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Strengthening Shariah Compliance Risk Culture
Shariah is the central tenet of Islamic finance. Its principles, which promote fairness and transparency, underpin the conduct of Islamic finance transactions. Failures in fully observing Shariah principles can thus affect the validity and enforceability of Islamic finance transactions, and increase financial and non-financial risks for Islamic financial institutions. For example, it is prohibited for Islamic financial institutions to recognise income derived from transactions that have not fully observed Shariah requirements. This could lead to safety and soundness concerns for an Islamic financial institution. Incidents of non-compliances on a broader scale can, in turn, undermine confidence in the Islamic financial sector and its stability. The effective management of Shariah non-compliance risk is therefore paramount, especially with the growing signifi cance of Islamic finance as a key component of the financial system, domestically and globally. This article highlights the approach by the Bank and the practices of Islamic financial institutions in inculcating an effective Shariah compliance risk culture.

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