Shariah Compliance: A Product
Development Perspective

 

As an Islamic
financial institution is a serious challenge to Islamic banking and takaful
operators in Malaysia. The overall aspect of Shariah compliance has always been
the cornerstone of this success as it embodies the future of the Islamic
financial system itself. By introducing the Islamic Financial Services Act
2013, Malaysia is the only country with comprehensive laws and regulations on
Shariah compliance for Islamic finance by setting high fines to any party who
deliberately violates sharia principles.

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Furthermore,
each Islamic financial institution is required to establish a Shariah panel to
advise on their operations and management. As is known, Shariah compliance is a
fundamental thing that must be monitored from time to time by the Islamic
Financial Institutions (IKI) to ensure that all transactions are done out of
sharia basis. Imperative implementation and monitoring may result in transactions
being cancelled and thereby negatively affect the public on the credibility of
the Islamic financial system.

However, this
element of sharia makes the Islamic financial system unique to conventional
monetary systems where everything to be done needs to be scrutinized in detail
and transparent so as not to undermine the interests of the contracting
parties.

To achieve comprehensive Shariah
compliance objectives, Bank Negara Malaysia (BNM) has introduced the Shariah
Governance Framework in 2011 which must be complied with by every licensed IKI.

 

 

 

 

 

 

 

 

1. The evolution of the Malaysian
Islamic financial system: The approach Pragmatic and staggered.

 

2. Financial system in Malaysia

            The importance of Shariah governance
The Islamic financial principles emphasize the strength of the values ??and
structure of corporate governance, transparency, disclosure of information and
strict compliance with Shariah principles. Frame Shariah governance work is an
organizational arrangement for an Islamic financial institution ensure the
effectiveness of the board’s oversight, responsibility and accountability, the
parties’ management and Shariah committees to address the business operating
environment which is always in compliance with Shariah principles.

This is because Shariah principles are the basis for Islamic
financial practices through compliance with the principles, terms and
principles as well organized by Islam. Comprehensive compliance with Shariah
principles will strengthen confidence society and financial markets towards the
credibility of Islamic financial operations.In Malaysia, the Bank has
established a mechanism for the Islamic financial system to operate consistently
based on the principles of Sharia Muamalah, through the institutional arrangement
clear to Islamic financial institutions regulated by the Bank. The structure of
Shariah governance two levels were introduced, comprised of major Shariah
advisory bodies in the Bank and Shariah oversight committees set up in each
Islamic financial institution.

New Syariah framework In line with the efforts to further
strengthen the structure of Shariah governance, the Bank will issued a new
governance framework for Islamic financial institutions below Bank regulation
to meet the following objectives:

§  outlining expectations on an Islamic financial institution in
relation to the structure, the processes and arrangements of Shariah governance
with the aim of ensuring all   operations
and its business activities are in harmony with the principles of Shariah;

§  provide comprehensive guidance to the board of directors, Shariah
committees and parties management of Islamic financial institutions in
discharging its responsibilities in respect of matters Syariah affairs; and

§  Ensuring the proper Shariah compliance through Shariah appraisal
function and audit function effective Shariah.

 

 

In the framework of the framework, the Bank has referred to the
Guiding Principles on Good Corporate Governance Syariah Governance System for
Institutions Which Offer Islamic Financial Services issued by the Islamic
Financial Services Board (IFSB) in December 2009 and as well as the
implementation of appropriate practices in countries with banking sector and
fast Islamic finance.

 

 

3. Strategies to make Malaysia a
leader in Islamic finance International and Malaysia positions

 

3.1 An
environment that helps the resilience of the Islamic financial system

v  Strong and helpful legal, regulatory and supervisory framework
development of the Islamic financial system

v   Producing Shariah
intellectuals who are also proficient in other areas of finance – role ISRA,
INCEIF, collaboration between Islamic financial institutions & ISRAs,
Islamic financial institutions & institutions of higher learning offering
Islamic financial courses

 

3.2Guidelines
that meet international standards Reducing inconsistency in Islamic financial
practice

v  Potential expanding and expanding market

 

3.3More
complex and diversified products Promoting financial linkages and global
integration

v  Ensure Islamic financial instruments are competitive

v  Encourage innovation of Shariah-compliant instruments (i-REIT,
sukuk)

 

 

3.4 The
Islamic Financial Services Board host (IFSB)

v  Promoting the stability of Islamic finance by publishing the
prudent standards possible adopted internationally

 

3.5 Transparency
and disclosure

v  Need to reduce risk to consumers due to increasingly complex
products

v  BNM issues a Guideline on Transparency and Product Disclosure to
improve financial product disclosure standards and support user wise decisions

 

4. Challenges in Islamic finance

4.1 The
involvement of Scholar in finance Islam

Ø  Active interaction and collective ijtihad among the scholars
“and Islamic scholars in Islamic finance for the development of more
Islamic financial products and services innovative

Ø   Distribute all views and
opinions to medium such as discussion, debate, dialogue, writing and writing a
study that can lead to a deeper debate

Ø   Need more courage to come up
with an open view on international level in describing approaches and
applications Shariah

 

 

 

 

4.2
Consolidation understanding and cooperation

v  Integrated understanding and support by all levels of society
within develop and develop Islamic finance

v  Understand and support the government’s desire to make Malaysia international
Islamic financial centres

 

4.3
Adjustment the law

v  Establishment of Legal Adjustment Committee for making the legal
system in Malaysia meet the demands Islamic finance & international
references

v  Drafting a more comprehensive Islamic financial deed and separate
from conventional finance to avoid overlap thereby ensuring that it safeguards
Islamic lawsuits.