9.5 Issues & Challenges in Implementing Shariah Governance
Key Takeaways
The core challenges of Shariah governance are independence, competence, confidentiality, consistency, enforceability, operational execution, and the debate over form versus substance.
Shariah committee members are appointed and paid by the institution they oversee. Malaysia manages this with BNM approval of appointments, independence and cooling-off rules, a nine-year tenure cap, and limits on multiple appointments.
In Shamil Bank of Bahrain v Beximco Pharmaceuticals (2004), the English Court of Appeal held that a clause making a contract 'subject to the principles of the Glorious Sharia'a' did not make Shariah the governing law, so English law alone applied.
In Investment Dar v Blom Developments Bank (2009), a Kuwaiti institution argued in the English High Court that its own wakalah contract was void as Shariah non-compliant. The case shows how Shariah non-compliance risk can become a legal defence.
Malaysia's responses include the binding national SAC, IFSA section 28, SGPD 2019, published rulings and standards, and professional certification for Shariah advisers and auditors.
Issues & Challenges in Implementing Shariah Governance
Quick Answer: Shariah governance depends on scholars who are independent, competent and consistent, on rulings that courts will enforce, and on operations that follow approved structures in practice. The recurring problems are conflicts of interest, too few qualified scholars, inconsistent fatwas across institutions and countries, courts that will not apply Shariah as a governing law, operational errors, and the criticism that some approved products are Islamic in form only. Malaysia's centralised, statutory model was built largely to address these problems.
The IFSB's guiding principles (IFSB-10) identify four attributes a Shariah governance system needs: competence, independence, confidentiality and consistency. The challenges below are best understood as threats to those attributes, plus the legal and operational problems that arise when rules meet the real world.
1. Independence and Conflicts of Interest
The issue. Shariah committee members are appointed, renewed and paid by the institution whose products they approve. Management may pressure scholars to approve products quickly or to find a permissive view (fatwa shopping). A scholar who rejects too many products may fear not being reappointed.
Malaysian safeguards (IFSA 2013 and SGPD 2019):
- BNM approval: appointment and reappointment need BNM's prior written approval, and termination needs BNM's prior approval.
- Independence rules:
- no executive role in the institution in the past two years;
- no substantial shareholding or significant business relationship;
- no active politicians.
- Tenure: a cap of nine years with the same institution.
- Board protection: the board must keep the committee free from undue influence and give it access to information and outside experts at the institution's cost.
- Conflicts: a conflicted member must abstain, and dissent is recorded in the minutes.
2. Competence and the Concentration of Scholars
The issue. A Shariah adviser needs fiqh muamalat and usul al-fiqh, Arabic, and an understanding of banking, law, accounting and risk. Few people have all of these. Internationally, a small group of prominent scholars has sat on many boards at once, which raises questions about time, confidentiality and concentrated influence.
Responses:
- SGPD 2019 requires a Shariah-qualified majority and a Shariah-qualified chairman.
- A member may hold no more than one appointment each in a licensed Islamic bank, a licensed takaful operator and a prescribed development financial institution.
- Members must attend at least 75% of meetings.
- Directors and senior management must keep building their Islamic finance knowledge.
- Professional certification has grown, for example IBFIM's Certified Professional Shariah Auditor (CPSA) and AAOIFI's Certified Shari'a Adviser and Auditor (CSAA), and so has university training.
3. Confidentiality vs. Transparency
The issue. Committee deliberations involve commercially sensitive product designs, so confidentiality is necessary. Yet customers, investors and the public need to know that products are compliant and that problems are fixed. Too much secrecy undermines trust; too much disclosure exposes strategy.
Responses:
- SAC rulings are published.
- Under SGPD 2019, the annual report must contain the board's statement on Shariah governance and the Shariah committee's opinion, signed by at least two members, including disclosure of any material Shariah non-compliance and its rectification.
- The number of committee meetings and each member's attendance must also be disclosed.
4. Consistency and Standardisation
The issue. Different scholars and schools reach different conclusions. Within a country, conflicting fatwas confuse customers and invite fatwa shopping. Across countries, products accepted in one market may be rejected in another, which fragments the market and raises costs. Examples include bai' inah, organized tawarruq, and the sale of debt at a discount.
Responses:
- In Malaysia, the SAC's rulings prevail over institutional committees (CBA 2009 s.58).
- BNM's contract-based policy documents standardise the essential features of each contract.
- Internationally, AAOIFI Shari'ah Standards and IIFA resolutions provide reference points.
- Some jurisdictions, such as the UAE with its Higher Sharia Authority at the central bank, have moved towards a central authority.
- Full harmonisation across jurisdictions remains elusive.
5. Legal Enforceability and Conflict of Laws
The issue. An Islamic finance contract is enforced by ordinary courts applying national law. If a court will not apply Shariah, or a party argues that its own contract is non-compliant, Shariah governance can be undermined.
Two English cases illustrate the risk:
| Case | What happened | Lesson |
|---|---|---|
| Shamil Bank of Bahrain EC v Beximco Pharmaceuticals Ltd [2004] EWCA Civ 19 | The financing agreements said: "Subject to the principles of the Glorious Sharia'a, this Agreement shall be governed by and construed in accordance with the laws of England." The borrowers argued the murabahah contracts were disguised interest loans invalid under Shariah. | The Court of Appeal held that English law alone governed. Under the Rome Convention a contract may choose only the law of a country, and the reference to Shariah principles was too general to be applied. Shariah compliance was the bank's own commitment, not a defence open to the borrower. |
| Investment Dar Co KSCC v Blom Developments Bank SAL [2009] EWHC 3545 (Ch) | A Kuwaiti Islamic investment company argued that its own wakalah deposit contract was outside its powers because it was not Shariah-compliant, so it need not repay. | The High Court held the argument raised a triable issue and refused summary judgment. Shariah non-compliance risk can become a legal defence that threatens counterparties and reputations. |
Malaysia's response: Islamic finance disputes go to the civil courts, which must consider published SAC rulings or refer Shariah questions to the SAC, and are bound by the answer (CBA 2009 ss.56–57). The Federal Court upheld this system in JRI Resources (2019). This greatly reduces the room for the arguments used in Shamil and Investment Dar.
6. Operational Shariah Non-Compliance
The issue. A product can be correctly approved and still be executed wrongly. Common examples:
- selling a commodity before the bank owns it;
- signing the agency and sale contracts at the same moment;
- miscalculating ibra' or late payment charges;
- system parameters that do not follow the approved sequence.
A 2015 survey by researchers at the International Institute of Advanced Islamic Studies (IAIS) Malaysia found that an improper sequence of contracts in tawarruq was the most frequent Shariah non-compliance event in Malaysian Islamic banks.
Responses:
- IFSA s.28 requires immediate notification, cessation, and a rectification plan.
- SGPD 2019 requires Shariah risk management, Shariah review and Shariah audit, with income purification for any breach.
- BNM policy documents set operational requirements, such as documentation, evidence of sequence, and staff training.
7. Cost and Proportionality
The issue. A full Shariah governance structure is costly: a committee of at least five members, a secretariat, review, risk and audit functions, training and systems. That is a heavier burden for small institutions and windows.
Response: SGPD 2019 applies proportionately. It requires a minimum of three committee members and two meetings a year for Islamic windows and foreign branches, and a financial group may apply for a single Shariah committee to serve the whole group.
8. Form vs. Substance
The issue. Even a fully compliant governance process can approve structures that replicate conventional outcomes, such as tawarruq-based cash financing that mirrors an interest-bearing loan. Critics argue this weakens the moral case for Islamic finance (sections 6.2 and 2.1).
Responses:
- BNM's value-based intermediation (section 7.2) pushes institutions beyond technical compliance towards positive impact.
- BNM's Hajah and Darurah policy document limits need-based exceptions (section 1.4).
- The SAC has shown it will correct market practice, as with its 2019 ruling against the traditional ar-rahnu structure (section 5.2).
- The SC's 2026 guidance asks sukuk advisers to consider maqasid outcomes, not only compliance.
Summary: Challenges and Malaysian Responses
| Challenge | IFSB-10 attribute | Main Malaysian response |
|---|---|---|
| Pressure on scholars | Independence | BNM approval; independence rules; nine-year cap; abstention on conflicts |
| Scarce expertise, concentration | Competence | Qualification rules; appointment limits; certification and CPD |
| Secrecy vs. disclosure | Confidentiality | Published SAC rulings; signed Shariah committee opinion in the annual report |
| Conflicting fatwas | Consistency | SAC prevails (CBA s.58); contract-based policy documents |
| Court enforcement | (Legal) | SAC reference binding on courts (CBA ss.56–57); JRI Resources (2019) |
| Execution errors | (Operational) | IFSA s.28 duties; three control functions; purification |
| Form over substance | (Ethical) | VBI; Hajah and Darurah policy document; SAC rulings on market practice |
In Shamil Bank of Bahrain v Beximco Pharmaceuticals (2004), the contract stated it was 'subject to the principles of the Glorious Sharia'a' and governed by English law. What did the English Court of Appeal decide?
That the Shariah Advisory Council of Bank Negara Malaysia must rule on the contract
That the contract was void because it combined Shariah and English law
That English law alone governed: only a country's law can be chosen, and the Shariah reference was too general
That the borrower could avoid repaying because the murabahah was a disguised interest-bearing loan under Shariah principles
A prominent Shariah scholar already sits on the Shariah committee of one licensed Islamic bank and one licensed takaful operator. Under SGPD 2019, which additional appointment is prohibited?
A seat on the Shariah committee of a second licensed Islamic bank
A seat on the Shariah committee of a prescribed development financial institution
A lecturing post at a public university
Membership of a university's research ethics panel
What does the Investment Dar v Blom Developments Bank case (2009) illustrate about Shariah governance?
That English courts automatically refer any Shariah question in a financing dispute to AAOIFI's Shari'ah Board
That a party can argue its own contract is non-compliant to avoid paying, so SNC risk is legal risk
That wakalah contracts are always void under English law
That Shariah committees can never be sued in Kuwait
Sections you finish are checked off in the contents.