ISRA International Shari‟ah Research Academy for Islamic Finance
International Shariah Audit Conference & Workshop, 9 May 2011, Crown Plaza Mutiara
OVERVIEW OF SHARI’AH GOVERNANCE IN
MALAYSIA AND GLOBALLY
Assoc. Prof. Dr. Mohamad Akram Laldin
Executive Director, ISRA
Outline
Introduction
Shari‟ah Governance in Malaysia and Globally
Existing Frameworks:
BNM Shari‟ah Governance Framework, IFSB Standards
and AAOIFI Standards
Overall Developments – Malaysia and Globally
Developments in Malaysia
Way forward
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Introduction
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Shari‟ah Governance
Shari‟ah compliance is the basic component of Islamic
financial institution
Over the years, Shari‟ah governance have been
discussed in the context of Shari‟ah board‟s duty.
Recent development in the industry shows that Shari‟ah
governance has gain more attention and more efforts
are being made to observe complete Shari‟ah
compliance chain.
Because, non compliance with Shari‟ah will injure IFI
and cause adverse effect on the industry.
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Non Compliance Risk
Non compliant
Product
Non compliant Defects in
Process Documentation
Shari‟ah Risk
i-Reputational Risk
ii- Non recognition of
Income
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Existing Frameworks: BNM‟s SGF, IFSB Guiding
Principles and AAOIFI Standards
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BNM Shari‟ah Governance Framework
The Role of SGF:
“To enhance the role of the board, the Shariah committee and the
management in relation to Shariah matters, including enhancing the
relevant key organs having the responsibility to execute the Shariah
compliance and research functions aimed at the attainment of a Shariah-
based operating environment.”
Effect:
SGF supersede the Guidelines on Governance of Shariah Committee for
the Islamic Financial Institutions issued in 2004. Most of the provisions of
the Guideline are included in the new SGF
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ISRA International Shari‟ah Research Academy for Islamic Finance
IFSB Standards
IFSB 10 - Guiding Principles on Shari’ah Governance System recommends that
Islamic finance institution must ensure proper functioning Shari’ah
governance is in place in the institution and that Shari’ah compliance is a
shared responsibility and not solely placed on the Shari’ah board.
It also emphasized that Shari’ah board should have clear mandate and
responsibility and they should meet certain „fit and proper‟ criteria.
IFSB also recommends the installation of the 4 values:-
1. Competence
2. Independence
3. Confidentiality
4. Consistency
Another relevant standard of IFSB is IFSB-3: Guiding Principles on Corporate
Governance for Institutions Offering Only Islamic Financial Services
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AAOIFI Standards
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AAOIFI Standards
Details
AAOIFI Governance Standards
Standard No. 1: Shari‟ah Supervision Body: Appointment, Composition
and Report
Standard No. 2: Shari‟ah Review
Standard No. 3: Internal Shari‟ah Review
Standard No. 4: Auditing and Governance Committee for Islamic Financial
Institution
Standard No. 5: Independence of Shari‟ah Supervisory Board
Standard No. 6: Statement on Governance Principles for Islamic Financial
Institution
Standard No. 7: Corporate Social Responsibility Conduct and Disclosure
for Islamic Financial Institution
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AAOIFI Standards
Relevant Standards
AAOIFI Shari‟ah Standard
Standard No. 29: Stipulations and Ethics of Fatwa in the Institutional
Framework
AAOIFI Standard on Ethics
Standard No. 1: Code of Ethics for Accountants and Auditors of Islamic
Financial Institutions
Standard No.2: Code of Ethics for Employees of Islamic Financial
Institutions
AAOIFI Standards on Audits
Eg. Standard No. 4: Testing for compliance with Shari‟ah rules and
principles by an external auditor
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Overall Developments – Malaysia & Globally
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Shari‟ah Governance Standards and the Frameworks Impacts
• Continuous Professional Development
Shari‟ah •
(Training & Exposure)
Succession Plan – Serious action required
Boards • Independence & Transparency
- Emphasis • Performance Assessment (Collective & Individually)
• Assistance of Supportive organs
Shari‟ah • To include: Shari‟ah Review, Audit, Secretariat,
Governance Risk Management and Research Organ
• Emphasis on Research
- Organs
• Active involvement of: BOD and Shareholders
Shari‟ah • Fatwa: To use acceptable Shari‟ah method to derive
legal ruling
Governance • IFI to disclose full, accurate and timely information
– Other • Shari‟ah Corporate Governance
requisites • Empowerment of CSR
ISRA • Observation
International Shari‟ah Research Academy for Islamic Finance of ethics and best business practice
Nevertheless, where the Shari‟ah governance
framework and the standards are not adopted, the
following concerns of the industry is still persistent.
Apart from that, in many jurisdictions, various
concerns on legal risks are not addressed too.
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Concerns in the Industry:
1. Shari‟ah scholars sitting on many Shari‟ah boards
(Fund@Work report). Quality and complete supervision
is questionable.
2. Shari‟ah advisor‟s lack understanding on finance
3. Check and balance of Shari‟ah advisory. Effective
Shari‟ah review and audit
4. Scholars‟ remuneration: question of transparency and
mode of calculation.
5. Shari‟ah scholars hold different opinion than the
Shari‟ah committee of IFI that they represent
6. Competency. Shari‟ah board taken as learning ground
for new/ inexperienced Shari‟ah advisors. Passive.
7. Fatwa Shopping
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Concerns in the Industry:
8. Legal Uncertainty
• Islamic finance cases are tried in English courts
• English court judges and lawyers are not familiar
with Shari‟ah
• Conflict on choice of laws
9. Documentation risk
10. Rooms to argue deals are non Shari‟ah compliance in
court by parties
11. Uncertainty of the legal status of Islamic instruments –
mostly untested.
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Significant Developments – Malaysia
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Existing Shari‟ah Governance Framework
1. BNM Shari‟ah Governance Framework – could be blueprint for global practice
2. Problems with legal uncertainty – Malaysia have taken serious actions to
solve them, such as:
• New Central Bank Act 2009
• Muamalah division in High Court
• KLRCA
• Law Harmonization Committee
3. Thus, Malaysia is said to have the most advanced legal environment for
settlement of Islamic finance cases.
4. It has encountered various experience (Islamic finance dispute) in the
country.
5. It has enabling laws and infrastructures
6. It can be come one of the best choices of law.
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Way Forward
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WAY FORWARD
ASAS (Association of Shari‟ah Advisors)
Towards an independent Shari‟ah Committee/ Board
Regulatory Body
Central Banks and IFI to seek their services
ASAS Country X ASAS of Country W
International ASAS
ASAS Country Y ASAS Country Z
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Alternative Dispute Resolution (ADR)
Fast settlement to solve Islamic finance disputes
It is the fastest solution to overcome the challenge to provide suitable dispute
settlement forum for Islamic finance cases
Supported by the existing of ADR Regional Centers in Kuala Lumpur and
Dubai. Malaysia also has Financial Mediation Bureau (FMB)
The centers can also settle cross boarder trade disputes.
It require insertion of a clause in the contract to permit its application
Lawyers need to advise their clients to chose this option prior to settlement in
court. It has a lot of advantages.
Good experience: Sanghi Polyesters Ltd (India) v. The International Investor
KCSC (Kuwait) [2001] C.L.C.
It involved Istisna’ Financing. The Arbitrator, an Islamic Law expert, respected
Shari’ah restrictions when awarding damages.
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22
Shari‟ah governance standards and framework are
crucial and need to be adopted globally.
Shari‟ah compliance is not the sole responsibility of
Shari‟ah board but all parties involved in Islamic
finance.
Shari‟ah compliance need to be ensured up until the deal
is settled or when disputed in court
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Thank You
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