Fine-Tuning Shari'ah Compliance in Malaysia through Regulations

Abstract

Shari'ah compliance is a cardinal principle in Islamic finance which must be observed by Islamic financialinstitutions in Malaysia and other emerging markets as it provides the original basis (or raison d'etre) forestablishing a faith-based and commercially viable alternative financial system. In fact, it is this unique anddistinctive ethico-religious feature that distinguishes Islamic finance from conventional finance. Theimposition of this additional requirement makes it necessary for Islamic financial service providers to operateaccording to Shari'ah [the law and objectives of the Shari'ah (maqasid al-Shari'ah)]. Prominence should notonly be given to legality of transactions, financial performances and profitability; these technical andcommercial parameters must also be enhanced by realization of the maqasid of public good. To gaugewhether IFIs are complying with Shari'ah, the compliance itself must be measured from end- to-end to coverthe whole spectrum of activities: from product development, operational process, human resourcemanagement, information technology application systems, to dispute resolution mechanisms. The integratedand comprehensive approach of Malaysia comes highly recommended as it will reflect the holistic worldviewof Islam. Protection of consumers, environmental protection, securing and realization of public benefit,should therefore form the central theme of Shari'ah compliant finance. When applied to banks and takafuloperations, it necessitates the business organisations to fine-tune Shari'ah compliance to a more humancentric tenor or orientation in its rule application, whilst achieving macro-economic goals of economicprosperity and social justice. The risk of Shari'ah non-compliances can be costly to the IFIs as it will lead toinvalidation of contract resulting in non-halal income and possibility of legal suits from aggrieved customersand harming industry's credibility. This paper highlights the legal and regulatory measures undertaken byMalaysia to fine-tune Shariah compliance. It gives greater focus to the general issues relating to Shari'ahcompliance within the Takaful industry and the challenges of control. Recommendations are made forstakeholders to operationalize the Maqasid al-Shari'ah through the inclusion of an ethical and moralparameter to complement legal compliance, and preparing the industry to move towards a Shariah-basedoperating environment.