1. Mahyuddin Khalid
emkay@salam.uitm.edu.my
ISLAMIC FINANCIAL
LEGAL FRAMEWORK
SHARIAH ADVISORY COUNCIL (SAC)

2. CONTENT
2
 INTRODUCTION
 DEFINITION
 SAB/SSC BEFORE AMENDMENT OF CBA 2003
 SAC OF BAFIA
 AMENDMENT OF CBA 2003
 SHARIAH ADVISORY COUNCIL
 APPOINTMENT OF SAC
 SECRETARIAT OF SAC
 RULINGS OF SAC
 FUNCTIONS OF SAC
 ADMINISTRATION OF JUSTICE
 MEMBERS OF SAC
 PRODUCTS DEVELOPMENT AND ENHANCEMENT
 SHARIAH GOVERNANCE
 CONCLUSION

3. INTRODUCTION
3
 It is mandatory for every Islamic bank to have a
SAC/SAB which plays a crucial role and
responsibility in ensuring the Islamic bank‟s
compliance with the principle of Shariah in its
operations.
 The scope of Shariah compliance is to comply
with the concepts and operations of Islamic
banks.
 The underlying concept of the products,
structures, term sheets, documentations,
accounting and operational procedures must
comply with Shariah principles
 It is important to ensure the existence of a single

4. INTRODUCTION
4
 The establishment of the SAC/SSB in some
jurisdictions is a statutory / legal requirement by
the country.
 In countries where there is no specific Islamic
banking law, the provision is made through IFI‟s
articles of association without any force of law.
 The Higher Religious Supervisory Board of the
International Association of Islamic Banks (IAIB)
requests that all IFI to appoint a Religious
Supervisory Board in order to render binding
decisions in conformity with Shariah.
 Furthermore, the Board decrees that IFI which
does not adhere to the rules will not be able to
claim to be operating according to Shariah.

5. DEFINITION
5
 AAOIFI:
 An independent body of specialised jurists in fiqh muamalat;
may include a member other than those specialised in fiqh
muamalat but who should be an expert in the field of Islamic
financial institutions and with the knowledge of fiqh muamalat
 BIMB:
 “A Religious Supervisory Council whose members would be
made up of Muslim religious scholars in the country to advise
on the operations of its banking business in order to ensure that
they do not involve any element which is not approved by the
Religion of Islam”
 “A group of Shariah experts whose responsibility is to
monitor and supervise the operations of Islamic financial
institutions in order to ensure that it does not contravene
Shariah principles.”
 It is clear that SAC/SSB is a body set up by the Islamic
bank‟s authorities to ensure the operations and activities of
the bank are Shariah compliant.

6. SAB/SSC BEFORE CBA 2003
6
 Several types of SAB/SSC in Malaysia under
various legal frameworks before amendment
of CBA 2003:
 Shariah Advisory Board (SAB) of Islamic bank -
IBA 1983
 Shariah Supervisory Council (SSC) of Takaful
operator - Takaful Act 1984.
 Shariah consultant for Islamic Banking Scheme
(SPI/SPTF) banks - BAFIA 1989
 Shariah Advisory Board (SAB) of savings and
development institutions which participated in
the SPI - Development Financial Institutions Act
2002 (DFIA)

7. SAC OF BAFIA
7
 The Shariah Advisory Council (SAC) of the BNM
was established under the BAFIA l989 to advise
BNM and IBS banks.
 Since the SAC was set up under the BAFIA, its
jurisdiction was limited to the banks and financial
institutions under BAFIA.
 It is not applicable to Islamic banks, Takaful
operators as well as savings and development
institutions
 The SAB and the SAC were totally independent
of each other and need to be regulated under a
supreme SAC to avoid the divergence of
opinions which might lead to confusion.

8. AMENDMENT OF CBA 2003
8
 CBA 1958 of the BNM was amended in 2003 to
enhance the role and functions of the SAC of the
BNM.
 The amendment included:
 new section 16B which provided for the
establishment of the SAC under the CBA for the
purpose of advising the BNM concerning matters
related to Shariah that affect all Islamic banking and
financial matters.
 new section 13A after section 13, which enables
Islamic banks to acquire advice from the SAC which
Is established under subsection 16B(l) of the CBA
and the advice given must be followed by the Islamic
banks.
 subsection 16B (1) vests the authority to the BNM to
establish the SAC and to clarify the jurisdiction and
function of the SAC

9. AMENDMENT OF CBA 2003
9
 With the amendment of the CBA in 2003, the role of the
SAB in IFI and its relation with the SAC need to be
streamlined and rationalised.
 SAB would act as Shariah advisors for particular institutions
only. It will play a complementary role to the SAC of the
BNM.
 BNM has issued the Guidelines on the Governance of
Shariah Committee for Islamic Financial Institutions.
 The Guidelines shall be applicable to all Islamic banks, IBS
banks, development institutions and Takaful operators.
 The objectives of these guidelines are:
 to set out the rules, regulations and procedures in the
establishment of a Shariah Committee;
 to define the role, scope of duties and responsibilities of a
Shariah Committee; and
 to define the relationship and working arrangement between a
Shariah Committee and the SAC of BNM.

10. SHARIAH ADVISORY COUNCIL
10
 SAC is defines as “the Shariah Advisory Council on Islamic
finance established under section 51”
 Section 51(1) allocates the authority of the BNM to establish
the SAC and clarifies its jurisdiction and functions as
follows:
 “The Bank may establish a SAC on Islamic Finance which shall
be the authority for the ascertainment of Islamic law for the
purpose of Islamic financial business.”
 Section 52(1) provides that the SAC shall have the following
functions:
 to ascertain the Islamic law on any financial matter and issue a
ruling upon reference to it in accordance with this part;
 to advise the Bank on any Shariah issue relating to Islamic
financial business, the activities or transactions of the Bank;
 to provide advice to any Islamic financial institution or any other
person as may be provided under any written law.

11. APPOINTMENT OF SAC
11
 According AAOIFI standard, the authority to appoint
members of the SSB must be vested in the Annual
General Meeting (AGM) of all shareholders of the
institution.
 The reason for this is to ensure that the members of
the SSB free from any undue influence of the
management board because the latter does not have
the authority to appoint or to dismiss them.
 It is acceptable for the management board to
propose the names of prospective members of the
SSB to the AGM for deliberation and endorsement .
 The rationale of AAOIFI‟S standard is, to prevent any
undue influence of the management board on the
Shariah advisers, which might exist if the former
were to be given the authority to appoint.

12. APPOINTMENT OF SAC
12
 However, if the appointment of the SSB is
now to be undertaken by the Supreme
Shariah board in the country, the issue of
undue influence by the management will
cease to be relevant.
 The role and functions of the SAB and SAC
are not mentioned clearly either by the IBA,
BAFIA or the CBA.

13. APPOINTMENT OF SAC
13
 Section 53 (1) clarify the appointment and the
qualifications of the SAC members:
 “The YDPA may, on the advice of the Minister
after consultation with the Bank. appoint persons
who are qualified or have knowledge or
experience in the Shariah and in banking,
finance, law or such other related disciplines as
members of the SAC”
 Section 53 (2) enable the Judges of the High
Court, Court of Appeal, Federal Court or Shariah
Appeal Court to be appointed as members of the
SAC after being consented by the Chief Justice
or the Chief of the Shariah Court respectively.

14. SECRETARIAT OF SAC
14
 Section 54 (a) Provision to establish a
secretariat and such other committees as it
considers necessary to assist the Shariah
Advisory Council in carrying out its functions
 Section 54 (b) To appoint any officer of the
Bank or any other person to be a member of
the secretariat or such other committees.

15. RULINGS OF SAC
15
 Section 55 provides that BNM should obtain advice
from the SAC in all matters relating to the Islamic
financial business.
 Section 55(1) : “The BNM shall consult the Shariah
Advisory Council on any matter:
 relating to Islamic financial business;
 or the purpose of carrying out its functions or conducting
its business or affairs under this Act or any other written
law In accordance with the Shariah,
 Section 55(2) : “Any Islamic financial institution in
respect of its Islamic financial business, may:
 refer for a ruling;
 seek the advice, of the SAC on the operations of its
business in order to ascertain that it does not involve any
element which is inconsistent with the Shariah.

16. REFERENCE TO RULINGS OF SAC
16
 Similarly, Islamic financial institutions also may refer
for a ruling or for a advice from the SAC in order to
ensure their Islamic financial business do not
contravene with the Shariah principles.
 CBA also provide allocation of reference to the SAC
for Shariah rulings in court proceeding or arbitration
tribunal .
 Section 56(1) state that if question arises concerning
a Shariah matter, the court or the arbitrator, as the
case may be, shall:
 take into consideration any published rulings of the SAC
 refer such question to the Shariah Advisory Council for its
ruling.
 CBA also gives authority to the SAC to make rulings
in any court proceedings and arbitration process for
disputes on issues involving Islamic banking and
financial institutions.

17. EFFECT OF RULINGS
17
 Section 57 provides effect of Shariah rulings
by the SAC pursuant to a reference made by
Islamic financial institutions under section 55
and the court or arbitrators under section 56.
 Section 57 : “Any ruling made by the SAC
shall be binding on the Islamic financial
institutions under section 55 and the court
and arbitrator making a reference under
section 56.”
 Section 57 clearly stated the rulings made by
the SAC on any disputes relating to Shariah
issues will be binding the civil court judges
and arbitrators,.

18. EFFECTS OF RULINGS
18
 In case of contradict of opinion or ruling between
Shariah body /Committee of Islamic Financial
Institution and SAC of BNM In Shariah matters, the
ruling given by the SAC shall prevail.
 Section 58 :“Where the ruling given by a Shariah
body or committee constituted in Malaysia by an
Islamic financial institution its different from the ruling
given by the SAC shall prevail.”
 This section gives recognition to the BNM‟s SAC as
the highest reference authority on Shariah issues for
all Islamic banks and banks under the Islamic
banking scheme.
 The SAC will be referred to by the courts or any
arbitration tribunal in any disputes pertinent to
Islamic banking and finance, and would assist judges
in making decisions accurately and in line with
Shariah principles.

19. FUNCTIONS OF SAC
19
 Section 52(1) provides that the SAC shall
have the following functions:
 to ascertain the Islamic law on any financial
matter and issue a ruling upon reference to it.
 to advise the Bank on any Shariah issue relating
to Islamic financial business, activities or
transactions
 to provide advice to any Islamic financial
institution or any other person as may be
provided under any written law.

20. FUNCTION AND DUTIES OF SHARIAH
ADVISERS
20
 Article 20 of the Guidelines on the Governance of Shariah
Committee for the Islamic Financial Institutions (BNM/ GPS
1) establishes the main functions and duties of the Shariah
advisers:
 To advise the management of the IFI on Shariah matters in
order to ensure that its business operations comply with
Shariah principles at all times.
 To endorse and validate relevant documentations such as the
proposal forms, contract, legal documentations, product
manuals, advertisements as well as brochures.
 To advise and provide assistance to the related parties of the
IFI such as its legal counsel, auditor or consultant on Shariah
matters upon request.
 To advise the IFI to refer to the SAC concerning matters which
have not been resolved or endorsed.
 To assist the SAC by giving explanations on any Shariah
matters that have been referred to and to ensure that all of the
SAC‟s decisions are implemented by the IFI.

21. ADMINISTRATION OF JUSTICE
21
 Another development in legal structure was the
establishment of dedicated High Court to adjudicate all
muamalat cases in the Commercial Division of the High
Court Kuala Lumpur.
 Practice Direction was issued by the Chief Judge of Malaya
to register Islamic banking and finance cases using a
special code number (22A) effective from 1 March 2003 .
 All cases filled will registered and heard in the High Court
Commercial Division 4 and this special High Court will only
hear cases on Islamic banking.
 The above provisions also acknowledge the authority of the
arbitration as one of the process in dispute resolutions in
cases involving Islamic banking matters.
 The advice made by the SAC will be binding on the
arbitration tribunal.

22. ADMINISTRATION OF JUSTICE
22
 Cases Registered from 1.3.2003 - 1.12.2005 =
656
 Settled Cases from 1.3.2003 - 1.12.2005 = 497
 Balance of Cases up to 1.12.2005 = 388
 Percentage of Settled Cases from 1.3.2003 -
1.12.2005 = 75.7%
 The statistic shows a remarkable amount of
cases settled by the court from the year 2003 to
2005.
 However, all of the cases are concerning
defaulters of facilities payment taken action by
the respective banks.
 None, from the statistics, is challenging the
decisions of the Shariah Committees.

23. MEMBERS OF SAC
23
 Another amendment in CBA in 2003 relating to the SAC as
well as the Shariah Committee was Section 16B (6)
 It limits the involvement of SAC members of BNM from
becoming members of any SSB in other IFI, unless they
have a written consent from BNM.
 This is to preserve independence SAC and to avoid conflict
of interest. However, the provision was taken out from the
CBA 2009.
 Similarly, a member of the Shariah committee of any IFI is
not allowed to be appointed in any other Shariah
committees of the same industry.
 This is to comply with the corporate governance policy in
terms of confidentiality and secrecy provisions.
 A company or an institution is no longer allowed to be a
Committee member as the Guidelines restrict the members
of the Shariah Committee to individuals only.

24. PRODUCT DEVELOPMENT AND
ENHANCEMENT
24
 Product development is an exercise to create a
new product or instrument to meet specific
requirements.
 The creation of a new product, other than for
diversification purposes, is to satisfy the needs of
customers under certain circumstances.
 In the conventional banking industry, all of those
developments are more of a product
enhancement rather than product development.
 But in Islamic banking business, a new product
must be fundamentally based on a new concept
or contract.
 Product enhancement is to add more value to an
existing product so that it becomes more viable
and more appealing.

25. ISLAMIC BANKINGS PRODUCT
DEVELOPMENT
25
 Some new product is created by reference to
existing contracts that being combined or
consolidated to form a new instrument.
 Product development takes the form of putting
existing contracts into new structure in order to
suit the banking environment.
 The common methodology of product
development is based on a few fatwas which are
very much peculiar to a specific mazhab though
this has no support from the overwhelming
majority of jurists.
 It is merely to seek some legal justification to
reinforce the „Islamicity‟ of the products that are
deemed to be feasible and viable without
considering status of the fatwa.

26. SAC ROLES IN PRODUCT
26
DEVELOPMENT
 The involvement of the SAC/SSB in product
development and approval is not at the initial
stage of product development, but in the
middle or at the end of the process.
 All the technical parts of the product
development are normally prepared by the
bank‟s management.
 Most of the IFI prefer to present their almost-
ready product to the SAC/SSB for approval
as far as Shariah compliance is concerned.

27. SAC ROLES IN PRODUCT
27
DEVELOPMENT
 In the deliberations, the SAC/SSB may
endorse or may suggest some changes to
achieve Shariah compliance, or may suggest
new features or a new product or contract
altogether.
 The responsibility to modify into a new
workable product still lies with the
management.
 This new product will he brought back for
discussion at the Shariah meeting to get the
final Shariah endorsement .

28. SHARIAH GOVERNANCE
28
 BNM has issued the Guidelines on the Governance of Shariah Committee
for IFI
 Among the duties of the Committee are to:
 advise the Board of Directors on Shariah matters regarding the bank‟s business
operations to ensure that they comply with Shariah principles at all times
 endorse Shariah compliant manuals
 endorse and validate relevant documents
 provide written Shariah opinion or decision
 IFI are responsible to:
 provide necessary assistance to the Committee
 refer all Shariah issues to the Committee for advice and adoption
 ensure that product documents containing Shariah matters be endorsed and
validated by the Committee
 provide access for the Committee members to the relevant records,
transactions, manuals or other relevant information
 provide sufficient resources, independent expert consultations, reference
materials and training.

29. SHARIAH GOVERNANCE
29
 The composition of the Committee shall be a
minimum three members.
 In addition to the Shariah Committee, an IFI is
also required to designate at least one officer,
preferably with the knowledge of Shariah, to
serve as the secretary to the Committee.
 The Committee will report to the board of
directors of the IFI.
 This reporting structure reflects the status of
the Committee as an independent body of the
IFI.

30. CONCLUSION
30
 The SC plays very important roles in ensuring
good Shariah governance.
 The setting up of a special High Court in
Commercial Division, the issuance of BNM/GPS1
and also the amendment of section 16B of the
CBA shows positive indication by the government
in providing more comprehensive and effective
Shariah governance.
 An effective Shariah governance framework
requires involvement of the Shariah Committee
as the key player, the government as the
regulatory body, the Islamic financial institutions
as the implementer and also to other persons
relevant to the business such as auditors,
accountants, lawyers.

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