shari’ah scholars as an independent director : a proposal

8/9/2019 Shariah Scholars as an Independent Director : A Proposal

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Shariah Scholars as an Independent Director: A Proposal

By: Ezry Fahmy

1.0Shariah scholars in IFIs

Malaysian rules and regulations have spelled out several provisions in relation to the

establishment ofShariah Advisory Committee (SAC) in the islamic financial institutions

in Malaysia. The existence of Shariah Advisory Committee (SAC) or Shariah

Supervisory Board (SSB) is one of the most important governance mechanisms of an

Islamic Financial Institution (IFI) to ensure the Islamic Financial Institutions (IFIs) are

compliance with Shariah.

It is important for the SSB to understand their roles and responsibilities as well as the

process of how an SSB should reviews the performance of a given IFIs. The roles and

responsibilities of the SSB of IFIs as define by the AAOIFI connotes a greater duty of not

only endorsing and approving the Banks products but ensuring its compliance through

directing, supervising and importantly reviewing its operations. This actually has no

difference than what define by IBA 1983 whereby the function of the Shariah committee

is more than just an advisory role on the banks operation1. Thus the SSB are considered

to be responsible in most aspects of the banks operational.

The Shariah scholars who act as advisors grounded in endorsement of all products

and services of their respective IFIs, without whom the compliance of the product to the

Shariah would be questionable2. This critical role is indiscriminate to all financial

products, be it banking, takaful, capital markets, wealth management and so forth.According to AAOIFI standard, Shariah advisers can be defined primarily as

"specialized jurists, particularly infiqh muamalah and Islamic finance, entrusted with the

1Mohd Hairul et. al.(2009) The Practice of Shariah Review as Undertaken by Islamic Banking Sector in Malaysia.

International Review of Business Research Papers. 5(1). p. 294-306.2 Aznan Hasan. (2009) How Shariah boards add value. Retrieved on March 8, 2010 from

http://www.thefreelibrary.com/How+Shariah+boards+add+value.-a0212386367


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duty of directing, reviewing and supervising the activities related to Islamic finance to

ensure they are in compliance with Shariah rules and principles. The views of the

Shariah adviser shall be binding in the specific area of supervision".3

1.1Role and responsibilities ofShariah scholars

As what explained above whereby the roles and responsibilities of the Shariah

scholars as SSB in respective IFIs has a lot to do with ensuring the operational side of

IFIs are Shariah compliance. Therefore, indirectly the Shariah advisor control what

dos and donts in the IFIs operational sides and their authority in approving products and

services more or less determine the path of the IFIs in terms of growth and sustainability.

Consequently, there should be no chance for conflict of interest between the Shariah

advisor and the IFIs!

Another question mark that we feel important to raise is whether the endorsement

in the yearly annual report where the Shariah advisor claims that we hereby confirm

that all the business activities fulfill the Shariah requirement. Personally, we have a

doubt; because it lacks the criteria of being independent. Our premise is that, the Shariah

officer/advisor works in the organization, paid by the organization and where the one

who approves the many products offered by the bank. Therefore, it does not seem right to

have people from inside to make such claim. Even the financial reports are being

validated by an external auditor.

2.0 Comprehend the position of Independent director and Shariah Scholars

Analyzing such statement above indirectly questioning why it is in the first place

there is a need of independent director especially for Shariah scholars? As what

explained above whereby the roles and responsibilities of the Shariah scholars as SAC

in respective IFIs has a lot to do with ensuring the operational side of IFIs are Shariah

3AAIOIFI, Accounting and Auditing Organization for Islamic Financial Institutions. (1999), Governance Standard for

Islamic Financial Institutions. No. 1 - Sharia Supervisory Board: Appointment, Composition and Report.


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compliance. Therefore, indirectly the Shariah advisor control what dos and donts in the

IFIs operational sides and their authority in approving products and services more or less

determine the path of the IFIs in terms of growth and sustainability. Consequently, there

should be no chance for conflict of interest between the Shariah advisor and the IFIs!

But currently, majority IFIs in the Islamic finance industry appointed the Shariah

scholars and pays them as advisor for the IFIs. Therefore, there is a direct relationship

between the Shariah advisor and the IFIs their working with. This kind of relationship

reflects that the Shariah Advisory Committee (SAC) as not totally independent as what

the bankers ought to be. Especially when such issues rise when in some cases like

products and services by Malaysias IFIs, which are often, deemed not Shariah

complaint in the more austere Gulf. These kind of issues being used by the critics as they

called Fatwa Shopping where the bankers phone up a Shariah scholar that are willing

to give them a Fatwa to seal of approval, confirming the product is Shariah compliant by

offer them a sum of money4. Such claim analogically may be viewed as a glass of water

with half empty or half filled. But on the other side, this kind of case will happen as long

as the Shariah scholars are attached with the respective IFIs.

3.0 Independent director in IFIs

The idea of having one ofShariah scholar as independent director in IFIs mainly

because to ensure there are sound policies, procedures and effective and efficient

monitoring systems with proper checks and balances can be done especially regards to

Shariah matters in IFIs operational process. An independent director can be explained

as5:

a) not been employed by the Company

b) not, and is not affiliated with a company that is an advisor or consultant to the

Company

c) not affiliated with a significant customer or supplier of the Company

4John Foster. (2010). How Sharia-compliant is Islamic banking?. BCC News. Retrieved on March 23, 2010, from

http://news.bbc.co.uk/2/hi/business/8401421.stm5Bursa Malaysia. (n.d). Corporate Governance Guide: Towards Boardroom Excellence. p.22


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d) no personal service contracts with the Company

e) not affiliated with a non-profit organization that receives significant funding

from the Company

f) not employed as an executive of another company where any of theCompany's executives serve on that company's board of directors

g) not a member of the immediate family of an individual who is, or has been

during the past five years, employed by the Company

h) not a controlling person of the Company

In simple words, an independent director is one who is independent of management

and free from any business or other relationship that could interfere with the exercise ofindependent judgment or the ability to act in the best interests of a listed company

6. The

purpose of identifying and appointing independent directors especially the Shariah

scholar is to ensure that the board includes directors who can effectively exercise their

best judgment for the exclusive benefit of the IFIs, judgment that is not clouded by real or

perceived conflicts of interest.

In IFIs case, the business operational processes represent Islamic business

organization, it portrays the image of Islam, thus any actions or decisions have direct and

indirect impact towards the teachings and religion of Islam. By having a Shariah scholar

in as the independent director, the Shariah scholar can help the board to provides

expertise and guidance on conformance to the Shariah principles in all matters of the IFI

business operations.

Having a Shariah background person in the board of director and being independent

will give good impression to the public. A Shariah scholar is a person with good

reputation and character as well as possesses the necessary qualifications and expertise,

particularly in fiqh muamalah and Islamic jurisprudence, and has experience and/or

exposure in Islamic finance brings greater confidence from the public towards the IFIs.

6Bursa Malaysia. (n.d). Corporate Governance Guide: Towards Boardroom Excellence. p.23.


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shari’ah scholars as an independent director : a proposal

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