Legal Aspects of
Islamic Finance

LAB4112
DR. ZULKIFLI HASAN

Contents

n  Insurance
n  Takaful

HISTORICAL BACKGROUND OF
WESTERN CONCEPT OF INSURANCE

n  1. Ottoman Empire- First introduce western
concept of insurance- Maritime Code 1863.

n  2. Ottoman Law of Insurance 1874-only life
insurance is haram or unlawful

n  Since then, western concept of insurance is
practiced almost in all countries in the world

Insurance?

n  Financial protection which involves the
execution of contracts between the insurer and
the insured in which the insurer agrees to
underwrite the subject risk of such contracts.

Definition

n  Insurance is an economic device
whereby the individual substitutes a
small certain cost (premium) for a
large uncertain financial loss (the
contingency insured against) that
would exist if it were not for the
insurance.

Socio-Economic Benefits of Insurance

n   Risk Coverage
n   Habit of Thrift
n   Safe and Profitable Investment
n   Secure working environment for

Businesses
n   Planning for life stage needs
n   Capital formation in the Economy

Nature of  Insurance Contract

Premium Compensation

Premium Compensation

General Insurance

Life Insurance

Shariah Position on Insurance
n Three major groups.

n Those who consider both the concept
and practice of  commercial insurance
un-Islamic.

n Those who are in agreement with the
present insurance and find nothing
wrong in it.

n Those who accept the concept of
insurance, but find prohibited elements
in its present practice.

Rulings of  Collective Fiqhi Bodies
n  Islamic Research Institute of  Al-Azhar Uni: 1965
n   Council of  Grand Ulama of  Saudi Arabia
n   Majlis Tahqiqat-e-Shari'yah Lucknow,   India
n   Islamic Fiqh Academy of  Rabita al-Aa'lam-e-

Islami
n   Al Majma’ Al-Fiqhi Al- Islami of  OIC: 1975
n  Council of  Islamic Ideology, Pakistan
n  International conference on islamic economic

1976
n  European Council for Fatwa.
n  According to these Fiqhi bodies Conventional

Insurance is unlawful because of involvement of
prohibited elements

Fatwa on Conventional Insurance

n  In 1972 the Fatwa Committee declared the
western concept of insurance was unlawful
because of gharar, riba and maisir

n  In 1982-  a committee set up by the govt to
study the implementation of takaful.

n  Fiqh Academy of the Organization of
Islamic Conference (OIC) at its gathering in
Jeddah in December 1985 resolved that no
form of insurance, be it life or general, had
conformed to the Islamic principle

Fuqaha Views on Life Insurance

n  1. Opponents:- Sheikh Shaukat, Abu
Zaharah and others.

n  Reason:-
n  i. Insuring one’s life
n  Ii. Betting

n  Iii. Element of riba, maisir, gharar.
n  Iv. Supersede the will of Allah
n  V. against the principle of mirath
n  Vi No direct authority to justify it

Fuqaha Views on Life Insurance
n  2. Justification of life insurance but in different

form namely Family Takaful.

n  i. mere financial transaction through mutual
cooperation.

n  Ii. No unlawful element.
n  Iii. Implied model of takaful-aqilah and

mudharabah.

n  Iv. Mutual cooperation to protect the necessities.
n  V. Securing the offspring it does not supersede the

will of Allah.

2. Justification of life insurance but in
different form namely Family Takaful

n  Vi. Security for poor.
n  Vii. Protection of unexpected difficulties.
n  Viii. Self reliant society.

OBJECTION TO THE WESTERN
CONCEPT OF INSURANCE

n  Riba
n  Gharar
n  Juhala
n  Maysir
n  Violation of inheritance law
n  Against the concept of qada and qadr
n  Forfeiture of premiums.

1. Riba

n  Insurance companies invest in trade and
bonds.

n  Life insurance- insurer undertakes to pay the
insured. The sum is in excess of the total
premium paid. Premium =Loan

n  Non-Life insurance- The insurance
companies invested the premium paid in
fixed interest earnings investment.

2. Gharar

n  Uncertainty= Risk, hazard or peril
n  Neither the insurer nor the insured knows

the nature and extent of their rights and
obligation until after the occurrence of the
insured event.

n  Any transaction must free from excessive
uncertainty

n  The insured is ignorant of the terms of the
insurance.- Unacceptable reason.

How To Free From Excessive Gharar

n  1. Mutual and Cooperative basis
n  2. The takaful coverage must be genuinely

required in order to safeguard interest
collectively

n  3.such coverage can only be safeguarded
through the insurance mechanism.

n  4. Type of contract is Unilateral Contract-
Al-Tabarruat.

3. Juhala

n  Uncertainty per se- all particulars of the
contract must be known to the parties at the
time of the contract. Otherwise- invalid

n  Life insurance- The insured does not know –
how long he will be paying the premiums.

n  Non life insurance- does not know how
much the insurer will pay him in the case of
insured event takes place

4. Maisir

n  Prohibition of unearned gains.
n  To court unnecessary risk by entering into a

transaction with a hope of gain as well as
fear of loss.

n  Undertaking a risk in the spirit of
speculation

n  Life insurance- If dies early-Lucky= Policy
money will be paid.

n  Non life insurance- if the insured event
occurs- Lucky. If no- gets nothing

Cont…

n  Policyholders- Pure Risk
n  Insurance Co- Speculative Risk
n  Premiums with promise to pay any claims

5. Violation of Islamic Law of
Inheritance

n  Law on Nomination- insurer can nominate
to any person as beneficiaries.

n  S 23- Hock Hoe’s Policy. Nominee enjoys
full benefit of the insurance policy.

n  This objection is not relevant anymore.
Amendment to the Insurance Act and
introduction of the Takaful Act 1984.

n  In Islam- nomination is just a trustee. The
policy money must be distributed –faraid.

6. Contravention of the Conception
of Pre-Destination

n  Concept of Qada and Qadar- The ultimate
destiny is in the hands of Allah.

n  Irrelevant- Failure to appreciate the real
function of insurance.

n  The insurance does not prevent pre-destined
events. It only reduces the pain and
suffering resulting from the insured events.

n  This is in fact in line with the Islamic
principle.

7. Objection to forfeiture of
Premiums

n  Insurer may forfeit the premiums that have
been paid in certain circumstances.

n  May forfeit in the event of avoiding non-
disclosure or breach of warranty by the
insured.

n  Islam does not allow the forfeiture of the
capital.

Takaful

n  The takaful model is based on the divine
concept of taawun, which means mutual
assistance. The concept of taawun is
recommended in the Quran (5:2):

n  “Help (taawun) one another to do what is right
(birr) and good (taqwa); do not help one another
towards sin and hostility. Be mindful of Allah,
for His punishment is severe.”

Development of takaful
n  Takaful started some  30 years ago in Sudan and Middle

East in 1979 :
n  The Islamic Arab Insurance Co. (IAIC) in the UAE

and

n  The Islamic Insurance Co. of Sudan
n  Later in 1984, Malaysia played a pioneering role in

setting the first Legal framework specific to Takaful
(Takaful Act Malaysia).

n  This was instrumental in the successful launching of the
Takaful movement in Malaysia and in other countries of
South East Asia.

Takaful Operators
n  AIA AFG Takaful Bhd.
n  AmFamily Takaful Berhad
n  CIMB Aviva Takaful Berhad
n  Etiqa Takaful Berhad
n  Great Eastern Takaful Sdn Bhd
n  Hong Leong MSIG Takaful Berhad
n  HSBC Amanah Takaful (Malaysia) Sdn Bhd
n  ING PUBLIC Takaful Ehsan Berhad
n  MAA Takaful Berhad
n  Prudential BSN Takaful Berhad
n  Syarikat Takaful Malaysia Berhad
n  Takaful Ikhlas Sdn. Bhd.

Origin of Takaful

n  1. Aqilah- Blood money
n  The tribe had to be ready to compensate the

heir of the victim.
n  Compensation likes indemnity in insurance

policy

n  2. S.Umar- Al-Dawawin System- Ministry to
contribute money for emergency or in need.

n  3. Khairat Kematian-

Sources of Law Affecting Takaful

n  1. Al-Quran- elements of mutual cooperation=
Almaidah: 5:2. Alleviation of hardship= 2:201

n  2. Sunnah= Prophet said: Tie the camel first and
then leave it to Allah

n  3. Practices of the companion- Al-Dawawin
System by S. Umar.

n  4. Fatwa or Ijtihad: Ibnu Abidin=Permissible
insurance in trade for merchant known as Sukra.

n  Muhammad Abduh, Zarqa- agreed to the
validity of Islamic insurance

Sources of Law Affecting Takaful
n  5. Masalih Mursalah= Life, necessity. A way

of providing material security.
n  6. Urf- Tribal Custom practice known as

Aqilah.
n  7. Unanimous Decision of Muslim Scholars-
n  Islamic Fiqh Week Syria 1961, Muslim

Scholars Conference 1965 Egypt and Islamic
Economic Conference Mecca 1976- Validity
of insurance business except life insurance.

n  International Islamic Insurance Dubai 1996
and Labuan 1997- Validity of Takaful.

Takaful and Maqasid al Shariah

n  1. Protection of property and Protection of life:
hajiyat and daruriyat

n  2. Legal maxim: darar must be removed.
n  3. To spread the risks of losses around the large

number of participants
n  Contemporary fuqaha: making takaful

mandatory to muslims.
n  Compulsory to protect the essential needs of the

society.

Takaful
n  Kafala: responsibility, guarantee or suretyship
n  Mutual Guarantee, shared responsibility, joint

guarantee, collective assurance and mutual
undertaking= mutuality and cooperation.

n  method of joint guarantee among a group of
members or participants against loss or damage
that may inflict upon any of them. The members of
the group agree to guarantee jointly that should any
of them suffer a catastrophe or disaster, he would
receive certain sum of money to meet the loss or
damage. All members of the group pool together
their efforts to support the needy.

Characteristics of Takaful
n  (i)  Cooperative risk-sharing for protection
n  (ii)  Clear segregation between participant and

operator
n  (iii)  Shariah - compliant investment strategies
n  (iv)  Avoidance of riba(interest),and

maysir(gambling)
n  (v)  Gharar (uncertainty) is forgiven, using tabarru

(charitable donation)
n  (vi)  Shariah advisory oversight and judicial

approval

Insurance v Takaful
Issues Insurance Takaful

Organising principle
Profit for
shareholders/ risk
transfer

Mutual for
participants

Value proposition  Profit for
shareholders

Affordability and
spiritual satisfaction

Laws  Secular regulations  Shariah plus
Regulations

Ownership  Shareholders  Participants

Insurance v Takaful
Issues Insurance Takaful

Management  Company management  Operator

Contract Form
Commercial exchange/
contract of compensa-
tion-adhesion

Cooperative, Islamic
Contracts of wakalah or
mudarabah with tabar’ru
donations

Investment  Equity/debt – no
restrictions

Shariah compliant equities/
no interest

Surplus  Shareholders account
Participants account
performance fee for
operator

Takaful Act 1984

n  S 2: Scheme based on brotherhood, solidarity,
and mutual assistance which provides for mutual
financial aid and assistance to the participants in
case of need whereby the participants mutually
agree to contribute for that purpose.

Takaful Act 1984

n  “takaful business” means business of takaful
whose aims and operations do not involve any
element which is not approved by the Syariah;

IFSA 2013

n  “takaful” means an arrangement based on
mutual assistance under which takaful
participants agree to contribute to a common
fund providing for mutual financial benefits
payable to the takaful participants or their
beneficiaries on the occurrence of pre-agreed
events;

IFSA 2013
n  S5. takaful business shall be divided into two

classes—
n  (a)  family takaful business, which in addition to

all takaful business concerned with family takaful
certificates shall include any type of takaful
business carried on as incidental only to the
family takaful operator’s business; and

n  (b) general takaful business,which means all
takaful business which is not family takaful
business.

Classification of Takaful

n  General
n  Family

General Takaful
n  Short tem policy
n  Contribution goes to GTF which is then invested

and the profits are paid back to the fund

n  Contributions go to a common pool to compensate
participants in the event of a loss.

n  No saving and investment elements.TO will
distribute any underwriting surplus to the
participants.

n  Eg motor vehicle, marine, personal accident,
health.

Family takaful

n  Long term policy (children education,
pension, compensation in the event of
death) 10-30 years.

n  PA: saving accounts
n  PSA: tabarru accounts
n  In the event of a loss the participants will be

compensated.
n  TO: fees or profit sharing

Underlying contracts

n  Takaful Business is based on the concepts of
Mudarabah, wakalah, waqf, jualah and
Tabarru.

n  Involvement of these Islamic forms of
business eliminates the elements of Riba
from insurance contract and convert
Gharar into tolerable form.

Nature of Relationship

n  Amongst the participants- al Tabarru
n  Contracts between participants and takaful

operators-
n  Mudharabah

n  Wakalah
n  Jualah
n  Waqf

n  Hybrid

Contract among takaful participants

n  Tabarru: gift or donation, which given by one in
favor of someone without seeking any
consideration.

n  A tabarru’ made based on the general principles of
contract in which the person binds himself
unilaterally by offering something valuable for the
noble cause of welfare of others

n  Issue:  outright gitft (hibah) or endowment?

n  AAOIFI: iltizam bit tabarru or nihd

Concept of Al-Tabarru’
n  participants’ contributions credited mainly

into two accounts; participant’s account
(PA) and participants’ special account
(PSA).

n  PA- To be invested based on mudharabah
n  The amount credited into the PSA is

regarded as tabarru’, which is managed by
the takaful operator to provide a security for
others who deserve

Issue on al tabarru

n  Opponent: it is not al tabarru but contract of
exchange
n Issue on gharar is there
n Al ibratu bi al maani la bi al alfaz (one should

look at the end result and not at its
wording)

n  Answer:
n  (iltizam bi al tabarru (self  imposed donation):

Maliki’s view

Contracts btn participants and TO

n  1. mudharabah: profit sharing
n  2. wakalah: fees
n  3. jualah: commission. Commitment to pay

for the performance.
n  4. waqf: TO as trustee.

Characteristics of Takaful

n  1. Mutual Help
n  2. Mutual Responsibility
n  3. Mutual Protection
n  Mutual insure one another.
n  Relationship- not as an insurer and insured

but participants and manager of the
contribution money.

n  4. Free from any element of riba, maisir,
juhala, excessive gharar.

Takaful Conditions (Mutual Assistance
and Cooperation)

n  1. Speciality Condition
n  Compliance with the Islamic cooperative

principles
n  2. Partnership Condition=
n  Participants- right t entitlement of surplus

profit and render liable to cover losses.
n  Surplus may be paid= pro rata basis.

Takaful Conditions (Mutual
Assistance and Cooperation)

n  3. Investment Condition=
n  To invest in halal sectors.
n  4. Management Condition=
n  Policy to have adequate representation on

the board of directors of the company to
scrutinize its accounts


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Legal Aspects of
Islamic Finance

LAB4112
DR. ZULKIFLI HASAN

Contents

n  Takaful Act 1984
n  IFSA 2013

Takaful Act 1984
n  S 4 of  the TA- takaful operators only
n  1. Company 2. Cooperatives Society.
n  In order to carry on takaful business the TO must:-

n  1. registered under the Act.
n  2. Maintains a surplus of  assets over liabilities of

not less than the amount prescribed from time to
time.

n  3. made deposit with the Accountant General a
value of  not less than the amount prescribed by the
minister

Cont…

n  S8- DG responsible for registration S10- DG
may impose conditions for registration.

n  S 8(5)- Vital Section- DG must be satisfied that
the aims and operations –syariah principles.

n  The AOA to establish SSC.
n  S 16- TO shall establish and maintain a takaful

fund in respect of each classes of takaful
business.

Maintains a surplus of assets over
liabilities

n  Takaful (Surplus of  Assets over liabilities)
Regulations 1985.

n  Family Solidarity Business- RM5 million
n  Takaful Business- RM10 million.

Made deposit with the Accountant
General

n  Takaful Statutory Deposits Regulations 1985.
n  Not less than RM300,000.00
n  TO must pay annual registration fee to BNM.
n  FSB or GB- RM2500.00
n  FSB and GB- RM5000.00

IFSA 2013

n  IFSA 2013 and Takaful
n  For stability
n  More power to BNM
n  To protect consumers
n  To strengthen shariah governance
n  Heavy penalty

Scope of IFSA 2013 and Takaful

n  1. Prudential Matters and Corporate Governance
n  2. Shariah Governance
n  3. Business Conduct and Consumer Protection

Definition
n  ‘Retakaful’ now also covers arrangement between

head office and branch
n   ‘Senior officer’ is statutorily defined and covers

everyone having authority and responsibility for
planning, directing or controlling the activities of a
TO; excluding the Shariah Committee

n   ‘Shariah Committee’ is formally required – with
governance framework, statutory duties and
privileges similar to actuaries and auditors (no
longer just a Syariah advisory body)

Definition

n  ‘Takaful certificates’ are expanded; whereby
issuing a takaful certificate shall be construed as
entering into a contract of takaful, whether or
not a formal contract has been issued

n  ‘Takaful contribution’, which was mentioned
only once in the TA, us now extensive
mentioned and regulated under the IFSA

Legal Form
n   International takaful business (by international

takaful operator), which is previously governed
under Part IIA of the Takaful Act, continues to
exist under the IFSA – no such business or
operator under the FSA for conventional insurers

n  All takaful operators have to separate family
takaful and general takaful businesses within 5
years from Appointed Date

n  All takaful operators have to be a ‘public’
company within 12 months from Appointed Date

Takaful Certificate

n  S. 140, IFSA – Schedule 8 sets out provisions
relating to takaful certificates

Pre-Contractual Duty of Disclosure

n  S. 141, IFSA – Schedule 9 : Sets out the pre-
contractual duty of disclosure and representations
for contracts of takaful in Part 2, and the remedies
for misrepresentations relating to contracts of
takaful in Part 3

n  Breach of duty of disclosure under paragraph 11
of Schedule 9 is punishable with imprisonment
not exceeding five years or fine not exceeding ten
million ringgit or both.
*Note that Schedule 9 explicitly states that it does not have
retrospective effect

Payment of Takaful Benefits

n  S. 142, IFS – Schedule 10
n  sets out provisions for the payment of takaful

benefits upon death of a takaful participant
under a family takaful certificate, or personal
accident takaful certificate issued in respect of a
contract of takaful entered into by the takaful
participant upon his life

Scope of Business

n  A licensed takaful operator shall not carry on
both family takaful business and general takaful
business, except that it may carry on the general
takaful business relating to medical by reason of
disease or sickness or medical expenses subject
to such requirements and conditions as may be
specified by BNM – s.16, IFSA

Cont…

n  A transition period of five years from the time
the IFSA comes into operation is allowed-
separate family takaful business and general
takaful business to comply with this – s.286,
IFSA.

n  Only licensed professional retakaful operator
can carry on both family takaful business and
general takaful business

Cont..

n  Any breach of the above may be liable to
imprisonment not exceeding eight years or a fine
not exceeding twenty-five million ringgit or to
both.

n  Except with the prior written approval of BNM,
a licensed takaful operator shall not carry on
annuity certain business, financial guarantee
takaful business or credit guarantee takaful
business – s.15(4), IFSA

n  Must be a public company – s. 21,

Winding-Up
n  Division 3 sub 2 (ss. 212 - 218), IFSA – In the winding

up of a Licensed takaful operator:
n   the valuation of its assets and liabilities, of the

shareholders’ fund and takaful fund, including liabilities
in respect of takaful certificates, shall be on a basis
determined by BNM and excludes the application of
the law relating to bankruptcy or insolvency.

n  termination of all takaful certificates issued by a
licensed takaful operator is effective from the date of
the winding up order and sets out the items which a
takaful participant can claim as a debt due to him.

Cont…

n  a liquidator of a licensed takaful operator which
is being wound up shall pay in good faith to any
of its claimants without requiring strict proof of
debt of such claims to facilitate payment.

n  issuance of a takaful certificate by a director,
officer, agent or contributory, past or present, of
a licensed takaful operator which is being wound
up after its cessation of takaful business is
prohibited.

Cont..

n  the liquidator of a family takaful operator is
empowered to carry on its existing family takaful
business with a view to its transfer as a going
concern to another takaful operator.

n  provisions relating to the priority of payment in
winding up of a licensed takaful operator are to
be followed.

Due Regard to SC Decision
n  BoD to have regard to interest of  takaful

participants; have due regard to any decision
of the Shariah committee on any Shariah
issue relating to the carrying on of business,
affairs or activities of the institution

n  Potential conflict of interest between
majority shareholder and takaful
participants

Civil Actions

n  Civil actions can be brought by any persons or
institutions or by BNM on their behalf against
any persons who contravenes or is in breach of
the IFSA provisions.

Statutory Duties

n  1. Shariah Compliance
n  2. Reporting Duties

Shari’ah Compliance and Reporting Duties

n  s.28, IFSA)
n  (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 SAC, the institution shall —

n  (a) immediately notify BNM 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;

n  and
(c) within 30 days of becoming aware of such noncompliance or
such further period as may be specified by BNM, submit to
BNM a plan on the rectification of the non-compliance.

Takaful Specific Provision

n  Policies
n  Business

Single license

n  Single licensed takaful business. S 16 of the
IFSA requires takaful operator to separate its
family business with general takaful
business. (5 years to split both business,
family business and general takaful business
into separate entities).

Takaful fund

n  S 94 prohibits a licensed takaful operator from
making any withdrawal from a takaful fund,
whether from the surplus, or otherwise, of that
takaful fund unless all the conditions set out is
fulfilled.

n  S 91 makes it mandatory for takaful operator to
separate takaful fund and shareholders’ fund.

n  S 95 makes qard or loan provision is compulsory to
every takaful operator in the event of deficit of the
risk fund.

Policies

n  Sch 9: “consumer takaful contract” means a
contract of takaful entered into, varied or
renewed by an individual wholly for purposes
unrelated to the individual’s trade, business or
profession.

Warranties and representations (para.10, Sch.9)

n  “Any representation made before a consumer takaful contract was
entered into, varied or renewed shall not be converted into a warranty
by means of any provision of the consumer takaful contract or of any
terms of the variation or of any other contract, whether by declaring the
representation to form the basis of the contract or otherwise.”

n  Abolishes the ‘basis of contract’ clause in consumer takaful
contracts.

n  Takaful operators can no longer argue that an
inaccurate answer constitutes a breach of warranty to
render a consumer takaful contract void from its
inception.

n  Therefore, takaful operators can only void a consumer
takaful contract on grounds of misrepresentation.

Cont..

n  Non-Consumer takaful: Basis of Contract
Clause-Void

n  Consumer Takaful:
n  Misrepresentation: reckless-contract void and

no refund of contribution
n  Innocent: Contract void and refund the

contribution.

Duty to Disclosure

Party Non-consumer takaful contracts  Consumer takaful
contracts

Takaful
Operator

Duty to not:
Make misleading or false
statements,
• fraudulently or otherwise;
•  Fraudulently conceal a material

fact; or
In the case of takaful agents,use
• unauthorised sales brochures

Same

Duty to clearly inform a proposer in
writing of the proposer’s pre-
contractual duty of disclosure, and
that this duty of disclosure shall
continue until the time the contract
is entered into, varied or renewed

Onus is on insurer to
ask a consumer to
answer specific
questions

Prohibited Business
n  List of prohibited business conduct (Schedule 7)
n  Engaging in conduct that is misleading or deceptive

in relation to the nature, features, terms or price of
financial service or product

n  Inducing financial consumer to an act or omit to do
an act in relation to financial service or product by
Making misleading, false or deceptive statements;
Dishonestly concealing or omitting material facts;
Recklessly making any statement, illustration,
promise, forecast or comparison which is
misleading, false or deceptive.

Cont…
n  Exerting undue pressure, influence or using or

threatening to use harassment, coercion, or physical
force in relation to the provision of or payment for
financial service or product.

n  Demanding payments for unsolicited financial
services or products unless the financial consumer
has communicated his acceptance of the offer
either orally or in writing.

Cont….

n  Exerting undue pressure on, or coercing,
financial consumer to acquire financial service or
product as a condition for acquiring another
financial service or product.

n  Colluding to fix or control the features or terms
of financial service or product to the detriment
of financial consumer, except for tariff or
contribution rates or policy terms approved by
BNM.


BLOG OF KNOWLEDGE (Shari'ah, Law, Islamic Finance and Muslim News)
Shari'ah, Law, Islamic Finance and Muslim News
Monthly Archives: June 2010
June 25, 2010
DR. ZULKIFLI HASAN
Islamic financing rebate (Ibra’) is mandatory
Bank Negara: Islamic financing rebate is mandatory

June 25, 2010 Available at:
http://www.themalaysianinsider.com/business/article/bank-negara-islamic-financing-rebate-is-mandatory/
KUALA LUMPUR, June 25 — Bank Negara has ordered sharia banks to give borrowers a rebate for early settlement under new rules designed to prevent legal disputes and restore confidence in Islamic financing contracts.
The ruling from Bank Negara’s sharia advisers will standardise the use of rebate, or ibrar, in bai bithaman ajil and murabaha financing contracts which are widely used in Malaysia’s $95 billion Islamic finance market.
Unlike conventional loans which levy interest on the accrued portion upon default, Islamic contracts are often asset sales where banks are entitled to the entire sum based on the whole tenure of the contract, regardless of when default occurs.
In practice, Islamic banks can grant a rebate to waive their right to the unaccrued sum but such discounts are discretionary, resulting in legal disputes. If a rebate is not given, sharia financing contracts can be more costly than conventional loans.
“In line with the need to safeguard maslahah (public interest) and to ensure justice to the financiers and customers, Islamic banking institutions are obliged to grant ibrar to customers for early settlement of financing based on buy and sell contracts,” the ruling said.
The ruling, effective June 7, requires the right of rebate to be specified in contracts. The method of computing the rebate will be determined by the central bank.
Ibrar is derived from the traditional Islamic notion of loans where charitable financing is extended to the poor and the lender writes off the debt if the borrower can’t afford to repay.
Some practitioners said the ruling would resolve uncertainties relating to the use of ibrar but was difficult to reconcile with the sharia’s tenets.
“It throws into doubt the legal principle which has traditionally been that ibrar cannot be compelled because it is at the discretion of the creditor,” said Mohamad Illiayas, an Islamic banking lawyer in Kuala Lumpur.
“In murabaha, bai bithaman ajil and bai ina contracts the price is one of five critical elements, the absence of which, or uncertainty or ambiguity with regard to any of the five elements would render a contract void.”

Figures on the value of bai bithaman contracts are hard to come by but Malayan Banking had earlier estimated that these contracts, along with bai inah and bai al dayn (debt trading contract) account for over 80 percent of the Islamic banking portfolio in Malaysia.
Islamic banking assets in Malaysia, which has the world’s largest bond market, totalled about US$95 billion (RM309 billion) or 19.6 per cent of total banking system assets as at December 2009, according to central bank data. Figures were not available on the number of Islamic financing defaults in Malaysia.
Best Regards

ZULKIFLI HASAN

DURHAM, UK
Burj Arab, Dubai
Islamic finance news
1 Comment
June 25, 2010
DR. ZULKIFLI HASAN
Can we survive without subscribing traditional banking system?
Salam to all,
I wish to highlight a possible good area for research pertaining to unbanked and underbanked individuals. According to the Federal Reserve Bank there are 30 Million Unbanked or Underbanked consumers in the United States. Unbanked individuals refer to those who do not have saving or current account while underbanked consumers to those who have bank’s account but use non-financial institutions for their financial services. There are five factors that influence the unbanked and underbanked individuals to avoid subscribing traditional banking facilities and services:-
1. living paycheck-to-paycheck due to limited and unstable income;

2. Negative experience with the existing bank;

3. Consumer misunderstanding and misinformation;

4. Retailers are often easier to use than banks for use of payment service; and

5. Need for physical control of and immediate access to money.
Unlike most of us, any potential of credit default, significant fees and penalties charges are no more relevant to the underbanked and unbanked consumers. For full article, click here:
A Study of the Unbanked and Underbanked Consumer in the Tenth Federal Reserve District
Best Regards

ZULKIFLI HASAN

DURHAM, UK
Brussels, Belgium
My Thought
News
Leave a comment
June 23, 2010
DR. ZULKIFLI HASAN
Why Britain’s Islamic Finance Industry Flopped
Why Britain’s Islamic Finance Industry Flopped
By Junaid Bhatti Available at:
http://www.respublica.org.uk/blog/2010/06/why-britain%E2%80%99s-islamic-finance-industry-flopped
Full disclosure time: I’ve been involved with Britain’s Islamic finance industry for most of the last decade. Indeed, I was part of the small team that set up the first Shariah-compliant FSA-approved bank in the UK, Islamic Bank of Britain (IBB). As an unashamed enthusiast for the cause, I extolled the virtues of IBB with great vigour for more than four years. After I moved on, I went on to be involved with several other big-name Islamic finance endeavours in the UK and promoted their merits with gusto.
So, as we now approach the sixth anniversary of IBB’s launch, I’m sad to finally have to admit that Islamic finance in the UK has been a huge flop. IBB may still be limping on as probably the last bastion of the cause, but it’s difficult to imagine it holding out for much longer. It’s a dramatic turnaround from those heady summer days of 2004 when we received the news that the government’s regulator, the Financial Services Authority, had agreed to provide us with a banking licence. IBB was the first entirely new UK bank for almost a century! We imagined we’d be overwhelmed by customers and enjoy accelerating growth for years to come. And I can’t begin to describe my pride when I became first official customer of IBB and opened account number X0000001 – an account I still hold today.
Flash forward five years since its inception and IBB has never made a profit. Not once, not ever. Rather, the company has reported combined losses of almost £45 million pounds, and its shares have lost more than 95% of their value since the highs enjoyed during the early years. But at least it’s fared better than many of its contemporaries in the industry. So what about the rest of the UK’s Islamic finance providers?
Well, the UK’s first ‘Halal’ insurance firm, Salaam Insurance, spectacularly shut up shop in 2009 after less than 18 months of trading. Lloyds TSB, which made a half-hearted stab at Shariah-compliant products in 2004, doesn’t seem to have promoted its offering for years. alburaq – owned by Arab Banking Corporation – has effectively withdrawn its savings and mortgage products from the mass market and now serves only the wealthiest of customers. Even HSBC Amanah, probably the most credible and efficient provider of Halal banking in the UK, has dramatically reduced its dedicated Islamic banking staff in Britain, and its marketing volume has been turned way down.
Clearly things haven’t gone well for the UK’s fledgling Islamic finance market since the promise of the early noughties. Before analysing why things went wrong, it’s worth going back to the beginning to examine the landscape before that early flourishing at the start of the new millennium.
Origins of the Industry
The aim of almost every Islamic bank has been to offer Shariah-compliant alternatives to conventional banking services. In practice, this has meant designing products so that, on the surface at least, they look no different to the accounts and loans you get through conventional banks. The customer notices no difference, as the bank does all the hard work to ensure that the contract and its operation are in compliance with the Shariah.
The main aims of Islamic finance are to avoid Riba (usury) and to ensure that money is not utilised to support unethical businesses, such as those involved in booze, pornography and gambling. Businesses that most conventional banks would (and do) whole-heartedly finance if they believe there’s profit to be made. However, whatever the ethical merits of Shariah banking, no-one could argue that Halal banking provides the best customer value from a financial perspective.
Islamic financial principles go back 1400 years, and were implemented by the Prophet Muhammad (pbuh) and his companions in their daily business dealings. Islamic banking, in its modern sense, is only about 50 years old. Unsurprisingly, it was an Arab community that revived these centuries-old financial principles. It all began in 1960s Egypt as a community banking movement designed to encourage rural farming communities to save and earn a Halal income.
However, it’s only been in the last two decades that the Islamic finance industry, buoyed by the increasing value of the Middle-Eastern oil industry, has taken off in a big way. There are now hundreds of Islamic finance companies around the Muslim world, and the industry has demonstrated consistent annual growth of between 15%-20%. So it was only a matter of time before venture capitalists in the West decided to throw their weight behind this potential cash cow.
British Islamic Banking
Few realise that the people driving the establishment of Islamic Bank of Britain and Salaam Insurance were not Muslims. Rather it was European entrepreneurs, attempting to mimic the financial success of Halal finance companies in the Middle East, who got the ball rolling for these flagship Shariah-compliant corporations. The flowering of Britain’s Islamic banking movement had little to do with the Koran and much more to do with capital gains.
In 2004, Islamic Bank of Britain was granted a banking licence and became the first government-authorised Halal bank in the western world. However, it wasn’t the first to introduce Islamic finance to the UK. Since the early 1990s several conventional banks have offered Islamic Mortgages to their British customers, including HSBC’s Amanah, alburaq and Ahli United Bank. These providers are still around, but they haven’t really evolved much since inception, and now limit themselves to offering Islamic Mortgages for only the wealthiest clients.
Over the years UK Islamic finance has offered its customers Savings and Current accounts for individuals, businesses, Masjids and Madrassahs; Islamic “Mortgages”; Commercial Property Finance, Home and Motor “Insurance” and a Halal alternative to conventional loans (dubbed “Personal Finance”). Yet, as the decade closed, barely 60,000 customers had chosen to join the Halal finance movement, representing about 4% of the British Muslim community.
That’s a woeful market share for the industry whatever way you try and spin it – and Britain’s Islamic bankers are desperately trying to spin it at every opportunity. However, it’s clear that all their business plans have failed spectacularly and that the strategies implemented by Islamic finance providers have been faulty from the start.
Where did it all go wrong?
In the mid-noughties, Islamic Finance in the UK seemed to be going from strength to strength. During the last decade the British government authorised the creation of six stand-alone Islamic finance firms. In addition, many conventional banks started offering Islamic products and services. However, public awareness and understanding of the industry and its products remained limited and muddled. Furthermore, right-wing media began encouraging growing animosity towards Halal finance providers, and their products and services, as part of a wider tabloid crusade against all things Islamic.
However, the most significant factor stunting the growth of the industry has been the ineffective way in which Islamic finance has been marketed to the public. (Veterans of the industry can stop reading now, as I’ve been banging on about this for longer than I can remember, and you’re probably tired of hearing it.)
Rational vs. Emotional Consumer
For many years now Halal finance has been sold as the logical choice for the British Muslim. Islamic bankers have explained at great length how its processes and procedures are Shariah-compliant. How an eminent committee of Imams – paid for by the bank – can confirm that it’s Shariah-compliant. And they’ll quote numerous holy texts to support their assertion that banking with them will help you avoid the Devil’s pitchfork after you die.
However, that message has limited appeal because when it comes to finance (and in many other areas of life) human beings make emotional choices as well as – and sometimes instead of – rational ones. The only way that Islamic banking will become successful is if the people marketing Halal finance appeal to the public in a way that is emotionally compelling.
After more than a decade, Islamic finance has attracted a tiny proportion of a potential 1.5 million Muslim adults in the UK. You’d think that, by now, the Islamic finance providers would have realised that boring technical explanations and emotional blackmail may not be the most effective way to win customers.
In fact, it’s the complete opposite of how financial services are marketed by everybody else. If you look at the conventional banking world, the majority of their adverts focus on how their bank offers more convenience and/or better value than their rivals. They usually claim to have the friendliest staff around, and some even go so far as to try and turn themselves into a premium fashion brand – as is the case with Amex Platinum or the NatWest Black.
And it works. It works because customers are driven by their whims, by their emotions and by their vanity. So the question any experienced marketer would ask the Islamic finance industry is this:
“If you were the average customer would you rather join a bank that promises to save your eternal soul thanks to the operational hoops it jumps through so it can conform to Islamic law? Or a bank that promises to be friendly, convenient, good value for money and also offers you a credit card that will make you the envy of your friends and family?”
“But we’re not appealing to the average customer,” they’ll reply, “We’re appealing to Muslims.”
It demonstrates how disconnected the industry’s marketers are from the hearts and minds of their target audience. There exists a myth in the minds of Islamic bankers, and the investors who fund their endeavours, that British Muslims are exceptionally devout and will always choose the ‘Halal’ option if it’s offered to them.
It’s a belief built upon an abundance of solid market research, conducted by independent (i.e. non-Muslim) research firms. The only problem being that the researchers don’t appreciate one important fact. When it comes to questions of religion, most Muslims will lie and pretend to be far more devout than they are in reality. It’s only natural when you are brought up in a community full of people who are judgemental about everyone’s sins but their own. That isn’t likely to come out in the research, however.
Islamic bankers need to ask themselves: if Muslims are as concerned with saving their eternal soul as the research suggests, then why is it that the Mosques are empty for most of the week, for most of the year? The number of people attending the obligatory communal dawn prayer can be counted on one hand (The exception being the month of Ramadan, where everyone suddenly seems to find rediscover their spirituality.) Clearly, most British Muslims are not puritanical and devout. So it hardly makes sense to appeal to a sense of religious devotion that isn’t there.
Islamic banks in the West need to face the reality that Muslim customers are not much different from mainstream customers. It seems counter-intuitive to sell a religious, ethical or moral choice by appealing to people’s ignoble instincts. But it’s a paradigm shift the industry needs to make, and they better make it soon before it’s too late. Because the reality is that the “devout Muslim” segment is nowhere near big enough to support the exceptional operational costs involved in running a bank or insurance firm.
If Islamic Bank of Britain, and the UK Islamic finance industry in general, hopes to survive – and there is some doubt as to whether it can – then it needs to understand the psychology of the customer, which is something that conventional banks have already perfected. Only then will there be hope that our children will still have access to the Islamic finance options we enjoy today.
Junaid Bhatti is Chief Editor of MuslimPolitics.com and a Fellow of the Institute of Islamic Banking and Insurance. He is an activist for the Conservative party and an e-strategist for Westminster Conservatives.
Best Regards

ZULKIFLI HASAN

DURHAM, UK
Milan, Italy
Islamic finance news
1 Comment
June 21, 2010
DR. ZULKIFLI HASAN
HSBC, Lloyds Banking Group: Defeat on Islamic banking
HSBC, Lloyds Banking Group: Defeat on Islamic banking
By Will Peters  Available at:
http://www.economy-news.co.uk/lloyds-banking-group-21201006.html
Lloyds Banking Group accused of ‘half hearted stab’ at Islamic finance provision. Lloyds Banking Group and HSBC Holdings have reportedly had to scale back their march into Islamic finance.
A report in this morning’s edition of the Times says Lloyds Banking and HSBC have failed to make much of an impact with their Sharia-compliant products which were set up to appeal to the UKs 2 million strong Muslim population.
The Times quotes Junaid Bhatti, a founder of the Islamic Bank of Britain, as saying HSBC Holdings and Lloyds Banking Group were seen as having made the most effort in trying to corner this niche market. “Lloyds, which made a half-hearted stab at Sharia-compliant products in 2004, doesn’t seam to have promoted its offering for years,” says Bhatti.
Lloyds Banking Group to acknowledge that while it no longer markets its Islamic products they are offered in detail on the Lloyds website.
HSBC Holdings says its Sharia accounts were growing 15% a year. Lloyds Banking had no figures to divulge on the issue.
Mohammad Qayyum, the director general of the Institute of Islamic Banking and Insurance in the UK said that the main problem the banks face is pricing – the products are too expensive – and standard alternatives are a much more attractive option.
However the Times reports that there could be legislative changes on the cards that will allow the likes of Lloyds Banking Group and HSBC Holdings to offer Islamic finance at reduced prices. The Treasury has made changes in the tax law to accommodate Sharia Qayyum says, The FSA (soon to be redundant) is also reportedly consulting on a new framework for issuance and regulation of sukuk bonds.
Regards

ZULKIFLI HASAN

DURHAM, UK
The Rock of Gibraltar “Jabal Tariq”.
Islamic finance news
Leave a comment
June 20, 2010
DR. ZULKIFLI HASAN
Islamic banking needs to focus on innovative products: Dr Zamir Iqbal
Islamic banking needs to focus on innovative products: Dr Zamir Iqbal
Available at:
http://www.dailytimes.com.pk/default.asp?page=20106
\16\story_16-6-2010_pg5_9
KARACHI: Dr Zamir Iqbal, a renowned scholar on Islamic Finance, has stressed the need for developing mechanism to enhance liquidity and innovative Islamic financial products in order to cater to the growing demand of Islamic Finance in the world.
Delivering a talk on ‘What Needs to be Done for Islamic Finance to Succeed’ at the State Bank of Pakistan, Karachi on Tuesday, Dr Iqbal observed that current business model of the Islamic banking industry needs to be reviewed to cater to the demand for more sophisticated products, which is likely to grow rapidly.
He said that it would be better for the Islamic banking industry to innovate rather than replicate the conventional banking products and noted that no or limited collective efforts have been made so far to develop such products.
Highlighting some factors for sustainable growth of Islamic Finance, Dr Iqbal emphasised the need for consolidation of Islamic banking; expanding the scope, services and products, strengthening the risk management systems and reducing reliance on commodity/fixed income-like products.
Referring to legal and regulatory issues, Dr Iqbal asserted that there is a need to improve corporate and Shariah governance, and supervision & monitoring systems. He also stressed the need to promote risk-sharing through participatory instruments like Musharaka and Mudaraba.
Dr Iqbal said that over the years Islamic Finance has grown into a global phenomenon and Islamic Finance market in the world is estimated at $1 trillion. “Islamic Finance is not just a phenomenon restricted to only Muslim countries,” he said and added that there is a growing recognition and acceptance of Islamic Finance in the world.
He said that several factors have contributed towards global acceptance of Islamic finance, which include increased demand for Shariah-compliant products fuelled by increased liquidity in the market, successful track record of Shariah-compliant financial intermediation, commitment by Islamic Development Bank, AAOIFI and IFSB to promote Islamic finance industry, etc.
Dr Iqbal said the development of Sukuk also had a positive impact on the development of Islamic finance. Director Islamic Banking Department, State Bank of Pakistan, Saleemullah, who also spoke on the occasion, highlighted the achievements of Dr Zamir Iqbal in the field of Islamic Finance.
Best Regard

ZULKIFLI HASAN

DURHAM, UK
Dubai Dessert, UAE
Islamic finance news
1 Comment
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+

Regulatory Framework of Shariah Governance

Zulkifli Hasan, PhD

+
Contents

n Regulatory framework of Shariah
Governance
n IBA1983
n CBA 1958 Amendment 2003
n IFSA 2013
n SGF
n AAOIFI
n IFSB

+
Section 3 (5) of the IBA (No longer
relevant)

n (5) The Central Bank shall not recommend the grant
of a licence, and the Minister shall not grant a
licence, unless the Central Bank or the Minister, as
the case may be, is satisfied—(a) that the aims and
operations of the banking business which it is
desired to carry on will not involve any element
which is not approved by the Religion of Islam; and

n (b) that there is, in the articles of association of the
bank concerned, provision for the establishment of
a Syari’ah advisory body, as may be approved by
the Central Bank, to advise the bank on the
operations of its banking business in order to
ensure that they do not involve any element which
is not approved by the Religion of Islam.

+
Section 13A (1) (No longer relevant)

n  13A. (1) An Islamic bank may seek the advice of the Syariah
Advisory Council on Syariah matters relating to its banking
business and the Islamic bank shall comply with the advice
of the Syariah Advisory Council.

n  (2) In this section, “Syariah Advisory Council” means the
Syariah Advisory Council established under subsection
16B(1) of the Central Bank of Malaysia Act 1958.

+Sec 124 of the BAFIA (no longer
relevant)

n  124. (3) Any licensed institution carrying on Islamic banking
business or Islamic financial business, in addition to its existing
licensed business may, from time to time seek the advice of the
Syariah Advisory Council established under subsection (7), on the
operations of its business in order to ensure that it does not involve
any element which is not approved by the Religion of Islam.

+
IFSA 2013

n  “Shariah Advisory Council” means the Shariah Advisory
Council on Islamic finance established under section 51 of
the Central Bank of Malaysia Act 2009;

n  “Shariah committee” means the Shariah committee of an
institution established pursuant to section 30;

+Part IV Shari’ah Requirements of the
IFSA

n  S28. (1) An institution shall at all times ensure that its aims
and operations, business, affairs and activities are in
compliance with Shariah.

n  (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.

+
S 29 of the IFSA

n (a) Shariah governance including—

n (i)  functions and duties of the board of directors,
senior officers and members of the Shariah
committee of an institution in relation to
compliance with Shariah;

n (ii) fit and proper requirements or disqualifications
of a member of a Shariah committee; and

n (iii)  internal Shariah compliance functions; and

n (b) any other matter in relation to the business,
affair and activity of an institution for the purposes
of compliance with Shariah.

+SC
n  30. (1) A licensed person shall establish a Shariah committee for

purposes of advising the licensed person in ensuring its business,
affairs and activities comply with Shariah.

n  31. No person shall be appointed, reappointed or accept any
appointment as a member of a Shariah committee unless such person
meets the requirements as set out in any standards as may be specified
by the Bank under subparagraph 29(2)(a)(ii) and has obtained the
prior written approval of the Bank.

+
Pre-CBA 2009

n  Affin Bank Berhad v Zulkifli Abdullah [2006] 3 MLJ 67 :
n  It is not a question of shariah law.

n  It is the conclusion of this court. There is no necessity to refer
the question to another forum.

n  Arab Malaysian Merchant Bank Berhad v Silver Concept Sdn
Bhd [2005] 5 MLJ 210 :
n  s 16B does not make reference to the SAC mandatory.

n  Only binding to the arbitrator.

+
SAC

n S 51 (1) The Bank may establish a Shariah
Advisory Council on Islamic Finance which
shall be the authority for the ascertainment
of Islamic law for the purposes of Islamic
financial business

n (2) The Shariah Advisory Council may
determine its own procedures

+
S 52 of the CBA

n S 52:  (a) to ascertain the Islamic law on any
financial matter and issue a ruling upon
reference made to it in accordance with this
Part;

n (b) to advise the Bank on any Shariah issue
relating to Islamic financial business, the
activities or transactions of the Bank;

+
S 52 of the CBA

n (c) to provide advice to any Islamic
financial institution or any other person as
may be provided under any written law;
and

n (d) such other functions as may be
determined by the Bank

+
Reference to SAC

n The court or arbitrator shall

n (a) take into consideration any published
rulings of the Shariah Advisory Council; or

n (b) refer such question to the Shariah
Advisory Council for its ruling.

n (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.

+
Tan Sri Khalid Ibrahim v Bank Islam
Malaysia Berhad [2009] 6 MLJ 416

n For the first time in the history of the
Malaysian court that the High Court judge
made reference to the SAC for confirmation
of the Shari’ah status of the agreement.

n BBA is recognized form of transaction.

+ Bank Islam Malaysia Bhd v Lim Kok Hoe & Anor
And Other Appeals [2009] 6 CLJ 22; [2009] 6
MLJ 839

n The ct will have to assume that the SAC and the SC
would have discharged their duty to ensure that
the operation of Islamic banks are complied with
the syariah.

n The judge should not have taken upon himself to
rule otherwise without having regard the view of
the SAC.

+Effect of Rulings

n S 57 Any ruling made by the Shariah Advisory Council
pursuant to a reference made under this Part shall be
binding on the Islamic financial institutions under
section 55 and the court or arbitrator making a
reference under section 56.

n 58. Where the ruling given by a Shariah body or
committee constituted in Malaysia by an Islamic
financial institution is different from the ruling given by
the Shariah Advisory Council, the ruling of the Shariah
Advisory Council shall prevail

+ Tan Sri Abdul Khalid bin Ibrahim v Bank
Islam Malaysia Bhd [2012] 7 MLJ

n (Mohd Zawawi J):

n   It is settled law that ss 56 and 57 of the Act are
valid federal laws enacted by Parliament and as
such were not in contravention of the FC.

n Difference of opinion on Shariah issues relating to
Islamic banking should be resolved within the
SAC. It is advisable and practical that a special
body like the SAC should ascertain the Islamic law
most applicable to the Islamic banking industry in
Malaysia

+
Azhar bin Osman & 3 Other Cases
(2010) 9 MLJ

n  Counsel for the bank contended that in a BBA contract the Bank has a
legal right to claim for the full sale price as stipulated in the Property
Sale Agreement, as.

n  The HC observed that in specifying the amount due, the issue which
confronts a BBA contract is the agreement is silent on:

n  Since the tenure of the contract has not completed, normally the bank
will further deduct as ibrar (a term used in Islamic banking for rebate)
what it refers to as ‘unearned profit“, i.e. the amount which has yet to
be earned by the bank, based on an Amortization table.

n  when a BBA contract is prematurely terminated upon default by the
borrower, the court cannot allow the bank to enforce the payment of
the full sale price in a premature termination:

+ MK Associates Sdn Bhd v. Bank Islam
Malaysia Bhd  [2015] 6 CLJ

n  The plaintiff must know of the imposition of Ta’widh so that

consent could be given freely. Obviously, the plaintiff in this
case did not know the imposition of Ta’widh on the financing
facility granted to it.

n  At the time the agreements were entered into Ta’widh was
not practised by the IFI. Ta’widh was only introduced after
the SAC’s Resolution in 1998. The said resolution was to take
effect only on 1 January 1999 to existing and new
agreements. Therefore, Ta’widh shall be applicable only on
or after 1 January 1999.

+
Shari’ah governance Framework for IFIs

n The SGF consists of two parts and one appendix
with part I consists of five sections and part II,
six sections. Part I provides an overview of
Shari’ah governance consisting of objectives,
scope of application, legal provision, effective
date and compliance deadline and approach.
Part II details out the Shari’ah governance
arrangements and these include general
requirement for Shari’ah governance
framework, oversight, accountability and
responsibility, independence, competence,
confidentiality and consistency and Shari’ah
compliance and research functions. All IFIs
licensed under the IBA, the BAFIA, the DFIA and
the TA are required to comply with the SGF.

+Objectives
n (i) sets out the expectations of the Bank on

an IFI’s Shariah governance structures,
processes and arrangements to ensure that
all its operations and business activities are
in accordance with Shariah;

n (ii) provides a comprehensive guidance to
the board, Shariah Committee and
management of the IFI in discharging its
duties in matters relating to Shariah; and

n (iii) outlines the functions relating to Shariah
review, Shariah audit, Shariah risk
management and Shariah research

+Framework

n  (i) the board oversight on Shariah compliance aspects of
the IFIs overall operations.

n  (ii) a  Shariah Committee  with qualified members

n  (iii) effective management responsibilities in providing
adequate resources and capable manpower

n  (iv) an internal Shariah review

n  (v) a regular Shariah audit, at least on an annual basis,

n  (vi) a Shariah risk management process

n  (vii) an internal Shariah research team

n  (viii) issuance and dissemination of Shariah decisions

+SGF
n In terms of appointment of the Shari’ah board,

section 3.8 mentions that the BOD of IFIs upon
recommendation of its Nomination Committee
should appoint the members of the SHC and
subject to the approval of the BNM and the SAC.
Appendix 2 on qualification requires the
Shari’ah board members to at least either have
qualifications or possess the necessary
knowledge, expertise or experience in Islamic
jurisprudence or Islamic commercial law.

n To ensure that the SHC is able to function
effectively, the SHC should consist of a minimum
of five members and its activities and functions
will be coordinated by the Shari’ah secretariat
of the respective IFIs (section 2.3).

+SGF
n With the purpose of mitigating the risk of

potential of conflict of interest and confidentiality
issues, IFIs are not allowed to appoint any
member of the SC in another IFI of the same
industry (section 5.4).

n Appendix 2 on disqualification provides that an
SHC member may be disqualified if he fails to
satisfy that he is fit for the position, fails to attend
75% of meetings in a year without reasonable
excuse, has been declared bankrupt, or a
petition under bankruptcy laws is filed against
him, was found guilty for any serious criminal
offence or any other offence punishable with
imprisonment of one year or more, or is subject
to any order of detention, supervision, restricted
residence or banishment.

+
SGF

n  Appendix 4 of the SGF provides the clear duties and
responsibilities of the SHC and these include: to advise the
BOD on Shari’ahmatters in its business operations; to endorse
Shari’ah compliance manuals; to endorse and validate
relevant documentations; to assist related parties on
Shari’ahmatters for advice upon request; to advise on matters
to be referred to the SAC; to provide written
Shari’ahopinions; and to assist the SAC on reference for
advice

+SGF
n The SHC is legally required to produce a

Shari’ah report expressing their observations on
IFIs’ compliance with Shari’ah principles as
illustrated in Appendix 3 of the SGF. In this
aspect, the BNM/GP8-i specifies the minimum
requirements of the Shari’ah report. The BNM/
GP8-i requires content of the Shari’ah report to
be at least, declaration of Shari’ah compliance
endorsed by the Shari’ah committee members.

n In terms of reporting structure, the SHC will
report functionally to the BOD as this reflects the
status of the SHC as an independent body of the
IFIs. The BOD is bound by any decision of the
SHC and they have to consider their views on
certain issues related to operational matters,
policy or business transactions.

+
IFSB AAOIFI

n 10 prudential standards for IFIs, 2 for capital
adequacy requirements, 1 for risk
management and 7 for governance,
disclosure and supervisory review process

n Guiding Principles on CG for Institutions
Offering Only Islamic Financial Services
(Excluding Islamic Insurance (Takaful)
Institutions and Islamic Mutual Funds)

n Guiding Principles on Governance for
Islamic Collective Investment Schemes,
n Guiding Principles on Governance for
Takaful (Islamic Insurance) Undertakings

n Guiding Principles on Governance for
Takaful Operations
n Guiding Principles on Conduct of  Business
for Institutions offering Islamic Financial
Services
n Guiding Principles on SG System for
Institutions offering Islamic Financial
Services

n 81 standards and guidelines which include
25 accounting standards, 6 auditing
standards, 7 governance standards, 41 Shari’ah
standards and 2 codes of  ethics.

n Shari’a Supervisory Board: Appointment,
Composition and Report;
n Shari’a Review
n Internal Shari’a Review
n Audit and Governance Committee
n Independence of  Shari’a Board
n Statement on Governance Principles for
IFIs

n Corporate Social Responsibility

+AAOIFI
n  (i)  Governance Standard for IFIs No. 1: Sharīʿah

Supervisory Board: Appointment, Composition and
Report

n  It consists of eight parts, namely introduction, definition,
appointment, composition, selection and dismissal, basic
elements of report, publication of the report, publication of
Sharīʿah rulings and guidelines, and the effective date.
Section 2 represents the most important provision in
Governance Standard No.1. It has three elements which
define the term ‘Sharīʿah board’. Firstly, a Sharīʿah board is an
independent body of specialized jurists in fiqh al muāmalāt.
This section allows the appointment of Sharīʿah board
members who are not specialized in fiqh al muāmalāt but who
are expert in the field of Islamic finance. Secondly, it
elaborates the role of the Sharīʿah board to ensure
compliance with Sharīʿah principles by having the authority
to direct, review and supervise the activities of IFIs. Thirdly, it
indicates the binding authority of the Sharīʿah board upon the
IFIs.

+
n Governance Standard for IFIs No. 2: Sharīʿah

Review

n It consists of eight parts with eighteen sections.
Section 3 explains the Sharīʿah review as an
examination of the extent of the IFIs’ Sharīʿah
compliance. section 5 puts the responsibility for
compliance upon the management.

n The Sharīʿah board is only responsible for
forming and expressing opinions on the extent
of Sharīʿah compliance. Sections 7–13 detail the
Sharīʿah review procedures, which involve
planning, designing, executing, preparing and
reviewing. The Sharīʿah review report should be
submitted to the AGM.

+n Governance Standard for IFIs No. 3: Internal
Sharīʿah Review

n It consists of eleven parts and thirty sections
which complement Governance Standard No. 2.
Standard No. 3 aims at establishing standards
and guidance on the internal Sharīʿah review.

n As the management of IFIs is responsible for
the extent of Sharīʿah compliance, it is
incumbent upon them to have a proper
mechanism of internal Sharīʿah review. While
the AAOIFI requires IFIs to carry out an internal
Sharīʿah review, it does not specify the
requirement of establishing a separate internal
Sharīʿah audit department.

n The internal Sharīʿah review can be carried out
by either an independent department or part of
the internal audit division.

+n Governance Standard for IFIs No. 4: Audit
and Governance Committee

n To complement the corporate governance
framework for IFIs, the AAOIFI strongly
recommends the establishment of an Audit and
Governance Committee (AGC) at the board
level.

n The AGC should consist of a minimum of three
members, appointed by the BOD from its non-
executive and independent board members,
who are knowledgeable about the affairs of the
institution and applicable regulations and laws,
including Sharīʿah rules and principles.

+n Governance Standard for IFIs No. 5:
Independence of Sharīʿah Board

n guidelines for its independence and
mechanisms to resolve issues of independence.

n The state of independence of the Sharīʿah board
is of the essence in enhancing public
confidence on the aspect of Sharīʿah
compliance. Section 3 restricts the Sharīʿah
board to subordinating their judgment on
Sharīʿah supervision to third parties. The
Sharīʿah board is not recommended to consist of
employees of the same IFIs or be involved in
managerial decisions and operational
responsibilities. The Sharīʿah board is required
to conduct continuous assessment of the IFIs
and do anything necessary to resolve any issues
of independence impairment.

+IFSB-10
n  SG:

n  The set of institutional and organizational
arrangements: This refers to the Sharīʿah board and
its related institutions, such as an internal audit
department and Sharīʿah division.

n  Effective independent oversight of Sharīʿah
compliance: This indicates the aims and objectives
of the Sharīʿah governance system to provide
efficient mechanisms for the purpose of Sharīʿah
compliance.

n  Sharīʿah pronouncements, dissemination of
information and an internal Sharīʿah compliance
review: This involves the overall Sharīʿah
governance processes that cover both ex ante and
ex post aspects of the Sharīʿah compliance
framework.

+Key Elements
Key Element Principle Operational Framework

Competence Fit and proper criteria Ex ante: Screening process
Ex post: Review and assessment

Professional training

Formal assessment

Independence Adequate capability to
exercise objective
judgment

Ex ante: Appointment, disclosure and full
mandate
Ex post: Review and assessment

Complete, adequate and
timely information

Confidentiality Strictly observe the
confidentiality

Ex ante: Undertaking secrecy
Ex post: Review and assessment

Consistency Fully understand the
legal and regulatory
framework strictly
observes the said
framework

There must be consistency in all ex ante and
ex post Sharīʿah governance processes