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Islamic financial institutions (IFIs) establish internal control systems to achieve operational effectiveness and efficiency, dependable financial reporting and regulatory adherence. Although IFIs have implemented the internal control systems to manage Shariah non-compliance risks, evaluation of their effectiveness remains relatively unexplored. This study assesses the effectiveness of internal control systems applied in Malaysian IFIs. A quantitative approach was utilised, employing a survey questionnaire to gather data from 47 IFIs in Malaysia. This study utilises the COSO Internal Control Framework, adapted to align with IFIs’ business operations and criteria specified in the Shariah Governance Policy Document released by Bank Negara Malaysia. Findings reveal that majority IFIs have implemented effective internal control systems. IFIs have created proficient control environments that foster necessary structure to facilitate evaluation of risks linked to failing to comply with Shariah principles. Nevertheless, improvement is needed in developing reliable policies and procedures to facilitate the implementation of management directives aimed at reducing risks that may hinder the attainment of Shariah compliance objectives. This study provides valuable insights into internal control system effectiveness and underscores the importance of implementing robust control functions and fostering a Shariah compliance culture to enhance the management of Shariah non-compliance risks.
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