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.

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:

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.

Shariah Resolution in Islamic Finance (SAC BNM 2nd Edition)

One of the more important books that we usually refer to is the Shariah Resolutions in Islamic Finance issued by BNM. A lot of issues that we usually faced in designing a product has actually been deliberated at length as evidenced in the book. Useful guidance for all.

Resolutions of Shariah Advisory Council of BNM 2nd Edition

Waiting for the softcopy of the latest edition. Please send me one!

SAC 2nd Ed

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To get more books, click on the picture.

Bank Islam’s Application of Shariah Contract in Islamic Banking Products and Services (2013)

In conjunction with Bank Islam Malaysia Berhad’s 30 years anniversary (Bank Islam was established in 1983), the kind bank decided to release this useful book of knowledge of the various structures they have in the Bank for the public. Perhaps produced as a gesture for publicity and a bit of chest-thumping, but it is a useful insight on the mechanism that the bank use in its day-to-day operations. And it is written is simple language and illustrated to provide simple understanding, it can be a useful reference to new learners of Islamic Banking contracts and structures.

Have a read and you can get valuable insights on the simplicity of Islamic banking products and services.

Note: This booklet is written prior to the introduction of the Islamic Financial Services Act 2013 (IFSA 2013) so while some of the terminologies may now differ, conceptually I do not see any significant variations to the structures now prevalent in the market.

Download your copy of the  Application of Shariah Contracts in Islamic Banking Products and Services (2013) here or on the picture above.

For More Books, click on below picture

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No Pork No Lard : The Shariah-Neutral Transactions

TO COMPLY OR NOT TO COMPLY, BUT THERE IS A THIRD OPTION

Following my earlier writing on the Digital Wallet / ePayments and how such transactions may have not breached Shariah requirements but lacks the validation to ensure all elements do not touch the prohibited elements, I am called to further expand on the topic. In my opinion, there are possibilities that more Shariah-Neutral products and transaction enter into the space of Islamic Banking, but without the validation of Shariah scholars or committees and yet, it will remain acceptable. It is possible, and it is already happening now.

“NO PORK NO LARD”

It is an interesting situation in Malaysia now, when it comes to food. In general, Malaysia as a Muslim country, the expectation is that the food consumed must be Halal and more importantly certified as such. The reason for it is that it gives comfort to the public that certain standards are adhered to according to religious requirements. To walk into a restaurant with the Halal signage gives us Muslims confidence to consume the food till our bellies are filled.

But there are challenges. The desire to ensure the standards are met has resulted in difficulties for restaurants getting certification quickly. The process is detailed and granular, and this is a good thing, but can be disheartening when the certification drags. And in some cases it is impossible to obtain, especially if the eatery has halal standard food but also offers alcoholic drinks to its non-Muslim customers. The Muslims know (or assume) the food is halal if they see there is no pork on the menu, and will ignore the alcoholic drink. This is now a common sight in Malaysia.

And thus the loop-hole or short-cut is discovered. Rather than going for certification of Halal for their restaurant, many owners now deemed it sufficient that the signage “No Pork / No Lard” will result in a Halal understanding. And this may be true; many small roadside businesses do not carry a Halal certification but is nonetheless patronised by Muslims as it does not carry pork on the menu. That cue is taken by the restaurant owners and over a period of time, the “No Pork / No Lard” now is understood to be serving halal food but without Halal certification.

DOES “NO PORK / NO LARD” MEANS IT’S SHARIAH NEUTRAL?

Taking that concept into the banking world, will consumers eventually be accepting Shariah Neutral products and services as the new norm? A product or services with no prohibitive elements that is deemed acceptable by both the producer and consumers but without any Shariah Committee validation. For many years some conventional banks have been offering Shariah compliant third party Takaful or Unit Trust products which was vetted by the Shariah Committee of the providers.There is total reliance on the providers validation for Shariah compliance.

Additionally, there are products and services that is by nature, very close to meeting the Shariah requirements in a contract. For example the leasing products which is perhaps 95% in line with Shariah requirements for Ijarah such as rental arrangements, ownership transfers and roles and responsibilities of lessor / lessee. The contention will always be the penalties and perhaps some operational practices, but in my view, these can be amended.

THEY WALK AMONG US

Believe it or not, there are already efforts on becoming Shariah-neutral where it is deemed acceptable practice for attracting Muslim consumers. Some non-Islamic banks have been aligning some of their products features to be consistent with Islamic banking practices under the guise of responsible financing or sustainable banking. For example, the compounding late payment interest which some non-Islamic banks no longer practice. Another example is that some are considering to remove “Commitment Fees” from unutilised financing balances in overdraft / revolving credit to align it to Islamic banking practices. We are starting to see non-Islamic banks realigning themselves to be on par with Islamic banking practices. Just to regain the competitive edge.

This will eventually lead to offerings that remove the prohibited elements and validated as acceptable by the public themselves, without further validation of Shariah scholars. Can a non-Islamic bank eventually offer products that it deemed as meeting the Shariah expectations? Surely, Shariah Committee will not have jurisdiction over a non-Islamic bank offering Shariah-Neutral offerings.

The more crucial question is perhaps : Will the public eventually become not so demanding for a stricter (or complicated)  Shariah Compliant product, and begin accepting Shariah-Neutral products that is offered by non-Islamic banks? Is that possible?

Such offerings may be offered via the digital world where the contractual lines are not so clear. Rebranding of a product can be done with minimal effort. The terms used can be made Shariah-friendly. How a transaction is handled behind the scenes may be less important  with the convenience of using Apps or Mobile Banking. And without Shariah scholars prohibition or decision on such matters, the public will hold to the opinion that it is deemed compliant and thus acceptable. Eventually, this opinion will become customary and generally accepted.

No Pork No Lard” may one day become the new acceptable norm in the non-Islamic banking space. And my suspicion, a lot of sceptics of Islamic Banking already hold this view. Maybe it is time to make clear of the colours of the offering; is it white or is it black? Otherwise, the colour of grey will become the new white.

To read the earlier posting, click on the following: https://islamicbankers.me/2019/01/15/e-wallets-did-you-forget-us-again/