The New Shariah Governance Policy Document (2019)

SHARIAH GOVERNANCE POLICY DOCUMENT (2019)

One of the most anticipated documents by the industry is the renewed Shariah Governance Framework, which was last issued in 2011. Many were waiting with bated breath on what changes were made to the document. I had a quick look at it also and generally, there were a few fine-tuning done to existing regulations.

A quick summary of the points in the Shariah Governance Policy Document (2019) are as follows:

  1. The responsibilities of the Board of Directors are to approve the policies regarding Shariah governance, oversee the implementation of SAC’s ruling and internal control framework, oversee the performance of senior management and promote a culture of Shariah compliance in the bank.
  2. The Board of Directors also must interact sufficiently with the Shariah Committee including giving due regards to the Shariah Committee decisions, paying attention to facts and rational and the implication of implementing the decision, with proper conflict resolutions and record of all deliberations on the issues.
  3. The Board of Directors must also assess the performance of the Shariah Committee formally, at least annually and ensure the remunerations reflect members’ accountabilities.
  4. The key responsibilities of the Shariah Committee themselves are defined as follows:
    1. Provide a decision or advice on the application of SAC ruling and BNM standards on Shariah matters
    2. Provide a decision or advice on matters that requires a reference to be made by the SAC
    3. Provide a decision or advice on matters that may trigger Shariah Non-Compliant event
    4. Deliberate and affirm Shariah non-compliant findings
    5. Endorsing rectification measures for Shariah non-compliance event
  5. The Shariah Committee shall be accountable for the quality, accuracy and soundness in their decisions and advices.
  6.  The Shariah Committee must establish a robust methodology to guide decision making process including taking into account relevant business and risk practices.
  7. If Shariah decides to place additional restrictions on the business in applying SAC ruling (meaning : stricter than SAC rulings), the bank must document the deliberation, obtain Board of Directors view on the decision, and immediately notify BNM on the decision.
  8. The Shariah Committee must exercise objectivity in making a judgement or deriving a decision to avoid impairing professional objectivity. Sufficient time is to be devoted to prepare for and attend Shariah Committee meetings.
  9. The Shariah Committee must continuously develop reasonable understanding of the business and keep abreast of the latest market and regulatory development, to be led by the Chairman of the Shariah Committee.
  10. The Chairman of the Shariah Committee must be able to apply relevant procedures for Shariah deliberations, liaise with Board of Directors, ensure sound decisions are made, encourage healthy discussion on issues, and ensure maintenance of records supporting Shariah decisions.
  11. Shariah Committee meetings must be conducted at least once every 2 months  (at least 2 times a year for Islamic Banking Windows operations) and attendance of each member must be 75%. This information to be reported in the bank’s annual report.
  12. Appointment of the Shariah Committee must fulfil the following:
    1. the person is a Muslim
    2. the person is “fit and proper
    3. the person is either Shariah qualified person or an expert possessing skills, knowledge and experience (to support the Shariah function)
  13. Shariah Qualified Person means the person:
    1. hold a minimum bachelor degree in Shariah which includes studies on Usul Fiqh (principles of Islamic Jurispruedence) or Fiqh Muamalat (Islamic transaction/commercial law)
    2. possesses solid knowledge in Shariah with reasonable Islamic finance knowledge and experience
    3. demonstrates strong proficiency and knowledge in written and verbal Arabic.
  14. A Shariah Committee member shall not serve in the same Bank for more than 9 years, must not accept appointment on more than 1 licensed banks, 1 licensed takaful operator and one prescribed institution. The member must also not be an active politician.
  15. The Shariah Committee composition must consist of a Shariah qualified Chairman of Shariah Committee and the majority of the Shariah Committee Members are Shariah qualified.
  16. The Shariah Secretariat must provide the Shariah Committee adequate time to deliberate all Shariah matters.

HOW MUCH POWER DOES THE SHARIAH COMMITTEE REALLY HAVE?

As expected, the Shariah Committee must have full accountability in making decisions via robust deliberation of the issues, including considerations of business practices. This idea is consistent with BNM’s expectation that Shariah Committee must reach a certain level of competency in advising the banks. BNM, it seems, is prepared to provide authority for Shariah Committee to decide on the business direction, in line with the overarching SAC decisions. This indicates that the Shariah Committee is meant to be influential in the Islamic Banking industry.

However, BNM also allows the challenge on Shariah Committee decisions if the bank deems the decisions have not taken into considerations the practical and business sense, especially for decisions stricter than the SAC. In such circumstances, the Board of Directors provide a view on the decision, and must be escalated to BNM. To ensure that this scenario does not happen as often, both Shariah Committee and the business must align the understanding on the business direction and mitigate the discrepancies in understanding. The role of the Chairman of the Shariah Committee is important to manage the interactions between the Board of Directors and his Shariah Committee members.

The above underlines the seriousness of the Shariah Committee function. With great powers comes great responsibilities. To hold such authority, the Shariah Committee must reflect quality, accuracy and soundness in all their decision-making.

WILL A SHARIAH COMMITTEE FUNCTION REMAIN A PART-TIME JOB?

Books

Personally, I understand there are challenges for Shariah Committees to devote a sizeable amount of time to provide banks with high quality, fully deliberated decisions that is valuable. There are still a number of Shariah Committees only choosing to stay in their areas of expertise while concentrating on their day jobs. We hardly see a scholar having a full-fledge research house coming into the market with resources that can support the business requirements of an Islamic Financial Institution (IFI).

Nothing is mentioned on the expected level of research to be done by a Shariah scholar. That level is still left to interpretation although with the requirement to be “conversant in Arabic” implies Shariah scholar should be referring their research and decisions more consistent with global standards, where text, references and decisions are discussed and derived in Arabic.

IS AVOIDING CONFLICT OF INTEREST MORE IMPORTANT THAN KNOWLEDGE SHARING?

One wish that I had for the Shariah Governance is the composition of Shariah Committee itself. While the limitation of service of not more than 9 years is good for an IFI (to encourage rotation in the industry), I still feel the knowledge growth and development of Shariah Committees may not be as fast as the anticipated industry growth. What more, I feel that the limitation of a Shariah scholar to only serve in 1 (one) Islamic Bank, 1 (one) Takaful Company, and 1 (one) Islamic Development Bank do not allow the sharing of knowledge between entities and industries. Perhaps there is a concern where there could be a conflict of interest? I do not know. All I know is that globally, it is common to see one advisor sitting on multiple boards and from the knowledge gathering, can be a substantial resource for the IFI.

WHY NOT THE CURRENT STRUCTURE?

In my opinion, there is a real shortage of knowledge between the old guards and the new challengers in the areas of Islamic Banking. What I see nowadays are issues being re-discussed again and again, and some have been discussed at length in different forums or decades earlier, with solid resolutions. The new scholars do not have the full understanding of history, background and context on many issues (some of which have already been discussed), and the older guard of very prominent scholars are not able to share the history, perspective, experience, background and earlier discussions on matters of Islamic Banking. This gap remains huge as the young scholars run to catch up in terms of the understanding that the older guards have. This resulted in many real, new and current issues being somewhat ignored as past issues are again discussed.

SO WHAT IS MY DREAM TEAM FOR A SHARIAH COMMITTEE?

In my perfect world, I would love to see a combination of the following:

  1. The Shariah Committee Chairman. Senior person in the industry leading the committee, with vast experience of Islamic Banking operations, as well as Shariah Qualified and conversant in written and spoken Arabic. Must have leadership qualities to be able to manage the Shariah Committee.
  2. Prominent Scholar. One prominent scholar should sit in as part of the Shariah Committee for the purpose of providing guidance, mentoring, advising and coaching to new Shariah Committee members and Industry Experts. This scholar should come from a list of 10-15 “A-Rated” Shariah scholars who have been in the industry of more then 15 years. Must have some capacity in BNM’s Shariah Advisory Council or is a Consultant with a reputable Shariah research house. Must have international exposure or sitting in an international Shariah board. Is allowed to sit in up to 5 (five) local Islamic Banks, Development Banks or Takaful Companies. Also conversant in Arabic, both written and spoken.This list of “A-Rated” Shariah scholars must be maintained or endorsed by BNM, just like how the Shariah Advisory Council (SAC) of BNM is maintained.
  3. Combination of Shariah Scholars and Industry Experts. Can be appointed based on expertise and academic background with strong background in research. Must be Shariah Qualified and conversant in written and spoken Arabic. For Industry Experts, must be a specialist in the give area and have sufficient experience. This group is to be groomed to be included into the “A-Rated” Shariah Scholars upon completion of tenure. Training and exposure to be given, with the assistance of the Prominent Scholar, on how to upscale and up-skill the knowledge in Islamic Banking.   And to be included into the “A-Rated” Shariah Scholars list, the scholars must undergo an overseas / international attachment with an international Islamic Bank as part of the Shariah Committee, perhaps for a period between 1 month to 3 months. This attachment should ideally be sponsored by BNM as part of the development of the Shariah Scholars exposure and capabilities.

Conclusion : The Shariah Governance Policy Document remains a strong upgrade from the previous SGF and should provide a more serious undertone to the overall workings of a Shariah Committee. This shall lead to stronger governance but I am not convinced on the development of Shariah Committees with the limitations imposed on appointments into Islamic Financial Institutions.

Wallahualam.

Concluding Post : True Islamic Banking is in a Cooperative Bank

By Dr. Rosana Gulzar Mohd

EXCERPT : If you could reform Islamic Banks, how would it be? We would have to think along the lines of PLS since as described earlier, it is among the main tenets of Islamic Banking. PLS, if well-implemented, can result in higher financial equality and stability, thereby improving the economy. But experience shows that not everyone tells the truth so banks have been swindled. The solution perhaps lies in Germany, where for almost 200 years, cooperative banks have thrived. The way they focus on people as opposed to profits stands in stark contrast to our Islamic banks. This means funding projects that benefit the community and sharing profits with customers since they are also owners of the banks. This ownership structure has also kept non-repayments low.

In the final piece, Dr Rosana proposes that the Islamic Banking model can use to benefit exploring the existing structures of Cooperative Banks, that embodies closely what is envisioned as Islamic Banking can be. There are fine examples of what are available in Germany and Indonesia where structures are receiving good support and responses by the community. Take the opportunity to consider Cooperative Banks as an option that can meet the expectations of Shariah.

For more writings under Dr Rosana, visit the page in this site which houses more of her writings by clicking below:

Continuing Post : The Problem with Transplanting the ‘Sustainability’ Movement on Islamic Banking

By Dr Rosana Gulzar Mohd
EXCERPT : In ‘Islamic’ Banking, we dance around issues as if vying for a Bollywood Oscar. The latest theme, on ‘Sustainability’, is fashioned after the United Nations (UN)’ Sustainability Development Goals (SDG), in concert with other large organisations such as the Islamic Development Bank and the World Bank. While they may seem like a natural fit with goals such as peace, justice and decent work for all, a closer look uncovers a few fundamental flaws. Firstly, while championing social and environmental wellness, we continue to evade the main issue, which is that profit- and loss-sharing, arguably the main tenets of Islamic Banking, have been replaced with tawarruq, which resembles riba in form and spirit. Secondly, and related to the first argument, this concept of ‘Sustainability’ is at odds with the modern financial system. One is about preserving for future generations while the other belies a winner-takes-all mentality. There is a view that like Islamic Banking, ‘Sustainability’ cannot be sustained in Commercial Banks even though several of them, from Singapore to London, have adopted the practices. In Islamic Banks’ (blind) pursuit of Commercial Banking, are we being set up for failure?

Following up her article earlier this month, this discussion focuses on the “Sustainability” revolution undertaken by Islamic Banks, and whether “being compassionate” adds value to the Islamic banking proposition which still practices debt-based banking. What do you think? Read the full article here or click on the above diagram. Comments and feedback welcomed

For more writings under Dr Rosana, visit the page in this site which houses more of her writings by clicking below:

Continuing Post : True Islamic Banking is Not in a Commercial Bank

By Dr Rosana Gulzar

 EXCERPT : This is the ‘square’ that the ‘round’ Islamic Banks have been fitted into. So although Islam encourages a range of objectives that include communal welfare and profit-making (Note: NOT profit-maxisiming), Islamic Banks, as Commercial Banks, are almost single-mindedly pursuing the highest profits they can make for shareholders. They do this through all kinds of loans that look eerily like the riba they are supposed to replace. This is the outcome of a decision made by a group of founders in the Gulf Cooperation Council (GCC) countries in the 1970s. They wanted to quickly absorb the people’s newfound wealth from the oil boom. Several earlier attempts at genuine PLS in Egypt failed so the fastest build-up for Islamic banking would be by replicating conventional finance.

This is the continuing discussion by Dr Rosana on the above topic, which puts in the case for Cooperative Banks to be a more suitable testbed for Islamic Banking concepts and contracts. Perhaps a new look on what financial structure is most suitable adopt the requirements of Shariah banking is required. What do you think? Do give your comments and contribute to the discussion. Read the full article here or click on the above diagram.

For more writing under Dr Rosana, visit the page in the site which houses more of her writings by clicking below:

New Post : Dr Rosana Gulzar

Sometimes we are obsessed with an idea that we are not able to step back to take a look at the bigger picture.

This is what Dr Rosana is attempting to do, to ask us to take stock of what Islamic Banking is all about and how to recognise the need to call the model as it really is. The idea of Islamic Banking cannot be just a single textbook idea, but must consider other models that is already doing it in substance instead of just form. She intends to outlay the shortfall of Islamic Banking and perhaps offer an insight of what can be the solution to it all.

Do visit her page by clicking on the above pictures or access her opening gambit to her upcoming articles in the following page.

  1. How About We Stop the Wayang in Islamic Banking?

Making Islamic Banking Resilient

Recently, I was invited to be part of a panel to present our views at the International Islamic University of Malaysia (IIUM) on how to make Islamic Financial Markets resilient. With great excitement I prepared my slides (panelists are given 20 minutes to present) and tried to figure out the best approach to present it in such a short time. However, when the session came, due to time overshoots and constraint, me as the last speaker was only left with 10 minutes. I had to make it count, so I talked fast.

Afterwards, however, I do not feel as if it was mission accomplished. Time was too short for me to put my argument properly and I had to drop many points in fear of cramming too much information into that 10 minutes. So I decided to post my slides up, and make a proper short commentary on what I meant to be communicated. Bear with me.

The Financial Industry Must be Resilient

  • STABILITY : The public must be confident on the resilience of the financial markets where the public is assured that there is not misconduct of public funds in the day to day operations of the banking industry. BNM has put in great lengths to ensure stability via sufficient capital, liquidity and funding. The operations of the bank must always meet the statutory requirement on financial stability with the introduction of the Liquidity Coverage Ratio (LCR), Net Stable Funding Ratio (NSFR), Rate of Return Framework (ROR), and Risk Informed Pricing.
  • SUSTAINABILITY : Any business, must intend to survive in the long run. Selecting your customers are important, and risk mitigation mechanisms must be available to defend the business. But at the same time, re-investment of profits must also be made for future growth, so it is a balance to be maintained.
  • INTEGRITY : As Bankers, integrity always plays an important, and fundamental, part.  But Islamic Bankers, another layer of integrity is also imposed which is Shariah. Banks are expected to be more and more of a moral champion in support of the various SDGs and ESGs where the idea of being good will eventually lead to better profits and prosperity. BNM’s Value Based Intermediation aims to expand the role of banks to be more than just profit driven, but more inclusive to embrace a wider range of customers and cater for their needs.

The Challenges are manifold.

Being resilient is always a challenge for the Banks, especially with so many moving parts in the financial world. New regulations, new competition, new structures, new products and new models continue to plague the banking industry. To change our mindset to make Banking and Financial Market more better requires a lot of soul searching and will power to make the change. I summarised the challenges into 3 broad categories:

  1. Consumer Market. Any major change in the banking model is not taken well by the consumer market. Customers come to the Bank mostly for advise on their banking services. The Banks struggle to introduce differentiating products, from the debt structures and into the thought of creating value through investments. I am not sure how successful introducing the VBI into the consumer market, but the has been a lack of awareness programmes to introduce to the public.
  2. Corporate Market. Corporates are driven by profits and benefits. It is their core function ie to increase shareholder value.
  3. Financial Markets. We lack sufficient financial instruments in the market. That is why the industry can only grow organically. It needs the strong-will to pump more capital into the market and creation of structures that do not mirror the conventional books.

The Reality is that Traditional Banks need to keep up.

  • Traditional Banks. Heavily regulated to ensure financial stability. But the speed of adaptation to new thinking and new technologies are too slow. It is high cost to make the change, but also it is high cost just staying where you are. Ask Nokia. If all Islamic Banks do is replicate, they are in danger of becoming obsolete in the near future.
  • Challenger Banks. Provides alternative banking structures or arrangement, with little or no hassle, with or without the use of technology. A lot of customers now by-pass banks to opt for the most convenient and fast banking products. With very minimal regulatory requirements.
  • Digital Banks. This new breed of banks are definitely very interesting. There are two differentiators i.e. 1) Banks that only digitalise their processes and paperwork and speed, but the fundamental bricks are the same, and 2) Banks that try to be different and offer a totally new proposition with a new set of bricks. Yet, Islamic Banks are expected to do all and adopt more stringent requirements when entering into the Digital space, while dealing with old issues such as constructive ownership and Aqad. More importantly, these issues can probably be resolved by NON-BANKS, offering the same terms and conditions, sometimes with slightly better proposition such as speed, accuracy and low cost. For example, big data companies such as Facebook and Grab intend to open their own “bank”. Facebook just launched its Libra bank trading in cryptocurrencies. Grab is rumoured to enter as well and these Big Data companies already have their database of ready customers for them to roll out their Digital Banks.

Stop Looking at Your Feet. Stretch out your hand and move to touch new Horizons.

A lot of discussions have been held between the academia and practitioners. It seems we are always looking ways to innovate and integrate into the future, but without any real solutions on how to actually do it. As mentioned, the will-power to affect change remains a huge challenge. Instead of “What Is….”  to be turned to “What If…” where solutions are always been discussed and developed for a solution, and “What Next…” clearly implying the shift in banking products from traditional to new developments.

It is no longer sustainable to just replicate. True innovation is on the rise. New solutions are needed to be offered to the customers.

The Next Generation bankers must familiarise themselves with all the blockchain and Internet of Things language and terms currently floating around. More importantly, there should be a look at the whole ecosystem to see where the Shariah elements can be included, and where others must be excluded. Collaborative discussions, between regulators, academicians, practitioners and Shariah scholars must work together for the growth in the industry. It is not just any growth, it involves a total paradigm shift to adopt the new ecosystem.

There is a need to differentiate and upscale the business practices. While we continue to focus on the Traditional Bank in making it more resilient, we might miss this opportunity to join the Industry Revolution 4.0 to revamp Islamic Banking and overlook the threats coming from other financial institutions (NON-BANK). This is the Banking disruption in real life.