The document discusses the Shariah governance framework for Islamic financial institutions established by Bank Negara Malaysia (BNM). It outlines that BNM places great importance on ensuring the Islamic financial system operates according to Shariah principles. This is achieved through a two-tier Shariah governance structure comprising a central Shariah advisory body at BNM and internal Shariah committees at each Islamic financial institution. The framework sets expectations for institutions' Shariah governance structures and processes to ensure operations comply with Shariah. It enhances the roles and responsibilities of boards, Shariah committees, and management in Shariah matters.

2. GOVERNANCE OF ISLAMIC FINANCIAL INSTITUTIONS (IFIS)
• Shariah principles are the foundation for the practice of Islamic finance through the observance of the tenets, conditions
and principles espoused by Shariah. Comprehensive compliance with Shariah principles would bring confidence to the
general public and the financial markets on the credibility of Islamic finance operations.
• Bank Negara Malaysia (the Bank) places great importance in ensuring that the overall Islamic financial system operates in
accordance with Shariah principles. This is to be achieved through the two-tier Shariah governance infrastructure
comprising two (2) vital components, which are a centralised Shariah advisory body at the Bank and an internal Shariah
Committee formed in each respective Islamic financial institution (IFI).
• The Shariah Advisory Council of Bank Negara Malaysia (SAC) is a body established under section 51 of the Central Bank
of Malaysia Act 2009 that has positioned the SAC as the apex authority for the determination of Islamic law for the
purposes of Islamic financial business. The mandates of the SAC, among others, are to ascertain the relevant Islamic law
on any financial matter and issue a ruling upon reference made to it, as well as to advise the Bank and the IFI concerned on
any Shariah issues relating to Islamic financial business operations, activities or transactions.

3. The Shariah Governance Framework for the Islamic Financial Institutions (the Framework) is
designed to meet the following objectives:
(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;
(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
(iii) outlines the functions relating to Shariah review, Shariah audit, Shariah risk management and
Shariah research.

4. CORPORATE GOVERNANCE
• Corporate governance is the system by which companies are directed and controlled.
Boards of directors are responsible for the governance of their companies.The
shareholders’ role in governance is to appoint the directors and the auditors and to satisfy
themselves that an appropriate governance structure is in place.
• The responsibilities of the board include setting the company’s strategic aims, providing
the leadership to put them into effect, supervising the management of the business and
reporting to shareholders on their stewardship.
• Corporate governance is therefore about what the board of a company does and how it
sets the values of the company, and it is to be distinguished from the day to day
operational management of the company by full-time executives.

5. SHARIAH GOVERNANCE
• In order to clarify the difference between Shariah governance and Shariah compliance, we would like to review the definition of Shariah
governance.
• BNM issued guidelines on Shariah governance called “Shariah Governance Framework for Islamic Financial Institutions (SGF).”
• How is Shariah governance described in SGF? Shariah principles are the foundation for the practice of Islamic finance through the
observance of the tenets, conditions and principles espoused by Shariah. Comprehensive compliance with Shariah principles would bring
confidence to the general public and the financial markets on the credibility of Islamic finance operations.
• Bank Negara Malaysia (the Bank) places great importance in ensuring that the overall Islamic financial system operates in accordance with
Shariah principles.This is to be achieved through the two-tier Shariah governance infrastructure comprising two vital components, which are
a centralized Shariah advisory body at the Bank and an internal Shariah Committee formed in each respective Islamic financial institution
(IFI).
• The Bank has developed the Shariah governance framework for IFIs with the primary objective of enhancing the role of the board, the
Shariah Committee and the management in relation to Shariah matters, including enhancing the relevant key organs having the
responsibility to execute the Shariah compliance and research functions aimed at the attainment of a Shariah-based operating environment.

6. An international standard setting organization called the Islamic Financial Services
Board (IFSB) was established on March 10, 2003, by central banks of mostly Islamic
countries. IFSB’s council members are composed of the central banks of the
following 20 countries: Bahrain, Bangladesh, Brunei, Djibouti, Egypt, Indonesia,
Iran, Jordan, Kuwait, Malaysia, Maldives, Mauritius, Nigeria, Pakistan, Qatar, Saudi
Arabia, Singapore, Sudan, Syria and UAE. Also, the president of the Islamic
Development Bank is a council member.

7. The key players in Corporate Governance (CG) of
Islamic Financial Institutions (IFIs)
Environment Important issues Objectives / Responsibility in CG
Government (Laws and regulations for IFIs) Laws facilitating operations of
Islamic financial institution
Provide clear laws and
regulations that cater to the
needs of IFIs
Accounting system Accounting and audit
standards for clear and
transparent communication of
information
Provide uniform, clear and
transparent accounting
standards
Supervisors Stability and soundness of the
financial system (eliminate
systemic risk)
Develop internal controls, risk
management procedures and
standards of transparency
Provide Guidelines for IFIs
Monitor overall operations in
general and risky behaviour in
particular

8. Banking associations Provide minimum standards of CG Set principles and sound practices
Shareholders Shareholder rights Elect board members
Share in profit
Board of directors Ensure good management team
Oversight of management
Protect shareholders and
investment depositors rights
Set overall policy and strategy
Accountability the management
Senior management Operate the institution efficiently.
Right balance between risk and
return
Efficient incentive-structure.
Implement the policies set by the
board in a sound and responsible
manner
Internal audit Quality and quantity of
information
Transparency of information
Ensure that the policies set by
board are followed by the
management (compliance)

9. Employees Skills and work ethics
Right incentive-structure
Meet the goals set by the
management
Minimize operational risks
Shari’ah boards Set shari’ah related rules and
principles
Oversee compliance with its verdict
Depositors Good service comparable returns Act responsibly
Monitor the performance
External auditors Quality and quantity of information
Transparency of information
Evaluate the accuracy of the quality
and quantity of information
Shari’ah audit Adherence to the shari’ah Ensure compliance with the shari’ah
board verdicts
Corporate Governance in Islamic Financial Institutions
By Hussein Elasrag

10. DUTIES AND RESPONSIBILTY OF SHARIAH COMMITTEE
All Shariah Committee members are expected to participate and engage themselves actively in
deliberating Shariah issues put before them. The main duties and responsibilities of the Shariah
Committee are as follows:
1. To advise the Board on Shariah matters in its business operation
The Shariah Committee shall advise the Board on Shariah matters in order to ensure that the
business operations of the Islamic financial institution comply with Shariah principles at all times.
2. To endorse Shariah Compliance Manuals
The Islamic financial institution shall have a Shariah Compliance Manual. The Manual must specify
the manner in which a submission or request for advice be made to the Shariah Committee, the
conduct of the Shariah Committee's meeting and the manner of compliance with any Shariah
decision. The Manual shall be endorsed by the Shariah Committee.

11. 3. To endorse and validate relevant documentations
To ensure that the products of the Islamic financial institutions comply with Shariah principles in all
aspects, the ShariahCommittee must endorse the following:
i) the terms and conditions contained in the proposal form, contract, agreement or other legal
documentation used in executing the transactions; and
ii) the product manual, marketing advertisements, sales illustrations and brochures used to
describe the product.
4. To assist related parties on Shariah matters for advice upon request
The related parties of the Islamic financial institution such as its legal counsel, auditor or consultant
may seek advice on Shariah matters from the ShariahCommittee.The ShariahCommittee is
expected to provide assistance to them so that compliance with Shariah principles can be assured
completely.
5. To advise on matters to be referred to the SAC
The ShariahCommittee must advise the Islamic financial institution to consult the SAC on any
Shariah matters which have not been resolved or endorsed by the SAC.

12. 6. To provide written Shariah opinion
The ShariahCommittee is required to record any opinion given. In particular, the Committee shall
prepare written Shariah opinions in the following circumstances:
i) where the Islamic financial institution make reference to the SAC for advice; or
ii) where the Islamic financial institution submits applications to Bank Negara Malaysia for new
product approval in accordance with guidelines on product approval issued by Bank Negara
Malaysia.
7. To assist the SAC on reference for advice
The ShariahCommittee must explain the Shariah issues involved and the recommendations for a
decision. It must be supported by relevant Shariah jurisprudential literature from the established
sources.The ShariahCommittee is also expected to assist the SAC on any matters referred by the
Islamic financial institution. Upon obtaining any advice of the SAC, the ShariahCommittee shall
ensure that all SAC's decisions are properly implemented by the Islamic financial institution.

13. ORGANS OF THE SHARIAH GOVERNANCE SYSTEM

14. BNM-SHARIAH GOVERNANCE FRAMEWORK FOR IFIS
The Bank has developed the Shariah governance framework for IFIs with the primary objective of
enhancing the role of the board, the ShariahCommittee and the management in relation to
Shariah matters, including enhancing the relevant key organs having the responsibility to execute
the Shariah compliance and research functions aimed at the attainment of a Shariah based
operating environment.
The ShariahGovernance Framework for the Islamic Financial Institutions (the Framework) is
designed to meet the following objectives:
(i) sets out the expectations of the Bank on an IFI’s Shariah governance structures, processes and
arrangements to ensure that all itsMoperations and business activities are in accordance with
Shariah;
(ii) provides a comprehensive guidance to the board, ShariahCommittee and management of the
IFI in discharging its duties in matters relating to Shariah; and
(iii) outlines the functions relating to Shariah review, Shariah audit, Shariah risk management and
Shariah research.

15. The framework is divided into (6) sections:
SECTION 1
General requirements of the Shariah governance framework
This section outlines the general requirements of the Shariah governance framework, which
describes the essential key functions or key organs
SECTION 2
Oversight, accountability & responsibility
This section outlines the level of accountability and responsibility expected of the board of
directors, Shariah Committee and management of an IFI.
SECTION 3
Independence
This section aims to safeguard the independence of the Shariah Committee in ensuring sound
Shariah decision-making and emphasis on the role of the board of directors in recognising the
independence of the Shariah Committee.
SECTION 4
Competency
This section highlights requirements and expected competencies to ensure key functions are
capable of implementing Shariah governance.
SECTION 5
Confidentiality & consistency
This section outlines the minimum set of rules that emphasises the importance of observing and
preserving confidentiality, and improving the level of consistency in decision-making by the
Shariah Committee.
SECTION 6
Shariah compliance & research functions
This section prescribes the functions of the internal Shariah review, Shariah audit, Shariah risk
management and Shariah research.