Sharia governance

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Sharia governance

• Professor Rodney Wilson
• Re-Imagining the Sharia Theory, Practice and
  Muslim Pluralism at Play
• Venice, 14th September 2009

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Contents

• National sharia boards and devolved compliance
• Central bank and security commission Sharia
  Boards
• Sharia compliance at institutional level
• IFSB Guiding Principles for Sharia Governance
• Independence and remit of sharia scholars
• Sharia board or sharia advisors
• External or internal audit
• Appointment of sharia scholars
• Qualification and experience
• Contractual arrangements for remuneration and
  conditions
• Procedures for the sharia board meetings
• Conduct, decision taking and workload planning
• Sharia assurance and the issuance of fatwa
• Mechanisms and reporting
• Number and status and lines of responsibility

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National sharia boards

• Malaysia
• National sharia boards serves the Central Bank
• In addition the Securities Commission has its own
  board
• Only these national boards have the authority to
  issue fatwa
• Sudan
• In Sudan finance specialists and economists serve
  on the sharia board of the Central Bank as well
  as fiqh scholars
• Iran
• Banks operate under the Law on Usury (Interest)
  Free Banking of 1983 which was approved by the
  Guardianship Council, the highest political and
  religious authority, under Ayatollah Ali Khamenei
• Council is the ultimate authority on fiqh,
  although there is no procedure for on-going
  sharia supervision at national level

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Devolved sharia compliance

• Sharia compliance at institutional level
• Islamic financial institutions appoint their own
  Sharia Boards
• The privatization of sharia compliance rather
  than its nationalization
• The issues of conflicting fatwa and sharia
  arbitrage
• Those serving at institutional level are approved
  by the national Sharia Boards in Malaysia
• No system of national approval in other
  jurisdictions, although being considered in the
  UAE

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IFSB Guiding Principles on Sharia Governance

• Exposure draft
• Issued in December 2008 with deadline for
  comments 15th May 2009
• Guiding principles
• Competence
• Independence
• Confidentiality
• Consistency

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General approach

• 1.1 The sharia governance structure should be
  commensurate and proportionate with the size,
  complexity and nature of the business
• 1.2 Each sharia board should have
• A clear terms of reference regarding its mandate
  and responsibility
• Well defined operating procedures and lines of
  reporting
• Good understanding of, and familiarity with,
  professional ethics and conduct

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Competence

• 2.1 Board members to meet an acceptable fit and
  proper criteria
• Good character
• Capability and expertise
• 2.2 Provision for continuous professional
  development of board members
• 2.3 Formal assessment of the effectiveness of
  each board and its members

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Independence

• 3.1 Strong and independent oversight role with
  capacity to exercise judgement
• No individual or group of individuals to dominate
  decision making
• 3.2 The board should be provided with complete,
  adequate and timely information prior to its
  meetings and as otherwise required

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Confidentiality

• 4.1 Sharia Board members should ensure internal
  information obtained in the course of their
  duties is kept confidential
• Implications for those who are members of
  multiple boards
• Possible conflicts of interest

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Consistency

• 5.1 Board members need to understand the legal
  and regulatory framework in the jurisdiction
  where they operate
• The board should promote convergence of sharia
  governance standards subject to the national
  framework in which they work

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Shariah governance structures

• Lines of responsibility

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Sharia Board or sharia advisors

• Status
• Consultants or auditors
• Fatwas mandatory, not discretionary
• Number
• Fully fledged Islamic financial institution may
  have 5 or more scholars
• Conventional financial institution with an
  Islamic window may have only one scholar or 3 at
  most
• Outsourcing of compliance
• Applying pre-determined criteria Dow Jones
  Islamic Indices
• Private outsourcing companies
• Yasaar (www.yasaar.org)

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Independence and remit of sharia scholars

• External or internal audit
• Sharia scholars as institutional employees
• Representatives of financial institution or
  independent outsiders
• Cross sector responsibilities
• Sharia audit of banking operations and third
  party fund management or leasing activities
• Cross border activities
• Should subsidiary or affiliate operations be
  controlled by home or host country scholars?

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Appointment of sharia scholars

• Qualification and experience
• Undergraduate or postgraduate degree in fiqh
  muamalet
• Language competency in Arabic and English
• Knowledge of commercial law and finance
• Previous employment and reputation
• Contractual arrangements for remuneration and
  conditions
• Permanent or ad hoc appointments
• Retention fee plus hourly/daily remuneration and
  travel and accommodation expenses

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Work of the sharia board

• Duties and responsibilities
• Review new financial contracts for sharia
  compliance
• Liaise with Islamic financial institutions legal
  team and external firms drafting contracts
• Monitor current operations of Islamic financial
  institution
• Investigation
• Study of fiqh muamalat
• Examination of fatwa by other sharia committee
• Referral to AAOIFI sharia standards
• Published rulings by Fiqh Academy, national
  sharia board, if any, and London based Institute
  of Islamic Banking and Insurance
  (www.islamic-banking.com)

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Legal interpretation through ijtihad

• Universal conformism or taqlid
• Follow religious authority
• Devotion to basic principles, qawaid
• The most broadly based legal maxims or generally
  agreed norms
• Approach deductive rather than inductive
• Scope for ijtihad, interpretation of Islamic law
  
• Need for ijtihad given increasingly complexity of
  finance and demand for shariah compliance
• Traditional ijtihad involved a single scholar
• Group or team ijtihad gives modern
  reinterpretations greater weight

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Procedures for sharia board meetings

• Conduct of meetings
• Determination of agenda
• Minutes of previous meetings, actions and
  follow-up
• Minutes of current meeting and assignment of
  tasks
• Decision taking
• Rulings unanimous rather than by majority vote
• Ijma or the consensus of opinions
• Power of veto by committee members
• Workload planning
• Frequency of meetings
• Preparation for meetings and circulation of
  documents
• Pro-active or re-active role of sharia board
• Interaction with financial professionals

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Sharia assurance and the issuance of fatwa

• Mechanisms
• Compliance statements in annual reports
• Web materials on sharia board composition and
  rulings
• Outreach activity by sharia scholars
• Explanation of fatwa
• Issuance of fatwa only or with detailed
  justification
• Responsibility of sharia board or internal
  sharia control department in using minutes as
  basis for explanation
• Concern with consistency with other fatwa

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International sharia guidance

• National sovereignty and sharia law
• International sharia bodies
• OIC Fiqh Academy
• Represents 56 Muslim countries
• Al Azhar University
• Oldest centre for Islamic scholarship
• International Islamic Financial Institutions
• Islamic Financial Services Board
• Guidelines and standards for the regulation of
  Islamic financial institutions
• AAOIFI
• Accounting and Auditing Organisation for Islamic
  Financial Institutions
• Islamic Development Bank
• Sharia compliant development assistance agency