How to Ensure Shari’a
Compliance in Islamic Banks
Dr. Muhammad Qaseem
Country Head of Shari’a, and Shari’a
Board Member
Dubai Islamic Bank Pakistan
Lahore, 02 Nov 2010
Main points
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Shari’a Compliance, Meaning &
Importance
Challenges in Developing Shari’a
Compliant products
Role of the Main Stakeholders in Ensuring
Shari’a Compliance
Issues of Shari’a Compliance in Various
Products
Meaning of Shari’a compliance
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Shari’a compliant means permissible in
Shari’a
A financial contract is permissible unless there
is a Shari’a evidence prohibiting it
What is Shari’a evidence? General Permission
There is no need for specific permission
Difference between Mu’amalat and Ibadat
Shari’a compliant and Shari’a based, any
difference? Maqasid Shari’yyah
A contract is Shari’a compliant if
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Executed by legally qualified parties
with their consent which requires
knowledge of the details
No involvement of Riba or doubt of Riba
No Gharar (Wujud, Husool, Meqdar)
Not disallowed by the Mujtahideen,
based on the entire Fiqhi literature
A contract is Shari’a compliant if
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its outcome is Halal __ I’etebar ul Ma’al
is not used as a legal device to allow
Haram
there is no condition in the contract
against its nature
Al Kharaj o Bed dhaman, (Title and
possession) principle complied with
Importance of Shari’a Compliance
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Shari’a Compliance distinguishes IFIs from
conventional banks
Accountability to Allah and to people
Shari’a Compliance an issues of Corporate
Governance
Shari’a Compliance the basis of People’s choice
amongst IFIs
Shari’a Compliance a safeguard against loss,
reputation risk
Compliance tool for growth and sustainability
Challenges in Developing
Shari’a Compliant Products
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The main stakeholders: Shari’a advisors,
bankers, regulators, customers
Conformity with laws, regulations,
accounting policies
Commercial viability: pricing, taxation
Negative Perception: use of benchmarks,
mimicking conventional structures,
marketing tactics
Role of Shari’a Advisors/Boards
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Shari’a Advisor or Board? Its level of involvement and
authority
Need for a blend of expertise: Knowledge of regulations,
laws, banking ops, aptitude
Shari’a Compliance Manual
Shari’a Department structure, resources
Product Development process:
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Presentation of the issue to SA
Fatwa and Structure
documentation
processes, product manuals/programs
proper accounting entries
Advertising material
Role of Shari’a Advisors/Boards
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Global acceptability: Avoiding dubious
structures, standardization of products
Shari’a Audit and its independence
Training of the staff
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Technical Training
Islamic Orientation
Educating the Customers/masses
Shari’a Secretariat: Proper Communication
between the Management and Shari’a
Advisor/Board
Role of Regulators
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Separate Laws and Regulations: Treating Islamic
Banking differently
Appropriate regulations, but avoid over-kill, gradual
Shari’a Board at national level/role: Standardization of
Products and Innovation at National Level
Restricting/Banning dubious products
Shari’a Advisors’ Fit & Proper Criteria
Strengthening Shari’a Advisors: Powers and limitations
of Shari’a Boards
Training for all: Bankers, Shari’a scholars, auditors
Shari’a Audit by the Regulator
Role of Bankers and Customers
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Islamic Orientation, Faith in Islamic banking
To Differentiate between Halal & Haram
Proper presentation of issues to Shari’a
Not seeking short cuts through by-passing the
processes
Knowledge of Shari’a rules and principles:
Training is a must
Educating the customers: Shari’a meetings with
customers to identify the issues
Issues of Shari’a Compliance in
Depository Products
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Shari’a issues in Pool Management
Single Pool or Multiple pools
Wakala and Musharaka Pools
Asset tagging, transfer of assets between pools
Shari’a compliance issues in Profit Distribution
of Common Mudaraba Pool
 Weightages (logical and non-discriminatory)
 Premature encashment of deposits
 Profit for broken period/on account
 Mudarib and Mudaraba’s expenses
Issues of Shari’a
Depository Products
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Compliance
in
Profit Equalization Reserve and Investment
Risk Reserve
Hiba from the Shareholders
Transparency in declaration of profit rates
Profit Calculation, monitoring and distribution
(involvement of Shari’a and audit)
Marketing issues
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Expected Rate of Return
Corporate Deposits, committing rates
Shari’a Issues in Asset Products
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Marketing Issues
Documentation, signing sequence
Late Payment
Ijara-based products’ issues
 Insurance
 Maintenance
 Loss of asset
Murabaha products’ issues