Study guide
1.4 Rule-Making in Modern Islamic Banking & Finance
IBFIM Associate Qualification in Islamic Finance AQIF
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1 Chapter 1: AQIF Orientation, Shariah Foundations & Rule-Making
1.1 About the AQIF Assessment & How to Use This Guide 1.2 Shariah Worldview, Fiqh & Legal Maxims 1.3 Primary & Secondary Sources of Shariah 1.4 Rule-Making in Modern Islamic Banking & Finance 1.5 Maqasid al-Shariah & Property Rights
2 Chapter 2: Islamic Economics, Core Prohibitions & Contract Essentials
2.1 Islamic Economics & the Fundamentals of Islamic Banking 2.2 Riba in Debts and Sales 2.3 Gharar, Maysir & Prohibited Activities 2.4 Contractual Essentials, Options & Unilateral Promises
3 Chapter 3: Exchange & Sale Contracts (Murabahah, Tawarruq, Salam & Istisna')
3.1 Murabahah & Bai Bithaman Ajil (BBA) 3.2 Tawarruq, Commodity Murabahah & BSAS 3.3 Forward Sales: Salam & Istisna'
4 Chapter 4: Leasing & Partnership Contracts (Ijarah, Mudarabah & Musharakah)
4.1 Ijarah & Ijarah Muntahiyah bi al-Tamlik (IMBT) 4.2 Mudarabah (Profit-Sharing Partnership) 4.3 Musharakah & Diminishing Partnership (MMP)
5 Chapter 5: Fee-Based, Security & Gratuitous Contracts (Wakalah, Kafalah, Rahn & Qard)
5.1 Agency & Service Contracts: Wakalah & Ju'alah 5.2 Security & Guarantee Contracts: Kafalah & Rahn 5.3 Gratuitous & Custody Contracts: Qard, Wadiah & Hibah
6 Chapter 6: Ethics in General, Islamic Ethics & Fiduciary Conduct
6.1 Ethics in General: Concepts, Sources & Theories 6.2 Foundations of Akhlaq in Islamic Finance 6.3 Market Conduct & Prohibited Trade Practices 6.4 Fiduciary Duties, Conflict of Interest & Confidentiality
7 Chapter 7: Treating Customers Fairly, VBI & Professional Standards
7.1 Treating Customers Fairly & Responsible Financing 7.2 Value-Based Intermediation (VBI) & Social Finance 7.3 Professional Conduct & AAOIFI Code of Ethics
8 Chapter 8: Malaysian Statutory Framework (IFSA & CMSA)
8.1 Islamic Financial Services Act 2013 (IFSA) Overview 8.2 Islamic Deposits vs. Investment Accounts under IFSA 8.3 Capital Markets and Services Act (CMSA) & Dispute Resolution
9 Chapter 9: Corporate & Shariah Governance in Islamic Financial Institutions
9.1 Corporate Governance in Islamic Financial Institutions 9.2 Two-Tier Shariah Governance Structure 9.3 Institutional Shariah Committee Roles & Operations 9.4 Shariah Control Functions & SNC Management 9.5 Issues & Challenges in Implementing Shariah Governance
10 Chapter 10: Islamic Finance Industry, Banking & Takaful Architecture
10.1 Overview of the Global Islamic Finance Industry 10.2 Islamic Banking System & Money Markets 10.3 Takaful Principles & Operational Models
11 Chapter 11: Islamic Capital Markets, Wealth Management & Contemporary Trends
11.1 Sukuk Structures & Market Mechanics 11.2 Shariah Equity Screening & Islamic Asset Management 11.3 Islamic Wealth Management, Social Finance & Contemporary Issues
1.4 Rule-Making in Modern Islamic Banking & Finance
Key Takeaways Explain This Topic AI
Modern Islamic finance relies on collective ijtihad at three levels: international bodies (IIFA, AAOIFI), national authorities (the BNM SAC and the SC's SAC), and each institution's Shariah committee.
In Malaysia, complying with a BNM SAC ruling is deemed compliance with Shariah (IFSA 2013 s.28(2)), and an SAC ruling prevails over a differing ruling of an institution's Shariah committee (Central Bank of Malaysia Act 2009 s.58).
BNM turns SAC rulings into binding standards under IFSA s.29 through contract-based policy documents, whose 'S' paragraphs are mandatory standards and 'G' paragraphs are guidance.
BNM's Hajah and Darurah policy document (issued 3 January 2024, effective 2 January 2025) sets four preconditions for any need-based exception: certainty, a necessary deviation, no practical compliant alternative, and no greater harm.
An institution may not invoke hajah or darurah for hardship arising solely from risks to its profitability or from weak governance and internal controls.
Last updated: October 2026
Rule-Making in Modern Islamic Banking & Finance
Quick Answer: Modern Islamic finance rules are made through collective ijtihad . International bodies such as the International Islamic Fiqh Academy (IIFA) and AAOIFI issue resolutions and standards. National authorities, the BNM Shariah Advisory Council (SAC) and the Securities Commission's SAC, issue binding rulings. Each institution's Shariah committee applies those rulings to its products. In Malaysia, BNM converts SAC rulings into enforceable standards under section 29 of the Islamic Financial Services Act 2013 (IFSA).
Section 1.3 described the classical sources of Shariah and the role of the individual mujtahid. This section covers the second half of the AQIF topic on rule-making: how rulings are produced for banks, takaful operators and capital markets today , and why their legal force in Malaysia is unusually strong.
1. Why Rule-Making Had to Change
Classical fiqh was developed mainly by individual jurists ( ijtihad fardi ) answering questions about trade, partnerships and loans. Modern finance raised problems no classical text addresses directly. Examples include electronic contracting, fiat money, deposit insurance, sukuk, capital adequacy, cross-border liquidity, and digital platforms. These questions need expertise in banking, law, accounting and economics as well as fiqh, and markets need consistent answers.
The response has been collective ijtihad ( ijtihad jama'i ): panels of scholars deliberate together, often with technical experts, and issue a resolution as a body. Collective rulings are more thoroughly researched and harder to "shop around", and they carry institutional authority.
2. The Three Levels of Rule-Making
Level Main bodies What they produce Legal force
International International Islamic Fiqh Academy (IIFA), an organ of the OIC created by the Third Islamic Summit in 1981; AAOIFI (Bahrain, established 1991), through its Shari'ah Board Fiqh resolutions, e.g. IIFA Resolution 9 (9/2) of 1985 on insurance, 65 (3/7) of 1992 on istisna' and 179 (19/5) of 2009 on tawarruq; AAOIFI Shari'ah Standards Persuasive; binding only where a jurisdiction adopts them
National Shariah Advisory Council of Bank Negara Malaysia (May 1997); Shariah Advisory Council of the Securities Commission (16 May 1996) Rulings (resolutions) for Islamic banking, takaful and the Islamic capital market Binding under Malaysian statute
Institutional The Shariah committee of each Islamic bank, takaful operator or window (IFSA s.30) Decisions and advice on products, documents and operations Binding within the institution, subject to SAC rulings
Note
The Islamic Financial Services Board (IFSB) , based in Kuala Lumpur, is a standard-setter for prudential matters such as capital, liquidity and governance. It does not issue fatwas.
3. The Malaysian Rule-Making Process
Malaysia's model is centralised and statutory. A typical path from a new issue to a binding rule:
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Key legal links:
IFSA s.28(2): compliance with an SAC ruling is deemed compliance with Shariah.
Central Bank of Malaysia Act 2009 (CBA) s.55: BNM and Islamic financial institutions may consult the SAC on Shariah matters. BNM's referral manual ( Manual Rujukan Institusi Kewangan Islam kepada Majlis Penasihat Syariah ) sets out the procedure.
CBA s.57: a ruling given on a reference binds the institution that sought it, and binds a court or arbitrator that referred the question.
CBA s.58: where an institution's Shariah committee rules differently from the SAC, the SAC's ruling prevails .
IFSA s.29: BNM may specify standards on Shariah matters in accordance with SAC rulings.
Rulings Become Standards
Since the early 2010s BNM has issued a Shariah contract-based regulatory framework : a policy document for each major contract. Examples include Murabahah, Musyarakah, Mudarabah, Ijarah, Istisna', Tawarruq, Wa'd, Wakalah, Kafalah, Rahn, Hibah, Qard, Wadiah, Bai' Inah, and Bai' al-Sarf (2018). Each document has two parts:
Shariah requirements: the essential features that make the contract valid, drawn from SAC rulings; and
Operational requirements: governance, structuring, risk management, disclosure and conduct.
Paragraphs marked "S" are standards that must be complied with, and non-compliance may lead to enforcement action. Paragraphs marked "G" are guidance.
SAC Rulings Are Published
SAC resolutions are published, for example in BNM's compendium Shariah Resolutions in Islamic Finance and in statements after SAC meetings. Courts and arbitrators must take published rulings into consideration (CBA s.56). This creates predictability that is rare in other jurisdictions. Section 9.2 discusses the court cases that confirmed the system.
4. Methods Used in Modern Rule-Making
Rule-making bodies draw on the classical toolkit introduced in section 1.3, applied systematically:
Method Meaning Malaysian example
Takhayyur (selection among schools) Choosing the most suitable recognised opinion, not only the local madhhab The binding unilateral promise ( wa'd mulzim ) draws on the Maliki view, while bai' inah relies on the Shafi'i view
Maslahah (public interest) Rules that secure benefit and prevent harm where texts are silent Deposit insurance and consumer-protection rules
'Urf tijari (commercial custom) Sound market practice can shape rulings Accepting electronic records as constructive possession ( qabd hukmi )
Sadd al-dhara'i (blocking the means) Prohibiting what leads to a prohibited result SAC's 2019 ruling against ar-rahnu structures that tied a fee to a loan (section 5.2)
Hajah and darurah (need and necessity) Exceptions where strict compliance causes real hardship T+2 settlement in currency exchange
Maqasid al-Shariah Testing rules against the objectives of Shariah The SC's 2026 guidance asking sukuk advisers to consider maqasid outcomes
5. BNM's Hajah and Darurah Policy Document (2024)
Because need-based exceptions can be abused, BNM issued a Hajah and Darurah policy document on 3 January 2024 , effective 2 January 2025 . It applies to exceptions under the fiqhiyyah perspective. Permanent, text-based permissions such as ijarah and salam (the usuliyyah perspective) need no further deduction and are outside its scope.
Four preconditions must all be met:
Certainty: the hardship is certain or highly probable, not a mere assumption.
Deviation required: removing the hardship requires departing from an existing Shariah principle or ruling.
No practical alternative: there is no Shariah-compliant alternative, or the available alternative is impractical in the situation.
Impact: the exception must not cause equal or greater harm to stakeholders, assessed through fiqh al-muwazanah (weighing benefits and harms).
An institution may not invoke hajah or darurah for hardship arising solely from risk to its profitability or from weaknesses in its own governance and internal controls .
The policy document recognises three categories:
Hajah type 1: hardship from widespread, hard-to-avoid situations ( 'umum al-balwa ) or accepted commercial custom. The SAC rules without specific conditions, and the ruling stands until overridden.
Hajah type 2: hardship of a specific institution or person short of darurah. The SAC rules with specific conditions or limits.
Darurah: extreme stress linked to recovery or resolution actions. The ruling is applied temporarily and proportionately, limited in duration and amount.
The document's own examples include ceding takaful risk to a conventional reinsurer when retakaful capacity is insufficient, and T+2 settlement in currency exchange where immediate exchange is not practised.
6. Strengths and Limits of the Model
Strengths: legal certainty, consistent products across the market, reduced fatwa shopping, and courts bound by expert rulings.
Limits: rulings can differ from those of other jurisdictions (for example on bai' inah, tawarruq and the sale of debt), which complicates cross-border products. Centralisation also places great responsibility on a small national council, so its research quality and independence matter. Section 9.5 discusses these challenges further.