In Malaysia, the Shariah governance framework for Islamic financial institutions (IFIs) is well-established and is overseen by regulatory authorities to ensure compliance with Islamic principles (Shariah). The key regulatory body responsible for overseeing and regulating Islamic finance, including Shariah governance, is the Central Bank of Malaysia, known as Bank Negara Malaysia (BNM). The Shariah governance framework in Malaysia encompasses various elements to ensure the integrity and compliance of Islamic financial activities. Here are the main components:
- Shariah Advisory Council (SAC): The Shariah Advisory Council is a central institution responsible for providing guidance on Shariah matters to Islamic financial institutions. It operates under the auspices of BNM and consists of prominent Islamic scholars with expertise in Shariah and finance. The SAC issues rulings and guidelines on Shariah matters, and its decisions are binding on Islamic financial institutions.
- Shariah Review Panel (SRP): Islamic financial institutions are required to establish their own Shariah review panels to ensure the Shariah compliance of their products and operations. The SRP is responsible for reviewing and approving financial products, contracts, and transactions to ensure they adhere to Shariah principles. It operates independently to provide an additional layer of scrutiny.
- Shariah Governance Framework (SGF): BNM has established the Shariah Governance Framework to guide Islamic financial institutions in setting up robust Shariah governance mechanisms. The SGF outlines the roles, responsibilities, and structures that IFIs must have in place to ensure compliance with Shariah principles. This includes the establishment of Shariah committees, review processes, and reporting mechanisms.
- Shariah Committees: Each Islamic financial institution is required to establish a Shariah committee consisting of qualified Islamic scholars and experts. The committee is responsible for advising on Shariah matters, reviewing and approving products and transactions, and ensuring ongoing compliance. The committee plays a crucial role in overseeing the institution’s adherence to Islamic principles.
- Shariah Risk Management: Islamic financial institutions are required to integrate Shariah risk management into their overall risk management framework. This involves identifying, assessing, and mitigating potential risks related to non-compliance with Shariah principles.
- Shariah Audit: Shariah audit functions are established to independently assess and verify the Shariah compliance of an Islamic financial institution’s operations and activities. This helps ensure the effectiveness of the institution’s Shariah governance mechanisms.
- Reporting and Transparency: Islamic financial institutions are required to disclose their Shariah governance framework and practices to promote transparency. Regular reporting to regulatory authorities and stakeholders is essential for maintaining accountability.
The Shariah governance framework in Malaysia reflects the commitment to upholding the principles of Islamic finance while ensuring the stability and integrity of the industry. It provides a comprehensive structure for Shariah oversight, with collaboration between regulatory bodies, Shariah advisory councils, and individual Islamic financial institutions.