The Shariah Committee, the Stale Mapping Table and the Quiet Donation
You are chief compliance officer of an Islamic fund management company with RM2.1 billion in assets under management. Its Shariah committee has three members. One resigned in January; the other two have each served three two-year terms and their contracts expire on 30 April. The board paper proposes reappointing both for a fourth term and adding a new member - the brother-in-law of a non-executive director, a respected retired civil servant with no qualification in fiqh muamalat. The paper notes that this will 'maintain continuity and keep costs down'. Separately, Shariah review found that a fund with RM380 million net asset value held 7.5% in non-Shariah-compliant securities for six weeks because an index mapping table was not updated after a review. Dividend income of RM180,000 from those holdings was pooled into the fund. The investment team says the breach is 'immaterial' and the money should be donated quietly. Sales agents continue to describe the fund as offering '100% Shariah-compliant, guaranteed halal returns'.
1. Assess the Shariah committee composition and appointment proposal.
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It fails on three counts.
Independence and conflict. The candidate is the brother-in-law of a non-executive director. Even if he is personally independent, the family link to the board undermines the committee's ability to rule against management when it must. The conflict must be declared and managed, or the candidate should not be appointed. The committee's value depends on its capacity to say no.
Competence. The role requires documented expertise in fiqh muamalat and Islamic finance. A respected retired civil servant without that background cannot supply the rulings the fund needs and would depend on management's briefing - the opposite of independent oversight. A mixed committee (a fiqh scholar, a market practitioner, a legal or regulatory expert) is one valid model, but every member must meet the competence criteria individually.
Continuity, term limits and succession. Reappointing both members for a fourth term after a resignation leaves the committee at minimum strength, entrenches groupthink and plans no succession. The resignation is a trigger to refresh, not to freeze. 'Keeping costs down' is not a governance rationale and would not survive scrutiny.
Process. The nomination should go through the nomination committee, be assessed against fit-and-proper criteria, and be approved by the board with reasons recorded. If a properly constituted committee cannot be achieved, the fund's Shariah sign-off is at risk and the SC should be engaged early rather than after the fact.
2. How should the breach and the RM180,000 be remediated? Address the 'immaterial' argument.
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Facts first. The fund held 7.5% in non-compliant securities for six weeks. The trigger was a stale index mapping table - a control failure, not a market event. RM180,000 of dividends from those holdings was pooled into the fund, so every unitholder's net asset value contains some non-compliant income.
Remediation steps.
- Convene the Shariah committee immediately for a ruling on the breach and the purification method. The committee's ruling governs; the investment team does not decide materiality.
- Dispose of the holdings in an orderly manner, documenting prices and timing. If the disposal crystallises a loss caused by the control failure, consider whether the manager should bear it rather than unitholders.
- Purify the RM180,000. It is not the manager's money, and donating it quietly as a public-relations exercise is not purification. Calculate the tainted proportion, remove it from the fund (or from the manager's fee where that is the approved route), and donate to an appropriate charity with the Shariah committee's approval, documenting the calculation.
- Fix the control: a formal change-control process for index mapping with maker-checker; daily pre-trade Shariah screening; escalation within one business day of any breach.
- The 'immaterial' argument. A Shariah mandate is binary - 7.5% is not a rounding error. Materiality may shape the remediation timetable and the disclosure wording; it cannot decide whether to remediate at all.
3. What should be disclosed, to whom, and what should happen to the marketing claims?
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Who needs to know. Unitholders, the Shariah committee, the board, the SC under applicable breach-reporting requirements, and the distributors. Concealment compounds the breach and can itself become a misleading statement or an obstruction.
To unitholders. A clear notice explaining what happened, over what period, the effect on net asset value, what has been done (disposal, purification), and what, if anything, they should do. Avoid language that hides the issue behind technical terms.
To distributors and the market. Withdraw the '100% Shariah-compliant, guaranteed halal returns' line immediately. 'Guaranteed halal returns' is simply wrong: returns are never guaranteed, and Shariah compliance is a standard, not a performance promise. Reissue the material, retrain agents and monitor their scripts. If the claims appeared in a prospectus or product highlights sheet, check whether a corrective statement or revised document is required.
Governance lesson. The mapping control, the Shariah review and the marketing were all treated as one-off exercises. The board should receive a report on root cause, corrective action and customer impact, and the regulator should see a firm that self-detected, remediated and disclosed. The reputational cost of hiding a RM180,000 breach is far greater than the breach itself.