1.0 Shari’ah scholars in IFIs
Malaysian rules and regulations have spelled out several provisions in relation to the establishment of Shari’ah Advisory Committee (SAC) in the islamic financial institutions in Malaysia. The existence of Shari’ah Advisory Committee (SAC) or Shari’ah 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 Shari’ah.
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 Bank’s 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 Shari’ah committee is more than just an advisory role on the bank’s operation . Thus the SSB are considered to be responsible in most aspects of the bank’s operational.
The Shari’ah 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 Shari’ah would be questionable . This critical role is indiscriminate to all financial products, be it banking, takaful, capital markets, wealth management and so forth. According to AAOIFI standard, Shari’ah advisers can be defined primarily as "specialized jurists, particularly in fiqh muamalah and Islamic finance, entrusted with the duty of directing, reviewing and supervising the activities related to Islamic finance to ensure they are in compliance with Shari’ah rules and principles. The views of the Shari’ah adviser shall be binding in the specific area of supervision".
1.1 Role and responsibilities of Shari’ah scholars
As what explained above whereby the roles and responsibilities of the Shari’ah scholars as SSB in respective IFIs has a lot to do with ensuring the operational side of IFIs are Shari’ah compliance. Therefore, indirectly the Shari’ah advisor control what do’s and don’ts 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 Shari’ah advisor and the IFIs!
Another question mark that we feel important to raise is whether the endorsement in the yearly annual report where the Shari’ah advisor claims that “we hereby confirm that all the business activities fulfill the Shari’ah requirement”. Personally, we have a doubt; because it lacks the criteria of being independent. Our premise is that, the Shari’ah 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 Shari’ah Scholars
Analyzing such statement above indirectly questioning why it is in the first place there is a need of independent director especially for Shari’ah scholars? As what explained above whereby the roles and responsibilities of the Shari’ah scholars as SAC in respective IFIs has a lot to do with ensuring the operational side of IFIs are Shari’ah compliance. Therefore, indirectly the Shari’ah advisor control what do’s and don’ts 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 Shari’ah advisor and the IFIs!
But currently, majority IFIs in the Islamic finance industry appointed the Shari’ah scholars and pays them as advisor for the IFIs. Therefore, there is a direct relationship between the Shari’ah advisor and the IFIs their working with. This kind of relationship reflects that the Shari’ah 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 Malaysia’s IFIs, which are often, deemed not Shari’ah 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 Shari’ah scholar that are willing to give them a Fatwa to seal of approval, confirming the product is Shari’ah compliant by offer them a sum of money . 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 Shari’ah scholars are ‘attached’ with the respective IFIs.
3.0 Independent director in IFIs
The idea of having one of Shari’ah 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 Shari’ah matters in IFIs operational process. An independent director can be explained as :
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
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 the Company'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 of independent judgment or the ability to act in the best interests of a listed company . The purpose of identifying and appointing independent directors especially the Shari’ah 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 Shari’ah scholar in as the independent director, the Shari’ah scholar can help the board to provides expertise and guidance on conformance to the Shari’ah principles in all matters of the IFI business operations.
Having a Shari’ah background person in the board of director and being independent will give good impression to the public. A Shari’ah 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. Stakeholder may feel relief if the independent director plays their important role as part of corporate governance: automatically maintaining public trust and confidence in the banking business.
4.0 Governance Framework: The way forward
Moreover, effective governance framework requires involvement of all stakeholders, namely, the board, senior management, and Shari’ah advisors that properly structured and complement each other in providing check and balances mechanism that strengthens the corporate governance practices. A committed and knowledgeable board is a cornerstone to an effective corporate governance system. Therefore having a Shari’ah scholar on board would help the IFIs via the necessary skills and experience towards achieving the IFI’s goals. This will eventually lead to a sound corporate governance practices that later on will contributes to situation where risk taking activities and prudence practices are appropriately balanced in the interest of stakeholders.
Besides that, an independent director comprises of Shari’ah scholar even only one of them being selected should be seen from a brighter side, this is when the role of the Shari’ah scholar as the Shari’ah Advisory Committee (SAC) as well as role as part of the boards can be strengthen when the Shari’ah scholar could fully utilize knowledge that he possess about market and industry. A dynamic mix of competent and diverse skill sets coupled with an appropriate tone at the top of practicing and promoting legal-ethical compliance and professional conduct are necessary ingredients for an effectively governed board.
To conclude, the appointment of Shari’ah scholar as an independent director will enhance the effectiveness of the board as the oversight body to oversee what the management does. Hence it will also help the company not only be independent according to the legislative but also independent in thought and action especially regarding the Shari’ah matters which are the back bone of the industry.
__________________________________________
References:
AAIOIFI, Accounting and Auditing Organization for Islamic Financial Institutions. (1999), Governance Standard for Islamic Financial Institutions. No. 1 - Shari’a Supervisory Board: Appointment, Composition and Report.
Aznan Hasan. (2009) How Shariah boards add value. Retrieved on March 8, 2010 from http://www.thefreelibrary.com/How+Shariah+boards+add+value.-a0212386367
Bursa Malaysia. (n.d). Corporate Governance Guide: Towards Boardroom Excellence. p.22-23.
Lencioni, P. M. (2007). The Five Dysfunctions of a Team: A Leadership Fable. Singapore; John Wiley and Sons (Asia) Pte Ltd.
John 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.stm
Mohd 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.
Ibn Yusof
29 April 2010/15 Jumaada al-awal 1431
6:54 p.m
www.ibnyusof.blogspot.com
Malaysian rules and regulations have spelled out several provisions in relation to the establishment of Shari’ah Advisory Committee (SAC) in the islamic financial institutions in Malaysia. The existence of Shari’ah Advisory Committee (SAC) or Shari’ah 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 Shari’ah.
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 Bank’s 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 Shari’ah committee is more than just an advisory role on the bank’s operation . Thus the SSB are considered to be responsible in most aspects of the bank’s operational.
The Shari’ah 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 Shari’ah would be questionable . This critical role is indiscriminate to all financial products, be it banking, takaful, capital markets, wealth management and so forth. According to AAOIFI standard, Shari’ah advisers can be defined primarily as "specialized jurists, particularly in fiqh muamalah and Islamic finance, entrusted with the duty of directing, reviewing and supervising the activities related to Islamic finance to ensure they are in compliance with Shari’ah rules and principles. The views of the Shari’ah adviser shall be binding in the specific area of supervision".
1.1 Role and responsibilities of Shari’ah scholars
As what explained above whereby the roles and responsibilities of the Shari’ah scholars as SSB in respective IFIs has a lot to do with ensuring the operational side of IFIs are Shari’ah compliance. Therefore, indirectly the Shari’ah advisor control what do’s and don’ts 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 Shari’ah advisor and the IFIs!
Another question mark that we feel important to raise is whether the endorsement in the yearly annual report where the Shari’ah advisor claims that “we hereby confirm that all the business activities fulfill the Shari’ah requirement”. Personally, we have a doubt; because it lacks the criteria of being independent. Our premise is that, the Shari’ah 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 Shari’ah Scholars
Analyzing such statement above indirectly questioning why it is in the first place there is a need of independent director especially for Shari’ah scholars? As what explained above whereby the roles and responsibilities of the Shari’ah scholars as SAC in respective IFIs has a lot to do with ensuring the operational side of IFIs are Shari’ah compliance. Therefore, indirectly the Shari’ah advisor control what do’s and don’ts 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 Shari’ah advisor and the IFIs!
But currently, majority IFIs in the Islamic finance industry appointed the Shari’ah scholars and pays them as advisor for the IFIs. Therefore, there is a direct relationship between the Shari’ah advisor and the IFIs their working with. This kind of relationship reflects that the Shari’ah 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 Malaysia’s IFIs, which are often, deemed not Shari’ah 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 Shari’ah scholar that are willing to give them a Fatwa to seal of approval, confirming the product is Shari’ah compliant by offer them a sum of money . 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 Shari’ah scholars are ‘attached’ with the respective IFIs.
3.0 Independent director in IFIs
The idea of having one of Shari’ah 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 Shari’ah matters in IFIs operational process. An independent director can be explained as :
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
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 the Company'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 of independent judgment or the ability to act in the best interests of a listed company . The purpose of identifying and appointing independent directors especially the Shari’ah 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 Shari’ah scholar in as the independent director, the Shari’ah scholar can help the board to provides expertise and guidance on conformance to the Shari’ah principles in all matters of the IFI business operations.
Having a Shari’ah background person in the board of director and being independent will give good impression to the public. A Shari’ah 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. Stakeholder may feel relief if the independent director plays their important role as part of corporate governance: automatically maintaining public trust and confidence in the banking business.
4.0 Governance Framework: The way forward
Moreover, effective governance framework requires involvement of all stakeholders, namely, the board, senior management, and Shari’ah advisors that properly structured and complement each other in providing check and balances mechanism that strengthens the corporate governance practices. A committed and knowledgeable board is a cornerstone to an effective corporate governance system. Therefore having a Shari’ah scholar on board would help the IFIs via the necessary skills and experience towards achieving the IFI’s goals. This will eventually lead to a sound corporate governance practices that later on will contributes to situation where risk taking activities and prudence practices are appropriately balanced in the interest of stakeholders.
Besides that, an independent director comprises of Shari’ah scholar even only one of them being selected should be seen from a brighter side, this is when the role of the Shari’ah scholar as the Shari’ah Advisory Committee (SAC) as well as role as part of the boards can be strengthen when the Shari’ah scholar could fully utilize knowledge that he possess about market and industry. A dynamic mix of competent and diverse skill sets coupled with an appropriate tone at the top of practicing and promoting legal-ethical compliance and professional conduct are necessary ingredients for an effectively governed board.
To conclude, the appointment of Shari’ah scholar as an independent director will enhance the effectiveness of the board as the oversight body to oversee what the management does. Hence it will also help the company not only be independent according to the legislative but also independent in thought and action especially regarding the Shari’ah matters which are the back bone of the industry.
__________________________________________
References:
AAIOIFI, Accounting and Auditing Organization for Islamic Financial Institutions. (1999), Governance Standard for Islamic Financial Institutions. No. 1 - Shari’a Supervisory Board: Appointment, Composition and Report.
Aznan Hasan. (2009) How Shariah boards add value. Retrieved on March 8, 2010 from http://www.thefreelibrary.com/How+Shariah+boards+add+value.-a0212386367
Bursa Malaysia. (n.d). Corporate Governance Guide: Towards Boardroom Excellence. p.22-23.
Lencioni, P. M. (2007). The Five Dysfunctions of a Team: A Leadership Fable. Singapore; John Wiley and Sons (Asia) Pte Ltd.
John 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.stm
Mohd 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.
Ibn Yusof
29 April 2010/15 Jumaada al-awal 1431
6:54 p.m
www.ibnyusof.blogspot.com
