The Journal of Muamalat and Islamic Finance Research

ISSN: 1823-075X e-ISSN: 2948-5266

Vol. 18, No. 2, Dec 2021, Pp. 144-157
DOI: https://doi.org/10.33102/jmifr.v18i2.374

Article

Board, Shariah Committee and Senior Management: Updates on the

Bank Negara Malaysia Shariah Governance Policy Document
Nurul Afidah Mohamad Yusof1, Mohammad Mahbubi Ali*2

1 Department of Finance, Faculty of Business and Finance, Universiti Tunku Abdul Rahman, Kampar Campus, Jalan
Universiti, Bandar Barat 31900, Kampar Perak, Malaysia
2 International Institute of Advanced Islamic Studies, Jalan Elmu, Off Jalan Universiti, 59100 Kuala lumpur, Federal

Territory of Kuala Lumpur, Malaysia

2 Tazkia University College, City, Jl. Ir. H. Djuanda No. 78 Sentul, Citaringgul, Kec. Babakan Madang, Kota Bogor,

Jawa Barat 16810, Indonesia

ABSTRACT - The paper aims to examine the relevant provisions of the

newly released Bank Negara Malaysia (BNM) Shariah Governance Policy
ARTICLE HISTORY
Document relating to the board of directors, Shariah Committee and
senior management of the Islamic Financial Institutions (IFIs) in Received:16th February 2021
Malaysia. The study is qualitative-based research. It reviews two Revised: 25th November 2021
Accepted:29th November 2021
documents, i.e. BNM Shariah Governance Framework 2010, and BNM Published:1st December 2021
Shariah Governance policy 2019. It uses a content analysis approach to
understand and compare the two frameworks from the perspective of the KEYWORDS
board, the Shariah Committee and senior management. The study finds Islamic finance, board, Shariah
that SGP 2019 enhanced features of the preceding SGF 2010 revolving Committee, Shariah governane,
around enhanced board oversight and roles over Shariah governance, management
strengthened Shariah Committee (SC) requirements in providing
independent and sound advice to IFIs, as well as a greater expectation for
the board and senior management in promoting Shariah compliance
culture. This paper examines the areas which have been addressed by the
new framework to improve several issues which have been highlighted
during the implementation of the previous framework, SGF 2010.

INTRODUCTION
With Shariah being the cornerstone of IFIs, it is indeed imperative to ensure Shariah compliance
across the institution to maintain public confidence. Failure to uphold the whole process of
Shariah compliance would certainly trigger negative repercussions to the IFIs, such as financial
loss and massive unwarranted withdrawal. Given the importance of Shariah compliance, the
Islamic financial system requires the institutionalisation of a robust Shariah governance structure
that would help to ensure an end-to-end Shariah compliance in the Islamic finance practices. The
establishment of a Shariah governance framework is essential to Islamic finance system stability.
As defined by IFSB-10, Shariah governance refers to “the set of institutional and organizational
arrangements through which an IIFS ensures that there is an effective independent oversight of Shariah compliance

*CORRESPONDING AUTHOR | Mohammad Mahbubi Ali | [email protected]

© The Authors 2021. Published by Penerbit USIM. This is an open access article under the CC BY 4.0 license.
over the issuance of relevant Shariah pronouncements, dissemination of information and an internal Shariah
compliance review” (Islamic Financial Services Board, 2009).
Meanwhile, the AAOIFI defines Shariah governance framework as “a set of organisational
arrangements through which Islamic financial institutions ensure effective oversight, responsibility and accountability
of the board of directors, management and Shariah committee” (Malik, 2020).
Through the definition given by AAOIFI, it is clear that the responsibility of sound Shariah
governance rests on the shoulders of the board of directors, management, and Shariah Committee.
This is found to be coherent with the concept of Shariah governance by BNM which also
highlights the crucial role played by these three key players.
Generally, the board holds the oversight accountability of the overall Shariah governance
by ensuring Shariah compliance and integration within the IFI’s operations and strategies.
Meanwhile, the Shariah committee is responsible to provide objective and sound advice to its
respective IFI to warrant Shariah compliance in the business operations, affairs, and activities.
Subsequently, the management is expected to observe the directives from the board which is then
supported by the necessary advice from the Shariah committee in its day-to-day management to
ensure Shariah compliance in the IFI’s business operations, affairs, and activities. It is also
important to note that for these three key players to carry out their fiduciary duties, they are
supported by four Shariah arms – Shariah research, Shariah audit, Shariah review, and Shariah risk
management control.
The many cases over the last two decades, which challenged the Shariah compliance aspect
of certain Islamic banking products, have called for the BNM to introduce the Shariah
Governance Framework for Islamic Financial Institutions (hereinafter referred to as SGF 2010),
issued on 22 October 2010. The SGF aims to strengthen Shariah governance structures, processes
and arrangements of the IFIs to ensure Shariah-compliance in place. It requires the IFIs to institute
clear internal control and remedial rectification measures to address Shariah non-compliant
incidents holistically. Admittedly, among others, the strong legal framework has helped the rapid
development and growth of the IFIs in Malaysia. The compliance of the framework has certainly
given the confidence and comfort to the market participants that the IFIs are operating according
to the Shariah requirements.
In response to the emerging business complexity and market maturity of the IFIs, BNM
has issued a new, revised version of the SGF, namely Shariah Governance Policy (SGP 2019), on
20th September 2019, which supersedes the existing SGF 2010. The process of coming out with
this new framework has taken a considerably long period, starting with the Shariah Governance
Survey (April 2016), Shariah Governance Discussion Paper (15 November 2016), and followed by
an exposure draft issued by BNM on the 9th November 2017. This new framework is set out to
strengthen board oversight and responsibilities over Shariah governance, and to enhance
requirements for Shariah Committee (SC) in providing objective and sound advice to IFIs.
Besides, the SGP also sets a higher expectation for the board and senior management in promoting
Shariah compliance culture, as well as higher expectations on the quality of internal control
functions. In a nutshell, this new and revised Shariah governance framework aims to reinforce the
effectiveness of Shariah governance functions and Shariah compliance culture in IFIs.
The purpose of this paper is to examine the key distinctive features and updates of the
new Shariah governance framework concerning the three important organs in Shariah governance,
i.e. board of directors (board), Shariah Committee (SC), and senior management. Both the existing
SGF 2010 and SGP 2019 are reviewed, compared, and analysed accordingly.

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LITERATURE REVIEW
The topic of Shariah governance has gained considerable traction in the academic literature, in
tandem with the rise of the Islamic finance industry. In the Malaysian context, this is especially
true when BNM issued its first comprehensive framework on Shariah governance in 2010, which
has invoked numerous research examining Shariah governance from various aspects. For instance,
prior research has looked into the Shariah governance practices across various countries (Miskam
& Nasrul, 2013; Mizushima, 2014; Rama, 2015; Alam et al., 2019; Mansoor et al., 2020; Mohamad
Asri et al., 2020). Through comparison, the findings from these research have provided good input
to having best practices in Shariah governance. Furthermore, the identification of challenges faced
in the implementation of Shariah governance has been supplemented by their respective pragmatic
solution recommendations (Farook & Farooq, 2011). Akin to the dynamic development of Islamic
finance in Malaysia, the industry has been receiving continuous regulatory support from relevant
authorities such as Bank Negara Malaysia, Securities Commission of Malaysia, Bursa Malaysia, etc.
An interesting study has been made by Kamaruddin et al. (2020) to compare three important
Shariah governance policy documents in Malaysia, namely SGF 2010, IFSA 2013, and SGP 2019.
The findings suggest that among the three, SGP 2019 provides the most comprehensive
Shariah governance framework. Nevertheless, the elaboration on Shariah governance definition
and objectives are still absent from SGP 2019. In addition, there has also been a significant focus
on the impact of Shariah governance on the performance of IFIs in the literature (Nawaz, 2017;
Buallay, 2019; Nawaz et al., 2021; Alam et al., 2021; Ben Abdallah et al., 2021). In its effort to find
empirical support on the importance of Shariah governance, the discussion around this
perspective highlights the effectiveness of Shariah governance in affecting the operational,
financial, and market performance of the IFIs.
In the following section of the literature review, the focus is given to the need for Shariah
compliance in IFIs in Malaysia. This lays out the backdrop for the discussion on the comparison
of Shariah governance policy documents, namely SGF 2010 and SGP 2019 in this study.

The Need for Shariah Compliance in IFIs in Malaysia

Over the last two decades, some cases were brought before the court to question the legitimacy
of the Islamic banking products and services, which in some cases resulted in the financial loss to
the bank due to the judge’s decision to deem the contract null and void. For example, the court
declared that Bai’ Bithaman Ajil (BBA) in the Arab Malaysian Finance Bhd v Taman Ihsan Jaya Sdn Bhd
& Ors [2008] 5 MLJ 631 was void because the BBA facility was a bona fide sale transaction.
Therefore, in the event the bank recalled the facility at a higher total price, the sale was no longer
a bona fide sale transaction but was merely a financing facility similar to a conventional loan.
As a consequence, it breaches the provisions of the Islamic Banking Act 1983 (IBA) and
the Banking and Financial Institutions Act 1989 (BAFIA), which require Islamic banking
businesses to comply with the religion of Islam (Arab Malaysian Finance Berhad v Taman Ihsan
Jaya Sdn Berhad & Ors, 2003). Nevertheless, the Court of Appeal in the case of Bank Islam Malaysia
Bhd. v Lim Kok Hoe & Anor and Other Appeals [2009] 6 CLJ 22 reversed the decision and the existing
principle of law that had appeared in the Taman Jaya case, upholding the validity of the BBA as
an enforceable contract (CLJ, 2009). The validity of the BBA contract in the financing facility was
also tested in the case of Bank Islam Malaysia Bhd. v Dato’ Hj Nik Mahmud Daud, Bank Kerjasama
Rakyat Malaysia Bhd. v Emcee Corporation Sdn Bhd, Affin Bank Berhad v Zulkifli Abdullah, CIMB Islamic
Bank Bhd. v LCL Corporation Bhd. & Anor, and other cases.
As Islamic banks have witnessed significant growth and move toward market maturity and
increased product complexity, more disputes and lawsuits are expected to continue to emerge
(Hasan & Asutay, 2011). Ensuring Shariah compliance aspects and strengthening robust Shariah
governance is, therefore. imperative to maintain the confidence of Islamic banking stakeholders
(Shafii et al., 2013). This is because insufficient attention to the entire Shariah compliance aspects

146
would have negative repercussions on the sustainability of the Islamic banking industry (Dusuki
& Ali, 2012).
On 22 October 2010, BNM issued the Shariah Governance Framework (SGF 2010) for
the IFIs under its purview (Islamic banks and conventional banks offering Islamic financial
services, and takaful companies). The framework was intended to improve Shariah governance
structures, processes and arrangements of the IFIs to ensure that Shariah-compliance aspects are
in place (Bank Negara Malaysia, 2010). It also requires IFIs to institute clear internal control and
remedial rectification measures in dealing with Shariah non-compliance events in a holistic manner
(Bank Negara Malaysia, 2019).
In 2013, the Islamic Financial Services Act (IFSA 2013) was gazetted to reinforce the
policy orientation of IFIs ensuring full Shariah compliance in their aims, operations and business
activities (Government of Malaysia, 2013). Any breach of Shariah-compliance requirements will
subject it to criminal and civil penalties, i.e. imprisonment of its executives and financial penalties.
Section 28(8) of the IFSA 2013 clearly states:
“Any person who contravenes subsection (1) or (3) commits an offense and shall, on conviction, be liable to
imprisonment for a term not exceeding eight years or to a fine not exceeding twenty-five million ringgit or to both”
(Government of Malaysia, 2013).
To complement SGF 2010 and IFSA 2013, as well as to strengthen Shariah compliance
culture among IFIs, BNM issued a number of Shariah standards, which featured the most
prevailing and applicable contracts and principles in Islamic banking and takaful industry in
Malaysia. These include Shariah standards on murabahah, mudarabah, musharakah, ijarah, wadiah,
istisna’, wa’ad, kafalah, hibah, tawarruq, bai’ ‘inah, rahn and bai’ al-ṣarf. These documents provide the
necessary guidelines to the IFIs in carrying out their operations.
The achievement of Shariah compliance is often linked to the effectiveness of risk
management practices. An interesting study by Embi and Shafii (2018) suggested that aside from
the Shariah governance elements, the corporate governance elements also have a positive impact
on the risk management practices. Therefore, the findings imply that a strong corporate and
Shariah governance may lead to a holistic Shariah compliance culture in IFIs.

METHODOLOGY
This present study applies a comparative analysis of Shariah Governance Framework (SGF) 2010
and Shariah Governance Policy Document (SGPD) 2019. In applying the critical comparison
between the two Shariah governance frameworks, the study begins with analysing the key roles
and responsibilities of key organs in Shariah governance, namaly board of directors, Shariah
committee and management. The discussion then delves into the comparison of the two
frameworks by highlighting key distinctive features of the new introduced SGPD 2019. Several
themes are identified in this respect, including oversight, accountability and responsibility of the
board, interaction mechanism between the board and Shariah committee and its dispute
mechanism, composition and maximum tenure of Shariah committee, and the responsibility of
senior management to continously strengthen their understanding on Islamic finance.

RESULTS
Comparison of SGF 2010 and SGP 2019
Shariah Governance Framework 2010 (SGF 2010)
In 2004, BNM issued the Governance Guidelines for Shariah Committee in IFIs. Among others,
it stipulates the duties and responsibilities of the Internal Shariah Committee in IFIs. However,
with increasing attention given to Shariah compliance in the ensuing years, the guidelines have
been replaced by the new Shariah Governance Framework for IFIs (SGF 2010), effective 1
January 2011. The main objective of this framework is to augment the roles played by the board

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of directors, the Shariah Committee and the management in ensuring Shariah compliance in the
company. The objectives as outlined by the framework are:
a) To establish the expectations of BNM on Shariah governance structures, processes, and
arrangements in IFIs to ascertain that Shariah compliance is fully observed in all its operations
and business activities.
b) To define appropriate guidelines to the board, the Shariah Committee, and the management of
the IFI so that they can discharge their duties about Shariah related matters in effective manners;
and
c) To explain different functions in IFIs, including Shariah review, Shariah audit, Shariah risk
management, and Shariah research.
Overall, the framework is deliberated in six sections, namely general requirements of SGF
2010, oversight, accountability and responsibility, independence, competency, confidentiality and
consistency, and finally Shariah compliance and research functions. Specifically, Section II of SGF
2010 deliberates further on the oversight, accountability, and responsibility of three key
functionaries in the implementation of Shariah governance, i.e. board of directors, Shariah
Committee, management.

Board of Directors
The ultimate accountability of the overall Shariah governance falls on the board of directors. The
board is expected to devise appropriate mechanisms that are necessary for them to perform their
diligent oversight in ensuring effective governance. Also, the board has to make sure that the
implementation of the framework corresponds to the size, complexity, and nature of its business.
With respect to Shariah-related policies, the board shall approve them upon consultation with the
Shariah Committee. Given the critical role of Shariah in the operation of IFIs, it is also important
for the board to establish an effective communication policy among the key organs of the IFI to
enable smooth escalation of material Shariah matters to the board, as well as to facilitate
dissemination of Shariah-related matters from the board to other members of the organisation.

Shariah Committee (SC)

Generally, the Shariah Committee (SC) carries the oversight accountability on Shariah-related
matters. SC plays a crucial role in IFI operations because the board relies heavily on the
committee’s decisions, views and opinions when it comes to Shariah-related matters. Thus, a
rigorous deliberation by the SC is required before any decision on Shariah matters is made, binding
the IFIs. In achieving this, the committee is supported by the Shariah review and Shariah audit
functions that will help to highlight issues that need attention. In addition, the SC also has the
responsibility to disclose sufficient information on the aspect of compliance in the annual report.
This corresponds to the requirements under the Guidelines on Financial Reporting for Licensed
Islamic Banks (GP8-i) and Guidelines on Financial Statements for Takaful Operators (GPT6).

Management
All Shariah rulings and decisions by the National Shariah Advisory Council (SAC) and Shariah
Committee are binding on the IFIs. In the Shariah governance framework, the management has
to observe and implement these decisions and rules accordingly. Any arising Shariah matters
encountered by the management shall be referred to the Shariah Committee for further advice. In
addition, the management also plays a crucial role to provide complete and accurate information
to the Shariah Committee in due course. The quality of the information will, in turn, determine
the quality of the deliberations and decisions made by the Shariah Committee. Another notable
responsibility of the management is to ensure that a holistic culture of Shariah compliance is
adopted within the organisation. It is believed that this holistic culture of Shariah compliance, i.e.
Shariah compliance in its overall financial and business operations, would help to create a positive
image of the IFIs and heighten the consumers’ confidence and hence good reputations.

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Key Distinctive Features of Shariah Governance Policy 2019 (SGP 2019)
This section highlights some of the new features of the SGP 2019 as compared to the 2010 SGF
from the context of the three key organs of Shariah governance implementation, i.e. board of
directors, Shariah Committee, and senior management.

Board of Directors
In SGF 2010, the oversight, accountability and responsibility of the board were generally focused
on upholding the overall Shariah governance framework and Shariah compliance of the IFI. This
aspect is seen to be further enhanced in the SGP 2019 whereby Part B: Section 8 (The Board –
Key Responsibilities) describes the board’s key responsibilities in more detail which includes
focusing on policy approval, oversight and implementation of SAC rulings and SC advice, internal
control environment, and implementation of Shariah governance by the senior management.
Another interesting detail is the responsibility of the board in promoting a sound corporate culture
that represents the importance of full compliance with Shariah requirements. The following are
some of the salient features of the SGP 2019 relating to the board of directors and some
comparisons with the preceding SGF 2010.
First, the SGF 2010 permitted Shariah Committees to implement stricter Shariah decisions
than the SAC BNM published rulings. On the other hand, the 2019 SGP requires banks to inform
BNM on any additional restrictions beyond the SAC rulings, supported by any documented
deliberation and justification by their Shariah Committees (para 10.7). In light of this issue, it is
also observed that the final SGP 2019 has removed a point from Para 9.2 of the BNM Shariah
Governance Exposure Draft 2017, which states:

“… where the Shariah committee holds a stricter view on a Shariah matter relative to a published ruling
of the SAC and the board seeks to apply the ruling of the SAC, .... the board must document the justifications for
the decision and inform the Bank no later than fourteen (14) days from the date that such decision was made.”

Unlike SGF 2010, where SC decisions should not be set aside or modified without its
consent, there is an exception made in the exposure draft regarding this matter. The exception is
applicable when SC adopts a more stringent Shariah decision than the National Shariah Advisory
Council (SAC) ruling. Until the board is exercising its authority, the impact of this para on the
supremacy of the SC decisions is hitherto unknown. In hindsight, it is probably prudent to remove
this point from the final SGP 2019 because it conveniently opens the door for the board to
challenge any SC decision that is different from the SAC ruling.
Second, the newly-introduced SGPD mandates IFIs to establish effective communication
between the boards and Shariah Committees on any issue related to shariah requirements, shariah
governance, or shariah non-compliance risks. The boards are also required to provide a regular
review on the quality and frequency of the engagement with the Shariah Committees. This would
enable both the board and the Shariah Committee to discharge their roles and responsibilities in
an effective manner. The previous SGF was, nevertheless, silent on such requirement. Another
interesting addition to SGP 2019 is the deliberation of the interaction between the board and SC.
It has often been argued whether the interaction and relationship between these two key organs
would result in any conflict of decisions. Paragraph 9.1, 9.2 and 9.3 provide a more detail guideline
on the interaction between the two, especially on how to handle differences in views without
underestimating the integrity of Shariah requirements.
The ‘conflict of decisions’ issue is very much related to the prominent topic of the Shariah
Committee's independence. Some argue that board and senior management might act as the
‘invisible hands’ to ensure the decisions are in line with their interests (Muhamad Sori et al., 2015).
Therefore, when SGF 2010 first suggested for the board to consider appointing at least one SC
member to also sit as a board member, it struck certain parties to believe that it opens the
possibility that the appointed SC member might then be under the pressure of the board and

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senior management to make decisions that lean towards their preference at the expense of Shariah.
Although the intention is to serve as a ‘bridge’ between the board and the SC and to promote
better apprehension and appreciation amongst the board members on the SC decisions, some
people are still sceptical. Considering the concerns of SC independence, it is particularly interesting
to note that the exposure draft of Shariah Governance asked for feedback from the public as to
how exactly should the integration be made:
a) appointment of at least one (1) Shariah committee member as a director; or
b) inclusion of at least one (1) Shariah committee member as a permanent invitee to board
meetings; or
c) joint meetings between the board and Shariah committee?
However, the SGP 2019 still makes the same recommendation in para 12.10 to appoint
SC member as a board member without dictating any specific form of integration as what had
been highlighted in the exposure draft. SGP 2019 stresses the importance of integration, i.e. to
promote better integration of Shariah governance consideration within the business and risk
strategy of the IFI. Given the fact that this argument of the Shariah Committee’s independence is
very subjective and will always boil down to the values of the committee member himself, it is
believed that this topic shall remain to be the hot potato of Shariah governance.

Shariah Committee
One key highlight of the SGP 2019 is the call for Shariah Committee to better integrate relevant
business and risk strategies in deliberating any Shariah issues faced by the IFIs. According to the
former Bank Negara Malaysia governor, the new framework “aims to position these committees as the
enabler and catalyst in supporting the board and senior management – one that drives innovation by providing
practical, actionable and impactful Shariah advice” (Damodaran, 2017).
It is interesting to see quite a number of further deliberations made on Shariah Committee
in the effort to make it more effective and efficient. First, the new SGP 2019 stipulates the
maximum tenure of Shariah Committee member to nine years in a single IFI. The 2010 SGF, on
the other hand, did not put any limit on the SC reappointment and tenure. This limit is intended
to address the complacency issue, which may have an adverse impact on the professional
objectivity of the SC. A new Shariah Committee composition is expected to strengthen the SC
overall competency and its Shariah deliberations. Nevertheless, this particular clause will only be
effective from April 1, 2023 to facilitate the transitional arrangements and sufficient time for IFIs
to establish their Shariah Committee compositions.
Second, in terms of composition, both frameworks require an IFI to comprise of at least
five Shariah Committee members (Para 2.3 of SGF 2010, and Para 13.2 of SGP 2019). However,
SGP 2019 also offers some flexibility (subject to BNM’s approval) to accommodate the small and
less complex IFIs, particularly the Islamic window or a foreign branch in Malaysia, whereby it
allows for a minimum of three Shariah committee members only (Para 13.4). The justification for
this smaller requirement is that a minimum of three SC members is proportionate to meet the
business needs of the relevant IFIs.
With regards to the committee composition, it is interesting to highlight the points
suggested by the exposure draft, which described the composition of the Shariah Committee to
comprise two categories, i.e. Shariah-qualified person and Islamic finance practitioner. To qualify
in either category, the requirements are laid out in Para 12.2 and Para 12.3 of the exposure draft.
It is noteworthy that the criteria for one to fall under the Islamic finance practitioner group seems
to be relatively strict. The requirement of at least one Islamic finance practitioner by this draft is
basically to address the concern that some SCs are perceived to be lacking the technical
understanding of specific business matters. Therefore, the presence of the Islamic finance
practitioner is expected to help avoid any unclear guidance and inappropriate alternative solutions
provided about the operationalisation of Shariah requirements. Although it is good in ensuring
the quality of the Shariah Committee, it is uncertain whether the industry currently has that large

150
pool of talent to recruit from to meet the demand. This is plausibly the reason for the SGP 2019
not adopting this particular requirement in its final issue.
Third, in terms of committee meetings, both frameworks require the meetings to be held
at least once in two months. However, SGP 2019 further provides that an IFI operating as an
Islamic window or a foreign branch in Malaysia is allowed to have the SC meetings at least twice
a year only (Para 11.3). It also maintains the 75% attendance requirement for the SC meetings. In
SGF 2010, it allows the participation of the SC member to be facilitated through video or
telephone conferencing where necessary. However, SGP 2019 stipulates that the attendance of
members at any SC meeting, by way other than physical presence, must remain the exception
rather than the norm. If any, necessary steps shall be taken to safeguard the confidentiality of the
deliberations. Besides, the SGP 2019 also does not allow any SC member to appoint another
person to attend the meeting on his behalf. On another note, in the case of IFIs which have only
3 SC members, they have to make sure that the two Shariah-qualified members are present in all
Shariah committee meetings.
Fourth, in terms of minimum quorum and decision making, SGF 2010 requires for the
meeting attendance to be at least two-third with the majority of the attending members being
those of Shariah qualified. Any decision shall only be approved if it is voted by at least two-thirds
of the present members, with the majority of the voters being members with Shariah background
(Appendix 5). However, this minimum quorum level is no longer applicable according to the SGP
2019. The new policy only requires that the majority of the committee members who attend each
meeting is Shariah qualified. Any decision of the committee shall also be made based on a simple
majority. The requirement to approve any decision in a Shariah Committee meeting has been
scaled down from two-thirds to a simple majority.
It is also noteworthy that in the BNM Shariah Governance Exposure Draft, a question on
voting rights was posed to the public for feedback: “Question 3 - Please provide views on whether equal
voting rights for all Shariah committee members (including members without qualification in Shariah) will affect
the perceived quality of any decisions by the Shariah committee.” This question is very interesting and
relevant because in making a Shariah decision, it is only intuitive that a Shariah's opinion carries
more weight than the others. For instance, in 3-2 votes, would a decision be considered as Shariah-
reliable if the three voters are coming from 2 non-Shariah plus 1 Shariah qualified member?
However, it is noticed that this issue is not included in the SGP 2019. Therefore, it is taken that
there are equal voting rights for all the Shariah Committee members.
Fifth, while SGF 2010 was silent on the presence of board members or senior management
during the Shariah Committee meeting, the SGP 2019 highlights some important points regarding
this controversial issue. It is stated that while they are allowed to sit in the Shariah Committee
meeting to give inputs and insights on any business, technical or operational matters, they must
not exercise undue influence that could hamper the Shariah Committee from preserving its
professional objectivity. With this, it is hoped that the Shariah Committee could exercise objective
judgment in its deliberations and decision-making (Para 11.13).
Finally, the SGP 2019 did not allow active politicians to serve Shariah Committee
members. This is another new, enhanced feature in the new SGPD where the previous SGF 2010
was silent on this issue.

Senior Management
As senior management, the responsibility to constantly develop and strengthen one’s
understanding of Islamic finance and other relevant areas is embedded in the job function itself.
Although the existing SGF is silent on this, it is often considered as the tacit responsibility of the
management. Note that para 2.14 of SGF 2010 states:
“The management is responsible to provide continuous learning and training programs to the key internal
stakeholders including the board, the Shariah Committee, and the relevant staff in Shariah and finance matters.

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This is to ensure that every function in the Shariah governance framework is sufficiently exposed to current
developments in Shariah-related matters.”
However, Para 15.2 of SGP 2019 explicitly mentions that senior management themselves
“must continuously develop and strengthen his understanding of Islamic, as well as keep abreast with developments
that may impact Islamic financial business.”
Another noteworthy element in the SGP 2019 is the new dedicated section on the Shariah
compliance culture elaborated in Part F of the policy document. Previously in SGF 2010, the
responsibility of the holistic Shariah compliance culture within the organisation was highlighted
to be on the shoulders of the management. However, in the SGP 2019, it becomes the collective
responsibility of all key organs in the IFI. In particular, SGP 2019 stipulates the adoption of ‘tone
from the top’ approach in communicating the Shariah compliance requirement.
In view of the Shariah compliance culture, it is essential to understand that Shariah
compliance goes beyond the justification of permissibility or prohibition of something. In line
with the complexity of current modern financial system, it is important to consider the realisation
of maqasid al-Shariah in formulating pragmatic Shariah solutions to the financial activities – aiming
to effectively harmonise the theory and reality (Ishak & Nasir, 2021). A contemporary example in
relation to this issue is highlighted by Shaharuddin (2020), discussin on how ‘Islamic’ was Islamic
banks in handling the moratorium package during the COVID-19 pandemic in Malaysia.
Apparently, some critics argued that the implementation does not truly respresent the philosophy
of Islamic finance.
Pursuant to the preceding discussion of the SGF 2010 and SGP 2019, Table 1 presents
the comparison between the two frameworks.

Table 1: Comparison between SGF 2010 and SGP 2019

Discussion SGF 2010 SGP 2019 Relevant key
organs
Board’s oversight  Generally focused on  More detailed, which  BOD
accountability and upholding the overall includes focus on policy
responsibility Shariah governance approval, oversight and
framework and Shariah implementation of SAC
compliance of the IFI rulings and SC advice,
internal control
environment, and
implementation of Shariah
governance by the senior
management
Effective  BOD must provide  Mandates IFIs to establish  BOD
communication of effective effective communication  SC
Shariah related communication policy between the BOD and SC  Senior
matters between the IFI’s key on any issue related to management
functions of the IFI in Shariah requirements,
order to ensure Shariah governance, or
material Shariah Shariah non-compliance
matters could be risks.
smoothly escalated to  BOD is also required to
the BOD provide a regular review on
the quality and frequency of
the engagement with SC
Interaction  BOD to consider  BOD to consider  BOD
between BOD appointing at least one appointing at least one SC  SC
and SC SC member to sit as a member to sit as a board
board member member

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  More detailed guidelines on
how to handle differences in
views between BOD and SC
without underestimating the
integrity of Shariah
requirements
Implementation  Permitted  Requires banks to inform  BOD
of stricter Shariah BNM on any additional  SC
decisions than the restrictions beyond the SAC
SAC BNM rulings rulings, supported by any
documented deliberation
and justification by their SC
SC reappointment  No limit  Maximum 9 years tenure of  SC
and tenure SC member in a single IFI
SC composition  At least five SC  At least five SC members  SC
members  Offers some flexibility
(subject to BNM’s
approval) to accommodate
the small and less complex
IFIs, particularly the
Islamic window or a
foreign branch in Malaysia
– allows for a minimum of
three SC members only
 Does not allow active
politicians to serve as
Shariah Committee
members
SC meetings  At least once in two  At least once in two months;  SC
months but an IFI operating as an
Islamic window or a foreign
branch in Malaysia is
allowed to have the SC
meetings at least twice a year
only
 SC member is required to
attend at least 75% of the
 SC member is
meetings
required to attend at
least 75% of the  The attendance of SC
meetings members at the meeting, by
way other than physical
 Allows SC members
presence, must remain the
to attend the meeting
exception rather than the
via video or telephone
norm. If any, necessary
conferencing where
steps shall be taken to
necessary
safeguard the confidentiality
of the deliberations.
 Does not allow any SC
member to appoint another
person to attend the
meeting on his behalf.
 Only requires that the
majority of the SC members

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  Minimum quorum is who attend each meeting is
two-third, with the Shariah qualified.
majority of Shariah  Any decision of the
qualified members committee shall be made
 Any decision shall based on a simple majority.
only be approved if it  In the case of IFIs which
is voted by at least have only 3 SC members,
two-third of the they have to make sure that
present members, the two Shariah-qualified
with the majority of members are present in all
the voters being Shariah committee
members with Shariah meetings.
backgroun
Presence of BOD  Silent  They are allowed to sit in  BOD
member or senior the SC meeting to provide  SC
management in inputs and insights on any  Senior
SC meeting business, technical or management
operational matters.
 They must not exercise
undue influence that could
hamper the SC from
preserving its professional
objectivity
Knowledge in  To have reasonable  Must continuously develop  BOD
Islamic finance understanding on the and strengthen the  Senior
principles of the understanding of Islamic management
Shariah and its broad finance, as well as keeping
application in Islamic abreast with developments
finance. that may impact Islamic
financial business.

CONCLUSION
This preliminary comparison between SGF 2010 and SGP 2019 reveals that the new policy
emphasizes on effective management of Shariah non-compliance risks through control function
and heightened expectations towards effective Shariah governance and culture. Therefore, the
implication of this study towards academia is validating the improvement and contribution of the
new policy from the previous one. Meanwhile, the implication of this study on the industry stems
from the findings which indicate that the new SGP 2019 is another important step in the
commendable development profile of Islamic banking and finance in Malaysia, which is expected
to strengthen the public confidence about Shariah compliance credibility of Islamic financial
institutions in the country.

154
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