Professional Documents
Culture Documents
Legal and Regulatory Issues in Islamic Banking and Finance Professor: Dr. Rodney Wilson Student: Hamad abdulaziz 15/4/2012
INTRODUCTION:
The Islamic Financial Service Board is an international financial organization. It was founded in 2003 and issues guiding principles and standards within the Islamic banking and financial sector. It aims to promote stability and order in the Islamic financial industry. It also aims to promote the awareness of Islamic financial services. Among its duties is the issuance of Shariah-compliant standards, and provision of guidance and supervision for Islamic Financial Institutions. The IFSB issued principles and standards regarding issues on Risk Management, Capital Adequacy Standards, Corporate Governance, Transparency and Market Discipline, Supervisory Review Process, Governance for Islamic Collective Scheme, Sukuk Securitization and Real Estate Investment, Takaful (Islamic Insurance) Undertakings, Conduct of Business, and Shariah Governance Systems1 for institutions offering Islamic financial services. The Board developed guiding principles in recent years to strengthen governance structures and processes in various segments of the Islamic financial services industry. These three guiding principles are Guiding Principles for Governance for Institutions offering only Islamic Financial Services (IFSB-3, 2006) Guiding Principles on Governance for Islamic Collective Investment Schemes (IFSB-6, 2008) Guiding Principles on Governance for Takaful Operations (IFSB-8, 2009)
In all three guiding principles, there were recurring issues of the functions of the Shariah boards. Due to these recurring issues, the IFSB prepared other sets of guiding principles on Shariah governance system. The objectives of these guiding principles are to: I. Complement other prudential standards issued by the IFSB by focusing on the importance of sound Shariah governance system with regard to competence, independence, confidentiality, and consistency of Shariah boards. Facilitate better understanding of Shariah governance issues in order to ensure that stakeholders are satisfied that an appropriate system is in place. Provide enhanced degree in terms of issuance, compliance and auditing for compliance with Shariah rulings. Provide greater harmonization of the Shariah governance structures and procedures across jurisdictions.
II.
III. IV.
There are nine guiding principles covered by the IFSB3. As we go further we will discuss each in details. This report is basically a summary of the guiding principle issued by the 2 IFSB and has been divided in three subsections. The next subsection will focus on the definition and scope of the Shariah governance system. The subsection after it covers the nine guiding principles and their best practices. I conclude by explaining the importance of adhering to these principles.
Shariah advisory firm: The Shariah advisory firm should possess adequate expertise and resources to undertake its duties. The IIFS should constantly monitor that the firm is equipped with the resources to perform duties effectively.
Principle 2.2: The IIFS shall facilitate continuous professional development of persons serving on its Shariah board, as well as its ISCU and ISRU, if any. Adequate training procedures should be provided to ensure and enhance professionalism and effectiveness. Policies should be established that ensure continuous professional development. IIFS should endeavor to maintain continuous training of the Shariah board, ISCU, and ISRU on relevant new laws, regulations and changing commercial risks. These training should equip the relevant board with industry specific knowledge in areas like banking, collective investment schemes (CIS) and takaful. Principle 2.3: There should be a formal assessment of the effectiveness of the Shariah board as a whole and of contribution by each member to the effectiveness of the Shariah board. The IIFS should establish performance assessments that monitor the effectiveness and productivity of the Shariah board members. Some assessments that should be measured include but are not limited to; demonstration of effective organizational accountability; effective communication with other organs of the governance; proper identification and evaluation of the organizations exposure Shariah non-compliance risk; promotion of ethics and values; and promotion of continuous improvement of an organizations Shariah control processes. 5
Part V: Consistency
Principle 5.1: The IIFS should fully understand the legal and regulatory framework for issuance of Shariah pronouncements/resolutions in the jurisdiction where it operates. It should ensure that its Shariah board strictly observes the said framework and, wherever possible, promotes convergence of the Shariah governance standards. The IIFS should ensure that the Shariah board follows appropriate procedures in dissemination of resolutions. Intellectual property of resolutions should be protected and 6 Shariah board should provide necessary details as to why certain resolutions for the permission or non-permission of transactions were issued. Shariah boards are also encouraged to make resolutions understandable by the general public . Best efforts should be exercised in documenting and publishing resolutions so that stakeholders in the industry can have easy access to it.
Conclusion:
This paper provides a short summary of IFSBs suggested guiding principles for Shariah governance in Islamic Financial Institutions. There are nine principles grouped into five parts; General approach to Shariah governance; Competence; Independence; Confidentiality; and Consistency. These parts cover basic procedures in setting up and establishing Shariah boards in IIFS. The principles encourage IIFS to employ best practice procedures in establishing their Shariah boards. Shariah boards must be competent and able to deliver required resolutions about Islamic financial contracts and services. The board should also be independent in making decisions, IIFS should not interfere and conflicts of interest should be avoided at all cost. Confidentiality should also be practiced by the board; information that is deemed private and not of public interest should be divulged by the board. Appropriate procedures should be maintained in issuing resolutions. IIFS should ensure that the board makes resolutions easily understandable by providing necessary details to interested stakeholders.