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This sub-section further examines the first research question, namely, how does the Shariah Advisory Council for IFIs in Malaysia ensure their activities are in compliance with Islamic Finance and how non- Shariah compliant events should be reported to authorities.

This sub-section investigates the perspective of Shariah officers towards important functions of the Shariah Committee appointed by the IFIs. The literature reviews of Chapter 2 outline the importance of Shariah advisors or known legally in Malaysia as Shariah Committee as the backbone of the IFIs to oversee its operations according to Islamic law. Previous studies found that the definition of stakeholder as a group of people who has direct relationship with an organisation (Friedman and Miles, 2006) and the Management of the company as non-stakeholder (Aoki, 2001). Hence the Shariah Boards sit as the advisor to IFIs, the committee act as non-management but have major responsibility to protect the rights of all stakeholders according to Islamic principles (Sekreter, 2013). In failing to do so, the management of Islamic banks in Malaysia could be liable to detention for a term not exceeding eight years or to a fine not exceeding twenty-five million ringgit or both, as per the section 28 of the duty of an institution to ensure compliance with Shariah of Part IV Shariah Requirements Division 1 of IFSA 2013. Amid the lack of standardised guidelines, ambiguous legal frameworks, inconsistencies of opinions on Shariah rulings in the Islamic finance industry (Tett, 2007), This section hence tries to explore the understanding and perceptions of Shariah personnel towards Shariah governance, roles of Shariah Committee and process in dealing with non-Shariah compliant income, as illustrated in the Table 16.0.

Table 16.0: The Understanding of Group of Respondents Towards Shariah Governance and Shariah non-compliance Reporting.

Questionnaires (Q18-Q25) Percentage Strongly Agree Agree Strongly Disagree Disagree

Q18. Shariah governance of Islamic banks is to ensure that its aims and operations, business, activities and transactions follow Shariah.

Answered Question: 38 Skipped: 0

92.11% 7.89% 0% 0%

Q19. The main role of the Shariah advisory body of each Islamic bank are in aspects of Shariah supervision, monitoring, auditing, and issuing legal rulings and Shariah audit opinions. Answered Question: 38

Skipped: 0

55.26% 31.58% 0% 2.63% Others (10.53%)

Three respondents commented that the roles of Shariah advisory bodies of Islamic banks can be referred to IFSA (2013) and SGF by BNM (2010), which include issuing Shariah audit opinions.

One respondent did not have a clear understanding on the question whether this should be referred to internal or external Shariah advisory bodies.

Q20. Report of non-Shariah compliant events shall be submitted to the Central Bank of Malaysia on an immediate basis.

Answered Question: 38 Skipped: 0

52.63% 34.21% 0% 2.63% Others (10.53%)

Two respondents shared a comment that non-Shariah compliance is not required to be reported.

Nonetheless, the other two respondents basically agreed that there is a relevant guideline that requires Islamic banks to report any non-Shariah compliance which is; 1- Actual and 2-potential. If a Shariah Committee decides the findings are Actual, the report needs to be submitted on an immediate basis. If a Shariah Committee decides the findings are (Potential), a bank has time to investigate whether the findings are actual findings or just operational findings.

to have their appointed Shariah Advisory Board, Shariah review and audit function, and proper reporting line to ensure that all operations, transactions and activities of the Islamic banks are Shariah compliant. Answered Question: 38

Skipped: 0

Others (5.26%)

One respondent commented that the question is not comprehensively explained while another respondent commented that Islamic banks are required to have their own Shariah Committee and 4 internal Shariah compliance functions - Shariah research, Shariah risk management, Shariah review & Shariah audit.

Q22. Within 14 days, IFIs are required to receive confirmation from SSCs regarding non-Shariah compliant events. Then the bank is required to submit to the Central Bank of Malaysia, the rectification plan that is approved by their Shariah committee and to SSC within 30days after the confirmation from SSC.

Answered Question: 38 Skipped: 0

44.74% 31.58% 0% 21.05% Others (21.05%)

Eight respondents commented differently as the following:

- Based on the latest ruling, reporting to BNM is within 3 days upon confirmation by the Board of Shariah Committee.

- Yes. Based on SNC reporting procedure

- What is SSC? The process shall be in accordance with relevant BNM Guidelines which specify the timeline.

- IFIs are required to table the Shariah issue to its Shariah Committee within 14 days from confirmation by a Shariah officer, and to be reported to BNM within 3 days from confirmation by a Shariah Committee on its non-Shariah compliance.

- What are the differences between a Shariah Committee and SSC? In addition to that, the rectification plan should also be approved by the Board of Directors.

- Agree, but the rectification plan is to be approved by the Board of Directors.

- Case by case basis.

- Within 30 days after confirmation by a Shariah committee on a non- Shariah compliant event, the bank must submit to Bank Negara an action plan approved by the Board of Director.

Q23. The Shariah advisor of an Islamic bank must conduct special meetings to discuss the rectification plan for a non-Shariah compliant event within 30 days or to exhaust to other means to obtain committee approval on the plan.

Answered Question: 38 Skipped: 0

50% 36.84% 0% 0%

Others (13.16%)

Five respondents commented differently as following:

- It is not a must. The rectification plan can be approved via email within 30 days.

- Who is the Shariah advisor in the above statement? And which committee does the above statement refer to? Please refer to relevant BNM guidelines which bind all the IFIs in the course of handling a SNC event.

- Not necessarily a special meeting. The discussion on the rectification plan could be one of the agendas in

the Shariah Committee's periodical meeting which is held within the 30 days.

- Consensus on the rectification plan is sometimes obtained via a circular resolution to meet the timeline

Q24. In contravention of IFSA 2013, severe punishment is imposed on the non-compliance of the Act.

Answered Question: 38 Skipped: 0

68.42% 31.58% 0% 0% Others

Q25. In relation to the question above, have your IFIs been convicted of such contravention? Answered Question: 38 Skipped: 0 Yes – 2.63% No – 81.58% Not Sure – 15.79% *Close- ended question with Yes or No or Not Sure as choice of answers. Others (Not applicable as a choice of answer)

Table 16 Understanding of Group of Respondents Towards Shariah Governance and non-Shariah compliance Reporting

Table 16.0 illustrates that Shariah personnel unanimously (100%) have similar perspectives towards Shariah governance, which is to ensure that its aims and operations, business, activities and transactions follow Shariah principles. Table 17.0 further explains the quantitative measures for interpreting the relationship between the understanding of Shariah governance and educational background.

Table 17.0 Cross-tabulation of group respondents – Relationship between Understanding on Shariah Governance and Educational Qualification

Sum of Respondent Educational Qualification Shariah governance of

Islamic banks are to ensure that its aims and operations, business, activities and transaction follow Shariah law. Bachelor (First Degree) Postgraduate (Master or PhD) Professional Qualification Grand Total Agree 1 2 3 Strongly Agree 16 16 3 35 Grand Total 17 18 3 38

Table 17 Cross-tabulation of group respondents – Relationship between Understanding on Shariah Governance and Educational Qualification

Table 17.0 presents that all Shariah personnel that participated and agreed with the function of Shariah governance in the survey at least have a bachelor’s degree for their educational qualification. Alternatively, this finding implies that the minimum requirement for the appointment to the Shariah secretariat mentioned in the Shariah governance framework of BNM is a bachelor’s degree.

Table 17.0 also illustrates that most respondents (86.84%) opine that the roles of Shariah Committee are to supervise, monitor, audit, and issue legal rulings and Shariah audit opinions. However, 2.63% of respondents strongly oppose this opinion. Furthermore, around 86% respondents agreed that the reporting of non-Shariah compliant events shall be submitted to BNM on an immediate basis. Nonetheless 2.63% strongly disagreed, while other respondents (7.89%) viewed that reporting to the central bank was unnecessary.

Table 18.0 has further confirmed that only 11 out of 38 respondents (28.94%) strongly and positively responded that a non-Shariah compliant event must be reported immediately to the BNM within a certain period as per the guideline issued

by the central bank, while 8 out of 38 respondents answered fairly, by providing justification. One respondent mentioned a different time period, which was thirty days.

Table 18.0 Cross-tabulation of group respondents – The Relationship between Understanding on Reporting of Non-Shariah compliant income and the Timeline Required

Sum of Respondent

The Report of non-Shariah compliant event shall be submitted to Central Bank of Malaysia on an immediate basis.

Within 14 days, IFIs are required

to receive confirmation from SSC regarding non- Shariah compliant events. Then the bank is required to submit to the Central Bank of Malaysia the rectification plan that is approved by their Shariah committee and SSC.

Agree Disagree Other (please specify) Strongly Agree Grand Total Agree 8 4 12 Other (please specify) 1 3 4 8

Strongly Agree 4 1 1 11 17 Strongly

Disagree

1 1

Grand Total 13 1 4 20 38

Table 18 Cross-tabulation of group respondents – Relationship between the Understanding on Reporting of Non-Shariah -compliant income and the Timeline Required

The survey found inconsistencies among the practices of IFIs pertaining to the reporting of non-Shariah compliant events in Malaysia. This finding further examines empirically the previous study where there were lack of standardised guidelines and ambiguous legal frameworks that contributed to the instability in the growth of Islamic finance (Tett, 2017). However, in the event of contravention of IFSA 2013, the respondents anonymously agreed that severe punishment would be imposed on the non-compliance of the Act and most of the respondents (97.37%) also agreed that their Shariah Committee must play a major role to discuss the rectification plan for a non-Shariah compliant event. Interestingly yet insignificantly one respondent admitted that his or her Islamic bank was being convicted under the IFSA 2013, while about 15% of respondents were unsure about any convictions. Hence, Shariah board must have adequate Islamic knowledge and proper skill in financial system (Ali et al.,2013; Marines 2001). This position also shows that a standardised practice is required to ensure effective reporting among the IFIs. The standardisation has once implemented has once implemented during Abbasside empire (Alkhatib, 2013). However, it contradicts with the several studies where standardisation is unnecessary in Islamic finance due to different school of thought (Mcmillan, 2011; Oakly, 2011; Wigglesworth, 2009; Nelson, 2006) except the standardisation at country level in order to approve Shariah matters (Tett, 2007) in this case is at the Malaysia’s banking regulatory system.

4.2.2 THE LEGAL REGULATORY FRAMEWORK GOVERING NON-SHARIAH