Management of Shariah Non - Compliance Income (SNCI) in Islamic Financial Institusion

Abstract

The rapid growth of Islamic finance in Malaysia demonstrates strong demand for Shariah-compliant financial products, yet the risk of Shariah non-compliance income (SNCI) continue to challenge the credibility of Islamic financial institutions (IFIs). Such non-compliance, arising from contractual errors, operational weaknesses and governance limitations, threatens public confidence and raises questions about effective Shariah governance. This study examines the concept, sources, governance practices and disposal mechanisms of Shariah Non-Compliance Income (SNCI) in Malaysian Islamic financial institutions (IFIs). Using a qualitative document-based methodology, the research synthesises regulatory guidelines, academic literature and institutional practices to identify the challenges and variations in SNCI management. Findings show that IFIs adopt structured processes of detection, confirmation, reporting and rectification, with purification through charitable allocation being the most common disposal method. However, significant gaps remain including uneven Shariah expertise among staff, inconsistencies in interpretation and limitations in disclosure practices. The study highlights the need for enhanced capacity building, harmonised Shariah interpretation, and stronger governance to maintain the integrity and sustainability of Islamic finance.