1. Governance Standard on Independence of Shari’a Supervisory Board
Exposure Draft;
Governance Standard on Independence of Shari’a Supervisory Board
Prepared by;
Alwin Yoga
Mohd Edil
Mohd Hairul Azrin
Nuraishah
REPORT
FIN 6650 Accounting and Control of Islamic Financial Institution

2. Introduction Background Information Issued Early February 2006
Public Hearing 2nd March 2006, Manama Bahrain
Purpose
provide guidance for members of Shari’a Supervisory Board (SSB) of Islamic Financial Institutions pertaining to its independence, monitoring of such independence and ways to resolve issues of independence
Need
There is currently no specific standard on the
Independence of SSB;
To ensure the credibility of the financial
Statements from Shari’a perspective
Increasing confidence of the public in the
Institution
Arising concerns of the Independence of Shari’a
Supervisory Board
Date Effective
Financial Period beginning 1 Muharram 1428 or 1 January 2007

3. Definition Exposure Draft
The first rough sketch (preliminary version) of written composition, standard or law. This preliminary version is normally use for public feedback.
Purpose
To solicit comments from preparers, users, related institutions, members of organization and other interested parties particularly on the issue(s) concern
Governance
The system by which business corporations are directed and controlled. It is about promoting corporate fairness, transparency, accountability and equitable treatment of stakeholders.
Independence
An attitude of mind which does not allow the viewpoints and conclusions of its processor to become reliant on or subordinate to the influences and pressures of conflicting interests. It is achieved through organizational status and objectivity. The principle of objectivity imposes obligations on SSB members to be fair, intellectually honest and free of conflict of interests (neutral) – Para 2

4. Importance of Independence
Opinion
The perceived independence of SSB is important for the users of the financial statements who need reassurance that the bank (financial institution) has strictly adhered to such Islamic precepts.
- Rifaat Ahmed Abdel Karim, The Independence of Religious and External Auditors: The Case of Islamic Bank.
Effect
Impairment of independence and objectivity can reduce the credibility of the SSB member which in turn reduce the confidence of the public/stakeholders in the respective Financial Institutions they seat.

5. Application General Guiding the meaning and clarification of
Independence
Providing outline to maintain independence
Avoid impairment to make objective professional
judgment
Applicability of AAOIFI Code of Ethics for
Accountants and Auditors and Code of Ethics for the
Employees of IFI
Outline ways to resolve independence Issue
Malaysian Context
GPS 1 (effective April 2005) had to some extend
outline independence
One seat per industry and members of SAC not
allowed to be in any SSB
Stringent process for election to SSB

6. Further Considerations
Situations
Subjectivity - determined by the members
Events of collusion of members
In the event of persisting independent issue leading
to resignation, regulatory action
Appraisal
Should the SSB be assessed by independent
entity such as a special board or regulators?
Position
Should SSB be an external party like external
auditors?
Acceptance
Importantly adaptation/adoption of the Standard by
Respective Regulators, IFI, members
“For a true believer (mukmin), failure to keep Islamic Law should exact (cause) an unbearable moral cost, much greater than loss of economic revenue)”
– Rifaat Ahmed Abdel Karim, The Independence of Religious and External Auditors: The Case of Islamic Bank.

7. Implication Benefits More compliant towards the Shari’a Standards
Ensures the operations of such financial institutions are in favor of the public’s interests i.e. Maslaha
Increases public’s confidence towards Islamic Financial Institutions
Achieving the fundamental objectives of an IFI by enhancing independence and objectivity of its SSB
Challenges
Difficult to implement in reality
Different SSB’s might have different views
There is still some doubt in what action should be taken if collusion exists within the SSB
Level of confidence in IFI
Integrity of IBF Industry
Level of SSB Independence
INDIRECTLY EFFECT
CAUSE

8. Summary Standard Laws Others Independence of SSB Integrity of IFI
Public Confidence
Best Practices
Regulation

9. References 1 2 3 4 5
Governance Standard on Independence of Shari’a Supervisory Board - Exposure Draft, AAOIFI
GPS 1 – Bank Negara Malaysia
Rifaat Ahmed Abdel Karim, The Independence of Religious and External Auditors: The Case of Islamic Bank.
Assoc. Prof. Dr. Abdul Rahim Abdul Rahman,
Nur Barizah Abu Bakar, Ade Wirman Syafie, A Preliminary Study On The Responsibility & Independence Of Syari’a Advisors Of Islamic Banks
Owen Matthews, How the West Came To Run Islamic Banks

10. Thank You

11. Definition of Sharia Supervisory Board
“an independent body of specialized jurist in fiqh al-muamalat (Islamic commercial jurisprudence) that is entrusted with the duty of directing, reviewing and supervising the activities of the IFIs in order to ensure that they are in compliance with Islamic Syari’a rules and principles”
- Article 2
Governance Standard , (AAOIFI)
Shariah Supervisory Board: Appointment, composition and Report

12. Literatures 1 2 3
Rifaat Ahmed Abdel Karim, The Independence of Religious and External Auditors: The Case of Islamic Bank.
Assoc. Prof. Dr. Abdul Rahim Abdul Rahman, Nur Barizah Abu Bakar, Ade Wirman Syafie, A Preliminary Study On The Responsibility & Independence Of Syari’a Advisors Of Islamic Banks
Owen Matthews, How the West Came To Run Islamic Banks

13. Auditor’s Independence
Independence in Fact / Mind (Real Independence)
An attitude of mind which does not allow viewpoints and conclusions of its processors to become reliant on or subordinate to the influences and pressures of conflicting interest (Lee, 1986 p.89)
Independence in appearance (Apparent independence)
Normally taken to mean the “physical” location the auditor is in relation to the company and its management (Lee, 1986, p.89)
The use of the term “independent audit” underlines the constitutional separation from the organizational entity which is audited and the “external” nature of the auditor’s position (Flint, 1988, p.55)

14. Resolving Independence Issue1 2 3 4
Documenting the issue
Review the issue internally within the SSB
If the issue still exists after the internal review by the SSB, the SSB member with the issue of independence impairment must resign and General Assembly (the AGM - Shareholders) of the IFI must be notified.
In all above levels of conflict resolution, consideration must be given to local law and regulations.
Para 12

15. Situation Provided by the Standards1 2 3 4 5 6 7 8
Financial involvement with, or in the affairs of, clients
Personal and family relationships
Fees
Contingency fees
Performance – Related Bonus
Goods and Services (undue hospitality)
Actual or threatened litigation
Long Association of SSBs with IFIs