Shari'ah Audit for Islamic Financial Services

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ISRA Islamic Finance Seminar (IIFS)
11 November 2008


Dr. Abdul Rahim Abdul Rahman2
(International Islamic University Malaysia)

Institutions that offer Islamic financial services are expected to operate by the code of Islamic ethics and must function within the limits of shari’ah. In order to ensure that the operations of Islamic financial institutions do not contradict with shari’ah, the Shari’ah Advisory Council (SAC), Shari’ah Supervisory Board (SSB) or Shari’ah Supervisory Committee (SSC) normally functions as advisors or supervisors of Islamic banking activities. Internationally, the Accounting and Auditing Organizations of Islamic Financial Institutions (AAOIFI) and the Islamic Financial Services Board (IFSB) have issued a number of governance standards and guidelines. In Malaysia, Bank Negara Malaysia (BNM) has also issued the relevant guidelines to ensure prudent regulation of shari’ah matters in Islamic financial institutions.

The main objective of this paper is to evaluate the need for shari’ah audit in order to complement the shari’ah compliance mechanisms that are already in place. Shari’ah audit must be undertaken systematically as part of the corporate governance mechanism of the Islamic Financial Institutions (IFIs). This is due to the increasing demands of stakeholders that require assurance of shari’ah compliance and accountability. The paper also discusses some challenges as pre-requisites to effectively undertake shari’ah audit.



This paper is prepared for presentation at the International Shari’ah Research Academy for Islamic Finance (ISRA) Islamic Finance Seminar held in Kuala Lumpur on 11th. November 2008. The paper is only a draft version and cannot be reproduced without prior permission of the author. The author can be contacted at IIUM (Tel: 603 6196 4671 or E -Mail: [email protected]). The author is currently Associate Professor at the Kulliyyah of Economics and Management Sciences, IIUM. The author was the former Director of the IIUM Institute of Islamic Banking and Finance.


ISRA Islamic Finance Seminar (IIFS)
11 November 2008

The Status Quo

The present shari’ah governance structure in Malaysia is centred on the National Shari’ah Advisory Council (NSAC) that acts as the sole authoritative body to advise Bank Negara Malaysia (BNM) for Islamic banking and Takaful operations. NSAC has the power to issue fatwa and these fatwa resolutions are binding on all financial institutions in the country. The functions of NSAC are, among others, to ensure banks comply with the shari’ah rules and guidelines. The NSAC, in theory, is expected to study and scrutinize the shari’ah opinions of the SSCs of Islamic banks and financial institutions. The NSAC is also entrusted to ensure compliance with shari’ah rules and guidelines by supervising bank’s operations. Other functions may include advising Islamic banks and financial institutions on shari’ah issues related to operations and financial dealings. The NSAC also has authority to examine laws, by-laws and circulars governing the financial institutions activities.

In addition, Securities Commission (SC) spelt out the criteria of a shari’ah advisor(s) or shari’ah committee in the Offering of Private Debt Securities Guideline 2000, Section 32 (1).

The advisor(s) must be an undischarged bankrupt person, who has not been

convicted for any offence arising out of a criminal proceeding. The advisor(s) must also be of a good repute and must possess the relevant qualifications and expertise, particularly in fiqh mua’malat and Islamic jurisprudence, with a minimum of 3 years working experience or exposure in Islamic finance. The above section also state that the issuer of Private Debt Securities must either appoint an independent shari’ah advisor with the above criteria or appoint the shari’ah committee...
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