The Federal Government has axed funding to an Islamic school in Sydney's south-west, saying it failed to address concerns about how the money was being spent.

Key points: Federal Government has cut funding to Malek Fahd Islamic School

Federal Government has cut funding to Malek Fahd Islamic School School found not to be complying with fundamental governance, financial and accountability requirements

School found not to be complying with fundamental governance, financial and accountability requirements Decision comes as part of a review of six schools affiliated with the Australian Federation of Islamic Councils

The Malek Fahd Islamic School, which has several campuses including its largest one in Greenacre, and more than 2,400 students, received $19 million in funding from the Government in the past year.

Education Minister Simon Birmingham said the Government would stop funding the school, starting from April 8, because the money was not being spent only on education.

The decision comes after a review into six school authorities affiliated with the Australian Federation of Islamic Councils (AFIC), after concerns were raised about the group profiting from taxpayer funds distributed to the schools.

"We have very strong standards in place, which we expect of all schools in receipt of federal funding," Mr Birmingham said.

"Those standards require schools to operate on a not-for-profit basis, and to dedicate all funding received to the benefit, welfare and educational advancement of the students to ensure that they are independent in their operations.

"This should not be seen as a matter relating to Islamic schools, this is a matter relating to school governance."

Mr Birmingham said the NSW Department of Education had been considering what contingency plans could be put in place if the school was to close and he was confident the students would find places in local schools.

He said the authority that operates Malek Fahd Islamic School was not able to demonstrate to the department that they had addressed the significant concerns about their financial management and governance arrangements raised during the formal compliance review of their operations.

"Last year the department issued a formal compliance notice when it found that the school authority was not complying with fundamental governance, financial and accountability requirements of the Australian Education Act 2013," he said.

"After carefully considering the response to the issues raised in the compliance notice, my department had to make the difficult decision to revoke the funding approval.

"The act requires, amongst other obligations, that all school authorities operate not-for-profit, be a 'fit and proper person' and ensure that funding provided is used only for school education."

A statement from Malek Fahd's legal representatives said the school would be asking for the decision to be reviewed.

"The board of Malek Fahd hope and expect that the outcome of the review will be favourable," the statement said.

"In the meantime, the school will continue to function normally.

"It should be noted that additional evidence may and will be provided by MFIS at the review."

School not 'embezzling money': official

Mohammad Berjaoui, vice president of AFIC in the Australian Capital Territory, said the organisation would comply with every rule and regulation the Government wants them to comply with.

"The money that we're getting for the school, it is all going to education," Mr Berjaoui said.

"We have bought two blocks of land, including a block of land in Hoxton Park, which now has more than 800 students and the other one has more than 400 to 500 students.

Parents protesting at the Islamic College of South Australia in 2015, which is one of five schools still being reviewed by the Federal Government due to financial concerns. ( Facebook: Change for Islamic College of South Australia, file photo )

"The land ... cost $6 million to $7 million, I'm not sure and to build on it was also a few million.

"Probably the management, it has not been done to the satisfaction of the Commonwealth, we'll look into it.

"But, believe me, there is no embezzlement, there is no money paid for favours, the money which Malek Fahd school gets, it goes into education.

"We will work very hard to fulfil the Federal Government requirements, it's taking us a long time to do it, but we will do it.

"We had a few people at Malek Fahd who were not capable of running the school, we have gotten rid of them and things will get better very, very soon."

The NSW Department of Education said they would "continue to work with the Commonwealth Department of Education and Training on these matters".

A statement from the Department of Education said it was continuing its compliance assessment of another five school authorities affiliated with AFIC, which include the Islamic College of Brisbane, the Islamic College of Melbourne, the Islamic College of South Australia, the Islamic School of Canberra and Langford Islamic College, in Western Australia.

Hundreds of teachers' jobs on the line

John Quessy the NSW and ACT secretary of the Independent Education Union said the school may have to close.

"We'll need to seek a meeting with the school to find out will they still be operating," Mr Quessy said.

Amjad Mehboob, chair of Muslims NSW said he was not surprised that the Government had decided to stop funding the Malek Fahd Islamic School. ( ABC News )

"It's quite a dramatic move, recurrent funding is usually used to pay teacher and staff wages.

"Malek Fahd is quite a big school, we're talking about hundreds of jobs."

He said the union would be seeking urgent discussions with the school about how the teachers would continue to be paid.

"We'll be questioning the ongoing employment of the significant number of members we have at the school," he said.

"I have every expectation the operators of the school will challenge this finding."

In December last year, the ABC obtained leaked documents alleging some AFIC representatives had received up to $500,000 of the funding distributed to its schools.

The documents showed that a $1.4 million loan was issued from the Malek Fahd school to AFIC, including hundreds of thousands for "unidentified services" to representatives including former project manager Amjad Mehboob.

Mr Mehboob, who was involved in setting up the school in 1989 said he was paid the work that he did, but his contract was terminated last year after what he said was a conflict with the current administration.

The chair of Muslims NSW said he was not surprised that the Government had made the decision to stop funding Malek Fahd.

"We were expecting this to happen, because the current leadership of the school and the national body did not listen to the requirements of the Government or to what the community was advising them," Mr Mehboob said.

Mr Mehboob said the current school administration had "no idea" how to fix the governance problems the school was facing.

He said the loss of funding was a tragedy for the school and its students.

"It's a big disaster for the community, which set up the school at a great cost. You can't have a worse situation."