9.3 Institutional Shariah Committee Roles & Operations
Key Takeaways
BNM's Shariah Governance Policy Document (SGPD 2019), issued 20 September 2019 and effective 1 April 2020, superseded the 2010 Shariah Governance Framework. It strengthens board accountability, Shariah committee independence, and conflict-of-interest controls.
A Shariah committee must have at least five members (at least three for an Islamic window or foreign branch). A majority, including the chairman, must be Shariah-qualified: at least a bachelor's degree in Shariah including usul al-fiqh or fiqh muamalat.
A member may not accept appointment in more than one licensed Islamic bank, one licensed takaful operator and one prescribed development financial institution. Members may serve the same institution for no more than nine years and may not be active politicians.
Core SC mandates include advising the Board, providing written sign-offs on end-to-end product documentation and marketing materials, assessing control functions, and issuing the statutory Annual Shariah Committee Report.
Committees must meet at least once every two months, and each member must attend at least 75% of meetings. A majority of Shariah-qualified members must be present for a quorum, and decisions are made by simple majority with minutes recording rationale and dissent.
Institutional Shariah Committee Roles & Operations
Within an Islamic financial institution, the Shariah Committee (SC) serves as the institutional guardian of religious integrity, ethical conduct, and legal validity. Operating as an independent governance organ, the SC ensures that every financial product, operational contract, treasury transaction, and commercial initiative complies rigorously with Shariah principles and statutory guidelines.
To standardize and strengthen institutional Shariah governance, Bank Negara Malaysia issued the landmark Shariah Governance Policy Document (SGPD 2019) on September 20, 2019, which took effect on April 1, 2020, completely superseding the pioneering Shariah Governance Framework for Islamic Financial Institutions (SGF 2010). The SGPD 2019 introduced significant enhancements designed to elevate corporate accountability, eliminate conflicts of interest, and professionalize Shariah committee operations.
Key Enhancements in SGPD 2019 vs. SGF 2010
The transition from SGF 2010 to SGPD 2019 reflected the growing maturity and systemic importance of Malaysia's Islamic finance sector. The policy document shifted the regulatory focus from structural compliance toward substantive board-level accountability and qualitative governance outcomes:
- Board Accountability: Explicitly designates the Board of Directors as holding ultimate accountability for Shariah governance, eradicating the misconception that Shariah compliance is solely the responsibility of the Shariah Committee.
- Enhanced Independence & Objectivity: Imposes rigorous conflict-of-interest controls, limits executive management influence, and mandates direct reporting lines from the SC to the Board.
- Fit and Proper Rigor: Establishes comprehensive competency assessments, fit-and-proper vetting, and mandatory continuing professional development (CPD) requirements for Shariah scholars.
- Synergy Between Board Committees and SC: Formalizes structured collaboration between the Shariah Committee and Board-level committees—particularly the Board Audit Committee (BAC) and Board Risk Committee (BRC)—to ensure seamless oversight of internal control functions.
- Proportionality and Operational Effectiveness: Adapts governance expectations based on the scale, complexity, and risk profile of the institution while maintaining uncompromising baselines for Shariah compliance.
Composition and Appointment Criteria for the Shariah Committee
To ensure institutional credibility, depth of juristic deliberation, and operational efficiency, BNM mandates strict structural and qualitative eligibility criteria for Shariah Committee appointments:
1. Numerical Composition and Shariah Majority
- Minimum Size: An IFI must appoint a Shariah Committee consisting of at least five (5) members. An Islamic window or a foreign branch in Malaysia needs at least three. A financial group may apply to BNM for a single Shariah committee to serve the whole group.
- Shariah Qualified Majority: A majority of SC members, and the chairman, must be Shariah-qualified persons, holding at least a bachelor's degree in Shariah that includes study of Usul al-Fiqh (principles of Islamic jurisprudence) or Fiqh al-Muamalat (Islamic commercial jurisprudence).
- Multidisciplinary Diversity: To foster multidisciplinary scrutiny of complex modern banking products, the remaining minority of the committee may comprise professionals holding recognized qualifications and senior experience in related fields—such as conventional banking, finance, accountancy, economics, or commercial law. However, these experts cannot outvote or form a majority over the Shariah-qualified scholars.
2. Fit and Proper Criteria
Under BNM's Fit and Proper Policy Document, every prospective Shariah Committee member must undergo rigorous screening before appointment and throughout their tenure. Candidates must demonstrate:
- Probity, Personal Integrity, and Reputation: Exemplary moral standing, honesty, financial fairness, and the absence of any criminal convictions, civil fraud judgments, or regulatory censure.
- Competency and Sound Judgment: Proven scholarly track record, profound understanding of modern financial mechanisms, analytical capability, and intellectual independence.
- Financial Integrity: Freedom from personal bankruptcy, loan defaults, unsatisfied judgments, or financial mismanagement.
- Mental Capacity and Time Commitment: Sound cognitive capacity and the practical ability to devote substantial time to prepare for and participate in committee deliberations.
3. Term of Appointment, Cooling-Off Periods, and Industry Exclusivity
- Prior Regulatory Approval: No individual can be appointed or reappointed to a Shariah Committee without BNM's prior written approval (IFSA s.31), and an IFI needs BNM's prior written approval before terminating a member (s.33(3)). Resignations must be notified to BNM within 14 days.
- Tenure Limit: A member must not serve the same IFI for more than nine years, which guards against familiarity with, and capture by, management. Applications to appoint or reappoint members must reach BNM at least three months before the candidate takes up the role or the current tenure expires.
- Independence Rules: Neither a member nor an immediate family member may have been an executive of the IFI within the past two years, be a substantial shareholder, executive director or senior officer of the IFI or its affiliates, or have had a significant business relationship with them in the past two years. A member must not be an active politician.
- Industry Exclusivity Restriction: Under SGPD 2019 (paragraph 12.7), an SC member must not accept appointment in more than one licensed Islamic bank, one licensed takaful operator and one prescribed development financial institution. A scholar may therefore sit on one of each, but cannot serve concurrently on:
- two licensed Islamic banks;
- two licensed takaful operators; or
- two prescribed development financial institutions.
This restriction eliminates severe structural conflicts of interest, prevents the cross-institutional leakage of proprietary financial engineering strategies, protects client confidentiality, and curbs the systemic concentration of scholarly authority among a small circle of jurists.
Core Roles and Responsibilities of the Shariah Committee
The Shariah Committee exercises five primary statutory responsibilities under SGPD 2019:
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| Core Mandates of the Shariah Committee |
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| 1. Advisory & Rulings | Issues binding decisions on Shariah matters |
| 2. Endorsement & Sign-off| Approves products, legal contracts & marketing|
| 3. Control Oversight | Scrutinizes Shariah Review & Audit reports |
| 4. Remediation Guidance | Formulates rectification plans for SNC events|
| 5. Annual Reporting | Publishes formal opinion in financial reports|
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1. Advising the Board and Management
The SC provides authoritative advice and binding decisions to the Board of Directors and Executive Management on all operations, treasury activities, liquidity management structures, and business initiatives, ensuring full alignment with SAC BNM resolutions.
2. Endorsement and Formal Sign-Off
The SC exercises statutory gatekeeping power over all commercial activities. An IFI cannot launch or execute any product, service, or campaign without prior written endorsement from the SC. This sign-off encompasses:
- Product Structuring: Validating underlying Shariah concepts (Murabahah, Tawarruq, Ijarah, Istisna', Musharakah), transaction sequence flows, and risk-allocation mechanics;
- Legal Documentation: Reviewing and approving master agreements, facility agreements, security charges (Rahn), agency appointments (Wakalah), and customer terms and conditions;
- Operational Manuals & IT Systems: Verifying that standard operating procedures, calculation algorithms (such as daily profit accruals and early settlement rebate/Ibra calculations), and core banking parameters execute transactions in the lawful sequence; and
- Marketing & Promotional Materials: Ensuring that advertisements, product brochures, website copy, and sales scripts represent terms accurately without deceptive exaggeration or misleading claims.
3. Assessment of Shariah Control Functions
The SC reviews and approves the annual plans, scopes, and methodologies of the internal Shariah Review and Shariah Audit functions. The SC objectively scrutinizes quarterly review findings and periodic audit reports, directing management to resolve identified control deficiencies.
4. Remediation of Shariah Non-Compliance
When potential Shariah non-compliant incidents occur, the SC evaluates the facts, determines whether a statutory SNC event has materialized, decides on the validity of affected contracts, and formulates the mandatory rectification and purification strategy.
5. The Annual Shariah Committee Report
The annual report must include disclosures by the board on its oversight of Shariah governance and by the SC on its responsibilities and its opinion on the state of the IFI's Shariah compliance. The SC's disclosure must be signed by at least two members. This public document provides shareholders, depositors, and regulators with an objective, formal opinion confirming whether the IFI's contracts, investments, and overall operations complied with Shariah principles throughout the financial year, explicitly disclosing any SNC events and the charitable purification of non-compliant income.
Operational Requirements and Meeting Governance
To preserve rigorous governance, SGPD 2019 establishes detailed operational protocols for committee administration:
- Meeting Quorum and Decisions: For a quorum, a majority of the Shariah-qualified members must be present at each meeting. Decisions are made by simple majority. A member with a conflict of interest must excuse himself from the discussion and abstain from voting.
- Attendance: Each member must attend at least 75% of meetings in a financial year and may not send a substitute. Virtual attendance should be the exception, not the norm.
- Meeting Frequency: The SC must meet at least once every two months, or at least twice a year for an Islamic window or foreign branch, and more often if needed. The number of meetings and each member's attendance are disclosed in the annual report.
- Meeting Minutes and Scholarly Rationale: Comprehensive, professional minutes must be maintained for every meeting. Minutes must record detailed discussions, specific Fiqh sources and legal maxims cited, inquiries posed to management, action items, and any dissenting votes or minority scholarly opinions. These records must be made available immediately upon inspection by Bank Negara Malaysia examiners.
- Direct Reporting Lines: The Shariah Committee reports directly to the Board of Directors. The SC Chairman has unhindered, direct access to the Board Chairman, guaranteeing that scholarly findings and compliance concerns cannot be filtered, softened, or suppressed by executive management.
Tripartite Governance Matrix: Board vs. SC vs. Management
Effective Shariah governance requires clear demarcation of authority across the three internal governance organs:
| Governance Dimension | Board of Directors (BOD) | Shariah Committee (SC) | Executive Management (CEO/C-Suite) |
|---|---|---|---|
| Primary Role | Ultimate fiduciary oversight and governance accountability | Independent Shariah decision-making and product endorsement | Operational day-to-day execution and business administration |
| Authority on Shariah | Must give due regard to SC decisions and resolve any difference through a documented conflict-resolution mechanism | Decides Shariah matters within the IFI, subject to SAC rulings | Executes transactions strictly within parameters approved by SC |
| Resource Allocation | Formally approves budgets, staffing, and remuneration for Shariah units | Identifies resource needs and recommends training/tools | Allocates operational personnel and manages day-to-day administrative budgets |
| Control Oversight | Oversees internal controls via Board Audit & Risk Committees | Approves review/audit scopes; assesses Shariah compliance findings | Implements internal controls, remedial actions, and process workflows |
| SNC Responsibility | Oversees rectification of Shariah non-compliance and the internal control framework | Advises on whether an event is SNC and on rectification and purification | Reports potential or actual SNC events to the board and SC promptly; the IFI must notify BNM immediately (IFSA s.28(3)) |
| Reporting Line | Reports to shareholders and regulatory authorities (BNM) | Reports functionally and directly to the Board of Directors | Reports directly to the Board of Directors and Board Committees |
Under Bank Negara Malaysia's Shariah Governance Policy Document (SGPD 2019), what are the mandatory baseline composition rules for an institutional Shariah Committee?
At least 3 members, with all members holding professional accounting certifications
At least 7 members, with the majority possessing conventional commercial law degrees
At least 5 members, with a majority, including the chairman, holding Shariah qualifications in fiqh or usul
Exactly 4 members, divided equally between Shariah jurists and executive management directors
Dr. Amin is a distinguished Shariah scholar currently serving as an active Shariah Committee member at Bank Muamalat Malaysia Bhd (a licensed Islamic commercial bank). Under SGPD 2019 conflict-of-interest regulations, which appointment is strictly prohibited?
Serving as an academic professor of Islamic jurisprudence at a public Malaysian university
Serving as an independent Shariah adviser to an international sukuk issuance listed on the London Stock Exchange
Serving on the Shariah Advisory Body of a government zakat distribution foundation
Accepting a concurrent seat on the Shariah committee of CIMB Islamic, another licensed Islamic bank
Under BNM's Shariah Governance Policy Document (SGPD 2019), what is required for a valid quorum at a Shariah Committee meeting?
Any three members, whatever their qualifications
A majority of the Shariah-qualified members must be present
The chairman of the board must attend as an observer
All members must be physically present, with no absences allowed
Sections you finish are checked off in the contents.