QUESTION 3 (25 MARKS) 

a. Critically discuss THREE (3) sources of the rules that guide the conduct of Islamic banking in Malaysia. (9 marks)

 b. Urf is one of the important secondary sources in Islamic law following the changes of many rulings subject to changes of circumstances. Explain the conditions for urf to be accepted as a legitimate source of Islamic law. (6 marks) 

c. Section 28(1) of IFSA 2013 states that one of the duties of an Islamic Financial Institution (IFI) is to "ensure that its aims and operations, businesses, affairs and activities are in compliance with Shariah". Based on the statement, explain how the IFI should ensure that all its operations, businesses, affairs and activities comply with Shariah principles. (6 marks)

d. Discuss the functions of Shariah Supervisory Board (SSB) in Islamic banking

a. According to the Sharia, or Islamic law, the most important principles of Islamic finance are: The Holy Quran, Hadith, and Ijma are the basic sources of Sharia. One of the fastest-growing parts of the global financial sector is Islamic finance, which consists of financial organizations and products that adhere strictly to Sharia or Islamic law.

 The Holy Qur'an.

In Islam, the Qur'an is revered as a sacred text and as the exclusive authority on all matters of faith and morality. As such, it contains the instructions given to Prophet Muhammad peace be upon him by Allah swt for the benefit of all mankind. It's impossible to deny the importance of these lessons.

Step-by-step explanation

a. According to the Sharia, or Islamic law, the most important principles of Islamic finance are: The Holy Quran, Hadith, and Ijma are the basic sources of Sharia. One of the fastest-growing parts of the global financial sector is Islamic finance, which consists of financial organizations and products that adhere strictly to Sharia or Islamic law.

 The Holy Qur'an.

In Islam, the Qur'an is revered as a sacred text and as the exclusive authority on all matters of faith and morality. As such, it contains the instructions given to Prophet Muhammad peace be upon him by Allah swt for the benefit of all mankind. It's impossible to deny the importance of these lessons.

The Hadith.

The Al-Qur'an is the first and foremost source of Shariah's law; the Hadith, the second, is of equal importance. Records of the Sunnah of the Prophet (pbuh) pbuh, which have been passed down through the ages and have become the foundation of Muslim faith and practice, are the Sunnah. The Sunnah (pl sunan) refers to the Prophet pbuh's customs, habits, and practices. It refers to his actions, speech, and other public declarations under a range of conditions.

The Ijma.
The Ijma is the third Shariah source. The term "ijma" refers to a group of Muslim jurists of a specific generation's consensus on a certain issue of law. When a mujtahid Islamic scholar or independent legal thinker is faced with a difficult or ambiguous issue, he or she uses the analogy of the Al-Qur'an or Sunnah to arrive at a solution to the problem, comparing the issue to similar cases that have already been addressed by the leadership of the Al-Qur'an or Sunnah.

b. Custom should be all-embracing or dominant.

For both common and special 'urf, the conditions of practical dominance are vital. When the all-encompassing character or supremacy is missing in 'urf and 'dat, they can't be trusted. It won't be believable until it's widely accepted and widely used. Without mentioning the price, for example, one can buy an article from someone. Now that the general public is aware of its cost, it will be clear. The sale will be void if there is no known price in the market.

Custom must be established at the time of legislation or deals.

Even if the Qur'an was disclosed in the vernacular of the Arabs, it is forbidden to deviate from their customs and practices in order to grasp shari'a scriptures and injunctions. In order to understand shar'a, one shouldn't put their faith in things they haven't encountered before. Sound in terms of words, meanings, and styles," he continues. 62 If you want to understand the meaning of a shar'a document, you need to look at what words signify in the context of the time they were written, as well as how they were used in everyday language. The lawgiver's intent will be assumed to be the same.

To summarize, ancient use, conventions, as well as habits will be taken account while interpreting ancient writings; no subsequent form of 'urf will be taken into consideration.

Custom must not disagree with shar?'a texts.

'urfs that contradict a shari'a text are likely to be rejected by jurists, according to this concept. Any use of usury as a foundation will not be used as evidence of the legitimacy of usury. Similarly, 'urf will not be employed in any other transactions or contracts if it conflicts with divine law.

As long as it does not contravene Sharia law but is in conflict with nusas, it will be permitted to use the customary usage. A clear order will be given, with no room for interpretation or analogy.

c. A comprehensive framework for Shariah governance has been attempted by Malaysia's Central Bank, Bank Negara Malaysia. In order to comply with Shariah, IFIs must follow the framework, which lays out the extent of their obligations and responsibilities and offers specifics on the processes and procedures they must follow. It was also recently modified in 2017 to ensure that the SGF remains relevant to the industry's requirements. The changes are intended to improve the efficiency with which Shariah governance is implemented in the Islamic finance business.

Malaysia, one of the major nations in Islamic finance, thinks that an efficient corporate governance structure for Islamic financial institutions is a consistent and systematic Shariah governance framework (SGF) (IFIs). IFIs in Malaysia have had to conform to a Shariah governance structure since the beginning of Islamic finance in Malaysia. Clear governance structures and processes that guarantee full compliance with Shari'ah Islamic law characterize a strong, well-established SGF.

It was made possible for any regulated conventional bank or financial institution to engage in Islamic banking or Islamic financial services in Malaysia by the Banking as well as  Financial Institutions Act . For Islamic banking and finance, BAFIA has a similar condition - that it must be carried out in compliance with Shariah law and that a Shariah committee must be created to oversee compliance.

The Central Bank of Malaysia Act was passed into law in 2009. The law ensured the Central Bank of Malaysia's continuing existence, administration, goals, responsibilities, and powers, as well as any incidental or consequential matters. The Act also anticipated the vital role of the SAC as the ultimate authority in Shar??ah questions in Islamic banking.

A revision to the SGF 2010 was made in 2017 to better reflect current Shariah governance standards and procedures for Islamic financial institutions (IFIs). Islamic financial activity has grown in scope and complexity, and recent policy developments have also necessitated revisions to the SGF 2010 standard. As of this writing, BNM is soliciting feedback on their 2018 SGF proposal.

d. In fiqh al-mu'amalat, the Shariah Supervisory Board (SSB) is an impartial group of jurists who are experts in the field (Islamic commercial jurisprudence). The Islamic financial institution's Shariah Supervisory Board is responsible for directing, reviewing, and supervising the institution's activities. Legal opinions and the Board's rulings on fatwas and legal opinions are binding.

Often referred to as a "Sharia audit," Sharia boards examine the activities of their financial institution to ensure that they are in accordance with Sharia and provide a fatwa religious decree on whether or not certain proposed transactions or items follow Sharia.

An Islamic bank's Shariah Supervisory Board (SSB) is a critical component. Shariah boards owe a duty of care to the institution's constituents and other stakeholders.

SSB's responsibilities are divided into six general categories:

Assert the legality of financial items by providing fatwas.

To ensure products are in compliance with Shariah regulations, conduct a Shariah audit.

Zakat payments can be calculated.

Get rid of anything that isn't in accordance with Shariah law.

Shareholders and depositors/investment account holders will benefit from your guidance.

Advise the bank on how it can better serve the community.