Index
A
Accountability of compliance staff, 10
Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI), 49–50, 133
accounting and reporting standards,
145
obligations and functions of
Sharī`ah board,
115
Sharī`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,
20–21
of financial statement,
20–21
Sharī`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,
123–124
duties and responsibilities,
124–125
responsibility and accountability based on SGF,
128–129
Boilerplate 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,
10–11
consequences of non-compliance,
definition,
independence and accountability,
10
operation manual,
areas of,
frequency of review,
job expectation level,
scope of,
specific responsibilities,
risk, definition,
Sharī`ah
duty of an institution,
33–34
information technology infrastructure and system,
15
marketing collateral and materials, multimedia, and broadcasting,
15–17
people responsible for,
14
structure of product/service/facility,
14
terms 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,
86
conformation of offer to acceptance,
86
contracting parties (buyer and seller),
87–88
maturity of contracting parties,
88
puberty of contracting parties,
87
sanity of contracting parties,
87–88
separation between the
ijab and
qabul,
87
session of contracts (
majlis al-`aqd),
86–87
subject matter (
mahall al-`aqd),
88–90
ju`alah (commissioned transaction),
94–95
kafalah (suretyship),
96–97
sequence in execution of,
51–68
uqud muawadat (exchange contract),
99–100
uqud tabarru` (voluntary contract),
99–100
validity under
ikrah (duress),
50
Counter 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,
221
parties involved, mentioning of,
211–212
schedule/appendix (if applicable),
227–230
structure of legal agreement/contract,
209–230
use of legal language,
231
Dual 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,
24–25
product-approval process,
22
External 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,
86
conformation of offer to acceptance,
86
connection of offer and acceptance,
86–87
contracting parties (buyer and seller),
87–88
maturity of contracting parties,
88
puberty of contracting parties,
87
sanity of contracting parties,
87–88
offer (
ijab) and acceptance (
qabul),
85–87
subject matter of contract (
mahall al-`aqd),
88–90
presence at time of contract,
89–90
suitability and legality,
88–89
Financial 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,
95–96
leased-based transactions,
90–94
profit-sharing-based transactions,
90–91
sales-and trade-based transactions,
90–94
security-based transactions,
90,
96–97
support-based transactions,
90
voluntary/charitable-based transactions,
90
Fiqh,
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,
46–47
minor
gharar (
gharar yasir),
45
Maliki and Hanbali schools of law,
45–46
Sharī`ah point of view,
46
substantial
gharar (
gharar kathir),
45
Ghubn (inequality), 47–48
excessive inequality (
ghubn fahish),
47–48
insignificant inequality (
ghubn yasir),
47–48
Governance, 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`),
48
incomplete duress (
ikrah ghayr mulji`),
48
validity of contracts under,
50
Ila, 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),
31
maximum permissible holdings for Islamic banks,
31
Islamic 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),
37–38
apointment of auditing person (Section 38),
38
definition of
Sharī`ah,
30–31
information furnished under Section 35,
36
Islamic banking business,
29–30
Islamic deposit and investment,
30
offences and penalties under Sections 28 and 29,
36
power of bank to take action (Section 245),
38–41
qualified privilege and duty of confidentiality (Section 36),
36–37
Sharī`ah compliance,
31–41
duty of institution,
32–34
process of rectification,
32
Sharī`ah-related provisions,
31
standards specified by banks,
34–36
Islamic 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,
13
and
Sharī`ah non-compliance risk,
12–13
Islamic leasing business, 30
Islamic principles in contracts
clarity of offer and acceptance,
86
conformation of offer to acceptance,
86
contracting parties (buyer and seller),
87–88
maturity of contracting parties,
88
puberty of contracting parties,
87
sanity of contracting parties,
87–88
separation between the
ijab and
qabul,
87
session of contracts (
majlis al-`aqd),
86–87
subject matter (
mahall al-`aqd),
88–90
Istisna’, 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,
166
Lease-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,
186–188
pre-payment/early settlement clause,
188
repossession of asset,
182
right to consolidate and principle of set-off,
184–185
right to recall the facility,
181–182
service charge relating to employees provident fund (EPF) withdrawals,
186
areas under consideration and review,
169–190
BBA home-financing,
194–197
rescheduling of payments in,
206
securities or collateral in,
205–206
combination of contracts,
173–178
contemporary applications and general rules for,
177–178
pre-arrangement (
Muwathoah) for,
176–177
Sharī`ah parameters in combination of contract,
175
debt financing
rescheduling of payments in,
206
securities or collateral in,
205–206
drafting of
parties involved, mentioning of,
211–212
schedule/appendix (if applicable),
227–230
structure of legal agreement/contract,
209–230
use of legal language,
231
fixed rate and floating rate,
190–193
form and the structure of the legal rights and liabilities,
179–180
general principles in,
167
Islamic Interbank Benchmark Rate (IIBR),
201–202
as a
murabahah vehicle term financing facility agreement,
187
risk taking in business transaction,
193
securitization of BBA debt,
206–207
Sharī`ah perspective,
167
considerations while drafting,
168–169
incorporation of
Sharī`ah requirements,
167–169
terms to be avoided in,
173
third party collateral,
194
treasury transactions,
204
using LIBOR in profit as benchmark,
200–205
calculation methodology,
203
variation of installment or tenure,
193
Legal 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),
89
sale of a non-existing thing,
89
subject matter of a contract,
89
Majallah al-Ahkam al-`Adliyyah, 92
Malaysian Code on Corporate Governance, 125–126
principles and recommendations in,
126–129
Management of IFI, 107–109
accountability on
Sharī`ah decisions,
108
allocation of resources and manpower,
108
code of conduct for
Sharī`ah committee,
109
continuous learning and training programs,
108
establishing a
Sharī`ah risk management control function,
109
implementation of
Sharī`ah governance,
108
inculcating
Sharī`ah compliance culture,
108
in terms of
Sharī`ah framework of Bank Negara Malaysia,
107–108
Maslahah, 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,
273–300
interbank master agreement of AIBIM
Murabahah Contract Note, 51
Musharakah, 50, 90–91, 168
sample of a contract of management agreement in
sukuk musharakah issuance,
233–240
Musharakah 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,
34–36
Pre-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,
102–103
contract combination,
104
elimination of prohibition element,
103
identifying underlying contract,
103
process of reassembling the product,
104
in product development and innovation,
105–106
public interest of
ummah,
105
selection of niche product and niche market,
101–102
terms and conditions of contract,
104–105
understanding of product,
102
Profit 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,
25–26
R
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,
79
riba al buyu/al-fadl,
43–45
riba al duyun/al-nasi`ah,
43–44
Risk
compliance,
investment banking/asset management,
24–25
Sharī`ah non-compliance,
12–17
in various fields of knowledge,
11
Risk management for non-Sharī`ah compliance risk, 102
organization’s board of directors,
123–129
product development process,
106–107
public/Muslim public and society,
154
Sharī`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,
73–83
Sharī`ah Advisory Council (SAC) of Bank Negara Malaysia (BNM), 30–31, 33–34, 79–80, 129–130
of Securities Commission (SC),
130
Sharī`ah audit
audit reports and audit ratings,
153
of company or department,
149
coverage and scope of,
147
of delivery channel/support centers,
150
engagement planning,
150–152
letter of engagement (EL),
150
methodology and framework,
149
monitoring/follow-up,
153
principles governing auditor,
145
of product development,
150
reporting of audit results,
152
roles and responsibilities of auditor,
148–149
Sharī`ah committee/board, 18–19, 112–123
appointment of auditor,
37–38
corporate governance organs,
114
duty of confidentiality,
36–37
information to be provided to,
36
involvement in Islamic banking activities,
113–114
main duties and responsibilities,
115–117
in advising related parties,
116
ensuring sequence of legal documentation,
116
providing written opinions,
116–117
review, examine, validate, and endorse documentations,
116
qualified privileges,
36–37
recommendation of AAOIFI,
115
resolution issued by,
114
Sharī`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,
119
resignation and dismissal of,
118
stipulated by AAOIFI,
119–123
appointment of Supervisory Board and fixing remuneration,
119–120
composition and dismissal of
Sharī`ah Board,
120
Supervisory Board’s report,
120–123
Sharī`ah management, 112
role to ensure
Sharī`ah compliance status,
112
Sharī`ah non-compliance reporting
on actual
Sharī`ah non-compliance event,
160
authentication or confirmation of
Sharī`ah non-compliance risk,
163
in case no
Sharī`ah non-compliance event is detected,
162–163
by Islamic financial institutions (IFIs),
157–158
as a potential
Sharī`ah non-compliance event,
159–161
submission of reports,
163
Sharī`ah non-compliance risk, , 12–17
causes of,
68–71
dual banking activities,
70–71
internal control system, weakness of,
69
IT system and IT infrastructure, weakness of,
69–70
knowledge, skills, and competency, lack of,
68
monitoring and supervision, lack of,
68
sequence in execution of,
51
checklist for, A.2.-A.3.
elements,
43–68
combination of contracts,
49–51
execution of contract,
51–68
gharar (uncertainty),
45–46
ghubn (inequality),
47–48
sequence of documents,
51–68
events,
19–25
investment banking/asset management risk,
24–25
product-approval process,
22
execution of legal documentations/product/service,
14–15
features of,
19
risk features and criteria,
19
on IFI, A.1.
in information technology infrastructure and system,
15
in marketing collateral and materials, multimedia, and broadcasting,
15–17
principles governing operational risk,
12
process of rectification,
32
research
methodology,
objectives of,
platform/foundation,
theoretical framework,
2–4
safeguarding of IAH funds,
12
techniques to identify,
83–84
uncertainty (
gharar) in price/rebate/compensation/fee disputes
vs,
20
Sharī`ah review
competency of review personnel,
139–141
empowerment and responsibility of,
136–138
objectives,
132–133
in relation to
Sharī`ah compliance requirements,
133
reporting requirements for,
143–144
of risk management processes,
142–143
Sharī`ah governance framework definition,
131
Sharī`ah risk management, 109–112
business continuity management framework,
111
capital management framework,
111
Sharī`ah screening process, 78–83
quantitative and qualitative approach,
80
Shipping 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,
26–27
Supervisory Board’s report, 121–123
management’s responsibility,
121
opening (introductory) paragraph,
121
Support-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,
47
deeds (
taghrir fi`li),
47
statements (
taghrir qawli),
47
Takaful 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,
78
criterion
for companies running casinos, gaming, and others,
79
product approval of securities in mixed companies,
79–80
production and sale of goods and services prohibited in Islam,
79
financial ratio benchmarks,
80–83
international resolutions and
fatwa,
78
resolutions of
Sharī`ah advisory council,
77
resolutions of
Sharī`ah committee,
77
Sharī`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),
253–273
Waqf, 99
Wasiyyah, 99
Z
Zaidan, Abdul Karim, 5–6