Shariah non-compliance risk
The operational risk that an institution fails to comply with Shariah rules and principles in its products and services.
Shariah non-compliance risk is an operational risk resulting from an institution's failure to comply with the rules and principles of Shariah in its products and services, as IFSB-31 defines it. It can lead to income having to be given to charity, contracts being treated as invalid and reputational damage. Regulators expect it to be identified, measured and managed like other operational risks, and Bank Negara Malaysia requires a Shariah risk management function.
Sources
This entry explains a term; it is not a Shariah ruling. Approving a product is for each institution's own Shariah board and regulator.
Related terms
Operational riskThe risk of loss from failed processes, systems, people or external events; for Islamic institutions it includes Shariah non-compliance risk.Purification of incomeGiving away, usually to charity, income from a non-compliant source or a Shariah breach, so the institution does not benefit.Shariah reviewA regular compliance function that assesses whether an institution's operations follow Shariah requirements.Shariah auditAn independent assessment of internal controls, risk management and overall Shariah compliance, usually by internal audit.