A Framework of Income Purification for Islamic Financial Institutions

Author (s): 
Asyraf Wajdi Dusuki, Mohammad Mahbubi Ali, and Lokmanulhakim Hussain

The concern over Shariah compliant transactions is firmly entrenched in activities and operation of Islamic financial institutions (IFI). As a business entity established within the ambit of Shariah, IFI is expected to be guided by values, principles, objectives and rulings of the Shariah. However ensuring effective Shariah compliance is not a straightforward matter. As financial markets are increasingly becoming sophisticated, heightened product innovations and engineering in Islamic finance entails the genuine concern over the need to strengthen Shariah compliance throughout the product life cycle. This inevitably means while a product may be deemed Shariah compliant prior to its launch (ex-ante), IFI must also be cognizant of the need to ensure the entire ex-post process including contract execution, utilization of fund, investment activities, audit and governance process are all in place. This paper focuses on the framework of dealing with Shariah non-compliant transactions in Islamic finance. The framework delineate the concept of illegitimate income and its sources from Islamic perspective insofar to develop a cohesive approach in dealing with diverse non-compliance situations based on established principles of Shariah. Although it is not expected for IFI to deliberately involve in illegitimate activities, any incident of non-compliance needs to be immediately addressed, rectified and reported. This is not only to ensure the purity of the income earned but more importantly for IFI to put in place adequate systems and controls to ensure such non-compliance with Shariah rules and principles can be averted.

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