2.6 Shariah-Compliant Schemes, Their Risks and the Role of the Shariah Advisory Council

FIMM Combined Examination FCE

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1 Introduction: The FIMM Combined Examination (FCE)

0.1 FCE Exam Facts, Registration Rules and How to Use This Guide

2 Chapter 1: Understanding Collective Investment Schemes in Malaysia

1.1 What a Collective Investment Scheme Is and How Malaysian CIS Are Classified 1.2 Investment-Linked Funds Are Not UTS; Industry Growth and History 1.3 Participants in the CIS Ecosystem: Unit Holders, Managers, Trustees, Distributors and Regulators

3 Chapter 2: Introduction to UTS and PRS

2.1 UTS and PRS as Investments: Mechanics, Unit Calculations and How They Compare 2.2 Types of Funds: By Asset Class, Fund Structure and Investment Objective 2.3 Methods of Investing and Dollar Cost Averaging 2.4 Benefits and Disadvantages of Investing in UTS and PRS 2.5 Understanding Risk and the Risks of Investing in Schemes 2.6 Shariah-Compliant Schemes, Their Risks and the Role of the Shariah Advisory Council

4 Chapter 3: Regulatory Framework

3.1 The Regulatory Framework: The SC, Other Regulators and FIMM's Dual Role 3.2 Legislation, SC Guidelines and FIMM Rules Governing UTS and PRS 3.3 Regulation of Scheme Providers and Oversight Functions 3.4 The Deed, the Prospectus or Disclosure Document, and the Product Highlights Sheet 3.5 Portfolio Constraints: Permitted Investments, Liquidity, Borrowing and Exposure Limits 3.6 Regulations for Other CIS: Real Estate Investment Trusts and Exchange-Traded Funds 3.7 Regulation and Duties of the Scheme Trustee 3.8 Regulation of Marketing and Distribution: Distributor Categories, Collection Points and Agency Structure 3.9 Registration of Consultants: Eligibility, Fit and Proper, Duration, Variation and Revocation

5 Chapter 4 (Part 1): Marketing and Distribution — Disclosure and Transactions

4.1 Servicing Investors and the Contents of the Prospectus and Disclosure Document 4.2 The Product Highlights Sheet, Advertising Standards and Account Maintenance 4.3 The Purchase Process and Suitability Assessment Before Personal Advice 4.4 Cooling-Off Rights, Repurchase of Units, Suspension and Switching 4.5 Financing the Purchase of UTS: Process, Safeguards and the Risk Disclosure Statement 4.6 EPF Transfers and Withdrawals for Investment in Approved Unit Trust Funds

6 Chapter 4 (Part 2): Marketing and Distribution — Distributions, Reporting and Service

4.7 Distributable Income, Distributions and NAV, "Buying" a Distribution and Taxation 4.8 Reporting to Investors: Confirmations, Statements, and Semi-Annual and Annual Reports 4.9 Marketing Principles, Delivering Quality Service and Handling Complaints 4.10 The Effect of Inflation, Taxation and Investment Costs on Returns 4.11 Investment Alternatives to UTS and PRS

7 Chapter 5: Code of Ethics

5.1 Compliance, Ethics and the Structure of the FIMM Code of Ethics 5.2 Core Principle 1: Honesty and Integrity 5.3 Core Principle 2: Professionalism 5.4 Core Principles 3 to 5 and Non-Compliance: Conflicts, Disclosure, Confidentiality and Misconduct

8 Chapter 6: Personal Financial Planning

6.1 Personal Financial Planning: Definition, Features, Five Areas and the Six Steps 6.2 Financial Planner Credentials, Skills, Remuneration, and How a Planner Differs from a Consultant 6.3 The Consultant's Role in Investment Planning and Advising Clients Through the Life Cycle

9 Chapter 7A: Features and Operations of UTS

7A.1 Structure of a UTS, the Trust Deed, the Parties and Modifying the Deed 7A.2 UTS Fees, Charges and Expenses, and the Management Expense Ratio 7A.3 Dealing in Units, Valuation, NAV Calculation and Unit Prices 7A.4 Forward and Historical Pricing, and the UTMC's Holding of Units 7A.5 Unit Splits, Distributions and Their Effect on NAV 7A.6 Measuring UTS Performance: Returns, Performance Tables, Risk Measures and Qualitative Factors 7A.7 Operational Aspects of Shariah-Compliant UTS and PRS and the Shariah Contracts Between the Parties 7A.8 Borrowing to Invest in UTS and the Risks of Loan Financing

10 Chapter 7B (Part 1): The Pension Landscape and the PRS Framework

7B.1 The Malaysian Pension Landscape and the Adequacy of Retirement Savings 7B.2 The World Bank's Five-Pillar Pension Framework in the Malaysian Context 7B.3 Key Players: EPF, KWAP, LTAT, Employer-Sponsored Schemes and Annuities 7B.4 Why Malaysia Needs PRS: Ageing, Longevity Risk and the Benefits of PRS 7B.5 The PRS Framework and the Private Pension Administrator (PPA) 7B.6 PRS Structure, the Trust and Deed, Advantages over Other Products, Eligibility and Contributions

11 Chapter 7B (Part 2): PRS Operations

7B.7 The PRS Default Option and Tax Incentives for Members and Employers 7B.8 The PRS Account Structure (Sub-Accounts A and B) and Vesting 7B.9 PRS Withdrawals: Pre-Retirement, Retirement, Permanent Departure, Incapacity and Death 7B.10 Switching Between Funds and Transferring Between PRS Providers (Portability) 7B.11 Unclaimed Monies, Death of a Member and PRS Nomination 7B.12 PRS Funds: Number, Core and Non-Core Funds, Objectives, Risk Profiles, Asset Classes, Authorisation and Naming 7B.13 PRS Fees, Charges and Expenses 7B.14 PRS Unit Creation, Forward Pricing, Valuation, Distributions, Performance Measurement and Electronic Communication

2.6 Shariah-Compliant Schemes, Their Risks and the Role of the Shariah Advisory Council

Key Takeaways Explain This Topic AI

A Shariah-compliant scheme may differ from a conventional scheme in its objectives, investment strategy, operations, documentation, investment avenues and accounts and reporting.

Shariah-compliant schemes face the same risks as conventional schemes plus Shariah non-compliance risk, which arises when a security is reclassified as Shariah non-compliant.

Reclassification can happen when too much of a company's income comes from non-compliant activities, after a merger or acquisition, or after a change in business direction.

The SC's Shariah Advisory Council publishes the results of its Shariah compliance review of Bursa Malaysia securities every six months, in May and November.

Even a fund that holds no interest-bearing instruments can be affected by the general level of interest rates in the economy.

Last updated: October 2026

How a Shariah-Compliant Scheme Differs

A Shariah-compliant scheme is very similar to a conventional one, except that all activities must comply with Shariah requirements . The study guide lists six areas where the two may differ:

objectives of the fund;
investment strategy;
operations and management;
documentation;
investment avenues and activities; and

accounts and reporting.

Objective – a conventional scheme seeks capital and income growth; a Shariah-compliant scheme seeks the same within the scope of Shariah principles , and its strategy must match.

Operations – the Scheme Provider must ensure daily operations meet both SC requirements and Shariah requirements. A Shariah adviser or Shariah committee strengthens compliance and supervision.

Investments – Islamic funds hold halal companies, Islamic debt securities and sukuk. They exclude companies in conventional banking, insurance and financial services, gambling, alcoholic beverages and non-halal food. A scheme may only invest in instruments approved as Shariah-compliant by the SC's Shariah Advisory Council (SAC) and/or the scheme's Shariah committee or adviser, consistent with the fund's objectives.

Cash and income – excess cash goes into Shariah-compliant instruments such as Islamic current or investment accounts. Returns avoid riba' (interest/usury) through a systematic cleansing or purification process that removes amounts from non-compliant sources; these amounts are normally donated to charity .

Risks of Shariah-Compliant Schemes

The study guide's Diagram 2.9 shows that Shariah-compliant schemes face the same kinds of risk as conventional schemes : investment, business, liquidity, regulatory, change in fees and (for UTS) borrowing-related interest rate risk.

Note

The general level of interest rates can affect a Shariah-compliant fund even if it holds no interest-bearing instruments, because interest rates are an economy-wide indicator that influences asset values.

The extra risk: Shariah non-compliance risk

Shariah non-compliance risk (also called Shariah-specific risk ) arises when a security the fund holds is reclassified from Shariah-compliant to Shariah non-compliant . This usually happens when:

a substantial part of the company's income comes from non-compliant activities;
the company undergoes a corporate restructuring such as a merger or acquisition; or

the company changes its business direction and becomes non-compliant.

The manager must then cleanse or purify the fund by disposing of the reclassified securities. Selling may happen at an unfavourable time, so the fund may earn a lower return or make a loss, reducing the NAV.

Risk Conventional scheme Shariah-compliant scheme
Investment, business, liquidity, regulatory Yes Yes
Interest rate environment Yes Yes, indirectly
Shariah non-compliance (reclassification) No Yes
The Role of the SC's Shariah Advisory Council (SAC)

SAC role Detail
Mandate Ensure the Islamic capital market (ICM) is implemented in line with Shariah principles

Advisory scope Advise the SC on all matters relating to ICM development; act as the reference point for ICM matters

Resolutions Resolve ICM issues and publish resolutions to guide the public and practitioners

Screening Review the Shariah compliance of securities listed (or to be listed) on Bursa Malaysia using quantitative and qualitative assessments

Publication Publish the review results every six months, in May and November

Those twice-yearly publications also set out:

the benchmarks used to decide the Shariah status of companies with mixed income; and

the disposal treatment for securities reclassified as non-compliant and for non-compliant securities held as investments.

Further SAC resolutions and documents are on the SC website. At fund level, the scheme's Shariah committee (or adviser) is responsible for making sure every aspect of the scheme is consistent with Shariah principles, including SAC resolutions .

Worked Scenario: A Holding Is Reclassified

An Islamic equity UTS holds shares in Company K, a logistics group. K acquires a hotel business that earns a large share of its income from serving alcohol. In the next SAC review (May or November), K is reclassified as Shariah non-compliant .

The fund's Shariah adviser confirms the reclassification and the disposal treatment published by the SAC.

The manager sells the K shares under that treatment. If K's share price has fallen, the fund realises a loss and its NAV drops.

Any amounts the SAC treatment requires to be cleansed are channelled to charity rather than kept by the fund.

The fund report later carries the Shariah adviser's opinion on whether the fund was managed in line with Shariah requirements.

This is why the study guide treats reclassification as a risk unique to Shariah-compliant schemes: the manager has no choice about selling, even when the timing is poor.

Who Does What in Shariah Governance

Body Level Role
SAC of the SC Whole Islamic capital market Rulings, resolutions and the list of Shariah-compliant securities

SAC of Bank Negara Malaysia Islamic banking, takaful and the Islamic money market Shariah rulings on the instruments it oversees; fund reports may rely on its classifications

Shariah adviser or Shariah committee Individual scheme Advises on and monitors the scheme's compliance, applying SAC resolutions

Compliance officer of the Scheme Provider Individual Scheme Provider Checks daily operations against SC and Shariah requirements

Exam Pointers

The difference between conventional and Shariah schemes lies in Shariah compliance , not in the basic trust structure. Both have a Trustee, units and NAV pricing.

The list of Shariah-compliant securities is updated in May and November .

The specific extra risk is reclassification (Shariah non-compliance risk); cleansing can lower returns.

Purification amounts are typically given to charity , not kept by the manager or returned to investors.

Chapter 7A covers the Shariah contracts (musyarakah, wakalah, bai and wadiah yad dhamanah) that govern relationships in Shariah-compliant UTS and PRS.