rustam idrees-shariah governance framework of ifis

Shariah Governance Framework for IFIs:Shariah Governance Framework for IFIs:Raising Shariah Competency to the Next LevelRaising Shariah Competency to the Next Level

International Conference on Islamic Business and Finance

Islamabad, Pakistan9 February 2011

Rustam Mohd IdrisDeputy DirectorIslamic Banking and Takaful Department

Contents

§ Background

§ Development of Shariah Governance

§ Building competencies for Shariah

Governance – Malaysian experience

3© BANK NEGARA MALAYSIA

Well developed governance structure is instrumental for safety & soundness of IFIs…

Governing Infrastructure

Regulatory Framework

Legal Framework

Shariah Governance Framework

Shariah governance framework is one of the key ingredients…


…Shariah Governance plays an important role in instilling & shaping sound governance practices ….

Principles of Islamic finance place great emphasis on strong corporate governance values & structure,

transparency, disclosure of information &strict adherence to Shariah principles…

Fiduciary duties in Islamic banking

transaction

NormalCorporate

Governance

Shariah Governance

Ensures compliance with Shariah rules & principles

Instill public confidence

Promote financial stability

Ensure strict Shariah-compliant

Importance of Shariah governance


Domestic initiatives International initiatives

Development of Shariah Governance…

AAOIFIAAOIFI

OIC Fiqh AcademyOIC Fiqh Academy

IFSBIFSB

Issuance of standards:i) Governance standards for IFIsii) Auditing standards for IFIsiii) Ethics standards

Set up of centralized Shariah advisory body

Legal provision / legislation& issuance of specific

guidelines

§Ensure uniformity & harmonisation of Shariahinterpretations

§Ensure business operations are in adherence with Shariah principles

§Promote stakeholders’confidence & integrity of Islamic financial industry

Issuance of standards:i) IFSB-3:

Guiding Principles on Corporate Governance for IIFS

ii) IFSB-10:Guiding Principles on ShariahGovernance Systems For IIFS

Establishment of Shariah Committee

within each IFIs

Intervention by

Central Bank

AAOIFI – Accounting and Auditing Organizations for IFIsIFSB – Islamic Financial Services BoardOIC – Organisation of the Islamic ConferenceIFIs – Islamic Financial Institutions IIFS – Institutions offering Islamic Financial Services

Source: www.aaoifi.comwww.ifsb.orgwww.fiqhacademy.org.sa

Published guidance for Shariah advisory’s roles in Islamic finance activities

§Establishment of Shariah advisors at IFIs§Guidance on roles &

responsibilities of Shariah advisors in ensuring Shariahcompliance


§ Establishment of SC at IFIs level under specific laws to provide check & balance, to ensure Shariah compliancePhase 1Phase 1

Phase 2Phase 2

Phase 3Phase 3

Phase 4Phase 4

SAC – Shariah Advisory Council of Central Bank of Malaysia; SC – Shariah Committee of IFIs; IBIs – Islamic Banking Institutions

Building foundation of legal, regulatory & Shariah framework

Instituting dedicated SAC at Central Bank to address Shariah compliance issues

Recognize SAC as an authoritative body

in issuing Shariah rulings / Establish governance for SC

SAC as the highest authority in IF /

Issuance of comprehensive SGF

Building Competencies for Shariah Governance…Malaysian experience

§ Promoting uniformity & harmonisation of Shariah interpretations amongst IFIs

§ Providing a platform for IFIs to seek Shariah advise through SAC

Phase 5Phase 5§ Elevating stature of SAC

§ SAC’s rulings are binding on IFIs, courts and arbitrators

§ Specific provisions in CBA

§ Court & arbitrator to refer to SAC’s rulings in any proceedings related to IF matters

§ Incorporating duties of SC in the industry

§ Enlarging pool of Shariah talentwithin the Islamic financial industry

§ Enhancing the roles & functions of the board, SC & management in relation to Shariah governance

§ Formation of Shariah key functions within IFIs to ensure Shariah-complaint


Shariah Governance Framework for IFIs

Key Features:

§ An apex authoritative body for the ascertainment of Islamic law for the purposes of Islamic financial business

§ Advise the Bank (and also IFIs) on any Shariah issue relating to Islamic financial business

§ Appointed by the King, on the advice of the Minister of Finance after consultation with the Central Bank

§ The court & arbitrator shall take into consideration any published rulings of the SAC, prior to any proceedings on Shariah matters

§ Rulings made by the SAC shall be binding on IFIs, court or arbitrator

Objectives:

§ Set out the expectations of the Bank on an IFI’s Shariah governance structures, processes & arrangements to ensure that all its operations & business activities are in accordance with Shariah

§ Provide comprehensive guidance to the board, Shariah Committee and management of the IFI in discharging its duties in matters relating to Shariah

§ Outline the functions relating to Shariah review, Shariah audit, Shariah risk management and Shariah research

Central Bank of Malaysia Act 2009

Shariah Governance Framework in Malaysia

Guided by two important legislation & guidelines


Framing the Shariah Governance Framework

Guiding Principles

§ Clear demarcations on accountability & responsibility

§ Outlines the level of accountability and responsibility of the board of directors, Shariah committee and management of the Islamic financial institutions

Oversight, Accountability & Responsibility

Independence

Aims at safeguarding the independence of the Shariah committee in ensuring sound Shariah decision-making, and emphasis on the role of the board of directors in recognizing the independence of the Shariah committee

Competency

Highlights requirements and expected competencies to ensure key functions are capable of implementing Shariah governance

Confidentiality & Consistency

Minimum set of rules that emphasizes on the importance of observing and preserving confidentiality and improving the level of consistency in decision making by the Shariah committee


Ex-ante regulationEx-ante regulation The new FrameworkThe new Framework

Oversight, accountability & responsibility

Oversight, accountability & responsibility

Measures to Heighten Shariah Governance Structure

IndependenceIndependence

CompetencyCompetency

Confidentiality & consistency

Confidentiality & consistency

§ Minimum of 5 SC members

- Majority must possess Shariah qualifications

§ Advocate regular engagements between board & SC

§ May appoint SC member as board

§ SC accountable on its decisions, views & opinions on

Shariah matters

§ Minimum of 3 SC members

§ Minimal engagements between

board & SC

§ SC’s roles limited to advisory

role, product approval &

endorsement

§ Prior written approval by BNM on

removal of SC member

§ Recognition by board on SC’s independence

§ SC’s decisions to be observed at all times by IFIs

§ Prior written approval by BNM & SAC for removal of

SC

§ Full disclosure & transparent information to SC

§ Appointment of SC by board,

upon recommendation by

Nomination Committee

§ Comprehensive ‘fit & proper’ criteria for SC

- Apart from board, BNM & SAC approve the appointment

of SC

§ Continuous learning & training programs to key

stakeholders

§ Develop succession planning program for SC

§ Retain restrictions on membership of SC to sit in IFIs

within the same industry

§ Whistle blowing provision by SC to BNM

§ Development of structured process in making Shariah

decisions

§ Restriction on membership of SC

to sit in IFIs within same industry


SHARIAH

as overarching principle in Islamic finance

BOARD RISK MANAGEMENT COMMITTEE

BOARD

Overall oversight on Shariah governance structure & Shariah compliance

SHARIAH COMMITTEE

Oversight accountability on Shariah related matters

BOARD AUDIT COMMITTEE

MANAGEMENT

• Ensure executions of business & operations are in accordance w ith Shariah principles

• Provide necessary support to the Shariah Committee

Shariah Risk Management Control Function

• Identify, measure, monitor, report & control Shariah non-compliance risk

• Form part of IFI’s integrated risk management framew ork

• Perform by risk off icers with suitable qualif ications & experience

Shariah Review Function

• Review business operations on regular basis to ensure Shariah compliance

• Cover overall business operations (end-to-end product development process)

• Perform by qualif ied Shariah off icer(s)

Shariah Research Function

• Conduct in-depth Shariah research prior to submission to Shariah Committee

• Assist & provide advice to relevant parties based on decision of SC

• Perform by qualif ied Shariah off icer(s)

Shariah Audit Function

• Provide independent assessment & objective assurance designed to value add & improve IFI’s compliance w ith Shariah

• Scope of audit covers all aspects of IFI’s business operations & activities

• Perform by internal auditors, w ho have acquired adequate Shariah-related trainings

Shariah Compliance and Research Functions

Model of the New Shariah Governance Framework for IFIs


Issues & challenges in Shariah governance…

Demand for talented Shariah experts outstrips its supply?

Whether a robust Shariah governance framework is essential for each institutions regardless of their structural differences?

Absence of Shariah audit framework

22

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33

Competency of Shariah scholars to understand the complexity of Islamic financial instruments

11


Thank youThank you

rustam idrees-shariah governance framework of ifis

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