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In Malaysia we have dual banking system

namely conventional banking that had
established long time ago and also Islamic
banking which started in 1983. Nevertheless,
Bank Negara Malaysia (BNM) were party
which control all banking activity in Malaysia.

Therefore, this chapter will peel with much

further on legislation that linked to Islamic
banking activity that practiced in our
country.
Thursday, December 31, 2
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SOURCES OF
SHARIAH
PRIMARY SOURCES
AL-QURAN
HADITH & SUNNAH
SECONDARY
SECONDARY SOURCES
SOURCES
IJMA
QIYAS
IJTIHAD

RULINGS OF
SHARIAH
WAJIB (OBLIGATION)
SUNNAT / MANDOOB
(RECOMMENDED)
HARUS/MUBAAH
(PERMISSIBLE)
MAKHRUH (DISCOURAGED)
HARAM (PROHIBITION)
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Al- Quran is the words of Allah revealed to the Prophet

Muhammad SAW in Arabic conveyed by angel of Jibrail.
Al- Quran consists of 114 chapters and about 6666 verses
It is a miracle in following aspects:
1.Its language is in clear and pure Arabic of the highest.
2.Its contains information and stories about peoples of the past.
3.It foretells future events which really took place afterwards as
foretold.
4.Its all about the creation of life and the universe, the orbits of
the Earth, the sun, moon and the stars, and the formation of
clouds and rains
It contains laws and rules on how to regulate political, legal,
economic, social and moral matters in society

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There are 6666/6236 verses and 350 legal verses (ayat

ahkam/judge) in the Quran:
140 verses concern Ibadat (such practical religious duties as
ritual prayer, legal alms and other charities, fasting,
pilgrimage, and so forth)
70 verses concern munahakat (devoted to marriage, divorce,
paternity, child custody, inheritance, and bequests)
70 verses concern muamalat (concerning commercial
transactions, such as sale, lease, loan, usury, and mortgage)
30 verses on crimes and penalties,
30 verses on justice, equality, evidence, citizens' rights and
duties, and consultation in government affairs.
10 verses on economic matters.

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Al- Quran was first revealed at about 611A.D with the first
verse revealed being Surah Al- Alaq verse 1 to 5. Al- Quran
was revealed piecemeal over a period of 22 years and the
last verse being Surah Al- Maidah verse 3 revealed in 632A.D
Al- Quran was revealed in two periods of the Prophets
mission: when the Prophet lived in Makkah and Madinah
respectively.
Chapters revealed in Makkah are called Meccas chapters
and those revealed in Madinah are called Medinas chapters.
During the life of Prophet and until the middle of Othmans
rule, the Quran was memorized by the Prophet and many
Sahabats and the verses of the Quran were transcribed on
flat pieces of stones, bones wood and date palms.

Al- Hadith is the saying, deeds and approvals of

Prophet Muhammad SAW
In Shariah, Hadith describes as Sunnah ( the way or
manner) of Prophet Muhammad.
There are three kinds of Sunnah:
a. A qaul or a saying of the Prophet Muhammad
which has a bearing on a religious question.
b. A fil which represent an action or practice
of the Prophet Muhammad.
c. A taqrir or a silent approval of Prophet
Muhammad of action or practice of another.

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o
o

SECONDARY SOURCES

IJMA:

IJMA is the verbal noun of the Arabic word ajmaa which has two
meanings: To determine, To agree upon something.
The consensus of the jurists in understanding, interpreting and applying
the teachings of the Quran and the Sunnah forms the third basic source
of the Shariah.
Ijma means a unanimous agreement among the mujtahidun of a Muslim
community on any Shariah ruling in a particular period following the
demise of the Prophet Muhammad (Peace Be Upon Him).
However, it is difficult to classify a particular Shariah ruling as ijma
considering the wide coverage of Islamic territory and the emergence of
the various school of thoughts among the Muslim community.
Therefore, the majority of Islamic scholars are of the opinion that ijma
only happened during the period of the companions of Prophet
Muhammad PBUH before they migrated to other territories.
As such, the claim that ijma had occurred after such period is quite
difficult to be accepted.

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The 20 rakaat of Tarawwih salah that is prayed in

Ramadan from the 1st of Ramadan until the last day of
Ramadan every day, and which is prayed after Isyak
prayer and in which the whole Quran is recited. This was
the Ijma of the Sahabat (R.A.) (companions) during the
time of Umar(R.A.), this is carried right from the time of
Umar(ra) until today.
Another example of Ijma is the second Azan of
Jumah(Friday), which was the Ijma of sahabat (R.A.)
during the time of Uthman (R.A) which is followed
through out the world.
This is because of the Sahih Hadith of the Prophet(PBUH)
said: "Hold fast to My Sunnah and the Sunnah of the
Khulafaa-el-Rashidin" (the Rightly Guided Caliphs). In this
hadith two Sunnats are mentioned, one of Rasulullah
(Sallallaahu layhi Wasallam) and the other of the
Sahabat (R.A)
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SECONDARY SOURCES

Qiys

o Qiys is a method that uses analogy comparison to derive Islamic legal

rulings for new developments.
o Qiys can be defined as taking an established ruling from Islamic Law and
applying it to a new case, in virtue of the fact that the new case shares the
same essential reason for which the original ruling was applied.
o Qiys, therefore, is a method that Muslim jurists use to derive a ruling for
new situations that are not addressed by the Qurn and Sunnah, like
many new developments of our age and like the customs of people not
encountered in Arabia during the time of the Prophet (peace be upon him).
o By way of qiys, these issues can be referred back to those that are
explicitly mentioned in the sacred texts.
o When we know the reason why something in Islamic Law is obligatory,
preferred, permitted, disliked, or forbidden, then if something else shares
the same reason, it can be given the same legal ruling.
o In such issues, the scholars have derived law through analogical deduction
on the basis of the provisions of Quran and the Sunnah on some similar
situation.
o The emphasis of qiyas is identification of a command cause between the
original and new case.
o It has been regarded as a legal source, which contributes significantly in
deciding new unresolved issues.
o For example, the Quran forbids the use of alcohol but does not
mention narcotics. Because alcohol and narcotics are both
intoxicating, one may use qiyas to determine that Islamic law
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forbids narcotics as well.
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11

SECONDARY SOURCES
IJTIHAD:

o The ijtihad of Islamic jurists is known as the science of Islamic

jurisprudence, which is an endeavor undertaken by the mujtahid
in formulating a particular rule and value of a subject matter that
is not clearly explained whether by the Al-Quran or Al-Sunnah.
o Mujtahid, required:
o Enough knowledge of Arabic so that the scholar can read and
understand both the Qur'an and the Sunnah.
o Extensive comprehensive knowledge of the Qur'an and the Sunnah.
More specifically, the scholar must have a full understanding of the
Qur'an's legal contents. In regards to the Sunnah the scholar must
understand the specific texts that refer to law and also the incidence of
abrogation in the Sunnah.
o Must be able to confirm the consensus (Ijma) of the Companions, the
Successors, and the leading Imams and mujtahideen of the past, in
order to prevent making decisions that disregard these honored
decisions made in the past.
o Should be able to fully understand the objectives of the Shariah and be
dedicated to the protection of the Five Principles of Islam, which are life,
religion, intellect, lineage, and property.
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SECONDARY SOURCES
IJTIHAD:

o Be able to distinguish strength and weakness in reasoning, or in other

words exercise logic.
o Must be sincere and a good person.
o In the context of Ijtihad, Shariah and Islamic jurisprudence will be
interpreted to have the same meaning, although from academic
perspective there are some differences between the two. Yet,
both are in the same discipline which discusses Allah SWTs rules,
regulations and legislation in matters of worship, family, financial,
criminal, state administration, international relation and others.
o Since the basis of Islamic jurisprudence is also Al-Quran and AlSunnah, the rulings derived through the exercise of ijtihad of
Islamic jurists are also considered as Shariah rulings because they
are based on the same sources.
o Therefore, Islamic jurists define Islamic jurisprudence as a
science that explains the Shariah rulings which are derived from
the detail evidences or authorities.

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Islamic banks or are also known as full fledged Islamic banking is like Bank Islam Malaysia

Berhad (BIMB), Bank Muamalat Malaysia Berhad (BMMB), Kuwait Finance House (KFH), Al Rajhi
Banking Corporation & Investment Corporation (M) Bhd (al-Rajhi) and Asian Finance Bank (AFB),
Affin Islamic Bank Berhad, Alliance Islamic Bank Berhad, Alliance Islamic Bank Berhad,
AmIslamic Bank Berhad, Asian Finance Bank (M) Berhad, CIMB Islamic Bank Berhad, HSBC
Amanah Malaysia Berhad, Hong Leong Islamic Bank Berhad, Maybank Islamic Berhad, OCBC AlAmin Bank Berhad, Public Islamic Bank Berhad, RHB Islamic Bank Berhad, & Standard Chartered
Saadiq Berhad.

While, Islamic Banking Scheme or before are also known as Interest Free Banking
Scheme / Islamic Banking windows. Examples: Citibank & Deutsche Bank (Malaysia)
Berhad.

This Islamic banking scheme sheltering under the larger conventional banking group.
Islamic banking subsidiaries shall come under the governance of the Islamic Banking Act
1983 instead of BAFIA 1992.
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An Act to provide for the licensing and regulation

of Islamic banking business.

Under section 2 of IBA 1983:

Islamic bank means any company which carries on
Islamic banking business and holds a valid license; and all
the offices and branches in Malaysia of such a bank shall
be deemed to be one bank.
Islamic banking business means banking business
whose aims and operations do not involve any element
which is not approved by the Religion of Islam.

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It was passed in Parliament and came into force on

October 1, 1989.

It has effectively replaced the Banking Act 1973 and

the Finance Companies Act 1969.

It is a comprehensive act and extends comprehensive

powers to Bank Negara Malaysia (BNM) to supervise a
larger spectrum of financial institutions, with the direct
responsibilities to regulate and supervise all licensed
institutions (commercial banks, finance companies,
merchant banks, discount houses and money brokers)
and also regulate scheduled and non-scheduled
institutions.
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Bank Negara Malaysia (BNM) has prepared the

Guidelines on the Governance of Shariah
Committee for the Islamic Financial Institutions
that regulates the governance of Shariah
Committee of an Islamic financial institution.

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In the Part B of guidelines, under establishment

of Shariah Board it outlines the following
requirements:
Every Islamic financial institution is required to
establish a Shariah Committee.
In the case of a BAFIA IBS bank, it may establish one
Shariah Committee for the banking group.
However, if a takaful operator is part of that group, the
tactful operator must establish its own separate Shariah
Committee, due to the legal requirement under the TA.

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The guidelines clearly uphold the

establishments of the SSB in align with
relevant laws governing the respective
institution.

For instance a single committee is not

allowed to act on behalf of both takaful and
Islamic bank that part of one group.

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Regarding the appointment and reappointment,

Part C of the guidelines provides following:
The Board of Directors of an Islamic financial institution
upon recommendation of its Nomination Committee shall
appoint the members of the Shariah Committee.
The appointment and reappointment of a Shariah
Committee member shall obtain prior written approval of
Bank Negara Malaysia.
The appointment shall be valid for a renewable term of
two years.

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BNM guidelines also provide detailed provisions on the

restriction imposed on the serving Shariah board
members.

The Part D of the guidelines provides that :

(a) In line with section 16B(6) of the Central Bank of

Malaysia Act 1958, an Islamic financial institution is not

allowed to appoint any member of the SAC to serve in its
Shariah Committee; and

(b) To avoid conflict of interest and for reasons of

confidentiality within the industry, an Islamic financial

institution shall not appoint any member of Shariah
Committee in another Islamic financial institution of the
same industry.
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For this purpose, Islamic financial institutions

which are regulated under the IBA, BAFIA and
DFIA are classified as of the "Islamic banking
industry", whilst Islamic financial institutions that
are regulated under the TA are classified as of the
"takaful industry".

Memberships in other categories of industry are

excluded from the restriction.

*DFIA -

Development Financial Institutions Act 2002

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With regard to the reporting structure, the

Shariah Committee will report functionally to the
Board of Directors of the Islamic financial
institution.

This reporting structure reflects the status of the

Shariah Committee as an independent body of
the Islamic financial institution.

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Shariah supervision is the single most important

element that distinguishes between a conventional
and an IFI.

It is the only way of certifying that its services,

products, and operations are actually Shariahcompliant.

In the emerging Islamic financial sector, therefore,

Shariah supervision is not a matter to be taken lightly.

The corporate governance is the theme of SSB.

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While it may be convenient to explain Shariah supervision as

a religious audit but its scope is far more comprehensive.

In essence, Shariah supervision is the process of ensuring

that a financial product or service complies with Islamic legal
precepts and principles, either by its conforming (to one
degree or another) to a recognized Islamic legal norm or by
its not violating the same.

Ideally, Shariah supervision will be a part of an Islamic

product or service from the time of its development, to its
launch, and throughout the period it is offered.

At the stage of research and development, or of drafting

contracts or offering memorandums, Shariah supervision, in
one form or another, should be an active participant.
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By including Shariah supervision and advice at the earliest

stages, management may save costly legal fees that may
be required at a later stage if elements of the proposed
business contracts need to be modified to comply with
Shariah principles and precepts.

Moreover, once a product is launched, Shariah supervision

may take the form of ongoing monitoring through periodic
audits. Such audits may be undertaken by means of site
visits, document reviews, or consultation with management
at regular intervals.

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The most obvious and immediate purpose of

Shariah supervision is to certify for practicing
Muslim consumers and clients that the financial
product or service being offered to them is
acceptable from an Islamic legal perspective and
is therefore lawful to them.

Such certification is generally documented in a

formal fatwa (Shariah position paper), may be
thought of as a form of due diligence.

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The primary beneficiary of Shariah supervision will be

Muslim consumers or investors who may not have
necessary skills or knowledge to evaluate the Islamic
banking products in the light of Shariah teachings.

It also supplies form of guarantee and advocacy that money

being invested in the IFIs is duly used in compliance with
Shariah rulings and haram elements are eliminated.

From the view point of corporate governance, IFIs embody a

number of interesting features since equity participation,
risk and profit loss sharing arrangements from the basis of
Islamic finance.

SSB functions as an extra layer of governance in IFIs in

order to bring transactions under strict conformity with the
Islamic law and expectations of Muslim community.

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As a legitimate control body SSB consists of a number of

members chosen among well qualified men of Islamic
jurisprudence and comparative law.

The education and qualification of these members will be dealt

in a later section of this paper.

The credibility of the Islamic banking activities is highly

dependent on the credibility of the Shariah advisers.

The credibility of Shariah advisers may also depend on the

perceptions and confidence of the bank managers in their role.
In order to ensure the modern application of banking system is
in line with Shariah requirements, it is strongly stressed that the
objectives of the establishment of Islamic Bank are to achieve
Falaah.

The objectives of Islamic banks may therefore differ greatly from

the conventional bank's objectives. Therefore, in order to ensure
compliance to the Syariah, IFIs use the service of well-verse
Shariah scholars.
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The laws governing the functions and operations and other

matters of SSB have been detailed in several Acts and
guidelines provided by regulators.

The Takaful Act (Malaysia) 1984 is one of the acts of

parliament aimed at controlling insurance practices in
Malaysia.

A financial institution licensed under the Banking and

Financial Institutions Act 1989 (BAFIA) required to comply
under relevant laws.

Bank Negara Malaysia has provided a set of guidelines

clearly aimed at the SSB. It will be important to discuss the
application of these guidelines issued by the Islamic Banking
and Takaful Department of central bank of Malaysia.

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All Shariah Committee members are expected to

participate and engage themselves actively in
deliberating Shariah issues put before them.

The BNM document that lays down guidelines for

Shariah board stipulates following duties and
responsibilities of the Syariah Committee:
To advise the Board on Shariah matters in its business
operation
To endorse Shariah Compliance Manuals
To assist related parties on Shariah matters for advice upon
request
To provide written Shari ah opinion
To assist the SAC on reference for advice

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To advise the Board on Shariah matters in

its business operation
The Shariah Committee shall advise the Board on Shariah
matters in order to ensure that the business operations of
the Islamic financial institution comply with Shariah
principles at all times.

To endorse Shariah Compliance Manuals

The Islamic financial institution shall have a Shariah Compliance
Manual.
The Manual must specify the manner in which a submission or
request for advice be made to the Shariah Committee, the
conduct of the Syariah Committee's meeting and the manner of
compliance with any Syariah decision.
The Manual shall be endorsed by the Shariah Committee.
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To assist related parties on Shariah matters

for advice upon request
The related parties of the Islamic financial
institution such as its legal counsel, auditor or
consultant may seek advice on Shariah matters
from the Shariah Committee.
The Shariah Committee is expected to provide
assistance to them so that compliance with
Shariah principles can be assured completely

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To provide written Shariah opinion

The Shariah Committee is required to record any
opinion given.
In particular, the Committee shall prepare written
Shariah opinions in the following circumstances:
where the Islamic financial institution make reference to
the SAC for advice; or
where the Islamic financial institution submits
applications to Bank Negara Malaysia for new product
approval in accordance with guidelines on product
approval issued by Bank Negara Malaysia

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To assist the SAC on reference for advice

The Shariah Committee must explain the Shariah
issues involved and the recommendations for a
decision. It must be supported by relevant Syariah
jurisprudential literature from the established
sources.
The Syariah Committee is also expected to assist the
SAC on any matters referred by the Islamic financial
institution. Upon obtaining any advice of the SAC,
the Shariah Committee shall ensure that all SAC's
decisions are properly implemented by the Islamic
financial institution

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Every Islamic financial institution is required to

establish a Shariah Committee.

In the case of a BAFIA IBS bank, it may

establish one Shariah Committee for the
banking group.

However, if a takaful operator is part of that

group, the takaful operator must establish its
own separate Shariah Committee, due to the
legal requirement under the TA.

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The BOD of an IFI shall appoint the members of the

Shariah Committee.

The appointment and reappointment of a Shariah

Committee member shall obtain prior written
approval of BNM. The appointment shall be valid for a
renewable term of two years.

In approving the appointment and reappointment,

Bank Negara Malaysia may impose necessary
conditions it deems fit in addition to the requirements
in these Guidelines. The failure to comply with any of
such conditions shall nullify the approval.
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A member of a Shariah Committee shall be an

individual.

A company, institution or body shall not constitute a

Shariah Committee for the purpose of these
Guidelines.

The proposed member of the Shariah Committee shall

at least either have qualification or possess necessary
knowledge, expertise or experience in the following
areas:
Islamic jurisprudence (Usul al-Fiqh); or
Islamic transaction/commercial law (Fiqh al-Mu'amalat).

The composition of the Shariah Committee shall

consist a minimum of three (3) members.
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Islamic financial institution is required to

have a minimum of one officer, preferably a
person with knowledge in Shariah, who will
serve as the secretariat to the Shariah
Committee.

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Shariah
Committe
e

Board of
Directors of
the Bank

The Shariah Committee will report functionally to the Board of

Directors of the Islamic financial institution.

This reporting structure reflects the status of the Shariah

Committee as an independent body of the Islamic financial
institution.

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An Islamic financial institution shall notify Bank

Negara Malaysia of any resignation or termination
of a member of the Shariah Committee within
fourteen days of the date of resignation or
termination. The notice shall state the reasons of
such termination.

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Shariah advisors are the backbone of the industry

without which the integrity of the whole industry will be
at stake.

Advisory services are an amanah (responsibility) and

must be discharged with utmost professionalism and
integrity.

More interactions is needed between the Shariah

advisors and the market players so that the supervisory
role will be enhanced.

Shariah scholars must ensure that all the decisions

made are realistic and serve the interest of the ummah.

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