5 Compliance Facts Every Islamic Finance Provider Must Understand

Islamic finance is built on justice, transparency, and risk-sharing principles — all grounded in Shariah (Islamic law). However, ensuring that financial products and services align with these principles requires more than ethical intention. It demands strict legal and regulatory compliance.

In Malaysia, Islamic finance providers operate in one of the world’s most developed and regulated Islamic finance frameworks. With this privilege comes a responsibility: to uphold Shariah compliance spiritually and legally.

Whether you are an Islamic bank, takaful operator, fund manager, or sukuk issuer, these five compliance facts are essential to avoid legal pitfalls and preserve trust in your institution.

1. Your Operations Must Follow a Clear Legal Framework

A robust and multi-layered legal structure governs shariah compliance in Malaysia. The main statutes include:

• Islamic Financial Services Act 2013 (IFSA)
  • Regulates Islamic banks and takaful operators.
• Central Bank of Malaysia Act 2009
  • Empowers the Shariah Advisory Council (SAC) of Bank Negara Malaysia (BNM) as the highest authority on Islamic financial matters.
• Capital Markets and Services Act 2007 (CMSA)
  • Overseen by the Securities Commission Malaysia (SC), this act governs Shariah-compliant capital markets, including sukuk and Islamic funds.

In addition to these Acts, providers must comply with BNM’s Shariah Governance Policy Document (SGPD) and other guidelines issued by the SAC and SC.

Failure to comply with these legal requirements may result in regulatory actions — including product suspension, penalties, or public reprimand. Therefore, every Islamic finance provider must ensure alignment with the legal system and Shariah rulings.

2. A Shariah Committee is Legally Required

Under the IFSA 2013 and SGPD, Islamic financial institutions are required to establish an internal Shariah Committee.

This committee plays a central role in:

• Reviewing and endorsing financial products and contracts.
• Ensuring business operations do not involve riba (interest), gharar (uncertainty), or maysir (gambling).
• Advising management and the board on Shariah matters.
• Overseeing Shariah risk management and audits.

Each Shariah Committee must consist of qualified scholars with the necessary expertise in fiqh muamalat (Islamic commercial jurisprudence) and finance.

SAC rulings must also guide their decisions. Where there is uncertainty, the committee can refer to the SAC for authoritative advice. This legal structure ensures that all institutions internalise Shariah supervision, making compliance a living practice rather than a checkbox.

3. Shariah Non-Compliance Can Result in Legal Sanctions

Non-compliance with Shariah law is not just a reputational issue — it can lead to serious regulatory and legal consequences. Common compliance breaches include:

• Offering products involving riba (e.g. interest-based loan structures).
• Structuring contracts with high elements of gharar or speculative risks.
• Failing to obtain proper approval from the Shariah Committee or SAC.
• Mislabeling a product as “Shariah-compliant” without following due process.

BNM and SC have the authority to:

• Issue penalties or administrative action.
• Suspend or revoke approval for products.
• Require refund or restructuring of affected contracts.
• Publicly disclose non-compliance findings, affecting stakeholder trust.

Additionally, civil suits may arise if investors or customers claim financial harm due to misleading representations of Shariah compliance. Hence, non-compliance costs are both legal and economic — not to mention the erosion of consumer confidence in Islamic finance.

4. Regular Internal Shariah Reviews and Audits Are Mandatory

Compliance is not a one-time event — it’s an ongoing legal and governance responsibility.

BNM’s Shariah Governance requirements mandate Islamic financial institutions to implement three essential functions:

• Shariah Review
  • Periodic assessment to ensure day-to-day operations follow Shariah requirements.
• Shariah Audit
  • Independent assurance function to evaluate the effectiveness of Shariah compliance controls.
• Shariah Risk Management
  • Identifying, assessing, and mitigating Shariah non-compliance risks.

These processes ensure compliance is embedded across all levels — from boardroom decisions to branch-level operations. Institutions must also submit an annual Shariah Compliance Report to regulators, detailing their findings, corrective actions, and governance structure.

Failure to carry out these obligations may be considered negligence in corporate governance, attracting scrutiny from BNM or SC.

5. Legal Expertise Enhances Shariah Risk Mitigation

While Shariah scholars ensure religious compliance, legal advisors are key in translating those principles into enforceable, risk-proof contracts.

Many legal disputes in Islamic finance arise not because of Shariah intent, but due to:

• Poor contract drafting
• Ambiguous terms
• Inadequate risk disclosures
• Misalignment between legal documents and Shariah concepts

This is where the legal services of firms like CY Wong Ng & Partners become essential.

Our services include:

• Structuring and vetting Islamic contracts
  • Including murabahah, ijarah, wakalah, and musharakah.
• Sukuk advisory
  • Reviewing terms and documentation to ensure Shariah and regulatory compliance.
• Dispute resolution and litigation
  • Representation in Islamic finance disputes, including contractual and regulatory claims.
• Shariah committee governance support
  • Advisory on roles, reporting, and SAC engagement.
• Training for management and boards
  • Practical legal sessions on Shariah compliance risk and governance.

Legal counsel safeguards institutions against regulatory penalties and strengthens Shariah’s credibility among investors, customers, and international stakeholders.

Conclusion – Strengthen Shariah Compliance Through Legal Clarity

Malaysia’s Islamic finance sector is highly regarded globally for its strong regulatory framework and Shariah integrity. However, maintaining this reputation requires continuous commitment from Shariah scholars, institutions, and legal professionals who operationalise these principles.

Let’s recap the five compliance facts every Islamic finance provider must understand:

• Operations must align with the legal framework, including IFSA, BNM, and SC guidelines.
• A qualified Shariah Committee is mandatory, guiding and monitoring Islamic compliance.
• Non-compliance has serious legal consequences, including sanctions, reputational damage, and lawsuits.
• Regular reviews and audits are legally required, ensuring ongoing compliance and risk control.
• Legal expertise is key to avoiding disputes and ensuring documentation, contracts, and processes are sound and enforceable.

Need Legal Advice on Shariah Compliance?

At CY Wong Ng & Partners, we support Islamic financial institutions with legal advisory services tailored to the dynamic requirements of Malaysia’s Shariah finance ecosystem.

Contact us today for a confidential discussion on how we can help strengthen your Shariah compliance, reduce legal risks, and enhance your institution’s governance standards.

FAQ

1. What is Shariah compliance in Islamic finance?

Shariah compliance refers to ensuring that all financial products, services, and operations adhere to Islamic principles — including the prohibition of riba (interest), gharar (uncertainty), and may (gambling) while promoting ethical risk-sharing and asset-backed transactions.

2. Which laws govern Islamic finance and Shariah compliance in Malaysia?

The key legislation includes:

• Islamic Financial Services Act 2013 (IFSA)
• Central Bank of Malaysia Act 2009
• Capital Markets and Services Act 2007 (CMSA)
  These are complemented by Bank Negara Malaysia (BNM) guidelines and the Securities Commission Malaysia (SC).

3. Is establishing a Shariah Committee mandatory for Islamic finance providers?

Yes. Under IFSA 2013 and BNM’s Shariah Governance Policy Document, all Islamic financial institutions must establish a Shariah Committee responsible for approving products, reviewing contracts, and advising on compliance issues.

4. What are the consequences of Shariah non-compliance?

Legal and regulatory consequences include:

• Monetary penalties
• Product suspension or withdrawal
• Regulatory sanctions
• Reputational damage
• Civil liability in some cases

5. What is the Shariah Advisory Council’s (SAC) role?

The SAC of Bank Negara Malaysia is the highest authority on Shariah matters in Islamic finance. Its rulings are binding on courts and regulators, and financial institutions must align their operations with SAC decisions.

6. Are internal Shariah audits required by law?

Yes. Islamic finance providers must conduct regular Shariah reviews and audits to assess ongoing compliance. This includes Shariah risk assessments and reporting to BNM.

7. Can legal advisors assist with Shariah compliance?

Absolutely. Legal counsel ensures that contracts and documentation align with Shariah principles and local laws. They also help mitigate compliance risks, resolve disputes, and support regulatory reporting.

8. What types of contracts require Shariah vetting?

Standard Islamic finance contracts include:

• Murabahah (cost-plus sale)
• Ijarah (leasing)
• Wakalah (agency)
• Musharakah (partnership): All such contracts must be reviewed to ensure Shariah structure and enforceability.

9. What happens if a customer sues for Shariah misrepresentation?

The provider may face civil liability if a product is misrepresented as Shariah-compliant and causes financial harm. Proper documentation, legal vetting, and Shariah approvals are critical in defence.

10. How can CY Wong Ng & Partners assist Islamic finance providers?

We offer:

• Legal review and drafting of Shariah-compliant contracts
• Regulatory advisory for BNM and SC submissions
• Dispute resolution in Islamic finance litigation
• Shariah governance training and compliance advisory