Index
A
Accountability of compliance staff, 10
Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI), 49–50, 133
accounting and reporting standards,
145obligations and functions of
Sharī`ah board,
115Sharī`ah committee/board, definition of,
113
Sharī`ah governance framework (SGF),
119–123
Sharī`ah pronouncement of 2008 clause six (6),
115
Adequacy, review in Sharī`ah compliance, 21
Agency Letter, 51
Al-ahkam, 5–6
Al-Khudri, Abu Sa’id, 44
Al-Samit, Ubadaibn, 44
Anti-money laundering,
Application Form, T&C, 51
Appointment or termination of a Sharī`ah committee member, 31, 117–118
Ariayh contract, 98
Asset Purchase Agreement, 51
Asset Sale Agreement, 51
Audit, 20–21
compliance audit on organization structure, people, processes, and information technology,
20–21of financial statement,
20–21Sharī`ah. See Sharī`ah audit
Australian Standards AS3806, 10
Authority of compliance staff, 10
B
Bai` al-dayn, 51, 93
Bai` al istijrar, 93
Bai` al-usul, 51
Bai` amanah (Hanbali Mazhab), 92
Bai` bithamanajil (deferred-payment sale), 51, 91–92
Bai` fuqara`, 93
Bai` `inah, 51, 92
Bai` `inah contract, 198–199
Bai` jaiz, 92
Bai` ma`dum, 195
Bai` mafalis, 93
Bai` mahawij, 93
Bai` man kasadatbidha`atuhu, 93
Bai` muzayadah, 93
Bai` sarf, 51
Bai` thanaya (Maliki Mazhab), 92
Bai` `uhdah (Syafi`iMazhab), 92
Bai` wafa`, 92
Bank Guarantee, 51
Banking Act of 1973, 29
Banking and Financial Institutions Act 1989 (BAFIA), 158
Bank Negara Malaysia (BNM) UPW/GP1,
Basel Committee on Banking Supervision, 10
Bi al-khasm, 51
Bills of exchange, 30
Board of directors, 123–129
definition and selection of members,
123–124duties and responsibilities,
124–125responsibility and accountability based on SGF,
128–129Boilerplate clauses, 221–225
Breach of duty of confidentiality, 36–37, 40
Breach of Sharī`ah, 31
Business activity benchmarks, 80–81
Business risk, 11
C
Capital Market Master plan, 80
Cash over total assets, 81
Central Bank of Malaysia Act 2009, 30–31, 130, 166
Certificates of Islamic deposit, 30
Combined contracts, 50. See also Contracts
Sharī’ah position in,
50
Sharī’ah requirements,
50–51
Committee of Sponsoring Organizations of the Treadway Commission (COSO), 69
Companies Act, 31
Compliance, 6–11
compliance officer
termination/resignation/hand-over,
10–11consequences of non-compliance,
definition,
independence and accountability,
10operation manual,
areas of,
frequency of review,
job expectation level,
scope of,
specific responsibilities,
risk, definition,
Sharī`ah
duty of an institution,
33–34information technology infrastructure and system,
15marketing collateral and materials, multimedia, and broadcasting,
15–17people responsible for,
14structure of product/service/facility,
14terms and conditions (T&C),
14
staff member’s responsibility,
Contracts
bai` bithamanajil (deferred-payment sale),
92
combination of,
49–51
Sharī`ah position in,
50
Sharī`ah requirements,
50–51 fundamental Islamic principles in,
85–90
clarity of offer and acceptance,
86conformation of offer to acceptance,
86contracting parties (buyer and seller),
87–88maturity of contracting parties,
88puberty of contracting parties,
87sanity of contracting parties,
87–88separation between the
ijab and
qabul,
87session of contracts (
majlis al-`aqd),
86–87subject matter (
mahall al-`aqd),
88–90ju`alah (commissioned transaction),
94–95
kafalah (suretyship),
96–97
sequence in execution of,
51–68uqud muawadat (exchange contract),
99–100
uqud tabarru` (voluntary contract),
99–100
validity under
ikrah (duress),
50Counter financing of terrorism,
Credit risk, 24
Currency-exchange contracts, 30
Customer’s Acceptance, 51
D
Dealer’s Offer to Sell and Declaration, 51
Debt over total assets, 81–82
Deposit, Islamic, 30
Development Financial Institutions Act 2002 (DFIA), 158
Drafting of legal documentation
boilerplate clauses,
221–225
law and jurisdiction,
222“no-assignment” clause,
221parties involved, mentioning of,
211–212schedule/appendix (if applicable),
227–230structure of legal agreement/contract,
209–230use of legal language,
231Dual banking activities, as cause of Sharī`ah non-compliance risk, 70–71
E
Earnings, 82
Equity financing, 30
Events, Sharī`ah non-compliance risk, 19–25
investment banking/asset management risk,
24–25product-approval process,
22External auditor, 31
F
FATF 40 Recommendations,
Federal Government Gazette Act 759, 39
Fee-based activity, 30
Fee-based transactions, 90, 94–95
ju`alah (commissioned transaction),
94–95
Financial deal, formation of (sighah)
clarity of offer and acceptance,
86conformation of offer to acceptance,
86connection of offer and acceptance,
86–87contracting parties (buyer and seller),
87–88
maturity of contracting parties,
88puberty of contracting parties,
87sanity of contracting parties,
87–88offer (
ijab) and acceptance (
qabul),
85–87subject matter of contract (
mahall al-`aqd),
88–90
presence at time of contract,
89–90suitability and legality,
88–89Financial guarantee, 96
Financial ratio benchmarks, 80–83
Financial risk, 11
Financial Services Bill 2012 (FSB), 29
Financial transactions in Islamic finance, 90–100
free-interest-loan-based transactions,
90,
95–96leased-based transactions,
90–94profit-sharing-based transactions,
90–91sales-and trade-based transactions,
90–94security-based transactions,
90,
96–97support-based transactions,
90voluntary/charitable-based transactions,
90Fiqh,
Free-interest-loan-based transactions, 90, 95–96
qard hassan (free interest loan),
95–96
G
Ghalat (mistake), 49
Gharar (uncertainty), 45–46, 79
conditions for the legal consequences of,
46–47minor
gharar (
gharar yasir),
45
Maliki and Hanbali schools of law,
45–46
Sharī`ah point of view,
46
substantial
gharar (
gharar kathir),
45Ghubn (inequality), 47–48
excessive inequality (
ghubn fahish),
47–48insignificant inequality (
ghubn yasir),
47–48Governance, 21–22, 34–35
Sharī`ah governance framework,
106–107
Guidelines on Internal Audit Function of Licensed Institutions, 149
H
Hand-over of compliance functions, 10–11
Hawalah (transfer of debt), 97
Hibah, 98–99
Hibah contract, 194
High Sharī`ah non-compliance risk, 41
Housing Development (control and licensing) ACT 1966, 195
Human errors, as cause of Sharī`ah non-compliance risk, 70
Huraira, Abu, 26
I
Ibra`, 97
Ijarah, 14, 103–104, 183
Ijarah (leasing), 94
Ijarah-muntahia bi al-tamlik, 51
Ikrah (duress), 48–49
complete duress (
ikrah mulji`),
48incomplete duress (
ikrah ghayr mulji`),
48validity of contracts under,
50Ila, period of, 48
Independence of compliance staff, 10
Information technology (IT) infrastructure system, Sharī`ah compliance status of, 69–70
Internal control
Internal Control Integrated Framework, 69
International Islamic banking business, 30
Interview, 83
Investment, Islamic, 30
Investment Account Holders (IAH) funds, 12
Investment banking/asset management risk, 24–25
Islamic Banking Act (IBA) 1983, 29
Islamic Banking Act 1983 (IBA), 158
Islamic Banking Act of 1983, 166
Islamic banking business
under the Financial Services Bill (FSB),
31maximum permissible holdings for Islamic banks,
31Islamic derivatives, 30
Islamic Documentary Credit, 51
Islamic factoring business, 30
Islamic financial institution (IFI)
Sharī`ah, concept of, . See also Sharī`ah, concept of
Islamic financial intermediation activities, 30
Islamic Financial Services Act (IFSA), 29
apointment of a person (Section 37),
37–38apointment of auditing person (Section 38),
38definition of
Sharī`ah,
30–31information furnished under Section 35,
36Islamic banking business,
29–30Islamic deposit and investment,
30offences and penalties under Sections 28 and 29,
36power of bank to take action (Section 245),
38–41qualified privilege and duty of confidentiality (Section 36),
36–37Sharī`ah compliance,
31–41
duty of institution,
32–34process of rectification,
32
Sharī`ah-related provisions,
31
standards specified by banks,
34–36Islamic Financial Services Board (IFSB), 12
Sharī`ah non-compliance risk,
12–13
Islamic Financial Services (IIFS)
and principle 7.1 of
Sharī`ah non-compliance risk,
13and
Sharī`ah non-compliance risk,
12–13Islamic leasing business, 30
Islamic principles in contracts
clarity of offer and acceptance,
86conformation of offer to acceptance,
86contracting parties (buyer and seller),
87–88maturity of contracting parties,
88puberty of contracting parties,
87sanity of contracting parties,
87–88separation between the
ijab and
qabul,
87session of contracts (
majlis al-`aqd),
86–87subject matter (
mahall al-`aqd),
88–90Istisna’, 103–104
Istisna’ (manufacturing contract), 93
Istisna Purchase Agreement, 51
IT risk, 24
IT system and IT infrastructure, consequences of weakness of, 69–70
J
Ju`alah (commissioned transaction), 94–95
Justified coercion, 48
K
Kafalah, 51
Kafalah bi al-dark, 96
Kafalah bi al-dayn (guarantee for debt), 96
Kafalah bi al-taslim (guarantee for delivery), 96
Kafalah (suretyship), 96–97
asil (the principal debtor),
96
L
Law for Islamic banking, 166
important and relevant laws,
166Lease-based financing, 30
Leased-based transactions, 90, 94
Legal documentation, 22
ambiguity in terms or conditions (T&C) or clauses,
180–190
“da’ wataajjal” (give discount and receive soon),
188–189
penalty/compensation/late-payment-charges clause,
186–188pre-payment/early settlement clause,
188repossession of asset,
182right to consolidate and principle of set-off,
184–185right to recall the facility,
181–182service charge relating to employees provident fund (EPF) withdrawals,
186areas under consideration and review,
169–190
BBA home-financing,
194–197
rescheduling of payments in,
206securities or collateral in,
205–206combination of contracts,
173–178
contemporary applications and general rules for,
177–178pre-arrangement (
Muwathoah) for,
176–177Sharī`ah parameters in combination of contract,
175
debt financing
rescheduling of payments in,
206securities or collateral in,
205–206drafting of
parties involved, mentioning of,
211–212schedule/appendix (if applicable),
227–230structure of legal agreement/contract,
209–230use of legal language,
231fixed rate and floating rate,
190–193form and the structure of the legal rights and liabilities,
179–180general principles in,
167Islamic Interbank Benchmark Rate (IIBR),
201–202as a
murabahah vehicle term financing facility agreement,
187risk taking in business transaction,
193securitization of BBA debt,
206–207Sharī`ah perspective,
167
considerations while drafting,
168–169incorporation of
Sharī`ah requirements,
167–169
terms to be avoided in,
173third party collateral,
194treasury transactions,
204using LIBOR in profit as benchmark,
200–205
calculation methodology,
203variation of installment or tenure,
193Legal documents in Islamic banking, 51
Letter of Appointment as Agent, 51
Letter Offer (LO)/Facility Agreement, 51
Letter of Hibah (LOH), 51
Logistics, poor, consequences of, 71
Low Sharī`ah non-compliance risk, 41
M
Majalla
financial deal, formation of (
sighah),
89sale of a non-existing thing,
89subject matter of a contract,
89Majallah al-Ahkam al-`Adliyyah, 92
Malaysian Code on Corporate Governance, 125–126
principles and recommendations in,
126–129Management of IFI, 107–109
accountability on
Sharī`ah decisions,
108allocation of resources and manpower,
108code of conduct for
Sharī`ah committee,
109continuous learning and training programs,
108establishing a
Sharī`ah risk management control function,
109implementation of
Sharī`ah governance,
108inculcating
Sharī`ah compliance culture,
108in terms of
Sharī`ah framework of Bank Negara Malaysia,
107–108Maslahah, 184
Master Facility Agreement, 51
Maximum permissible holdings for Islamic banks, 31
Medium Sharī`ah non-compliance risk, 41
Mergers in Islamic banking business, 31
Miscommunication, as cause of Sharī`ah non-compliance risk, 71
Moral hazard and Sharī`ah non-compliance risk, 70
Muamalah Sharī`ah principles, 30–31
Mudarabah, 51, 90–91, 168
Mudarib, 51
Muntahiah bittamlik, 103–104
Muqaradah. See Mudarabah
Muqassah (set-off), 97
Murabah, 168
Murabahah, 50–51, 93, 103–104, 182–183, 188, 192–193, 205
corporate master agreement,
273–300interbank master agreement of AIBIM
Murabahah Contract Note, 51
Musharakah, 50, 90–91, 168
sample of a contract of management agreement in
sukuk musharakah issuance,
233–240Musharakah mutanaqisah ijarah, 51
Muslim public and society and Sharī`ah compliance, 154
Mutlaq al fahm,
Muuzaraah (crop sharing), 90–91
Muwakkil Acceptance, 269–270
Muzaqah, 90–91
N
Non-compliance, consequences of,
O
Observation technique, 83
Offences for non-compliance, 36
Operational risk, 12, 22–23
P
Partnership financing, 30
Penalties for non-compliance, 40, 36
Post-product approval process, 107
Power of bank
to specify standards on
Sharī`ah matters,
34–36Pre-product approval process, 107
Product-approval process, 22
Product development process, 106–107
Product owner, 101–107
compliance to
Sharī`ah rules and principles,
101
analysis and examination of product,
102–103contract combination,
104elimination of prohibition element,
103identifying underlying contract,
103process of reassembling the product,
104in product development and innovation,
105–106public interest of
ummah,
105selection of niche product and niche market,
101–102terms and conditions of contract,
104–105understanding of product,
102Profit before tax (PBT), 82
Profit-sharing-based transactions, 90–91
Property Purchase Agreement, 51
Property Sale Agreement, 51
Prophet Muhammad, 5–6
Purchase Request, 51
Q
Qard hasan, 172
Qard hassan (free interest loan), 95–96
Qardh ujrah, 51
Qirad. See Mudarabah
Qualified privileges, 36–37
Quran, 5–6
provisions in
Sharī`ah compliance,
25–26R
Rabawi commodity, 44
Rahn (pledges), 97
“Related Party Transactions,” 31
Reputational risk, 23–24
Rescheduling of payments, 206
Review of adequacy, 21
Riba, 43–45, 50
as primary activity of company,
79riba al buyu/al-fadl,
43–45
riba al duyun/al-nasi`ah,
43–44
Risk
compliance,
investment banking/asset management,
24–25Sharī`ah non-compliance,
12–17
in various fields of knowledge,
11Risk management for non-Sharī`ah compliance risk, 102
organization’s board of directors,
123–129product development process,
106–107public/Muslim public and society,
154Sharī`ah Advisory Council (SAC) of Bank Negara Malaysia (BNM),
129–130
Sharī`ah management,
112
S
Salam (future delivery), 94, 103–104
Sale-based financing, 30
Sales-and trade-based transactions, 90–94
Bai` BithamanAjil (deferred-payment sale),
91–92
istisna’ (manufacturing contract),
93
salam (future delivery),
94
sarf (currency exchange),
94
Sampling, 83
Security-based transactions, 90, 96–97
kafalah (suretyship),
96–97
Security contract, 92
Session of contracts (majlis al-`aqd), 86–87
Sharī`ah, concept of, 5–6
fiqh,
Quran, provisions from,
25–26
requirements in Islamic banking,
sunnah, provisions from,
26–27
tools to identify incongruence in,
73–83Sharī`ah Advisory Council (SAC) of Bank Negara Malaysia (BNM), 30–31, 33–34, 79–80, 129–130
of Securities Commission (SC),
130Sharī`ah audit
audit reports and audit ratings,
153of company or department,
149coverage and scope of,
147of delivery channel/support centers,
150engagement planning,
150–152
letter of engagement (EL),
150methodology and framework,
149monitoring/follow-up,
153principles governing auditor,
145of product development,
150reporting of audit results,
152roles and responsibilities of auditor,
148–149Sharī`ah committee/board, 18–19, 112–123
appointment of auditor,
37–38corporate governance organs,
114duty of confidentiality,
36–37information to be provided to,
36involvement in Islamic banking activities,
113–114main duties and responsibilities,
115–117
in advising related parties,
116ensuring sequence of legal documentation,
116providing written opinions,
116–117review, examine, validate, and endorse documentations,
116qualified privileges,
36–37recommendation of AAOIFI,
115resolution issued by,
114Sharī`ah-compliant status of a company, 81–82
Sharī`ah governance framework (SGF), 32, 106–107, 117
Sharī`ah committee,
117
experience in
Sharī`ah pronouncements/decisions,
119resignation and dismissal of,
118
stipulated by AAOIFI,
119–123
appointment of Supervisory Board and fixing remuneration,
119–120composition and dismissal of
Sharī`ah Board,
120Supervisory Board’s report,
120–123Sharī`ah management, 112
role to ensure
Sharī`ah compliance status,
112Sharī`ah non-compliance reporting
on actual
Sharī`ah non-compliance event,
160authentication or confirmation of
Sharī`ah non-compliance risk,
163in case no
Sharī`ah non-compliance event is detected,
162–163by Islamic financial institutions (IFIs),
157–158as a potential
Sharī`ah non-compliance event,
159–161
submission of reports,
163Sharī`ah non-compliance risk, , 12–17
causes of,
68–71
dual banking activities,
70–71internal control system, weakness of,
69IT system and IT infrastructure, weakness of,
69–70knowledge, skills, and competency, lack of,
68monitoring and supervision, lack of,
68sequence in execution of,
51checklist for, A.2.-A.3.
elements,
43–68
combination of contracts,
49–51execution of contract,
51–68gharar (uncertainty),
45–46
ghubn (inequality),
47–48
sequence of documents,
51–68events,
19–25
investment banking/asset management risk,
24–25product-approval process,
22execution of legal documentations/product/service,
14–15features of,
19
risk features and criteria,
19on IFI, A.1.
in information technology infrastructure and system,
15in marketing collateral and materials, multimedia, and broadcasting,
15–17principles governing operational risk,
12process of rectification,
32research
methodology,
objectives of,
platform/foundation,
theoretical framework,
2–4safeguarding of IAH funds,
12techniques to identify,
83–84
uncertainty (
gharar) in price/rebate/compensation/fee disputes
vs,
20Sharī`ah review
competency of review personnel,
139–141empowerment and responsibility of,
136–138objectives,
132–133
in relation to
Sharī`ah compliance requirements,
133reporting requirements for,
143–144of risk management processes,
142–143Sharī`ah governance framework definition,
131
Sharī`ah risk management, 109–112
business continuity management framework,
111capital management framework,
111Sharī`ah screening process, 78–83
quantitative and qualitative approach,
80Shipping Guarantee, 51
Sigah/statement of contract, 85
Sighah. See Financial deal, formation of (sighah)
Suftajah, 98
Sukuk, 81, 206–207
Sukuk ijarah, 171–172
Sukuk musharakah, 171–172
Sunnah, 5–6
provisions in
Sharī`ah compliance,
26–27Supervisory Board’s report, 121–123
management’s responsibility,
121opening (introductory) paragraph,
121Support-based transactions, 90, 97–98
hawalah (transfer of debt),
97
Surah al-Baqarah, 79
Suretyship. See Kafalah (suretyship)
T
Tabarru`, 99–100
Taghrir (deception), 47
conditions required in,
47deeds (
taghrir fi`li),
47statements (
taghrir qawli),
47Takaful Act 1984 (Section 282), 29
Takaful Act 1984 (TA), 158
Tawarruq, 198
Termination/resignation of compliance staff, 10–11
Testing, 84
Tools to identify incongruence in Sharī`ah compliance, 73–83
AAOIFI
Sharī`ah standards,
78criterion
for companies running casinos, gaming, and others,
79product approval of securities in mixed companies,
79–80production and sale of goods and services prohibited in Islam,
79financial ratio benchmarks,
80–83international resolutions and
fatwa,
78resolutions of
Sharī`ah advisory council,
77resolutions of
Sharī`ah committee,
77Sharī`ah Parameter References (SPR),
77
Sharī`ah screening process,
78–83
quantitative and qualitative approach,
80
Transfer of ownership, 199–200
Treasury risk, 24
Trustee Act 1949, 99
U
Unjustified coercion, 48
Uqud muawadat (exchange contract), 99–100
Uqud tabarru` (voluntary contract), 99–100
V
Voluntary/charitable-based transactions, 90, 98–100
W
Wa`ad, 51
Wadi`ah, 99
Wakalah (agency), 51, 95
corporate
wakalah placement agreement (AIBIM),
253–273Waqf, 99
Wasiyyah, 99
Z
Zaidan, Abdul Karim, 5–6
