Malaysian central bank tightens Shariah rules

Malaysia's central bank yesterday announced rules to tighten Shariah compliance at Islamic banks, including raising advisors' accountability and independence, and requiring audits on banks.

Disputes on the compliance of certain products such as a recent case involving Kuwait's Investment Dar have put the spotlight on the role of Shariah advisors in approving products and their relationship with bank management.

Malaysia's central bank, which oversees the world's largest sukuk market, said Islamic banks must set up Shariah review, audit and risk management control functions to reinforce compliance. "The framework aims essentially to strengthen the Shariah governance process, decision-making, accountability and independence," the central bank said in its 2009 annual report.

"To reinforce the Shariah compliance functions, internal Shariah review and audit requirements will be introduced, supported by an appropriate risk management process and research capability," it said.

The central bank, Bank Negara, said under the rules the board would be responsible for the overall Shariah oversight of Islamic banks but must recognise the independence of advisers.

The role of Shariah advisers is widened to include ensuring implementation of decisions involving Islamic law and must inform the bank where non-compliance with Shariah issues have not been properly addressed.

Islamic financial institutions in Malaysia, which include the units of HSBC, Kuwait Finance House, Maybank and CIMB, must have review functions that continuously monitor Shariah compliance of their operations.

They must also have annual Shariah audits.

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