Chapter 2 Shariah Supervision in IFI
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This document discusses Shariah supervision in Islamic financial institutions. It outlines the models of Shariah advisory services, including international Shariah boards, national Shariah boards, institutional Shariah boards, and outsourcing advisory services. It also describes the establishment of Shariah committees and their duties, which include advising the board, endorsing compliance manuals and documents, and providing written Shariah opinions. The document cautions against excessive flexibility in decisions and explores challenges in Shariah supervision, such as balancing monetary gains with Shariah objectives.
Chapter 2 Shariah Supervision in IFI
- 1. ISLAMIC INVESTMENT Mahyuddin Khalid emkay@salam.uitm.edu.my Shariah Supervision in Islamic Financial Institutions 1
- 2. Topic Outline Models Of Shariah Advisory Services Establishment Of Shariah Committee Duties And Responsibilities Of Shariah Committee Excessive Flexibility (Al-Tasahul) In Making Shariah Decisions Challenges In Shariah Supervision 2
- 3. Preamble Among the duties of the Shariah Council, as stated in the statutes of the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) is the following: To bring about mutual conformity or approximation between the conceptualizations and the practical applications of Shariah supervisory boards of Islamic financial institutions so as to avoid inconsistencies and contradictions between the fatawa and the implementations of these institutions in ways that lead to the effectiveness of the role of Shariah supervisory boards in Islamic financial institutions and central banks. 3
- 4. Definition Shariah Advisor as defined by AAIOFI Shariah advisors are specialized jurists particularly in Fiqh Muamalah and Islamic Finance Entrusted with the duty of directing, reviewing and supervising the activities related to Islamic finance To ensure that the activities in compliance with Shariah rules and principles. The views of the Shariah advisor shall be binding in the specific area of supervision. Shariah advisors People who are entrusted to ensure the compliance aspects of particular products and instruments used in the Islamic Finance industry which broadly includes banking, capital market and takaful. 4
- 5. Models Of Shariah Advisory Services • E.g. AAOIFI, Islamic Development Bank (IDB). International Shariah Boards • E.g. Malaysia, Pakistan, Sudan, Indonesia National Shariah Boards and different Shariah Advisory Boards at Institutional level • These are commonly referred to as Shariah Committee(SC) or Shariah Supervisory Boards (SSBs) and work on an institutional level. Institutional Shariah Boards • E.g. Europe, Amanie Advisory Outsourcing of Shariah Advisory Services • E.g. Dallah al-Barakah Central Shariah Board for the whole Group • E.g. Dr Mohd Daud Bakar Individuals undertaking the Shariah Advisory role 5
- 6. 6 Centralized Shariah Advisory by Country Country Centralized SSB or High Shariah Authority or Fatwa Board Jordan No Malaysia Yes Sudan Yes Bahrain No Kuwait Yes Pakistan Yes UAE Yes Indonesia Yes
- 7. Malaysian Model of SAC • To enhance the role and functions of its Shariah Advisory Council (SAC) for Islamic Banking and Takaful. Bank Negara Malaysia has amended the Central Bank of Malaysia Act 1958 • Accorded the SAC as the sole Shariah authority in Islamic finance. • The SAC will be referred to by the court or arbitrator in disputes involving Shariah issues in Islamic banking, finance and takaful cases. Implication 7
- 8. Malaysian Model of SAC To effectively play its role, the SAC operates as an independent body. • An independent SAC with high level of integrity will command public confidence • Will boost the industry to a greater height. There is also a crucial need to define the relationship between the SAC and Shariah bodies which act as Shariah advisers in the industry. • Towards this end, the Shariah bodies in the Islamic financial institution need to be rationalised. • A Shariah body in the industry which is to be known as a Shariah Committee, will play a complementary role to the SAC of Bank Negara Malaysia. 8
- 9. Shariah Committee of Islamic Financial Institution Every Islamic financial institution (IFI) is required to establish a Shariah Committee. In the case of a IFSA2013, for Islamic Banking Subsidiaries (IBS) bank, it may establish one Shariah Committee for the banking group. However, if a takaful operator is part of that group, the takaful operator must establish its own separate Shariah Committee, due to the legal requirement under the Takaful Act 1984. E.g. Maybank group, Maybank Islamic and Etiqa Takaful The Board Of Director of an IFI shall appoint the members of the Shariah Committee. The appointment and reappointment of a Shariah Committee member shall obtain prior written approval of BNM. 9
- 10. Qualification & Composition of Shariah Committee A member of a Shariah Committee shall be an individual. A company, institution or body shall not constitute a Shariah Committee for the purpose of these Guidelines. The proposed member of the Shariah Committee shall at least either have qualification or possess necessary knowledge, expertise or experience in the following areas: Islamic jurisprudence (Usul al-Fiqh); or Islamic transaction/commercial law (Fiqh al-Mu'amalat). The composition of the Shariah Committee shall consist a minimum of three (3) members. 10
- 11. Restrictions on Shariah Committee Section 16B(6) of the Central Bank of Malaysia Act 1958: Islamic financial institution is not allowed to appoint any member of the SAC to serve in its Shariah Committee Islamic financial institution shall not appoint any member of a Shariah Committee in another Islamic financial institution of the same industry. To avoid conflict of interest and for reasons of confidentiality within the industry For this purpose, Islamic financial institutions which are regulated under the FSA and IFSA are classified as of the "Islamic banking industry", whilst Islamic financial institutions that are regulated under the Takaful Act are classified as of the "takaful industry". Memberships in other categories of industry are excluded from the restriction. 11
- 12. Duties and Responsibilities of Shariah Committee To advise the Board on Shariah matters in its business operation To endorse Shariah Compliance Manuals To endorse and validate relevant documentations To assist related parties on Shariah matters for advice upon request To advise on matters to be referred to the SAC To provide written Shariah opinion To assist the SAC on reference for advice 12
- 13. Duties and Responsibilities of Shariah Committee • The Shariah Committee shall advise the Board of IFI on Shariah matters • To ensure that the business operations of the IFI comply with Shariah principles at all times. To advise the Board of IFI on Shariah matters in its business operation • The IFI shall have a Shariah Compliance Manual. • The Manual must specify the manner in which a submission or request for advice be made to the Shariah Committee, the conduct of the Shariah Committee's meeting and the manner of compliance with any Shariah decision. • The Manual shall be endorsed by the Shariah Committee. To endorse Shariah Compliance Manuals 13
- 14. Duties and Responsibilities of Shariah Committee • To ensure that the products of the Islamic financial institutions comply with Shariah principles in all aspects, the Shariah Committee must endorse the following: • The terms and conditions contained in the proposal form, contract, agreement or other legal documentation used in executing the transactions • The product manual, marketing advertisements, sales illustrations and brochures used to describe the product. To endorse and validate relevant documentations • The related parties of the IFI such as its legal counsel, auditor or consultant may seek advice on Shariah matters from the Shariah Committee. • The Shariah Committee is expected to provide assistance to them so that compliance with Shariah principles can be assured completely To assist related parties on Shariah matters for advice upon request 14
- 15. Duties and Responsibilities of Shariah Committee • The Shariah Committee must advise the IFI to consult the SAC on any Shariah matters which have not been resolved or endorsed by the SAC. To advise on matters to be referred to the SAC • The Shariah Committee is required to record any opinion given. • The Committee shall prepare written Shariah opinions in the following circumstances: • Where the IFI make reference to the SAC for advice • Where the IFI submits applications to BNM for new product approval in accordance with guidelines on product approval issued by BNM. To provide written Shariah opinion 15
- 16. Duties and Responsibilities of Shariah Committee • The Shariah Committee must explain Shariah issues involved and the recommendations for a decision. • It must be supported by relevant Shariah jurisprudential literature from the established sources. • The Shariah Committee is also expected to assist the SAC on any matters referred by the Islamic financial institution. • Upon obtaining any advice of the SAC, the Shariah Committee shall ensure that all SAC's decisions are properly implemented by the Islamic financial institution. To assist the SAC on reference for advice 16
- 17. Duties and Responsibilities of IFI to the Shariah Committee To refer all Shariah issues to the Shariah Committee To adopt the Shariah Committee's advice To ensure that product documents be validated To have a Shariah Compliance Manual To provide access to relevant documents To provide sufficient resources To remunerate the members of the Shariah Committee accordingly 17
- 18. Duties and Responsibilities of IFI To refer all Shariah issues to the Shariah Committee • The IFI must refer all Shariah issues in its business operations to the Shariah Committee for advice. • The submission for an advice or a decision must be made in a comprehensive manner for an effective deliberation by the Shariah Committee. • This include explaining the process involved, documents to be used and other necessary information. To adopt the Shariah Committee's advice • The IFI is required to adopt and take necessary measures for implementation of Shariah Committee's advice. To ensure that product documents be validated • The IFI shall obtain validation of the Shariah Committee relating to Shariah issues in all product documentations. 18
- 19. Duties and Responsibilities of IFI To have a Shariah Compliance Manual •The IFI shall ensure that the Shariah Compliance Manual is endorsed by the Shariah Committee. To provide access to relevant documents •The IFI must provide necessary assistance to the Shariah Committee. •The Shariah Committee must be given access to relevant records, transactions, manuals or other relevant information, as required by them to perform their duties. •The Shariah Committee members are granted exemptions from the secrecy provisions under the respective legislations. To provide sufficient resources •The IFI must provide the Shariah Committee with sufficient resources, e.g. budget allocation, independent expert consultation, reference materials and trainings. •It is also the duty of the IFI to familiarize the Shariah Committee on its operation and business. To remunerate the members of the Shariah Committee accordingly •The Board shall determine the remuneration of the Shariah Committee members (through its Remuneration Committee). •The remuneration shall commensurate and reflect the roles and functions of the Shariah Committee 19
- 20. Different Approaches in Shariah Supervision The driven factors are: Fanaticism towards a particular mazhab, views or scholars Depending on the literal meaning of the text (al- Qur’an and Sunnah) without referring to its objectives (maqasid) Unnecessarily propagating the usage of sadd al-dharai’i (blocking the means to evil) in disputed issues Rigidity and inflexibility (al-tadyik wa al- tashaddud) in making Shariah decisions 20
- 21. Excessive Flexibility (al-Tasahul) in Making Shariah Decisions Excessive utilisation of the principle of maslahah and darurah which might lead to misusing these two principles Choosing the facility (tatabbu’ al-rukhas) and taking the easiest view of the mazahib (al-talfiq bayn al-mazahib) Finding legal devices (al- tahayul al- fiqhiyyah) in order to justify certain rulings 21
- 22. The Moderate Approach In Arriving At Shariah Decisions Islam is a system that emphasize on the importance of moderation (al-wasatiyyah) in everything The scholars shall investigate the issues and arrive at a decision without compromising the fundamentals of Shariah Imam al-Shatibi emphasized the importance of moderation when he says: “A vice mufti is the one who provides moderate and practical solutions for the public and will not burden them with unnecessary burdens (al-shiddah) and will not also be incline towards excessive flexibility (up to the point of compromising Shariah principles)” 22
- 23. Challanges In Shariah Supervision Knowledge and the know-how of Islamic instruments Synergizing between the Shariah requirements with the legal and taxation framework Innovation in Shariah compliance and viable products Balancing between the monetary gains and fulfilling the Shariah objectives Clear and transparent procedures in decision-making 23
- 24. Conclusion Shariah advisors are the backbone of the industry without which the integrity of the whole industry will be at stake Advisory services are an amanah (responsibility) and must be discharged with utmost professionalism and integrity More interactions is needed between the Shariah advisors and the market players so that the supervisory role will be enhanced Shariah scholars must ensure that all the decisions made are realistic and serve the interest of the ummah 24
- 25. Summary In this chapter you have learned about: Models Of Shariah Advisory Services Shariah Committee Excessive Flexibility (Al-Tasahul) In Making Shariah Decisions Challenges In Shariah Supervision 25
- 26. Thank You26