How to Ensure Shari

1
How to Ensure Sharia Compliance in Islamic Banks

• Dr. Muhammad Qaseem
• Country Head of Sharia, and Sharia Board Member
• Dubai Islamic Bank Pakistan
• Lahore, 02 Nov 2010

2
Main points

• Sharia Compliance, Meaning Importance
• Challenges in Developing Sharia Compliant
  products
• Role of the Main Stakeholders in Ensuring Sharia
  Compliance
• Issues of Sharia Compliance in Various Products

3
Meaning of Sharia compliance

• Sharia compliant means permissible in Sharia
• A financial contract is permissible unless there
  is a Sharia evidence prohibiting it
• What is Sharia evidence? General Permission
• There is no need for specific permission
• Difference between Muamalat and Ibadat
• Sharia compliant and Sharia based, any
  difference? Maqasid Shariyyah

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A contract is Sharia compliant if

• Executed by legally qualified parties
• with their consent which requires knowledge of
  the details
• No involvement of Riba or doubt of Riba
• No Gharar (Wujud, Husool, Meqdar)
• Not disallowed by the Mujtahideen, based on the
  entire Fiqhi literature

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A contract is Sharia compliant if

• its outcome is Halal __ Ietebar ul Maal
• is not used as a legal device to allow Haram
• there is no condition in the contract against its
  nature
• Al Kharaj o Bed dhaman, (Title and possession)
  principle complied with

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Importance of Sharia Compliance

• Sharia Compliance distinguishes IFIs from
  conventional banks
• Accountability to Allah and to people
• Sharia Compliance an issues of Corporate
  Governance
• Sharia Compliance the basis of Peoples choice
  amongst IFIs
• Sharia Compliance a safeguard against loss,
  reputation risk
• Compliance tool for growth and sustainability

7
Challenges in Developing Sharia Compliant
Products

• The main stakeholders Sharia advisors, bankers,
  regulators, customers
• Conformity with laws, regulations, accounting
  policies
• Commercial viability pricing, taxation
• Negative Perception use of benchmarks, mimicking
  conventional structures, marketing tactics

8
Role of Sharia Advisors/Boards

• Sharia Advisor or Board? Its level of
  involvement and authority
• Need for a blend of expertise Knowledge of
  regulations, laws, banking ops, aptitude
• Sharia Compliance Manual
• Sharia Department structure, resources
• Product Development process
• Presentation of the issue to SA
• Fatwa and Structure
• documentation
• processes, product manuals/programs
• proper accounting entries
• Advertising material

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Role of Sharia Advisors/Boards

• Global acceptability Avoiding dubious
  structures, standardization of products
• Sharia Audit and its independence
• Training of the staff
• Technical Training
• Islamic Orientation
• Educating the Customers/masses
• Sharia Secretariat Proper Communication between
  the Management and Sharia Advisor/Board

10
Role of Regulators

• Separate Laws and Regulations Treating Islamic
  Banking differently
• Appropriate regulations, but avoid over-kill,
  gradual
• Sharia Board at national level/role
  Standardization of Products and Innovation at
  National Level
• Restricting/Banning dubious products
• Sharia Advisors Fit Proper Criteria
• Strengthening Sharia Advisors Powers and
  limitations of Sharia Boards
• Training for all Bankers, Sharia scholars,
  auditors
• Sharia Audit by the Regulator

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Role of Bankers and Customers

• Islamic Orientation, Faith in Islamic banking
• To Differentiate between Halal Haram
• Proper presentation of issues to Sharia
• Not seeking short cuts through by-passing the
  processes
• Knowledge of Sharia rules and principles
  Training is a must
• Educating the customers Sharia meetings with
  customers to identify the issues

12
Issues of Sharia Compliance in Depository
Products

• Sharia issues in Pool Management
• Single Pool or Multiple pools
• Wakala and Musharaka Pools
• Asset tagging, transfer of assets between pools
• Sharia compliance issues in Profit Distribution
  of Common Mudaraba Pool
• Weightages (logical and non-discriminatory)
• Premature encashment of deposits
• Profit for broken period/on account
• Mudarib and Mudarabas expenses

13
Issues of Sharia Compliance in Depository
Products

• Profit Equalization Reserve and Investment Risk
  Reserve
• Hiba from the Shareholders
• Transparency in declaration of profit rates
• Profit Calculation, monitoring and distribution
  (involvement of Sharia and audit)
• Marketing issues
• Expected Rate of Return
• Corporate Deposits, committing rates

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Sharia Issues in Asset Products

• Marketing Issues
• Documentation, signing sequence
• Late Payment
• Ijara-based products issues
• Insurance
• Maintenance
• Loss of asset
• Murabaha products issues