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![Page 1: FR IFAAS Istanbul Shariah Governance Sep 11 - tkbb.org.tr 10-RAZ… · Durham’Islamic’Finance’Autumn’School’ 2011’in’Istanbul’ Mohammad’Farrukh’Raza,’Shariah’](https://reader031.fdocuments.net/reader031/viewer/2022022514/5af53b9b7f8b9a190c8e0bec/html5/thumbnails/1.jpg)
Durham Islamic Finance Autumn School 2011 in Istanbul
Mohammad Farrukh Raza, Shariah Governance in Financial Ins@tu@ons 1
© 2009 IFAAS UK Ltd. All rights reserved.
Shariah Governance in Financial Ins@tu@ons
Mohammad Farrukh Raza
Managing Director – IFAAS (UK, France & Bahrain)
© 2011 IFAAS. All rights reserved.
Presented at the Durham Islamic Finance Autumn School 2011 jointly organised by Durham Centre for Islamic Economics and Finance and ISAR-‐Istanbul Foundation for Research and Education Istanbul Commerce University, Istanbul 19th-‐22nd September 2011
TABLE OF CONTENTS § Shariah and financial ins@tu@ons
Ø Types of Islamic financial ins@tu@ons Ø Dual Governance model
§ Shariah Supervisory CommiOee “SSC”/Shariah Board Ø Defini@on Ø Composi@on, selec@on and dismissal Ø Morals and requirements Ø Roles and Responsibili@es Ø Example of SSC at work Ø SSC mee@ngs Ø SSC terms of reference, powers and authori@es Ø Year End SSC Shariah report
§ The role of Shariah Compliance Officer (SCO) § Standardiza@on in Islamic Finance § Shariah Standards (AAOIFI) § Controversies & Challenges in Shariah governance
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Durham Islamic Finance Autumn School 2011 in Istanbul
Mohammad Farrukh Raza, Shariah Governance in Financial Ins@tu@ons 2
ABOUT US
IFAAS Projects
IFAAS Bahrain
IFAAS France
IFFAS UK
IFAAS Offices
Government of Senegal
SHARIAH AND FINANCIAL INSTITUTIONS
§ Islamic financial products have similar objec@ves as conven@onal products – fulfilling the needs of customers but in a Shariah compliant way
§ Islamic products and the ins@tu@ons providing them are subject to conformity with the requirements of Shariah
§ The financial ins@tu@ons providing Islamic products have to conform to both – regulatory and Shariah requirements that vary for different types of the ins@tu@ons
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Durham Islamic Finance Autumn School 2011 in Istanbul
Mohammad Farrukh Raza, Shariah Governance in Financial Ins@tu@ons 3
TYPES OF ISLAMIC FINANCIAL INSTITUTIONS
§ Windows model – conven@onal ins@tu@on carrying out Islamic financial transac@ons which are segregated from the other ac@vi@es
§ Branches – dedicated delivery channel just providing Islamic financial services
§ Subsidiaries – separate legal en@ty owned by a parent company to specifically undertake Islamic financial ac@vi@es
§ Stand alone – totally independent structure
SHARIAH REQUIREMENTS FOR FI’S § Islamic window of conven@onal ins@tu@on
Ø Segrega@on of funds Ø No separate balance sheet required
§ Islamic subsidiary of financial ins@tu@on Ø Clean funds (may be provided by the mother company) Ø Separate balance sheet required (may be incorporated into the group
balance sheet) § Fully-‐fledged Islamic financial ins@tu@on
Ø Shariah fully embedded in the governance model of the FI § All models need a Shariah Board/Shariah Supervisory
CommiOee (SSC) to supervise the Shariah compliance § All models operate on dual governance structures
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Durham Islamic Finance Autumn School 2011 in Istanbul
Mohammad Farrukh Raza, Shariah Governance in Financial Ins@tu@ons 4
DUAL GOVERNANCE MODEL Shariah Framework
“SSB/SSC” Regulatory framework “NaJonal Regulator” e.g. BDDK, CMB etc
Islamic Bank
Trea@ng Customers Fairly Transparency Risk control Social responsibility Money laundering Know Your Customer
Shariah Sales Policy Ethical Trading Profit sharing Fairness Mutual coopera@on Social responsibility Profit distribu@on
DUAL GOVERNANCE MODEL
There is a lot of similarity between regulatory and Shariah requirements
§ Capital adequacy (Shariah does not define any monetary adequacy but requires the ins@tu@on to fulfill its promises and obliga@ons on assets and liabili@es sides)
§ TreaJng Customers Fairly (The ins@tu@on is required to ensure that the product is designed and implemented according to the needs of the customer and is not being miss-‐sold)
§ Disclosures (The ins@tu@on has to ensure that all systems are working correctly and no misrepresenta@ons are being made)
§ Data ProtecJon (The ins@tu@on is bound to preserve the privacy and confiden@ality of the customer’s personal informa@on)
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Durham Islamic Finance Autumn School 2011 in Istanbul
Mohammad Farrukh Raza, Shariah Governance in Financial Ins@tu@ons 5
ISLAMIC BANK -‐ CORPORATE STRUCTURE Nomina@ons CommiOee Shariah
Supervisory CommiOee
Shariah Compliance Officer
Board of Directors
Managing Director
Remunera@ons CommiOee
Audit CommiOee
Internal Audit
Finance Opera@ons Marke@ng Sales
IT HR
Shariah guidelines
SSC -‐ DEFINITION
§ The SSC is an independent regulatory body of specialised Muslim scholars entrusted with the duty of providing guidance, supervision and cer@fica@on of Islamic financial products to ensure that they are in compliance with Shariah rules and principles
§ However the onus is on the management to raise maOers with the
SSC whose role is more akin to a regulator (such as BDDK or CMB) than to an internal department or management commiOee
§ The SSC may also include other experts in areas of Islamic financial
ins@tu@ons with knowledge of Islamic jurisprudence rela@ng to commercial transac@ons
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Durham Islamic Finance Autumn School 2011 in Istanbul
Mohammad Farrukh Raza, Shariah Governance in Financial Ins@tu@ons 6
SSC -‐ COMPOSITION AND SELECTION
§ The SSC should be appointed by the shareholders in their Annual General Mee@ng upon the recommenda@on of the BOD taking into considera@on the local legisla@on and regula@ons
§ The SSC shall consist of at least three members of whom one will be elected as the chairman by the fellow members
§ The SSC should not include directors (execu@ve or non-‐execu@ve) or significant shareholders of the financial ins@tu@on
§ Islamic financial ins@tu@on is required to have a minimum of one officer, preferably a person with knowledge in Shariah, who will serve as the secretariat to the Shariah CommiOee (this func@on may be outsourced)
SSC -‐ DISMISSAL § The dismissal of a member of the SSC shall require a
recommenda@on by the board of directors and be subject to the approval of the shareholders in the general mee@ng
§ SSC members are disqualified if they have acted in a manner which may cast doubt on their fitness to hold the posi@on of a Shariah CommiOee member
§ SSC members are dismissed if they have failed to aOend most of the mee@ngs scheduled for Shariah CommiOee in their appointment period without a reasonable excuse
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Durham Islamic Finance Autumn School 2011 in Istanbul
Mohammad Farrukh Raza, Shariah Governance in Financial Ins@tu@ons 7
SSC -‐ MORALS AND REQUIREMENTS
§ SSC member should be Muslim, with faith and belief, mature, wise and fair in his rulings
§ SSC member should not agree on something if he is not sa@sfied with its interpreta@on
§ SSC member should have a good reputa@on in the community
§ Members of the SSC should have wide knowledge and a degree in Islamic Shariah and especially in “Fiqh Al Mu’amalat” (jurisprudence of financial dealings)
§ They should have knowledge in business, economics, accoun@ng and finance
EXAMPLE OF SSC AT WORK
Product Concept prepared defining the underlying Islamic Principles of the product
Ini@al review of the SSC on the principle and the product’s main condi@ons
Building the product’s documenta@on according to the direc@ves received from the Scholars
Scholars review the final documenta@on and issue their approval
Product documenta@on reviewed by legal and compliance
Product Launch
Regular & periodic Sahariah Audit for ongoing assurance throughout the product life cycle
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Durham Islamic Finance Autumn School 2011 in Istanbul
Mohammad Farrukh Raza, Shariah Governance in Financial Ins@tu@ons 8
SSC -‐ MEETINGS
§ The number of SSC mee@ngs will differ from one IFI to another, but usually they will have 3 to 4 mee@ngs a year
§ Decisions will be taken by majority of votes § A follow-‐up will be conducted in every mee@ng to resolve
pending Shariah issues § The SSC issue fatwas (ruling),guidelines and approve
investment agreements and products documenta@on § It is recommended that the IFI publishes the fatwas, rulings and
guidelines
SSC -‐ TERMS OF REFERENCE
§ The SSC Terms of Reference will be very similar to any other commiOee of the IFI and it will include the following: 1-‐ Objec@ves: mainly to ensure Shariah compliance of the IFI 2-‐ Du@es and responsibili@es: defining the scope of work
required from the SSC 3-‐ Membership: describing the requirement of each member
and the term of the appointment 4-‐ Mee@ngs: defining the minimum numbers of mee@ngs and
the procedures of each mee@ng 5-‐ Authority: defining the authority of the SSC and tools
available for them to implement their rulings
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Durham Islamic Finance Autumn School 2011 in Istanbul
Mohammad Farrukh Raza, Shariah Governance in Financial Ins@tu@ons 9
SSC -‐ POWERS AND AUTHORITIES § The SSC fatwas (rulings)and guidelines are binding on the
IFI § Shariah compliance is the backbone of Islamic banking
and finance § The SSC gives legi@macy to the prac@ces of Islamic
banking and finance § The SSC boosts the confidence of the shareholders and
the public that all the prac@ces and ac@vi@es are in compliance with the Shariah at all @mes
SSC – YEAR END SHARIAH REPORT § The SSC will issue an annual report sta@ng whether the IFI’s
ac@vi@es, opera@ons, contracts, documents, financial statements and income are in compliance with the Shariah rules and principles
§ This report usually forms an integral part of the IFI’s annual report § The Shariah CommiOee report will be addressed to the
shareholders § This repor@ng structure reflects the status of the Shariah CommiOee
as an independent body of the Islamic financial ins@tu@on
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Durham Islamic Finance Autumn School 2011 in Istanbul
Mohammad Farrukh Raza, Shariah Governance in Financial Ins@tu@ons 10
ROLE OF SHARIAH COMPLIANCE OFFICER (SCO)
§ Independent role within the ins@tu@on § Coordinate closely with the SSC for all Shariah related issues § Ensures implementa@on of all SSC direc@ves and resolu@ons § Assist the IFI departments in carrying out their daily ac@vi@es
according to Shariah principles § Carries out Shariah audit of the different func@onal areas § Reviews products, policies and procedures throughout their
lifecycle § Reports any Shariah non compliance ac@vity directly to the MD
and the SSC § May be outsourced, if required
OrganisaJon AAOIFI IFSB IIFM Full name Accoun@ng & Audi@ng
Organisa@on for Islamic Financial Ins@tu@ons
Islamic Financial Services Board
Interna@onal Islamic Financial Markets
Domain Shariah Governance, Products, Accoun@ng, Audi@ng and ethics
Pruden@al requirements (Financial stability, Capital adequacy , Risk management)
Islamic financial contracts (Commodity Murabaha, Forex Swaps etc)
Main clients Financial ins@tu@ons Regulators & other authori@es
Financial ins@tu@ons
Base Bahrain Kuala Lumpur (Malaysia)
Bahrain
STANDARDISATION IN ISLAMIC FINANCE
§ All organisa@ons working in different spheres § No conflict or compe@@on between them § Mutually complementary services overseen by individual independent SSC’s
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Durham Islamic Finance Autumn School 2011 in Istanbul
Mohammad Farrukh Raza, Shariah Governance in Financial Ins@tu@ons 11
SHARIAH STANDARDS (AAOIFI) § AAOIFI (Accoun@ng & Audi@ng Organisa@on for Islamic Financial
Ins@tu@ons) is an independent body established in 1990 under an agreement between a number of Islamic Financial Ins@tu@ons and is now based in Bahrain
§ AAOIFI’s objec@ve is to formulate and issue Shariah, accoun@ng, ethics and governance standards for the interna@onal IFIs and standardise the Islamic financial industry
§ There are 30 Shariah Standards issued (to date) covering all known Islamic financial principles yet the work is s@ll in progress
§ The standards are released by consensus of AAOIFI Shariah Board consis@ng of Shariah scholars from all major schools of thought and regions of the world
§ AAOFI is a member of the Interna@onal Accoun@ng Standard Board
DIFFERENT MODELS OF SHARIAH GOVERNANCE
§ Malaysian Model – centralised Shariah governance Ø Shariah Advisory Council of Bank Negara Malaysia Ø Highest and ul@mate authority on Islamic financial maOers in the country
(BNM Act 2009) Ø Guidance, valida@on, and arbitra@on (by ruling) on all Islamic finance
maOers Ø Shariah Supervisory CommiOee required at each Islamic Financial
Ins@tu@on to complement SAC § Bahrain Model -‐ ins@tu@onal Shariah governance
Ø Each ins@tu@on is required to have its own SSC Ø AAOIFI Shariah standards are compulsory
§ UK Model – ins@tu@onal Shariah governance Ø Each ins@tu@on has its own SSC Ø FSA being a secular body does not involve in Shariah
§ Other Models
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Durham Islamic Finance Autumn School 2011 in Istanbul
Mohammad Farrukh Raza, Shariah Governance in Financial Ins@tu@ons 12
CONTROVERSIES IN SHARIAH GOVERNANCE § Conflicts of interest § Confiden@ality § Fees (scholars for dollars?) § Scarcity of scholars VS high
demand § Finding problems or finding
solu@ons? § Dialogue between the deaf? § Consistency issues § Who takes the blame? § Expecta@on management § Resource planning
A study in 2010 demonstra@ng that a small minority of scholars is sipng on the majority of the Shariah Boards / Supervisory CommiOees triggered a widespread debate over the issue of Shariah governance.
Source: Funds @ work
CHALLENGES IN SHARIAH GOVERNANCE § The scholars of different schools of thought (Madhabs) with
different interpreta@ons and opinions § The number of scholars qualified in the jurisprudence of dealings
(Fiqh-‐ul-‐muamalat) rela@vely limited § The level of familiarity of the scholars with modern day financial
services is limited § Most of the management of IFI’s coming from conven@onal
backgrounds with no or very liOle understanding of Shariah § The expecta@ons of the stakeholders (regulators, shareholders,
customers and the management of IFI’s) from Islamic finance are very unrealis@c
§ More emphasis is required on training and Shariah audit
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Durham Islamic Finance Autumn School 2011 in Istanbul
Mohammad Farrukh Raza, Shariah Governance in Financial Ins@tu@ons 13
THANK YOU
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TEL : +33 820 20 41 21 www.ifaas.fr
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Bahrain Financial Harbour Manama
TEL : +973 17502876 www.ifaas.com