UIB2612

TRIMESTER 1610

SHARIAH ADVISORY
COUNCIL

INTRODUCTION
The Shariah Advisory Council of Bank Negara
Malaysia (SAC) was established in May 1997 as
the highest Shariah authority in Islamic finance in
Malaysia.
The SAC has been given the authority for the
ascertainment of Islamic law for the purposes of
Islamic banking business, takaful business,
Islamic financial business, Islamic development
financial business, or any other business, which is
based on Shariah principles and is supervised and
regulated by Bank Negara Malaysia.

INTRODUCTION
the reference body and advisor to
Bank Negara Malaysia on Shariah
matters, the SAC is also responsible for
validating all Islamic banking and
takaful products to ensure their
compliance and compatibility with the
Shariah principles. In addition, it
advises Bank Negara Malaysia on any
Shariah issue/s relating to Islamic
financial business or transactions of
As

INTRODUCTION
It is mandatory for every Islamic bank to have a SAC/SAB
which plays a crucial role and responsibility in ensuring the
Islamic banks 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 and
uniform opinion in matters relating to the Shariah. This is
to avoid conflicts between SAC of the Islamic Banks.
4

INTRODUCTION
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 IFIs (Islamic Financial
Institution) Articles of Association without any force of law.
The Higher Religious Supervisory Board of the International
Association of Islamic Banks (IAIB) requested 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 (mandatory requirement).
5

DEFINITION
By AAOIFI (Accounting and Auditing Organization for Islamic Financial
Institutions:
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

By 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 banks authorities
to ensure the operations and activities of the bank are Shariah compliant.
6

THE LEGAL
FRAMEWORK OF
SAC IN MALAYSIA

SAC OF BAFIA
The Shariah Advisory Council (SAC) of the BNM was
established under the BAFIA l989 to advise BNM and
Islamic 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 TO CBA
2003
Prior to 2003, there has been no any provision under the
Central Bank of Malaysia Act (CBA) regarding operation of
Islamic banking and finance.
Only in 2003, the CBA 1958 was amended to includes
section 16B which allocates for the establishment of the
Shariah Advisory Council (SAC) at the BNM for the purpose
of advising the BNM concerning matters related to Shariah
which affect the Islamic banking and financial industries.
The new Central Bank of Malaysia Act 2009 was
introduced and explicitly codifies the duality of the
Malaysian financial system which shall consist of Islamic
and conventional financial system.

THE CENTRAL BANK OF

MALAYSIA ACT 2009
Pre 2009 The Central Bank of Malaysia Act 1958 (Act
509)
The repealed Act was amended in 2003 to insert section 16B
which provides for the establishment of an Advisory Council
which shall be the authority for the ascertainment of Islamic
law for the purposes of Islamic banking business, takaful
business, Islamic financial business, Islamic development
financial business, or any other business which is based on
Shariah principles and is supervised and regulated by the
Central Bank of Malaysia.
The 2003 amendment was meant to provide a better position
on the National Shariah Advisory Council whereby it uplifts the
position of Islamic banking and finance in the country.

Before the coming into force of the CBA 2009, the SAC
has always been considered as an authoritative body
with the expertise and competency to provide ruling on
Islamic finance issues. According to Ruzian & Noor
Inayah (2012) the presiding judge is not precluded
from exercising his own discretionary power and has
the option whether to refer the issue to the SAC.
Reference to the law reports shows that the civil courts
have in fact referred to section 16B and acknowledged
the requirement of the provision but elected not to
refer to the SAC on the ground that the ruling made by
the Council has no binding effect on them.

CONT
The provision further provides that where in any
proceedings relating to Islamic banking business and
Islamic financial business which is based on Shariah
principles before any court or arbitrator any questions
arises concerning a Shariah matter, the court or the
arbitrator may refer such question to the Shariah
Advisory Council for its ruling.
Any ruling made by the Shariah Advisory Council
pursuant to a reference by a court, be taken into
consideration by the court and if the reference was
made by an arbitrator, be binding on the arbitrator.

THE ISLAMIC FINANCIAL

SERVICES ACT 2013
The rule relating to Shariah governance is provided
under section 30 until section 36 of IFSA 2013 whereby
the existence of these provisions highlighted the
intention of the law maker, in focusing to the matters
pertaining to appointment and qualification of the
Shariah Committees members in Islamic financial
institution.

SECTION 30
Unlike the Central Bank of Malaysia Act 2009 which merely
touched the surface of the matter by highlighting the general
requirement for financial institution to have a Shariah
committee, the current provision provides a more specific
requirement under section 30 of IFSA 2013 which requires an
institution to apply directly to the Central Bank for the
establishment of Shariah Committee.
This will enable the Central Bank to have direct information as
to the members of the Shariah Committee in an Islamic
financial institution, which at the same time, to ensure a
proper supervision towards the activities conducted.

SECTION 29 & 31
Another major point being made available under the new Shariah governance
legal provision is the criteria of the members of Shariah Committee.
A clear standard of requirement pertaining to the appointment of such
committee is highlighted under section 31 which is to be crossed referred with
section 29 (2) (a) which states only those who is really fit and qualified may
be appointed as the Shariah Committee members.
This leads to the notion that members of Shariah Committees in every
financial institution must be chaired by those who met the requirements as
stated by the Central Bank.
Availability of such clause would be vital in ensuring the products and services
introduced by the Islamic financial institution complied with the Shariah
principles via the supervision of competent members

SECTION 32
Section 32 of IFSA 2013 contributes to the significance of
Shariah Committees in every institution through the introduction
of the Shariah governance which not only set out the duties of
the Shariah committees in the institution, but rather blend into
the structure of the company itself.
By extending the powers of Shariah governance into certain
aspects in a company such as matters involving the board of
directors and internal Shariah compliance, we can understand
that Shariah governance would be one of the integral parts in
an institution up to the point that Shariah comittee may no
longer be treated as a minor part or division of a company, what
more against the idea of abandoning such governance rules.

SECTION 33 & 34
The introduction of under section 33 and 34 of IFSA, on
the other hand, enables the Central Bank to
continuously be updated by the institution of its
Shariah Committee members.
In order to maintain its aim of ensuring that only those
who really qualifies entitled to be the members, the
provision set out the clause relating to the cessation of
the members including situations which would
disqualifies from becoming Shariah committee
members.

SECTION 35
By setting out a more precise rules and features of the
Shariah committee members, the IFSA 2013 under
section 35 has made it compulsory for management in
charge of the company to provide information to the
Shariah committee in exercising its task and duties.
While the Act did not mention the type and degree of
information required, it can be assumed that the
Shariah Committee is authorised to obtain regardless
of any kind, if such information would assist them in
carrying out their duties.

SECTION 36
In addition, section 36 marks the trust which has been
given by the legislation over the Shariah Committee to
hold any type of information including the confidential
ones provided such information is not being relayed to
the other persons.
While maintaining the duty of confidentiality, the
Shariah committees are also vested with the protection
under the qualified privilege which prevents them from
being taken a legal action by the Islamic financial
institution, if it can be proven that such duties was
conducted in good faith.

THE EFFECT OF THE ISLAMIC

FINANCIAL SERVICES ACT
2013
The development of Islamic banking in Malaysia gave
rise to the establishment of Shariah Advisory Council of
Bank Negara Malaysia as the highest authoritative
body in ascertaining the Shariah matters relating to
Islamic finance in Malaysia.
The Shariah Advisory Council has been given the
mandate to ascertain the Shariah compliance relating
to matters which include Islamic banking, Takaful,
Islamic financial business or any other business that
are based on Shariah principles.

CONT
The newly enforced Islamic Financial Services Act
(IFSA) 2013 seeks to redress this matter by providing a
more significant authority towards Shariah Advisory
Council which at the same time regulates the Islamic
financial institutions throughout Malaysia with the
latest provisions within its respective jurisdiction.

Shariah compliance and Shariah governance provisions

under the Shariah Advisory Council is among the latest
features being made available under the IFSA 2013
which empower the authorities of Shariah Advisory
Council itself as well as posing a more diverse
practicality over the main aspects in Islamic financial
institution while maintaining the status as the highest
supervision power over the Islamic financial institutions
in Malaysia.

23

CENTRAL BANK ACT

2009
The legislature had taken step to rectify the above
situations by passing the CBA 2009 and it is done by
granting the authority to the CBM for the
establishment of the SAC as the highest and sole
authority to be referred by the civil courts in dealing
with Islamic banking and finance cases in Malaysia.
The law is intended to further enhance and improve
the Shariah governance framework in Islamic financial
system with special reference to the establishment of
the SAC, its functions, method of appointment,
qualification and criteria of the members and the
status of Shariah rulings issued by the SAC under the
law.

The CBA 2009 further provides that any ruling made by

the SAC pursuant to a reference made under Chapter
VII shall be binding on the Islamic financial institutions
and the court or arbitrator dealing with Islamic banking
cases. (Ahmad Suhaimi, 2009).
The provision clearly states that any ruling made by
the SAC will be binding on the civil court and the
arbitrator which means the court and the arbitrator
must follow the ruling to arrive at their decision and
the ruling shall form part of the judgment of the court
in Islamic finance cases. (Tengku Hasmuddin, 2009).

SAC IN MALAYSIA

SHARIAH ADVISORY
COUNCIL
SAC is defined 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.
26

The members of Shariah Committee (SC) are the

scholars with knowledge and expertise in Islamic
jurisprudence.
The
ultimate
purpose
of
the
establishment of the SC in Islamic financial institutions
is to ensure Shariah compliance to its operations and
products.
All banks and takaful operators must have provision
regarding the establishment of SC in their Articles of
Association and Memorandum of Association.
The term Shariah Cmmittee has been introduced by
CBM in section 3 of the Guidelines and Procedures for
Shariah Committee (BNM/GPS1) issued in December
2004.

APPOINTMENT OF SAC
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 AAOIFIS standard is, to prevent any undue
influence of the management board on the Shariah advisors,
which might exist if the former were to be given the authority to
appoint.
28

APPOINTMENT OF SAC
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 ceased to be relevant.
The role and functions of the SAB and SAC are not
mentioned clearly back then either by the IBA, BAFIA
or the CBA.

29

APPOINTMENT OF SAC
Section 53 (1) clarifies 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.
30

SECRETARIAT OF SAC
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.

31

RULINGS OF SAC
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.
32

REFERENCE TO
RULINGS OF SAC
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.

33

Adnan Trakic (2013) conluded that by virtue of sections

56 and 57 of the CBA 2009, the civil court judges or
arbitrators dealing with cases arisng from Islamic
financial business are obliged to refer Shariah issues
to the SAC for ruling and its ruling becomes binding on
them.
He observed that he efficacy and workability of this
model has already been tested in a few judicial
decisions in Malaysia.

EFFECT OF RULINGS
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,.
35

EFFECTS OF RULINGS
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 BNMs 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.
36

FUNCTIONS OF SAC
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.

37

FUNCTION AND DUTIES

OF SHARIAH ADVISORS
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 SACs decisions are
implemented by the IFI.
38

ADMINISTRATION OF
JUSTICE
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.
39

MEMBERS OF SAC
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
confidentiality and secrecy provisions.

in terms of

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.
40

PRODUCT DEVELOPMENT
AND ENHANCEMENT
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 (expand/vary) 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.
41

ISLAMIC BANKINGS
PRODUCT DEVELOPMENT
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.
42

SAC ROLES IN PRODUCT

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 banks 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.

43

SAC ROLES IN PRODUCT

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 .

44

CONCLUSION
Harmonisation of decision by SAC with other countries
are important to the Islamic banks that has branches in
other countries.
The contradiction views will effect the business of
Malaysian Islamic banks in other countries.
It is important for the SAC to take into consideration
the views of other countries, especially middle east in
making any decisions.

45

CONCLUSION
Compliance to Shariah is essential to enhance the confidence
of the stakeholders of Islamic financial institutions.
In this regard, the IFSA provides a comprehensive legal
framework that is in full compliance with Shariah in all aspects
of regulation and supervision of the Islamic financial
institutions in Malaysia, from licensing to the winding up of the
Islamic financial institutions.
The legislation specifically provides for the enforcement of
Shariah non-compliance risk and imposes statutory duty upon
the Islamic financial institutions to ensure that their aims,
operations, affairs, businesses and activities are in compliance
with Shariah rules at all times