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

Chapter 1

Fundamental Concept of Sharī`ah and Sharī`ah Non-Compliance Risk

1.0. INTRODUCTION

Sharī`ah non-compliance risk in Islamic finance and legal documentations is a very vital topic due to the risk involved, which might lead to serious financial implication rendering the financial contract invalid. This non-Sharī`ah compliance status will trigger the legitimacy of the income generated by the Islamic financial institution. Hence, understanding the Sharī`ah requirements in Islamic banking facilities and legal documentation is crucial. Sharī`ah non-compliance risk consists of three important terms, namely: Sharī`ah, risk, and compliance. A brief definition for each term is given below.

1.1. CONCEPT OF SHARĪ`AH

The Arabic word Sharī`ah refers in its literal meaning to the road to the watering place, the straight path to be followed,1 whereas the technical meaning refers to designating a rule of law, or a system of law, or the whole of the message of particular prophet.2 However, in the Islamic context Sharī`ah refers to the laws and commandments and way of life prescribed by Allah to mankind.3 Another definition of Sharī`ah is: “The sum total of Islamic teaching and system, which was revealed to prophet Muhammad (s.a.w) recorded in the Quran as well as deducible from the Prophet’s divinely guided lifestyle called the sunnah.”4 In other words, “Sharī`ah refers to commands, prohibitions, guidance, and principles that God has addressed to mankind pertaining to their conduct ...