An Empirical Study of the Effectiveness of the Shariah Governance Framework (SGF 2010)

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This research has been funded by Bank Muamalat Malaysia Berhad (BMMB). The copyright of this research belongs to BMMB. However, BMMB has given ISRA an exclusive license to publish the output of this research as an ISRA Research Paper (IRP).


Malaysia has placed great emphasis on strong structure and corporate governance values of Islamic financial institutions (IFIs) operating Islamic financial business in order to ensure conformity and adherence to Sharīʿah principles. Not only that, the legal structure of IFIs in Malaysia is significantly ahead of other countries, and the corporate and Sharīʿah governance framework is undoubtedly well in place, making Malaysia the role model for the world’s Islamic financial industry. The Sharīʿah governance aspect has always been part of the legal infrastructure starting from the initial establishment of Islamic banking and finance in Malaysia. This is evidenced by the incorporation of the requirement of Sharīʿah compliance vis-a-vis Sharīʿah governance provisions in the Islamic Banking Act 1983 requiring Islamic banks to include mention of the Sharīʿah compliance of their operations in their articles of association. At that stage the Sharīʿah compliance aspects of Islamic financial institutions were the prerogative of the Sharīʿah committees appointed by the respective IFIs. This was followed by the introduction of the Guidelines on the Governance of Sharīʿah Committee for Islamic Financial Institutions, known as Garis Panduan Syariah (GPS1), in 2004. The Guidelines issued by the Central Bank of Malaysia (Bank Negara Malaysia/"BNM") set out the rules, regulations and procedures for the establishment of a Sharīʿah committee; defined the role, scope of duties and responsibilities of a Sharīʿah committee; and provided guidance to IFIs on the relationship and working arrangement between a Sharīʿah committee and the SAC of Bank Negara Malaysia. The commitment of BNM to continuously enhance the Islamic finance industry was further evidenced by the introduction of the Shariah Governance Framework for Islamic Financial Institutions (SGF) which was introduced in late 2010. The framework took effect on January 2011. These new guidelines enhance the functions of the Sharīʿah committee and emphasise the responsibility of all stakeholders in ensuring that the operations of the institutions are conducted in a Sharīʿah-compliant manner. The significant aspect of the new guidelines is that the stakeholders of Sharīʿah compliance have been widened to include the board of directors and management of the IFIs in addition to the Sharīʿah committee. This framework also sets out the requirements on the proper Sharīʿah governance structures, processes and arrangements to ensure that Sharīʿah compliance is being dutifully observed by the IFIs. As such, the guidelines put a strong emphasis on the functions of Sharīʿah review, Sharīʿah audit, Sharīʿah risk management and Sharīʿah research.....

Keywords: Sharīʿah Governance Framework, Malaysia, Islamic finance industry, implementation




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