Page 32 - CMA Journal (Mar-Apr 2025)

Focus Section

Additionally, inconsistencies in Shariah rulings and a assurance that their money is handled in line with
shortage of skilled professionals in Islamic finance impede Shariah principles. Shariah compliance is also essential
full implementation. To overcome these obstacles, the for improving risk management and governance.
government must reinforce Shariah-compliant regulatory Financial institutions can mitigate non-compliance risks,
frameworks, invest more in Islamic economic education, avoid reputational damage, and ensure regulatory
and improve public awareness. adherence by implementing strong oversight
procedures. Furthermore, since numerous regulatory
The sustainability and integrity of Islamic financial
organizations, including the Islamic Financial Services
institutions are largely dependent on shariah audit and
Board (IFSB) and the Accounting and Auditing
compliance. Maintaining adherence to Shariah principles
Organization for Islamic Financial Institutions (AAOIFI),
has grown more crucial as the Islamic banking sector
establish rules that Islamic financial institutions must
grows internationally. Islamic finance is regulated by
abide by, Shariah compliance makes it easier to adhere to
moral and legal precepts drawn from Shariah law, in
international Islamic finance standards.
contrast to conventional finance, which is largely
concerned with maximizing profits. These values place a Regulatory Frameworks
strong emphasis on risk-sharing, justice, transparency,
Numerous national and international regulatory
and the prohibition of abusive financial practices.
standards provide guidelines for implementing Shariah
Financial institutions are expected to refrain from
audit and compliance systems. Comprehensive Shariah
transactions including riba (interest), gharar (extreme
governance guidelines that specify the duties and
uncertainty), maysir (gambling), or investing in haram
responsibilities of Shariah Supervisory Boards, internal
(prohibited) activities like gambling, alcohol, and immoral
compliance operations, and audit procedures have been
sectors. To ensure adherence, financial institutions use established by the AAOIFI. These guidelines offer financial
strict Shariah governance systems, including
institutions a structured approach to ensure business
independent Shariah audits, Shariah Supervisory Boards
practices are Shariah-compliant. In a similar vein, the IFSB
(SSBs), and internal compliance departments.
has released standards that support best practices in
Shariah Audit and Its Role in Compliance Islamic financial institutions' governance, transparency,
and risk management. Furthermore, a lot of central banks
A Shariah audit is an organized and methodical have set up Shariah governance structures to control
evaluation of an organization's adherence to Islamic Islamic money and banking inside their borders. For
financial principles. It assesses how well corporate example, all Islamic financial institutions must have a
practices, governance frameworks, and financial strong compliance structure with clearly defined duties
products conform to Islamic law. In contrast to traditional for Shariah boards, internal auditors, and compliance
audits—mainly concerned with financial accuracy and officers, according to Malaysia's Shariah Governance
regulatory compliance—a Shariah audit expands its Framework (SGF), which is enforced by Bank Negara
scope to include ethical, religious, and legal Malaysia. To make sure that Islamic financial institutions
considerations from an Islamic perspective. It involves follow Shariah law, other jurisdictions—like Saudi Arabia,
checking that all institutional operations align with Bahrain, and the United Arab Emirates—have created
Islamic theology, analyzing financial transactions, their own regulatory systems.
reviewing contractual agreements, and evaluating Challenges in Shariah Audit and Compliance
governance systems. The primary goal of Shariah
auditing is to assure stakeholders—clients, investors, and Despite its importance, the effectiveness of Shariah audit
regulatory bodies—that the organization operates in and compliance faces several challenges:
accordance with Islamic principles.
1) Lack of Uniformity Across Jurisdictions: One
Shariah compliance helps Islamic finance achieve several major challenge is the absence of uniformity among
important objectives. Above all, it ensures that all various jurisdictions. Shariah interpretations may
financial services and products adhere to Islamic law. This vary depending on the school of thought, and Islamic
includes ensuring contracts don't contain any elements finance operates in a broad global milieu. This
of riba, gharar, or maysir, and that financing and diversity makes it challenging for financial
investment arrangements follow ethical and religious institutions to attain consistency in their compliance
guidelines. Shariah compliance encourages efforts, often resulting in the inconsistent application
accountability and transparency, which in turn boosts of Shariah compliance rules. Furthermore, the lack of
stakeholder confidence. A strong compliance framework internationally recognized Shariah norms hinders the
contributes to the development of trust in the operations development of cross-border Islamic financial
of Islamic banks, as investors and depositors seek operations and products.

30 ICMA’s Chartered Management Accountant, Mar-Apr 2025