Dissecting the principle of “due regard” : exploring the interaction between board of directors and its shariah committee in Malaysian Islamic financial institution

Abstract EN

Board of directors (board) of an Islamic financial institution (IFI) is statutorily required to ensure that the aims and operations, business, affairs and activities of such IFI are in compliance with shariah.

despite having the ultimate power to run the IFI, the board is statutorily expected to seek advice from the shariah committee (SC) of such IFI with a view to achieve the compliance in shariah.

nevertheless, the treatment on the shariah advice from the SC is debatable.

is it obligatory or merely persuasive for the board to follow such advice? the law simply mentions that the board shall have due regard to any decision of the SC on any shariah issue relating to the carrying on of business, affairs or activities of the IFI.

recently, bank Negara Malaysia (BNM) issued the shariah governance policy document which aims to regulate the proper treatment of due regard.

based on this policy document, the ultimate accountability of shariah compliance still lies on the board.

the board in essence is expected to follow the advice of the SC and giving due regard to such advice, the board is required to put in place conflict resolution mechanism to deal with any differences in views between the board and the SC, in the case where the board refused to accept the views of SC with justifications.