By Dr Mohammad Mahbubi Ali
SYARIAH is the backbone of Islamic financial institutions (IFIs).Ensuring syariah compliance is essential for maintaining the confidence of stakeholders and the public at large.
Inadequate attention to the whole process of syariah compliance inevitably triggers negative repercussions for IFIs, such as financial loss and massive withdrawals.
Over the last two decades, many cases have been brought to the courts challenging the syariah compliance aspects of some Islamic banking products.
The decision by some judges to annul the underlying contracts of several Islamic banking products has posed the threat of financial losses for the banks.
As a case in point, in the Arab Malaysian Finance Bhd versus Taman Ihsan Jaya Sdn Bhd case, the court declared that bay’ bi thaman ajil (BBA) was invalid on the basis that the BBA facility was a bona fide sale transaction.
Therefore, when the bank recalled the facility at a higher total price, the sale no longer represented a bona fide sale transaction but was merely a financing facility similar to a loan under the conventional system.
Nevertheless, the Court of Appeal in the case of Bank Islam Malaysia Bhd versus Lim Kok Hoe reversed this decision, upholding the validity of the BBA as an enforceable contract.
Against the above backdrop, on Oct 26, 2010, Bank Negara Malaysia (BNM) introduced the Syariah Governance Framework (SGF) for IFIs operating under its purview (notably Islamic banks, conventional banks offering Islamic financial services and takaful companies).
The SGF aimed to strengthen the syariah governance structures, processes and arrangements of IFIs to ensure syariah compliance. The SGF required IFIs to institute clear internal control and remedial rectification measures to address Syariah non-compliant incidents holistically.
In response to emerging IFI business complexity and market maturity, on Sept 20, 2019, BNM issued a new, revised version of the SGF, namely Syariah Governance Policy (SGP), which supersedes the exiting SGF.
This new framework set out to enhance board oversight and the responsibilities of syariah governance, increase the requirements for syariah committees providing objective and sound advice to IFIs, raise the expectation that board and senior management promote a syariah compliance culture, and improve the quality of internal control functions.
This article highlights some of the new, enhanced features of the 2019 SGP in comparison with the 2010 SGF.
FIRST,the new SGP restricts the tenure of syariah committee members to a maximum of nine years in a single IFI, in comparison to the 2010 SGF, which had no limit.
This limit addresses concerns regarding complacency, which may affect the professional
objectivity of syariah committees.
A fresh and new composition of syariah committee members is expected to deepen syariah deliberation and the overall competence of syariah committees.
This particular requirement, however, will only be effective from April 1, 2023, to allow for transitional arrangements and sufficient time for IFIs to reconstitute their syariah committee compositions.
SECOND,the previous SGF allowed syariah committees to adopt more stringent syariah decisions than the published rulings of the Syariah Advisory Council (SAC).
The new SGP, however, mandates that banks notify the BNM about any additional restrictions that go beyond the SAC rulings, together with any documented deliberation and justification by their syariah committees (para 10.7).
THIRD,the preceding SGF was silent about the status of a politically-exposed person acting as a member of a syariah committee. The 2019 SGP, on the other hand, explicitly prohibits active politicians from becoming syariah committee members.
FOURTH,the new SGP mandates that boards establish effective communication with their syariah committees on all matters relating to syariah requirements, syariah governance, or syariah non-compliance risks.
The boards must also regularly review the quality and frequency of their engagement with their syariah committees. This is to enable both the board and syariah committee to discharge their respective responsibilities effectively. The 2010 SGF was, however, silent on this requirement.
FIFTH,the former SGF required that the syariah review function be conducted by a qualified syariah officer, holding at least a bachelor’s degree in syariah, including in ushul fiqh and fiqh muamalat.
The new SGP removes such requirements and situates itself as part of the overall compliance responsibility under the control function.
In this regard, the syariah review function is required to have a sound understanding of those syariah requirements applicable to Islamic financial businesses and operations.
Finally, while the 2010 SGF required the establishment of a dedicated syariah research function by a qualified syariah officer, the 2019 SGP removes this requirement by consolidating its role under the syariah secretariat function.
The approach taken by the new policy places more emphasis on ensuring effective management of syariah non-compliance risks through control function.
From a broader perspective, we can conclude that the new SGP demonstrates BNM’s heightened expectations towards effective syariah governance and culture.
This is yet another step in the impressive development profile of Islamic banking and finance in Malaysia, which it is is hoped will see an increase in public confidence in the often questioned syariah compliance credibility of Islamic banks and financial institutions in this country.
the writer is a Research Fellow at the International Institute of Advanced Islamic Studies (IAIS) Malaysia.