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Lesson Outcome

Explain the roles and responsibilities of local

and international regulatory bodies and
standard setters of Islamic Financial Institutions
Compare and contrast the Shariah governance
framework of Bank Negara Malaysia (BNM) and
Islamic Financial Services Board (IFSB).
Summarise the salient points in Shariah
governance standards issued by AAOIFI.
Who are the Shariah Governing

Bank Negara Malaysia
Securities Commission
International level
Bank Negara Malaysia
SACs effort to regulate IFI on Shariah &
corporate governance
Resolutions of Shariah Advisory Council of Bank
Negara Malaysia
Guidelines on Corporate Governance for
Licensed Islamic Banks (revised BNM/GP1-i)
Guidelines on the Governance of Shariah
Committee for Islamic Financial Institutions
Shariah Governance Framework for Islamic
Financial Institutions
Guidelines on Corporate Governance for
Licensed Islamic Banks (revised
Promotes the adoption of effective and high standards
of corporate governance practices by Islamic bank
Formulated based on the fundamental concepts of
responsibility, accountability and transparency, with
greater emphasis on the role of the board and
The Guidelines contained broad principles dealing
Board matters;
Management oversight;
Accountability and audit; and
14 Principles
14 principles
Shariah Governance Framework for
The primary objective is to:
enhance the role of the Board, the Shariah
Committee or Shariah Supervisory
Board and the management in relation to
Shariah matters.
enhancing the relevant key organs having the
responsibility to execute the Shariah
compliance and research functions to achieve a
Shariah-based operating environment
Key organs in SGF
Key organs Functions

Board of directors Oversee on Shariah compliance aspect of the IFIs overall operations. Here, the board is
ultimately responsible for establishing an appropriate Shariah governance framework for an
IFI. The board is expected to understand the Shariah non-compliance risk associated with
Islamic finance business and its implications to the IFI.

Shariah Committee or Consist of qualified members with Shariah background who are able to deliberate Islamic
Shariah Supervisory finance issues and provide sound Shariah decisions.
Management Responsible to provide adequate resources and capable manpower support for every function
involved in the implementation of Shariah governance. This is to ensure that the business
operations are executed in accordance with the Shariah.

Shariah Review This practice should be conducted on a continuous basis. This review should cover processes
and deliverables as well as determining that they satisfy the needs of the Shariah.

Shariah Audit This audit should be done on an annual basis to verify that the IFIs key functions and
business operations comply with Shariah.

Shariah Risk To practice shariah risk management process to identify all possible Shariah non-compliance
Management risks and take remedial measures to reduce the risk.

Shariah Research To develop an internal Shariah research team to conduct research on Shariah.
Securities Commission
Statutory body entrusted with the responsibility of regulating
and systematically developing the Malaysia's capital
It has direct responsibility in supervising and monitoring the
activities of market institutions and regulating all persons
licensed under the Capital Markets and Services Act 2007.
The Shariah Advisory Council (SAC) was established in 1996
under the authority of the Securities Commission Malaysia.
The duty of the council is to advise the Securities Commission on
Islamic capital market operations, standardize and harmonize the
application of Shariah principles and concept and, review Shariah
compatibility with other conventional instruments and new Islamic
Its most important function is to endorse the permissible or
permitted counters in its list of Shariah-compliant securities.
International standard-setting organisation that
promotes and enhances the soundness and stability of
the Islamic financial services industry by issuing global
prudential standards and guiding principles for the
industry, broadly defined to include banking, capital
markets and insurance sectors
IFSB has issued fifteen Standards, Guiding Principles
and Technical Note for the Islamic financial services
Our focus:
IFSB-3: Corporate Governance
IFSB-10: Guiding Principles on Shariah
Governance System
IFSB 3: Corporate Governance
Principle 1.1 IIFS shall establish a comprehensive governance
policy framework which sets out the strategic roles
and functions of each organ of governance and
mechanisms for balancing the IIFSs
accountabilities to various stakeholders.
i. General
approach of Principle 1.2 IIFS shall ensure that the reporting of their financial
IIFS and non-financial information meets the
requirements of internationally recognized
accounting standards which are in compliance with
Shar`ah rules and principles and are applicable to
the Islamic financial services industry as recognized
by the supervisory authorities of the country.
IFSB 3: Corporate Governance

Principle 2.1 IIFS shall acknowledge IAHs right to monitor the

performance of their investments and the associated
risks, and put into place adequate means to ensure
that these rights are observed and exercised.
ii. Rights of
Principle 2.2 IIFS shall adopt a sound investment strategy which is
account holders
appropriately aligned to the risk and return
expectations of IAH (bearing in mind the distinction
between restricted and unrestricted IAH), and be
transparent in smoothing any returns.
IFSB 3: Corporate Governance
Principle 3.1 IIFS shall have in place an appropriate mechanism
for obtaining rulings from Shar`ah scholars,
applying fatw and monitoring `ah compliance in
all aspects of their products, operations and

iii. Compliance with activities.

Islamic `ah rules and

principles Principle 3.2 IIFS shall comply with the Shar`ah rules and
principles as expressed in the rulings of the IIFSs
`ah scholars. The IIFS shall make these rulings
available to the public.

iv. Transparency of Principle 4 IIFS shall make adequate and timely disclosure to
financial reporting in IAH and the public of material and relevant
respect of investment information on the investment accounts that they
accounts manage.
IFSB 10: Shariah Governance System
set of institutional and organizational arrangements through which an
IFI ensures that there is effective independent oversight of Shariah
Issuance of relevant Shariah pronouncements/ resolutions by
Shariah board/committee after going through due processes.
Dissemination of information on Shariah pronouncements/
resolutions to the operative personnel of the IFIs who monitor the
day-to-day compliance with the Shariah
Internal Shariah compliance unit (ISCU) or Shariah compliance
officer who is a part of the IFIs compliance team
Internal Shariah compliance review/audit (ISRU) to verify that
Shariah compliance has been satisfied.
Conduct of an annual Shariah compliance review/audit to verify that
the internal Shariah compliance review/audit has been appropriately
carried out and its findings have been duly noted by the Shariah
IFSB 10: Shariah Governance System
Part I Relates to the general approach to Shariah Governance System, whereby various ex-ante and
ex-post processes considered as essential parts of good governance practices in other
internationally recognized governance standards, such as the precise terms of reference for
Shari`ah boards, appropriate alignment of incentives, proper record-keeping, adoption of a
professional code of ethics, etc., are adapted in order to strengthen the Shari`ah Governance

Part II Suggests various measures to ensure reasonable expertise and skill-sets in `ah boards, and to
evaluate their performance and professional development.

Part III Aims at safeguarding the independence of Shari`ah boards, particularly from the management
of IIFS, by highlighting various issues arising from potential conflicts of interest and
recommending how they should be managed.
Part IV Emphasizes the importance of observing and preserving confidentiality by the organs of Shariah
Part V Focuses on improving consistency in terms of the professionalism of members of the Shariah
board, which would be crucial in enhancing their credibility and confirming their integrity
through a set of best practices.
Bahrain-based main international organization that
formulates and publishes accounting, auditing, ethics,
governance and Shariah standards for the Islamic
finance industry.

Standard Number Details

Governance Standard for IFI No. 1 Shariah Supervisory Board: Appointment,

(GSIFI-1) Composition and Report

Governance Standard for IFI No. 2 Shariah Review


Governance Standard for IFI No. 3 Internal Shariah Review

GSIFI 2: Shariah Review
Assist SSB of IFI in performing Shariah reviews to ensure compliance
with Islamic Shariah rules and principles.
This standard requires close coordination between the SSB and the
external auditor. The standard explained on the following important
Definition and principles of Shariah review
Shariah review is an examination of the extent of the IFIs
compliance in all its activities, with the Shariah. This examination
includes contracts, agreements, policies, products, transactions,
memorandum and articles of association, financial statements,
reports (especially internal audit and central bank inspection),
circulars etc.
Objective of the review is to ensure that the operation of the IFI
do not contravene the Shariah.
GSIFI 2: Shariah Review
Responsibility for compliance with the Shariah
It is the management responsibility to comply with
the Shariah.
The SSB shall assist the management to carry out this
responsibility by providing guidance, advise and
training relating to compliance with the Shariah.
Shariah review procedures has to be carried out in
three stages as follows
Planning review procedures
Executing review procedures
Documenting conclusions and report
GSIFI 3: Internal Shariah Review
Objective: ensure that the management of an IFI discharges their
responsibilities in relation to the implementation of the Shariah
rules and principles. The internal Shariah review is to be carried
out by an independent division/department or part of the internal
audit department.
The IFI shall develop a charter that explains the statement of
purpose, authority, and responsibility of the internal Shariah
reviewers. The charter has to make clear that the internal Shariah
reviewers are to have no executive authority or responsibility for
the activities they review.
The organizational status of the internal Shariah review shall not be
lower than that of the internal audit department/internal control
department. They shall have direct and regular communications
with all levels of management, SSB and external auditors.
GSIFI 3: Internal Shariah Review
The guidelines emphasized the importance of professional proficiency
of the internal Shariah reviewers. The staff shall be proficient and have
appropriate educational background and training relevant to internal
Shariah review.
The scope of work: examination and evaluation of the adequacy and
effectiveness of the IFI system of internal Shariah control and the
quality of performance in carrying out assigned responsibilities.
Internal Shariah review be performed according to four stages
planning documentation, examining and evaluating internal Shariah
review information, reporting and follow up.
The head of the internal Shariah review shall manage the internal
Shariah review activities by establishing plans, provide written policies
and procedures to guide the staff of internal Shariah review and
establish a programme to select and develop the performance of the
Search internet on the functions and responsibilities
in relation to Shariah Governance issued by:
Bank Negara Malaysia (BNM)
Securities Commission (SC)
Islamic Financial Services Board (IFSB)
Accounting, Auditing Organisation for Islamic
Financial Institution (AAOIFI)