MALAYSIAN INSTITUTE ‘OF ACCOUNTANTS White Paper on Shariah AuditWhite Paper on Shariah Audit Copyright © 30 June 2023 by the Malaysian Instituto of Accountants (MIA). All rights resorve “The Malaysian Insitute of Accountants’ logo appearing oni tis publication is a registered trademark of MIA. No part of this publication either in whole or in part may be copied, reproduced, recorded, cistrbuled, republished, downloaded, cisplayed, posted, stored or transmitted in any form (tangible or intangible) or by any means, incuding but not limited to elecronc, mechanical, photocopying, scanning or audlolvideo recording, information storage or retrieval syslem for ary purpose \Whatsoever without prior express writen permission of MIA. 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Whilst every reasonable care has been {akon in preparinglcampiling this document, MIA makes no representations or warranties of whalsoaver nalura (ther expressly ‘or impliedly) in cegpect ofthis publication including but not ited to the accuracy, suitably elabilly or completeness of the information contained inthis publication, Please take notice that under no circumstances will MIR is Council members, citectors, ‘and employees be lable to any person or business entity for any director indirect losses, costs or damages howsoever arising including due to the use of and relance of any information contained in tis publication, Please consider the environment before printingWhite Paper on Shariah Audit ABSTRACT Various organisations that offer Shariah-compliant services and products, contribute significantly to Malaysia's globally competitive Islamic finance industry. Given that Shariah regulations and compliance are a competitive edge in growing and capitalising on Islamic markets, it is imperative to ensure consistent Shariah compliance for the issuance of Islar finance services and products, particularly through the adequate implementation of Shariah governance structures and Shariah audit practices. This paper provides an overview of the diverse regulations and current practices, as well as the issues and policy recommendations relating to Shariah audit for the following sectors: Islamic banking and takaful, Islamic capital market, Islamic co-operatives, public trust entities and other Islamic institutions such as State Islamic Religious Councils. This paper is based on ‘a mix of primary and secondary data. Notably, it derives analysis of the current challenges in implementing Shariah governance and audit from roundtable sessions and the deliberations ‘of a Shariah Audit Working Group comprising industry experts and regulators. ‘Two key challenges are identified : (1) the lack of defined scope for Shariah audit and, (2) the lack of required talent with the requisite skill and knowledge to perform an effective Shariah audit. To tackle these issues, this paper proposes the issuance of a Roadmap and Best Practice Guides that address talent management and professional development for Shariah auditors, as well as audit coverage respectively,White Paper on Shariah Audit LIST OF CONTRIBUTORS Are Prof Dr Zurina Shafi Prof Dato’ Dr Mustafa Mohd Hanefah Dr Nurazalia Zakaria Dr Supiah Salleh Dr Muhammad Iqmal Hisham Kamaruddin Shariah Audit Working Group Muhammad Syarizal Abdul Rahim Chairman. Mohamad Faisal Abdul Malik Member Mohd Khaidzir Shahari Member Rahimah Abdul Karim Member ‘Shamsul Bahrom Mohamed Ibrahim Member Sharifatul Hanizah Said Ali Member imon Tay Pit Eu Member Eau Urc Rc Mohd Muazzam Mohamed Chairman, Dato’ Hj Mohd Redza Shah Abdul Wahid Member Mohamad Faisal Abdul Malik Member Mohd Khaidzir Shahari Member Muhammad Syarizal Abdul Rahim Member Prof. Dr Norman Mohd Saleh Member Professor Dato’ Dr. Azmi Omar Member Sharifatul Hanizah Said Ali Member Tuan Haji Nasran Omar Member Lara Zulfa Abdul Rahman Hadzirah Razini Mohd Redzuan Amatina AnuarWhite Paper on Shariah Audit CONTENTS ABSTRACT i LIST OF CONTRIBUTORS i 1. INTRODUCTION 5 Il, OVERVIEW 2.0 Introduction 6 2.4 Islamic Financial System 1“ 2.1.4 Islamic Banking and Takaful 1“ 2.1.2 Islamic Capital Market 14 2.1.2.1 Securities Screening Methodology 18 2.1.2.2 Appointment of Shariah Advisers for ICM Products and Services 18 2.2 Co-operatives 20 2.2.1 Shariah Governance in Co-operatives 24 2.3 Public Trust Entities (PTEs) 22 2.3.1. Lembaga Tabung Haji (TH) 23 2.3.2. Employees Provident Fund (EPF) 24 2.3.3 Permodalan Nasional Berhad (PNB) 25 2.3.4 Yayasan Pembangunan Ekonomi Islam Malaysia (YaPEIM) 26 2.4 State Islamic Religious Councils (SIRCs) 27 2.4.1, Governance of SIRCs 27 Ill, SHARIAH AUDIT: DEFINITION, PROCESS AND SCOPE 3.1 Definition of Shariah Audit 30 3.2 Shariah Audit Process and Scope 34 IV, ISSUES AND CHALLENGES IN SHARIAH GOVERNANCE AND AUDIT 4.0 Introduction 32 4.1 Islamic Banking and Takaful 33 4.2 Islamic Capital Market 33 4.3 Co-operatives 34 4.4 Public Trust Entities (PTEs) 35 4.5 State Islamic Religious Councils (SIRCs) 36 V. THE WAY FORWARD 37 REFERENCES 38 APPENDIX 1 42 APPENDIX 2 46White Paper on Shariah Audit INTRODUCTION Malaysia is recognised as a global leader in Islamic finance with bright prospects to generate, drive and capture greater growth owing to strong market demand from the country's Muslim-majority population and high potential to serve the international market. The Islamic finance industry in Malaysia comprises several sectors that contribute to Malaysia's robust growth in this space. This paper covers the following sectors: + Islamic banking and takaful; + Islamic capital market; + Islamic co-operatives; + Public Trust Entities (TEs); and + other Islamic institutions such as State Islamic Religious Councils (SIRCs). Shariah audit practices in these sectors are diverse due to the different approaches taken by their respective regulators. This paper provides an overview of the regulations and current practices, as well as the issues and policy recommendations relating to Shariah audit in these sectors. Section Il summarises the Shariah governance and audit practices adopted in each sector. Section Ill briefly elaborates on the definition, process and scope of Shariah audit. Lastly, Section IV discusses the current challenges faced by each sector in the areas of Shariah governance and audit. This White Paper derives its analysis of these issues from four roundtable sessions with representatives from Islamic financial institutions (IFIs), the Islamic capital market, public trust entities, co-operatives, and State Islamic Religious Councils. Lastly, Section V proposes a way forward to enhance Shariah audit practices in these sectors.White Paper on Shariah Audit IL OVERVIEW 2.0 Introduction According to the State of the Islamic Economy Report 2020/21, Malaysia has pioneered the development of Islamic finance ecosystems for eight consecutive years starting from the year 2013. Based on the Global Islamic Economy Indicator, which measures how well-positioned countries are to capitalise on the halal economy, Malaysia is in first place with a total score of 290.2, chiefly due to the rapid development of its Islamic finance sector, while Saudi Arabia is in second place with a score of 156.1 (DinarStandard, 2020). Similarly, the Islamic Financial Development Report 2021 ranks Malaysia first, followed by Indonesia, According to the Islamic Financial Development Indicators, Malaysia leads in quantitative development, knowledge, awareness and governance (ICD-REFINITIV, 2021). Furthermore, the Islamic Financial Services Industry Stability Report 2021 produced by the Islamic Financial Services Board (IFSB) recognises Malaysia as the third largest country in terms of Islamic financial assets globally (11.4%). Malaysia also has the largest sukuk market, with approximately 47.3% of total sukuk globally (IFSB, 2021). Islamic financial system Presently, there are 16 Isiamic Banks, 15 Takaful Operators and six (6) Development Financial Institutions (DF Is) in Malaysia's Islamic financial industry. These institutions are listed by sector in Table 1 below. Table 1: Islamic Financial Institutions (IFls) in Malaysia Islamic Banks 4. Affin islamic Bank Berhad 2. _ALRajhi Banking & Investment Corporation (Malaysia) Berhad 3. Alliance Islamic Bank Berhad 4. AmBank Islamic Berhad 5. Bank Istam Malaysia Berhad 6 Bank Muamalat Malaysia Berhad 7. CIMB Islamic Bank Berhad 8. Hong Leong Islamic Bank Berhad 9. HSBC Amanah Malaysia Berhad 40. Kuwait Finance House (Malaysia) Berhad 11, Maybank Islamic Berhad 12, MBSB Bank Berhad 13. OCBCAL-Amin Bank Berhad 14, Public Islamic Bank Berhad 45. _ RHE Islamic Bank Berhad 16. _ Standard Chartered Saadiq BerhadWhite Paper on Shariah Audit Il OVERVIEW (CONT’D.) 2.0 Introduction (cont’d.) Table 1: Islamic Financial Institutions (IF ls) in Malaysia (cont'd.) Takaful Operators, 4. AIAPUBLIC Takaful Berhad 2. AmMetLife Takaful Berhad 3. Etiqa Family Takaful Berhad 4. Etiqa General Takaful Berhad 5. FWD Takaful Berhad 6 Great Easter Takaful Berhad 7. Hong Leong MSIG Takaful Berhad 8. Prudential BSN Takaful Berhad 9. Sun Life Malaysia Takaful Berhad 40. _ Syarikat Takaful Malaysia Am Berhad 11, Syarikat Takaful Malaysia Keluarga Berhad 12. Takaful ikhlas Family Berhad 13. Takaful Ikhlas General Berhad 14, Zurich General Takaful Malaysia Berhad 15. Zurich Takaful Malaysia Berhad Development Financial In ns (DFs) Bank Pembangunan Malaysia Berhad ‘Small Medium Enterprise Development Bank Malaysia Berhad (SME Bank) Export-Import Bank of Malaysia Berhad (EXIM Bank) Bank Kerjasama Rakyat Malaysia Berhad (Bank Rakyat) Bank Simpanan Nasional Bank Pertanian Malaysia Berhad (Agrobank) PeaeNe Source: BNM (2021) The Islamic Capital Market sector is significant as it supports economic growth by facilitating equity and non-equity funding. Malaysia's Islamic capital market sector features 787 public listed companies (81% of 969 companies) that are classified as Shariah-compliant securities as at 25 November 2022. In addition, there are forty (40) Shariah-compliant securities in the Leading Entrepreneur Accelerator Platform (LEAP) market, five (5) Islamic Real Estate Investment Trusts (i-REITs) and six (6) Islamic Exchange-Traded Funds (ETFs) (Securities Commission, 2022). These Shariah-compliant securities are listed in Tables 2 to 5 below. Table 2: Shariah-Compliant Securities in the Main Market/Ace Market as at 25 November 2022 Ptr Peg rc rst Shariah-Compliant || Securities | Shariah-Compliant Securities (%) Industrial Products & Services 238 280 85 Consumer Products & Services 156 205 76 Property 90 99 1 Technology 85 108 79 Construction 61 63 7 Plantation 36 43 84White Paper on Shariah Audit Il OVERVIEW (CONT’D.) 2.0 Introduction (cont’d.) Table 2: Shariah-Compliant Securities in the Main Market/Ace Market as at 25 November 2022 (cont'd.) ice roa Shariah-Compliant || Securities | Shariah-Compliant Securities (%) ct id Transportation & Logistics Energy Healthcare Telecommunications & Media Utilities Financial Services Closed-End Fund Nil 1 Nil SPAC Nil 1 Nil Total 787 969 8t Source: Securities Commission (2022) Table 3: Shariah-Compliant Securities in the LEAP Market as at 25 November 2022 Technology Consumer Products & Services 8 Industrial Products & Services 12 Healthcare 4 Construction 3 Energy 1 Plantation 1 Source: Securities Commission (2022) Table 4: List of Islamic Real Estate Investment Trust (i-REITs) a 1. Al’Agar Healthcare REIT Damansara REIT Managers Sdn Bhd 2 Al-Salam REIT Damansara REIT Managers Sdn Bhd 3. Axis-REIT ‘Axis REIT Managers Bhd 4, _ KLCC Property & REIT Stapled Securities. KLCC REIT Management Sdn Bhd 5. AME Real Estate Investment Trust REIT Managers Sdn Bhd, Source: Securities Commission (2022) Table 5: List of Islamic Exchange-Traded Fund (ETFs) a oo MyETF Dow Jones Islamic Market i-VCAP Management Sdn Bhd Malaysia Titans 25 2. MyETF MSCI Malaysia Islamic Dividend i-VCAP Management Sdn Bhd 3. MyETF MSCI SEA Islamic Dividend i-VCAP Management Sdn Bhd 4, VP-DJ Shariah China A-Shares 100ETF- Value Partners Asset Management MYR, Malaysia Sdn BhdWhite Paper on Shariah Audit Il OVERVIEW (CONT’D.) 2.0 Introduction (cont’d.) Table 5: List of Islamic Exchange-Traded Fund (i-ETFs) (cont'd.) a Ce 5. MyETF Dow Jones U.S. Titans 50 i:-VCAP Management Sdn Bhd 6. Tradeplus Shariah Gold Tracker Affin Hwang Asset Management Bhd Source: Securities Commission (2022) Co-operatives The 2021 Profile of Top 100 Malaysian Co-operatives in Malaysia issued by the Malaysia Co-operative Societies Commission (Suruhanjaya Koperasi Malaysia or SKM) reveals that the top 100 co-operatives (co-ops) have combined assets totalling RM26.15 billion as at 2021 These co-ops posted RM4.23 billion in income, with their shares and subscription fees collected amounting to RM6.21 billion. The financial services sector continues to dominate this list with 41 credit co-ops (SKM, 2021a). In addition, there are about 530 co-ops offering both financing and credit functions that amount to RM12.15 billion (SKM, 2021b). The details of these co-ops with financing and credit functions are in Table 6 below. Table 6: Co-ops with Financing and Credit Functions aor e BANKING Bank Kerjasama Rakyat Malaysia Berhad 1 9.67 Koperasi Co-opbank Pertama Malaysia Berhad 1 0.46 Total Financing from Bank Function 2 10.13 CREDIT Co-operative Credit Function 376 1.59 Co-operative Non-Credit Function 154 0.43 Total Financing from Credit and Non-Credit 530 2.02 Fun: TOTAL 532 12.45 ‘Source: SKM (2021b) Public trust entities (PTEs) Apart from co-operatives, PTEs too provide Shariah-compliant offerings. PTEs are government bodies, non-governmental organisations and Islamic foundations that serve specific objectives. These entities collect funds from investors, depositors or contributing members for the special purposes outlined in their organisational visions and missions. Examples are the Employees Provident Fund (EPF), Lembaga Tabung Haji (TH), Kumpulan Wang Amanah Pencen (KWAP), Lembaga Tabung Angkatan Tentera (LTAT), Permodalan Nasional Bhd (PNB) and Yayasan Pembangunan Ekonomi Islam Malaysia (YaPEIM). ‘As PTEs manage funds on behalf of their depositors and the public at large, proper Shariah governance and audits for their shariah-compliant offerings must be in place to ensure the accountability and sustainability of the funds managed. The details of the main PTEs in Malaysia are shown in Table 7.White Paper on Shariah Audit Il OVERVIEW (CONT’D.) 2.0 Introduction (cont’d.) Table 7: Main PTEs in Malaysia ooo Employees Provident Fund (EPF) Assets: RM1.01 trillion Net income": RM42.08 billion (EPF Annual Report, 2020) 2. Permodalan Nasional Bhd (PNB) Assets: RM322.64 billion Net income": RM11.02 billion (PNB Annual Report, 2020) 3. Lembaga Tabung Haji (TH) Assets: RM82.54 billion Net Income": RM3.42 billion (TH Annual Report, 2020) 4, Yayasan Pembangunan Ekonomi Istam Assets: RM7.24 billion Malaysia (YaPEIM) Revenue: RM53.77 milion (YaPEIM Annual Report, 2019) Note: Net income* = net income after tax State Islamic Religious Councils (SIRCs) Zakat and wagf institutions in Malaysia, including State Islamic Religious Councils (SIRCs), are required to provide their services in accordance with Shariah requirements. In Malaysia, SIRCs are responsible for managing Islamic wealth such as zakaf, wagf, bailulmal and other Islamic social funds. Currently, there are 14 SIRCs in Malaysia, which are listed in Table 8 below. Table 8: SIRCs in Malaysia De Majlis Agama Islam Wilayah Persekutuan (MAIWP) 2 Majlis Agama Isiam Selangor (MAIS) 3. Malis Agama Islam Negeri Sembilan (MAINS) 4, Majlis Agama Islam Negeri Johor (MAIJ) 5. Malis Agama Islam & Adat Melayu Perak (MAIPk) 6. 7. 8. Majlis Agama Islam Negeri Pulau Pinang (MAINPP) Malis Islam Sarawak (MIS) . Mais Agama Islam Negeri Kedah Darul Aman (MAINK) 9. Malis Agama Islam & Adat Istiadat Melayu Perlis (MAIPs) 10. Malis Agama Islam & Adat Istiadat Melayu Kelantan (MAIK) 11, Majlis Agama Islam & Adat Melayu Terengganu (MAIDAM) 12 Majlis Ugama Islam & Adat Resam Melayu Pahang (MUIP) 13. Majlis Agama Istam Melaka (MAIM) 14, Majlis Ugama Islam Negeri Sabah (MUIS) 10White Paper on Shariah Audit Il OVERVIEW (CONT’D.) 2.1 Islamic Financial System 2.1.4 Islamic Banking and Takaful Bank Negara Malaysia (BNM) regulates and supervises Shariah compliance and governance within IFIs and other relevant entities to promote financial stability and economic growth. Figure 1 outlines the main regulatory initiatives introduced by BNM in the last four decades. Governance Policy Document 2019 Figure 1: Legal and Regulatory Frameworks of the Islamic Banking and Takaful Industry since 1983 Figure 1 shows the evolution of Malaysia's Shariah compliance ecosystem and its progression towards the overarching goal of realising IFls' value-based intermediation functions. "White Paper on Shariah Audit Il OVERVIEW (CONT’D.) 2.1 Islamic Financial System (cont’d.) 2.4.41 — Islamic Banking and Takaful (cont’d.) Today, the applicable regulatory standards and guidelines are as follows: Islamic Financial Services Act (IFSA) 2013 The Islamic Financial Services Act (IFSA) together with the Financial Services Act (FSA) issued on 30 June 2013 integrates a range of financial laws “under a single legislative framework for the conventional and Islamic financial sectors respectively, namely, the Banking and Financial Institutions Act 1989 (BAFIA), Islamic Banking Act 1983, Insurance Act 1996 (IA), Takaful Act 1984, Payment Systems Act 2003 and Exchange Control Act 1953 which are repealed on the same date” (BNM, 2013). The FSA and IFSA are efforts to modernise the laws governing financial institutions’ conduct and supervision, with an eye towards effectively facilitating and maintaining financial stability, inclusive growth, and adequate consumer protection. The IFSA outlines the regulation and supervision of Islamic financial institutions, payment systems and other relevant entities, along with the oversight of Islamic money markets and Islamic foreign exchange. Together, these laws facilitate the advancement towards a more sound, responsible and progressive financial system in Malaysia. Shariah Governance Policy Document (SGPD) 2019 The SGPD 2019 was issued by BNM on 20 September 2019 to strengthen the oversight accountabilities of the Board of Directors, the Shariah Committee and other key organs involved in the implementation of Shariah governance, Furthermore, in line with the Shariah Committee's objective to achieve effective management vis--vis Shariah non-compliance risks, this policy document bolsters the Committee's decision-making process and internal control functions. By implementing the SGPD 2019, Fs will be better placed to support a strong Shariah compliance risk culture given more active roles from the Board of Directors, the Shariah Committee and senior management. There are six main parts in the SGPD 2019 covering: (i) the board of directors (BOD): (ii) Shariah Committee; (il) senior management; (iv) control functions; (v) Shariah compliance culture and remuneration; and (vi) transparency and disclosures. The primary difference between the Shariah Governance Framework (SGF) 2010 and SGPD 2019 is the restructuring of four Shariah functions (namely, Shariah risk management, Shariah review, Shariah audit and Shariah research) into three functions. Under the restructured functions, the Shariah research function is combined with the Shariah secretariat’s function and is no longer classified under the control function. Part E of the SGPD 2019 strongly encourages IFls to have robust Shariah compliance functions (that is, risk management, review and audit functions), Other key enhancements made in SGPD 2019 include a change in the tenure limit of Shariah members, notifications to BNM when applying stringent Shariah Committee decisions, prohibitions in appointing active politicians as Shariah Committee members, as well as the regular review of the quality and frequency of the Board's engagement with the Shariah Committee. 2White Paper on Shariah Audit Il OVERVIEW (CONT’D.) 2.1 Islamic Financial System (cont’d.) 2.4.41 — Islamic Banking and Takaful (cont’d.) Statutory Committee Established in 1997, the Shariah Advisory Council of Bank Negara Malaysia (SAC BNM) is the Statutory Committee vested with the ultimate Shariah authority for IFI governance. The Central Bank of Malaysia Act 2009 (CBA 2009) reinforces the SAC BNM's role and function as the primary legal authority to supervise and regulate IFIs on BNM's behalf. The SAC BNM's decisions are binding on IFs, the court, arbitration and BNM. The SAC BNM's decisions shall prevail in cases of conflicting or inconsistent Shariah opinions among Islamic banks’ Shariah Committees. The SAC’s mandates as provided under section 52 of the CBA 2009 are as follows (BNM, 2009): i Ascertain the Islamic law on any financial matter and issue a ruling upon reference made to it in accordance with this Part; ii Advise the Bank (i.e. BNM) on any Shariah issues relating to Islamic financial business, the activities or transactions of the Bank; and ili, Provide advice to any Islamic financial institution or any other person as may be provided under any written law. The SAC BNM comprises Shariah scholars, jurists and market practitioners. These members are qualified individuals with vast experience in banking, finance, economics, law and the application of Shariah—particularly in the areas of Islamic economics and finance. SAC members are appointed by the Yang di-Pertuan Agong, based on the advice of the Minister of Finance after consultation with BNM IFls as Value-Based Intermediators BNM guides Islamic financial practitioners towards achieving the value propositions of IFis as financial intermediators that serve the real economy. In collaboration with the Islamic finance industry, BNM released a 2018 strategy paper entitled Value-based Intermediation: Strengthening the Roles and Impact of Social Finance for a more sustainable financial ecosystem. The strategies promote the application of value-based intermediation (VBI) practices, which will lead to an improved suite of products and services offered by Islamic Banking Institutions (IBIs) to better facilitate entrepreneurship, community well-being, and sustainable environmental protection and economic growth without compromising shareholders’ returns. The intended outcomes of VBI are broadly similar to the objectives set by structures such as Environmental, Social and Corporate Governance (ESG); Sustainable, Responsible, Impact Investing (SRI); and ethical finance frameworks. With the adoption of VBI, practitioners will need to consider the impact of their activities and actions not only on financial consumers but a wider range of stakeholders, as guided by the Shariah principles that determine the underlying values and priorities of VBI. 3White Paper on Shariah Audit Il OVERVIEW (CONT’D.) 2.1 Islamic Financial System (cont’d.) 2.4.4 Islamic Banking and Takaful (cont’d.) In 2018, BNM issued three guidance documents to facilitate the practical adoption of VBI (BNM, 2018b). VBI aims to re-orient Islamic finance business models towards realising the objectives of Shariah: that is, to generate a positive and sustainable impact on the economy, community and environment through Islamic practices, processes, offerings and conduct. The gist of the three documents are as follows: i The Implementation Guide for VBI provides guidance on practical value-based banking practices. It acts as a reference for IFis that intend to adopt VBI initiatives and outlines the phases of implementation, as well as key implementation challenges and some pragmatic solutions (BNM, 2018c); ii. The VBI Financing and Investment Impact Assessment Framework (VBIAF), which was jointly developed with The World Bank and International Centre for Education in Islamic Finance (INCEIF), facilitates the implementation of an impact-based risk management system. It provides a schema for assessing the financing and investment activities of IBIS in line with their respective VBI commitments; (BNM, 2019b); and ili, The VBI Scorecard, which was jointly developed with the Global Alliance for Banking on Values, covers the purposes, Key components of assessment and proposed measurement methodology of value-based intermediation (BNM, 2018d) 2.1.2 Islamic Capital Market Malaysia's capital market regulations can be categorised into two distinct phases: before and after the issuance of the Securities Commission Malaysia Act 1993 (SCA), Prior to this Act's introduction, regulation of Malaysia's capital market was under the purview of various institutions, namely, the Registrar of Companies (ROC), Capital Issues Committee (CIC), Panel on Take-overs and Mergers (TOP), Foreign Investment Committee (FIC), Bank Negara Malaysia (BNM), Ministry of Trade and Investment (MIT!) and Kuala Lumpur Stock Exchange (KLSE) (Singhand & Yusof, 2014). The SCA promotes capital market development and streamlines regulations for the securities market by appointing a single regulator (i.e. the Securities Commission) to expedite the processing and approval of corporate transactions. Promoting the development of the Islamic financial market is similarly crucial because this, along with the issuing of sukuk by leading corporations as a long-term corporate financing instrument, is the main avenue for Islamic securities and funds growth. Hence, in terms of Shariah governance, the Shariah Advisory Council of Securities Commission Malaysia (SAC SC) was formally established in 1996 to advise the SC on issues of Shariah compliance within the Islamic capital market (ICM) and to publish Shariah Resolutions accordingly. The Shariah Resolutions act as a point of reference and provide clarity, certainty and consistency to all market players in the industry “White Paper on Shariah Audit Il OVERVIEW (CONT’D.) 2.1 Islamic Financial System (cont’d.) 2.1.2 Islamic Capital Market (cont’d.) The Shariah governance framework for Malaysia's ICM entails the following i, The SAC SC as the apex Shariah regulatory authority for ascertaining the application of Shariah for Malaysia's ICM (Securities Commission, n.d.); and ii, The Shariah adviser is required to be appointed at the industry level pursuant to various guidelines. The adviser is to provide Shariah expertise and advice, as well as review and ensure ICM products and services’ compliance with Shariah requirements (Securities Commission, n.d.). Shariah requirements are also stipulated in the product guidelines issued by the SC. Apart from the overarching Shariah governance framework in the ICM forwarded by the SAC SC and Shariah Advisers, the SC introduced a Shariah screening methodology in 1995, 15 years earlier than the SGF. The SAC SC issued its first list of Shariah-compliant securities in 1997. This initiative offers an easy guide for investors and fund managers seeking Shariah-compliant investment securities. In addition, the SC provides details of the Shariah screening methodology used to screen and determine the Shariah status of the listed secutities—whether it will be classified as Shariah-compliant securities or Shariah non-compliant securities, This methodology assesses the quantitative and qualitative aspects of the listed companies, with the exact qualitative aspects decided by the SAC SC. In 2012, the SAC SC introduced a revised Shariah screening methodology featuring a two-tier quantitative assessment (Ayedh et al., 20194; 2019b). 24.2.1 Securities Screening Methodology Stock screening is the process of filtering stocks according to an investment strategy's relevant criteria, With respect to Shariah-compliant stocks, screening is used to segregate between Shariah-compliant and non-Shariah compliant stocks in a particular market (Najib et al., 2014) There are several Shariah screening methodologies presently available worldwide. This includes the Dow Jones Islamic Market index (DJIM), FTSE Global Islamic Market Index Series, and Standard & Poor (S&P) Isiamic Market Indices. Meanwhile, in Malaysia, the SAC of the SC publishes its list of Shariah-compliant securities once every six months. This is one of the important roles played by the SC, through its SAC, in ensuring Shariah compliance in the ICM. 18White Paper on Shariah Audit Il OVERVIEW (CONT’D.) 2.1 Islamic Financial System (cont'd) ) 2.4.2 Islamic Cay | Market (cont’ 2.1.2.1 Securities Screening Methodology (cont'd.) In determining the Shariah status of a listed company, the contribution of non-Shariah compliant activities to the company's group revenue and group profit before taxation will be computed and compared against the relevant business activity benchmarks as follows: The 5% benchmark The 5% benchmark is applicable to the following businesses/activities: + conventional banking and lending; + conventional insurance; + gambling; + liquor and liquor-related activities; + pork and pork-related activities; + nonhalal food and beverages; + Shariah non-compliant entertainment; + tobacco and tobacco-related activities; + interest income’ from conventional accounts and instruments (including interest income awarded arising from a court judgement or arbitrator); + dividends? from Shariah non-compliant investments; and + other activities deemed non-compliant according to Shariah principles as determined by the SAC SC. For the above-mentioned businesses/activities, the contribution of the Shariah non-compliant businesses/activities to the Group revenue or Group profit before taxation of the company must be less than 5% ii, The 20% benchmark The 20% benchmark is applicable to the following businesses/activities: + share trading; + stockbroking business; + rental received from Shariah non-compliant activities; and + other activities deemed non-compliant according to Shariah principles as determined by the SAC SC. For the above-mentioned businesses/activities, the contribution of Shariah non-compliant businesses/activities to the Group revenue or Group profit before taxation of the company must be less than 20% Interest income and dividends from Sharh non-compliant investments wll be compared agains the Group revenue. However, if the main activity of the company is holding of investments, the dividends from Shariah non-compliant investments will b compared agains! the Group reverue and Group proft before taxation "interest income and dividends from Shar'ah non-compliant investments will be compared against the Group revenue. However, Ifthe main activity of the company is holding of investments, the dividends from Shariah non-compliant investments will be compared against the Group revenue and Group proft before taxation. 16White Paper on Shariah Audit Il OVERVIEW (CONT’D.) 2.1 Islamic Financial System (cont'd) ) 2.4.2 Islamic Cay | Market (cont’ 2.1.2.1 Securities Screening Methodology (cont'd.) Financial Ratio Benchmarks For the financial ratio benchmarks, the SAC SC takes into account the following a. Cash over total assets Cash only includes cash placed in conventional accounts and instruments, whereas cash placed in Islamic accounts and instruments is excluded from the calculation. b. Debt over total assets Debt only includes interest-bearing debt whereas Islamic financing or sukuk is excluded from the calculation The above-mentioned financial ratio is intended to measure riba and riba-based elements within a company's statements of financial position. Hence, in classifying a company as Shariah-compliant, cash over total assets and debt over total assets ratios must be less than 33%. In addition to the above two-tier quantitative criteria, the SAC SC also takes into account the qualitative aspect which involves public perception or image of the company's activities from the Islamic perspective. In 2013, the SC revised the Shariah screening methodology for two reasons. Chiefly, it aims to reflect the current development and sophistication of the Islamic finance industry, as well as bolster the competitiveness of the Malaysian Islamic equity market and Islamic fund management industry by building its scale and international reach (Securities Commission Malaysia 2013b). The revision of the screening methodology mainly affects the quantitative assessment of stocks. The new methodology applies a two-tier quantitative assessment. The first-tier quantitative assessment is similar to the previous Shariah screening methodology, except that the business activity benchmark has been revised from four benchmarks (i.e. 5%, 10%, 20% and 25%) to only two benchmarks (i.e. 5% and 20%). The 5% level of business activity benchmark is mainly designed to assess the level of contributions from activities that are prohibited by Shariah. Meanwhile, the 20% level of activity benchmark assesses the level of contributions from activities that are generally permissible according to Shariah and have an element of maslahah (public interest), though other factors may affect the Shariah status of these activities. The second tier introduces a financial ratio benchmark to measure riba’ (usury) and riba'-based elements in the company's balance sheet. In calculating the financial ratio, cash will only include cash placed in conventional accounts and instruments, while debt includes only interest-bearing debt. Table 9 details the differences between the initial and revised Shariah screening methodologies in Malaysia. "7White Paper on Shariah Audit Il OVERVIEW (CONT’D.) 2.1 Islamic Financial System (cont'd) ) 2.4.2 Islamic Cay | Market (cont’ 2.1.2.1 Securities Screening Methodology (cont'd.) Table 9: Key Differences between the Initial and Revised Shariah Screening Methodologies in Malaysia nes rons 41. Quantitative assessment Reduced benchmark 1. Quantitative assessment Compute the contribution of from four to two non- permissible activities and ‘Compute the contribution of compare with the group non-permissible activities and turnover and group profit compare with the group before tax. Benchmarks used: tumover and group profit i 5% before tax. Benchmarks used: fi, 10% i, 5% ii, 20% il, 20% iv. 25% Nowly introduced Second tier Compute the financial ratios: i. Cashi Total Assets ii, Debt Total Assets Each ratio must be lower than 33%. 2, Quantitative assessment Unchanged 2. Quantitative assessment i, Image of the company i, Image of the company ji, Maslahah, ‘umum balwa’, il, Maslahah, ‘umum balwa’, “ur etc “un ete. ‘Source: Zainudin et al. (2014) Due to the importance of the ICM sector, with 81% of Bursa-listed companies being Shariah-compliant as of 25 November 2022, itis vital to foster market discipline and promote public confidence in the continued Shariah compliance of industry players, 2.1.2.2. Appointment of Shariah Advisers for ICM Products and Services ‘The SC adopts a two-tier Shariah governance framework for the capital market (Securities Commission, n.d.) The first tier is the Shariah Advisory Council. In addition, the SC has an internal secretariat. The Islamic Capital Market Development Business Group acts as a dedicated Secretariat responsible for reviewing each product submitted to ensure compliance with Shariah requirements and product guidelines, and for undertaking Shariah-related research The second tier is the Shariah advisers at the industry level who must be registered with the SC; their appointment, role and responsibilities are specified in the Guidelines on Islai Capital Market Products and Services. 8White Paper on Shariah Audit Il OVERVIEW (CONT’D.) 2.1 Islamic Financial System (cont'd) ) 2.4.2 Islamic Cay | Market (cont’ 2.1.2.2. Appointment of Shariah Advisers for ICM Products and Services (cont'd.) As at January 2023, there are 66 individuals, 20 corporations, 17 licensed Islamic banks as defined in the Islamic Financial Services Act 2013 and various licensed banks or licensed investment banks as defined in the Financial Services Act 2013 that have been approved by Bank Negara Malaysia to engage in Islamic banking and who are registered as Shariah advisers with the SC (BNM 2021; Securities Commission, 2023) The appointment of Shariah advisers is mandated under the Guidelines on Islamic Capital Market Products and Services for any issuance of ICM products and services such as Islamic unit trust funds, Islamic real estate investment trusts, Islamic exchange-traded funds, Islamic wholesale funds, sukuk, asset-backed sukuk and Islamic-structured products. The Guidelines on Islamic Capital Market Products and Services also specify other relevant Shariah requirements for the issuing of any ICM products and services. These advisers are independent parties to the ICM product or service providers. With regards to Islamic fund management, the product and service providers are required to have in place compliance officers and internal audit functions to monitor Shariah compliance. Other companies that manage real estate investment trusts and exchange-traded funds similarly need to appoint compliance officers. These are forms of Shariah governance that are unique to the ICM, since the SAC regulates Islamic products and services rather than the institutions offering them. Much like the SGPD 2019 introduced by BNM, the SC’s Guidelines on Islamic Capital Market Products and Services has benefited the Islamic fund management sector by establishing the relevant key organs for Shariah compliance, namely, Shariah review and audit, which is supported by Shariah risk management and research. Nevertheless, in the SC guidelines, the onus in managing shariah risk management is on the business units that manage the portfolio; while the Shariah adviser must (i) review the Islamic collective investment scheme's (CIS) compliance report and investment transaction report to ensure that they comply with Shariah; and (li). prepare a report to be included in the Islamic CIS’ fund report stating its opinion whether the Islamic CIS has been operated and managed in compliance with Shariah, including rulings, principles and concepts endorsed by the SAC SC for the financial period concerned. (On 28 November 2022, the SC enhanced the Guidelines on Islamic Capital Market Products and Services to address the lifetime registration of Shariah Advisers, their continuous professional development and conduct requirements. Further comparative information on the previous and new Guidelines on Islamic Capital Market Products and Services is provided in Appendix 1 19White Paper on Shariah Audit Il OVERVIEW (CONT’D.) 2.1 Islamic Financial System (cont'd) ) 2.4.2 Islamic Cay | Market (cont’ 2.1.2.2. Appointment of Shariah Advisers for ICM Products and Services (cont'd.) Notably, the Guidelines on Islamic Capital Market Products and Services enable the role of independent Shariah Advisers in providing continuous oversight with regards to Shariah governance and compliance. Nonetheless, the industry faces a shortage of qualified Shariah advisers who are well versed in both the Shariah and operational aspects of the ICM sector. There is a need for human capital development to train existing and new Shariah advisers in ICM-related matters. 2.2 Co-operatives ‘As economic agents with a strong social bent, co-operatives have contributed significantly to the wider community's development through their operations in areas such as banking, creditfinance, plantations, housing, industry, consumer goods, construction, transport and services. Through these operations, Ahmad Bello (2005) states that co-operatives play an increasingly important role worldwide in poverty reduction, job creation, economic growth and social development Moreover, co-operatives have many opportunities for lifting the poor out of poverty and other forms of deprivations. According to Birchall (2003), the co-operative sector could create opportunities on the supply and demand sides. On the supply side, they can create opportunities for the poor by stimulating economic growth and making markets work for the poor. On the demand side, they help the poor take advantage of opportunities by building their confidence through education, training, and self-organisation for various common interests. In Malaysia, the co-operative society was first established in 1922 to improve its members’ wellbeing, eradicate poverty and redistribute national wealth. Suruhanjaya Koperasi Malaysia (SKM), a commission established on 1 January 2008, regulates this sector; it governs, among others, co-operative registration, supervision and monitoring, It replaced the Department of Co-operative Development, which was founded under the Co-operative Act 1948 (Revised 1983), as the de jure regulator for this sector. Prior to SKM's takeover, the Department of Co-operative Development—which was initially known as The Office of The Director of Co-operation—was responsible, under the Co-operative Societies Enactment 1922 that preceded the Co-operative Act, for the registration and development of co-operatives. Currently, the sector is regulated under the Co-operative Act 1993 (Act 502), which was enacted to solidify regulatory requirements for Malaysia's co-operatives. The co-operative sector's growth is driven by Angkatan Koperasi Kebangsaan Malaysia Berhad (ANGKASA), which was officially registered as a national union following the Second Co-operative Congress. ANGKASA is considered the lead national co-operative and “implements co-operative transformation programs through its participation in high-value economy projects in seven 7 key economic sectors; Financial Services, Wholesale & Retail, Tourism & Healthcare, Agriculture & Agro-Base Industry, Plantation, Telecommunication, and Property Development’ (International Co-operative Alliance, (n.d.).. 20White Paper on Shariah Audit Il OVERVIEW (CONT’D.) 2.2 Co-operatives (cont’d.) ANGKASA has the following mandates (Intemational Co-operative Alliance, (n.d.): i. To unite and represent Malaysia's co-operatives at the national and international level; ji, To stimulate and develop the co-operative business by identifying and advancing new business areas, developing and strengthening existing business, and creating a national and international network; and To boost the understanding and practice of co-operative values and principles aligned with International Labour Organization (ILO) Recommendation 193, which recognises co-operatives as a vehicle for socioeconomic development To cater for the growth of Islamic co-operatives, ANGKASA established KOPSYA ANGKASA Berhad, a body registered with SKM in July 2011. KOPSYA ANGKASA offers innovative Islamic financing, deposit and investment products and services to its member co-operatives under the supervision of its Shariah Advisory Committee. The credit co-operatives sector, which is represented by two co-operative banks and 572 credit co-operatives, is significant as it contributes nearly 84% to total sector tumover as shown in Table 10. Table 10: Summary interim Statistics of Co-operatives in Malaysia as at 30 June 2021 nd a aS | (RM Mi Banking 120,170.22 13,345.40 2 Grea sr 14,936.39 2,370.91 3. Agricultural 3,262 3,925.09 664.52 4. Housing 304 4,008.13 101.25 5. Industrial 345 78.34 14.89 6 Consumer 5,482 2.477.241 4,112.25 7. Construction 250 158.01 28.17 3._| Teneportaton 481 335.16 304.54 9. Services 3,959 9,375.69 953,00 Source: SKM (2021) The growth in financing extended by the credit co-operatives, as evinced by the RM14,936.39, million in assets at end June 2021, coupled with increased awareness on Shariah-compliant financing, necessitates a strategy for Shariah governance and assurance on the part of regulators and co-operative operators. 2.2.4 Shariah Governance in Co-operatives Suruhanjaya Koperasi Malaysia (SKM) consistently works to strengthen Islamic co-operatives’ adherence to Shariah rules. According to Itam, Hasan, & Alhabshi, (2016), SKM. has taken several actions to achieve the aforementioned. Under the Malaysia Co-operative Societies Commission Act 2007, for instance, SKM may consult with the SAC BNM on any co-operative business matters relating to Islamic financial services. aWhite Paper on Shariah Audit Il OVERVIEW (CONT’D.) 2.2 Co-operatives (cont’d.) 2.24 Shi h Governance in Co-operatives (cont'd.) As with financial institutions, Shariah governance and audit in non-bank financial institutions improved significantly with the growth of Malaysia's Shariah legal framework—specifically when SKM introduced Garis Panduan 28: Shariah Governance Guidelines (GP28), on 1 July 2015. GP28's implementation is applicable to co-operatives engaged in the following businesses: + banking + credit + financing + ArRahnu GP28 was issued under section 86B of the Co-operative Societies Act 1993 to regulate co-operatives offering Shariah compliant products; it covers co-operatives’ formation of a Shariah committee and its Shariah governance. It is a proactive initiative to further develop an Islamic financial system that must meet increasingly complex consumer and business needs GP28 provides Shariah compliance guidance that will strengthen public confidence in the credibility of the Islamic muamalat system, especially in the co-operative sector. Guidelines for conventional co-operative governance were issued earlier in May 2015 through GP27, which emphasises the role of the board and management. In contrast, GP28 complements GP27 through its Shariah focus. It emphasises the overall role of the following components: the board, management, internal audit and Shariah committees. These four functions are obligated to ensure that the operations of an Islamic co-operative are in line with Shariah rules. The roles of each Shariah organ function are described in Appendix 2. In the formation of a Shariah Committee, moreover, there should be at least one secretariat to serve the Shariah Committee. In terms of qualifications, SKM stipulates that the secretariat must possess at least a Diploma in Shariah or Usul Figh and Figh al’Mu'amalat. 23 Public Trust Entities (PTEs) PTEs collect funds from investors, depositors or contributing members for special purposes, as outlined by their organisational vision or provisions in parliamentary acts. Examples are the Employees Provident Fund (EPF), Lembaga Tabung Haji (TH), Kumpulan Wang Amanah Pencen (KWAP), Lembaga Tabung Angkatan Tentera (LTAT), Permodalan Nasional Bhd (PNB) and Yayasan Pembangunan Ekonomi Islam Malaysia (YaPEIM). Some of these entities were established under a parliamentary act or a foundation. The provisions in the act, or objectives of a foundation, lay out the PTE’s responsibilities. Some PTEs are established to reduce poverty among the poor and needy, as well as provide cheaper health services and affordable education and housing. Others collect public savings to invest in Public Listed Companies (PLCs) or other companies, including SMEs in Malaysia 22White Paper on Shariah Audit Il OVERVIEW (CONT’D.) 2.3. Public Trust Entities (PTEs) (cont’d.) The depositors of these investment trust companies or investment holding entities enjoy returns based on their amount of investment, This investment is suitable for risk-averse individuals, given that PTEs mostly invest in low-risk portfolios such as treasury bonds and sukuk. Many countries have set up such entities to serve the poor and needy. PTEs are entrusted to collect money from the public to provide such services with lesser financial regulatory requirements as compared to financial institutions. A PTE of particular interest is Lembaga Tabung Haji. TH collects money from depositors who save money to perform Umrah or Hajj This function of collecting money from the public is similar to commercial banks. However, TH is not under the supervision of Bank Negara Malaysia but the Minister of Religious Affairs in the Prime Minister's department. 2.31 Lembaga Tabung Haji (TH) Lembaga Tabung Haji is a statutory body established by the Government of Malaysia in 1963 and supervised by the Minister of Religious Affairs in the Prime Minister's Department. This PTE is governed by the Tabung Haji Act 1995 (Act 535) and is mandated by law to facilitate Malaysian Muslims’ savings for haij. TH was the first Islamic financial institution established in Malaysia; in comparison, Bank Islam Malaysia Berhad was established in 1983, As the only hajjfacilitating institution in the country, TH endeavours to strengthen the Malaysian Muslim economy by offering options for savings and Shariah investments. To date, TH has more than 9 million depositors and 125 branches with 10,000 customer touchpoints nationwide (TH 2020). TH also operates offices in Jeddah, Kingdom of Saudi Arabia, under the purview of the Malaysian Consulate. Prior to TH's founding, there was no Islamic financial institution that enabled Malaysian Muslims to save for hajj expenses. Even though several banks were already operating then, not a single one was an Islamic bank. Under the Tabung Haji Act 1995 (Act 535), the government only serves as a custodian of the deposits and ensures that depositors’ investments are protected. Tabung Haji cannot and should not invest in non-Shariah instruments. TH Investment Policy & Framework Tabung Haji has an internal Shariah investment policy and framework. There is a Shariah unit to vet through investments, including risks and compliance, and it reports to TH's Shariah Advisory Committee. TH's Shariah Advisory Committee in turn reports to the board committee. TH's annual report, which includes a Shariah report, discloses the status of its business and operations’ Shariah compliance every year. 23White Paper on Shariah Audit Il OVERVIEW (CONT’D.) 2.3. Public Trust Entities (PTEs) (cont’d.) 2.3.2 Employees Provident Fund (EPF) Established in 1951, the Employees Provident Fund (EPF) is the de jure employee retirement fund for the Malaysian workforce in accordance with the Employees Provident Fund Act 1991. All private-sector employees are required by law to contribute 9% of their monthly salary to EPF. Public sector employees ineligible for pensionable schemes must likewise do so. EPF is mandated by law to invest in equities, assets or other financial products to deliver a reasonable annual dividend pay-out to its contributors ‘Simpanan Shariah EPF has introduced a Shariah-compliant account known as Simpanan Shariah for its contributors. Simpanan Shariah is a savings option managed and invested by EPF in line with Shariah principles. To ensure that Simpanan Shariah is managed according to Shariah as required under section 43A of the EPF Act, a Shariah governance framework has been established Contributors can thus opt to have their contributions channelled to Shariah-compliant investments or otherwise. However, the amount invested in Shariah-compliant companies is not yet reported in EPF's annual reports. It is also not clear whether a Shariah audit unit has been established within the internal audit department. A Shariah Advisory Committee governs EPF’s management of Shariah-compliant accounts and investments; its appointment and functions are outlined below. Establishment of Shariah Advisory Committee Section 23A of the EPF Act (1991) stipulates the establishment of its Shariah Advisory Committee. 1. The Board shall establish a Shariah Advisory Committee which shall be the authority for the ascertainment of Shariah matters to advise the Board and the Investment Panel in ensuring that the management of the accounts of the members of the Fund whose elections under section 43A have come into effect complies with Shariah principles, including the contributions, investment and dividend 2. The Shariah Advisory Committee may determine its procedures. Functions of Shariah Advisory Committee Section 23B of the EPF Act (1991) details the functions of the above Shariah Advisory Committee’ 1. Toascertain the application of Shariah principles on any matter relating to the accounts of the members of the Fund whose elections under section 43A have come into effect; 2. To advise the Board and the Investment Panel on any matter relating to Shariah and the application of Shariah principles on any matter relating to the accounts of the members of the Fund whose elections under section 43A have come into effect; and 3. Such other functions as may be prescribed by the Board. 24White Paper on Shariah Audit Il OVERVIEW (CONT’D.) 2.3. Public Trust Entities (PTEs) (cont’d.) 2.3.2 Employees Provident Fund (EPF) (cont'd.) Appointment of Shariah Advisory Committee Members Section 23C of the EPF Act (1991) covers the appointment of Shariah Advisory Committee members as follows 1. The Board shall appoint such number of persons, which shall not be less than three, from amongst persons who are qualified in Shariah, or who have knowledge or ‘experience in Shariah and banking, finance, law or such other related disciplines, as members of the Shariah Advisory Committee. 2, Members of the Shariah Advisory Committee shall not be entitled to any remuneration but may be paid such honorarium, any travelling and subsistence allowances, as the Board may determine. Reference to the Shariah Advisory Committee on Shariah matters Section 23D of the EPF Act (1991) highlights references to the Shariah Advisory Committee as follows: 1, The Board and the Investment Panel shall refer to the Shariah Advisory Committee any matter relating to Shariah and any matter which requires the ascertainment of Shariah principles by the Shariah Advisory Committee relating to the accounts of the members of the Fund whose elections under section 43A have come into effect. 2. The advice given by the Shariah Advisory Committee on any matter referred under subsection (1) shall be binding on the Board and the Investment Panel. 23.3 Permodalan Nasional Berhad (PNB) Permodalan Nasional Berhad (PNB), which was established on 17 March 1978 as an instrument of the Government's New Economic Policy, is run by Yayasan Pelaburan Bumiputra to ensure the equitable redistribution of national wealth to all Malaysians. Since its founding, PNB has become one of the largest fund management companies in Malaysia with assets under management (AUM) of RM343.1 billion as at 30 November 2022 (PNB, 2022), PNB's portfolio covers strategic investments in Malaysia's leading corporates, global equities, private investments and real estate. Amanah Saham Nasional Berhad (ASNB) is the unit trust company of PNB with 32 branch offices and more than 2,600 agent branches nationwide. Since the launch of its first unit trust fund in 1981, ASNB now manages 1417 unit trust funds with a total of 273.3 billion units in circulation (UIC) and 14.7 million accounts. Of these 17 unit trust funds, six (6) are fixed price funds and eleven (11) are variable price funds (PNB, 2022) PNB awarded its Shariah Advisory Council responsibility for giving Shariah advice and views, as well as monitoring matters relating to PNB/ASNB uni trust fund investments to ensure that these investments comply with the Shariah rules suggested by the National Fatwa Council. PNB also has in place Shariah control functions comprising Shariah Management, Internal Assurance, Compliance and Risk Management. 25White Paper on Shariah Audit Il OVERVIEW (CONT’D.) 2.3. Public Trust Entities (PTEs) (cont’d.) 2.3.3 Permodalan Nasional Berhad (PNB) (cont'd.) In 2020, PNB's investment had successfully achieved a 75% Shariah compliance rate according to the SC’s Shariah screening methodology, while the other 25% is Shariah-compliant according to PNB's Maqasid Al-Shariah screening methodology. PNB has developed the Magasid Al-Shariah screening and undertaken several other initiatives to improve and structure PNB's investments, with the broader aim of attaining its organisational objectives while ensuring Shariah compliance 2.3.4 Yayasan Pembangunan Ekonomi Isiam Malaysia (YaPEIM) Yayasan Pembangunan Ekonomi Islam Malaysia (YaPEIM) was established as a foundation by the Federal Government on 13th October 1976 and incorporated by the Trustees (Incorporation) Act 1952. The Lembaga Pemegang Amanah—a board of trustees and management team—leads YaPEIM's administration. Among YaPEIM's corporate objectives are as follows (YaPEIM, n.d. Social Business 1. Providing microcredit financing facilities, platforms and support for entrepreneurial development to spur socioeconomic development as well as social well-being 2. Running profitable businesses with efficient financial management & administration practices, as well as good governance, to strengthen the institution's position Socio-Economy & Charitable Development 1. Cultivate and provide enabling and reliable infrastructure to the community. 2. Deliver charitable donations to beneficiaries using a variety of transparent, effective, and community-assisting approaches. Most of the funds are distributed to students, poor families, entrepreneurs, orphans, the B40, educational institutions and NGOs. In this sense, its activities directly contribute to realising Magqasid Al-Shariah. However, based on its annual report and website information, it is not clear whether a Shariah governance framework, or Shariah audit and assurance unit, exists within YaPEIM. A series of roundtable discussions may be useful to gamer further input and insight on YaPEIM's Shariah governance and audit practices. 26White Paper on Shariah Audit Il OVERVIEW (CONT’D.) 24 State Islamic Religious Councils (SIRCs) 2441 Governance of SIRCs In Malaysia, State Islamic Religious Councils (SIRCs) advise the Head of Islamic Religion on all Islamic matters except for Islamic law and the administration of justice, which falls under the purview of the Shariah courts and muftis. The SIRCs also manage Islamic wealth such as zakat, waqf, baitulmal and other Islamic funds. Currently, there are 14 SIRCs in Malaysia. Each SIRC is established in accordance with the Federal Constitution's Ninth Schedule List Il (the State List), which authorises states to govern the collection of zakat fitrah, baitulmal or other similar Islamic funds (Mahadi et al., 2018) SIRCs are to report zakat and wagf management and performance to their respective State Ruler (Norzilan, 2018). Due to this reporting structure, each state has distinct management practices and legislation for zakat and wagf governance (Aziz & Ali, 2018). In 2004, the Department of Wagf, Zakat and Hajj (JAWHAR) was established with the aim of promoting systematic and effective zakat and wagf administration throughout the country (Norzilan, 2018; Suhaimi et al., 2014). Malaysia's current zakat and wagf governance structure is depicted in Figure 2 below. ‘State Level National Level ‘Sultan’ Ruler ofthe State ‘State Islamic Department of Religious Wiagt, Zakat and Council SIRC) Haj UAWHAR) Zekat Inston Waar institution Figure 2: Zakat and Wagf Governance Structure in Malaysia 27White Paper on Shariah Audit Il OVERVIEW (CONT’D.) 2.4 State Islamic Religious Councils (SIRCs) (cont’d.) 2.441 — Governance of SIRCs (cont'd.) There are 17 zakat institutions from 14 states in Malaysia. Table 11 presents a list of these institutions, their structure and their functions. Eight (8) institutions have been corporatised, whereas the remaining nine (9) zakat institutions are non-corporatised according to the following categorisatior 1. Traditional: both the zakat collection and distribution functions under the same entity are not corporatised (Johor, Kedah, Kelantan, Perak, Perlis and Terengganu); 2. Semi-corporatised: the zakat collection and distribution functions are separated into different entities. The zakat collection entity is corporatised but the zakat distribution entity is not (Melaka, Pahang and Wilayah Persekutuan); and 3. Corporatised: both the zakat collection and distribution functions fall under the same corporatised entity (Negeri Sembilan, Penang, Sabah, Sarawak, Selangor) Table 11: Zakat Institutions under SIRCs in Malaysia Johor Malis Agama Islam Johor (MALJ) Non-Corporate Collection & Distribution Kedah LLombaga Zakat Negeri Kedah (LZNK) -Nor-Gorporate Collection & Distribution Kelantan Non-Corporate Collection & Distribution Perak Malis Agama Islam dan Adat Isiadat Non-Corporate Collection & Distribution Melayu Perak (MAIPK) Ports Majlis Agama Islam dan Istiadat Melayu _-Non-Corporate Collection & Distribution Porlls (MAIPs) Terengganu Mails Agama Islam dan Adat Istiadat Non-Corporate Collection & Distribution Melayu Terengganu (MAIDAM) Melaka Mails Agama Islam Melaka (MAIM) Non-Corporate Distribution Pahang Majlis Ugama islam dan Adat Resam Non-Corporate Distribution Melayu Pahang (MUIP) witayah Majlis Agama Islam Wilayah Persekutuan _Non-Corporate Distribution Porsokutuan (MAI) Negeri Sembilan Perbadanan Baitulmal Negeri Sembilan Corporate _—_Collection & Distribution (PBMALNS) Penang Zakat Pulau Pinang Corporate __Calection & Distribution ‘Sabah Pusat Zakat Sabah MUIS (PZS-MUIS) Corporate __Calection & Distribution ‘Sarawak ‘abung Baituimal Sarawak (TBS) Corporate Collection & Distribution Selangor Lembaga Zakat Selangor (LZS) Corporate Calection & Distribution 28