The Islamic financial system in Malaysia has seen significant advancement in scale, diversity and sophistication of institutions and financial offerings in recent years, reflective of a maturing market. As the Islamic banking and takaful industry continues to develop, challenges in the business and operating environment would require attendant risks to be well-managed. This framework aims to clarify parameters on hajah and darurah1 to facilitate contemporary application in Islamic financial business in accordance with Shariah.
Hajah and darurah concepts have been applied in Islamic financial business to address hardship2 or difficulties in executing financial transactions or arrangements based on Shariah principles. The application of hajah and darurah arises during unfavourable circumstances or distress situations facing an Islamic financial institution (IFI) to prevent harm3 (mafsadah) and ultimately attain benefit (maslahah) of effective financial intermediation.
The Shariah Advisory Council of Bank Negara Malaysia (the SAC) has, on caseby-case basis, issued several Shariah rulings4 that outline broad Shariah parameters5 relating to the application of hajah and darurah. Taking into consideration the implementation of these rulings by IFIs, a more robust governance process and assessment approach are warranted to promote effective application of hajah and darurah by IFIs.
This policy document sets out the Shariah and operational requirements and expectations concerning the application of hajah and darurah, as follows:
(a) outline the definition, preconditions, scope of prohibited application and parameters of different categories of hajah and darurah;
(b) clarify and strengthen the accountability of individuals responsible for the assessment, deduction as well as implementation of hajah and darurah6; and
(c) outline the operational requirements and guidance in facilitating Shariah deliberation and decision-making on the application of hajah and darurah.
Given the specific nature of hajah and darurah, Bank Negara Malaysia (the Bank) expects all governance organs in IFIs to play their role in supporting effective implementation of hajah and darurah by ensuring—
(a) a comprehensive assessment is being carried out and supported with clear justifications and business impact analysis;
(b) robust deliberation and informed decision-making are performed by the Shariah committee; and
(c) appropriate ex-ante and ex-post assessment as well as review are performed by the control functions to serve as a check and balance to the implementation of the Shariah rulings and decisions or advice of the Shariah committee.
This document belongs to Bank Negara Malaysia (BNM). Full access to the original source is available here: https://www.bnm.gov.my/banking-islamic-banking
