SHARĪ'AH RISK MANAGEMENT PRACTICES IN MALAYSIAN ISLĀMIC BANKS

• Published in: International Journal of Economics, Management and Accounting Management and Accounting, 2022-01, Vol.30 (1), p.101-123
• Main Author: Ariffin, Noraini Mohd
• Format: Article
• Language: English
• Subjects: Banking industry; Banks; Compliance; Councils; Financial institutions; Financial services; Islamic financing; Islamic law; Jurisdiction; Noncompliance; Risk management; Stakeholders
• ISSN: 2462-1420

Sharī'ah compliance in Islāmic banks is important to provide confidence and assurance to the public, as well as improve the credibility of Islāmic banking operations in the financial market. Islāmic banks can be potentially exposed to the Sharīah non-compliance risk if the operations and business activities do not adhere to Sharī'ah principles. In light of this, Sharī'ah risk management is very important in Islāmic banks. The Central Bank of Malaysia (Bank Negara Malaysia) requires Islāmic banks to incorporate Sharī'ah risk management practices as part of the necessary Sharī'ah functions in Islāmic banking institutions. This is part of the Sharī'ah Governance Policy Document, issued by Bank Negara Malaysia in 2019. The Sharī'ah risk management function is to systematically identify, measure, monitor and control Sharī'ah non-compliance risk and mitigate any potential non-compliance events. This is consistent with the other two Sharī'ah control functions, which involve Sharī'ah review and Sharī'ah audit. Within this setting, the present study is conducted to examine the existing Sharī'ah risk management practices in selected Islāmic banks in Malaysia as well as providing recommendations on the best Sharī'ah risk management practices. Institutional theory and contingency theory are used in this study. Interviews with several key officers from selected Islāmic banks were conducted to obtain their views on Sharī'ah risk management practices since they are involved directly in managing Sharī'ah non-compliance risks in their respective banks. Findings showed that existing Sharī'ah risk management practices in Islāmic banks are similar to those of conventional banking institutions in terms of risk identification, risk measurement, risk monitoring and controlling, and risk reporting. Nonetheless, for Sharī'ah risk management, the focus was on managing Sharī'ah non-compliance since Sharī'ah requirements need to be adhered to at all times. All of the interviewees from the selected banks agreed that the risk identification stage is the most crucial in Sharī'ah risk management. The implication of the study is to have a Sharī'ah risk management framework for Islāmic banks so that practices are consistently used. In addition, this can assist the Sharī'ah audit in conducting risk-based audit. Bank Negara Malaysia should also play a role by issuing guidelines on Sharī'ah risk management as a guidance for Islāmic banks in Malaysia.