Study guide
9.1 Corporate Governance in Islamic Financial Institutions
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
9.1 Corporate Governance in Islamic Financial Institutions
Key Takeaways Explain This Topic AI
Corporate governance is the system of relationships among a company's board, management, shareholders and other stakeholders that sets objectives and holds decision-makers to account. IFIs add Shariah compliance and investment account holders to this picture.
BNM's Corporate Governance policy document (3 August 2016) requires a majority of independent directors and a non-executive chairman who has not been CEO in the past five years. It allows at most one executive director without BNM approval.
Banks and takaful operators must have board nominations, remuneration, risk management and audit committees. Each committee needs at least three directors, a majority of them independent, and the board chairman may not chair any of them.
BNM expects independent directors' tenure generally not to exceed nine years, and requires a code of ethics supported by a whistleblowing policy.
IFSB guidance highlights the governance gap for investment account holders, who bear investment risk without shareholders' voting rights, and recommends specific protections for them.
Last updated: October 2026
Corporate Governance in Islamic Financial Institutions
Quick Answer: Corporate governance is how a company is directed and controlled: who sets its objectives, who monitors management, and how decision-makers are held accountable. Malaysian Islamic banks and takaful operators follow BNM's Corporate Governance policy document (3 August 2016), with its independent-majority boards and four core board committees. They add Shariah governance on top (sections 9.2–9.4), and must protect stakeholders, such as investment account holders, who do not exist in conventional banks.
1. What Is Corporate Governance?
The OECD describes corporate governance as the set of relationships between a company's management, its board, its shareholders and other stakeholders, which provides the structure for setting objectives, attaining them, and monitoring performance. Good governance rests on four ideas:
Accountability: directors and managers answer for their decisions.
Transparency: timely, accurate disclosure.
Fairness: equitable treatment of shareholders and stakeholders.
Responsibility: compliance with law and regard for society.
An Islamic perspective. These ideas match Islamic principles closely:
- amanah : office and wealth are trusts;
- shura : consultation in decision-making;
- 'adl : justice to all stakeholders;
- hisbah : oversight of conduct;
ultimate accountability to Allah.
Islamic governance thinking therefore leans towards a stakeholder model : the firm serves shareholders, depositors, investment account holders, employees, customers and society, all within Shariah.
2. Why Islamic Financial Institutions Need More Than Ordinary Governance
Special feature Governance consequence
Shariah compliance is part of the product A Shariah committee and control functions are needed, and a Shariah failure is a legal, financial and reputational event (IFSA s.28)
Investment account holders (IAHs) IAHs bear investment risk like shareholders but have no vote. The institution must protect them through disclosure, fair profit allocation, and reserve policies
Depositors under qard Principal is guaranteed, and the bank must manage liquidity prudently
Takaful participants Their risk fund belongs to them, not to shareholders, so the operator must keep funds segregated and act as a fiduciary
Displaced commercial risk Management may be tempted to smooth returns at shareholders' or IAHs' expense, which needs board-level policy
3. BNM's Corporate Governance Policy Document (2016)
BNM's Corporate Governance policy document , issued on 3 August 2016 , applies to licensed banks, Islamic banks, insurers and takaful operators. Its key requirements:
3.1 Board Composition
The board must have a majority of independent directors at all times.
The chairman must not be an executive , and must not have served as CEO of the institution in the past five years .
The board may have no more than one executive director , unless BNM approves otherwise.
An independent director must not have been an executive in the past two years, or have a significant business relationship with the institution.
BNM expects tenure limits for independent directors generally not to exceed nine years .
3.2 Board Committees
Every institution must establish:
- a board nominations committee ;
- a board remuneration committee (it may be combined with the nominations committee);
- a board risk management committee ; and
a board audit committee .
Each committee must have at least three directors , with a majority of independent directors . To keep deliberations robust, the chairman of the board must not chair any board committee .
3.3 Culture, Ethics and Remuneration
Institutions must adopt a code of ethics that promotes ethical, prudent and professional behaviour, supported by a transparent whistleblowing policy .
Remuneration must promote a sound risk culture and prudent risk-taking.
Boards must approve and maintain credible recovery and resolution plans for conditions of stress.
3.4 Where Shariah Governance Fits
BNM's Shariah Governance policy document (SGPD 2019) makes the board accountable for Shariah governance as part of overall governance. It requires every director to keep developing knowledge of Islamic finance, and encourages the board to appoint a Shariah committee member as a director (sections 9.2–9.3). The Shariah committee therefore works alongside the board committees: for example, Shariah audit reports go to both the audit committee and the Shariah committee.
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4. Listed Islamic Banking Groups
Islamic banks owned by listed groups, such as a holding company on Bursa Malaysia, are also influenced by the Malaysian Code on Corporate Governance (MCCG 2021) , issued by the Securities Commission. It promotes board independence and diversity, effective audit and risk committees, and transparent reporting, on a comply-or-explain basis.
5. International Guidance
IFSB: IFSB-3 (2006) was the first set of Guiding Principles on Corporate Governance for institutions offering only Islamic financial services. It grouped its principles around an overall governance framework, the rights of investment account holders , Shariah compliance, and transparent reporting on investment accounts. It suggested a board-level governance committee to look after IAHs. The IFSB has since issued IFSB-30 , a revised standard on corporate governance for the banking segment.
AAOIFI: AAOIFI's governance standards cover the Shari'ah supervisory board, Shari'ah review, and an audit and governance committee for Islamic financial institutions.
6. Common Governance Weaknesses to Recognise
- Weakness Example Safeguard
- Dominant CEO or executive board Chairman and CEO roles combined Non-executive chair; independent majority
- Weak oversight of risk Rapid financing growth without challenge Board risk management committee
- Misaligned pay Bonuses tied only to sales volume Remuneration committee; risk-adjusted pay
Ignoring IAHs Moving bad assets into investment account pools IAH protection policies, disclosure, fair allocation
Shariah treated as a formality Products launched before Shariah sign-off Board accountability under SGPD; Shariah committee endorsement
The IFSB's 2026 stability report notes that governance gaps, especially in frontier markets, remain a key vulnerability for Islamic banks.