Shari’a governance

Professor Rodney Wilson

Re-Imagining the Shari’a: Theory, Practice and Muslim Pluralism at PlayVenice, 14th September 2009

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ContentsNational shari’a boards and devolved compliance

– Central bank and security commission Shari’a Boards

– Shari’a compliance at institutional level

IFSB Guiding Principles for Shari’a Governance

Independence and remit of shari’a scholars– Shari’a board or shari’a advisors

– External or internal audit

Appointment of shari’a scholars– Qualification and experience

– Contractual arrangements for remuneration and conditions

Procedures for the shari’a board meetings– Conduct, decision taking and workload planning

Shari’a assurance and the issuance of fatwa– Mechanisms and reporting

– Number and status and lines of responsibility

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National shari’a boardsMalaysia

– National shari’a boards serves the Central Bank– In addition the Securities Commission has its own board– Only these national boards have the authority to issue fatwa

Sudan– In Sudan finance specialists and economists serve on the shari’a board of

the Central Bank as well as fiqh scholarsIran

– Banks operate under the Law on Usury (Interest) Free Banking of 1983 which was approved by the Guardianship Council, the highest political and religious authority, under Ayatollah Ali Khamenei

– Council is the ultimate authority on fiqh, although there is no procedure for on-going shari’a supervision at national level

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Devolved shari’a complianceShari’a compliance at institutional level

– Islamic financial institutions appoint their own Shari’a Boards

– The privatization of shari’a compliance rather than its nationalization

– The issues of conflicting fatwa and shari’a arbitrage– Those serving at institutional level are approved by

the national Shari’a Boards in Malaysia– No system of national approval in other jurisdictions,

although being considered in the UAE

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IFSB Guiding Principles on Shari’a Governance

Exposure draft– Issued in December 2008 with deadline

for comments 15th May 2009

Guiding principles– Competence– Independence– Confidentiality– Consistency

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General approach

1.1 The shari’a governance structure should be commensurate and proportionate with the size, complexity and nature of the business

1.2 Each shari’a board should have:– A clear terms of reference regarding its

mandate and responsibility

– Well defined operating procedures and lines of reporting

– Good understanding of, and familiarity with, professional ethics and conduct

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Competence2.1 Board members to meet an acceptable fit

and proper criteria– Good character– Capability and expertise

2.2 Provision for continuous professional development of board members

2.3 Formal assessment of the effectiveness of each board and its members

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Independence3.1 Strong and independent oversight role

with capacity to exercise judgement– No individual or group of individuals to

dominate decision making

3.2 The board should be provided with complete, adequate and timely information prior to its meetings and as otherwise required

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Confidentiality

4.1 Shari’a Board members should ensure internal information obtained in the course of their duties is kept confidential

– Implications for those who are members of multiple boards

– Possible conflicts of interest

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Consistency

5.1 Board members need to understand the legal and regulatory framework in the jurisdiction where they operate

– The board should promote convergence of shari’a governance standards subject to the national framework in which they work

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Shariah governance structuresLines of responsibility

Shariah board

Board of directors Internal shariah audit Clients

ShareholdersManagement

and junior staff

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Shari’a Board or shari’a advisorsStatus

– Consultants or auditors– Fatwas mandatory, not discretionary

Number– Fully fledged Islamic financial institution may have 5 or more

scholars– Conventional financial institution with an Islamic window may

have only one scholar or 3 at most

Outsourcing of compliance– Applying pre-determined criteria: Dow Jones Islamic Indices– Private outsourcing companies– Yasaar (www.yasaar.org)

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Independence and remit of shari’a scholarsExternal or internal audit

– Shari’a scholars as institutional employees– Representatives of financial institution or

independent outsidersCross sector responsibilities

– Shari’a audit of banking operations and third party fund management or leasing activities

Cross border activities– Should subsidiary or affiliate operations be

controlled by home or host country scholars?

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Appointment of shari’a scholarsQualification and experience

– Undergraduate or postgraduate degree in fiqh muamalet– Language competency in Arabic and English– Knowledge of commercial law and finance– Previous employment and reputation

Contractual arrangements for remuneration and conditions– Permanent or ad hoc appointments– Retention fee plus hourly/daily remuneration and travel and

accommodation expenses

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Work of the shari’a boardDuties and responsibilities

– Review new financial contracts for shari’a compliance– Liaise with Islamic financial institution’s legal team and external firms

drafting contracts– Monitor current operations of Islamic financial institution

Investigation– Study of fiqh muamalat– Examination of fatwa by other shari’a committee– Referral to AAOIFI shari’a standards – Published rulings by Fiqh Academy, national shari’a board, if any, and

London based Institute of Islamic Banking and Insurance (www.islamic-banking.com)

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Legal interpretation through ijtihad

Universal conformism or taqlid– Follow religious authority– Devotion to basic principles, qawaid– The most broadly based legal maxims or generally

agreed norms– Approach deductive rather than inductive

Scope for ijtihad, interpretation of Islamic law – Need for ijtihad given increasingly complexity of

finance and demand for shariah compliance– Traditional ijtihad involved a single scholar – Group or team ijtihad gives modern

reinterpretations greater weight

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Procedures for shari’a board meetings

Conduct of meetings– Determination of agenda– Minutes of previous meetings, actions and follow-up– Minutes of current meeting and assignment of tasks

Decision taking– Rulings unanimous rather than by majority vote– Ijma or the consensus of opinions– Power of veto by committee members

Workload planning– Frequency of meetings– Preparation for meetings and circulation of documents– Pro-active or re-active role of shari’a board– Interaction with financial professionals

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Shari’a assurance and the issuance of fatwa

Mechanisms– Compliance statements in annual reports– Web materials on shari’a board composition and

rulings– Outreach activity by shari’a scholars

Explanation of fatwa– Issuance of fatwa only or with detailed justification– Responsibility of shari’a board or internal shari’a

control department in using minutes as basis for explanation

– Concern with consistency with other fatwa

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International shari’a guidanceNational sovereignty and shari’a lawInternational shari’a bodies

– OIC Fiqh Academy• Represents 56 Muslim countries

– Al Azhar University• Oldest centre for Islamic scholarship

International Islamic Financial Institutions– Islamic Financial Services Board

• Guidelines and standards for the regulation of Islamic financial institutions

– AAOIFI• Accounting and Auditing Organisation for Islamic Financial

Institutions

– Islamic Development Bank• Shari’a compliant development assistance agency