BNM proposes enhancements for Islamic financial institutions

This is because recent development in the sector necessitates greater governance


Bank Negara Malaysia (BNM) has issued an exposure draft to enhance the existing regulatory requirements and expectations on Shariah governance for Islamic financial institutions (IFIs), as the recent development in the sector necessitates greater governance.

The central bank said the key enhancements to the framework include to strengthen the board’s oversight on accountability and responsibilities over Shariah governance, and the requirements for the Shariah committee to provide objective and sound advice to IFIs in line with the Islamic Financial Services Act 2013 (IFSA).

Other amendments include to enhance the expectations for the board and senior management to promote a Shariah-compliant culture and to integrate Shariah governance considerations in business and risk strategies.

“This paper aims to strengthen the effectiveness of Shariah governance implementation within IFIs in response to the growing scale and complexity of Islamic financial business, and the recent policy developments in the area of governance, compliance and risk management,” BNM said in a statement yesterday.

The proposals also detail enhanced regulatory expectations on the quality of internal control functions to ensure effective management of Shariah non-compliance risks.

BNM said these suggestions havetaken into consideration the findings from the Shariah Governance Survey, which was conducted in April 2016, and the feedback received on the Shariah Governance Discussion Paper issued on Nov 15, 2016.

The central bank noted that the institutionalisation of a sound Shariah governance framework would strengthen public confidence in the aims, management and business operations of IFIs.

BNM has invited written feedback on the proposed regulatory requirements, including suggestions on areas to be clarified and alternative proposals that it should consider.

Such feedback should be supported by a clear rationale, accompanying evidence or practical examples — where appropriate — to facilitate greater understanding of its context.

Responses are to be submitted to the central bank at shariahgovernance@ by Dec 11, 2017.

IFIs refer to licensed Islamic banks, licensed takaful operators and professional retakaful operators, licensed banks and licensed investment banks to carry on Islamic banking business and prescribed institutions.

The Shariah Governance Framework for IFIs was introduced in 2011. It played a critical role to support the development of the Islamic finance industry in the country, especially in promoting end-to-end Shariah compliance.

But the growing scale and complexity of Islamic financial business, as well as recent policy developments in the area of governance, compliance and risk management have necessitated further enhancements to be made to the existing framework.

“Key enhancements in this policy document are intended to reinforce a closer integration of Shariah governance considerations in the business and risk strategies of each IFI,” according to the draft exposure document.

“This will further clarify the oversight accountability of the board and all other key organs involved in the implementation of Shariah governance,” said BNM.

The draft document also points out to the reshaping of the composition and role of Shariah committee to strengthen the quality of Shariah decisions or advice that informs the decision-making by those leading IFIs.