Shari'ah Non-compliance Risk Management and Legal Documentations in Islamic Finance

APPENDIX

The Impact of Non-Sharī`ah-Compliance Risk on the IFI, and Checklist

A.1. THE IMPACT OF NON-SHARĪ`AH-COMPLIANCE RISK ON THE IFI

Islamic financial institutions are bound to carry out their business activities in accordance with Sharī`ah rules and principles by virtue of the license granted by the central bank. Hence, the existence of Sharī`ah non-compliance risk in their business activities may affect the integrity and the credibility of the IFI and may expose their business to high risk. The impact of Sharī`ah compliance rating and audit findings can significantly affect the acceptability of the financial statements of Islamic financial Institutions as well as the expectations and confidence of the investor and stakeholders.

Prior to issuance of any opinion or report by the auditor, all relevant issues must be addressed and discussed with the parties concerned in order to take corrective actions and ensure that a reasonable assurance can be provided on Sharī`ah compliance. Disclosing information to the public before remedial measures are taken by IFIs on Sharī`ah non-compliance may lead to a crisis of confidence amongst investors and stakeholders as well. It may further lead to a crisis of liquidity where depositor’s cash out their deposits and investment account holders withdraw their investments. This confidence crisis may affect the IFI to suffer losses from the drastic decline on the value of their investments.

Non-compliance to specific processes and sequence ...