Audit & Sharia Compliance – Issues in Islamic Banking And

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Transcript of Audit & Sharia Compliance – Issues in Islamic Banking And

AUDIT & SHARIA COMPLIANCE ISSUES IN ISLAMIC BANKING AND FINANCE

Presentation By: Omar Mustafa Ansari Partner Ford Rhodes Sidat Hyder & Co. (Member of Ernst & Young Global Limited)

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:Presentation By

.Omar Mustafa Ansari Partner Ford Rhodes Sidat Hyder & Co

Role of Auditors and Accountants in Islamic Finance Allah SWT says in Quran that Allah doth command

you to render back your trusts to those to whom they are due; And when ye judge between people that ye judge with justice. According to the code of ethics for accountants and auditors of Islamic financial institutions, accounting (duly including auditing external, as well as, internal) is one of the professions that is required by Shariah as a Fard Kifaya. In other words it is a duty which, if performed by some, would exempt others in the society. Otherwise, the whole society is sinful.

Presentation By:

Omar Mustafa Ansari Partner Ford Rhodes Sidat Hyder & Co.

Purity of Transactions and Building Reliance on Islamic Finance Islamic banking industry is presently growing

at a very high pace. One of the critical issues the industry is facing is the matter of purity in transactions which, in longer run, will ensure reliance of Muslim Ummah in this model of Islamic finance and banking. If this issue, at this stage, is ignored, it may result in a disaster in the name of Islamic Finance.

Presentation By:

Omar Mustafa Ansari Partner Ford Rhodes Sidat Hyder & Co.

Strategy to Build Reliance on Islamic Finance and Banking A three

fold strategy may help out the industry to ensure Shariah compliance on an ongoing basis. 1. Standardization of Shariah Compliance Regulations for Islamic Finance; 2. Improved governance and Shariah Compliance Assurance for Islamic Financial Institutions; and 3. Shariah Compliance Rating of Islamic Financial Institutions and Products.

Presentation By:

Omar Mustafa Ansari Partner Ford Rhodes Sidat Hyder & Co.

STANDARDIZATION OF SHARIAH COMPLIANCE REGULATIONS FOR ISLAMIC FINANCE

Standardization of Shariah Compliance Regulations for Islamic Finance Standardization is necessary to ensure that

all the matters of Islamic financial institutions are dealt with, within a framework which is acceptable for all Muslims. Internationally, there have been a lot of efforts for standardization of practices being followed by various Islamic financial institutions. These efforts include a lot of research work.

Presentation By:

Omar Mustafa Ansari Partner Ford Rhodes Sidat Hyder & Co.

Standardization of Shariah Compliance Regulations for Islamic Finance The most admirable job has been performed

by: the Islamic Fiqh Academy of the Organization of Islamic Countries; and the Accounting and Auditing Organization of Islamic Financial Institutions (AAOIFI). In respect of governance and risk management, Islamic Financial Services Board has also performed a commendable job.

Presentation By:

Omar Mustafa Ansari Partner Ford Rhodes Sidat Hyder & Co.

Introduction to AAOIFI AAOIFI was established in 1990 in Algiers under an

Agreement of Association between a number of Islamic financial institutions (IFIs). Now it is based in Bahrain. Its objectives primarily include development of accounting, auditing, governance and Shariah standards for Islamic financial institutions. Accounting, Auditing and Governance Standards (AAGS) are issued by AAOIFIs Accounting and Auditing Standards Board whereas the Shariah Standards Board issues the Shariah Standards.

Presentation By:

Omar Mustafa Ansari Partner Ford Rhodes Sidat Hyder & Co.

Introduction to AAOIFI These Boards have, to date, performed a

remarkable job by issuing accounting, governance, auditing and Shariah standards for Islamic financial institutions. These Boards have been established by choosing the experts of the fields from throughout the Islamic world. Accordingly, their works, are considered to be a consensus (Ijma) of the experts from the field. These work may be used for standardization of practices of Islamic finance and banking throughout the world.Presentation By: Omar Mustafa Ansari Partner Ford Rhodes Sidat Hyder & Co.

Introduction to IFSB Officially inaugurated on November 03, 2002

and started operations on March 10, 2003. Serves as an international-standard setting body of regulatory and supervisory agencies that have vested interest in ensuring the soundness and stability of the Islamic financial services industry. Promotes the development of a prudent and transparent Islamic financial services industry through introducing new, or adapting existing international standards consistent with Islamic Shariah principles.Presentation By: Omar Mustafa Ansari Partner Ford Rhodes Sidat Hyder & Co.

Pakistans Perspective Accounting and Financial Reporting

The Institute of Chartered Accountants of Pakistan has issued Islamic Financial Accounting Standards for Ijara and Murabaha which are under implementation stages. These standards are approved by SBP and notified by SECP. Shariah Compliance SBP has established a Shariah Board. SBP has issued essentials for Islamic banking and financial products and a bunch of model agreements. But all these are considered to be guidelines, and not regulations. SBP has also issued various circulars in this respect.

Presentation By:

Omar Mustafa Ansari Partner Ford Rhodes Sidat Hyder & Co.

Pakistans Perspective Governance What SBP is Doing

Shariah compliance framework being established. Draft Islamic banking guidelines issued and comments received. A Shariah compliance inspection mechanism is being introduced and a Shariah compliance inspection manual has been developed. Risk management standards are being adopted with suitable modifications.

Presentation By:

Omar Mustafa Ansari Partner Ford Rhodes Sidat Hyder & Co.

Pakistans Perspective Takaful

Takaful Rules developed and now being reviewed for improvement. Revised Rules will include accounting regulations for Takaful. SECP has established a Central Shariah Board. Mandatory Shariah Compliance Audit for Takaful. Modarabas All model agreements and products are being reviewed from Shariah compliance perspective. Religious Board for Modarabas is now in operation after a long gap.

Presentation By:

Omar Mustafa Ansari Partner Ford Rhodes Sidat Hyder & Co.

IMPROVED GOVERNANCE AND SHARIAH COMPLIANCE ASSURANCE FOR ISLAMIC FINANCIAL INSTITUTIONS

Shariah Non-Compliance Risk: What & Why?Shariah non-compliance risk is a significant risk for an Islamic financial institution from two perspectives: 1. It impacts the reputation of the Islamic financial institution and deteriorates reliance of the depositors, investors, customers and other stakeholders in the long-term; and 2. It impacts the revenue as well, because in case of an identified Shariah non-compliance, the income arising from such transaction is to be given in charity. But, for the society, and considering it a step towards complete transition of economy on Islamic principles, Shariah compliance is the essence of Islamic banking and finance.

Presentation By:

Omar Mustafa Ansari Partner Ford Rhodes Sidat Hyder & Co.

How to Manage Shariah NonCompliance Risk?Shariah Review

Shariah Supervisory Board / Shariah Advisor Internal Shariah Review Consideration of Shariah Compliance by the External Auditor

Presentation By:

Omar Mustafa Ansari Partner Ford Rhodes Sidat Hyder & Co.

Shariah Compliance Assurance for Islamic Financial Institutions Rules, regulations and standards might not

work unless and until an effective network of check and balance is established to ensure compliance of the same in letter and spirit. Shariah compliance cannot be ensured merely on the basis of approval of products by the Shariah Supervisory Boards and the Shariah Advisors. Approvals have to be matched with the ground realities.

Presentation By:

Omar Mustafa Ansari Partner Ford Rhodes Sidat Hyder & Co.

Shariah Compliance Assurance for Islamic Financial Institutions1. Shariah compliance review report of Shariah

Supervisory Board or the Shariah Advisor (May, or may not be, based on Internal Shariah Review). 2. Shariah compliance audit by the external auditors of the Islamic financial institutions. 3. Shariah Compliance Inspection of Islamic commercial banks. 4. Independent Shariah compliance assurance (internal or external) from professionals.

Presentation By:

Omar Mustafa Ansari Partner Ford Rhodes Sidat Hyder & Co.

Shariah Compliance Review By Shariah Advisor Issues Competence (From Assurance

Perspective) Without any disregard to the individuals, and not as a generalized rule, it needs to be realized that the jurists sitting on the Board or working as Shariah Advisors possess little knowledge about the accounting and auditing, and more importantly, the operations of the financial institutions.

Presentation By:

Omar Mustafa Ansari Partner Ford Rhodes Sidat Hyder & Co.

Shariah Compliance Review By Shariah Advisor Issues

Consequently, their compliance review generally remains limited to the extent of assurance of the legal form of transactions i.e. vetting of agreements and documents etc. On the contrary, the operational matters which include the substance of the transaction might remain unattended because it is not the core competence of these respectable jurists.

Presentation By:

Omar Musta