Shariah Non-compliance Risk (SNCR) Management Framework Adoption Beyond Islamic Banking: Exploring Its Adoption in Philanthropy Operations

Abstract

Shariah non-compliance (SNC) risk management is essential for Islamic institutions to align their operations with Shariah law, thereby preserving public trust, ethical integrity, and operational legitimacy. While SNC risk management has traditionally been applied within the Islamic banking sector, this paper investigates its applicability and potential benefits within Islamic philanthropic operations, specifically waqf and zakat. These institutions, rooted in religious and ethical mandates, require robust governance frameworks to ensure transparent fund management, standardized reporting, and sustained donor confidence. Drawing on lessons from the Islamic finance sector, this study advocates for the implementation of standardized SNC risk management frameworks that incorporate Shariah audit practices and structured compliance mechanisms. These frameworks are essential to enhance oversight, promote ethical governance, and address challenges such as decentralization, inconsistent practices, and limited Shariah expertise. Through qualitative interviews with two high-performing state Islamic religious councils (SIRCs) in Malaysia, this study explores the specific SNC-related risks faced by philanthropic organizations and evaluates the importance of Shariah-compliant risk management in strengthening institutional governance. Ultimately, this research aims to support the broader institutionalization of SNC frameworks in Islamic charitable sectors, ensuring long-term integrity, accountability, and alignment with Maqasid al-Shariah. This study contributes to the knowledge by expanding the scope of Shariah Non-Compliance risk management from Islamic finance to Islamic philanthropy (waqf and zakat). It fills a governance gap by proposing standardized SNC frameworks for these institutions, supported by case insights from Malaysian state Islamic religious councils. The research also links SNC practices to Maqasid al-Shariah, highlighting their role in promoting ethical integrity, transparency, and public trust in the Islamic social finance sector.