MODEL OF A SHARIAH GOVERNANCE FRAMEWORK: THE CASE OF

The main role of a Shariah advisory body in each Islamic bank is in relation to aspects of Shariah supervision, monitoring, audit and the issuance of legal rulings. Islamic Financial Services Board (2009) has defined “Shariah scholars”, as persons who are engaged professionally to provide opinions on Shariah, particularly in the product and service offering process. On the other hand, the word “scholar” is defined as ‘a person who studies a subject in great detail, especially at a university or ‘someone who is clever or good at learning by studying’ (Cambridge Dictionary, 2015). In Arabic, the translation for “scholar” is “alim” (plural: ulama), which means a person who is an expert and more specialised in Fiqh al-Muamalat (Islamic law of transaction), rather than Shariah or other areas of Islamic study. (Marines, 2001) further explained that ulama play a role as guardians of Islamic teaching and their efforts have preserved religion by having adequate Islamic knowledge and qualifications, including the ability to provide the right interpretations of Shariah Rulings from primary sources i.e. the Holy Quran and Hadith. Furthermore, the fruits from their expertise produces

opinions in the form of Shariah pronouncements or resolutions related specifically to IFIs and are usually not directly related to the general public or businesses. This is because the opinions issued by the scholars are based on the paperwork and issues presented to them (Marines, 2001).

Hasan (2012) explained that in Malaysia, the Central Bank has established rules and guidelines as references for Islamic banking institutions, for instance the Shariah Governance Framework for Islamic Financial Institutions. Dubai, on the other hand, has passed separate laws which provide the legal framework for laws regulating Islamic financial business as well as regulations in relation to the Shariah board. Special laws in Dubai relating to Islamic banking institutions are known as the Dubai International Financial Centre Law No 13 (2004) and the Islamic Financial Business Module of the Dubai Financial Services Authority. However, the requirements of Shariah governance issued by relevant bodies in Islamic finance namely the IFSB, AAOFI and BNM, are not similar from one another. This can be seen in one instance where the definition of Shariah governance is comprehensively defined by the IFSB, while the other bodies has lack of the same (Ibrahim et al.,2011).

AAOIFI defined the Shariah supervisory board as “an independent body of specialised jurists in fiqh al muamalat (Islamic law of transaction).” However, AAOIFI further explained that the Shariah supervisory board may include members other than those specialised in fiqh mua’malat, but they should be experts in the field of IFIs with a knowledge of fiqh mua’malat. The main responsibility of a Shariah supervisory board is to provide direction, guidance and supervision in relation to the activities of IFIs. The purpose is to ensure IFIs are following Shariah rules and principles.

According to the Guideline of IFSB-10, the guiding principles on Shariah Governance Systems for Institutions Offering Islamic Financial Services defines the Shariah governance system as “a set of institutional and organisational arrangements through which IFIs ensure that there is an effective independent oversight of Shariah compliance over the issuance of relevant Shariah pronouncements, dissemination of information and an internal Shariah compliance review” (IFSB, 2009).

Therefore, again in the interest of transparency, it is significant to stress the term “members of the Shariah board”, should be applied rather than “Shariah scholars”, as

the ulama implies a wider meaning and are not limited to only the IFIs . Furthermore, the Shariah supervisory board plays a vital role in developing strong Shariah governance within the IFS. Shariah advisors have been further defined by the Central Bank of Malaysia and Bank Negara Malaysia (BNM) in the Guideline on the Governance of Shariah Committees for Islamic Financial Institutions. It was reiterated that a Shariah Committee should play an effective role in upholding a conducive Shariah governance framework including a compliance programme, harmonisation of Shariah interpretation and enhance regulatory supervision of IFIs. In addition, paragraph of 2.17 of the same Guideline has also outlined the duties and responsibilities of Board Directors, the Shariah Committee and management in dealing with non-Shariah compliant events (BNM, 2011)

All Islamic banks are expected to have a Shariah supervisory board to ensure that all their practices, transactions and activities are Shariah compliant (Hamza, 2013). In addition, the Shariah Advisory Council of Bank Negara Malaysia has issued a guideline on late payment charges for every Islamic banking institution in Malaysia where late payment charges containing both concepts of Gharamah (penalty) and

Ta’widh (compensation on actual loss) are allowed. Gharamah is not permissible to

be recognised as Islamic banks income, thus it must be channelled to charitable bodies (BNM, 2012). In addition, a late payment charge may be imposed on debtors because of their own procrastination in making payments and as the delay results in injustice to a creditor’s rights (Al-Mani', 2003)

Thus, Shariah governance and approval are required to be obtained from Shariah scholars who understand Islamic jurisprudence and rulings for every IFI for each product offered by the bank (Arshad and Wardhany, 2012). Shariah supervisory board also needs to be introduced at a regulatory level in order to strengthen and harmonise the different opinions of Shariah boards of the IFIs. It has been noted from a pilot study conducted that the Central Bank of Malaysia is implementing two levels of a Shariah supervisory framework model, first at a micro level and second at a macro level. The micro level covers governance by the IFIs, whereas the macro level covers governance on a national level. The pilot study conducted is self-explanatory which will be presented in Section 3 of this thesis. The methods through which Malaysia ensures Shariah governance are illustrated below:

(1) Micro Level (2) Macro Level Shariah Advisory Boards of Islamic

banks

Shariah Advisory Council (SAC) of the central bank of Malaysia

Shariah Governance Framework for Islamic financial institutions

Shariah Advisory Council of the Securities Commission

Legal redress through a dedicated division in the civil courts and through arbitration

Table 3 Two Types of Shariah Advisors in Malaysia

At a micro level, Shariah governance is ensured by Islamic banks via the implementation of the IBA 1983. This legislation defines an “Islamic bank” as any company that conducts Islamic banking business and has a valid licence. “Islamic banking business” is defined under the same provision as “any banking business whose aims and operations do not involve any element which is not approved by the religion of Islam”. The “religion of Islam’’, however, is not defined in the statute. The question then is, how is Shariah governance ascertained if an Islamic banking product is approved according to the religion of Islam and do the activities of the Islamic banks conform to Islamic teachings?

Every bank that intends to practise Islamic banking must establish a Shariah Advisory body (also known as the Shariah Advisory Committee or Shariah Supervisory Board) to advise the bank on the operations of its banking business to ensure that the bank complies with the “religion of Islam”. Thus, this Shariah Advisory body ensures that Shariah is complied with by the Islamic bank.

Shariah governance has developed gradually in Malaysia from the establishment of IBA 1983 until recently, the introduction of a new legislation which repealed the IBA 1983, known as Islamic Financial Services Act 2013 (IFSA 2013). Section 27 until Section 38 of IFSA 2013 covers aspects of Shariah compliance and Shariah governance. Section 51 to Section 58 specifically provide provisions on Shariah Advisory Councils. Furthermore, Section 59 states the power of BNM to issue guidelines on Shariah matters. It also provides duties and responsibilities of internal Shariah committee in advising IFIs on Shariah matters. The main purpose of having

the new IFSA 2013 was to ensure Shariah compliance. Section 28 of IFSA 2013 provides that all IFIs must always ensure that its aims and operations, business affairs and activities follow Shariah law and any rulings by the Shariah advisory council. In ensuring strict adherence to the rules, IFSA 2013 imposes severe punishment on non- compliance of the rules. Section 28(5) provides for the impact of non-Shariah compliant events, which includes punishment of imprisonment for a term not exceeding eight years or a fine not exceeding twenty-five million ringgits or both.

Figure 1 Islamic Financial Institutions Structures Based of the Shariah Governance Framework of BNM, Malaysia 2010

Generally, a two-tier Shariah governance infrastructure model has been introduced by the Bank Negara of Malaysia which is comprised of two vital components, namely the Shariah Advisory Council (SAC) and Shariah Committee (an internal Shariah advisory body formed in each respective IFI). The SAC plays a greater role to ensure that the overall Islamic financial system in Malaysia operates in accordance with Shariah principles, especially when involving disputes or arbitration in any court governed under the law of the land. Apart from that, the Shariah Governance of BNM also outlined the important functions namely Shariah risk, Shariah review, Shariah

Research and Advisory, and Shariah audit that led by Shariah officers employed by the IFIs in Malaysia.

2.2.6 SHARIAH GOVERNANCE PROCESS: ROLES AND APPOINTMENT OF