1.4 Rule-Making in Modern Islamic Banking & Finance

Rule-Making in Modern Islamic Banking & Finance

Quick Answer: Modern Islamic finance rules are made through collective ijtihad. International bodies such as the International Islamic Fiqh Academy (IIFA) and AAOIFI issue resolutions and standards. National authorities, the BNM Shariah Advisory Council (SAC) and the Securities Commission's SAC, issue binding rulings. Each institution's Shariah committee applies those rulings to its products. In Malaysia, BNM converts SAC rulings into enforceable standards under section 29 of the Islamic Financial Services Act 2013 (IFSA).

Section 1.3 described the classical sources of Shariah and the role of the individual mujtahid. This section covers the second half of the AQIF topic on rule-making: how rulings are produced for banks, takaful operators and capital markets today, and why their legal force in Malaysia is unusually strong.

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1. Why Rule-Making Had to Change

Classical fiqh was developed mainly by individual jurists (ijtihad fardi) answering questions about trade, partnerships and loans. Modern finance raised problems no classical text addresses directly. Examples include electronic contracting, fiat money, deposit insurance, sukuk, capital adequacy, cross-border liquidity, and digital platforms. These questions need expertise in banking, law, accounting and economics as well as fiqh, and markets need consistent answers.

The response has been collective ijtihad (ijtihad jama'i): panels of scholars deliberate together, often with technical experts, and issue a resolution as a body. Collective rulings are more thoroughly researched and harder to "shop around", and they carry institutional authority.

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2. The Three Levels of Rule-Making

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3. The Malaysian Rule-Making Process

Malaysia's model is centralised and statutory. A typical path from a new issue to a binding rule:

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Key legal links:

• IFSA s.28(2): compliance with an SAC ruling is deemed compliance with Shariah.
• Central Bank of Malaysia Act 2009 (CBA) s.55: BNM and Islamic financial institutions may consult the SAC on Shariah matters. BNM's referral manual (Manual Rujukan Institusi Kewangan Islam kepada Majlis Penasihat Syariah) sets out the procedure.
• CBA s.57: a ruling given on a reference binds the institution that sought it, and binds a court or arbitrator that referred the question.
• CBA s.58: where an institution's Shariah committee rules differently from the SAC, the SAC's ruling prevails.
• IFSA s.29: BNM may specify standards on Shariah matters in accordance with SAC rulings.

Rulings Become Standards

Since the early 2010s BNM has issued a Shariah contract-based regulatory framework: a policy document for each major contract. Examples include Murabahah, Musyarakah, Mudarabah, Ijarah, Istisna', Tawarruq, Wa'd, Wakalah, Kafalah, Rahn, Hibah, Qard, Wadiah, Bai' Inah, and Bai' al-Sarf (2018). Each document has two parts:

• Shariah requirements: the essential features that make the contract valid, drawn from SAC rulings; and
• Operational requirements: governance, structuring, risk management, disclosure and conduct.

Paragraphs marked "S" are standards that must be complied with, and non-compliance may lead to enforcement action. Paragraphs marked "G" are guidance.

SAC Rulings Are Published

SAC resolutions are published, for example in BNM's compendium Shariah Resolutions in Islamic Finance and in statements after SAC meetings. Courts and arbitrators must take published rulings into consideration (CBA s.56). This creates predictability that is rare in other jurisdictions. Section 9.2 discusses the court cases that confirmed the system.

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4. Methods Used in Modern Rule-Making

Rule-making bodies draw on the classical toolkit introduced in section 1.3, applied systematically:

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5. BNM's Hajah and Darurah Policy Document (2024)

Because need-based exceptions can be abused, BNM issued a Hajah and Darurah policy document on 3 January 2024, effective 2 January 2025. It applies to exceptions under the fiqhiyyah perspective. Permanent, text-based permissions such as ijarah and salam (the usuliyyah perspective) need no further deduction and are outside its scope.

Four preconditions must all be met:

1. Certainty: the hardship is certain or highly probable, not a mere assumption.
2. Deviation required: removing the hardship requires departing from an existing Shariah principle or ruling.
3. No practical alternative: there is no Shariah-compliant alternative, or the available alternative is impractical in the situation.
4. Impact: the exception must not cause equal or greater harm to stakeholders, assessed through fiqh al-muwazanah (weighing benefits and harms).

An institution may not invoke hajah or darurah for hardship arising solely from risk to its profitability or from weaknesses in its own governance and internal controls.

The policy document recognises three categories:

• Hajah type 1: hardship from widespread, hard-to-avoid situations ('umum al-balwa) or accepted commercial custom. The SAC rules without specific conditions, and the ruling stands until overridden.
• Hajah type 2: hardship of a specific institution or person short of darurah. The SAC rules with specific conditions or limits.
• Darurah: extreme stress linked to recovery or resolution actions. The ruling is applied temporarily and proportionately, limited in duration and amount.

The document's own examples include ceding takaful risk to a conventional reinsurer when retakaful capacity is insufficient, and T+2 settlement in currency exchange where immediate exchange is not practised.

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6. Strengths and Limits of the Model

• Strengths: legal certainty, consistent products across the market, reduced fatwa shopping, and courts bound by expert rulings.
• Limits: rulings can differ from those of other jurisdictions (for example on bai' inah, tawarruq and the sale of debt), which complicates cross-border products. Centralisation also places great responsibility on a small national council, so its research quality and independence matter. Section 9.5 discusses these challenges further.