BNM's Syariah governance

28 December, 2017      441



BANK Negara Malaysia (BNM) has thrown down the gauntlet to the Islamic finance industry by raising the bar for Syariah governance, the very raison d’etre of the faith-based Islamic system of financial management, which today has an estimated US$2.6 trillion (RM10.60 trillion) of assets under management with the potential to rise to US$5 trillion by 2025.


Malaysia has the most structured and advanced Syariah Governance Framework (SGF) in place in the world, complete with enabling legislation through the comprehensive Islamic Financial Services Act 2013 and the Development Financial Institutions Act 2002, and a robust monitoring and enforcement regime.


The rationale is simple — effective Syariah governance gives certainty, integrity and confidence to stakeholders in the Islamic finance system ranging from the Treasury to regulators, standard setters, market players, investors and customers.

The success of BNM’s SGF policy is underlined by the fact that other jurisdictions including Bahrain, Pakistan and the United Arab Emirates (UAE) are emulating the Malaysian model.


BNM, in my experience of covering its activities over the last 35 years under successive governors, has shunned complacency and has always sought ways to add value to its regulatory and supervisory functions based on international best practices and leading from the front through innovation. Not surprisingly, erstwhile governors such as Tan Sri Dr Zeti Akhtar Aziz used to be regularly voted “Central Banker of the Year” by Global Finance no doubt enhanced by her international reputation and her determination to maintain the independence of BNM as a financial regulator and custodian of monetary policy.


Her successor, Governor Tan Sri Muhammad Ibrahim has followed in her footsteps, and in recent weeks has presided over two important developments in the SGF function in Islamic finance, which will have positive implications for the global market.

Firstly, BNM launched an Exposure Draft for market consultation, which set out the bank’s proposed regulatory requirements on Syariah governance for Islamic financial institutions (IFIs). That consultation ended last week.


“The proposals,” according to BNM, “seek to strengthen the effectiveness of Syariah governance implementation within IFIs, primarily through enhanced oversight accountability over Syariah governance and improvements to the quality of internal control functions. Syariah governance is integral to Islamic financial system stability. The institutionalisation of a sound SGF strengthens public confidence in the aims, management and business operations of IFIs”.


BNM first introduced SGF for IFIs in 2011, which has played a critical role in supporting the robust and orderly development of the industry in Malaysia.

This is in line with the regulatory objective of promoting end-to-end Syariah compliance. Nevertheless, the growing scale and complexity of Islamic financial business, as well as recent policy developments in the area of governance, compliance and risk management, have necessitated further enhancements to be made to the existing framework.


These include a closer integration of Syariah governance considerations in the business and risk strategies of IFIs; enhancing oversight accountability of the board and other key organs involved in the implementation of Syariah governance; and, reshaping the composition and role of Syariah committee to strengthen the quality of Syariah decisions or advice that informs the decision-making by IFIs. Once the revised proposals are adopted, they will become effective for all IFIs in Malaysia on Jan 1, 2021.


It is no coincidence that BNM pioneered the centralised Shariah Advisory Council (SAC) at the level of the regulatory authority in May 1997, which sets the rules of the game for the industry and acts as the Syariah Advisory of Last Resort.

The Central Bank of Malaysia Act 2009 strengthened the role of the SAC as the highest Syariah authority in Islamic finance in the country, whose members are appointed by the Malaysian monarch from among Syariah experts and industry practitioners.


This centralised SAC model is the industry standard for regulators in many countries, albeit key markets, such as Saudi Arabia and Turkey, have yet to follow suit.

At one stage even Luxembourg was considering establishing such a council in pursuit of its ambition of turning the Duchy into the European Centre for Islamic finance, especially Sukuk and investment funds.


Muhammad hosted a dinner on Dec 12 to commemorate the 20th anniversary of its SAC and to recognise contributions of former and current members of the council in shaping the development of Islamic finance in Malaysia.

He used the occasion to introduce what could become the defining raising of the SGF bar in recent times by announcing that BNM would make the Certified Syariah Advisors (CSA) and Certified Syariah Practitioner (CSP) certification recently introduced by the Kuala Lumpur-based Association of Syariah Advisers in Islamic Finance “a pre-requisite for the appointment and re-appointment of Syariah committee members. This also applies for key Syariah personnel in Islamic financial institutions, including Islamic windows”.

Muhammad said: “The aim is to ensure Syariah advisers and personnel are equipped with the necessary knowledge that transcends across various disciplines including legal, finance and taxation matters. The timeline for compliance will be decided later.”


The above SGF initiatives demonstrate BNM’s commitment towards shaping and nurturing high-quality Syariah talent locally and internationally by deepening its capacity, and elevating the professionalism of Syariah advisers and upskilling competencies in the IF community effectively through continuous education. These are bold initiatives.


Muhammad maintains, “contentious differences in Syariah opinion is a given but it must not hold us back, but rather be resolved through debate and discussion with a view to find truth and justice”.


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The writer is an independent
London-based economist and writer

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