Instituting Shariah audit in Malaysian Islamic financial institutions

Abstract EN

The overall objective of Islamic finance is to preserve socio-economic justice and ethical values in obligations and contractual rights arising from financial transactions.

It obligates Islamic financial institutions (IFIs) to fully comply with the principles of the Shariah in all their activities.

Complacency of IFIs in fulfilling these requirements would lead the market to lose confidence in these institutions.

Eventually, it would render these institutions just another version of their conventional counterparts, and it might retard the growth of the whole Islamic finance industry.

Therefore, complete adherence to Shariah rulings is the only option for IFIs.

In order to correctly measure the rule compliance of these institutions, a proper Shariah audit mechanism should be put into operation that would validate the level of compliance of these IFIs.

This paper highlights the practical challenges in implementing such a Shariah audit system.

It also proposes some suggestions to address these challenges.