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Abstract
For Islamic financial institutions, ensuring that their activities, products and services are in compliance with the Sharīʿah (Islamic law) is paramount for many reasons. Among the most important is that it is a means of attaining and maintaining public confidence. With the introduction of Islamic Financial Services Act (IFSA) 2013 and new policies in Malaysia, the industry’s awareness of such requirement has also increased. Stakeholders are concerned and keen to ensure that the full lifecycle of Islamic financial products and services are compliant with the Sharīʿah. Sharīʿah non-compliance (SNC) is seen as a serious risk that has to be properly managed. Bank Negara Malaysia (BNM) has introduced policies dealing with the way to report and treat SNC events in financial transactions or business activities of Islamic financial institutions. At first glance, the approach laid down in those policies seems holistic. It appears capable of covering all SNC events and providing the best “cure” to all issues as it requires the practice, and similar practices, to cease immediately until the matters are rectified in the manner approved by the board of directors (BoD) of the concerned institution. The danger of applying a one-size-fits-all approach, however, is that there are instances where a different approach is more appropriate. Furthermore, requiring a financial institution to cease a practice or similar practices while waiting for the BoD’s approval of a rectification plan—a step suggested in the BNM policies—is not warranted and may not be necessary for events of a certain nature. Hence, this paper aims to revisit the issues related to the reporting and treatment of SNC events by introducing a classification of the SNC events. Furthermore, it proposes that the reporting manner and treatment of SNC events be commensurate with and correspond to the events as classified.
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