PB AQIF (14-15 Sep 15)

ASSOCIATE QUALIFICATION
IN ISLAMIC FINANCE (AQIF)

14th & 15th September 2015
IT & TC, Public Bank Berhad
ASSOCIATE QUALIFICATION IN ISLAMIC FINANCE (AQIF)
 14th & 15th September 2015  Public Bank ITTC, Bangi 
/ Greetings!
Dear Participants,
On behalf of the organizer, we welcome you to the Associate Qualification in

Islamic Finance program. We are indeed honored by your participation in this
program.
Please refer to administrative details as follows:
i. Program Schedule
Program Begins - 8:45 a.m.

Morning Break - 10:30 a.m.
Lunch Break - 1:00 p.m. to 2:00 p.m.
Afternoon Break - 3:30 p.m.
Program End - 5:45 p.m.
ii. Handphone
Kindly set your handphone to silent mode while the program is in

progress.
iii. Assistance
Should you need any assistance, please inform the Secretariat as

necessary.
iv. Evaluation Form
Please give us your suggestions and comments by filling up the enclosed

evaluation form in order to guide us in enhancing and improving our future
program.
Finally we hope that you will obtain maximum benefit from this program. We
also would like to apologize for any inconvenience or shortcoming that you may
experience during the program. We look forward to welcome you again in our
future programs.
Thank you.
Best regards,
Program Secretariat
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IN-HOUSE TRAINING PROGRAM
SHARIAH FRAMEWORK AND GOVERNANCE IN ISLAMIC FINANCE
 Monday, 14 September 2015  Public Bank Berhad 
Time Topic
8.30 a.m. Registration
8:45 a.m. Corporate Governance in Islamic Financial Institutions

 The Importance of Corporate Governance in IFIs
 Principles of Corporate Governance
 Standards and Guiding Principles
- BNM Guidelines on Corporate Governance
- SC: Malaysian Code on Corporate Governance
- AAOIFI : Accounting, Auditing and Governance Standards
- IFSB-3- Guiding Principles on Corporate Governance for Institutions
Offering Only Islamic Financial Services (Excluding Islamic Insurance
(Takaful) Institutions and Islamic Mutual Funds)
Speaker: Ustaz Muhammad Hadi Abdullah

IBFIM’s Trainer
10:30 a.m. Coffee Break
11.00 a.m. Shariah Compliant and Governance Framework for Islamic Banks
 What is Shariah Governance?
 Component of Shariah Compliance
 Significance of Shariah Governance
 Models of Shariah Governance
 Shariah Compliant Processes
1:00 p.m. Lunch
2:00 p.m. Regulatory Framework of Shariah Governance

 BNM Shariah Governance Framework
 SC: Registration for Shariah Advisers Guidelines
 Expectations on Key Functionaries of Shariah Governance Framework
- Board
- Shariah Committee
- Management
 Other Internal Shariah Functions and Their Roles
- Shariah Risk Management Function
- Shariah Research Function
- Shariah Audit Function
- Shariah Review Function
- Shariah Secretariat Function
3:30 p.m. Coffee Break
4.00 p.m. Implementation and Challenges

 Case Study – Corporate Governance Failure
5:45 p.m. End of Program

ASSOCIATE QUALIFICATION IN ISLAMIC FINANCE
IN-HOUSE TRAINING
AQIF
SHARIAH FRAMEWORK AND GOVERNANCE

Module
IN ISLAMIC FINANCE 14th September 2015

At the end of the module, participants should be able to :

1. Explain the Islamic laws and principles that govern the Islamic financial system
2. Explain the position and responsibilities of Shariah Committees/ officers/ advisors in
the operations of Islamic finance; and
3. Apply the governance framework, minimum standards and specific requirements
outlined by the regulators
USTAZ MUHAMMAD HADI ABDULLAH
IBFIM’s Trainer
Muhammad Hadi Abdullah was the Head of Shariah of Hong Leong Islamic Bank Berhad (“HLISB”).
Prior to that, he was the Manager of Shari’ah Compliance, Islamic Markets of Bursa Malaysia
Berhad. He was previously worked as Senior Shariah Fellow at IBFIM. His expertise covers Shari’ah
funds advisory, Shari’ah stock screening, compliance verification exercise and Shariah audit. He was
a Shariah-qualified personnel for Shariah advisory of Shariah-based products and services regulated
by the Securities Commission. He is currently attached to the Strategy and Business Development of
HLISB.
He obtained his Master in Comparative Laws from International Islamic University Malaysia and
Bachelor of Shari’ah Islamiah (Hons) from the Al-Azhar University, Egypt. He completed Chartered
Islamic Finance Professional (CIFP) and also holds an Islamic Financial Planner (IFP) certification. He
is currently pursuing a PhD in Islamic finance at INCEIF.
AQIF Module 4: Shariah Framework and Governance in Islamic Finance
 14 September 2015  Public Bank Berhad 
Presented by;
Ustaz Muhammad Hadi Abdullah
IBFIM’s Trainer
This Course at Glance

Part 1 Corporate Governance in Islamic Financial Institutions
 The Importance of Corporate Governance in IFIs
 Principles of Corporate Governance
 Standards and Guiding Principles - BNM, SC, AAOIFI, IFSB
Part 2 Shariah Compliant and Governance Framework for Islamic Banks
 What is Shariah Governance?
 Component of Shariah Compliance
 Significance of Shariah Governance
 Models of Shariah Governance
 Shariah Compliant Processes
Part 3 Regulatory Framework of Shariah Governance
 BNM Shariah Governance Framework
 SC: Registration for Shariah Advisers Guidelines
 Expectations on Key Functionaries of Shariah Governance Framework - Board,
Shariah Committee, Management
 Other Internal Shariah Functions and Their Roles - Shariah Risk Management,
Shariah Research & Secretariat , Shariah Audit, Shariah Review
Part 4 Implementation and Challenges
Copyright © IBFIM 2015. All Rights Reserved 1

Part 1
Corporate Governance in Islamic Financial Institutions
 The Importance of Corporate Governance in IFIs
 Principles of Corporate Governance
 Standards and Guiding Principles - BNM, SC, AAOIFI, IFSB
What is Corporate Governance?
IFSB’s Guiding • A defined set of relationship between a

Principles on company’s management, its Board of Directors,
Corporate its shareholders and other stakeholders which
Governance for provides the structures through which:
Institutions Offering The objectives of the company are set; and The
Only Islamic Financial means of attaining those objectives and
Services defines: monitoring performance are determined.
SECURITIES • The process and structure used to direct and

COMMISSION manage the business and affairs of the
company towards enhancing business
(Malaysian Code on
prosperity and corporate accountability with
Corporate the ultimate objective of realising long-term
Governance 2012 stakeholder value, whilst taking into account
defines: the interests of other stakeholder.

Why Corporate Governance?

• Resolve conflicts of interest among Management, Board,
Shareholders and other stakeholders and protect all
stakeholders’ interests
• Set vision and mission statements and strategic targets for
the company
• Achieve the strategic targets set by ensuring application of
best practices in:
– Internal control systems
– Regulatory compliance
– Accounting and Auditing
– Risk Management
– Information disclosures
– Shariah compliance
– Socially Responsible Businesses
5
Who Are The Stakeholders?
 Management
 Board
 Shareholders
 Employees
 Suppliers of funds
 Policy makers and regulators

Interest and Key Functionalities

Aspects Interest Functional Roles
REGULATORY Economic stability. Sets regulatory framework for sound
AUTHORITY proper corporate governance.
SUPERVISORY Compliance with the laws and regulation. Supervise and monitor the
AUTHORITY effectiveness of corporate
governance and to check compliance
with regulation.
SHAREHOLDERS Wealth maximization, satisfactory earnings per share, Appoint fit and proper boards,
dividends, above average return on investment and management auditors and Shariah
excellent continuous growth. Committee.
INVESTMENT Return of deposit at maturity on the agreed terms, Monitor investment performance
ACCOUNT protection of their interests and profit.
HOLDERS
SHARIAH Compliance with Shariah rules and principles. Ensure Shariah compliance and
COMMITTEE protect the rights and interest of
depositors and other stakeholders.
BOARD OF Monetary and non-monetary compensation, high Set the IFI direction and policies.
DIRECTORS integrity, an efficiently and effectively managed
company and outstanding corporate reputation and
brand.
MANAGEMENT Monetary and non-monetary compensation and Implement policies set by the Board
commitment to claims of the contract. of Directors.
How to Protect Interest of

the Stakeholders?
 Apply best practice standards and effective systems of

accountability and incentives
 Clear and transparent contracts and documented rights and
responsibilities of parties
 Information disclosure and market discipline
 Institutional checks and balances
 Regulation and supervision
 Moral suasion
 Enabling environment

Recognized Codes of Corporate Governance

1. “Principles of Corporate Governance” –
Organisation for Economic Cooperation
and Development (OECD) – revised 2004
2. “Enhancing Corporate Governance of
Banking Supervisions” – Basel Committee
for Banking Supervision (BCBS) – revised
2006
3. “Guiding Principles on Corporate
Governance for Institutions Offering Only
Islamic Financial Services” – Islamic
Financial Services Board (IFSB) – 2006
4. “Guidelines on Corporate Governance” –
Bank Negara Malaysia
5. “Malaysia Code of Corporate
Governance” – Securities Commission
Scope of the Recognised Codes
The issue of IFI

accountability and
transparency to its
customers, particularly
Investment Account
Holder (IAH), as well as
Shariah compliance,
have not been covered
or contemplated in any
of these documents.
10

CG: Special Case of IFI

 Shariah compliance
 Fiduciary duties to provide Shariah compliance product and
services to the customer
 Ethics & social responsibility
 Interests of Investment Deposit Holders (IAHs),
especially the unrestricted deposits
 Potential conflicts of interest
between shareholders and unrestricted IAHs
especially where the funds are commingled
 Transparency in financial reporting e.g. calculation of
Mudārib’s share (where funds are commingled) and profit
distribution
11
Current Issues in CG of IFI

FIELDS ISSUES
Protection of Potential conflict of interest between IAHs vis-à-vis Management
Investment Account (Shareholders)‫‏‬
Holders (“IAH”) • Fiduciary responsibilities: Proper systems and processes to
avoid potential conflicts of interest.
• Adequate disclosures: About the IFI’s investment objectives and
policies, operational guidelines that govern the relationship
between the bank and IAHs.
Shariah Committee • SC is a specific organ of governance. It should be concerned
(SC) with monitoring Shariah compliance and not just issuing fatwas.
• Since SC members may lack monitoring skills, auditors and
audit committee should act in concert to assist SC.
Transparency in • The current financial reporting practices of IBs do not provide
Financial Reporting adequate information to their IAH regarding the revenues and
expenses accruing to their particular investment fund
• IAH is rightfully entitled to transparency, e.g. calculation of
Muḍārib share and profit allocation
12

CG of IFI: Looking Ahead
 Adoption of OECD and BCBS recommendations will improve

IBs’ Board and Directors’ and Management’s awareness of
the importance of good governance
 Due recognition of IAH’s rights and risks as residual
claimants will lead to appropriate protection of IAH
 More professional approach for Shariah compliance will
mitigate compliance and reputational risks of IBs
 Increased transparency in financial and non-financial
reporting by IBs will inculcate better risk management
structure and discipline culture amongst IBs
13
IFSB’S Guiding Principles

Principle 1.1
IFIs shall establish a comprehensive governance policy
framework which sets out the strategic roles and functions of
each organs of governance and mechanisms for balancing their
accountabilities to various stakeholders.
Recommended Best Practices
 The BOD as the ultimate internal-policy maker shall be responsible for
steering the establishment of governance policy framework.
 The BOD shall set up Governance Committee comprises of (i) a member of
the Audit Committee, (ii) a Shariah scholar (possibly from SC) and (iii) a
non-executive director.
 The primary objectives of the GC is to protect the interests of stakeholders
other than the shareholders.
14


Principle 1.2
IFIs shall ensure that the reporting of their financial and non-financial
information meets the requirements of internationally recognised accounting
standards which are in compliance with Shariah rules and principles and are
applicable to the Islamic financial services industry as recognised by the
supervisory authorities.
 The Audit Committee shall be mandated to:
(i) review and monitor the entire accounting process of the IIFS through close
cooperation with the internal and external auditors; and
(ii) provide the BOD with reports and recommendations with a particular
reference to the IFI’s compliance with internationally recognized accounting
standards applicable to the Islamic financial services industry in reporting
their financial and non-financial information.
 The Audit Committee shall communicate and coordinate with both the SC to
ensure that information on compliance with Sharīàh rules and principles by the
IIFS is reported in a timely and adequate manner.
15

Principle 2.1
IFIs shall acknowledge the IAH’s rights 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.
 The relationship between IAH and IFI may be compared to collective investment schemes
(CIS). Both IAH and CIS participants:
(i) entrust their money to be invested and managed by a fund manager;
(ii) bear the risk of losing the capital of their investment; and
(iii) have very minimal rights in controlling the conduct of the fund manager; more often
they would have to vote with their feet – that is, simply move their investment away if
they find the fund manager’s performance is unsatisfactory.
 Restricted IAH shall have the right to obtain at least all the information usually available to
participants of a CIS.
 Unrestricted IAH shall be allowed access to all the necessary information in respect of their
accounts – in particular, the calculation and allocation of profits and the investment policies
of the IFI.
16

Principle 2.2
IBs shall adopt a sound investment strategy which is 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.

 In developing their investment strategy on behalf of IAH, IFI shall carefully consider the risk and
return expectations of IAH by (i) having an appropriate and systematic know-your-customer
mechanism which can effectively reflect the different risk–return profiles of restricted and
unrestricted IAH; (ii) employing qualified investment managers who fully understand the needs
and expectations of IAH; and (iii) keeping the Governance Committee fully informed of the
investment strategy adopted by IIFS, where appropriate.
 The IFI shall inform the IAH if the institution practices the smoothing of returns such as a PER.
 In order to ensure that the utilization of PER is appropriate, the Governance Committee shall be
mandated to scrutinize such utilization and to make appropriate recommendations to the BOD.
17
Principle 3.1
IFIs shall have in place an appropriate mechanism for obtaining
Shariah rulings, application of fatwas and monitoring of Shariah
compliance in all aspects of their products and operations.
Principle 3.2
IFIs shall comply with the Shariah rules and principles as
expressed in the rulings of the IFIs Shariah scholars. The IFIs shall
make these rules and principles available to the public.
18


Principle 4
IFIs shall make adequate and timely disclosure to IAH and the public, of
material and relevant information on the investment accounts that they
manage.
 Information on the basis for profit distribution and allocation shall be provided to the IAH prior
to the opening of the investment account, especially since under a Muḍārabah contract the PSR
must be declared in advance.
 Asset allocation shall be duly reported within the IIFS’s financial statements.
 The utilization of PER for smoothing the returns to IAH and shareholders, as well as the use of
IRR for covering losses (if any), is an issue of public interest and shall be publicized.
 IIFS are encouraged to publish in their annual report a policy statement issued and affirmed by
the BOD in respect of the investment accounts that they offer.
 Other recommended disclosures by the BCBS Paper: (i) information about the BOD and senior
management; (ii) basic ownership structure; (iii) organizational structure; (iv) information about
the incentive structure e.g. remuneration policies, executive compensation, bonuses; (v) code or
policy of business conduct and/or ethics, as well as any applicable governance structures or
policies etc.
19
Guidelines on Corporate Governance for

Licensed Institutions
The primary objective of the “Guidelines on Corporate Governance for Licensed

Institutions” (the Guidelines) is to promote the adoption of effective and high
standards of corporate governance practices by Licensed Institutions
involves the manner in which the business and affairs are governed by its board
of directors and senior management, affecting how an institution:
• sets corporate objectives, including generating economic returns to owners;
• runs the day-to-day operations of the business;
• considers the interests of recognised stakeholders3;
• aligns corporate activities and behaviours with the expectation that the
institution will operate in a safe and sound manner, and in compliance with
applicable laws and regulations; and
• protects the interests of depositors.
20


Principle 1: should be Principle 2: should be an
Principle 3: should be a clear
headed by an effective effective board composition,
division of responsibilities at
board, which assumes with a strong independent
the helm of an institution
specific responsibilities element
Principle 5: Directors must be

Principle 4: should be a persons of calibre, credibility
Principle 6: Board should
formal and transparent and integrity with the
meet regularly and be duly
process for the appointment necessary skills and
furnished with complete and
of directors to the board and experience and be able to
timely information
the appointment of CEO devote time and
commitment
Principle 7: formal and an

ongoing assessment of the
effectiveness of the board as
a whole, the directors and
the CEO
21

Principle 9: Persons empowered
Principle 8: should be a formal Principle 10: There should be
with decision-making authority
and transparent procedure for clear separation between
(including directors) should
fixing the remuneration shareholders and management
exercise care to avoid situations
packages of board members, so as not to impede sound
that may give rise to a conflict
CEO and senior management corporate governance
of interest situation
Principle 11: There should be

Principle 12: Licensed Principle 13: Conducting
robust auditing requirements
Institution should engage in corporate governance in a
and the auditor, board and
regular, effective and fair transparent manner can
management need to maintain
communication with reinforce sound corporate
professional and objective
shareholders/stakeholders governance
relationships
Principle 14: Board is

collectively responsible and
accountable for the veracity of
disclosures and management of
risk
22

MCCG 2012
 Sets out 8 broad principles followed by 26 corresponding
recommendations.
 In summary the principles and recommendations focus on:
laying a strong
foundation for the promote timely safeguard the
board and its
committees to carry
and balanced integrity of
out their roles disclosure financial reporting
effectively
emphasize the encourage

importance of risk shareholder
management and participation in
internal controls general meetings
23
AAOIFI Governance Standards
AAOIFI has issued:

• 25 accounting standards
• 6 auditing standards
• 7 governance standards
• 48 Shariah standards
• On corporate governance, due to absence of any corporate
governance framework for IFIs in late 1990s, AAOIFI has taken
the initiative to provide basic guideline for a Shariah
governance framework in its governance standards no. 1 - 5
24

Part 2
Shariah Compliant and Governance Framework for Islamic Banks

 What is Shariah Governance?
 Component of Shariah Compliance
 Significance of Shariah Governance
 Models of Shariah Governance
 Shariah Compliant Processes
25
What is Shariah?
 Literally means, “the road to the Islam
watering place” or “the straight path
to be followed.”
 Divinely revealed principles Aqidah Shariah Akhlak
governing faith, conduct and legal
injunctions.
 Recorded in the Quran and deduced Ibadah
Muamalah
Ammah
in from the Sunnah
 Ready made and given guidance
 In most cases is in the form of Munakahat Muamalat Jinayat
general principles:
– Prohibition of riba
– Conclusion of contract by consent Political Economic Social
activities activities activities
– Obligation of fulfill all obligations
– Recommendations of having
attestation and security/ Banking
activities
collateral
26

Sources of Shariah
The Prophet Muhammad (pbuh) was reported to sent Mu’az bin Jabal, as a
governor to Yemen and also appointed him as a judge. Before sending him, the
Prophet (pbuh) asked him:
PROPHET: “According to what will you judge if a problem is brought to you?”

MU’AZ: “According to the scriptures of Allah (al-Qur’an).”
PROPHET: “And if you did not find anything in it?”
MU’AZ: “According to the Sunnah (tradition) of the Messenger of Allah.”
PROPHET: “And if you did not find anything in it?”
MU’AZ: “Then I shall strive to interpret with exertion of my reason.”
PROPHET: “Praise be to Allah who has favoured the messenger of His
Messenger with what His Messenger is willing to approve it.”
(Reported by Abu Dawud: no 3592)
27
Sources of Shariah
• The sources were utilised in
Al-Quran
order to deduce the rulings by
Primary Sources
the Shariah scholars.
Al-Sunnah
Sources of Shariah
• The Mu’az hadith indicates the

Ijma’
priority in the utilisation of the
sources of Islamic law.
Qiyas
• Sources about which scholars

Istihsan
are in agreement on their
utilisation:
Secondary Sources Istishab
– Al-Qur’an
Maslahah – Al-Sunnah (traditions of the
Mursalah Prophet Muhammad)
– Al-Ijma’ (unanimous
Sadd al-Dhara’i
agreement)
– Al-Qiyas (analogical
‘Urf
deductions)
28

Al-Quran: The Fundamental Source

“The speech of Allah, sent down upon the last prophet,
Muhammad (pbuh), in its precise meaning and precise
wording, transmitted to us by numerous persons (tawatur),
both verbally and in writing.”
• Inimitable and unique in its style. To sustain these special
attributes, it is protected by Allah from any corruption.
• Considered as the code of conduct for Muslims in all sphere
of life.
• Provide criteria to distinguish true from false, good from bad
and halal (lawful) from haram (unlawful).
• Only selected issues are elaborated in detail.
• Many general principles – can be used as guidance to resolve
many contemporary issues.
29
Al-Sunnah: Complementing Al-Qur’an
“All that is narrated from Prophet Muhammad (pbuh),

including his actions, sayings and whatever he has tacitly
approved.”
• Its authority deduced from al-Quran – injunctions which
command the believers to follow the instructions from
Prophet Muhammad (pbuh).
• Complement al-Quran in 3 ways:
– Explains and further elaborates the meanings of al-Quran.
– Supports the rulings already stated in al-Quran.
– As independent source of Islamic law.
30

Al-Ijma’ (Consensus Among Jurists)

Al-Amidi defines Ijma’ as “the unanimous agreement of the mujtahidin of
the Muslim community of any period following the demise of Prophet
Muhammad (pbuh) on any matters.”
• Conditions for ijma’ to be valid:
– There are a number of qualified scholars available at the time the
issue is encountered.
– All the scholars must reach a consensus on a juridical opinion at the
time an issue arises.
– The agreement must be demonstrated by the scholars on a particular
issue verbally or in writing.
• Ijma’ occurred during the time of companions particularly during the
period of Khulafa’ al-Rashidin.
• After this age, individual ijtihad flourished in e.g. in Kufah and Sham.
• Modern initiative to revive and reform ijma’ e.g. Majma’ al-Fiqh al-Islami
al-Duwali.
31
Al-Qiyas (Analogy)
“Extension of a Shariah value from the original case (asl), to a
new case (furu’), because the latter has the same effective
cause (‘illah) as the former.”
• The original case is ruled by the text either al-Quran or al-
Sunnah, and qiyas aims to extend the same ruling on the new
case based on the shared ‘illah.
PILLARS OF QIYAS EXAMPLES
1. Original case (Asl) Prohibition of usury in exchange of
gold and silver
2. The new case (Furu’) Modern currencies
3. The effective cause (‘Illah) Medium of exchange
4. The rule (Hukum) Prohibition of usury in exchange of
modern currencies
32

Development of Rulings in Transaction

• Apart from complying to “conclusive” evidences from al-Qur’an and al-
Sunnah, many Shariah rulings relating to commercial contracts are based on
their rationale, effective causes and benefits.
• The prohibition or permissibility in each case ceases or continues in
accordance with its effective cause. Rasulullah SAW said:
“Muslims are bound by the conditions they made; except a condition that
legalises impermissible act or invalidates permissible act.”
(Narrated by Imam al-Tirmizī)
To advise the Bank in determining Shariah status of the transactions, the
Bank should establish its Shariah Advisory Council comprises of learned
Muslim jurists in the field of Usul al-Fiqh (jurisprudence) and Fiqh al-
Mu’amalat (Islamic law of transactions).
33
Customary Practices as a Basis of Judgment

• Legal maxims: “Customs is in force” (‫)العادة محكمة‬
• Customary practices in term of their words and actions are acknowledged
and recognised by Shariah subject to:
– Does not violate a divine text of Al-Quran and Al-Sunnah.
– Must be consistently applied and prevailing in the society.
– Must have been in effect at the time the transaction is carried out.
– The contracting parties must not have agreed to a condition contrary
to the customary practices.
• Example: Acceptance of scholars of delay of two business days (t+2) as
spot transaction in currency exchange due to the prevalent market
practice to facilitate the transfer of fund from one country to another.
The tools and procedures of conventional banks which do not contravene

with Shariah requirements may be adopted subject to approval from
Shariah Advisory Council.
34

Maqasid al-Shariah The

ENDS / ‫الغاية‬ (The Objectives of Shariah) Framework
of Islamic
Finance
No Al-
No Riba Zulm
1st Level of
(Qimar)
Compliant
No Gharar
Uqud Musamma
(Nominate Contracts)
MEANS/ ‫وسيلة‬
‫ال‬
Islamic Contract Uqud Ghair Musamma

(Non-Nominate Contracts)
Investment Activities
Rectifying & Purifying
2nd Level Conversion Process
of Shariah-Compliant
Hedging Instruments
Compliant Operation
Monitoring & Supervision
Social Responsibility
35
Understanding
Preparation of Product
Shari’ah Specification Doing Shariah
review Analysis
manual
Procuring Shariah-Compliant Conveying

right message
Resolution to Shariah
Process Scholars
Getting the
Shari’ah Getting Sign-
review of legal Liaising with off of the
documentation legal council to structure
done prepare legal

documentation
36

Product – Shariah Compliance Process
 Shari’ah advisors cannot

work in isolation.
Risk
Product Approval
Requirement  Closer cooperation and
more transparency
Shari’ah Financial between all parties
Compliance Requirement Marketing involved such as risk
Manual & Pricing
management officers and
others is very much
Legal and needed.
Research Taxes Review &
Shari’ah Audit
Requirement  This will help into
efficient and
Design & Shari’ah comprehensive
Develop Requirement development and review
of Shari’ah compliant
product at one time.
37
Why Shariah Compliance is so Important?
 Shariah compliance is original basis for having a banking system that

meets the religious requirements of Muslim in line with their ‘Aqidah
(faith).
 Shariah compliance is the factor that distinguishes Islamic banking from
conventional banking.
 Ensures acceptance, validity and enforceability of contracts from Shariah
point of view.
Non Financial Impacts Financial Impacts
 Against the commands of Allah.  Invalidation of contract (‘aqad)

 Impediment from Allah’s blessing or Non-halal income
barakah  Capital adequacy ratio (CAR)
 Contravention of the provision of Islamic Impact
Financial Services Act 2013
 Jeopardize the Bank’s reputation as an
Islamic bank
38

What is Shariah Governance?

IFSB-10 Guiding Principles on Shariah Governance Systems for Institutions
Offering Islamic Financial Services defines:
“A set of institutional and organisational arrangements through which

Islamic financial institutions ensure that there is an effective
independent oversight of Shariah compliance over the issuance of
relevant Shariah pronouncements, dissemination of information and an
internal Shariah compliance review.”
This requires:
1. A set of institutional and organisational arrangement – Board of
Directors, Shariah committee, Shariah division, internal audit function.
2. An effective independent oversight on Shariah compliance
3. Shariah pronouncements, disseminations of info and an internal Shariah
review – ex-ante and ex-post aspects of the Shariah compliance
framework.
39
Evolution of Shariah Governance?

 Shariah governance is relatively new to any discourse on fiqh al-muamalat. Shariah
governance is a unique kind of governance in financial architecture as it is
concerned with the religious aspects of the overall activities of IFIs.
 The notion of market regulation through an institutional approach has already
been implemented since pre-modern Muslim societies in the form of institution
known as hisbah.
 Initially, upon establishment of IFIs, the discussion of Shariah governance rest on
establishment of Shariah Committee - Faisal Islamic Bank of Egypt (1976), Jordan
Islamic Bank (1978), Faisal Islamic Bank of Sudan (1978), Kuwait Finance House
(1979), Bank Islam Malaysia Berhad (1983) and Dubai Islamic Bank (although it is
IB – 1999).
 Shariah governance adds an additional layer of governance to the existing
corporate governance structure of IFIs.
 Until the issuance of the IFSB-10, there was no formal and proper definition of
Shariah governance system. The IFSB-10 definition proposes that Shariah
governance is beyond the establishment of Shariah Committee .
 Prior to IFSB-10, AAOIFI had issued several governance standards and IFSB-10 is
followed by other comprehensive guiding principles on Shariah governance which
includes Shariah Governance Framework issued by Bank Negara Malaysia in late
2010.
40

Significance of Shariah Governance

…….Strict Compliance
with Shari’ah
Governance Promotes
Financial Stability...and
more Growth
Shari’ah is
Backbone of
the Industry
SHARI’AH Fiduciary Normal

COMPLIANCE Shari’ah duties in Corporate
Governance Islamic Governance
banking
transaction
Confidence
Legitimacy
and Trust of
of Products
Stakeholders
41
IFSB-10: Principles of Shariah Governance

 IFSB focuses on four (4) main elements of governance:
Key Element Principle Operational Framework
Competence Fit and proper criteria Ex-ante: Screening process
Professional training Ex-post: Review and assessment
Formal assessment
Independence Adequate capability to exercise
Ex-ante: Appointment, disclosure
objective judgment and full mandate
Complete, adequate and timely Ex-post: Review and assessment
information
Confidentiality Strictly observes confidentiality Ex-ante: Undertaking secrecy
Ex-post: Review and assessment
Consistency Fully understand that the legal Consistent in all ex-ante and ex-
and regulatory framework and post Shariah governance process
strictly observes the said
framework
42

IFSB-10: Institutional Arrangement

Functions Common Corporate Governance Additional for IFI
Governance Board of Directors Shariah Committee
Control Internal Audit Division, External Internal Shariah Review, Shariah Review by
Auditor Shariah Committee, Shariah Audit
Compliance Regulatory and Financial Internal Shariah Compliance (Research)
Compliance Division
Risk Risk Management Division (Credit, Shariah Compliance Risk Management
Management Market and Operational Risk)
 IFI and typical financial institutions share a common institutional arrangement of

corporate governance framework, except the additional set of organizational
arrangement in IFI to meet the religious requirement of Shariah compliance in all
aspects of their business transactions and operations.
 The system is meant to address a specific type of exclusive to IFI i.e. the Shariah
non-compliance risk (SCR). While there is no specific risk management model to
address the SCR, other than its classification under operational risk, the Shariah
governance system would help to mitigate SCR that may incur unimaginable
potential of loss and negate the IFI’s credibility.
43
Scope of Shariah Governance?

 Shariah Governance
Framework shall cover: 7. Periodic 1. Product
and Annual Initiative
 Ex-ante aspects Shariah
(Processes 1-6) – Review
Issuance of Shariah
rulings and
dissemination of 6. 2. Preliminary
Dissemination Shariah
Shariah related
of Ruling Analysis
information.
3.
 Ex-post aspects 5. Shariah Development
(Process 7) – Periodic Ruling of Legal
and annual internal Documents
Shariah review
process which 4. Review of
Documents
includes Shariah
audit.
44

Models of Shariah Governance
• Although institutions are required to ensure

Centralized Shari’ah compliance but the government
regulates Shari’ah advisory on a central level
• No government intervention in the

Laissez Faire provision of Shari’ah advisory
• Self-regulated
• The institutions must ensure Shari’ah

Hybrid compliance and report their efforts to the
central regulatory authority
45
1. Centralized Shariah Governance
 Shariah Advisory at the

regulator’s level
 Centralized Fatwa
 Issue guidelines on the Iran
governance of Shariah Malaysia
Brunei
committee for the IFI Sudan
 Conduct Shariah compliance Indonesia
review
 Centralized Appointment of
Shariah committees of IFI
46

2. “Laissez Faire” Shariah Governance

South Korea
Germany
UK
Turkey
Japan
Qatar
France Malta Saudi
Arabia Kuwait Thailand
Hong Kong
Jordan
Singapore
 Most of the GCC countries, new entrants and non-Islamic jurisdictions
 Institutions must ensure Shariah compliance by themselves
 Shariah compliance at best a reputational issue 47
3. Hybrid Shariah Governance
 Shariah Board of State Bank of Pakistan is

the highest authority and has a supervisory
role.
 IFI shall have at least 1 Shariah Advisor
PAKISTAN
 Instructions and Guidelines for Shariah
Compliance in IFIs are issued by State Bank
of Pakistan and applicable to IFI
 Shariah Advisors must observe “fit and
proper” criteria
 National Council of the Shariah Supervisory
Committees of IFIs in UAE UAE
 Each IFIs are free to appoint their Shariah
Advisors.
48

Part 3
Regulatory Framework of Shariah Governance

 Islamic Financial Services Act 2013
 BNM Shariah Governance Framework
 SC: Registration for Shariah Advisers Guidelines
 Expectations on Key Functionaries of Shariah Governance
Framework - Board, Shariah Committee, Management
 Other Internal Shariah Functions and Their Roles - Shariah
Risk Management, Shariah Research & Secretariat , Shariah
Audit, Shariah Review
49
Islamic Financial Services Act 2013
50

Promote financial stability and Strengthen regulation of

compliance with Shariah financial institutions
Implement recommendations
under Financial Sector
Assessment Program (IMF &
World Bank).
GATE KEEPING PROVISIONS

 Licensing  Directors
 Approval  Chief Executive Officer
 Authorization  Auditors
 Designation  Shariah Advisory Council
 Shareholders  Shariah Committee
51
Islamic Banking Model Post IFSA 2013

 Wider options for Islamic banks in terms of its business model
 Regulatory treatment aligned with distinct features of Shariah contracts
 Business conduct and product offerings to be aligned with distinct features of Shariah contracts
Legal recognition of distinctive features of Shariah contracts
Liability Asset
Accepting Islamic deposit
Provision of finance clarity of scope
AND / OR
based on Shariah contracts
Accepting money under an investment account
Principal non-guaranteed
Principal guaranteed Shariah
Shariah contracts
contracts
INVESTMENT ACCOUNT Any other activities as may be
ISLAMIC DEPOSIT
(Assets ring-fenced to meet specified by the Bank
(Priority of payment
liabilities-account upon
accorded upon winding up)
winding up)
52

Salient Changes –
Strengthened Shariah Compliance
Duty of Islamic banks to ensure Shariah compliance (end to end) which includes responsibility of
the BOD and Shariah Committee.
BNM supervisory power to issue Shariah Standards and Practice Guides
Severe penalties for Shariah non compliance
Islamic banks conduct financial intermediation functions using Shariah contracts. For asset
– clarity on scope of provision of finance. For liability – deposit vs investment
Enhanced business conduct which is in compliance with the essence of Shariah especially
prohibition of unfair and deceptive business contract.
Expand the scope of audit for External Auditor to include Shariah audit (4th Level of Defence).
53
Power of BNM to
Issue Binding Standards on Shariah
Objectives of the Standards
Towards achieving value

propositions of Islamic
finance.
Financial intermediation that

serves real economy.
Distinct risk and reward

profiles based on Shariah
contracts.
54

Power of BNM to
Issue Binding Standards on Shariah
IFSA provides legal platform for contract-based regulatory framework.
 Shariah Standards are considered as published rulings of SAC:
 “Standards (S) ” – essential feature of a particular Shariah contract and shall be
adhered to. In the event of non-compliance, BNM may take enforcement
actions.
 “Practice Guides (PG)” – optional features of a particular Shariah contract as
provided under Shariah and may be implemented.
 Work in progress at BNM – with active participation of the industry
 Considered all possible product structures in Islamic finance
 Example: Murabahah, Mudharabah, Ijarah, Wakalah, Istisna’
 To be supported by Operational Requirements to cover risk management, legal,
accounting and other operational aspects of applying Shariah Standards.
 Reference made to established literatures – previous SAC resolutions, AAOIFI
Shariah Standards, Islamic Fiqh Academy resolutions and established fatwas.
 Wider options for Islamic banks in terms of business model.
55
Benefits of Shariah Standards

Streamline the interpretation of Shariah scholars domestically
and internationally – will attract better understanding on
Shariah practice towards MIFC.
Reference to the court and arbitrator in resolving disputes.

Expedite the process without a need to refer to the SAC..
Serve as a guide for product development.
Serve a guide for Shariah reviewer, Shariah auditor and

external auditor in performing their tasks.
56

Section 28 of the Islamic Financial Services Act 2013, on Shariah compliance

provides:
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 purpose 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.
57
In Ensuring Strict Adherence to the Shariah…

IMPACT
OF SNC
Contravention of the Islamic Financial Services Act 2013:

8 years
Section 28(5) of the Act provides RM25m
Imprisonment for a term not exceeding eight years; or
Fine not exceeding twenty-five million ringgit; or both.
 BNM will issue more Shariah Requirements and Optional Practices documents to govern
applied Shariah contracts in Malaysia. The documents will be considered as published rulings
Moving Forward
of the Shariah Advisory Council. Impact on Bank Islam:

- Gap analysis against the bank’s current practice
- Research for new product
 Greater responsibility on Board’s oversight
 IFSA – allows appointment of external auditor to audit on Shariah matters and external
Shariah auditors.
58

Reporting of Shariah
Non-compliance is Compulsory
Section 28 (3) of Islamic Financial Services Act 2013:
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:
Immediately notify BNM and its Shariah Committee of the fact;
Immediately cease from carrying on such business, affair or activity and

from taking on any other similar business, affair or activity; and
Within thirty (30) days of becoming aware of such non-compliance or such

further period as may be specified by BNM, submit to BNM a plan on the
rectification of the non-compliance. The plan must be approved by the BOD
59
Reporting of
Actual Shariah Non-compliance (SNC) Event
1. Report on actual SNC shall be
submitted to BNM on an
“immediate”* basis as and when
necessary.
2. Within the 14 days – required to

obtain the confirmation from the
SSC.
3. The Bank is required to submit to

BNM the rectification plan (approved
by the Board and SSC) within 30 days
after the confirmation by SSC.
4. In the event that no Board meeting

*Note: “Immediate” is defined as within 14 working days upon will be held within such 30 days, the
realization of the event Bank is required to exhaust other
means to obtain the Board’s
approval on the rectification plan
prior to submission to BNM.
60

Reporting of Potential
Shariah-Non Compliance (PSNC) Event
1. Any pending decision by the SSC on
the identified issue shall be treated
as PSNC.
2. Report on PSNC to BNM – shall be

made on a monthly basis based on a
calendar year which is not later than
2 weeks after the end of each
monthly period.
1) Early detection of emerging Shariah non-compliant practices that may have industry
RATIONALE TO
REPORT PSNC
wide implication.
BNM’S
2) Harmonizing of non-compliance incidences treatment of Shariah on similar type or

case across the industry to ensure a level playing field when it comes to the treatment
of Shariah non-compliance event.
61
Reporting of
No Shariah-Non Compliance (NSNC) Event
– submit the reports on a monthly basis which serves as a
declaration or official attestation on the status of Shariah
compliance of the IFIs.
Submission of reports:
 Submission of the reports constitutes an official attestation by the Bank based on

the business operations and activities conducted
 Officer-in-charge of the Bank shall be prepared to respond to any query from BNM
as to the details of the submission [Shariah Compliance Risk Management officers]
 The Chief Risk Officer/ senior management in charge of statutory reporting of the
Bank is responsible and will be held accountable for the quality and accuracy of the
information submitted [Chief Compliance Officer]
62

Shariah Governance System

Typical Financial
Functions Addition in IFIs Remarks
Institutions
Independent organ which provide decisions,

Governance Board of directors Shariah committee views and opinions with regard to Shariah
related matters. Report directly to the board.
Perform by internal audit personnel that are

Internal & external trained in Shariah. Conduct audit on Shariah
Shariah auditors
auditors related matters. The result of assessment
will be reported to Shariah committee.
Risk Management
& Internal Control Form part of the integrated risk
management control function to identify all
Risk management unit Shariah risk
possible risk of Shariah non-compliance and
or department management officers
provide mitigating measures to reduce the
risk.
Continually assess the level of Shariah

compliance of all activities and operations.
Where instance of non-compliances are
Regulatory & financial
Shariah review identified, to take prompt rectification
Compliance compliance officers,
functions or unit measures and put in place the necessary
unit or department
mechanism to avoid recurrences. Report to
the Shariah committee and administratively
to the management.
Source: Bank Negara Malaysia
63
BNM’S Shariah Governance Framework

 Effective date 1 January 2011 and Islamic banks are given
6 (six) months to comply with all requirements.
 IFI to confirm status of compliance with SGF at the end of
the six months. Full enforcement 1 July 2011.
 Objectives:
 Set out the expectation of BNM on Shariah
governance structures, processes and arrangements
to ensure that all its operations and business activities
are in accordance with Shariah.
 Provides a comprehensive guidance to the Board,
Shariah Supervisory Council and management of the
Bank in discharging its duties in matters relating to
Shariah; and
 Outlines the functions relating to Shariah review,
Shariah audit, Shariah risk management and Shariah
research.
64

BNM SGF Principles

Section Principle
• General requirements of Shariah governance Framework It is the duty and responsibility of an Islamic financial institution
General requirements of the Shariah governance to establish a sound and robust Shariah governance framework
with emphasis placed on the role of key functionalities in
i framework which describes the essential key 1 ensuring effective implementation of the Shariah governance
functions or key organs* framework
• Oversight, accountability and Responsibility

Outlines the level of accountability and responsibility of Islamic financial institutions shall set out the accountability and
the board of directors, Shariah committee and responsibility of every key functionary involved in the
ii management of the Islamic financial institutions 2 implementation of Shariah governance framework
• Independence Independence of the Shariah committee shall be observed at all

times in exercising their duties to make objective and informed
Aims at safeguarding the independence of the Shariah judgment
committee in ensuring sound Shariah decision-making,
iii and emphasis on the role of the board of directors in 3
recognising the independence of the Shariah committee
Any person bearing responsibilities outlined in the Shariah

• Competency governance framework of an Islamic financial institution shall
Highlights requirements and expected competencies to possess the necessary competencies and continuously enhance
iv ensure key functions are capable of implementing 4 their knowledge and understanding on Shariah as well as keep
Shariah governance abreast of the latest development in Islamic finance
• Confidentiality and consistency Internal and privileged information obtained by the Shariah
Minimum set of rules that emphasises on the 5 committee in the course of their duties shall be kept
confidential at all times and shall not be misused
importance of observing and preserving confidentiality
vi and improving the level of consistency in decisionmaking
Professional ethics, judgement and consistency shall be
by the Shariah committee 6 maintained in ensuring Shariah compliance
• Shariah compliance and research functions There shall be a robust Shariah compliance function, comprising
Prescribes the functions of the internal review and audit functions, supported by risk management
vii Shariah review, Shariah audit, Shariah risk 7 control process and internal research capacity
management and Shariah research funtion
Source: Bank Negara Malaysia 65
Shariah Governance Framework’s Model

Shariah
Principle in Islamic finance
BOARD
BOARD RISK SHARIAH COMMITTEE
MANAGEMENT BOARD AUDIT COMMITTEE
Overall oversight on Shariah
COMMITTEE Oversight accountability on
compliance & review
Shariah related matters
MANAGEMENT
 Ensure executions of business & operations are in

accordance with Shariah rules & principles
 Provide necessary support to the Shariah committee
Shariah Audit Function

Shariah Risk Management
Control Function Shariah Review Function Shariah Research Function
Provide independent
assessment & objective
Identify, measure, monitor, Review business operations on Conduct comprehensive Shariah
assurance designed to value add
report & control Shariah non- a regular basis to ensure Shariah research prior to submission to
& improve IFI’s compliance with
compliance risk compliance the Shariah committee
Shariah
Source: Bank Negara Malaysia

66

General Requirements
 IFI shall ensure that aims & operations of its business are in
compliance with Shariah at all times
 IFI shall ensure effective & responsible key functions or organs

and reinforced Shariah compliance functions supported by
appropriate risk management processes & research capability
 IFIs governance structure shall be guided by a set of policies &

procedures that further explains structure roles, responsibilities
& accountabilities & duties of various governance functions
within IFI
 Shall establish a formal reporting channel among key organs to

allow reporting on Shariah matters to be carried out effectively
Framing Shariah Governance Framework

Oversight, accountability & Independence
Responsibility
Clear demarcations on accountability &  Recognition by board on SC’s
responsibility independence
 Board overall accountability  Appropriate reporting structure
 SC accountability on decisions, views &  SC decision shall not be set aside
opinions  Access to necessary info by SC
 Management’s responsibility in providing  Appointment & removal of SC
adequate support
Guiding
Principles
Competency Confidentiality & consistency

 Duty to observe confidentiality on
 Comply to fit & proper requirement
sensitive info obtained by SC
 Continuous training provided to key
 Restriction on SC membership in IFI
internal stakeholders
within same industry
 Performance assessment for SC
 Structured decision making process
 Succession planning program for SC
 SC should not undermine SAC rulings

Expectations on Key Functions

 Accountable & responsible on the overall SGF structure &
Shariah compliance
Board  Approve all policies related to Shariah matters
 Ensure that management provides full information &
disclosures to Shariah committee
 Appoint Shariah committee upon recommendation of its NAC
 Recognize the independence of Shariah committee & ensure
free from undue influence
 Ensure that Shariah decisions are duly observed & implemented
by the IFI
 Collectively have reasonable understanding on the principles of
Shariah & its broad application in Islamic finance
 Develop a set of fit & proper criteria for the Shariah committee
 Review the performance of Shariah committee to gauge the
competence, knowledge & contributions

 Accountable & responsible for all its decisions, views &
opinions related to Shariah matters
 Shall perform an oversight role on the IFIs business operations
Shariah  Advise the board & provide input to the IFI on Shariah
Committee matters
 Endorse Shariah policies & procedures prepared by IFI
 Endorse & validate relevant documentations eg. legal
documentations, product manual, marketing advertisements,
etc
 Report directly to board, to reflect independence from
management & other stakeholders
 Inform board & recommend forth remedial actions or
measures to rectify the situations
 Enhance knowledge in Shariah & Islamic finance as well as
keep abreast with affairs of IFI
 Observe confidentiality code at all times & shall not use info
obtained in ways that is detrimental to IFI


 Responsible to observe & implement Shariah decisions & rulings
made by SC & SAC
 Provide necessary info & disclosures to SC in a true & fair
Management manner & transparent on any areas that need clarification by SC
 Provide adequate resources & manpower to support Shariah
governance infrastructure
 Provide continuous learning & training programs to key internal
stakeholders including board, SC, and relevant staff in Shariah
 Develop & adopt a holistic culture of Shariah compliance within
the organisation
 Ensure that Shariah policies & procedures are accessible at all
times to those involved in the implementation of Shariah
governance
 Immediately notify the board & Shariah Committee as well as
the Bank in the event the management becomes aware that
certain operations are found to be carrying out business(es)
which is(are) not in compliance with Shariah
Expectations on Key Functions - Conclusion
SHARIAH COMMITTEE BOARD AND

MANAGEMENT
 Responsible for forming and  Responsibility for compliance to
expressing an opinion on the the Shariah therewith rests with
extent of IFI compliance with the the management of IFI.
Shariah.
 Responsible to provide to SC all
 SC to assist the management in information relating to IFI
complying with the Shariah rules compliance to the Shariah.
and principles by providing
guidance, advice and training on
Shariah.
72

Other Key Internal Functions

 Apart from Shariah review & audit IFIs are also expected to establish other functions that complement
and provide necessary support to Shariah compliance functions within the organisation
Objectives Scope & Functions
 Identification & assessment of Shariah  Form part of IFIs integrated risk

Shariah risk risk would be systematically controlled mgmt control function
& monitored
management control
 Ensure proper deliberation of Shariah  Perform in-depth research on

Shariah research related matters Shariah including providing day-to-
function day Shariah advice & consultancy
 Perform by qualified Shariah officers
 May seek input from experts on
technical matters
 Provide necessary support to Shariah  Coordinating meetings, compiling

Shariah secretariat committee & IFI in implementing papers, disseminating Shariah
Shariah governance decisions
function
 Engaging with relevant parties that
need assistance
Shariah Review Vs. Shariah Audit

SHARIAH REVIEW SHARIAH AUDIT
 Meaning: Regular assessment on  Meaning: Periodical independent
Shariah compliance in the activities assessment of the IFI to ensure sound and
and operation of IFIs by qualified effective internal control system for
officers. Shariah compliance.
 Function: Examination & evaluation  Function: Shall be performed by internal
of the IFI’s level of Shariah auditors with adequate Shariah related
compliance, remedial rectification knowledge and training.
measures and control mechanism
 Scope: Overall business operations of  Scope: All aspects of IFI’s business
IFIs, starting from product structuring operations & activities (e.g. financial
to product offering statement, organisational structure,
adequacy of Shariah governance process
etc.)
 Process: Planning – documentation –  Process: Understanding business of IFI –
communicating outcome (report) – develop audit program – obtain relevant
rectification. sources – conduct audit exercise –
communicating result – recommendation –
rectification, follow up.
74

Shariah Review Vs. Shariah Audit
1. Shariah Review must be performed by qualified Shariah officer

i.e. an officer who holds a bachelor degree in Shariah, which
includes study in Usul Fiqh (origin of Islamic law) and Fiqh al-
Muamalat (Islamic transaction law).
2. Differences in term reporting:
i. Shariah Review reports – Shariah Committee and

Management
ii. Shariah Audit findings – Shariah Committee and Board

Audit Committee.
75
SGF Requirement: Shariah Audit

1. To be performed by “internal auditors”, who have acquired adequate
Shariah-related knowledge and training.
 The expertise of IFI Shariah officers may be engaged as long as the
objectivity of the audit is not compromised.
 May be outsourced to external parties; subject to oversight,
accountability and responsibility over these functions must remain with
the IFI.
2. Shariah audit may be conducted as part of thematic audit on specialised
area e.g. management audit and AML.
3. Shariah audit on critical areas shall be conducted once a year.
4. Deliverables of Shariah audit function shall be determined by Board Audit
Committee (upon consultation with Shariah Committee).
5. BNM may appoint an external party or person to conduct Shariah audit on
the operations of IFI, if BNM considers it is desirable.
76

SGF Requirement: Shariah Audit Process

1. Understanding of business activities – to allow better scoping of an audit
exercise i.e. auditability and relevance of activities.
2. Developing of comprehensive audit program or plan. Program should
include:
 Objectives, Scope, Personnel assignment, Sampling, Control and
duration
3. Obtaining and making reference to relevant sources:
 Shariah Advisory Council of BNM rulings, Shariah Committee ’ s
decisions, fatwas and guidelines, Shariah audit results and Internal
Shariah checklist
4. Conducting Shariah audit on a periodical basis.
5. Communicating results arising from the Shariah audit to the Board Audit
Committee and the Shariah Committee; and
6. Providing recommendations on rectification measures taken and following-
up on the implementation of rectifications.
77
Managing Shariah Audit Process
78

Definition of Shariah Non Compliance Risk

Guiding Principles:
OPERATIONAL RISK Principle 7.1: IIFS shall have in place adequate systems and
controls, including Shariah Board/ Advisor, to ensure
“Risk of losses resulting from compliance with Shariah rules and principles.
inadequate of failed internal
comply at all times with the Shariah rules and principles.
process, people and systems or
from external events, which contract documentation complies with the Shariah – with
includes legal risk and Shariah non regard to formation, termination and elements possibly
compliance risk, but excludes affecting contract performance.
strategic and reputational risk.”
Shariah compliance review at least annually.
SHARIAH NON COMPLIANCE RISK keep track of income not recognised arising out of
Shariah non-compliance and assess the probability of
similar cases arising in the future.
“The risk that arises from the
Bank’s failure to comply with the Principle 7.2: IIFS shall have in place appropriate
Shariah rules and principles mechanisms to safeguard the interests of all fund
determined by the relevant Shariah providers. Where IAH funds are commingled with the
regulatory councils.” IIFS’’s own funds, the IIFS shall ensure that the bases for
asset, revenue, expense and profit allocations are
established, applied and reported in a manner consistent
with the IIFS’’s fiduciary responsibilities.
79
SCR and Capital Adequacy Requirement

 IFSB -2 (Capital Adequacy Standard) - IFIs are
Annual Average Gross Income
required to set aside 15% of average annual (previous three years) X 15%
gross income over preceding three (3) years
gross for OR. Gross income is defined as:
Net income from financing activities (e.g. selling
 Regulator has discretion impose a higher price less purchase price) which is gross of
capital charge as to a higher capital charge any provisions and operating expenses; plus
as they deem fit to cater for SCR of a Net income from investment activities; plus
particular SCR. The percentage is not Fee income (e.g. commission and agency fee)*
specified in the IFSB-2 because the extent of
losses arising from non-compliance with Less:
Investment account holders’ share of income
Shariah rules and principles cannot be
ascertained owing to lack of data.
Malaysia – BNM’s Capital Adequacy Operational Risk Capital Requirement (ORCR)

Framework for Islamic Banks.
Islamic banks may adopt Standardized
Approach (SA) subject to BNM approval. ORW = 12.5 * ORCR
Islamic banks that have adopted SA are not
allowed to revert to BIA without the approval of
* BNM’s CAFIB – may include income from non-
BNM. Shariah compliant sources, if any.
80

Basel Sound Practices on Operational Risk

Disclosure
10 Public disclosure or risk exposure
and quality of management
Roles of supervisors
9 Regular evaluation of strategies
policies, procedures and practices
8 Ensure banks have effective framework
Risk management identification,

measurement, monitoring and
7 Contingency and business continuity plan
control
6 Policies,
risks
processes and procedures to mitigate
5 Monitor risk profiles and losses - KRI
4 Identify and assess risks in products, activities, processes

and system
Development an appropriate risk 3 Senior management responsible for implementing the framework
framework and environment
2 Framework subject to effective and comprehensive internal audit.
1 Board sets – strategy and framework plus oversight
81
Bank Islam’s Risk Management Framework

 Bank Islam adopted
definition of OR as
per BNM’s Capital
Adequacy
Framework of Islamic
Banks (CAFIB).
 Risk Management
Framework of the
Bank communicates
the Bank’s vision
and strategies in
managing credit,
market, operational,
Shariah non
compliance and
other risks of the
Bank.
 The RMF is
supported by various
polices and
guidelines.
82

Risk Policies and Guidelines
Bank Islam’s Risk Management Framework is built  Risk Management Framework

upon the solah (prayer), the main pillar of Islam.
 Operational Risk Management
Framework and Guideline
 Standard of Control of Operational Risk
(SCOR)
 Risk Loss Event Management and
Reporting Guideline
 Business Continuity Management
Policy
 Business Continuity Management
Guideline
 Shariah Compliance Policy

 Shariah Compliance Risk Management
Guideline
 Shariah contracts’ guidelines
83
Risk Appetite Framework of Bank Islam

 RMF is supported by Risk Appetite Framework i.e. the guiding document for any strategic,
business and/or risk decision making process. The document reflects the current macro-
economic environment and in line with Internal Capital Adequacy Assessment Process (ICAAP).
RAS 1 RAS 3 RAS 6

Responsibility of Senior Periodic review on All employees are responsible
Management via MANCO & comprehensiveness of the for risk and held accountable
subject to oversight by Board Bank’s risks and resources/
processes applied to manage
the risk
RAS 8 RAS 9 RAS 10

Adherence to laws, Shariah Adherence to minimum control Only undertake well understood
principles and tenets. Zero- standards (Standard for the activities
tolerance to Shariah non Control of OR “SCOR)
compliance
RAS 11 RAS 14 RAS 15

No compromise on reputational Perform annual ICAAP as part of Strong PIDM rating, minimum of
risk business & budget planning. category 2
Establish a comprehensive
capital plan
84

ORM and SCRM Strategy

3RD LINE OF DEFENCE
Internal Audit (Including
Shariah Audit)
2ND LINE OF DEFENCE PROVIDE INDEPENDENT
ASSURANCE to Board of Directors
Operational Risk Mgmt
and Senior Management that Risk
Dept, Compliance & Management processes and tools
1ST LINE OF DEFENCE Control Dept and are effectively implemented.
Operational Risk Control
Line Management Committee
(including Business and
ESTABLISH and maintain ORM and
Support Heads, Branch
SCRM Framework, assessing
Managers, BRO, SRO, monitoring, reporting &
DORC and all staff) controlling risk on a bank wide
level
RESPONSIBLE for ongoing
oversight of risk and control at
day to day work level.
85
SCRM Processes and Tools

Assessment & Control &
Identification Reporting
Measurement Monitoring
Risk Profiling MASA-Shariah MASA-Shariah & MASA-Shariah, KRI

SNCTR & SNCTR
• Identify and • Assess and MASA-Shariah • Report risk
1ST LOD document SCR to measure SCR on •Document actions (SNCTR)
develop risk profile: half yearly basis taken/ required to
1. Risk description (role of BRO and mitigate SCR
2. Causal factors DORC) •Ensure resolution
3. Controls
SNC Tracking
•SNC Tracking Report
(SNCTR) mostly driven
CCD
• Compliance and • Monitor submission. MASA-Shariah • Report risk:

2ND LOD
Control Department • Validate residual •Monitor resolution of 1. KRI
actively drive risk actions taken 2. SNCTR
identification of SCR 3. Non Halal
and document SCR SNC Tracking Income
control & residual •Analyze and monitor • Report to Board/
risk (SCR Profile) BRC, SRC, MRCC,
•Develop Shariah SCRCC
Policy, Guidelines
86

Identification of SCR (Risk Mapping)

Shariah (S1) = Customer is not eligible to
transact (ahliyyah al-tasarr uf)
Shariah (S2) = Appointment of Agent Form not

completed and signed.
Shariah (S3) = Amount booked is different

from the amount in the Offer to Purchase.
Shariah (S4) = Acceptance of Purchase is not

generated and kept in Customer file (no
Qabul).
MASA-Shariah (self assessment) – medium and high Shariah (S5) = Documents used are not the
Compl Additional
approved version.
Risk Task OIC Shariah Requirement
y (Y/N) Control
S1 –  Financing PFE  Customer must have capacity to
Customer is application enter into transaction.
not eligible to creation.  Granting financing to customers
transact. Shariah (S6) = COT is not distributed to
 Handle who are clearly known not to Customer.
offer have the capacity to pay it is
acceptance prohibited (haram).
S2 – Financing PFE  Shariah Compliance Policy - All Shariah (S7) = Customer does not sign a duly
Appointment application documents relating to the completed document with specified asset.
of Agent creation. products and services must be Acknowledgement of receipt from Customer is
Form is not approved by the SSC. done by initialing at the relevant document.
completed  To perform as an agent, the
and signed. Bank must be appointed by the
principal.
87
Shariah Research
SHARIAH
RESEARCH
In addition to
Shariah
compliance
Research Secretariat
functions, there is
a need to have an
internal unit
 Perform in-depth research and  Serve the Shariah Committee.
comprising of
studies on Shariah issues. Shall
qualified Shariah
be performed by qualified  Coordinate meetings,
officers to
Shariah officers with advice compiling papers and
perform Shariah
and input from experts. disseminating Shariah
research roles:
decisions.
 Provide day-to-day Shariah
advice and consultancy
including product
development processes based
on the decisions of SAC and
Shariah Committee.
88

Part 4
Implementation and Challenges
89
Shariah Committee’s Report
 In Malaysia,GP8-i: Guideline on Financial Reporting for Licensed Islamic

Banks (2005) and GPT6: Guidelines on Financial Statements for Takaful
Operators provides requirements for disclosure which includes Shariah
Committee Report. This is further reiterated in the Shariah Governance
Framework for Islamic Financial Institutions (2010).
 Accounting and Auditing Organization for Islamic Financial Institution

issued a standard on the format of the Shariah Committee/Shariah
Supervisory Board Report (GSIFI No 1) that is made effective in 1999.
 BNM’s SGF has adapted the particular AAOIFI standard according to local
banking regulation, which is a good move as it allows for a
straightforward comparison of Shariah Committee Report across
international borders.
90

Minimum Disclosure: SGF

Introductory Paragraph on
Responsibilities of SC Members
 Review the principles and contracts.
 Form an opinion whether the IFIs
have complied with Shariah rulings
of SAC and SC
Distinguishing management’s
responsibility from SC’s responsibility
 Management to ensure that IFI
conducts business in accordance
with Shariah.
 SC is only forming independent
opinion based on its review.
Scope para outlining the scope of work
for SC members
Opinion Para whether the items that
have been reviewed are in compliance
with the Shariah.
Closing Para – Confirmation on
Operation for the financial year
91
Example: Bank Islam
92

Example: Bank Islam
93
Implementation Challenges of Shariah Governance
1. The lack of knowledge and comprehension among Shari’ah scholars about

modern financial practices.
2. Shortage of Shari’ah scholars to serve Islamic financial institutions.
3. The challenge to synergize between the Shari’ah, regulatory, legal, finance
and tax requirements in product development.
4. The challenge to move towards innovations and providing Islamic based
services and products. This is to move away from the prevailing practice of
imitation and replication of the conventional products or the sole focus on
Shari’ah compliant services.
5. The challenge to provide speedy and timely Shari’ah solution to Islamic
financial institution’s issues.
6. The challenge to balance between monetary and Shari’ah objectives.
7. The challenge of secrecy and confidentiality.
8. The challenge of the knowledge gap in the industry whereby the unique
features of Islamic finance and its products are not well understood and
appreciated.
94

Case 1 – Collapses of the Bank of Credit and

Commerce International (BCCI) in 1991
• Faisal Islamic Bank of Egypt, Dubai Islamic Bank, Tadamon
Islamic Bank, Qatar Islamic Bank and Kuwait Finance House
had invested in BCCI with understanding that BCCI will invest
their funds in commodities or goods.
• However, the auditors of BCCI, Price Waterhouse Cooper later
reported that there was no proof that BCCI entered into any
commodity contracts.
FACTOR AND IMPACT

Weak supervision on Shariah governance and lack of screening
process at the IFIs level. This lead to misplaced of funds obtained
from IFIs into Shariah non-compliant portfolio.
95
Case 2 – Failure of Kleinwort Benson to

Introduce an Islamic trust in 1986
• Kleinwort Benson is the first investment bank to introduce an
islamic unit trust in United Kingdom in 1986 using its specialty
in the finance of exports and imports of commodities and
good knowledge of the workings of the London Metal
Exchanges.
• The fund was registered in Guernsey for tax reason and
efforts were made to market the fund in the GCC.
• There was no Shariah advisor monitoring the fund.
FACTOR AND IMPACT

• The fund was not succesful as it was difficult to establish credibility with GCC
investors without the Shariah advisor/ Shariah committee.
• This deficiency was subsequently rectified when Kleinwort Benson launched Al
Meezan Commodity fund in 1996
96

Case 3 – Investment Dar KSC vs. Blom

Development Bank Sal (2009) EWHC 3545
• Investment Dar (ID) refused to pay the expected profit and to return the
principal amount of wakalah based deposit in the amount of USD10
million. ID claimed that the deposit did not comply with Shariah and
therefore, is not allowed under its Article of Association and should be
considered void.
• In the contract, ID confirms that the terms of the master Wakalah contract
and the transactions contemplated thereby are in accordance with the
Shariah as interpreted by the Shariah.
• The investments made by ID were not succesful and ID stopped making
payments to Blom. Blom sued ID for repayment of the amounts it had
invested as well as the specified rate of return profit.
FACTOR AND IMPACT
• Important of ascertainment of the Shariah compliance status of the
transaction by the counterparties
• Affected the trust on IFI especially by non-Muslim investors
97
Case 4 – Dubai Islamic Bank 1998 – Runs of

deposit in one day and losses of USD50 mil
• Incurred losses of USD50 million when “a bank official
extended financings without confirming to the bank’s credit
terms”.
• News of the losses caused a run on deposits of USD138
million (7% of the bank’s total deposit), in one day, forcing the
Dubai Central Bank and the UAE authorities to ride to the
rescue, and provide the liquidity and the guarantees
necessary to reassure depositors.
FACTOR AND IMPACT

• Operational risk – failure of internal control
98

Conclusion
 Shariah governance allows for systematic and
transparent mechanism to monitor and
ensure Shariah compliance in all stages of
provision of Islamic financial services.
 The real challenge is effective implementation
and enforcement of the Shariah governance
system.
 Implementation requires commitment and
correct attitude of all stakeholders involved
especially the Board of Directors and Senior
Management of the IFIs.
 Successful implementation of Shariah
governance will boost confidence of the
integrity of IFIs and prevent unnecessary
operational risks to the IFIs.
99
THANK YOU & WASSALAM
IBFIM
3rd Floor, Menara Takaful Malaysia, Jalan Sultan Sulaiman, 50000 Kuala Lumpur
(Tel) +603-2031 1010 (Fax) +603-2020 1812
(Email) training@ibfim.com (Web) www.ibfim.com
100

ASSOCIATE QUALIFICATION IN ISLAMIC FINANCE
IN-HOUSE TRAINING
AQIF
ISLAMIC FINANCE
Module
REGULATORY FRAMEWORK 15th September 2015

At the end of the module, participants should be able to :

1. Explain the global overview of the financial system and the structure as well as the
practice of Islamic financial system in Malaysia;
2. Apply the relevant guidelines and the regulatory requirements in relation to Islamic
finance operations in Malaysia; and
3. Describe the current development in the Islamic financial stability globally.
IN-HOUSE TRAINING PROGRAM
ISLAMIC FINANCE REGULATORY FRAMEWORK
 Tuesday, 15 September 2015 Public Bank Berhad 
Time Topic
8:45 a.m. Overview of Islamic Financial System

 An Overview of the Global Financial System
 History and Development of Islamic Financial System
 Islamic Financial System Structure
i. Islamic Financial Institutions
- Banking
- Non-bank Financial Intermediaries
- Other Non-bank Financial Intermediaries
ii. Islamic Financial Markets
 Capital Market
 Money & Foreign Exchange Markets
 Derivatives Markets
 Offshore Market
Speaker: Puan Apnizan Abdullah

IBFIM’s Trainer
10:30 a.m. Coffee Break
11:00 a.m. Legal and Regulatory Framework of Islamic Financial Institutions from
Malaysian Environment
 Role of BNM
 Role of Securities Commission
 Role of Islamic Financial Services Board (IFSB), Accounting and Auditing
Organization for Islamic Financial Institution and Malaysian Accounting
Standards Board
 Legal and Regulatory Framework of Islamic Financial Institutions
 Relevant Acts Governing Islamic Financial Institutions
- FSA (2013)
- IFSA (2013)
- Central Bank of Malaysia Act 2009
- Securities Commission Act 1993
- Capital Market and Services Act 2007
- Development Financial Institutions Act 2002 (Act 618)
- Anti-Money Laundering and Anti-Terrorism Financing Act 2001
(Act 613)
- Payment Systems Act 2003 (Act 627)
- Money-Changing Act 1998 (Act 577)
 International Islamic Finance Regulatory Framework (covering cross-
border transactions)
1:00 p.m. Lunch

2:00 p.m. Legislation and Guidelines for Islamic Financial Institutions
 BNM’s Guidelines
 Banking Guideline
 Takaful Guideline
 SC’s Guidelines
 Guidelines on Islamic Fund Management
 Guidelines for Islamic Real Estate Investment Trusts
 Guidelines on the Offering of Islamic Securities
 Registration of Shariah Advisers Guidelines
3:30 p.m. Coffee Break
4:00 p.m. MIFC

 The Role of MIFC
Issues and Challenges in the Implementation of Islamic Financial

System
 Legal
 Accounting
 Shariah
 Systems
 Risk
 Integration etc.
5:45 p.m. End of Program

APNIZAN ABDULLAH
IBFIM’s Trainer
She holds a LLB (hons), obtained from the IIUM, the garden of virtue of knowledge in 2003. Being a
scholar of Yayasan FELDA that sponsored her study at the IIUM, she successfully graduated for her
Master of Comparative Law (MCL) from the same university in 2004. To explore more on practical
experience in Islamic banking and finance she pursued her pupillage at Messrs. Mohd Ismail & Co.
(as it then was) which specialized in Islamic banking legal practice.
With the experience she obtained under her master, Mr Mohd Ismail Shariff, she continued her
legal practice at Messrs Mak Farid & Co. After a year, she subsequently shifted to the academic line
by firstly joining Universiti Tunku Abdul Rahman in 2007 and University of Malaya in 2008 till 2010.
As she is always passionate in seeking knowledge in the area of Islamic financial laws and practice,
she then pursued her Chartered Islamic Finance Professional (CIFP). She managed to obtained her
CIFP in 2011 from INCEIF. In 2012, she was invited to join International Shariah Research Academy
(ISRA) as a researcher.
Realizing the need in enhancing her knowledge and competency in Shariah, she subsequently
embarked her enrolment at IIUM for LLBS and successfully obtained her first class degree in Shariah
in 2014 from the institution. During her university days, she was awarded with the Best Student in
Islamic Banking & Takaful in 2003, Dean’s list certificates for few semesters and Rector’s list.
She has written numerous articles in international journals, ISRA Research Papers and Islamic
finance magazines and presented papers locally and internationally. She was also entrusted to
conduct few trainings in the area of Islamic financial law organized by local polytechnic institutions,
university and private institutions. Currently, Puan Apnizan is pursuing her PhD from the same
university specializing in International trade law and Islamic financial services.
AQIF Module 5: Islamic Finance Regulatory Framework
ISLAMIC FINANCE REGULATORY FRAMEWORK
Presented by:
Puan Apnizan Abdullah
IBFIM’s Trainer
Historical Development Of Banking
i. Pre-Islamic Era
ii. During the Prophet Time
iii. During the Era of Khulafa’ Al-Rashidun
iv. During Umayyad, Abassids & Ottomon caliphates
Copyright ©IBFIM 2015. All Rights Reserved 1

1)During the Pre-Islamic Era

• Mecca as a centre for Ibadah
• This factor made it as a trade centre
• Wadiah, Mudharabah and Musyarakah commonly practiced
• Before his prophethood, the Prophet Muhammad was a well-

known custodian
• Loan existed but with interest
• When he became a Prophet, loan was banned but

Mudharabah, Musyarakah and wadiah were still actively
practised and endorsed by Shariah
3
2)During the time of the Prophet
• Those contracts remained practised except loan with usury
• Only allow qard hasan
• Muzaraah dan musaqah then existed
• Islam sets out rules in dealing with dinar and dirham –trace of
money exchange
• Riba was made haram (all kinds)

3)During the era of Khulafa’ AlRasyidun
• Continued those practices
• Started to have money remittance or transfer
• Trace of cheque used-during Umar’s time
• International trade was active
• Banking was carried by individual, no trace of banking via

institution
4) During the era of

Umayyad, Abassid and Ottomon
• Continued the practices as well

• Additional developments:
1. Money changer by institution-jihbiz
2. Sukuk during Marwan’s time
3. Fulus was introduced
4. Bill of exchange started to be used-suftajah
5. Jahbadh (merchant banker)
6. Murabahah was used
7. Hiwalah
8. Ibda’-liquidity management

Resurgence Of Islamic Financial System In The

20th Century
Early Efforts And Experiment
• In 1903, the Egyptian Shari’ah scholars declared the illegality

of the interest paid on the post office saving funds according
to Islamic law.
• 1920’s-In India
• 1947-Malaysia-Maarof Zakariah-Bank Kebangsaan Melayu
• 1950’s-in Pakistan

• 1963-Mit Ghamr in Egypt and Tabung Haji in Malaysia
• 1972-Nasser Social Bank
• 1975-IDB
• 1975-First Islamic Commercial Bank
• etc.
Nasser Social Bank Egypt 1972

Philippine Amanah Bank Philippines 1973
Islamic Development Bank Saudi Arabia 1975
Dubai Islamic Bank UAE 1975
Faisal Islamic Bank of Egypt Egypt 1977
Faisal Islamic Bank of Sudan Sudan 1977
Kuwait Finance House Kuwait 1977
Islamic Investment Company Bahamas 1977
Islamic Banking System International Holdings Luxembourg 1978
Jordan Islamic Bank for Finance and Jordan 1978
Investment
Islamic Investment Company of the Gulf UAE 1978
Bahrain Islamic Bank Bahrain 1979
Shariah Investment Services Switzerland 1980
Bahrain Islamic Investment Bank Bahrain 1980
Dar al-Maal al-Islami Switzerland 1981
Dar al-Maal al-Islami Trust Bahamas 1981
Islamic Investment House Jordan 1981
Islamic International Bank for Investment and Egypt 1981
Development
Islamic Investment House Jordan 1981
AlBaraka Investment and Development Saudi 1982
Company
Saudi-Philipphine Islamic Development Bank Saudi Arabia 1982
Al-Baraka Investment Company UK 1982
Massraf Faysal AlIslamy Bahrain 1982
Bank Islam Malaysia Berhad Malaysia 1983
International Islamic Bank of Dacca Bangladesh 1983
Islamic Bank International Denmark 1983
Tadamon Islamic Bank Sudan 1983
Qatar Islamic Bank Qatar 1983
Bait Ettamouil Saudi Tounsi Tunisia 1984
10

IF Continues to Grow Till Present with

Tremendous Achievements
11
International Overview: Legal System
12

LEGAL FRAMEWORK AROUND THE WORLD

13
Stages
INTERNATIONAL NATIONAL
LEVEL LEVEL
14

How Does It Works?

BIS-BASEL
COMMITTE
E
Internation WORLD
al Treaties BANK
WTO IMF
ICC FATF
IGA IAIS
IOSCO
15
Case Study 1
• Can you insert “Shariah” as the governing law in your legal

document?
• Implications?
16

Case Study 2
• Can a country execute sukuk contract without even taking into

consideration the IOSCO Principles?
17
Case Study 4
• Can Islamic Finance be operated in secular countries eg USA? Is

there any constitutionality issues?
18

Case Study 5
• What is the available law to regulate Takaful?
• What is the impact of IAIS (International Association of

Insurance Supervisors?
19
Lets Talk : Dispute
• How do we resolve disputes – cross border?

• Investment Dispute-What is ICSID?
• G-G
• P-P
• C-C Reciprocal
Enforcement
• C-P Judgement ?
• G-P
• G-C
20

Resolving Cross Border Disputes
Contract
Clause
21
Standards Mercatoria ADR?
UNCITRAL
New York Arbitration
Convention Model Law
Arbitration Act
Each country
22

Arbitration Avenues Around The Globe
23
Case Study 6
• How to execute a decision / award from Arbitrator in Malaysia

in UK?
24

Why Arbitration In Islamic Finance?
• RATIONALE?
Holistic Reasoning's
• SUBJECTED TO LEX
MERCATORIA
• CROSS BORDER / ROME CONVENTION
REGULATION 1
INTERNATIONAL FINANCING NEW YORK CONVENTION
• NORMS/ CULTURE/TRADE ICC
USAGE AROUND THE

WORLD
• AAOIFI & OCI FIQH
ACADEMY-STANDARDS
25
Do We Effective Islamic Finance Regime For

Islamic Finance at international concert?
OIC fiqh
IFSB academy
AAIOFI
26

• Persuasive Effect!!!
• Not Binding
27
Malaysian Legal Framework
28

IBF - An Introduction
• The structure of IBF is firmly rooted in Quran & Sunnah
• Part of Islamic civilization since the beginning of Islam
• Last 4 decades – it has emerged as one of the most

significant & successful modern implementations of the
Islamic legal system
• A good example of Islamic legal innovation & development –

dynamism of fiqh al-muamalat
29
Salient Features Of Islamic Finance
Islam Principles of Contracts (Aqd)

Islamic finance is fundamentally based on transaction contracts,
executed in due consideration of the existing laws of a particular jurisdiction.
Rules to be observed
. Riba free  Gharar free

•Any predetermined Riba
Observing that every contract
payment over and above possesses all its essential
the amount of principal is elements and that every essential
prohibited element meets the necessary
No
value/use
Gharar conditions
Avoidance
Contract must be of value of
• The activities done must prohibition No involvement of impure goods
be of value to the parties • riba based asset
• non-permissible entertainment
No-gambling Impure activities
• Gambling is highest level Gambling
goods
of speculation/gharar • manufacture or sale of non halal
products (e.g. pork, tobacco-
based, alcoholic beverages)
© Rusni Hassan 2011. All rights reserved.
30

Historical Development of
Islamic Banking and Finance in Malaysia
Year Key Milestone
1963 Establishment of Pilgrims’ Fund Board (Lembaga Tabung Haji)
 Systematic mobilization of funds
 Assist Muslim community to perform Pilgrimage as well as participate
in investment and economic activities
1980 Bumiputera Economic Congress proposed the setting up of an Islamic
bank
 Triggered by a growing revival of Islamic values amongst the Muslim
population
 Reinforced by the successful implementation of Islamic banks in the
Middle East
1981 National Steering Committee undertook a study and made
recommendations on all aspects of the setting up and operations of an
Islamic bank
31
‘continuation
Year Key Milestone
1983 Enactment of the Islamic Banking Act (IBA) 1983
Bank Islam Malaysia Berhad (BIMB) was incorporated as Malaysia’s first
Islamic bank
 BIMB was given a grace period of 10 years to operate without
competition, to protect its growth and development
 Over the period of 1983 – 1993, BIMB achieved an average annual
growth rate of 48%
Enactment of the Government Investment Act (GIA) 1983
 Enables the issuance of government papers and bonds
 Government investment certificates (GIC) initially offered on the basis
of qardh hasan but subsequently changed to bay’ al-’inah
1984 Setting up of Takaful companies, to complement the operations of
Islamic banks
1992 BIMB was listed on KLSE
32

‘continuation
Year Key Milestone
1993 The Dual Banking System was implemented, allowing Islamic and conventional
banking to co-exist and run concurrently in the financial system
 Islamic Banking Scheme (IBS) introduced, which allowed conventional banks
to offer Islamic banking windows
1999 Bank Muamalat Malaysia Berhad, Malaysia’s second full-fledged Islamic bank,
was incorporated
 Resulting from the merger between Bank Bumiputera Malaysia Berhad
(BBMB) and Bank of Commerce Berhad (BOCB)
KLSE Islamic Index was introduced
2000 Establishment of Association of Islamic Banking Institutions of Malaysia (AIBIM)

 To harmonize and streamline Islamic banking practices
 As platform to voice issues with the authorities
Establishment of Islamic Banking and Finance Institute Malaysia (IBFIM)
 Industry owned training institute
33
‘continuation
Year Key Milestone
2002 Introduction of standard generic names for Islamic banking products, e.g.
savings account-i, current account-i, home financing-i, hire purchase-i,
cash line facility-i, share-financing-i, working capital financing-i, letter of
credit-i
Introduction of Islamic banking logo
 To increase visibility, provide branding of Islamic financial products and
reflect commitment of the development of Islamic banking and finance
Malaysia issued first global sovereign Sukuk al-Ijarah bond
2004 RHB and CAHB were given approval to launch Islamic banking subsidiaries
2005 Entrance of Kuwait Finance House, Al Rajhi & Asian Finance (a

consortium of Qatar Islamic Bank, RUSD Investment Bank Inc. &
Global Investment House).
34

‘continuation
Year Key Milestone
2008 International Islamic Banking licenses were issued to Unicorn

International Islamic Bank, First Islamic Investment Bank Ltd
(owned by PT. Bank Muamalat Indonesia) and Deutsche Bank Ag
(2010), allow the bank to provide Islamic commercial and
investment services denominated in foreign currencies
2010 5 new Islamic banking licenses to foreign banks (BNP Paribas SA,
PT Bank Mandiri, National Bank of Abu Dhabi, Mizuho Bank and
Sumitomo-Mitsui Banking Corporation) and the establishment of
“Mega Islamic Bank”
2013 Enactment of Financial Services Act 2013 (FSA) and Islamic
Financial Services Act 2013 (IFSA) to replace Banking &Financial
Institution Act 1958 (BAFIA) and Islamic Banking Act 1983 (IBA)
35
IBF In Malaysia-Shariah Contracts

development
1980 1990 2000 2005
•Intro & market •Islamic windows •Broader & deeper •Maturing &
familiarization (1993) - BAFIA market – esp. sukuk globalization
•Development of •Accelerated growth market: •Rule on full fledged
markets, players & in market size & • Guthrie Sukuk al Islamic subsidiaries
products players Ijarah (2001) •Islamic bank
•“Pilot project”: •Additional products • 1st Malaysian licenses to
• BIMB – IBA 1983 features: Global Sukuk al foreigners (2005):
• STMB – TA 1984 • BBA, Murabahah, Ijarah (2002) • KFH, Al Rajhi,
•Limited products: Ijarah, Wadiah, •Experimenting new QIB, etc
• BBA, Ijarah – Mudarabah product structures: •Moving towards
financing •Intro of Islamic • BBA, Murabahah, globally accepted
• Mudarabah, Capital Market: Ijarah, Istisna’, products:
Wadiah – • Equity, bonds, Mudarabah, • Ijarah, Istisna’,
deposits money market Musharakah Mudarabah,
•More facilitative Musharakah
legal/tax regime –
exemptions etc.
36

Malaysian Islamic Financial System
Malaysian Islamic Financial System
Capital Other
Banking Takaful
Market markets
Venture
Derivatives Inter bank
Equity Debt Development Micro Capital
& futures Money
market market institutions financing & Private
market market
Equity
37
Malaysian Financial Regulatory Framework
Central Bank of CMSA 2007 Labuan Offshore

Malaysia Act 2009 SCA 1993 Securities
SICDA 1991 Industry Act
1998
38

Regulators ensure sound financial regulations to achieve efficient, effective and stable
Islamic financial sector – the Case of Malaysia
Islamic Financial Services Board (IFSB) - Established in 2002
• International prudential standard setting body for Islamic finance
International
IFSB
• Ensures cross-border regulatory framework & international best practices
Islamic Financial Stability Forum (IFSF)
• Platform for information exchange & engagement btwn Islamic finance
IFSF
authorities
• Promotes cross-border cooperation
Bank Negara Malaysia (BNM)

BNM
• Regulator & supervisor of:
• Islamic Banks, International Islamic Banks
SAC for Islamic • Takaful & Retakaful Operators, International Takaful Operator
Banking & Takaful Shariah Advisory Council (SAC) for Islamic Banking & Takaful
• Highest authority for Shariah matters in Islamic banking & takaful
Domestic -
SC
Malaysia
Securities Commission (SC)

• Regulator of Islamic capital market : Islamic securities & Islamic fund
SAC for Islamic Capital managers
Markets Shariah Advisory Council (SAC) for Islamic Capital Market
• Highest authority for Shariah matters in Islamic capital market
Labuan FSA Labuan Financial Services Authority (Labuan FSA)

• Regulator of offshore Islamic banking windows & offshore takaful windows
Shariah Advisory Council (SAC) for Labuan FSA
SAC for Labuan FSA • Highest authority for Shariah matters in offshore Islamic banking & takaful
39
Central Regulation
Central Bank of Malaysia Act 2009

Section 2 : definitions of “Islamic financial business”
“ Any financial business in ringgit or other currency which is subject to the laws
enforced by the Bank and consistent with Shariah”
Sec 27 : Recognition on Dual Financial System in Malaysia
“The financial system in Malaysia shall consist of the conventional financial
system and the Islamic financial system”
Section 60 : BNM’s role to promote MIFC
“ The Bank shall, in cooperation with the Government or any Government
agency, statutory body, supervisory authority or international or supranational
organization, develop and promote Malaysia as an international Islamic
financial centre.”
Part VII Central Bank of Malaysia Act 2009 (sec 51 - 57)

 Establishment of SAC as the authority for ascertainment of Islamic Law for
purposes of Islamic financial business
40

Sec. 56 of the Central Bank Act, 2009
Section 56. Reference to Shariah Advisory Council for ruling from court or arbitrator.
(1) Where in any proceedings relating to Islamic financial business before any court or arbitrator any
question arises concerning a Shariah matter, the court or the arbitrator, as the case may be, shall—
(a) take into consideration any published (b) refer such question to the Shariah
rulings of the Shariah Advisory Council; or Advisory Council for its ruling.
(2) Any request for advice or a ruling of the Shariah Advisory Council under this Act or any other law
shall be submitted to the secretariat.
41
SAC
SUPERVISORY
ADVISORY
42

LAWS OF MALAYSIA
Effective Date : 30 Date of publication

22 Mar 2013
June 2013 in the Gazette
Date of Royal
Assent 18 Mar 2013
An Act to provide for the regulation and supervision of Islamic

financial institutions, payment systems and other relevant entities
and the oversight of the Islamic money market and Islamic foreign
exchange market to promote financial stability and compliance with
Shariah and for related, consequential or incidental matters.
43
Effects of IFSA2013
• Takaful Act 1984

• Islamic Banking Act
Repealed IFSA2013
1983
Insurance Act 1996

Payment system Act
2003
BAFIA 1989 Repealed
FSA2013
Exchange Control Act
1953
44

Specific Legislations on Islamic Banking
FINANCIAL SERVICES ACT 2013

IFSA 2013
• is very regulatory in nature; does • Insurance companies

not provide for the substantive &Conventional banks licensed
law for Islamic banking under FSA 2013 are also
• GAZETTED IN JUNE 2013 allowed to carry out IBF
• Mainly provides for the licensing
operation, in addition to their
& regulation of Islamic banking
business in Malaysia.
conventional banking
operation, provided that they
consult Bank Negara Malaysia.
45
Primary objectives of IFSA:

In order to ensure financial stability and compliance with Shariah
and in order to pursue this objectives, the Central Bank shall
a) foster-
• (i) the safety and soundness of Islamic financial institutions;

• (ii) the integrity and orderly functioning of the Islamic money market and Islamic
foreign exchange market;
• (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 services and products.
46

Effects of IFSA
STATUTORY
DUAL
COMPLIANCE
47
Compliance
Regulatory
Shariah
requirement
Legal
requirement Internal
SOP
Any laws
passed by
Parliament
National
International
Guidelines,
standards
Any
By BNM Regulatory
Reform by
different
jurisdiction
48

Significant features of Shariah Compliance
Shariah Rigorous shariah

compliance compliance
determinants function
through rulings (Shariah Review
of SAC & Shariah Audit)
Effective
Reporting
functions of
obligations of
Management,
IFIs to report
Board & Shariah
non compliance
Committee
49
Roles of Key Functionaries to

Ensure Shariah Compliance
BOD
SC
CEO
Enhanced statutory reporting obligations (Audit &

AUDITOR
Shariah Audit)
Oversight role to assist BOD & senior management for
sound and prudent management of TO through ensuring/

ACTUARY
safeguarding interest of takaful participants
50

Islamic Banks
Sec. 2 of IFSA 2013: Licensed

Islamic bank means a person
licensed under section 10 to carry
on Islamic banking business and
includes a licensed international
Islamic bank
51
Islamic banking business” means the

business of—
• accepting Islamic deposits on current account, deposit

account, savings account or other similar accounts, with or
without the business of paying or collecting cheques drawn
by or paid in by customers; or
• accepting money under an investment account; and
• provision of finance; and
• such other business as prescribed under section 3;
52

SEC 3 IFSA
3. The Minister may, on the recommendation of the Bank, prescribe—
S3(a) any business or activity as an addition to the definition of—

i. “Islamic banking business”;
ii. “international Islamic banking business”;
iii. “Islamic financial intermediation activities”;
iv. “Islamic factoring business”; or
v. “Islamic leasing business”,
and upon such prescription, the definition as added to shall be deemed to be
an integral part of this Act as from the date of such prescription, or from such
later date as may be specified in the order; and
(b) any business, service or activity in relation to a financial service as an

Islamic financial advisory business for the purposes of the definition of
“Islamic financial advisory BUSINESS under s 2(1).
53
C-“provision of finance” means

entering into, or making an
arrangement for another person
to enter into, the businesses or
activities which are in accordance
(f) purchase of bills of with Shariah including—
exchange, certificates (a) equity or partnership
of Islamic deposit or financing, including
other negotiable musyarakah, musyarakah
instruments; and mutanaqisah and
mudarabah;
(b) lease based financing,

including al-ijarah, al-
(e) fee based activity,
ijarah muntahia bi al-
including wakalah;
tamlik and al-ijarah
thumma al-bai`;
(c) sale based financing, including

(d) currency exchange istisna`, bai` bithaman ajil, bai`
contracts; salam, murabahah and
musawamah;
54

BRIEF OF IFSA2013
Part I Preliminary
Part II REGULATORY OBJECTIVES AND POWERS AND FUNCTIONS OF BANK
Part III AUTHORIZATION
Part IV SHARIAH REQUIREMENTS
Part V PAYMENT SYSTEMS
Part VI PRUDENTIAL REQUIREMENTS
Part VII OWNERSHIP, CONTROL AND TRANSFER OF BUSINESS
Part VIII FINANCIAL GROUPS
Part IX BUSINESS CONDUCT AND CONSUMER PROTECTION

PART X ISLAMIC MONEY MARKET AND ISLAMIC FOREIGN EXCHANGE MARKET
PART XI SUBMISSION OF DOCUMENT OR INFORMATION
PART XII EXAMINATION
PART XIII DIRECTIONS OF COMPLIANCE
PART XIV INTERVENTION AND REMEDIAL ACTION
PART XV OTHER POWERS OF BANK
PART XVI ENFORCEMENT AND PENALTIES
PART XVII GENERAL PROVISIONS
PART XVIII REPEAL, SAVINGS AND TRANSITIONAL
55
Breach of Shariah Compliance

Section 28. (1) states that 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—
a) immediately notify the Bank and its Shariah committee of the fact;
b) immediately cease from carrying on such business, affair or activity and
from taking on any other similar business, affair or activity; and
c) within thirty days of becoming aware of such noncompliance or such
further period as may be specified by the Bank, submit to the Bank a plan
on the rectification of the non-compliance.
56

IFSA2013: What is Shariah Breach?
Section 28(1) requires an institution to at all times ensure that its aims and operations,
business, affairs and activities are in compliance with Shariah. The compliance should be
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. The section further mention
that there three situations where the Shariah breach may occur in a situation where an
institution becomes aware that it is;
i. Carrying on any of its business, affair or activity in a manner which is not in
compliance with Shariah; or
ii. Carrying on any of its business, affair or activity in a manner which is not in
compliance the advice of its Shariah committee; or
iii. Carrying on any of its business, affair or activity in a manner which is not in
compliance the advice or ruling of the Shariah Advisory Council.
57
Shariah Compliance Should Be In….
AIMS
OPERATIONS
BUSINESS
AFFAIRS
ACTIVITIES
58

What is Shariah Compliance?

Authors Findings
IFSB (2005) Failure of Islamic banks to comply with shariah rules &
principles in term of products and activities will result in
transaction being cancelled or income generated would
not be recognized as eligible profit.
Grais & Pellegrini Shariah compliance:

(2006) (1) not to engage in interest-based transaction;
(2) not to conduct a purely financial transaction
disconnected from the real economic activity;
(3) not to participate in a transaction where there is
exploitation of any party; and
(4) not to participate in activities regarded as harmful to
society.
59
Shariah-Compliance Process in IBS

Authors Findings
IFSB Stages of shariah-compliance process:-

(2009) (1) Ex-ante processes – product design and development stage.
(2) Ex-post processes – all activities perform by the banks after the
product has been offered to the customers and the transactions have
been carried out, i.e. internal shariah review & shariah governance
reporting.
‘Abd al-Hamid al-Bali Methods for supervisory activities:
(2003) in Triyanta (1) Researching and evaluating the operation of the bank;
(2010) (2) Issuing decision relating to the product and operation; and
(3) Withdrawing or cancelling decisions and operations which are not in
line with shariah principles.
Triyanta Method of supervision:-

(2010) (1) pre-supervision (qabliyyah/sabiqah)
(2) on-going process supervision (athna’ al-‘amal)
(3) post-supervision (ba’diyyah/laiqah).
60

Reading Compliance
• SGF
• Financial Reporting Guidelines
• New Products Guidelines
• Other Guidelines depends on sectorial
61
Sectors
Banking and Deposit-Taking

Institutions (Sector 1)
Insurance and Takaful

(Sector 2)
Money Services Business

(Sector 3)
Electronic Money and Non-

Bank Affiliated Charge &
Credit Card (Sector 4)
DNFBPs and Other Non-

Financial Sectors (Sector 5)
62

Examples : Handle Sectorial
Anti-Money
Anti-Money
Laundering and Anti-Money
Laundering and Anti-Money Anti-Money
Counter Financing Laundering and
Counter Financing Laundering and Laundering and
of Terrorism Counter Financing
of Terrorism Counter Financing Counter Financing
(AML/CFT) – of Terrorism
(AML/CFT) – of Terrorism of Terrorism
Electronic Money (AML/CFT) –
Banking and (AML/CFT) – (AML/CFT) –
and Non-Bank DNFBPs and Other
Deposit-Taking Insurance and Money Services
Affiliated Charge & Non-Financial
Institutions (Sector Takaful (Sector 2) Business (Sector 3)
Credit Card (Sector Sectors (Sector 5)
1)
4)
63
Insurance & Takaful
• Financial Reporting
• Operational Guidelines and Procedures on Special Relief

Facility 2015 ** updated 2015/02/18
• Financial Reporting ** updated 2015/01/28
• Financial Reporting for Islamic Banking Institutions **

updated 2015/01/28
64

Development Financial Institutions
• Capital Adequacy
• Capital Framework for Development Financial Institutions ** updated
2008/04/25
• Financial Reporting
• Guideline on Classification of Impaired Loans/Financing and Provisioning
for Bad and Doubtful Debts
• Guidelines on Data Management and MIS Framework for Development
Financial Institutions
• Guidelines on Financial Reporting for Development Financial Institutions
– Related attachment: FAQs for Guidelines on Financial Reporting for
Development Financial Institutions (DFIs)
• Operational Guidelines and Procedures on Special Relief Facility 2015 **
updated 2015/02/18
65
Prudential Limits & Standards

• Guideline on Minimum Audit Standards for Internal Auditors of Development Financial Institutions
• Guideline on Corporate Governance Standards on Directorship for Development Financial Institutions **
updated 2010/02/08
• Guideline on the Governance of Shariah Committee
• Appointment of External Auditor by Development Financial Institutions ** updated 2008/04/24
• Guidelines on Best Practices for the Management of Credit Risk for Development Financial Institutions **
updated 2009/07/27
• Guidelines on Fit and Proper for Key Responsible Persons for Development Financial Institutions ** NEW
2011/09/15
• Guidelines on Corporate Governance for Development Financial Institutions ** updated 2011/11/18
– Related attachments
• Guidelines on Ibra' (Rebate) for Sale-Based Financing * Same guideline applies to Banking, Insurance &
Takaful and Development Financial Institutions** NEW 2013/02/04
• Risk Governance * Same guideline applies to Banking, Insurance & Takaful and Development Financial
Institutions** NEW 2013/03/01
• Islamic Corporation for the Development of the Private Sector (ICD) as an Interbank Player
• Introduction of New Products * Same guideline applies to Banking and Development Financial
Institutions **updated 2014/03/07
• Operational Risk Management
• Concept Paper: Compliance
• Reference Rate Framework
– Guide to Consumer on Reference Rate
66

• Capital Adequacy
• Guidelines on Dynamic Solvency Testing
• Minimum Paid-up Capital Requirement for Takaful Operators
• Risk-Based Capital Framework for Insurers **updated 2013/06/21
– Attachment 1
– Attachment 2
– Attachment 3
• Guidelines on Internal Capital Adequacy Assessment Process (ICAAP) for
Insurers ** NEW 2012/02/28
– Related attachment: Implementation Guidance on ICAAP Guidelines
– Related attachment: FAQ on Guidelines on Internal Capital Adequacy
Assessment Process for Insurers & Implementation Guidance (IG)
• Risk-Based Capital Framework for Takaful Operators ** UPDATED
2013/6/26
– Related attachment ** NEW 2013/6/26
67
Shariah
• Shariah Governance Framework for Islamic Financial Institutions** updated 2010/10/26 This supersedes
previous guideline below:
– Guidelines on the Governance of Shariah Committee for the Islamic Financial Institutions
• Concept Paper on Shariah Parameter Reference 4: Musharakah Contract ** NEW 2010/06/15
– Attachment 1: Draft of Shariah Parameter Reference 4: Musharakah Contract
– Attachment 2: Feedback Form on Draft of Shariah Parameter Reference 4: Musharakah Contract
(SPR4)
• Schedule of Shariah Advisory Council Meetings for 2013 ** updated 2012/12/03
• Concept Paper on Shariah Parameter Reference 5: Istisna' Contract ** NEW 2010/12/28
– Attachment 1: Draft of Shariah Parameter Reference 5: Istisna' Contract
– Attachment 2: Feedback Form on Draft of Shariah Parameter Reference 5: Istisna' Contract (SPR5)
• Resolutions of Shariah Advisory Council of Bank Negara Malaysia 2010 - 2011 ** NEW 2012/07/11
• Concept paper on Shariah Requirements, Optional Practices and Operational Requirements of
Musharakah ** NEW 2013/12/20
• Concept paper on Shariah Requirements, Optional Practices and Operational Requirements of
Mudarabah ** NEW 2013/12/20
• Concept paper on Ijarah ** NEW 2014/06/24
• Concept paper on Istisna’ ** NEW 204/06/24
• Resolusi Syariah dalam Kewangan Islam MPS BNM (2010-2012)** NEW 2014/11/04
• Concept Paper on Wadi'ah ** NEW 2015/1/16
• Shariah Leaders Education Programme
68

• Decision/ New Resolution

• Shariah Standard on Mudarabah ** NEW 2012/10/23
• Exposure Drafts on Islamic Financial Contracts (Shariah Requirements and Optional
Practices) ** NEW 2013/12/09
– Attachment 1 - Exposure Draft Hibah (Shariah Requirements & Optional Practices)
– Attachment 2 - Feedback Form for Hibah (Shariah Requirements & Optional Practices)
– Attachment 3 - Exposure Draft Bai` Ìnah (Shariah Requirements & Optional Practices)
– Attachment 4 - Feedback Form for Bai` Ìnah (Shariah Requirements & Optional
Practices)
– Attachment 5 - Exposure Draft Kafalah (Shariah Requirements & Optional Practices)
– Attachment 6 - Feedback Form for Kafalah (Shariah Requirements & Optional Practices)
– Attachment 7 - Exposure Draft Wakalah (Shariah Requirements & Optional Practices)
– Attachment 8 - Feedback Form for Wakalah (Shariah Requirements & Optional Practices)
– Attachment 9 - Exposure Draft Wadiàh (Shariah Requirements & Optional Practices)
– Attachment 10 - Feedback Form for Wadiàh (Shariah Requirements & Optional
Practices)
– Attachment 11 - Exposure Draft Wa`d (Shariah Requirements & Optional Practices)
– Attachment 12 - Feedback Form for Wa`d (Shariah Requirements & Optional Practices)
– Attachment 13 - Exposure Draft Tawarruq (Shariah Requirements & Optional Practices)
– Attachment 14 - Feedback Form for Tawarruq(Shariah Requirements & Optional
Practices)
69
Money Services Business

• Guidelines on Statistical Reporting for Money Services Business ** NEW 2012/03/15
– Attachment : Statistical Submission Forms ** updated 2013/04/03
• Guidelines on Governance and Operational Requirements on Conduct of Money Services Business( MSB) ** NEW
2012/10/16
• Guidelines on Risk Management and Internal Controls for Conduct of Money Services Business | Garis Panduan bagi
Pengurusan Risiko dan Kawalan Dalaman untuk Perniagaan Perkhidmatan Wang ** NEW 2012/12/06
• Guidelines on Agent Oversight Framework for the Money Services Business Industry ** NEW 2013/04/15
• Anti-Money Laundering and Counter Financing of Terrorism (AML/CFT) - Money Services Business (Sector 3) ** NEW
2013/09/04
• Pematuhan Terhadap Peraturan-peraturan di dalam Akta Perniagaan Perkhidmatan Wang 2011
• Pengeluaran Resit bagi Transaksi Perniagaan Perkhidmatan Wang
• Syarat-Syarat Lesen di bawah Seksyen 10(2) APPW (2011)
• Pembayaran Fi Lesen Tahunan di bawah Akta Perniagaan Perkhidmatan Wang 2011 (APPW)
• Pematuhan Terhadap Garis Panduan Yang Dikeluarkan di Bawah Akta Perniagaan Perkhidmatan Wang 2011 (APPW)**
NEW 2014/03/19
• Pengemukaan Permohonan Di Bawah Akta Perniagaan Perkhidmatan Wang 2011 (APPW)
• Pematuhan Terhadap Peraturan-Peraturan di bawah Akta Pencegahan Pengubahan Wang Haram dan Pencegahan
Pembiayaan Keganasan 2001 (AMLATFA) ** NEW 2014/07/02
– Anti-Money Laundering and Anti-Terrorism Financing (Invocation of Part IV) Order 2014 ** NEW 2014/07/02
– Anti-Money Laundering and Anti-Terrorism Financing (Amendment of Second Schedule) Order 2014 ** NEW
2014/07/02
• Pembayaran FI Lesen Tahunan Di Bawah Akta Perniagaan Perkhidmatan Wang 2011 (APPW) Untuk 2014 ** NEW
2014/11/03
• Pengemukaan Laporan Suku Tahunan Berkenaan Status Kewarganegaraan Pekerja Pemegang Lesen ** NEW 2014/11/03
– Lampiran ** NEW 2014/11/03
70

Agent Banking
• Guidelines on Agent Banking ** NEW 2012/08/15

– FAQs on Agent Banking** NEW
71
Representative Offices
• Guidelines on Establishment of Representative Offices of Foreign

Institutions** NEW 2012/08/16
– Appendix 1: Form BNM/RO
– Appendix 2: Application Form for Appointment/Renewal of

Appointment of Expatriate Officer
72

Business Conduct
• Circular on Standardised Documentation for Description of Key Terms for

Housing Loan / Home Financing Agreements
• Market Value of Motor Vehicles
• Process Improvement to Expedite Issuance of Redemption Statement and
Release of Original Title of Property
• Circular on POWER! Programme
• Perbankan Islam Logo ** NEW 2014/05/30
• Concept Paper on Financial Ombudsman Scheme ** NEW 2014/08/29
• Prohibited Business Conduct ** NEW 2014/11/17
– Attachment 1 - Response to Feedback Received
73
Prudential Limits & Standards

• Statutory Reserve Requirement ** updated 2011/07/08 • Guidelines on Credit Transactions and Exposures with
• Liquidity Framework Connected Parties **updated 2014/07/21
• Liquidity Framework-i (for Islamic Banking Institutions) • Guidelines on Credit Transactions and Exposures with
• Prudential Standards on Securitisation Connected Parties for Islamic Banks **updated 2014/07/21
Transactions**updated 2009/10/23 • Minimum Guidelines on the Provision of Internet Banking
• Guidelines on Accepted Bill-i (AB-i) Services by Licensed Banking Institutions [This guideline is
currently being reviewed and will be posted soon]
• Guidance Notes on Sell and Buy Back Agreement *updated
2013/06/28 • Guideline on Stress Testing
• Shariah Resolutions in Islamic Finance • Guidelines on the Governance of Shariah Committee for the
Islamic Financial Institutions * Same guideline applies to
• Best Practices for Credit Risk Management Banking
• Introduction of New Products * Same guideline applies to • Guidelines on Reference Rates, Lending Rates and Deposit
Banking and Development Financial Institutions **updated Rates of Banking Institutions **updated 2009/03/23
2014/03/07
– Attachment : Lending Rates On New Loans Approved
• Guidelines on Investment Banks During The Month (xls)
• Guidelines on Investment in Shares, Interest-in- Shares and • Guidelines on International Islamic Bank **updated
Collective Investment Schemes 2010/01/13
• Guidelines on Investment in Shares, Interest-in- Shares and • Guidelines on Permitted Capital Market Activities by Islamic
Collective Investment Schemes for Islamic Banks. Banks
• Guidelines on Musharakah and Mudharabah Contracts for • Guidelines on Skim Perbankan Islam
Islamic Banking Institutions
• Auto Debit Settlement for Ringgit Money Market Transactions
• Guidelines on Corporate Governance for Licensed with Bank Negara Malaysia **updated 2008/11/03
Institutions ** updated 2013/06/19
• Guidelines on Data Management and MIS
• Guidelines on Corporate Governance for Licensed Islamic Framework **updated 2011/09/05 *Same guideline applies
Banks (Revised BNM/GP1-i) ** updated 2013/06/19 to Insurance & Takaful
• • Prohibition on Specific/ Restricted and Loss-Bearing Fund
Placement from Islamic Banks to Parent Banking
Institutions**updated 2010/01/13
• Guidelines on Property Development and Property
Investment Activities by Islamic Banks **updated 2010/04/01
74

Continued…
• Classification and Impairment Provision for • KLIBOR Rate Setting
Loans/Financing ** updated 2011/11/09 • Revised BNM/APP and BNM/DIR Application Forms and
• Guidelines on Ibra' (Rebate) for Sale-Based Financing * Statutory Declaration Form
Same guideline applies to Banking, Insurance & Takaful – Related attachment : Revised Forms
and Development Financial Institutions** NEW – Related attachment : Forms related to Insurance
2013/02/04 companies
• Risk Governance * Same guideline applies to Banking, • Risk-Informed Pricing
Insurance & Takaful and Development Financial
Institutions** NEW 2013/03/01 • Single Counterparty Exposure Limit
• Holding of Immovable Properties ** NEW 2013/06/28 – Attachment 1 (ZIP,49KB)
• Prudential Standards on Securitisation Transactions for • Single Counterparty Exposure Limit for Islamic Banking
Islamic Banks ** NEW 2013/06/28 Institutions
• Information Requirement under Section 279(1) of the – Attachment 1 (ZIP,49KB)
Financial Services Act 2013 ** NEW 2013/06/28 • Islamic Corporation for the Development of the Private
• Application to be Approved as Financial Holding Sector (ICD) as an Interbank Player
Company Pursuant to Sections 280(2) and 280(3) of the • Investment Account** NEW 2014/03/25
Financial Services Act 2013 and Section 290(1) of the • Operational Risk Management
Islamic Financial Services Act 2013 ** NEW 2013/06/28 • Regulated Short-Selling of Securities in the Wholesale
• Fit and Proper Criteria ** NEW 2013/06/28 Money Market
• External Auditor **effective until 31 December 2014 • Concept Paper: Compliance
• External Auditor ** effective 1 January 2015 • Shareholder Suitability
• Capital Funds • Reference Rate Framework
• Capital Funds for Islamic Banks – Guide to Consumer on Reference Rate
• Regulatory treatment for IILM Sukuk [Bahasa Melayu] [English] [Mandarin]
• Repurchase Agreement Transactions
• Liquidity Coverage Ratio ** effective 1st June 2015
– Response to feedback received
75
Shariah Non-Compliance Reporting

Submission to
Shariah Committee
Detection of SNC
(14 working days)
event by Shariah Internal reporting
for confirmation
personnel
(actual vs.
potential)
Submit to BNM (3
working days after
Shariah Committee
Submit to BNM (30
Table to BOD on meeting) for actual
days from prior
rectification plan event or 2 weeks
submission)
after month end
for potential or no
SNC event
76

77
78

Legislated duty on Islamic financial institutions to ensure

end to end Shariah compliance
• Codification of duty on Islamic financial

institutions to ensure its aims,
operations, business, affairs and
activities are in compliance with
Shari’ah at all times
 Compliance with rulings of Shariah
Advisory Council a determinant of
“compliance with Shariah”
 Reporting obligations on non-Shariah
compliances imposed on Islamic
financial institutions
 Bank empowered to assess rectification
plan to address non-compliances
 Backed by comprehensive enforcement
tools to address non-compliances
79
Codification & Specification of Specific Roles and

Responsibilities of Key Functionaries
80

Shariah compliance & supervision: Implication
To carry out
the shariah independence
compliance
duty
effectively,
the need of binding force of its rulings
a clear
framework
and objectivity
structure
(i.e. system)
in term of:-
mandate
81
Other Laws Relevant to Islamic Banking

• IBF – also governed by the other general law of the country, e.g. Contract
Act, National Land Code, Companies Act, Hire Purchase Act, Rules of High
Court, etc.
• General legal framework affecting IBF:

 Taxation law:
• Real Property Gain Tax Act 1976
• Stamp Act 1949
• shariah requirements – “true transactions” vis-à-vis
“notional transactions”
 Registration requirements (e.g. NLC) – transfer of legal title vis-à- vis
beneficial title; charges under Companies Act, etc.
 Litigation – Civil Court jurisdiction – Shariah requirements may not be
addressed / recognized
82

Stamping Requirements
• Stamp Act 1949 (Amd 1989)

– Liability of banking instruments to stamp duty
– 1989 amendment to avoid double stamp duty for Islamic financing
documents (equal treatment for Islamic financial documents in terms of
stamp duty)
Sec 4 Stamp Act Sec 14 Stamp Act
For Islamic banking documents “duty
- Instruments chargeable with stamp duty chargeable
(includes islamic banking documents) thereon shall be calculated on the principal
- How much to pay? amount provided by the financier or financing
- First Schedule on stamp duty : body”
Principle document – ad volarem - Stamp Duty (Exemption) (No.5) Order 1984
Subsidiary documents – RM10 provides guidelines for Murabahah:
- Parties to determine which is principle  PPA = subsidiary doc-RM10
docs & which is subsidiary docs PSA = principal doc - Ad valorem stamp
duty
83
Taxation Requirements
Most of IB transactions involve two

Tax payable on gains/profits derived
sets of exchange that involves
from disposal or acquisition of real
acquisition & disposal of assets (eg:
property/shares in real property
selling & buying) & theoretically they
companies
are subject to two tax
Governing Rules
Real Property Gains Tax
Act 1979 (RPGTA)
Tax is based on the price at the time of

Amendment (in 1985)to sec 3 – avoid disposal and/or acquisition (date of
double taxation on IBF transactions agreement eg: PPA & PSA for
Murabahah)
84

Takaful
85
Introduction To Takaful
Mutual Guarantee
What is Takaful
– participants mutually guarantee one another
against loss or damage
• Takaful means “guaranteeing each

5 Key Elements of Takaful
Ownership of the funds

other”
– Policyholders ers are owners of the fund and
• Islamic insurance based on the entitled to its profits.
principle of Ta’awun (mutual
assistance) and Tabarru’ (donation) Elimination of Uncertainty
where the risk is shared collectively – Tabarru’ concept eliminate element of
by the group of participant uncertainty
voluntarily.
Management of the Takaful Fund
• Members or participants agree to – TO manage the fund via Mudarabah or Wakalah
jointly guarantee among themselves
against loss or damage to any of
them as defined in the agreement. Investment Conditions
– All investments must be Shari’a compliant
86

Malaysian Takaful Industry

Diversified takaful market internationally and locally;
Tremendous increase in the number of takaful operators
2001 2006 2010
Total number of Takaful players Worldwide 38 133 181
Total number of Takaful players Malaysia 2 8 12
87
BNM’S Guidelines On Takaful
Guidelines on Takaful
• Guidelines on Takaful Operational Framework • Guidelines on Fit and Proper for Key Responsible
• Guidelines on Financial Reporting for Takaful Persons
Operators • Internet Takaful
• Anti-Money Laundering and Counter Financing of • Appointment of External Auditors by Takaful &
Terrorism (AML/ CFT) Sectoral Guidelines 2 for Retakaful Operators
Insurance and Takaful Industries • Guidelines on Application for Registration and
• Guidelines on Stress Testing for Takaful Operators Operation of Retakaful Operator.
• Guidelines on Related Party Transactions for • Guidelines on Investment Management for Takaful
Takaful Operators Operators
• Guidelines on the Role of the Appointed Actuary • Guidelines on Introduction of New Products for
• Guidelines on Directorship for Takaful Operators Insurance Companies and Takaful Operators
• Guidelines for Audit Committees • Guidelines on Valuation Basis for Liabilities of General
Takaful Business
• Guidelines on Valuation Basis for Liabilities of Family
Takaful Business
88

Guidelines On TOF
Applicability & Legal Basis

Applicable to all TO registered under IFSA2013
Pursuant to Section 29 of IFSA2013 that allows BNM to issue guidelines,
circulars or notes as deemed necessary.
OBJECTIVES
• To enhance the operational efficiency of the Takaful business
• To build healthy Takaful funds which are sustainable
• To safeguard the interests of participants
•To promote uniformity in Takaful business practices.
89
TOF: Guiding Principles

Ensure uniformity with Shariah principles
and consistency with the
essential features of Takaful
Shariah
Promote prudent
Instill good
Good management of the
governance and Prudence Takaful funds to
risk management Governance enhance the funds
practices
financial resilience
Appropriateness Fairness
Ensure appropriateness Promote fairness

of fees & charges
imposed on the and transparency to
participants and Takaful protect the interests
funds of participants
90

Industry Associations
Setting up code of conducts, ethics and best practices
Adopted by members of the associations
Purpose: Self Regulation & promoting interests of members
MALAYSIAN TAKAFUL
ASSOCIATION
 Established in 2002
 Mandatory association pursuant to TA 1984
requiring all TO to be a member of an  Promoting self-regulation, continuing education
association before they can commence & professional skills development, promote
operations greater discipline & sound business practices
Persatuan Insuran National Association Malaysian

Am Malaysia Malaysian Life Insurance
Fieldforce and Advisers
 Statutory association for General
Insurance Company under Insurance Act
1996
91
Legal & Regulatory Framework Of Malaysian ICM
92

Regulatory Framework: Two-Tier Structure
1st TIER Guidelines on Offering of

General legal PDS
requirement s General Guidelines on REITs
imposed by law Regulatory Guidelines on ETFs
/ Securities Requirement
Commission
Two-tier
Additional Shariah Criteria Regulatory
Structure
2ND TIER
Appointment of Specific
Shariah Advisor requirement
for Shariah Guidelines on Offering of Islamic
Approval by compliance Securities
Shariah Guidelines on Islamic REITs
Advisory Guidelines on Islamic ETFs
Council
93
Private Regulatory Authority In

Malaysian Capital Market
Private Regulatory
Authority
Accounting Auditing
Working Group
Organization of Islamic
Islamic Financial (representatives of
Financial Institutions
Services Board market players)
(AAOIIFI
Best practices/ code of

Standards Standards
Conduct and Ethics
94

Legislations For Islamic Securities
• Capital Market and Services Act 2007

• Securities Commission Act 1993 (SCA)
• Securities Industry (Central Depository) Act 1991 (SICDA)
• Companies Act 1965 (CA)
• Other rules Guidelines:
• Regulations
• Ministerial orders
• Orders & directives by SC
• Guidelines
95
Guidelines On Islamic Securities
• Guidelines on the Offering of Private Debt Securities (PDS

Guidelines) 2000 – includes guidelines on IPDS
• Guidelines on the Offering of Asset-Backed Debt Securities -
includes IABS
• Guidelines on the Minimum Contents Requirements for Trust
Deeds
• Guidelines on Contents of Prospectus for Debentures
• Guidelines on Islamic Securities 2004
• etc.
96

Shariah Regulation In Islamic Securities
 Through the supervision of SC’s Shariah Advisory Council
 The SAC’s function:

 Advise on operation & development
 Advise on compliance criteria & guideline
 Review proposals & inquiries and give legal opinions
 Promote harmonization & convergence of shariah
principles
 Provide general guideline on matters related to Islamic
investment & transactions
97
Guidelines On Offering Of Islamic Securities 2004
Ensure IS is
Financial center structured
offering IS must based on Ensure
appoint Shariah harmonization
independent principles of Shariah
Shariah advisor approved by principles &
/consultant SAC of SC practices
Shariah Any new

advisor/ principles not
consultant listed in the
must be Guidelines -
approved & must consult
registered by SC’s SAC
SC
98

Approved Shariah Principles For Islamic Securities
PRIMARY SUPPLEMENTARY
BBA Bay’ al-Dayn
Murabahah Bay’ al-Muzayadah
Istisna’ Dhaman
Bay’ al-Inah Kafalah
Bay’ al-Salam Haq Tamalluk
Ijarah Hibah
Ijarah Thumma al-Bay’ Hiwalah
Mudarabah Wakalah
Musharakah
Ujrah
Qard al-Hasan
Ibra’
Rahn
99
Information Disclosure Requirements

For Islamic Securities
• Details of utilization of proceeds

• Underlying/ identified assets
• Shariah principles used
• Name of Shariah advisor
• Declaration statement from Shariah
advisor
• Description of facility / structure
• Prices i.e. sale & purchase price
• Details on primary & secondary bonds
Material information
that must be disclosed
in the issuance of IS
100

Islamic Unit Trusts

An open-end collective investment that invests its pooled fund in
Shariah- approved equities, bonds and money market
including direct business ventures, unquoted securities, etc.
Profit & Loss

Features of Unit Trust
The profit and loss or risk are
Unit trust is a collective investment
measured collectively based on the
in equity market and bond market
NAV
UNIT TRUST-i
Risk Portfolio Investment Mechanism
Although meant for investment, the Islamic unit trusts can only invest in
risk portfolio is lower compared to approved Shariah compliant equity
direct investment in stock market counters and Islamic bonds &
securities
101
Regulatory Framework Of Islamic Unit Trust
Governs the operation and administration of

unit trust funds in Malaysia
Provides investor protection and

facilitates the development of the industry
Covers areas pertaining to submissions,

Guidelines On
Unit Trust
parties to the fund, structure, investment
Funds powers, restrictions, submissions and
disclosure requirements
For Islamic Funds, there are additional

requirements stipulated in Chapter 6 of
the Guidelines.
102

Additional Requirements For Islamic Funds
Appointment of Shariah Committee/Adviser
Designated Compliance Person for

Islamic funds
Guidelines
On Funds must be true-to-label
Unit Trust
Funds
Chapter 6
Reporting by Shariah Committee/Adviser

in the Funds’ Reports
103
What Is Structured Products
• A structured product is generally a pre-packaged

investment strategy which is based on derivatives, such as
a single security, a basket of securities, options, indices,
commodities, debt issuances and/or foreign currencies etc
104

Islamic Structured Products
Structured product Investment products with fixed maturity
is a pre-packaged
Structured products are by nature not
investment strategy which homogeneous
is based on derivatives,
Combination of shares, bonds, indices or
such as a single security, a commodities with derivatives
basket of securities,
options, indices, Two components - a note & a derivative.
commodities, debt
The Note provides periodic profit
issuances and/or foreign payments & derivative provides payment
at maturity
currencies etc
Investment should be done in Shariah
compliant manner
105
Legal Framework For

Islamic Structured Products
Sec 32 of SCA: Guidelines on Offering of

• Any issues of structured Structured Products 2007
products must get prior • Facilitate issuance of investment
approval from Securities products
• Investor protection (sophisticated
Commission investors)
• Shariah compliance & integrity
106

Eligible Issuers & Eligible Investors
Eligible Issuers Eligible Investors

• Licensed commercial bank • Sophisticated investors
• Qualified dealers • Company with minimum
• SPV asset of RM10million
• Foreign qualified broker • Individual with minimum
• Cagamas & Cagamas SPV individual asset of RM3
million
• Principal investors investing
minimum of RM250,000
107
What Is REITS:
• REITs is Real Estate Investment Trusts
• Securities Commission REITs Guidelines:

“ a trust investment vehicle that invests or proposes to invest
at least 50% of its total assets in real estate. An investment in
real estate may be by way of direct ownership or a
shareholding in a single-purpose company whose principle
assets comprise real estate.”
• iREITs is Islamic Real Estate Investment Trusts
108

Legal Framework
 Governed by Guidelines on Islamic Reits 2005 issued by

Securities Commission
 I-REITS must satisfy shariah guidelines:

 rental of real estate by I-REITS for business purposes with
a permissibility benchmark of 20%;
 investment, deposit and financing for I-REITS;
 Takaful schemes to insure real estate;
109
Shariah-Permissible Investments For IREITS
Physical land &

Real Estate man-made items
attached to the land
Asset-backed
securities
Single purpose companies
Islamic bonds issued
from securitization Private companies whose principal
transaction assets comprise of real estate
I-REITs
Non real estate- Real estate-related assets

related assets
Cash, deposit or Liquid assets Units of other I-REITs,
other instrument Shariah-compliant securities
convertible into cash Shariah-compliant securities of of property companies &
within 7 days non-property companies Islamic bonds securities
(Shariah-compliant) issued by property companies
110

Judiciary And The Court Regulatory Framework

In Islamic Finance
111
Why Civil Court Has the jurisdiction In Islamic

Finance?
112

The Federal Constitution

• Civil Court’s jurisdiction: List I (Federal List)
– civil and criminal procedure and administration of
justice including contracts, mercantile laws,
arbitration
• Shariah Court's jurisdiction: Para 1 List II (State List)
 State has power on the organization and procedure of Shariah
Court
 Jurisdiction over persons professing religion of Islam
 Jurisdiction only on matters in para 1
 No jurisdiction over offences except provided by Fed law.
 Matters in para 1 is matters pertaining to Islamic law and
personal and family law of persons professing the religion of
Islam including divorce, wakaf, succession, offences against
religion of Islam except which is in Fed. Law
113
Court’s Jurisdiction Over Islamic

Banking & Finance Cases
• Civil Courts have jurisdiction • Cases: BIMB v Adnan bin Omar,
• Why? BIMB v Tinta Press Sdn. Bhd. & Ors,
– Although the term “Islamic Dato’ Nik Mahmud v BIMB, Bank
Law” in Para 1, List II of Ninth Rakyat v Emcee Corp, Affin Bank v
Schedule is wide, its Zulkifli, etc.
application is limited to • The Court used the civil law and
persons professing the procedures in reaching its decisions.
religion of Islam • The Court did not consider the
– Only federal legislations on application of the existing law and
IBF – no state legislations on procedure to have contradicted the
IBF Shariàh or in anyway affect the
– Banking & finance within List validity of the transactions.
I (Federal List) of Ninth
Schedule
114

Let’s Hear From The Bench
115
Which Court Can Hear Dispute In Islamic

Finance?
• ANY COURT!
EXCEPT……
SHARIAH COURT…….WHY?
116

Muamalat Court-Set Up
This specialised court is the High

With the increase in the number Court 4 (Muamalat) Civil Division
of Islamic finance disputes being of the Jalan Duta Courts
registered in the High Court of Complex, Kuala Lumpur. Today,
Kuala Lumpur, the Chief Justice the court consists of one judge,
of Malaysia has introduced a one deputy registrar and two
specialised court in 2003 to senior assistant registrars
handle and manage Islamic handling specifically Islamic
finance disputes only, consisting finance matters. To further
of 42A (applications originating strengthen the management of
with originating summons) and cases at the Kuala Lumpur High
22A (applications originating Court, the new fast track system
with writ summons) was introduced in March 2009 to
applications. speed up the disposal of cases.
117
118

The pertinent changes effected by Act A1382 are as

follows:
(a) The monetary jurisdiction of the Sessions Court has been increased from RM250,000.00 to RM1,000,000.00
[s. 7(a)(ii) of Act A1382];
(b) The monetary jurisdiction of a First Class Magistrate has been increased from RM25,000.00 to RM100,000.00
[s. 11 of Act A1382];
(c)The monetary jurisdiction of a Second Class Magistrate has been increased from RM5,000.00 to RM10,000.00
[s. 13 of Act A1382];
(d) The Sessions Court has been conferred with jurisdiction to try all actions and suits of a civil nature for the
specific performance or rescission of contracts or for cancellation or rectification of instruments, within the
jurisdiction of the Sessions Court [s. 7(a)(iii) of Act A1382];
(e) A Sessions Court may, in respect of any action or suit within the jurisdiction of the Sessions Court, in any
proceedings before it –
(i) grant an injunction; and
(ii) make a declaration, whether or not any other relief, redress or remedy is or could be claimed [s. 7(b) of Act
A1382];
119
The Impact of the Amendment
Most of Islamic finance Retail Products

are below 1 Million. Mostly dispute
will be under the jurisdiction of
Session Court and Magistrate Court.
Order for sale (Originating Summons)

is strictly given under the power of
High court regardless of the quantum
of disputes. However, for an action
under writ and the issue of Order 14
may attract concerns whether Islamic
Finance issues are triable issues in the
eyes of lower court are still subjective.
120

The Practice After the Amendment 1st of March

2013 Onward
The amount from RM100,000-

RM300,000 will bear the code
A52M(Saman Sivil Muamalat) heard
at session court by Session judge
grade L52 and L54 as written in
The amount from RM1.00 to Pekeliling Ketua Pendaftar Bil 1 2013.
RM100,000 will bear the code A72M
(Saman Muamalat) and heard at
magistrate court as written in
Pekeliling Ketua Pendaftar Bil 1 2013. The amount from RM300,000-
RM1,000,000 will bear the code
B25M(Saman Sivil Muamalat) heard
at session court by a Session judge
grade JUSA as written in Pekeliling
Ketua Pendaftar Bil 1 2013.
121
THERE ARE 14 HIGH COURTS AND EVERY

DISTRICT HAS SESSION COURT AND
MAGISTRATE COURTS IN MALAYSIA,
HOW THE COURT REFER TO SAC?
122

Manual Rujukan Mahkamah dan Penimbang Tara

kepada Majlis Penasihat Syariah Bank Negara
Malaysia di bawah Seksyen 51 dan Seksyen 56 Akta
Bank Negara Malaysia 2009
123
Only Refer Issue On Shariah Related To Islamic

Finance
SAC
SAC
SECRETARIAT
COURT
Pre-Analysis
Research
124

Insufficient Legal
Protection
Banks as financiers
Jurisdiction of
in trading activities
Court
& equity
LEGAL & SHARI’AH

ISSUES FACED BY
ISLAMIC BANKING
Understanding
Understanding
origin of IB
Essence of ‘Aqd
products
Understanding
Fiqh of 4 Mazhab
125
Dear Litigants
How to Settle Dispute?
Alternative
Court Dispute
Resolution
126

Islamic Banking Cases In Malaysia
• The trend of IBF cases can be divided into two:
Where the courts are ready to enforce Where the courts have taken the
the IBF documents as contracted by the approach to equate IBF cases with
parties conventional banking
• BIMB v Adnan bin Omar (1994) •Affin Bank Bhd v Zulkifli Abdullah (2006)
• Datuk Haji Nik Mahmud bin Daud •Malayan Banking Bhd v Marilyn Ho Siok
v BIMB(1994) Lin (2006)
• Bank Kerjasama Rakyat M’sia Bhd
• Arab Malaysian Finance Bhd v Taman
v Emcee Corporation Sdn Bhd (2003)
Ihsan Jaya & Ors (2008)
• BIMB v Lim Kok Hoe & Ors (2009)
127
Title of the case Nature of main Issue(s) of the case/trends Decision Remarks
contract(s) of claims
Bank Islam BBA -Application for Order for -The court granted the -The court followed the principle
Malaysia Berhad v. Sale under Section 256 of bank with Order for sale in the case of Bank Kerjasama
Pasaraya Peladang the NLC 195 for a charge of the charged property Rakyat v Emcee Corporation
Sdn Bhd [2004] 1 that was contended to fail as claimed -no reference was made to the
LNS 280 due to the non-compliance SAC to determine the case
of Order 83 of RHC 1980 due
to the bank’s failure to state
current amount of claim and
interest
Arab-Malaysian BBA -The bank applied for Order -The BBA facility is widely -The court had appreciated the
Merchant Bank (corporate for Sale under Section 256 & accepted and works in its nature of BBA contract.
Berhad v. Silver financing) 257 of the NLC 1965 nature and process. -the court admitted that there
Concept Sdn Bhd -the charges were valid was a paucity of adequate
[2006] 8 CLJ 9 -the customer argued that
there was a cause to the -the Order for sale was precedent and authority
contrary to dismiss the granted after minor pertaining to Islamic financial
application for the following correction of the amount matter
reasons; made before the final -the court recognised Islamic
hearing financial matters are to be
1) the BBA (Al-Wujuh) -rebate is discretionary determined according to Islamic
contract was illegal as principles but any civil law is still
against public policy due to applicable
the existence of element of -As reference to SAC is not
interest in a fixed loan mandatory, the court can elect
2)As such charges secured in not to opt for it
pursuant to the BBA contract -the court claimed that Islamic
are null and void banking should not stick to one
3) the amount of debt was mazhab
not correctly stated
4)the customer was
deprived from its right to
have rebate as the contract
was terminated pre-
maturely
128

MOHD ALIAS IBRAHIM V RHB BANK BHD &

ANOR[2011] 4 CLJ 654
• It is to be noted that the root word "ascertain" used in s. 51 of

Act 701 is also used in Item 4(k) of the Federal List in the
Ninth Schedule of the Constitution. This similarity is of
important significance and not a mere coincidence, since the
State List in the Ninth Schedule uses the word
"determination" instead and states that the jurisdiction of the
State is for "the determination of matters of Islamic law". In
any case, since the keyword here is "ascertainment of Islamic
law", it follows that, if the court were to refer any question
under s. 56(1) of Act 701 to the SAC, the SAC is merely
required to make an ascertainment, and not determination,
of Islamic laws relating to the question. (paras 85 & 87-88)
129
Should We Decide Dispute Via

Arbitration?
130

TYPES OF
ARBITRATION
INSTITUTIONAL AD HOC
131
Institutional Arbitration
• There are today many international arbitral institutions.
• While a selection of the most prominent institutions is

presented below, there are many other regional institutions,
including: the Inter-American Commercial Arbitration
Commission (IACAC), the Singapore International Arbitration
Centre (SIAC), the German Institution of Arbitration (DIS), the
Hong Kong International Arbitration Centre (HKIAC), and the
China International Economic Trade Arbitration Commission
(CIETAC)
132

Advantage Of Institutional Arbitration
1) provides comprehensive rules and tested proven procedures,

has long standing tradition.
2) warrants specialised assistance to the parties during the

various stages of the arbitral procedures. The institution will
assist the parties in setting up the tribunal and monitor the
procedures.
133
Mediation
134

Expert Determination
135
Hybrid Dispute Resolution Mechanisme
136

THE EFFECTS OF IFSA TO REGULATORY

FRAMEWORK IN ISLAMIC FINANCE IN
MALAYSIA
137
Dispute Resolution
Financial Ombudsman Scheme
138

Dispute Resolution
BEFORE IFSA AFTER IFSA
Financial Mediation Bureau (FMB) is S133.“financial ombudsman scheme”
an independent body whose objective means a scheme for the resolution of
is to provide objective and timely disputes between an eligible
resolution of dispute, claim and complainant and a financial service
complaints from services provided by provider in respect of financial services
financial institutions. In many ways, or products;
the working dynamics of FMB is similar s133.“eligible complainant” means any
to the workings of Federal Student Aid person who is eligible to refer a
(FSA) in America which conducts itself dispute to a financial ombudsman
as an ombudsman agency the scheme in accordance with the terms
department of education in the US. of reference of the scheme;
However, FMB has the power to
decide on the complaint or claim
which, which distinguish it from FSA
only has an advisory role. FMB
decisions are binding on the
institutions but not on the complaint
139
FOS: Terms Of Reference
Regulations to be made includes;

a) Functions & Duties of person operating the scheme
b) Terms of the scheme setting out:
Types of disputes to be referred
1) Eligible complainants
2) Membership requirements
3) Application, operations and procedures
4) Fees to be charged
5) Types of award to be granted
140

Consumer Protection
s138(5) Where a dispute has been referred to a financial

ombudsman scheme by an eligible complainant, the eligible
complainant is not entitled to lodge a claim on such dispute with
the Tribunal for Consumer Claims established under the
Consumer Protection Act 1999 [Act 599].
141
 Codification of Shariah governance
 Distinguishes between ‘investment’ and ‘deposit’
 Seeks to differentiate from conventional products
 Promotes development of equity based and profit and risk

sharing
 products/financing model
 BNM will issue/issued 11 new Shariah standards in Y2013 and

Y2014
 Resulting in mass product migration
142

Depositor
IFSA“depositor” means a person entitled to the repayment of an

Islamic deposit, whether the Islamic deposit was made by him or
any other person;
IFSA“investment account” means an account under which money

is paid and accepted for the purposes of investment, including for
the provision of finance, in accordance with Shariah on terms
that there is no express or implied obligation to repay the money
in full and—
a) either only the profits, or both the profits or losses, thereon
shall be shared between the person paying the money and the
person accepting the money; or
b) with or without any return;
143
IFSA “Islamic deposit” means a sum of money accepted or paid in accordance

with Shariah—
(a) on terms under which it will be repaid in full, with or without any gains,
return or any other consideration in money or money’s worth, either on
demand or at a time or in circumstances agreed by or on behalf of the person
making the payment and person accepting it; or
(b) under an arrangement, on terms whereby the proceeds under the

arrangement to be paid to the person paying the sum of money shall not be
less than such sum of money, but excludes money paid bona fide—
(This may include any precious metal or stones or any artciles or things that
regardless of whether the transaction is described as loans, financing,
investment, savings, etc)
(i) by way of an advance or a part payment under a contract for the sale, hire or
other provision of property or services, and is repayable only in the event that the
property or services are not in fact sold, hired or otherwise provided;
(ii) by way of security for the performance of a contract or by way of security in
respect of any loss which may result from the non-performance of a contract;
(iii) without limiting paragraph (ii), by way of security for the delivery up or return
of any property, whether in a particular state of repair or otherwise; and
(iv) in such other circumstances, or to or by such other person, as set out in
schedule 2;
144

The continuation of Mudharabah deposits in its existing shape

and form is no longer permitted.
All Mudharabah deposits shall be reclassified as investment
accounts which means :-
i. They no longer have the protection of PIDM
ii. Have the potential to enjoy a higher upside but also bear
risk of losses
145
For customers with low risk appetite who seek a ‘deposit’ product i.e. limited upside as well as
downside, Islamic financial Institution (IFI)s are offering to migrate all Mudharabah General Investment
accounts to Commodity Murabaha/Tawarruq deposit products.
For Mudharabah Current and Saving Accounts (CASA), migration shall be to Wadiah and Qard contracts.
Mudharabah investment accounts moving forth shall take the form of a partnership where one partner
provides the capital (rabb-ul-maal) to the other (mudarib) for investment in a commercial enterprise. In
this case, it would be most likely a restricted mudarabah or al- mudarabah al-muqayyadah in which
case the mudarib is restricted only to such business as pointed out by rabb-ul-maal. And the business
the IFI would most likely deploy the funds to would be the business of financing. (In this instance,
tagging of the funds to the financing assets is required).
146

Regulatory Control-
Interest In Shares Of Licensed Person
no Details BAFIA INSURANCE ACT FSA2013 IFSA2013
1 Acquisition of interestabove any S87(1)(b) S99(1)

multiples of 5% or the percentage
holding for a mandatory offer
2 Acquisition of interest more than 50% S99(2)
Approval of MOF, on
recommendation of
BNM
3 Disposal of interest S45(1)(b) approval S67(1) approval of No approval No apporval
of MOF required MOF required for required required
the disposal of >5%
Subsequent
disposal-MOF
Approval
4 Computation of interest in shares S2(1)CA1965 S2(1) legal & S2(1)&sch 3 Same
deemed interest in equitable interest in Effective interest in
shares a shares shares
Includes the
aggregate held by
spouse, child, family
corporation, person
acting in concert
5 Disposal of interest of >50% or 50% S45(1)(b) approval S89approval of s99
or less but has control over licensed of MOF required for MOF, BNM
person the disposal of >5% Recommendation
147
Disclosures Of Confidentiality
Shariah Shariah Appointed Audit on Examination Protection Permitted

governance audit actuaries Shariah by relevant in relation disclosures
compliance overseas to
supervisory disclosure
authority of
information
to Bank
S36 div 2 S82 div 4 s89 S37 div 3 s164 s267 s146
No breach S38(3) no
if made in breach if
good faith reported to
Bank
148

Whistle Blower
SGF Appendix 5:Reporting
The Shariah Committee shall put on record in its report or statements
directed to the board, its concerns over any Shariah non-compliance
issues.
36. A member of a Shariah committee shall not be liable—
(a) for a breach of a duty of confidentiality between such member and
the institution in respect of—
i. any reporting to the Bank; or
ii. 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;
(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.
149
36. A member of a Shariah committee shall not be liable—
(a) for a breach of a duty of confidentiality between such

member and the institution in respect of—
i. any reporting to the Bank; or
ii. 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.
150

After IFSA
S267. (1) Where a person discloses in good faith to the Bank, his knowledge
or belief or any document or information that a breach or contravention has
been committed or is about to be committed under this Act—
(a) such person shall not be liable for a breach of a duty of
confidentiality imposed by any law, contract or rules of professional conduct;
(b) it shall be a defence in an action, a suit, prosecution or proceeding that is
brought, instituted or maintained in any court or before any other authority
against the person who made the disclosure to the Bank that in his belief the
disclosure was necessary for the carrying into effect the provisions of this Act;
or
(c) no contractual or other rights or remedy may be enforced against the
person on the basis of disclosure.
(2) Any document or information disclosed to the Bank under subsection (1)
and the information and identity of the person making the disclosure shall be
secret between the Bank and the person who made the disclosure
151
Schedule 9: Uberrime Fide
• s5(5) If the licensed takaful operator does not make a request

in accordance with subparagraph (1) or (3) as the case may
be, compliance with the consumer’s duty of disclosure in
respect of those subparagraphs, shall be deemed to have
been waived by the licensed takaful operator.
152

S141: Schedule 9
Pre Contractual Disclosure
(2) Where there is a conflict or inconsistency between a

provision of this Schedule and the Contracts Act 1950 [Act
136], the provision of this Schedule shall prevail.
(3) Notwithstanding any other written law, the provisions of this

Schedule shall apply to determine whether a licensed takaful
operator may avoid a contract of takaful and in particular a
contract covering third party risks in respect of death or
bodily injury to any person caused by or arising out of the
use of a motor vehicle or land implement drawn on a road,
for misrepresentation.
153
Duty to Full Disclosure

s11. (1) No licensed takaful operator, takaful agent, approved takaful
broker, approved Islamic financial adviser or Islamic financial
adviser’s representative in order to induce a person to enter into, vary
or renew, or offer to enter into, vary or renew, a contract of takaful,
whether or not a consumer takaful contract, with it or through him—
a) shall make a statement which is misleading, false or deceptive,

whether fraudulently or otherwise;
b) shall fraudulently conceal a material fact; or
c) in the case of a takaful agent, use any marketing brochure or
product illustration not authorized by the licensed takaful
operator.
(2) Where a person is induced to enter into, vary or renew a contract

of takaful in a manner described in subparagraph (1), the contract of
takaful shall be voidable and the person shall be entitled to rescind it.
154

S13(4) Material Facts…
• (4) For the purposes of subparagraph (2), “material matter” or

“material fact” means a matter or fact which, if known by the
licensed family takaful operator, would have led to its refusal
to issue a family takaful certificate to the takaful participant or
would have led it to impose terms less favourable to the
takaful participant than those imposed in the family takaful
certificate
155
Liability Of Agents Who Negotiate Contracts…..
• s12. (1) A person who is authorized by a licensed takaful

operator to be its takaful agent and who solicits or negotiates
a contract of takaful in that capacity shall be deemed, for the
purpose of the formation or variation of the contract of
takaful, to be the agent of the licensed takaful operator and
the knowledge of that takaful agent shall be deemed to be
the knowledge of the licensed takaful operator.
156

More….
(2) A statement made, or an act done, by the takaful agent shall be
deemed, for the purpose of the formation or variation of the contract
of takaful, to be a statement made, or act done, by the licensed takaful
operator notwithstanding the takaful agent’s contravention of
subparagraph 11(1) or any other provision of this Act.
(3) Subparagraph (1) shall not apply—
(a) where there is collusion or connivance between the takaful agent

and the proposer in the formation or variation of the contract of
takaful; or
(b) where a person has ceased to be a takaful agent of a licensed

takaful operator and the licensed takaful operator has taken all
reasonable steps to inform, or bring to the knowledge of takaful
participants of the fact of such cessation.
157
Misrepresentation
a misrepresentation for which a licensed takaful operator has a remedy in Division 2
against a consumer may be classified as—
(a) deliberate or reckless;
(b) careless; or
(c) innocent.
(4) A misrepresentation is deliberate or reckless if the consumer knew that—
(a) it was untrue or misleading, or did not care whether or not it was untrue or
misleading; and
(b) the matter to which the misrepresentation related was relevant to the licensed
takaful operator, or did not care whether or not it was relevant to the licensed
takaful operator.
(5) A misrepresentation made dishonestly is to be regarded as having being made
deliberately or recklessly.
(6) A misrepresentation is careless or innocent, as the case may be, if it is not
deliberate or reckless.
(7) It is for the licensed takaful operator to show that a misrepresentation was
deliberate or reckless on a balance of probability.
(8) Unless the contrary is shown, it is to be presumed that the consumer knew that a
matter about which the licensed takaful operator asked a clear and specific question
was relevant to the licensed takaful operator.
158

S18 - Contract Act 1950
 "Misrepresentation" includes-
a) the positive assertion, in a manner not warranted by the
information of the person making it, of that which is not
true, though he believes it to be true;
b) any breach of duty which, without an intent to deceive,
gives an advantage to the person committing it, or anyone
claiming under him, by misleading another to his
prejudice, or to the prejudice of anyone claiming under
him; and
c) causing, however innocently, a party to an agreement to
make a mistake as to the substance of the thing which is
the subject of the agreement.
159
Intervention And Remedial Action
• Appointment of Receiver & Manager

• Compulsory Transfer of Business,
• Asset & Liabilities
• Bridge Institution
• Restructure Share Capital
• Financial Assistance
Removal of Director/CEO/Senior
Officers
Intervention and Remedial Action
Winding Up
160

challenges ahead
Engagement
with Islamic
banking & takaful
• Issuance of revised guidelines industry on Specific policies
to incorporate detail •Investment- account framework
requirements in existing laws •Shariah non- compliance
Reporting •Conversion to single
which are still relevant/remain Takaful business
in place
Issuance of important specifications/

prescriptions –
guidelines/shariah
standards as guidance to industry
Practitioners
161
MIFC
• Malaysia International Islamic Financial Centre (MIFC)

initiative was launched in August 2006 to promote Malaysia as
a major hub for international Islamic finance.
• The MIFC initiative comprises a community network of

financial and market regulatory bodies, Government
ministries and agencies, financial institutions, human capital
development institutions and professional services companies
that are participating in the field of Islamic finance.
162

Focus Areas
The MIFC initiative aims to position Malaysia as the Islamic

finance hub through the following focus areas:
Sukuk Origination
Islamic Fund and Wealth Management
International Islamic Banking
International Takaful
Human Capital Development
163
164

Incentives
• Incentives are accessible to financial institutions participating in

MIFC including
– new licenses for conducting foreign currency businesses,
– attractive tax incentives and
– facilitative immigration policies.
• Thus financial institutions may benefit from cost savings from a

reduced cost of doing business, a shorter learning curve, shorter
time to market, access to new markets and surplus funds and
the advantage of having diversified into a new asset class.
165
‘continuation
• Foreign and domestic financial institutions are offered to

conduct the full range of international Islamic banking and
takaful businesses in foreign currency under the following
new establishments:
 International Islamic Bank (IIB);
 International Takaful Operator (ITO); and
 International Currency Business Unit (ICBU).
166

THANK YOU & WASSALAM
IBFIM
3rd Floor, Menara Takaful Malaysia, Jalan Sultan Sulaiman
50000 Kuala Lumpur.
(Tel) +603-2031 1010 (Fax) +603-2020 1812
(E-mail) training@ibfim.com / info@ibfim.com
167

PB AQIF (14-15 Sep 15)

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ASSOCIATE QUALIFICATION

IN ISLAMIC FINANCE (AQIF)

On behalf of the organizer, we welcome you to the Associate Qualification in

Please refer to administrative details as follows:

Program Begins - 8:45 a.m.

Kindly set your handphone to silent mode while the program is in

Should you need any assistance, please inform the Secretariat as

iv. Evaluation Form

Please give us your suggestions and comments by filling up the enclosed

“ Your Islamic Finance Business Partner”

With IBFIM Online, you can stay

For enquiry, please contact:

8:45 a.m. Corporate Governance in Islamic Financial Institutions

Speaker: Ustaz Muhammad Hadi Abdullah

Speaker: Ustaz Muhammad Hadi Abdullah

1:00 p.m. Lunch

2:00 p.m. Regulatory Framework of Shariah Governance

Speaker: Ustaz Muhammad Hadi Abdullah

3:30 p.m. Coffee Break

4.00 p.m. Implementation and Challenges

Speaker: Ustaz Muhammad Hadi Abdullah

5:45 p.m. End of Program

SHARIAH FRAMEWORK AND GOVERNANCE

IN ISLAMIC FINANCE 14th September 2015

At the end of the module, participants should be able to :

This Course at Glance

Copyright © IBFIM 2015. All Rights Reserved 1

Corporate Governance in Islamic Financial Institutions

 The Importance of Corporate Governance in IFIs

 Principles of Corporate Governance

 Standards and Guiding Principles - BNM, SC, AAOIFI, IFSB

What is Corporate Governance?

IFSB’s Guiding • A defined set of relationship between a

SECURITIES • The process and structure used to direct and

Copyright © IBFIM 2015. All Rights Reserved 2

Why Corporate Governance?

Who Are The Stakeholders?

Copyright © IBFIM 2015. All Rights Reserved 3

Interest and Key Functionalities

How to Protect Interest of

 Apply best practice standards and effective systems of

Copyright © IBFIM 2015. All Rights Reserved 4

Recognized Codes of Corporate Governance

Scope of the Recognised Codes

The issue of IFI

Copyright © IBFIM 2015. All Rights Reserved 5

CG: Special Case of IFI

Current Issues in CG of IFI

Copyright © IBFIM 2015. All Rights Reserved 6

CG of IFI: Looking Ahead

 Adoption of OECD and BCBS recommendations will improve

IFSB’S Guiding Principles

Copyright © IBFIM 2015. All Rights Reserved 7

IFSB’S Guiding Principles

IFSB’S Guiding Principles

Copyright © IBFIM 2015. All Rights Reserved 8

IFSB’S Guiding Principles

Recommended Best Practices

IFSB’S Guiding Principles

Copyright © IBFIM 2015. All Rights Reserved 9

IFSB’S Guiding Principles

Guidelines on Corporate Governance for

The primary objective of the “Guidelines on Corporate Governance for Licensed