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How to Review Financial Documents to Ensure Shariah Compliance? In Islamic finance, ensuring Shariah compliance in documents is crucial. It aligns financial practices with Islamic principles, maintaining the integrity of operations. This guide outlines a structured approach for reviewing documents. 1. Foundations of Shariah Compliance (Knowing the Applicable Policies) Shariah compliance is based on Islamic law, which prohibits riba (usury), gharar (uncertainty), and haram (forbidden) activities. The Maqasid al-Shariah (objectives) aim to preserve religion, life, intellect, lineage, and wealth. 2. Preliminary Assessment (Hypothesis) Begin with a preliminary assessment by identifying the transaction type and its relevance to Shariah. Determine if the document pertains to products like ijarah (leasing), murabahah (cost-plus financing), or wakalah (agency), focusing on potential Shariah issues like interest clauses or speculative terms. 3. Detailed Shariah Screening (Hands-on Procedures/Operation) Conduct a detailed screening to identify any clauses that may violate Shariah principles: - Riba: Ensure no interest-based payments. - Gharar: Avoid excessive uncertainty, especially in contracts related to sales or insurance. - Haram: Verify that the business activity is not prohibited in Islam. - Ensure no transgression to the purpose of the contract, i.e. no guarantee of profits in equity contracts & etcetera. - Word search (ctrl+F): Filter words that are conventionally used for interest based lending, e.g.: loan, interest, drawdown, borrow, repay and et-cetera. 4. Applying Shariah Standards (Cross-checking with Regulatory Compliance) Apply established Shariah standards and resolutions, like those from the Shariah Advisory Council (SAC) of Bank Negara Malaysia. Ensure contracts, such as murabahah, are structured correctly with clearly defined profit margins and asset sales. 5. Shariah Compliance Tools: Hajah and Darurah (Applying Exemptions Where Necessary) In situations of hardship or necessity, invoke Hajah (need) and Darurah (necessity). These allow temporary deviations from standard Shariah principles if justified, ensuring the integrity of the process. 6. Shariah Committee Approval (Submission for Approval) The final step is obtaining approval from the Shariah committee or its delegated/mandated authority (i.e., Heads of Shariah div or Chief Shariah Officers) which reviews and certifies compliance. Document their decisions, including any required amendments. 7. Ongoing Monitoring (Shariah Review & Shariah Audit) Shariah compliance requires continuous monitoring. Regular audits and prompt incorporation of new standards ensure sustained alignment with Islamic law. Conclusion Ensuring Shariah compliance in documents is vital for the integrity of Islamic finance. A structured methodology, from understanding Shariah principles to ongoing monitoring, ensures alignment with Islamic law and builds trust in Islamic financial products.