shariah framework & governance in bank islam

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  • Visitation by International Center for Development in Islamic Finance Indonesian Banking Development Institute (ICDIF-LPPI),

    Indonesia

    SHARIAH FRAMEWORK & GOVERNANCE IN BANK ISLAM

    Mohd Nazri Bin ChikAssistant General Manager, Shariah Division

    24th June 2013/ 15th Syaaban 1434

    Strictly Private & Confidential

  • IntroductiontoShariahGovernance

    TOPIC1TOPIC1

  • IFSB-10 Guiding Principles on Shariah Governance Systems for Institutions Offering Islamic Financial Services defines:

    A set of institutional and organisational arrangements through which Islamic financial institutions ensure that there is an effective independent oversight of Shariah compliance over the issuance of relevant Shariahpronouncements, dissemination of information and an internal Shariahcompliance review.

    This requires:1.A set of institutional and organisational arrangement Board of Directors, Shariah committee, Shariah division, internal audit function.

    2.An effective independent oversight on Shariah compliance

    3.Shariah pronouncements, disseminations of info and an internal Shariah review ex-ante and ex-post aspects of the Shariah compliance framework.

    WHATISSHARIAHGOVERNANCE?

  • DISSEMINATIONOFSHARIAHRESOLUTIONS

    ISSUANCEOFSHARIAH

    RESOLUTIONS

    ANNUALSHARIAHREVIEW

    PERIODICINTERNALSHARIAHREVIEWS

    EXANTE

    EXPOST

  • IMPLICATIONSOFSHARIAHNONCOMPLIANCES?

    Page 5

    IMPACTOFSNC

    Shariah non-compliant income due to invalidation of contract (aqad)

    Capital adequacy ratio (CAR) impact

    Against the commands of Allah SWT

    Impediment of Allahs SWT blessing or barakah

    Jeopardize business reputation

    Contravention of the Islamic Financial Services Act 2013:

    Section 28(5) of the Act providesImprisonment for a term not exceeding eight years; or

    Fine not exceeding twenty-five million ringgit; or both.

    FINANCIAL NON-FINANCIAL

    REGULATORY

  • MODELSOFSHARIAHGOVERNANCE

  • ShariahCompliantProcess

  • RegulatoryFrameworkofShariahGovernance

    TOPIC2TOPIC2

  • Effective date 1 January 2011 and Islamic banks are given 6 (six) months to comply with all requirements.

    IFI to confirm status of compliance with SGF at the end of the six months. Full enforcement 1 July 2011.

    Objectives:Set out the expectation of BNM on Shariah governance structures, processes and arrangements to ensure that all its operations andbusiness activities are in accordance with Shariah.Provides a comprehensive guidance to the Board, ShariahSupervisory Council and management of the Bank in discharging its duties in matters relating to Shariah; andOutlines the functions relating to Shariah review, Shariah audit, Shariah risk management and Shariah research.

    BNMSSHARIAHGOVERNANCEFRAMEWORK

  • GuidingPrinciples

    Oversight, accountability & ResponsibilityClear demarcations on accountability &responsibility

    Board overall accountabilitySC accountability on decisions, views & opinionsManagements responsibility in providing adequate support

    IndependenceRecognition by board on SCs independenceAppropriate reporting structureSC decision shall not be set asideAccess to necessary info by SCAppointment & removal of SC

    CompetencyComply to fit & proper requirementContinuous training provided to key internal stakeholdersPerformance assessment for SCSuccession planning program for SC

    Confidentiality & consistency

    Duty to observe confidentiality on sensitive info obtained by SCRestriction on SC membership in IFI within same industryStructured decision making processSC should not undermine SAC rulings

    Source:BankNegaraMalaysia

    FRAMINGSHARIAHGOVERNANCEFRAMEWORK

  • ShariahPrincipleinIslamicfinance

    MANAGEMENTEnsure executions of business & operations

    are in accordance with Shariah rules & principles

    Provide necessary support to the Shariah committee

    BOARDOverall oversight on

    Shariah compliance & review

    BOARD AUDIT COMMITTEE

    BOARD RISK MANAGEMENT

    COMMITTEE

    Shariah Review FunctionReview business operations on a regular basis to ensure

    Shariah compliance

    Shariah Risk Management Control Function

    Identify, measure, monitor, report & control Shariah

    non-compliance risk

    SHARIAH COMMITTEEOversight accountability on

    Shariah related matters

    Shariah Audit FunctionProvide independent

    assessment & objective assurance designed to value

    add & improve IFIs compliance with Shariah

    Shariah Research Function

    Conduct comprehensive Shariah research prior to submission to the Shariah

    committee

    ShariahcomplianceandResearchFunctions

    Source:BankNegaraMalaysia

    SHARIAHGOVERNANCEFRAMEWORKSMODEL

  • Shariah Review Shariah Audit

    ScopeScope

    ObjectiveObjective

    ProcessProcess

    ToensurethattheactivitiesandoperationscarriedoutbytheIFIdonotcontravenewiththeShariah

    Toprovideanindependentassessment&objectiveassurancetoensureasoundandeffectiveinternalcontrolsystemforShariah compliance

    Overallbusinessoperations,includingtheendtoendproductdevelopmentprocess(fromproductstructuringtoproductoffering)

    Planningthereviewprogram(includingobjectives,scope,reporting,rectificationandfollowupactionsfollowedbytheexecutionoftheprogram);

    Documentationoftheprocessesinvolved;

    Communicatingtheoutcome&highlightinganynoncompliancestotheShariahCommittee&themanagement;and

    RectifyinganyinstancesofShariahnoncompliancetopreventsucheventsfromrecurring.

    AllaspectsoftheIFIsbusinessoperations&activities,including:

    auditoffinancialstatements;

    complianceauditonorganisational structure,people&ITapplicationsystems;and

    reviewofadequacyoftheShariahgovernanceprocess.

    UnderstandingthebusinessactivitiesoftheIFI toallowforbetterscopingofanauditexercise;

    Developingacomprehensiveinternalauditprogram;

    Obtainingandmakingreferencetorelevantsources(e.g.SACspublishedrulings,theSCS decisions,etc)

    CommunicatingresultsorfindingstotheBoardAuditCommitteeandtheShariah Committee;and

    ProvidingrecommendationsonrectificationmeasurestakenaswellasfollowingupontheimplementationbytheIFI.

    Source:BankNegaraMalaysia

    SHARIAHREVIEWANDSHARIAHAUDITFUNCTIONS

  • Shariahriskmanagementcontrol

    Shariahriskmanagementcontrol

    Shariahresearchfunction

    Shariahresearchfunction

    Shariahsecretariatfunction

    Shariahsecretariatfunction

    Apart from Shariah review & audit IFIs are also expected to establish other functions that complement and provide necessary support to Shariah compliance functions within the organisation

    Objectives Scope & Functions

    Form part of IFIs integrated risk mgmt control function

    Identification & assessment of Shariah risk would be systematically controlled & monitored

    Perform in-depth research on Shariah including providing day-to-day Shariah advice & consultancy

    Perform by qualified Shariah officers

    May seek input from experts on technical matters

    Coordinating meetings, compiling papers, disseminating Shariah decisions

    Engaging with relevant parties that need assistance

    Ensure proper deliberation of Shariah related matters

    Provide necessary support to Shariah committee & IFI in implementing Shariah governance

    Source:BankNegaraMalaysia

    OTHERKEYINTERNALFUNCTIONS

  • ShariahSupervisoryCouncil

    BoardofDirectors

    BoardRiskCommittee

    MRCC

    ORCC*

    ShariahDivision

    Audit&ExaminationCommittee

    InternalAuditDivision(Shariah

    audit)

    ZakatCommittee

    ManagingDirector

    Note:SCRM Shariah Compliance Risk ManagementMRCC Management Risk Control CommitteeORCC Operational Risk Control Committee

    Administratively Functionally

    * w.e.f July 2012. Previously Shariah non compliance risk was over sighted by Shariah Compliance Risk Control Committee.

    ShariahReview

    Committee

    BANKISLAM'SINTERNALSHARIAHGOVERNANCE

  • TOPIC3TOPIC3

    ShariahNonComplianceRiskManagement

  • GuidingPrinciples:

    Principle7.1:IIFSshallhaveinplaceadequatesystemsandcontrols,includingShariah Board/Advisor,toensurecompliancewithShariah rulesandprinciples.

    complyatalltimeswiththeShariah rulesandprinciples.

    contractdocumentationcomplieswiththeShariah withregardtoformation,terminationandelementspossiblyaffectingcontractperformance.

    Shariah compliancereviewatleastannually.

    keeptrackofincomenotrecognised arisingoutofShariahnoncomplianceandassesstheprobabilityofsimilarcasesarisinginthefuture.

    Principle7.2:IIFSshallhaveinplaceappropriatemechanismstosafeguardtheinterestsofallfundproviders.WhereIAHfundsarecommingledwiththeIIFSsownfunds,theIIFSshallensurethatthebasesforasset,revenue,expenseandprofitallocationsareestablished,appliedandreportedinamannerconsistentwiththeIIFSsfiduciaryresponsibilities.

    DEFINITIONOFSHARIAHNONCOMPLIANCERISK

    OPERATIONALRISK

    Riskoflossesresultingfrominadequateoffailedinternalprocess,peopleandsystemsorfromexternalevents,whichincludeslegalriskandShariahnoncompliancerisk,butexcludesstrategicandreputationalrisk.

    SHARIAHNONCOMPLIANCERISK

    TheriskthatarisesfromtheBanksfailuretocomplywiththeShariahrulesandprinciplesdeterminedbytherelevantShariahregulatorycouncils.

  • IFSB -2 (Capital Adequacy Standard) -IFIs are required to set aside 15% of average annual gross income over preceding three (3) years gross for OR.

    Regulator has discretion to impose a higher capital charge as they deem fit to

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