بسم الله الرحمن الرحيم In the Name of Allah Ever Gracious Ever Merciful

Supervisory and Regulatory Role of Shari'a Boards 24 January 2012

Topics The Difficulty of Using Religious Legal Norms in a Secular Setting The Missions and Tasks of Shari'a Boards: From Ruling to Auditing Financial Structuring and Innovation under Shari'a Constraints

Shari’a – The Heart and Spirit of the Islamic Financial Industry Adherence to Shari’a is the “MAIN” factor differentiating Islamic financial institutes from conventional. This makes Shari’a “compliance” and the Shari’a Supervisory function– essentially the most important governance mechanism for the industry.

Financial Risk Reputation Risk Non compliance Risks

 The Deloitte Islamic Finance leaders survey in the Middle East (Biannual survey, Issue 1, 2010) highlighted Issues such as: 58% of the industry leaders surveyed view corporate governance and Shari'a governance as prerequisites for best practices 66% of industry leaders surveyed indicated that the Islamic Finance industry is under regulated Improvement of the Shari'a approval process and internal audit systems can be expected to evolve Indications

Currently, Shari’a compliance relies basically on internal corporate structures, mainly SSB as part of the governance structure. AAOIFI, CIBAFI, IFSB Regulations, what to consider? Regulations

The Missions and Tasks of Shari'a Boards: From Ruling to Auditing

AAOIFI defines Shari’a Compliance Reviews as “examination of the extent of an IFI’s compliance, in all its activities, with the Shari’a. This examination includes contracts, agreements, policies, products, transactions, memorandum and articles of association, financial statements, reports (especially internal audit and central bank inspection), circulars etc.” ACCOUNTING, AUDITING & GOVERNING STANDARDS FOR IFI GSIFI No. 2, Introduction, Para 1, pg 14 The Compliance Review Function (requirements)

Apart from legitimizing all products, services and agreements in compliance with Shari’a rules and principles, Supervisory Boards are also mandated, in certain regulations, to assure continuous “compliancy” of respective institutes AAOIFI’s Shari’a Governance standards mandate Supervisory Board members to conduct periodic (at least annually) Shari’a Compliance Reviews’ on respective institutes AAOIFI has diligently established distinctive governance requirements with separate functions, scope & systematic- procedures & requirements to be practiced in SSB’s Shari’a review exercises The Compliance Review Function (requirements)

 The periodic Shari’a compliance review employs performing random samples of completed transactions to ensure congruence of all transactions to Shari’a rules and guidelines.  Challenging factors involve in constraining SSB from fulfilling Shari’a Review mandates can be: the volume of activity, access to monitoring systems, complexity of financial transactions, density & dynamism of the Islamic industry extent of site visits, Inadequate Shari’a audit programs Compliance Issues

We are at a different stage where the current system is not sufficient Instituting Shari’a Supervisory functions SSB is part of the system, but not the only part Professional internal Shari’a audit function Strong Regulations Sufficient internal control systems and other internal arrangements Proper external arrangements including external Shari’a Audit The need for a complete Shari’a Supervisory system

Sufficient regulations Sufficient Shari’a Supervisory system Sufficient internal control Financial Structuring and Innovation under Shari'a Constraints

والحمد لله رب العالمين...