Shari`ah Compliance Risk

At a time when interest in Islamic finance is growing, it is important to understand how Shari\u27ah-based considerations may impact a business or a transaction, as well as measuring, classifying, and quantifying the sorts of risks associated with Shari\u27ah compliance. Clearly, being able to identify and to understand Shari\u27ah compliance risk is an important key to providing a consistent framework for managing that risk. Emphasizing this importance is the relatively recent emergence of Islamic finance and its continuing efforts to develop industry standards and best practices. Indeed, as this Article will explain, there is much that remains to be accomplished by the industry internally. Shari\u27ah compliance risk may be classified in terms of the levels of that risk, the factors that constitute it, and its strategic and tactical management. Management of Shari\u27ah compliance risk, like other forms of risk management, may also be seen as having a lifecycle. The purpose of this Article is to explore this subject in a preliminary manner, to lay the foundations for its definition, to describe its characteristics and implications, and to examine how it is presently managed by Islamic financial institutions. It is the author\u27s hope that this Article will contribute to an understanding of the subject and lead to more systematic studies of this area in the future