IFSB-INCEIF EXECUTIVE FORUM Sound Governance Practices: Promoting Stability in Islamic Finance TOPIC...

IFSB-INCEIF EXECUTIVE FORUMSound Governance Practices: Promoting Stability in Islamic Finance

TOPIC

Achieving the Right Balance Between Conformance and Performance-The way forward for Islamic Financial Industry

Sasana Kijang, Bank Negara Malaysia9-10 December 2014

Assoc Prof Dr Azman Mohd Noor Head, Department of Fiqh,

International Islamic University MalaysiaDrazman.net

by


INTRODUCTION: THE COMFORMANCE AND PERFORMANCE

What makes IFI differs from

conventional is the Shariah compliance

requirement

Conformance aims at offering

alternative Shariah compliant banking

and financial transactions

Performance in general is to maximize

profits to the shareholders


SGF and Regulatory Requirement


Number of Shariah Committee Members at IFI

Malaysia GCC5 members, at least 3 with strong Shariah background

No such requirement. Some IFI has more reasonable numbers while some others with only 1or 2 persons


Shariah Advisory Council at the highest Regulatory LevelMalaysia GCC

1. SAC is the highest authority, and a reference for court judgement.

1.Shariah Board is only at the IFI. Most of the GCC has no SAC at central bank.

-Qatar has initiated the establishment of SAC, but there is a suggestion to dilute the SC of IFI.

-Kuwait: CBK law se 10/artcle 93, if islamic by bank general assembly Kuwait . In case of dispute on shariah matters BOD may transfer the matters to fatwas council (Lanjah al-fatwa), ministry of waqf. UAE: Capital Market SAC. Central UAE Higher Shariah Authority is appointed by the cabinet at the Ministry of Justice and Islamic Affairs


Shariah Conformance Product Approval

Malaysia GCCThere are two tier/level Shariah supervision, one at IFI and another one at Bank Negara, two layers of product approval. SC can report direct to SAC

The approval from the regulators only for the technical, risk aspects, not on Shariah matters.


Shariah Audit and Compliance Review Exercise

Malaysia GCC-By BNM--Internal Shariah audit-Internal Shariah Risk/ Compliance Review-By external Shariah auditor (not compulsory)

-Internal Shariah audit -external Shariah auditor


Appointment of the SC and Reporting Flow Chart

Malaysia GCC

Shariah Committee members are nominated and appointed by BOD after getting consent from BNM.

Shariah committee is reporting to BOD

Shariah Committee can also report to SAC BNM

Shariah Audit reports to Audit committee and SC

Shariah Compliance review reports to Risks Committee; and SC

Saudi and Kuwait; SC members are appointed by the General Assembly.

Shariah Committee is reporting to GA

No higher level

Shariah Audit reports to SC

Mostly report to SC


EXAMPLES OF COMMON NON CONFORMANCES

Non Shariah Compliance Issues

Example in Tawarruq

Selling commodity which is not in existence.

Dual Agency Commodity Murabahah

Roll over (qalb al-dayn) in debt restructuring

How indebtedness is established, big number of contracts be

excuted

Example in Murabahah and Ijarah

• No clear contract, prices and contracting parties in the legal

doc.

• ‘Inah issue


EXAMPLE OF NON PERFORMANCES

Failure to achieve projected and budgeted profit,

lack of profit maximization, low profit compared to

cost.

Non Compliance to Regulatory

policies/requirement.

Exposure to risks such as credit risk, market,

operation, NPF recovery etc.

Lack of talented performing staff and the issue of

staff turnover.


CHALLENGES

Does conformance affect smooth

performance or the other way around?

Does conformance slow down

performance, because of Shariah

approval requirement?

Shariah Review under Shariah Division

or Compliance Division


How to Harmonize Conformance and Performance

Shariah Governance Framework/

Shariah Compliance Manual of Each IFI

Shariah conformance should be

embedded in Key Performance

Indicators.

Product Manual, SOP, Shariah Audit

Reporting of Shariah division, directly to

CEO.


Cont’.. Harmonization between Conformance and Performance Should Shariah Head Division, join

Management Committee Meeting?

Credit Committee.

Should a Shariah Committee become a

Board Member? Or permanent

invitee/invitee in BOD.


Thank you

Drazman.net

IFSB-INCEIF EXECUTIVE FORUM Sound Governance Practices: Promoting Stability in Islamic Finance TOPIC...

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