A.1. THE IMPACT OF NON-SHARĪ`AH-COMPLIANCE RISK ON THE IFI

Islamic financial institutions are bound to carry out their business activities in accordance with Sharī`ah rules and principles by virtue of the license granted by the central bank. Hence, the existence of Sharī`ah non-compliance risk in their business activities may affect the integrity and the credibility of the IFI and may expose their business to high risk. The impact of Sharī`ah compliance rating and audit findings can significantly affect the acceptability of the financial statements of Islamic financial Institutions as well as the expectations and confidence of the investor and stakeholders.

Prior to issuance of any opinion or report by the auditor, all relevant issues must be addressed and discussed with the parties concerned in order to take corrective actions and ensure that a reasonable assurance can be provided on Sharī`ah compliance. Disclosing information to the public before remedial measures are taken by IFIs on Sharī`ah non-compliance may lead to a crisis of confidence amongst investors and stakeholders as well. It may further lead to a crisis of liquidity where depositor’s cash out their deposits and investment account holders withdraw their investments. This confidence crisis may affect the IFI to suffer losses from the drastic decline on the value of their investments.

Non-compliance to specific processes and sequence that support a specific Sharī`ah concept may potentially lead to contravention to provision of IFSA Act 2012 that upon conviction is liable to a fine and revocation of license

Null and void (batil/fasid) contract
Non-recognition of income derived from the transaction
Inability to recover the financing
Legal action (including monetary losses) if sued by the customer
Reputation risk—perception of the stakeholders and public confidence

A.2. MAJOR ASPECTS GOVERNING THE CHECKLIST FOR NON-SHARĪ`AH-COMPLIANT RISK

The checklist as shown here incorporates the main aspects to be referred to during the review exercise and ascertain Sharī`ah non-compliance in the products and activities of IFIs.