Potential Shariah Non-compliance Determinant Factors: A Guidance for Shariah Control Function of Islamic Financial Institution in Malaysia

Islamic banking is distinguished from conventional banking by its adherence to the principles of Shariah and it is perceived as a Shariah compliant financial intermediary which carry the image of Islam in providing the financial solution to the public especially for Muslim. Furthermore, as compared to its counterpart, Islamic banking is exposed to an additional risk that is peculiar to its operation which is Shariah non-compliance (SNC) risk. With that said, proper management of SNC risk is vital for Islamic banking since the impact of the risk could not just possibly affecting the financial but also the image its carry. One of the governance aspects in managing the SNC risk is the capability of its officer to identify, assess and report the SNC incident. In this regard, Bank Negara Malaysia (BNM) through its Operational Risk Integrated Online Network (ORION) policy document requires Potential SNC event and Actual SNC event to be reported to BNM. Referring to the latest ORION policy document issued in 2021, BNM has removed the requirement for a Potential SNC to be confirmed by a “qualified Shariah officer” and replaced with the “officer within Shariah control function” which could include officer with and without Shariah study background. Through this amendment, it raised question on the capability of the officer without Shariah study background to assess and subsequently confirm the incident as Potential SNC. This paper shall attempt to analyse the factor which contribute to Shariah non-compliance event in Islamic banking and develop a pragmatic parameter for the officer within Shariah control function as guidance for confirmation of Potential SNC event. This study adopted qualitative and case study approach focusing on one Islamic bank in Malaysia. The suggested parameter of Potential SNC event is based on the study of Shariah reasoning behind the decision of Shariah Committee for the Actual SNC events disclosed in the annual report of
Islamic Financial Institution.