundunderPartIVDivision1and2ofIFSA2013whereinsomewillbediscussedinthelaterpartofthispaperwork.



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6.Regulatoryobjectives.

TheprincipalregulatoryobjectivesofthisActaretopromotefinancialstability

andcompliancewithShariahandinpursuingtheseobjectives,theBankshall‐

(a)foster‐

(i) thesafetyandsoundnessofIslamicfinancialinstitutions;

(ii) the integrity and orderly functioning of the Islamicmoneymarket and

Islamicforeignexchangemarket;

(iii) safe, efficient and reliable payment systems and Islamic payment

instruments;and

(iv) fair, responsible and professional business conduct of Islamic financial

institutions;and

(b) strive to protect the rights and interests of consumers of Islamic financial

servicesandproducts.

In facttheonlysignifantdistinctionbetweenIFSA2013andtheFinancialServicesAct

2013istherequisiteforShariahcompliance.

ii)RegulatoryrequirementforestablishmentofSC

Secondly, it is essential to know that it is a regulatory requirement for every IFI to

establish an internal SC as per section 30 (1) of IFSA 2013 who must satisfy the

requirementsof“fitandproper”spelledout insection29(2)(ii)ofIFSA2013thatare



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furtherspecifiedunderAppendix2ofCBMSGF5.Thisistoensurecloseobservanceand

effectivemonitoringoftheShariahprinciplesbyeachIFIthatoperatesIslamicbanking

business.Section30ofIFSA2013stipulates:

30.EstablishmentofShariahcommittee.

(1) A licensed person6shall establish a Shariah committee for purposes of

advisingthelicensedpersoninensuringitsbusiness,affairsandactivitiescomply

withShariah.

In a nutshell, the duty of SC is to perform an oversight function on Shariah matters

related to the IFI’s business operations and activities that are ideally achievable via

regularShariahreviewandShariahauditmonitoring.7

iii)SC’spowerandauthoritysubservienttotheShariahAdvisoryCouncilofCBM(“the

SAC”)

It has been long established that the SAC is the ‘authority for the ascertainment of

IslamiclawforthepurposeofIslamicfinancialbusiness’withthepowerto ‘determine

itsownprocedures’asstipulatedinsection51oftheCBMA2009.Further,IFSA2013by

virtueofsection28(2)reinforcesthesamebystatingthat‘compliancewithanyruling

oftheShariahAdvisoryCouncilinrespectofanyparticularaimandoperation,business,

affairoractivityshallbedeemedtobecompliancewithShariah inrespectof thataim

and operations, business, affair or activity.’8Consequentially, if there is a discrepancy

5 Appendix 2 of SGF (BNM/RH/GL_012_3) that is obtainable viawww.bnm.gov.my/guidelines/05_Shariah_Governance_Framework_20101026.pdf details out the criteriaof persons to assume the role of SCwhich includes descriptions on the appointment of SC, applicationproceduresofSC,resignationanddismissalofSC,qualificationsanddisqualificationsofSCaswellasthenegativelist.6Section2(1)of IFSA2013defines“licensedperson”as ‘meansapersonlicensedundersection10tocarryonlicensedbusiness’andsection10explains thata ‘licensedperson’ isanapplicantwhomuponpassingthe assessment by CBM and thereafter escalated to theMinisterwith recommendation for a license isgrantedthesamebythe latter ‘tocarryonIslamicbankingbusiness,takafulbusiness,internationalIslamicbusinessorinternationaltakafulbusiness,withorwithoutconditions.’7Foramoreextensivedescription,readersmayrefertoparagraph2.8oftheCBMSGF.8Thisprovisionwillberevisitedatalaterpartofthispaperwork.



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betweentherulingordecisionofSCandtheSAC,therulingoftheSACwillprevail.Such

isclearlyspelledoutinsection58oftheCBMA2009below9:

ShariahAdvisoryCouncilrulingprevails

58. Where the ruling given by a Shariah body or committee constituted in

Malaysiabyan Islamic financial institution isdifferent fromtherulinggivenby

the Shariah Advisory Council, the ruling of the Shariah Advisory Council shall

prevail.

iv)IFIandSCtoconformtotherulesandrulingsbyCBMandtheSAC

Hence, it shouldnaturally followthat theSCand IFIsmustconformatall times to the

established rules of CBMwhich shall include any Shariah related circulars, guidelines

andpublishedrulingsoftheSAConIslamicbankingmatters.Suchpowerisprescribed

toCBMbyvirtueofsection7(2)ofIFSA2013whichstipulates:

7.PowersandfunctionsofBank.

(2)ThepowersandfunctionsoftheBankunderthisActareinadditionto,and

not in derogation of, the powers and functions of the Bank under the Central

BankofMalaysia2009.

A cross reference to section59of theCBMA2009will further tell us that issuanceof

circulars,guidelinesorother formsorrulingbyCBMinconnection to Islamicbanking

business has a binding effect on IFIs with a fine of up to RM3,000,000 if breached.

Section59ofCBMA2009stipulatesthebelow:

TheBanktoissuecirculars,guidelines,etc.,onShariahmatters

9SimilardescriptionoftheSAC’sasthe‘highestShariahauthority’andfunctionsarefoundinthewebsiteofCBMathttp://www.bnm.gov.my/index.php?ch=en_about&pg=en_thebank@ac=802.



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59. (1) TheBankmay issue suchwritten circulars, guidelines or notices on any

ShariahmatterrelatingtotheIslamicfinancialbusinesscarriedonbyanyIslamic

financialinstitutioninaccordancewiththeadviceorrulingoftheShariahAdvisory

Council.

(2) An Islamic financial institution shall comply with any written circulars,

guidelines or notices issuedby theBankunder subsection (1) andwithin such

timeasmaybesetoutinthecirculars,guidelinesornotices.

(3)Anypersonwhofailstocomplywithanycirculars,guidelinesornoticesissued

by theBankunder subsection (1) commitsanoffenceandshallonconvictionbe

liabletoafinenotexceedingthreemillionringgit.

Based on thewordings of section59 (1) of theCBMA2009 above, it is apparent that

circulars,guidelinesorotherrulesissuedbyCBMareinaccordanceorconformitytothe

advicesbytheSACastheadvisertoCBMinmattersrelatedtoIslamicbankingbusiness

inMalaysiaandthehighestShariahauthorityofthesame.10

SelectedShariahIssuesorChallengesofIFSA2013

Now that the principal requirements and principles have been laid down above, it is

befittingtoproceedwiththeselectedShariahchallengessurroundingtheIFSA2013and

otherrelevantlawsonIslamicbanking.Foreasyunderstanding,theissuesorchallenges

willbedissectedunderseparatesubheadingsbelow.

1.FinalauthorityonShariahrelatedmattersinIFI:theBoardorSC?

10As earlier mentioned, section 28 (2) of IFSA further reinforces the SAC’s authoritative position bystatingthat,‘ForthepurposeofthisAct,acompliancewithanyrulingoftheShariahAdvisoryCouncilinrespectofanyparticularaimandoperation,business,affairoractivityshallbedeemedtobecompliancewithShariahinrespectofthataimandoperations,business,affairoractivity.’



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WehaveseentherequirementfortheestablishmentofaninternalSCforitsfunctionsas

adviser to the Board of the IFI as well as ‘executor’ of the SAC’s rulings and other

guidelinesorcircularsissuedbyCBM.Asimplelookatthesefunctions,whichareinsync

withtheprincipalaimofIFSA2013i.e.Shariahcompliance,itiseasyforonetoforma

presumptionthattheSCshallhavethefinalauthorityonstrictlyShariahrelatedmatter

orissuethatmayariseinanIFI.However,inactuality,thepositionisslightlyhazyand

not very straightforward. A close observation on the related laws concerning the

authoritytomakedecisionsonShariahmattersbetweentheBoardandSCwillarriveat

divergingfindings.Belowaretheargumentsinsupportoftheaboveproposition:

i)TheBoardasultimatedecisionmakerincludingonShariahrelatedmatters

Paragraph2.1oftheCBMSGFclearlyidentifiestheBoardastheresponsiblebodythat

carries the ultimate accountability for the overall Shariah compliance by an IFI as

detailedoutinparagraph2.1oftheSGFinbelow:

2.1 The board is ultimately accountable and responsible on the overall Shariah

governance frameworkandShariahcomplianceofthe IFI, by putting in place

theappropriatemechanismtodischargetheaforementionedresponsibilities.

Hence, it is theBoardwith theburden toensureShariahcomplianceby the IFIwhich

alsoimpliesthattheBoardpossessestheultimaterighttodecideonmattersrelatedto

Shariah,asrightsalwayscommensuratewithaccountabilities.Further,section65(2)(f)

ofIFSA2013acquaintsuswiththeunderstandingthattheBoardisonlyrequiredtotake

‘dueregard’ofthedecisionorviewsbytheSC.Section65(2)(f)ofIFSA2013stipulates:

65.Functionsanddutiesofboardofdirectors

(2)Withoutlimitingthegeneralityofsubsection(1),theboardofdirectorsshall‐

………



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(f) havedue regard toanydecisionof theShariah committee onanyShariah

issue relating to the carrying on of business, affairs or activities of the

institution.

‘Due regard’ from its plain language11indicates that the Board is expected to take

appropriate or adequate consideration of the SC’s views on Shariah related matters

priortodrawingitsowndecision,which,intheBoard’sopinionbestsuitstheIFI’saims

andoperations.There isnootherprovision in IFSA2013 to suggest that theBoard is

boundorexpectedtoadheretotheadvicesorrulingsputforthbytheSCalthoughwe

mightfindevidencetosupportotherwisefromSGFofCBM.

ii)SC’sdecisions,viewsandopinionsbindtheIFI

TheCBMSGFunderparagraph2.7notonlyexplicitlystatesthattheBoardis‘expected

torelyontheSConallShariahdecisions,viewsandopinions’butfurtherstatesthatthe

decisions,viewsandopinionsareinfactbindingupontheIFI.Paragraph2.7ofCBMSGF

quotedinverbatimbelow:

2.7 The Shariah Committee shall be responsible and accountable for all its

decisions, views and opinions related to Shariah matters. While the board

bearstheultimateresponsibilityandaccountabilityontheoverallgovernance

of the IFI,theboardisexpectedtorelyontheShariahCommitteeonallShariah

decisions, viewsandopinionsrelatingtothebusinessoftheIFI. As the Shariah

decisions, views and opinions bind the operations of the IFI, the Shariah

Committee is expected to rigorously deliberate the issues at hand before

arrivingatanydecisions.

From the above, one may infer that the Board is to adopt the decisions or views

suggested by the SC as they bind the operations of the IFI. In furtherance to above,

paragraph3.3,SectionIII:IndependenceoftheCBMSGFstatesthat:

11The Oxford dictionary defines ‘due’ as “expected” or “of proper quality or extent” and ‘regard’ as“considerorthinkofinaspecifiedway”or“attentiontoorconcernforsomething”.Bothdefinitionsareobtainable from http://www.oxforddictionaries.com/definition/english/due andhttp://www.oxforddictionaries.com/definition/english/regard.



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3.3 TheBoard shallensurethatdecisionsmadebytheShariahCommitteeareduly

observed and implemented by the IFI. Decisions made by the Shariah

Committeeshouldnotbesetasideormodifiedwithoutitsconsent.

IfonechoosestosaythattheBoardisonlyrequiredtoconsulttheSCforviewsasmere

guidance, one should have a second look at the above paragraph 3.3 of CBM SGF as

decisionsreachedbytheSConShariahmattersorissuesshallbeimplementedbytheIFI

and not to be ‘belittled’ or set aside in anywaywithout the SC’s consent. Itmust be

rememberedthattheSCshallgraduallyreporttotheBoardofitsdecisionswhichmeans

thattheSC,inthiscontext,isthefinaldecisionmakeronthoseShariahmattersreferred

to by theManagement of the IFI for decisions.12Further, it does not need a reminder

that the Board is to act in accordance with IFSA 2013 and other relevant laws

enforceableatthatgiventimeaspersection65(1)ofIFSA2013belowandthusobliged

toobservetheguidelinesintheCBMSGF.Section65(1)ofIFSA2013stipulates:

65.Functionsanddutiesofboardofdirectors

(1) The business and affairs of an institution shall be managed under the

directionandoversightof itsboardofdirectors,subjecttothisActandanyother

writtenlawwhichmaybeapplicabletotheinstitution.

An IFI or the Board must be careful as not to exert any influence on the SC in its

decisionsastheSCmustbeallowedtomaintainitsindependenceatalltimesasstatedin

paragraph3.1ofSectionIIIofCBMSGFbelow:

3.1 The board shall recognise the independence of the Shariah Committee and

ensurethatthecommitteeisfreefromanyundueinfluence thatwouldhamper

12Paragraph1.6ofPart2,SectionIoftheCBMSGFstatesthat,“TheIFIshallestablishformalreportingchannel(s) among the key functions to ensure that the reporting on Shariah matters is carried outeffectively and on timely manner. In this regard, theShariahCommittee shall functionallyreport to theboardofdirectors.”Hence,ShariahrelatedmattersthatrequireresolutionswillcometotheSCpriortotheBoardoftheIFI.



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the Shariah Committee from exercising objective judgment in deliberating

issues brought before them. Correspondingly, the Shariah Committee is

expected tomake sounddecisions on Shariahmatters inan independentand

objectivemanner.

One may argue that since the expertise of Shariah lies with Shariah Committee, it is

natural that the Board shall always rely on the Shariah Committee in its decision

regardingShariahcompliant.Nevertheless, is itallowedfortheBoardnottoadoptthe

opinionoftheSC,insteadobtaininganotherparty’sopinionandadoptit?Byprovisionof

SGF, the answer is explicitly negative. However, if the provision of IFSA 2013 is

considered, onemay argue that the Board shall be given the final authority tomake

decisionsevenonShariahmattersas IFSAonly saysBoard tohave legalobligation to

“takedueregard”onlytotheopinionoftheSC,evenonShariahmatters.

2.AssuranceofShariahcompliance:theBoard’sorSC’smainresponsibility?

ThereisnodisputethatIFIsmustatalltimesbeincompliancewithShariahasspelled

outinsection28(1)ofIFSA2013below:

28.DutyofinstitutiontoensurecompliancewithShariah.

(1)Aninstitutionshallatalltimesensurethatitsaimsandoperations,business,

affairsandactivitiesareincompliancewithShariah.

Anykindof breachornon‐adherenceof the aboveprovision i.e. non‐compliancewith

Shariahwouldinvokegrievouspenaltyaspersection28(5)IFSA2013:13

13AbreachofShariahcomplianceunderIFSAwouldtantamounttoaharsherpunishmentasprescribedundersection28(5)ofIFSA2013incomparisontoabreachofShariahrelatedguidelinesorrulingsbytheSACorCBMasstipulatedinsection58(3)CBMA2009withtheadditionalof(1) imprisonmentupto8yearsor(2)higherpecuniarypunishmentofuptoRM25millioninsteadofRM3millionunderCBMA2009or (3)both.Section58 (3)ofCBMA2009states that, “Anypersonwhofailstocomplywithanycirculars,guidelinesornoticesissuedbytheBankundersubsection(1)commitsanoffenceandshallonconvictionbeliabletoafinenotexceedingthreemillionringgit”.



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(5)Anyperson who contravenes subsection (1) or (3) commits an offence and

shall, on conviction, be liable to imprisonment for a term not exceeding eight

yearsortoafinenotexceedingtwenty‐fivemillionringgitortoboth.14

However, the question to pose is, who in the IFI bears the ultimate responsibility of

ensuringShariahcomplianceandconsequentiallybeliableundersection28(5)ofIFSA

2013followingabreachorShariahnon‐compliance?WillitbetheBoardbeingthetop

decisionmaker in the IFIorSCasadviser to theBoardonmatters thatare related to

Shariah?

EventhoughthispaperworkisconfinedtotheBoardandSC,itisworthnoting,thatthe

term ‘any person’ in section 28 (5) of IFSA 2013 above suggests that anyonewho is

involvedinthedecisionmakingofthematterthatleadstotheShariahnon‐compliance

maypotentiallybetriedandconvictedundersection28ofIFSA2013i.e.fromtheBoard

down to the frontline officers who may have ‘contributed’ to the Shariah non‐

compliance.

i)TheBoardhasultimateaccountabilitytoensureShariahcompliance

As seenearlierunder section65 (1)of IFSA2013andparagraph2.1ofCBMSGF, the

Board is of the responsibility to ensure Shariah compliance by an IFI. Hence,

undoubtedly,theBoardissubjectedtotherelevantpunishmentsprescribedundereach

law.15

ii)DoesSCsharesameaccountabilityastheBoardforShariahnon‐compliance?

14Ultimately, the IFImay lose its license to be in operation as per section 18 (1) of IFSA 2013whichstipulates that, “18. (1)TheMinistermay, on the recommendationof theBank, revoke the licence of alicensedperson,andtheBankmayrevoketheapprovalofanapprovedperson,onthegroundsthat—(a)thepersonispursuingaims,orcarryingonitsoperations,business,affairsandactivitiescontraryto

Shariah;”15IFSA 2013 imposes a heavier legal burden on the Board to take accountabilities in ensuring strictShariah compliance of an IFI including implementation of Shariah rulings, effective communications,soundShariahcompliantbusinessoperations,andetc.



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It is well established and accepted that rights always commensurate with liabilities.

Hence,itisfairtosaythattheSCshalltakeresponsibilitiesoftheviewsorrulingsissued

toanIFI.Suchissupportedbyparagraph2.7oftheCBMSGFextractedbelow:

2.7 The Shariah Committee shall be responsible and accountable for all its

decisions,viewsandopinionsrelatedtoShariahmatters.

However, the concern raised is in situations where the SC has appropriately and

sufficientlyadvisedtheIFIanditsBoardonaShariahrelatedmatterbutisonewhichis

not considered to be in the best interest of the IFI and thus ‘altered’ by the Board in

accordancewiththepowergrantedtoitbyvirtueofsection65(2)(f)ofIFSA2013and

paragraph2.1,SectionIIofCBMSGFdespitethelettersofparagraph3.3,SectionIIIof

the CBM SGF16, as discussed at length earlier. In such circumstances, will the SC be

considered to have discharged its duties satisfactorily or will it be forced to face the

harsh punishments under IFSA2013? Is it fair to presume that if the SC does not in

actualityhavetheauthoritytomakethefinaldecisiononmattersrelatedtoShariah,the

SC is hence absolved from its responsibility to ensure actual implementation of the

issuedShariahrulingsasdemandedundersection28(1)of IFSA201317which is thus

passed to the Board? This is another area that could benefit from clarification by the

authority.

iii)ContraventionofIFSA2013mayresulttoterminationofSC’smembership

OtherthanthepunishmentswehaveseenunderIFSA2013,thereisaspecificprovision

in theAct thatempowersCBMuponconsultationwith theSAC18to terminate theSC’s

16Notetheparagraph3.3ofCBMSGFprohibitsanyformofalterationoftheSC’sviewswithouttheSC’sconsent. Paragraph 3.3 of CBM SGF states, “The Board shallensure thatdecisionsmadeby theShariahCommitteearedulyobservedandimplementedbytheIFI.DecisionsmadebytheShariahCommitteeshouldnotbesetasideormodifiedwithoutitsconsent.17Section 28 (1) of IFSA 2013 requires “An institution shall at all times ensure that its aims andoperations,business,affairsandactivitiesareincompliancewithShariah”.18Paragraph 3.8 of CBM SGF laid down the foundation that the SAC alongside CBMmust approve anydecision to remove any SCmember. Paragraph 3.8 of the CBM SGF states, “All appointments includingreappointment,resignationandremovaloftheShariahCommitteemembersshallbemadebytheBoard,subjecttotheapprovalbytheBankandtheSAC.”



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membership if the SC is found to have breached or not complywith any provision of

IFSA2013i.e.section33(4)(a)thatisgeneralandwideenoughtocoverbothdeliberate

orunintentionalacts.Section33(4)(a)stipulates:

33.CessationasmemberofShariahcommittee.

(3) An institution shall not terminate the appointment of a member of its

Shariahcommitteeunlesstheinstitutionhasobtainedpriorwrittenapproval

todoso.

(4) Subject to section 273, the Bank may, by order in writing, remove a

memberofaShariahcommitteeiftheBankisoftheopinionthat‐

(a) such member has contravened any provision of this Act or failed to

complywithanystandardsapplicabletohim.

iv)ShariahmattersunresolvedbytheSCtobeescalatedtotheSAC

WithregardtoShariahissuesormattersthatcouldnotberesolvedbytheSC,theCBM

SGF,underitem7ofAppendix4,statesthattheSCmayadvicetheIFItoconsulttheSAC

forresolutionsorrulings:

7. AdviseonmatterstobereferredtotheSAC TheShariahCommitteemayadvisetheIFItoconsulttheSAC onShariahmatters

thatcouldnotberesolved.

However,inlightoftheprovisionsofIFSA2013,itseemsthatthis‘option’providedto

theSChasbecomeanobligationwhich failuremaytantamount toabreachof theAct.

Forexample,section29(4)ofIFSA2013stipulates:

29.PowerofbanktospecifystandardsonShariahmatters

(4)Everyinstitutionshallatalltimes—

(a)ensurethatitsinternalpoliciesandproceduresonShariahgovernanceare



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consistentwiththestandardsspecifiedbytheBankunderthissection;and

(b) whether or not standards have been specified by the Bank under this

section,manageitsbusiness,affairsandactivitiesinamannerwhichisnot

contrarytoShariah.

TheaboveprovisionofIFSA2013demonstratesthatanydeviationfromShariah,which

maypotentiallyresultfromanunresolvedShariahmatter,mayimplicatetheSC.Hence

the SC must take the necessary steps to ensure that its duties are properly and

satisfactorilydischargedundertheAct.

3.AdequatecompetenciesoftheSC

IFSA 2013 does not detail out the expected functions and scope of duties and

responsibilities of the SC. It merely provides that CBM has the power to specify

standardsinrelationtoShariahwhichmustbeadheredto.Henceonemustgobackto

theCBMSGFtolookatthelistofduties,rights,functionsandaccountabilitiesoftheSC.

i)OversightfunctionviaShariahauditandShariahreview

Paragraph 2.8, Section II of CBM SGF underlines the oversight role of SC via Shariah

reviewandShariahauditfunctionswhichrequiretheSCtoidentifyissuesandpropose

appropriatesolutions19,asbelow:

2.8 The Shariah Committee is expected to perform anoversightroleonShariah

mattersrelated to the institution’s business operations and activities. This

shallbeachieved throughtheShariahreviewandtheShariahauditfunctions.

Regular Shariah review reports and the Shariah audit observations should

enable theShariahCommittee to identifyissuesthatrequireitsattentionand

whereappropriate,toproposecorrectivemeasures.

19Item5ofAppendix4,CBMSGFstatesthatSCisto,“ToassesstheworkcarriedoutbyShariahreviewandShariahauditinordertoensurecompliancewithShariahmatterswhichformspartoftheirdutiesinprovidingtheirassessmentofShariahcomplianceandassuranceinformationintheannualreport.“



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ii)SufficientknowledgeinIslamicfinanceandgeneralfinance

OtherthanShariahreviewandShariahauditfunctions,theSCisfurtherexpectedtohold

sufficientknowledgeonnotonlyIslamicfinancebutalsofinanceingeneraltoensureits

effectivenessindeliberatingissuesbroughtforthbytheIFI.Paragraph4.1,SectionIVof

CBMSGFstates:

4.1 Theboardandmanagementareexpectedtohavereasonableunderstanding

ontheprinciplesoftheShariahanditsbroadapplicationinIslamicfinance.

TheShariahCommittee isexpectedtohavesufficientknowledgeon finance in

general,andIslamicfinanceinparticular,toenabletheShariahCommitteeto

comprehend Shariah issues brought before them. The Shariah Committee

members are expected to constantly equip themselves with relevant

knowledge on Shariah and finance as well as attend relevant training

programs.

iii)Adequatelegal,marketingandsalesknowledge

Adequate knowledge in legal,marketing and sales are required for the SC in order to

exhaust its advisory function in determining Shariah compliance of legal documents,

marketingandsalesincludingadvertisementsaswellascampaignsofIslamicproducts

offeredbyanIFIallofwhichmustreceiveendorsementsbytheSCbeforetheycanbe

launchedorexecuted.Item4,Appendix4oftheCBMSGFstatesthat:

4.Endorseandvalidaterelevantdocumentations

To ensure that the products of the IFI comply with Shariah principles, the

ShariahCommitteemustapprove:

i) the terms and conditions contained in the forms,contracts,agreementsor

otherlegaldocumentationsusedinexecutingthetransactions;and



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ii) the product manual, marketing advertisements, sales illustrations and

brochuresusedtodescribetheproduct.

Fromtheabove,itisclearthattheexpectedskillsandknowledgeoftheSCishighasthe

SC is required topossessadequateor sufficientknowledge inShariah review,Shariah

audit,Islamicfinance,finance,law,marketingandsales.

iv)ActiveparticipationrequiredofSC

Recognising the heavy responsibilities placed in the SC, the law requires that all

informationsubmittedtotheSCisaccurateandcomplete.Toillustratethis,section35of

IFSA2013stipulates:

35. (1) An institution and any director, officer or controller of such institution

shall—

(a) provideanydocumentorinformationwithinitsorhisknowledge,orcapableof

beingobtainedbyitorhim,whichtheShariahcommitteemayrequire;and

(b) ensurethatsuchdocumentor informationprovidedunderparagraph(a) is

accurate,complete,notfalseormisleadinginanymaterialparticular,

to enable the Shariah committee to carry out its duties or perform its functions

underthisAct.

Similarly,paragraph2.12,SectionIIofCBMSGFstates:

2.12 Given that the accountability of Shariah decisions rests with the Shariah

Committee,themanagementisexpectedtoprovideinformationanddisclosure

whicharecompleteandaccuratetotheShariahCommitteeinatimelymanner,

andshallbetransparent on any areas thatneed clarificationby the Shariah

CommitteetoenabletheShariahCommitteetodischargeitsdutieseffectively



17

However,havingsaidtheabove,theSCmustunderstanditsrolesandhenceshallhave

therighttorequestforadditionalinformationrequiredinordertoarriveattheaccurate

decisionsorresolutions.Tothiseffect,paragraph3.4,SectionIIIoftheCBMSGFstates

that:

3.4 The Shariah Committee shall have access to accurate, timely and complete

information fromthemanagement. Iftheinformationprovidedisinsufficient,

theShariahCommitteemayrequest foradditional informationwhichshallbe

dulyprovidedbythemanagement.

Infurtherancetothis,theSCshouldalsobeconsciousofitsrighttoacquireprofessional

assistance from lawyers, accountants and economists for guidance which must be

fulfilledbytheIFI.Paragraph4.3,SectionIVofCBMSGFstates:

4.3 The IFI shall engage other professionals such as lawyers, accountants and

economists to provide appropriate assistance and advice to the Shariah

Committee,especiallyregardingissuesonlawandfinance.

4.RectificationofShariahnon‐compliantevents:reportingtoCBMandtheSAC

Upon the identification of a breach of Shariah or Shariah non‐compliant incident, the

samemustbeimmediatelyremediedbytheIFI.Allnecessarymeasuresandstepsmust

besatisfactorilytakenbytheIFItowardrectifyingtheShariahnon‐complianteventby

firstly notifying its SC and subsequently cease the operation of such event with

immediateeffects.

i)NotificationoftheShariahnon‐complianteventstotheSC,theBoardandCBM

IFSA 2013 under section 28 (3) & (4) specifies the actions required of an IFI in

addressingaShariahnon‐complianteventasfollows:



18

28.DutyofinstitutiontoensurecompliancewithShariah.

(3) Where an institution becomes aware that it is carrying on any of its

business,affairoractivityinamannerwhichisnotincompliancewithShariah

ortheadviceofitsShariahcommitteeortheadviceoforrulingoftheShariah

AdvisoryCouncil,theinstitutionshall‐

(i) immediatelynotifytheBankanditsShariahcommitteeofthefact;

(ii) immediatelyceasefromcarryingonsuchbusiness,affairoractivityand

fromtakingonanyothersimilarbusiness,affairoractivity;and

(iii) within thirty days of becoming aware of such non‐compliance or such

furtherperiodasmaybespecifiedbytheBankaplanontherectification

ofthenon‐compliance.

(4)TheBankmaycarryoutanassessmentasitthinksnecessarytodetermine

whether the institution has rectified the non‐compliance referred to in

subsection(3).

To sum up the above provision in a simpler manner, the IFI is required to (1)

concurrently notifyCBMand its SC of the identified Shariahnon‐compliant event; (2)

ceasesuchShariahnon‐compliantbusinessoractivity;(3)submitarectificationplanto

addresstheShariahnon‐complianteventtoCBMwithin30days.(4)Anassessmentmay

be conducted post rectification by CBM to satisfy the effectiveness of the rectification

plan.

Similarly,theCBMSGFprovidesinparagraph2.17,SectionIIataslightlygreaterdetail,

thereportingprocessbelow:



19

2.17 In the event the management becomes aware that certain operations are

found tobe carryingoutbusiness(es)which is(are)not in compliancewith

Shariah,oragainsttheadviceofitsShariahcommittee,ortherulingsofthe

SAC,themanagementshall:

(i)immediatelynotifytheboardandShariahCommitteeaswellastheBank

ofthefact;

(ii) immediately cease on to take any new business related to the Shariah

non‐compliantbusiness;and

(iii) within thirty (30) days of becoming aware of such non‐compliance or

suchfurtherperiodasmaybepermittedbytheBank,furnishaplantorectify

the state of non‐compliance with the Shariah, to be duly approved by the

boardandendorsedbytheShariahCommittee.

Theslightdeferenceinthe2provisionsabovelieinsteps(1)and(3)whereintheCBM

SGFincludestheBoardasapartytobenotifiedalongsideCBMandtheSCin(1)andthat

thesubmittedrectificationplantoCBMin(3)mustbeonethatisapprovedbytheBoard

andendorsedbytheSC.Havingsection7(2)of IFSA201320inmind,wecanconclude

thatthese2provisionscomplementeachotherthusallowingtheadoptionofastricter

reportingprocessi.e.underCBMSGF.AlthoughtheprocessesdepictedinbothCBMSGF

andIFSA2013areclear,theactualexecutionoftheprocessmaybeburdensomeonthe

IFIs,especiallytheoneswithabigoperationsize.

Normally, a potential Shariah non‐compliant event is escalated to the SC by the

ManagementofanIFI.TheSCwillthenassessanddeliberateonwhetherthepotential

Shariahnon‐compliant event is in fact actual Shariahnon‐compliant event,whichwill

then be reported to the Board for the Board’s cognizance. Subsequent to that, the

20Section7(2)of IFSA2013stipulates, “(2)Thepowersandfunctionsof theBankunderthisActare inaddition to, and not in derogation of, the powers and functions of theBank under the Central BankofMalaysia2009.”



20

Management will propose a rectification plan to the SC for endorsement and to the

Board for approval prior to submission of the same to CBM. All thesewill take place

within30daysfromtheconfirmationoftheactualShariahnon‐complianteventbythe

SC.Now, ifwe lookat theprocessdrawn inCBMSGFaswell as IFSA2013, the IFI is

required to concurrentlynotifynot just itsBoard andSCbut alsoCBMof the Shariah

non‐compliant event which at this juncture is a mere ‘potential’ breach pending the

confirmation by its SC. Therefore, the biggest concern by the IFI on this prescribed

processisontheunnecessarycomplicationarisingfromthe‘premature’notificationto

CBMifthesuspectedShariahnon‐complianteventisfoundtobeShariahcompliantby

theSCoftheIFI.ThiswillsurelyinvolveaseriesofinternalprocessesintheIFIthatwill

besuretobetimeconsumingandcostineffective.ThenextquestiontoaskisifCBMis

indeed to be notified concurrently, will this mean that the 30 days period for the

submissionofthedulyapprovedrectificationplanrunfromthedateofthenotification

to CBM? If such is the case, then the larger IFIs are at risk of breaching the 30 days

periodrequirement.

ii)SCtoinformCBMofineffectiveorinadequaterectificationmeasures

TheSCofanIFIcarriesanextraresponsibilityrelatedtothereportingofaShariahnon‐

compliantactivityi.e.theSCisrequiredtoinformtheBoardofthesametogetherwith

the proposed corrective measures for the Board’s consideration and approval.

Paragraph3.6oftheCBMSGFstates:

3.6 Where the Shariah Committee has reason to believe that the IFI has been

carrying on Shariah non‐compliant activities, the Shariah Committee shall

informtheboardandtorecommendsuitablemeasurestorectifythesituation.

ThesaidresponsibilityoftheSCdoesnotendwiththenotificationtotheBoard.TheSC

is further required toescalate theShariahnon‐compliant activity toCBM in the event

that the same isnot effectively addressedornot rectified asperparagraph3.7 of the

CBMSGFbelow:



21

3.7 In cases where Shariah non‐compliant activities are not effectively or

adequatelyaddressedornorectificationmeasuresaremadeby the IFI, the

ShariahCommitteeshallinformtheBankofthefact.

Although the above rightfully signifies the SC’s independence, its execution may be

challengingfortheSCasinrealitytheSCreportstotheBoardandtheSC’sremuneration

aswellascontinuationoftermissubjectedtotheBoard’sapproval.

5.ProtectionoftheBoardagainstpenaltiesunderIFSA2013:IsSCaccordedthesame?

IFSA2013mayoffersomedegreeofcomforttotheBoardofanIFIparticularlyfromthe

wordsofsection66(1)(b)&(c)thatmaysavetheBoardfrombeingtriedforabreach

ofShariahcomplianceiftheBoardcanprovethatithasactedingoodfaithandexercised

reasonable amount of care, skill and diligence in arriving at any decision related to

Shariah.Section66(1)(b)&(c)ofIFSA2013stipulates:

66.Dutiesofdirectors.

(1)Adirectorofaninstitutionshallatalltimes‐

(b) actingoodfaithinthebestinterestsoftheinstitution;

(c) exercisereasonablecare,skillanddiligencewith–

(iv) the knowledge, skill and experience which may reasonably be

expectedofadirectorhavingthesameresponsibilities,and;

(ii) any additional knowledge, skill and experience which the director

has.

However,thereisnoequivalentprovisionunderIFSA2013toaccordthesametotheSC.

DoesthismeanthattheActisoftheintentiontoplaceaheavierburdentotheSCdueto

the higher skills set expected of SC in regards to the Shariah? The only ‘exemption’



22

enjoyablebytheSCistheimmunityagainstanydefamationsuitinrespectofstatements

madewithoutmalice in the course of discharging its duties. Section 36 of IFSA 2013

stipulates:

36.Qualifiedprivilegeanddutyofconfidentiality.

AmemberofaShariahcommitteeshallnotbeliable–

(b)tobesuedinanycourtfordefamationinrespectofanystatementmade

bythememberwithoutmalice in thedischargeofhisdutiesunderthis

Act.

Outside the Act, protection to the Board may be available in the form of ‘insurance’

providedbyrespectiveIFIsagainstanypecuniarypunishmentunderIFSA2013.Asthis

is a voluntary initiativeundertakenby the IFIs i.e. notprescribedby the law, it is the

prerogative of the IFIs to whether or not extend the same protection to their SC

members.Giventhe importanceandcontributionof theSCtowardthebusinessof the

IFIs, it is strongly suggested that the SC be accordedwith the sameprotection as the

BoardoftheIFIs.

6.PublicinterestasgroundofrevocationofIFI’slicense

The voice of Islamic banking consumers has always been heard and plays a part in

helping shape the operations of Islamic banking as we see today. Building public

confidence is an important key towards establishing a strong foundation of Islamic

bankingwhichaimistoideallybringbackgoodtothepublic.Itisrecognisedthatpublic

confidencemaybeestablishedbydisplayingacloseobservanceofthetenets,conditions

andprinciplesofShariahintheordinaryoperationsofIslamicbankingasmaybeseenin

paragraph1.1ofPartI:OverviewoftheSGFCBMbelow:

1.1 Shariah principles are the foundation for the practice of Islamic finance

throughtheobservanceofthetenets,conditionsandprinciplesespousedby



23

Shariah. Comprehensive compliance with Shariah principles would bring

confidencetothegeneralpublicandthefinancialmarketsonthecredibilityof

Islamicfinanceoperations.

Theamplified ‘voice’of thepublic iswell reflected in IFSA2013undersection6 (b)21

apart from one whole part dedicated to the same i.e. Part IX Business Conduct and

ConsumerProtectionwithamuchmore significant legal impact to IFIs.However, this

paperworkwouldliketohighlightaprovisionunderPartIIIAuthorisation,Division4of

IFSA2013,inparticularsection18(1)(i)whichindicatesthepowerofpublicconfidence

as it clearlystipulates that theMinistermayrevoke the licenseofan IFI following the

recommendationofCBMonthegroundof‘theinterestofconsumers’:

18.(1)TheMinistermay,ontherecommendationoftheBank,revokethelicenceof

alicensedperson,andtheBankmayrevoketheapprovalofanapprovedperson,on

thegroundsthat—

(i)itisintheinterestofconsumersoffinancialservicesand�productstodoso.

PotentialWaystoResolveShariahChallengesofIFSA2013

1.Applicabilityofthelaw

Itishardtoforeseeanyrejectionornon‐acceptanceofthefactthatIFSA2013andthe

CBM SGF complement each other22. However, it may help to clear doubts and

conflictionsbetweenthe2authoritiesifthefollowinginitiativesaretaken.

i)IFSA2013orSGFtotakeprevalence?

Itisclearfromsection7(2)ofIFSA201323thatIFSA2013istoaccordadditionalpower

toCBMthusindicatingthattheexistingrulingsorguidelinesissuedbyCBMarestillin

21Section6(b)ofIFSA2013stipulatesthat“theprincipalregulatoryobjectivesofthisActaretopromote

financialstabilityandcompliancewithShariahandinpursuingtheseobjectives,theBankshall–

(b)strivetoprotecttherightsandinterestsofconsumersofIslamicfinancialservicesandproducts.

22Forexample,refertosection28ofIFSA2013andparagraph2.17ofCBMSGF.



24

force unless otherwisementioned. Therefore, CBM has the power to state the law or

rulestotakeprevalence,especiallywhenthereisaconflictingorvariedruleonasimilar

item.Forexample,section65(2)(f)of IFSA2013requirestheBoardtoonlytake ‘due

regard’of theSC’sdecisiononShariahrelatedmatters.However,paragraph3.3of the

CBM SGF clearly states that the Board is to ensure that the SC’s decisions are duly

implementedbytheIFIwithoutanyalteration24.Bothauthoritiesareprovidedbelow:

65.Functionsanddutiesofboardofdirectors(ofIFSA2013)

(2)Withoutlimitingthegeneralityofsubsection(1),theboardofdirectorsshall‐

………

(f) havedue regard toanydecisionof theShariah committee onanyShariah

issue relating to the carrying on of business, affairs or activities of the

institution.

vis‐à‐vis:

Paragraph3.3,SectionIII:IndependenceoftheCBMSGF:

3.3 TheBoard shallensurethatdecisionsmadebytheShariahCommitteeareduly

observed and implemented by the IFI. Decisions made by the Shariah

Committeeshouldnotbesetasideormodifiedwithoutitsconsent.

ii)Updatingtherelevantguidelines

Anothersuggestionisfortherelevantguidelines,inthiscontext,theCBMSGFtobeduly

updatedtobeinlinewiththechangesorupdatesmadetosimilaritemsthatarecovered

underIFSA2013.Tostatetheobvious,CBMSGFstillhasitsscopeofapplicationlimited

to “an Islamic bank licensed under Islamic Banking Act 1983 (IBA), a takaful and

23Refertofootnoteno.20.24An indepthdiscussionmaybefoundunderItem1oftheselectedShariahchallengesof IFSA2013ofthispaperwork.



25

retakaful operator registered under the Takaful Act 1984 (TA), a financial institution

licensedundertheBankingandFinancialInstitutionsAct1989(BAFIA)thatparticipates

intheIslamicBankingScheme;andadevelopmentfinancialinstitutionprescribedunder

theDevelopmentFinancialInstitutionsAct2002(DFIA)thatparticipatesintheIslamic

BankingScheme.”25

2.BridgingthegapbetweentheBoardandSC

Aneffectivewaytoaddressthe‘discrepancies’inthedecisionsmadebytheBoardand

theSConShariahrelatedmattersthatmaygiverisetotheissueoftheultimatedecision

maker discussed at length earlier is by adopting the suggestion under CBM SGF,

paragraph2.4whichstates:

2.4 Theboardmayconsiderappointingat leastone (1)memberof theShariah

Committeeasamemberoftheboardthatcouldserveasa ‘bridge’betweenthe

board and the Shariah Committee. The presence of a director with sound

Shariah knowledge would foster greater understanding and appreciation

amongsttheboardmembersonthedecisionsmadebytheShariahCommittee.

Asprecisely statedabove, thepresenceof adirectorof theBoardwith soundShariah

knowledge would foster greater understanding and appreciation amongst the Board

members on the decisionsmade by the SC thus avoiding differing views between the

BoardandtheSC.

Conclusion

IFSA 2013 is the landmark of a robust development and establishment of the Islamic

banking business and operations in Malaysia. However it must be realised that IFSA

2013isnotastand‐aloneActbutrathercomplementedbytheexistinglawsuchasthe

CBMA 2009 and CBM SGF. There are several challenges related to an effective

25Asperparagraph3.1oftheIntroductionofCBMSGF



26

compliancetoShariahunderIFSA2013,viewedfromtheperspectiveofanSCmember

such as conflicting authority between the Board and SC on Shariah related matters,

superiorityoftheSC’sdecisionsonShariahmattersintheIFI,sharedaccountabilitiesof

Shariahnon‐compliant eventsorbreachof theAct aswell as the implicationsof such

breachontheSC.Otherthanthese,concernsarealsoraisedonissuesconnectedtothe

adequacyoftheSC’scompetenciesindischargingitsdutiesundertheAct,rectificationof

Shariah non‐compliant events and the protections available to the SC against the

provisionsofIFSA2013.

Several suggestions that may be considered in overcoming the identified Shariah

challengesabove includedeterminationof theprevailing lawbytheauthority,gradual

updates of the existing guidelines to be in line with IFSA 2013 as well as the

appointmentofanSCmemberasadirectortoclosethegapbetweentheBoardandthe

SC by enhancing the appreciation of Shariah by the earlier with the presence of the

latter.

TheselectedShariahchallengesdiscussedatlengththroughoutthispaperworkshallnot

be viewed as flaws but rather taken as a challenge to tighten the existing laws and

regulationsofIslamicbankinginMalaysiatoinsureabrighterfutureoftheindustry.

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