The risk that arises from failure or inability to comply with shari’ah rules and principles. Shari’ah non-compliance risk is part of operational risk of an Islamic bank (Islamic financial institution– IFI). Compliance may be broad or specific, i.e., with regard to shari’ah rulings (ahkam) determined by an entity’s shari’ah supervisory board (SSB) or the relevant regulatory and supervisory authority in the country/ jurisdiction where it operates.
This risk impacts operations in the sense that transactions and contracts may be considered in violation of shari’ah requirements and hence are deemed null and void. Any impermissible income from non-complianct operations shall be purified, i.e., disposed of by way of charity.
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