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

Chapter 4

Tools and Techniques to Identify Incongruence in Sharī`ah Compliance

4.0. INTRODUCTION

The nature of Sharī`ah non-compliance risk refers to the structure of the product, the terms, the conditions governing the contracts/products/services, and the executions of the legal documentation/products that represent the stage of implementation. There are other related aspects that are within the Sharī`ah non-compliance scope such as marketing collateral, telemarketing, broadcasting, information technology infrastructure, and systems.

With regards to the means and instruments, there are a few that can be used in order to identify incongruence in Sharī`ah compliance.

4.1. TOOLS

4.1.1. Accounting/Islamic Financial Reporting Technique

Accounting is a very important instrument to identify incongruence with Sharī`ah by using different accounting tools or techniques such as the financial data, balance sheet, and so forth. The prohibited elements in Sharī`ah can be easily identified through this process. Accounting as an instrument along with the technique used can bring Sharī`ah compliance to the entire financial transactions and business activities that cover areas as follows:

• Accounting represents an official record of a financial transaction and traces the movement of assets and the type of payment at each stage of a transaction.
• Tracing and recording the different lawful and legitimate business activities.
• Allocating valid contracts and profit that exclude interest and uncertainty ...