Shariah Risk Management Practices in Malaysian Banks
Shariah compliance is of critical importance for Islamic banks, as it not only provides confidence in the banking system and the bank’s credibility, but also because non-compliance risks making income non-halal and thus requiring its donation to charity.
Shariah non-compliance risk is defined as “the risk of non-compliance resulting from a failure of an Islamic bank’s internal systems and personnel”.
To help banks maintain Shariah compliance, Bank Negara Malaysia (the central bank) established the Shariah Governance Framework in 2010, providing clear and comprehensive guidelines for Islamic banking institutions in Malaysia. These guidelines were updated in 2019, with the Shariah Governance Framework being replaced by the Shariah Governance Policy Document. As soon as a bank becomes aware of non-compliance, Bank Negara Malaysia and its Shariah committee must be informed, and the business, affair or activities must immediately be ceased until review is made and the non-compliance is rectified. Failure to follow these steps may result in criminal proceedings. Checks are therefore made to catch non-compliance before it reaches this stage.
