IFSB-INCEIF EXECUTIVE FORUM
Sound Governance Practices: Promoting Stability in Islamic Finance
Achieving the Right Balance Between Conformance
and Performance-The way forward for Islamic Financial
Industry
by
Assoc Prof Dr Azman Mohd Noor
Head, Department of Fiqh,
International Islamic University Malaysia
Drazman.net
Sasana Kijang, Bank Negara Malaysia
9-10 December 2014
IFSB-INCEIF EXECUTIVE FORUM
Sound Governance Practices: Promoting Stability in Islamic Finance
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
IFSB-INCEIF EXECUTIVE FORUM
Sound Governance Practices: Promoting Stability in Islamic Finance
SGF and Regulatory Requirement
IFSB-INCEIF EXECUTIVE FORUM
Sound Governance Practices: Promoting Stability in Islamic Finance
Number of Shariah Committee Members at IFI
Malaysia
5 members, at least 3
with strong Shariah
background
GCC
No such requirement.
Some IFI has more
reasonable numbers
while some others
with only 1or 2
persons
IFSB-INCEIF EXECUTIVE FORUM
Sound Governance Practices: Promoting Stability in Islamic Finance
Shariah Advisory Council at the highest Regulatory Level
Malaysia
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
IFSB-INCEIF EXECUTIVE FORUM
Sound Governance Practices: Promoting Stability in Islamic Finance
Shariah Conformance Product Approval
Malaysia
There 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
GCC
The approval from the
regulators only for the
technical, risk aspects,
not on Shariah matters.
IFSB-INCEIF EXECUTIVE FORUM
Sound Governance Practices: Promoting Stability in Islamic Finance
Shariah Audit and Compliance Review Exercise
Malaysia
-By BNM-Internal Shariah
audit
-Internal Shariah
Risk/ Compliance
Review
-By external Shariah
auditor (not
GCC
-Internal Shariah
audit
-external Shariah
auditor
IFSB-INCEIF EXECUTIVE FORUM
Sound Governance Practices: Promoting Stability in Islamic Finance
Appointment of the SC and Reporting Flow Chart
Malaysia
GCC
Shariah Committee members are
nominated and appointed by BOD
after getting consent from BNM.
Saudi and Kuwait; SC members are
appointed by the General Assembly.
Shariah committee is reporting to
BOD
Shariah Committee is reporting to GA
Shariah Committee can also report to
SAC BNM
No higher level
Shariah Audit reports to Audit
committee and SC
Shariah Audit reports to SC
Shariah Compliance review reports to
Risks Committee; and SC
Mostly report to SC
IFSB-INCEIF EXECUTIVE FORUM
Sound Governance Practices: Promoting Stability in Islamic Finance
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
IFSB-INCEIF EXECUTIVE FORUM
Sound Governance Practices: Promoting Stability in Islamic Finance
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.
IFSB-INCEIF EXECUTIVE FORUM
Sound Governance Practices: Promoting Stability in Islamic Finance
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
IFSB-INCEIF EXECUTIVE FORUM
Sound Governance Practices: Promoting Stability in Islamic Finance
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.
IFSB-INCEIF EXECUTIVE FORUM
Sound Governance Practices: Promoting Stability in Islamic Finance
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.
IFSB-INCEIF EXECUTIVE FORUM
Sound Governance Practices: Promoting Stability in Islamic Finance
Thank you
Drazman.net