Shari'ah Non-Compliance Risk Management and Legal Documentations in Islamic Finance (Hardcover)

Foreword ix

Acknowledgments xi

About the Author xiii

Introduction 1

Chapter 1: Fundamental Concept of Shari'ah and Shari'ah Non- Compliance Risk 5

1.0. Introduction 5

1.1. Concept of Shari'ah 5

1.2. Compliance in the Islamic Financial Institutions: An Overview 6

1.3. Concept of Risk 11

1.4. The Concept of Shari'ah Non-Compliance Risk 12

1.5. Review of the Concept of Shari'ah Non-Compliance Risk 17

1.6. Features of Shari'ah Non-Compliance Risk 19

1.7. Shari'ah Non-Compliance Risk Events 19

1.8. The Shari'ah Basis for Shari'ah Compliance 25

Chapter 2: Shari'ah Compliance in IFSA 2013 and Classification of Shari'ah Non-Compliance Risk 29

2.0. Introduction 29

2.1. Provisions Unique to Islamic Banks in IFSA 2013 29

2.2. Shari'ah Compliance in IFSA 2013 31

2.3. Classification of Shari'ah Non-Compliance Risk 41

Chapter 3: The Major Risk Elements of Shari'ah Non-Compliance Risk and Its Causes in Islamic Finance Operations 43

3.0. Introduction 43

3.1. The Major Risk Elements of Shari'ah Non-Compliance Risk 43

3.2. The Causes of Shari'ah Non-Compliance Risk in Islamic Finance Operations 68

Chapter 4: Tools and Techniques to Identify Incongruence in Shari'ah Compliance 73

4.0. Introduction 73

4.1. Tools 73

4.2. Techniques 83

Chapter 5: Understanding the Shari'ah Requirements for Mitigating the Shari'ah Non-Compliance Risk in Islamic Finance 85

5.0. Introduction 85

5.1. The Fundamental Islamic Principles in Islamic Contracts 85

5.2. The Fundamental Islamic Financial Transactions Used in Islamic Finance 90

Chapter 6: Lines of Defences for Shari'ah Non-Compliance Risk Management 101

6.0. Introduction 101

6.1. The First Line of Defence: Product Owner 101

6.2. The Second Line of Defence: Management of the IFI 107

6.3. The Third Line of Defence: Shari'ah Risk Management 109

6.4. The Fourth Line of Defence: Shari'ah Management 112

6.5. The Fifth Line of Defence: Shari'ah Committee/Board 112

6.6. The Sixth Line of Defence: Board of Directors 123

6.7. The Seventh Line of Defence: Shari'ah Advisory Council (SAC), Bank Negara Malaysia (BNM)/Authorities 129

6.8. The Eighth Line of Defence: Shari'ah Review 130

6.9. The Ninth Line of Defence: Shari'ah Audit 144

6.10. The Tenth Line of Defence: Public 154

Chapter 7: Shari'ah Non-Compliance Reporting 157

7.0. Introduction 157

7.1. Objective 157

7.2. Applicability 158

7.3. Legal Provisions 158

7.4. Reporting Requirements 159

7.5. Reported as Potential Shari'ah Non-Compliance Event 159

7.6. Submission of Reports on Actual Shari'ah Non-Compliance Events 160

7.7. Timeline for Actual Shari'ah Non-Compliance Reporting 160

7.8. Potential Shari'ah Non-Compliance Event 161

7.9. Timeline for Potential Shari'ah Non-Compliance Reporting 161

7.10. No Shari'ah Non-Compliance Event Is Detected 162

7.11. Process Flow for Authentication or Confirmation of Shari'ah Non-Compliance in the IFIS 163

Chapter 8: Legal Documentations in Islamic Finance 165

8.0. Introduction 165

8.1. Introduction to Legal Documentation 165

8.2. Law Related to Islamic Banking 166

8.3. General Principles in Legal Documentation 167

8.4. Legal Documentation: Definition and Shari'ah Concern 167

8.5. Incorporation of Shari'ah Requirements into Legal Documentation 167

8.6. The Main Functions of the Legal Documentation 169

8.7. Areas in Legal Documentation under Consideration and Review 169

8.8. Potential Area of Shari'ah Non-Compliance Risk 190

Chapter 9: Drafting Legal Documents 209

9.0. Introduction 209

9.1. Structure of the Legal Agreement/Contract 209

9.2. Tips for Drafting Text and Additional Clauses 230

9.3. Legalistic Style 231

Chapter 10: Useful Information and Samples of Legal Documentation 233

10.0. Introduction 233

10.1. Sample of an Agreement (Musharakah Agreement in Sukuk Issuance) 233

10.2. Sample of an Offer Letter 241

10.3. Sample of Legal Document Structure 243

10.4. Master Agency Agreement (AIBIM) 246

10.5. Corporate Wakalah Placement Agreement (AIBIM) 253

10.6. Corporate Murabahah Master Agreement 272

10.7. List of the Top Common Audit Shortcomings in Shari'ah Non-Compliance 300

Appendix

The Impact of Non-Shari'ah-Compliance Risk on the IFI, and Checklist 303

A.1. The Impact of Non-Shari'ah-Compliance Risk on the IFI 303

A.2. Major Aspects Governing the Checklist for Non-Shari'ah-Compliant Risk 304

A.3. Checklist for Shari'ah Non-Compliance Risk 305

List of Abbreviations 317

Glossary 321

Bibliography 327

Index 329