International Journal of Islamic Economics and Finance Research, Vol. 3, No.

2, 2020
e-ISSN: 2636 – 9419

REALIZING MAQASID AL-SHARI’AH IN SHARI’AH

GOVERNANCE: A CASE STUDY OF ISLAMIC BANKING
INSTITUTIONS MALAYSIA

Azmir Azri Ahmad

Faculty of Business and Management
Universiti Sultan Zainal Abidin
Kampus Gong Badak, 21300, Kuala Nerus, Terengganu
[email protected]

Muhammad Shahrul Ifwat Ishak

Faculty of Business and Management
Universiti Sultan Zainal Abidin
Kampus Gong Badak, 21300, Kuala Nerus, Terengganu
[email protected]

ABSTRACT

This study explores how far the element of maqasid al-Shari’ah is realized through the practice
of Shari’ah governance in Malaysia. Among the main bodies in Islamic banking institutions,
Shari’ah governance plays a vital role in ensuring that all financial activities comply with
Shari’ah rulings and its objective. Based on library research, this study analyzes secondary
sources including books, articles and related documents to obtain a clear picture of the element
of maqasid al- shari’ah in Shari’ah governance. The findings reveal that two special maqasid
have been realized through the practice of Shari’ah governance in Malaysia: ensuring the
viability of Islamic banking institutions and promoting transparency. While this study is limited
due to the lack of empirical analysis, it could be considered as being among the preliminary
studies on the topic of maqasid al-Shari’ah in Shari’ah governance.

Keywords: Islamic finance, Shari’ah governance framework, Maqasid al-Shari’ah,

INTRODUCTION

It should be understood that even though Islamic financial institutions play in the same field as
their conventional counterpart, the former needs to ensure that all of its activities are in line
with Shari’ah principles. This includes all developed products and financial practices
according to fiqh Mua’amalat (Islamic commercial jurisprudence). In this regard, a special
governance run by a group of Shari’ah experts is needed by Islamic institutions to ensure their
activities can be closely monitored.
In fact, utilizing the name of Islam must be done carefully by Islamic financial
institutions as any wrongdoing may affect public confidence, and later their business as well.
The case where the sales of sukuk dropped 50% and prices fell at an average of 1.51% in 2008
is an example to illustrate this point. Even though many factors contribute to this problem, it
was argued in the statement by Muhammad Taqi Usmani, one of the prominent scholars in
Islamic finance, that 85% of sukuk in the Gulf are non-Shari’ah compliant, which has
significantly affected public confidence. This could lead to legal risk in some countries, as

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Islamic products may be declared void by a court if they fail to fulfill Islamic requirements like
the case of Bayʿ Bithaman ajil in Malaysia.
In this regard, Shari’ah governance is given special attention as a vital organ in the
Islamic finance industry. In fact, this position is only qualified for those who have a strong
background in Shari’ah and a deep understand of the current practice of finance. This is due to
Shariah governance’s responsibility in terms of Shari’ah matters such as structuring,
reviewing, approving, auditing, and issuing an annual certification of Shari’ah compliance.
Realizing its significant role, Shari’ah governance needs to strengthen its fundamentals
from the Shari’ah aspect rather than mirror corporate governance. For this purpose, maqasid
al-Shari’ah seems to be ideal to be embedded with the concept of Shari’ah governance. While
many studies pertaining to maqasid al-Shari’ah in banking, finance and economics have been
carried out, it is found that the topic of maqasid al-Shari’ah in Shari’ah governance is still
lacking. As a response, this study aims to explore the elements of maqasid al-Shari’ah that can
be embedded within Shari’ah governance. The reformation of the Islamic finance industry
should include promoting maqasid through product development or regulations; instead, the
most practical solution is to strengthen its internal organ with fundamental maqasid al-
Shari’ah. This study is divided into several sections.

The concept of Shari’ah Governance in Islamic Finance

To begin with, it is learned that a Shari’ah Governance Framework is crucial for Islamic
Finance. IFIs need a unique governance framework to ensure their activities fully comply with
Shari’ah rulings and principles. Furthermore, Shari’ah governance reflects a few elements such
as integrity, transparency, accountability and responsibility that also exist in Islamic principles
with the purpose to preserve maslahah to all stakeholders.
Over the years, the term “Shari’ah governance” has been clarified by many parties.
Sastra (2018), for example, explains the main difference between Shari’ah governance and
conventional corporate governance, whereby the former aims to ensure all activities,
transactions, practices in IFIs must be in accordance to the Shari’ah principles. Furthermore,
Noreen et al., (2016) states that the underlying concept behind the Shari’ah Governance
Framework is deeply rooted in the Qur’an and the Hadith, thus its function is significantly
deferent than the concept of the corporate governance model in conventional finance.
In fact, Shari’ah requirements in IFIs are not limited in terms of prohibiting riba, gharar, and
gambling. Rather, their highest fundamental principles are derived from the concept of tauhid
(Noradibah et al., 2018). This can be understood from the Qur’an when Allah SWT says:

“And I created not the Jinn and mankind except that they
should worship Me” (Adh-Dhariyat: 56)

According to the tafsir (commentary) by Ibn Kathir, the meaning of this verse is, “I,
Allah, only created them so that I order them to worship Me, not that I need them” (Muhamad
Saed, 2012). In this regard, based on this verse, all mankind is accountable to Allah in this
world and the hereafter. The concept of tauhid is embedded in the Shari’ah governance as it
guides mankind to perform their duty and their responsibility because their actions are
accountable to Allah (ISRA, 2011).
According to the Shari’ah governance framework, it is understood that the Shari’ah
Committee (SC) represents its main components. The ultimate responsibility of SC is to
provide clear advices for IFIs to ensure their activities are Shari’ah compliant (BNM, 2019).

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In this regard, the concept of shura is applied in the Shari’ah governance framework, where
IFIs must consult with the group of Shari’ah experts so that their activities are according to
Shari’ah rulings and principles (Zain et al., 2015).
It is argued that the most crucial elements of Shari’ah governance are disclosure and
transparency (ISRA, 2011). For example, the guideline issued by BNM has outlined the
principle of transparency in which IFIs must disclose all information related to Shari’ah in their
annual report (BNM, 2019). Despite the fact that this term has been widely discussed in
corporate governance, the concept of transparency is not alien in Islam. In fact, it is very much
similar to the Islamic principle of amanah. The concept of amanah represents the element of
trust and honesty. Shuhari et al., (2019) concluded that the concept of amanah refers to the
person who is entrusted with something to be performed, and he holds responsibility for any
wrongdoing or deceit.
In the Qur’an Allah S.W.T says:

“And if one of you deposits a thing on trust with another let the trustee (faithfully) discharge
his trust and let him fear his Lord. Conceal not evidence, for whoever conceals it – his heart
is tainted with sin. And God know all that ye do” (Al-Baqarah 283).

The above-mentioned verse implicitly indicates that in any business dealing, there must
be an element of transparency and disclosure. Nevertheless, despite the fact that the concept of
amanah is an essential element in Shari’ah governance. Noordin et al., (2015) argued that the
current disclosure of Shari’ah reported in IFIs is not adequate and needs to be improved.
With regards to Shari’ah governance, its framework consists two important terms: Shari’ah
and governance. The word Shari’ah can be defined as “Path of religion and the various aspects
of laws (al-ahkam) which Allah provides for his servants (humankind) trough divine law
revealed to Prophet Muhammad S.A.W (al-Qur’an) or trough sunnah” (Abdul Karim Zaidan,
2006). As for governance, Hassan (2011) defines it is a system of guiding, monitoring and
controlling institutions and organizations. In general, both words carry the same meaning: the
institution is guided or controlled towards one goal to achieve success. Nevertheless, Shari’ah
governance is guided by the divine law of God. This is because the primary sources of reference
for Shari’ah governance are extracted from the Qur’an and the Sunnah. Also, its main elements
are embedded with Shari’ah principles.
Shari’ah governance has attracted a number of literatures, yet Hassan (2011) argues
that no previous study has provided a clear definition on this term, except the definition by
IFSB (2009). This body defines Shari’ah governance as a set of institutional and organizational
arrangements through which IFIs ensure that there is effective independent oversight of
Shari’ah compliance over the issuance of relevant Shari’ah pronouncements, dissemination of
information, and an internal Shariah compliance review.
This definition emphasizes three essential elements; firstly, IFIs should be
institutionally arranged by an SC along with all internal Shari’ah functions namely Shari’ah
Risk, Shari’ah Review and Shari’ah Audit. Secondly, the board and management of IFIs must
ensure that the SC and relevant parties such as Shari’ah Review and Audit can exercise their
duties independently and their decisions must be free from any undue influences. Thirdly, the
definition denotes the internal arrangement process that covers the pre-transaction review and
post-transaction review in ensuring the Shari’ah compliance framework (ISRA, 2011).
Meanwhile, the Central Bank of Kuwait issued Shari’ah Supervisory Governance for Kuwaiti
Islamic Banks and defines it as a system whereby an IFI attempts to comply with Shari’ah and
its objective (Maqasid al-Shari’ah) through independent and professional supervision (Central
Bank of Kuwait, 2016). This definition has incorporated the element of maqasid al-Shariah.

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In more detail, all bodies including the SC, internal Shari’ah Review and Shari’ah Audit should
ensure all transactions are in accordance to Shari’ah and its maqasid al-Shariah. Contrary to
other definitions where it is emphasized only to the organizational arrangement, the Central
Bank of Kuwait attempted to further strengthen their Islamic finance by complying with
maqasid al-Shari’ah. It is also assumed that maqasid al-Shariah is supposed to guide the
implementation of the Shari’ah governance framework in Islamic finance.

MAQASID AL-SHARI’AH IN ISLAMIC FINANCE

Technically, the term maqasid al-Shari’ah can be understood as the wisdom that is emphasized
by God in his rulings (Al-Yūbī, 1998). Based on this concept, Shari’ah rulings are revealed for
special purposes (Adis, 2014). Maqasid al-Shari’ah is interrelated with another term of
maslahah (public interest) which reflects its core spectrum. In this regard, Al-Shātibī (2004)
views maslahah as representing essential elements of human life: the exercise of one’s
livelihood, and the development of the emotional and intellectual qualities needed to live an
effective life. In exploring the Qur’an and the Hadith, maslahah is the main objective of
Shari’ah rulings, mainly to bring mercy (Qur’an: 21:107) and avoid difficulties (Qur’an: 6:5).
At the same time, some Shari’ah rulings represent specific maslahah, such as protecting life
through the rule of qisos (law of equality) (Qur’an: 179:2) and distributing the wealth through
the rule of fai’ (spoil of war) (Qur’an: 59:7).
Maslahah can also be learned from the Prophetic practices such as the case when the
Prophet refused to take any action towards the munafiqin (a hypocrite group) due to the
negative image towards Islam (Muslim, 2000). This approach has been followed by the rightly
guided caliphs through their policies and decisions. For example, compiling the Qur’an as a
single book, banning interfaith marriage, declaring divorce three times at once to count as three
times, selling any lost camel, and imposing a fine on craftsmen for loss or damage to customers’
property (Al-Khādamī, 2010).
The theory of maqasid al-Shari’ah has been systematically developed by Muslim
scholars between the 15th and 18th C.E. (Auda, 2007). Among the earliest were Al-Juwayni,
al-Ghazali and Izz ʿAbd al-Salam who introduced the idea of maslahah as well as five
dharuriyyat (essentials) including protecting din (religion), nafs (soul), aql (intellect), nasb
(progeny) and mal (property) (Al-Yūbī, 1998). This was followed by ibn Taimiyyah, ibn
Qayyim, and al-Qarafi, who have expanded the issues of maslahah, particularly in dealing with
a possible clash between maslahah and the banning or tolerating of an action in the name of
maslahah. Also, the issue of hiyal (trick) has attracted scholars to discuss how this element was
utilized to legalize prohibited actions (Al-Raisūnī, 1995). On top of that, the topic of maqasid
al-Shari’ah has become a comprehensive discussion with a unique approach introduced by al-
Shatibi (Hamīdān, 2004). Known as the father of maqasid, al-Shatibi has reformed the
fundamentals of maqasid al-Shari’ah with practical principles that can be applied in Islamic
jurisprudence (Al-ʿAbaidī 1992).
In modern times, maqasid al-Shari’ah has gained more attention by many scholars as
it has become an independent subject today. Maqasid is well-known as a concept that reflects
the holistic meaning of Islam. Instead being jurisprudence-oriented, many scholars have
attempted to deduce other values from Islamic sources to be recognized as maqasid al-
Shari’ah, along with five well-known dharuriyat. These include equality, freedom, reform,
justice, human dignity and developing civilization (Adis Duderija, 2014; Bin al-ʿAshūr, 2001).
Meanwhile, Attia (2003) has proposed the scope of maqasid al-Shari’ah as re-manifested into
individual, family, ummah, and all humanity. To ensure the practicality of maqasid al-
Shari’ah, Al-Qarḍāwī (2006) believes that several concepts like fiqh al-Maqasid

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(understanding the objectives of Islamic law), fiqh al-Muwazanat (understanding equilibrium),

fiqh al-Awlawiyat (understanding priority) and fiqh al-Ikhtilaf (understanding disagreement),
should be considered in practice.
In terms of its roles, it can be understood that maqasid al-Shari’ah promotes the total
well-being of humankind and ensures the environment is according to the dictates of Shari’ah
(Shinkafi & Ali, 2017). In this regard, it is essential to protect Shari’ah rulings from being
altered in the name of the human well-being and avoid applying these rulings on a literal textual
approach (Al-Qarḍāwī, 2006). While maqasid al-Shari’ah promotes achieving maslahah
through Islamic rulings, rather than over-emphasizing their technical or legal aspects, it also
plays a role in harmonizing between revelation and reality. Maqasid al-Shari’ah provides a
special guideline for scholars to engage with the change of circumstances, people's needs and
customs, and consider the social, cultural, political and economic background, before applying
any rule (Zahraa, 2003).
Over the period, many studies regarding Islamic finance and maqasid al-Shari’ah have
been carried out to improve the current practice of this industry. Dusuki and Abdullah (2007)
hold the view that maqasid al-Shari’ah should provide an ethical guidance to ensure Islamic
financial institutions promote social welfare and fulfill society's needs, rather being solely
profit-oriented. Meanwhile, Laldin and Furqani (2013) proposed a special framework for
applying maqasid al-Shari’ah in Islamic finance. The framework emphasizes wealth
circulation, fair and transparent financial practices, and justice at both micro and macro levels.
This is in line with concept of special maqasid al-Shari’ah introduced by Ibn Al-Ashūr (2001)
whereby financial practices fulfil objectives of wealth in terms of being wuḍūh (transparency)
and thabāt (stability). In terms of products, Ahmed (2011) came up with an idea of the maqasid
assessment where Islamic financial products must fulfil Islamic principles in terms of form and
substance, along with society’s needs including poor people and small/micro entrepreneurs.
Through maqasid al-Shari’ah, it is required that Islamic finance should not emphasize on legal
aspects only but also to fulfil the spirit of Shari’ah in its operations. In this regard, Hasan (2016)
has proposed the value-oriented reform to promote equity-based financing and customer
protection. To realize this idea, he believes that the Shari’ah governance system can play a
significant role. Meanwhile, Shaharuddin (2010) has stressed the need for a well-defined
maslahah guideline in dealing with Islamic finance issues. This is vital since scholars can either
be too rigid by over-focusing on technical aspects, or too liberal by arguing with unregulated
maslahah principles. To practically apply the element of maslahah in real practice, Zakariyah
(2015) views that the element of morality in Islamic finance should be promoted through
education and awareness for all parties in this industry. Meanwhile, Soualhi and Bouheraoua
(2019) emphasized the element of macro maqasid in Islamic finance, including consideration
of the explicit ruling of the Islamic legal text, consideration of a contract’s own objective and
implications and consideration of justice and fairness in a contractual relationship. These
maqasid should be realized at the level of regulators first before the level of Islamic financial
institutions. At the same time, macro maqasid also needs to be considered as the benchmark to
measure compliance of the Islamic finance regulations with the objectives of Shari’ah,

SPECIAL MAQASID AL-SHARI’AH RELATED TO SHARIAH GOVERNANCE

In general, maqasid al-Shari’ah can be categorized into two: general and specific. General
maqasid refers to maṣlaḥah that covers all or the majority part of Shari’ah (Bin al-ʿAshūr,
2001). General maṣlaḥah is established through the deducted process from all or the majority
of areas of Islamic jurisprudence (Al-Khādimī, 2010). Among them are five fundamentals of
ḍaruriyyat, iṣlah (reform), protecting the system, and avoiding difficulties. In fact, general

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maṣlaḥah has strong fundamentals from Islamic sources, thus, it represents the whole meaning
of Shari’ah. As a result, it can be applied widely in different fields and is considered the main
priority under this classification. As for special maqasid, it reflects maṣlaḥah on specific areas
of Shari’ah (Bin al-ʿAshūr, 2001). For example, maqasid in ibadat, family law, criminal law,
and politics.
With regards to Shari’ah governance, special maqasid can be identified as follows:

1. To support Viability of Islamic Financial Institutions.

Even though Islamic financial institutions have emerged since a half-century ago, they are still
considered as new players in the financial industry compared to their conventional
counterparts, which have already been well-established for almost four centuries (Ishak, 2018).
In fact, Islamic finance is facing many challenges to adapt its system to the modern financial
environment. Furthermore, Islamic financial institutions, particularly Islamic banks, need to
mitigate two types of risks in their operations: the risk as a financial intermediary and the risk
of utilizing Islam's name in their services. The first risk includes credit risk, market risk of the
absence of a developed secondary market for sukuk, mark-up risk using specific benchmark
rates for their instruments, asset price risk, liquidity risk, and legal risk (Ahmed & Khan, 2007).
As for the second risk, since Islamic products have unique features, their practices must be
compliant with Shari’ah as some countries have established specific laws for Islamic banking
practices.
While the number of Islamic banks has expanded dramatically around the world, it is
reported that few of them have shut down their operations. For example, the Ihlas Finance
House, an Islamic financial institution in Turkey, was closed in 2001 due to liquidity problems
and financial distress (Syed Ali, 2007). Meanwhile, Faisal Islamic Bank closed its operations
in the UK for regulatory reasons. At the same time, the Dubai Islamic Bank and Bank Islam
Malaysia Berhad faced corporate difficulties and had borne significant losses, as the former
experienced a USD 501 million fraud case while the latter declared RM 457 million losses as
their BODs were not competent in respect to the banking industry (ISRA, 2011).
Thus, it can be concluded that Islamic financial institutions are still struggling to
establish its identity and to adapt its system to the modern financial industry, which seems to
be inconducive to its progress. In this regard, the viability of Islamic financial institutions
should be considered as an important maqasid al-Shari’ah in Islamic finance.

2. To promote transparency.
The second identified maqasid al-Shari’ah related to Shari’ah governance is to promote
transparency. In general, promoting transparency in all financial activities is part of special
maqasid al-Shari’ah in finance (Al-Ashūr, 2001). Through this concept, all deals and
transactions must be conducted in a transparent manner and all contracting parties must be clear
about them. This includes the important facts of a transaction, particularly the items that have
the potential for disputes. Then, they must mutually agree on it before the transaction can be
executed. In this regard, Allah orders Muslims to write an agreement in matters relating to debt:
“O you who have believed, when you contract a debt for a specified term, write it down” (al-
Baqarah: 282). This verse becomes a guideline for Muslims when they are about to be involved
in a long-term financial commitment to write the agreement, save all the details, and ensure
that there are vital witnesses (Ibn Kathīr, 2008).
To support the maqasid of transparency in Islamic finance, Shari’ah governance should
also be transparent. This governance plays vital roles in developing, reviewing, approving,
auditing and issuing a certification of Shari’ah compliance for any product (ISRA, 2011). Also,

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since Islamic financial institutions rely on public confidence, particularly regarding Shari’ah
matters, Shari’ah governance needs to enhance its transparency in conducting its roles.

A CASE STUDY OF SHARIAH GOVERNANCE FRAMEWORK IN MALAYSIA

This section will explore how maqasid al-Shariah concepts are implemented in the Shari’ah
governance framework. In examining the extent to which the maqasid al-Shariah is embedded
in Shari’ah governance, it is imperative to discuss an overview of Shari’ah governance practice
in IFI. As mentioned earlier Shari’ah governance as defined by IFSB (2009) is a set of
institutional and organizational arrangements through which IFIs ensure that there is effective
independent oversight of Shari’ah compliance. Additionally, the institutional arrangement
means the Shari’ah board and all related Shari’ah control functions ensure the Shari’ah
compliance of IFI (ISRA, 2011).

Viability of Islamic Finance Through Shariah Governance Framework in Malaysia

There are many factors that contribute to the global financial crisis, which, among others, are
excessive and irresponsible lending by conventional banks. Moreover, as highlighted by Kayed
and Hassan, (2011), the regulatory failure such as lack of effective regulation introduced by
the regulator and lack of adequacy of governance established by the bank has led into a global
financial crisis. Hence, for Islamic finance, it is imperative to establish effective governance in
avoiding such failures in the future.
The development of Islamic banking and its regulation in Malaysia involve several
phases where Phase 1 began in 1983 until 1993, and Phase 2 began in 1994. In the early phase
of Islamic banking, several dedicated legislations were published and officially passed in the
parliament to facilitate the first Islamic banking operations, Takaful and others related to
Islamic financial institutions (Munirah & Zakiri, 2016). Consequently, Islamic banks must
appoint an SC to obtain the Islamic bank license from BNM. A year later, the Takaful Act 1984
was introduced, followed by the Banking and Financial Institutions Act 1989 (BAFIA), The
Central Bank of Malaysia Act 2009, and the Securities Commission Act 1993 (Zulkifli Hassan,
2010). As mentioned by Haji Besar et al. (2009), the Islamic Banking Act 1983 was the first
regulatory that had stated the provision for the establishment of the SC as a requirement in
granting the Islamic banking license.
The effort to develop a comprehensive Shari’ah governance framework was undertaken
by BNM (Laldin & Furqani, 2018). BNM issued the first systematic guideline related to
Shari’ah governance in 2005, titled the ‘Guidelines on the Governance of Shari’ah Committee
for the Islamic Financial Institutions’ or known as GPS 1. Five years later, BNM issued more
comprehensive Shari’ah Governance, which came into effect in 2011. The most significant
changes in SGF 2010 compared to GPS 1, was that BNM has further elaborate the roles and
responsibilities of the SC and has included the board's role and senior management in ensuring
Shari’ah compliance. In general, the Shari’ah governance framework 2010, Islamic banking
and Takaful are expected to establish four dedicated Shari’ah functions namely Shari’ah
Review, Shari’ah Audit, Shari’ah Risk and Shari’ah Research. The figure below illustrates a
model structure of the roles, functions, and reporting relationships of key organs in the IFI’s
Shari’ah governance framework:

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Figure 1: Shari’ah Governance Framework BNM 2010

Source: (SGF BNM, 2010)

Given the rapid development of IFI business complexity and market maturity, the new
Shari’ah governance issued by BNM in 2019, known as Shari’ah Governance Policy
Document (SGPD 2019), superseded the earlier Shari’ah governance 2010. The revised
Shari’ah Governance Policy 2019 emphasized Shari’ah non-compliance risk's effective
management by strengthening the Shari’ah control function (Kamaruddin et al., 2020).
The highest level of institutional arrangement is known as the Shari’ah committee (SC)
which is the body accountable for Shari’ah related matters by the respective IFI. Each
jurisdiction adopts different practices and models of Shari’ah governance (Alam et al., 2019).
For example, a centralized Shari’ah governance model has been adopted in Malaysia,
comprising a two-tier model. The highest authority, namely the Shari’ah Advisory Council sits
at the national level, whereby the SC works at the institutional level. The Shari’ah Advisory
Council’s ultimate objective is to reduce opinion differences, ensure harmonization of Shari’ah
ruling, and promote good governance within IFI (Grassa, 2015).

Figure 2: Two Tier Model

Source: (Grassa, 2013)

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The SC also undertakes the role in supervising, monitoring, auditing, and issuing fatwa
to the IFI (IFSB, 2009). This includes ensuring zakat payment, providing guidance on the
disposal of non-Shari’ah compliant funds, and its broader social role. Moreover, Akram Laldin
(2020) posited that Shari’ah committee members must also assess the Islamic banking product
and its implication to the economics of the ummah, which requires the maqasid approach to
their ruling. It is also proven that the presence of Shari’ah committee in the IFIs gives comfort
and confidence among the public towards Islamic banks (Marwan et al., 2016). This is because
their function is not merely in ensuring Shari’ah compliance, but also to improve the quality
of financial statements, improve bank performance, contribute to a moral and ethical system,
and so forth (Mukhibad, 2019).
In view of the above, the Shari’ah committee's roles are not only to serve the Islamic
bank, but also extend to the customers and overall public and society. Serving the public
interest to maximize benefits and reduce losses for society is the main principle of the maqasid
al-Syariah.
Apart from that, a sound and robust Shari’ah governance normally comprises two main
pillars: internal and external organizational arrangement. As discussed earlier, the external
arrangement is handled by the SC and is assisted by other Shari’ah control functions, usually
referred to as Shari’ah Review, Shari’ah Audit, and Shari’ah Risk, which are expected to
provide a system of checks and balances within the organization (Laldin & Furqani, 2018). As
highlighted by Karim Ginena and Azhar Hamid, (2015), the internal Shari’ah control system
of an Islamic bank is a critical system that operates at all times and in all levels within the bank
to promote prudent Shari’ah-compliant operations in accordance with laws, regulations,
policies, guidelines, and best practices. In the SGPD 2019, BNM has taken out the roles of
Shari’ah research function and maintained only three functions as follows:
i. Shari’ah Risk Management: Shari’ah risk management refers to a function that
systematically identifies, measures, monitors, and reports Shari’ah non-compliance
risks in the operations and business.
ii. Shari’ah Review: Shari’ah review refers to a function that conducts regular assessment
on the compliance of the operations, business, affairs, and activities of the IFI with
Shari’ah requirements.
iii. Shari’ah Audit: Shari’ah audit refers to a function that provides an independent
assessment on the quality and effectiveness of the IFI’s internal control, risk
management systems, governance processes, as well as the overall compliance of the
IFI’s operations, business, affairs and activities with Shari’ah.

As compared to the conventional financial institutions, IFIs have been exposed to

additional type of risk, namely ‘Shariah non-compliance risk’. Hence, it is necessary IFIs to
have an adequate management risk system that can avoid the mentioned inherent risks. In
SGPD 2019, it is required that the Board, Shari’ah Committee, and Senior Management to
establish an effective internal organizational arrangement in supporting Shari’ah compliance
risk culture in the IFIs. Besides, Shari’ah risk management function also must identify Shari’ah
non-compliance risk exposure, assess the risk, and measure its potential impact to the IFIs. In
ensuring the effective control in place, Shari’ah risk management must thoroughly monitor the
Shari’ah non-compliance risk embedded in the business and operation of IFIs. As for reporting,
the Shariah risk management function must escalate a full report regarding the Shariah non-
compliance risk exposure and its potential to the board, senior management, and Shariah
committee.

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Hence, it can be concluded that ensuring Shari’ah compliance activities of IFIs are the
collective responsibilities of all the stakeholders, including the SC, Shari’ah control functions,
and not to mention the Board, Senior Management, and others.

Transparency and Disclosure in Shariah Governance

One of the essential elements in Islamic banking is transparency and disclosure. Similar to the
concept of accountability in Islam, the IFIs are expected to fully disclose their activities,
financial performance, and status of Shari’ah compliance activities, including numbers of
Shari’ah non-compliance events that occur in the financial year report to the public.
Nevertheless, Sekreter (2013) argued that most Islamic banks are lacking in terms of
transparency and disclosure to their stakeholders.
Due to the public's demand for transparency and disclosure towards Islamic banks, the
proper implementation of Shari’ah governance is imperative since it assists in ensuring that all
the activities and operations comply with the Shari’ah. This is in consistent with the concept
of maqasid al-Shariah in Islam, which is to protect and preserve public interest, including the
needs of IFIs’ stakeholders.
With general scrutiny for transparency and disclosures, the previous SGF 2010 only
provides the example of the minimum annual disclosure in the appendix. As a result, all the
Islamic banks (as per the table) have provided disclosure, namely the Shari’ah Committee
Report, in their respective annual reports (SGF BNM, 2010).

Table 1: Shari’ah Committee Report of Islamic Banks in Malaysia

No. Islamic Bank in Malaysia Shariah Shariah Non-
Committee compliance
Report Event Report
1. Affin Islamic Bank Berhad √ √
2. Al Rajhi Banking √ √
3. Alliance Islamic Bank Berhad √ √
4. AmBank Islamic Berhad √ √
5. Bank Islam Malaysia Berhad √ √
6. Bank Muamalat Malaysia Berhad √ √
7. CIMB Islamic Bank Berhad √ √
8. HSBC Amanah Malaysia Berhad √ √
9. Hong Leong Islamic Bank Berhad √ √
10. Kuwait Finance House (Malaysia) Berhad √ √
11. MBSB Bank Berhad √ √
12. Maybank Islamic Berhad √ √
13. OCBC Al-Amin Bank Berhad √ √
14. Public Islamic Bank Berhad √ √
15. RHB Islamic Bank Berhad √ √
16. Standard Chartered Saadiq Berhad √ √
Source: Researcher Compilation

Nevertheless, SGPD 2019 includes a more extensive discussion, mainly on the report
of Shari’ah governance practices in the IFI annual report. It is required that the board discloses
its oversight accountability for Shari’ah governance implementation and disclosure by the SC

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regarding its responsibility and their opinion towards the compliance of IFIs with Shari’ah
principles. Apart from that, the board and SC must ensure that all the information from the
financial report is accurate and does not contain any misleading information and, ultimately,
the Shari’ah committee report must be signed by the members of the SC.
Regarding the Shari’ah committee report, SGPD 2019 requires that the SC provides
evidence that the respective IFIs comply with Shari’ah, and to disclose further if a Shari’ah
non-compliance event has occurred during the financial year report, whether ‘non-material’ or
‘material’. The material or non-material Shari’ah non-compliance disclosure is needed because
Shari’ah non-compliance events involving financial loss such as breach of tenets or aqad
requires purification of income, or non-financial implications, or may give reputational damage
to the IFIs. Moreover, such a report must also include the nature, status and measures
undertaken to address the Shari’ah non-compliance events, either material or non-material.

CONCLUSION

The Shari’ah Governance Framework is a backbone of Islamic finance where Islamic financial
institutions must monitor, control, and conduct their activities according to the Shari’ah
principles. Despite numerous studies on Shari’ah governance practice, there are still limited
studies on the applicability of maqasid towards Shari’ah governance practice. Therefore, this
study explores the realization of maqasid al-Shari’ah in the Shari’ah governance practice in
Malaysia.
The findings reveal that two special maqasid have been realized through the practice of
Shari’ah governance in Malaysia: ensuring the viability of Islamic banking institutions and
promoting transparency by virtue of the efforts taken by BNM together with support by
Malaysia's government, such as the issuance of legislation, act, standard, and governance with
the ultimate objective to promote the Islamic financial system's resilience. The latest Shari’ah
governance 2019 also emphasized on transparency and disclosure in IFIs. Hence, combining
both ingredients, namely effective Shari’ah governance, and transparency, can further increase
the stakeholder’s confidence in Islamic finance.
While this study is limited due to the lack of empirical analysis, it could be considered
among the preliminary studies on maqasid al-Shari’ah in Shari’ah governance. Therefore, for
further studies, it is recommended to carry out empirical studies regarding the post-
implementation of Shari’ah Governance Policy Document 2019 and a case study on the
Shari’ah Committee Report of Islamic financial institutions in Malaysia.

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