ENHANCING SHARIAH GOVERNANCE: THE KEY RISK INDICATORS FOR MANAGING SHARIAH NONCOMPLIANCE RISK IN ISLAMIC FINANCIAL INSTITUTIONS

Abstract

The whole process of Shariah compliance in Islamic financial institutions (IFIs) needs adequate attention. This is because Shariah non-compliance risk (SNCR) may cause not only unrecognition of income, but also contribute to the implications on the existing risk profiles. The objective of this study is to propose selected key risk indicators (KRIs) for SNCR. At first, it is necessary to review the implications of SNCR on existing risk profiles in order to examine to what extent the relationship between risks may give some ideas in determining KRIs for SNCR. This study is conducted through a literature review of existing academic journals, related reports, and statutes. The methodology began with addressing the criteria for good KRIs for risks. This study suggests the selected KRIs for SNCR, in the level considered in a stress testing programme for Shariah risk management. This study also suggests several KRIs for SNCR such as number of new Shariah-related complaints and the amount of impure income as a percentage of total income. Overall, this study has several implications to the Islamic finance industry, and can be a reference for IFIs in structuring their own comprehensive risk management to enhance the effectiveness of the Shariah governance practice.