ENHANCING SHARIAH COMPLIANCE OF ISLAMIC FINANCIAL ...€¦ · Ijarah etc Finance & invest in...

ENHANCING SHARIAH COMPLIANCE OF

ISLAMIC FINANCIAL INSTITUTIONS

THROUGH SHARIAH GOVERNANCE

Prof. Dr. Rusni Hassan

IIUM Institute of Islamic Banking and Finance

International Islamic University Malaysia

[email protected]

ISLAMIC FINANCE INTELLECTUAL DiSCOURSE 2018

Organised by: IRICIEF KUIS

Bangi, Selangor (20 - 21 February 2018)

mailto:[email protected]

Islamic Finance: A Recap

Regulatory Approach on Shariah Compliance

Shariah Governance of IFIs

Shariah Governance Framework: The Malaysian Model

SGF & Shariah Compliance

Conslusion & The Way Forward

The Outline2

©Rusni Hassan 2018. All rights reserved.

Islamic Finance: A Recap3

Shariah principles are the foundation for the practice

of Islamic finance through the observance of the

tenets, conditions and principles espoused by Shariah


Shariah Framework of IBF

The Shariah Features4

Practice and operations of Islamic Banking & Finance based on principles of Shari`ah, fiqh and ijtihad

Islamic Banking & Finance products that reflect “islamicity” of its terms & conditions

Distinguished features from conventional practice in terms of products, legal requirement, tax, accounting etc


Sharuiah Framework of IBF

The Underlying Shariah Principles 5

Iqtidadiyyah(Belief)

Amaliyyah(Dealings

Ibadah

(Worship)

Muamalah

(Dealings)

Akhlaqiyyah(Morality)

Islamic Finance is to adopt Shariah principles

Islamic Finance is to reflect Shariahcomponents or aspects in all its activities

Islamic Finance is commercial transactions based on prescribed principles of Fiqh al-

Muamalat

Islamic Finance is to uphold the objectives of Shariah (Maqasid al-Syariah)


6



The Operating Challenges

Dual

Banking

System

Conventional Banking/ Financial System

Framework

FiatMonetary

System

Fractional Reserve Banking

Debt-based, Collateral

Based & Risk Averse

Leveraging on

Conventional

Banking/Financial

Business Model


Balancing with Conventional Framework7

Application of Shariah compliant contracts eg: Murabahah, Musharakah,

Ijarah etc

Finance & invest in Shariah compliant business portfolio

What IBF

have to do


Offer Shariah compliant products & services which satisfy form & legal

technicalities

Apply/use majority of conventional banking rules & products which are

consistent with Shariah


The Effect of Conventional Framework8

Fitting-in Conventional banking/finance features has

resulted the following:

THUS …

Expose IFIs to Shariah

Non-Compliance Risk

&

THE NEED for

Shariah Compliance and

Governance Framework


Regulatory Approach on Shariah Compliance 9


The growth and development of

Islamic finance industry are

supported through good governance

and its comprehensive legal

frameworks

Regulatory Approach on IBF

The Legal Guidance on Shariah Compliance10

In addition of the

Shariah framework,

the legal & regulatory

requirements also

mandated IBF to

comply with Shariah

principles


4


Sec 6 IFSA :

The principal regulatory objectives of this Act

are to promote financial stability and compliance

with Shariah

Regulatory Approach on IBFEnsuring End-to-End Shariah Compliance

Sec 28(1) IFSA:

An institution shall at all times ensure that its

aims and operations, business, affairs and

activities are in compliance with Shariah


Roles of Key Functionaries on Shariah Compliance


12

BOD

SC

CEOAuditors

Actuary

Oversight role in ensuring Shariah compliance & due regards to SC’s decision

Oversight & advisory

role on Shariah matters

to ensure Shariah

compliance

Ensure business operations meet Shariahrequirements & Reporting obligations to BNM & SC

Enhanced statutory reporting obligations (Audit

& Shariah Audit)

Oversight role to assist BOD & senior

management for prudent management of TO by ensuring/safeguarding

interest of takafulparticipants


Procedure for Shariah Compliant Events


13

Where the IFI is aware that any of its business, affair or activity is not incompliance with Shariah or the advice of SC or the ruling

of the SAC, the IFI shall

(a)

notified to BNM & SC

(b)

cease the activities

(c)

Rectify within 30

days


Penalty of Non-Compliance

IFIs shall at all times ensure

Shariahcompliance

Contravention of ShariahCompliance requirements will subject to imprisonment not exceeding 8 yrs or fine not exceeding RM25 million or both


14

Dynamic and good shariah governance is the very essence in

the development of Islamic banking and finance sector.

Good shariah governance guarantees the Islamic financial

growth. The ultimate purpose of Shariah governance is to

ensure shariah compliance to its operations and products

Shariah Governance of the IFIs15


Centralized

• Government regulates Shari’ahadvisory on a central level

• Internal assurance on Shari’ah compliance through Shariahadvisor

• Countries: Malaysia, Brunei, Indonesia, Iran, Sudan

Laissez Faire

• No government intervention in the provision of Shari’ah advisory

• Self-regulated

• Countries: UK, Singapore, Qatar, Turkey, Jordan, Thailand, Japan, Hong Kong, Germany, France


Shariah Governance for IFIsThe Models

Shariah Governance for IFIs

Understanding Shariah Governance

“Shariah Governance system is a set of

institutional and organisational

arrangements through which Islamic

financial institutions ensure that there is

an effective independent oversight of

Shariah compliance over the issuance of

relevant Shariah pronouncements,

dissemination of information and an

internal Shariah compliance review.”

IFSB-10 Guiding Principles on Shariah Governance Systems

for Institutions Offering Islamic Financial Services

Key Features of

Shariah Governance



Aims & Objectives of Shariah Governance18

CONCEPTSHARIAH

ADVISORY

STRUCTURESHARIAH

SUPERVISION

OPERATIONSHARIAH

REVIEW/AUDIT

TR

UL

Y S

YA

RIA

H C

OM

PL

IAN

T

INST

RU

ME

NT

S &

PR

AC

TIC

ES

PROCESS FUNCTIONSPURPOSE

Shariah Compliance aspects are to be observed throughout the process in developing/constructing the

products/framework and to be supported by proper Shariah governance functions

SG aims to ensure Shariahcompliance in actuality i.e. Shariah legitimacy of products and/or Shariahcompliant operations of IFIs

SG is essential to gain confidence and trust of stakeholders i.e. perception of the outsiders and reputation/ public confidence



Key Components of Shariah Governance19

• Who is/are responsible on SG ?

BODs

Shariah Committees

Management

Employees

• Qualification & Competency

Fit and proper criteria

Continuous development &

enhancement

• Robustness of the

structure

• Rigorous & efficient

process

• Effective communication

• Reporting & Disclosure


Shariah Governance for IFIs Principles of Shariah Governance

20

Sound and Robust Shariah

Governance Structure

ShariahCompliant Functions

Oversight, Accountability

& Responsibility

Independence

Competency

Confidentiality & Consistency

Professionalism


BNM places great importance in ensuring that the

overall Islamic financial system operates in accordance

with Shariah principles.

This is to be achieved through the two-tier Shariah

governance infrastructure comprising two vital

components, which are a centralised Shariah advisory

body at the BNM and an internal Shariah Committee

formed in each respective IFI.

Shariah Governance Framework:

The Malaysian Model21


SGF in Malaysia

The Centralised Approach22

Shariah Advisory Council at the Central level (BNM)

established under Sec 51 of CBMA 2009

Highest authority to decide Shariah matters in Islamic Finance

in Malaysia

Shariah Committee at the respective IFIs

Appointed by Board of Director

Upon recommendation/approval of BNM

Two layer of Shariah Advisory Board to ensure Shariah

Compliance and harmonisation of Shariah decision


SGF in Malaysia

The Shariah Advisory Council

Establishment of ShariahAdvisory Council

Sec 51 (1) of CBMA

• “The Bank may establish a Shariah Advisory Council on Islamic Finance which shall be the authority for the ascertainment of Islamic law for the purposes of Islamic financial business”.

• To ascertain the Islamic law on any financial matter & issue a ruling upon reference made to it

• BNM shall consult SAC on any matter relating to Islamic financial business for the purpose of carrying out its functions or conducting its business or affairs in accordance with Shariah

• Any ruling made by SAC shall be binding on IFI, Court and/or arbitrator


SGF in Malaysia

Reference or Consultation to SAC

• BNM shall consult the SAC on any matterrelating to Islamic financial business for thepurpose of carrying out its functions orconducting its business or affairs in accordancewith Shariah

BNM

Sec 55 (1) CBMA 2009

• Any IFI may refer to SAC in respect of itsIslamic financial business for the purpose ofseeking advice or to get a decision/ruling onShariah matters

IFIs

Sec 55 (2) CBMA 2009


SGF in Malaysia

SAC in Judicial Proceeding

• In judicial proceedings (incourt or arbitration), whereany question relating toShariah matter arises Courtor arbitrator shall (a) takeinto consideration ofrulings of SAC (b) refersuch question to SAC

Reference to SAC

• Any ruling made by SACshall be binding on IFI,Court and/or arbitrator

Effect of SAC

Decision


1. For questions concerning a Shariah matter, the civilcourt is bound to take into consideration any publishedrulings of the SAC or refer such questions to the SACfor its ruling and any such ruling made shall be bindingon the court.

2. Sec 51 of CBMA 2009 refers to SAC’s role to make anascertainment, and not determination, of Islamic lawsrelating to IBF

3. The issue of whether the facility is Shariah compliant ornot is to be decided by the court.

4. The rulings as passed by the SAC constitute a form ofexpert opinion in the matter of Islamic finance.

5. SAC as the amicus curiae

Note: See also Tan Sri Khalid Ibrahim’s case

Mohd Alias bin Ibrahim v

RHB Bank Berhad & Anor

[2011] 3 MLJ 26

SGF in Malaysia

Shariah Committee

Establishment of Shariah Committee

(Sec 30 IFSA)

• A licensed person shall establish a Shariahcommittee for purposes of advising the licensed person in ensuring its business, affairs and activities comply with Shariah.

• Accountable & responsible for Shariah decisions

• Ensure Shariah compliant operations of IFIs

•BoD shall give due regards to SC decision


SGF in Malaysia

Shariah Governance Framework 2011

Objectives:

1. Sets out the guidelines on the IFI’s Shariah governance structures, processes and arrangements to ensure that all its operations and business activities are in accordance with Shariah

2. Provides a comprehensive guidance to the board, Shariah Committee and management of the IFI in discharging its duties in matters relating to Shariah

3. Outlines the functions relating to Shariah review, Shariah audit, Shariah risk management and Shariah research

Applicability:

The SGF is applicable to all IFIs under supervision of BNM:

• Licensed Islamic banks

• Takaful company

• Financial institutions offering Islamic finance services

• Development financial institutions which carries Islamic Banking Scheme (DFI banks)


Shariah Governance at the IFIs is regulated under

the Shariah Governance Framework of IFIs issued by BNM

SGF in Malaysia

Shariah Governance Structure28

The Shariah governance structure shall be robust & supportive to the IFIs internal

infrastructure to ensure effective overall Shariah compliant process


SGF in Malaysia

Accountability of Key Functionaries

Functions Governance Authorities

in Normal Financial

Institutions

Additional

Elements in

IFIs

Explanation on Functions

Governance Board of Directors Shariah

Committee

Provide independent view and decisions on

Shariah related matters

Report directly to BOD

Risk

Management &

Internal

Control

Internal & External

Auditors

Shariah Auditors Conduct audit on Shariah related matters

Conducted by internal Shariah trained

personnel

Report to Shariah Committee

Risk Management Unit or

Department

Shariah Risk

Management

Officers

Identify all possible Shariah non-compliance

risk

Provide mitigating measures

Compliance Regulatory & Financial

Compliance Officers, Unit

or Department

Shariah Review

Functions or Unit

Continuos assessment on Shariah compliance

Take prompt rectification measures

Report to Shariah Committee & Management

29


BOD to recognise & ensure SC’s

independence

SC report directly to

BOD

SC shall have access to all information

BOD must ensure SC’s

decisions are implemented

SGF Principles

Independence of

Shariah Committee

30

SGF in Malaysia

Independence of Shariah Committee


SGF in Malaysia

Continuous Knowledge Enhancement

BOD & Management shall

have sufficient Islamic Finance

knowledge

Ensure competency of SC through “Fit & Proper Criteria”

Establish adequate continuous education

programme

31

© Rusni Hassan 2018. All rights reserved.

SGF in Malaysia

Professional Ethics, Judgment & Consistency of Decision

References to SAC in case of dispute (internal dispute/ arbitration/court

SC not to undermine

their decisions & SAC’s

Establish a structured Shariahdecision making

process

32


Shariah principles are the foundation for the practice of

Islamic finance through the observance of the tenets, conditions

and principles espoused by Shariah.

Comprehensive compliance with Shariah principles would

bring confidence to the general public and the financial markets

on the credibility of Islamic finance operations.

SGF & Shariah Compliance33



Rigorous Shariah Compliance Process

Shariah Review

& Audit

Shariah Risk Management

Control

Shariah Research & Secretariate

•Regular exercise of ShariahReview

•Independent Shariah audit exercise conducted by trained Shariah auditors

•Identify possible Shariah risk

•Measures for mitigation & control

•Formulate Shariah compliance risk management policy & guidelines

•Qualified Shariah officers toperform in-depth Shariahresearch

•Establishing Shariah secretariate

34


• SGF requires

rigorous Shariah

Compliance process

to ensure end-to-end

Shariah compliance

Operations of IFIs

• This enhanced

process ensures no

SNCs occurrence,

protect the sanctity

of Islamic Finance

and achieving the

objectives of Shariah

(maqasid al-Shariah)


Shariah Compliance Towards Financial Stability

SG ensure end-to end Shariah compliant aspects which is the essence of IF

SG ensure consistent market practices in view of differences of views of scholars

SG supports Corporate Governance principles

SG enhance accountability of stakeholders

SG ensure the public expectations are met



The Regulations on Reporting of SNCs36

SGF

Principle 1.1

An IFI carrying out Islamic financial business shall ensure that the aims and operations of its business are in compliance with Shariah principles at all times. An end-to-end Shariahcompliant control mechanism shall be established in all aspects of its business operations to ensure that all activities are Shariah compliant.

IFSA

Section 28

IFIs shall ensure that its overall operations are Shariahcompliance

Any SNC shall be reported immediately to ShariahCommittee and to BNM within 14 days

Rectification must be made within 30 days

Guidelines on Reporting of Islamic Banks

Section 10.1 – 10.5

Shariah Committee must disclose overall Shariahcompliance aspects of IFIs including SNC, remedial action for such SNC & uses of SNC income

ORION

The IFIs must report the actual SNC event to BNM upon confirmation by the SCs

The IFIs must submit to the rectification plan as approved by the Board and the SC within 30 days.

SGF

requirements on

Shariah

compliance is fully

supported by other

regulations &

guidelines and

thus ensure

industry’s

commitment

towards Shariah

compliance & no

tolerance towards

SNCs©Rusni Hassan 2018. All rights reserved.


Some Issues & Challenges37

Corporate Governance vis-a-vis Shariah Governance

Conflict of laws vs harmonization of laws

Optimal Shariah Governance practice

Human resource issues

Shariah Governance & Maqasid al-Syariah

Cross border practices of Shariah Governance


Conclusion and The Way Forward38


The Islamic financial system is in its evolutionary

phase….. provided that the basic supportive

infrastructure is established, the inherent features

of the Islamic financial industry can themselves

contribute to strengthening the global financial

architecture.

Introduction and infrastructure development

Growth and market expansion by entering into global market

Enhanced regulatory

requirements and financial stability

• Development of IF

markets, players,

products &

instruments

• Pilot projects –

DIB; IDB; First

Takaful; BIMB

• Broader & deeper market

on IF

• Global expansion

especially sukuk market

• Strengthening of the

regulations on IF

•Governance & financial

stability

Conclusion & The Way ForwardShariah Governance for Development & Progress of Islamic Finance


http://www.google.com.my/url?sa=i&rct=j&q=&esrc=s&source=images&cd=&cad=rja&uact=8&ved=0ahUKEwipv4zTlfLOAhXMMo8KHValB6wQjRwIBw&url=http://www.healthcareitleaders.com/blog/healthcare-it-leaders-named-to-inc-5000-list-of-americas-fastest-growing-private-companies/&bvm=bv.131783435,d.c2I&psig=AFQjCNHY-2LS8zF2QtUgonZfeg-Yo_lB1A&ust=1472956718947638

http://www.google.com.my/url?sa=i&rct=j&q=&esrc=s&source=images&cd=&cad=rja&uact=8&ved=0ahUKEwipv4zTlfLOAhXMMo8KHValB6wQjRwIBw&url=http://www.healthcareitleaders.com/blog/healthcare-it-leaders-named-to-inc-5000-list-of-americas-fastest-growing-private-companies/&bvm=bv.131783435,d.c2I&psig=AFQjCNHY-2LS8zF2QtUgonZfeg-Yo_lB1A&ust=1472956718947638

http://www.google.com.my/url?sa=i&rct=j&q=&esrc=s&source=images&cd=&cad=rja&uact=8&ved=0ahUKEwjh_PGHlvLOAhWKQ48KHdayDUEQjRwIBw&url=http://www.cotc.edu/Discover/college-policies&bvm=bv.131783435,d.c2I&psig=AFQjCNGYRtb5M_AkJSLSa1Y-cvR6qN3SJQ&ust=1472956830184156

http://www.google.com.my/url?sa=i&rct=j&q=&esrc=s&source=images&cd=&cad=rja&uact=8&ved=0ahUKEwjh_PGHlvLOAhWKQ48KHdayDUEQjRwIBw&url=http://www.cotc.edu/Discover/college-policies&bvm=bv.131783435,d.c2I&psig=AFQjCNGYRtb5M_AkJSLSa1Y-cvR6qN3SJQ&ust=1472956830184156

Conclusion

THE WAY FORWARD40


41

Wasaalamualaikum warahmatullahi wabarakatuh&

THANK YOU


ENHANCING SHARIAH COMPLIANCE OF ISLAMIC FINANCIAL ...€¦ · Ijarah etc Finance & invest in...

Documents

Transcript of ENHANCING SHARIAH COMPLIANCE OF ISLAMIC FINANCIAL ...€¦ · Ijarah etc Finance & invest in...