A study on the legal aspects of the shariah advisory boards in Malaysian financial institutions

Abstract

The existence of the Sharῑᶜah advisory board in an Islamic financial institution is significant in ensuring that the institution complies with the Sharῑᶜah principles in carrying out its Islamic financial business and activities. Due to the vital role in ensuring Sharῑᶜah compliance of the Islamic financial institution, the Sharῑᶜah advisory board should be equipped with a comprehensive legal sanction to govern its affairs and those of its members. This study examines the legal aspects of the Sharῑᶜah advisory board in Malaysian Islamic financial institutions. This study seeks to answer whether the existing legislations are sufficient to govern the legal aspects of the Sharῑᶜah advisory board in Malaysia which consists of the Sharῑᶜah Advisory Council established by Bank Negara Malaysia and the Sharῑᶜah advisory boards established by the respective Islamic financial institutions. This study adopts the legal research method where the data used were largely library-based (documentary). Statutory provisions passed by the Parliament of Malaysia, Guidelines issued by Bank Negara Malaysia and other legal instruments were explored and analysed to understand the legal aspects of the Sharῑᶜah advisory board in Malaysia. This study found that the Sharῑᶜah advisory board is regulated by several statutes and guidelines governing Islamic financial business in this country of which several legal aspects of the Sharῑᶜah advisory board are provided in the statutes and guidelines. Based on the analysis conducted on the relevant provisions of such legislations, this study reveals that the existing legislations have covered the essential legal elements of Sharῑᶜah advisory board. However, several provisions of such existing legislations seem to be unclear and thus require proper explanations. In addition, the existing legislations fail to prescribe several significant elements dealing with the Sharῑᶜah advisory board such as the the position of the Sharῑᶜah Advisory Council in the organizational structure of Bank Negara Malaysia, the religion of the members of the Sharῑᶜah Advisory Council, the termination procedures of the member(s) of the Sharῑᶜah advisory board of the Islamic financial institutions and the assessment methods to measure the competency of the board members. This study concludes that the existing legislations are insufficient to regulate the legal aspects of the Sharῑᶜah advisory board in Malaysia. Insight drawn from this study suggest the need to enhance the existing legislations and strengthen the regulatory framework of the Sharῑᶜah advisory board in Malaysia. The relevant authority should take immediate approach to improve the deficiencies of the legislations in order to avoid any possible legal conflict in the future.