1. IFSB-INCEIF EXECUTIVE FORUM Sound Governance Practices: Promoting Stability in Islamic Finance TOPIC Achieving the Right Balance Between Conformance and Performance-The way forward for Islamic Financial Industry Sasana Kijang, Bank Negara Malaysia 9-10 December 2014 Assoc Prof Dr Azman Mohd Noor Head, Department of Fiqh, International Islamic University Malaysia Drazman.net by

2. IFSB-INCEIF EXECUTIVE FORUM Sound Governance Practices: Promoting Stability in Islamic Finance INTRODUCTION: THE COMFORMANCE AND PERFORMANCE  What makes IFI differs from conventional is the Shariah compliance requirement  Conformance aims at offering alternative Shariah compliant banking and financial transactions  Performance in general is to maximize profits to the shareholders

3. IFSB-INCEIF EXECUTIVE FORUM Sound Governance Practices: Promoting Stability in Islamic Finance SGF and Regulatory Requirement

4. IFSB-INCEIF EXECUTIVE FORUM Sound Governance Practices: Promoting Stability in Islamic Finance Number of Shariah Committee Members at IFI MalaysiaGCC 5 members, at least 3 with strong Shariah background No such requirement. Some IFI has more reasonable numbers while some others with only 1or 2 persons

5. IFSB-INCEIF EXECUTIVE FORUM Sound Governance Practices: Promoting Stability in Islamic Finance Shariah Advisory Council at the highest Regulatory Level MalaysiaGCC 1.SAC is the highest authority, and a reference for court judgement. 1.Shariah Board is only at the IFI. Most of the GCC has no SAC at central bank. -Qatar has initiated the establishment of SAC, but there is a suggestion to dilute the SC of IFI. -Kuwait: CBK law se 10/artcle 93, if islamic by bank general assembly Kuwait. In case of dispute on shariah matters BOD may transfer the matters to fatwas council (Lanjah al-fatwa), ministry of waqf. UAE: Capital Market SAC. Central UAE Higher Shariah Authority is appointed by the cabinet at the Ministry of Justice and Islamic Affairs

6. IFSB-INCEIF EXECUTIVE FORUM Sound Governance Practices: Promoting Stability in Islamic Finance Shariah Conformance Product Approval MalaysiaGCC There are two tier/level Shariah supervision, one at IFI and another one at Bank Negara, two layers of product approval. SC can report direct to SAC The approval from the regulators only for the technical, risk aspects, not on Shariah matters.

7. IFSB-INCEIF EXECUTIVE FORUM Sound Governance Practices: Promoting Stability in Islamic Finance Shariah Audit and Compliance Review Exercise MalaysiaGCC -By BNM- -Internal Shariah audit -Internal Shariah Risk/ Compliance Review -By external Shariah auditor (not compulsory) -Internal Shariah audit -external Shariah auditor

8. IFSB-INCEIF EXECUTIVE FORUM Sound Governance Practices: Promoting Stability in Islamic Finance Appointment of the SC and Reporting Flow Chart MalaysiaGCC Shariah Committee members are nominated and appointed by BOD after getting consent from BNM. Shariah committee is reporting to BOD Shariah Committee can also report to SAC BNM Shariah Audit reports to Audit committee and SC Shariah Compliance review reports to Risks Committee; and SC Saudi and Kuwait; SC members are appointed by the General Assembly. Shariah Committee is reporting to GA No higher level Shariah Audit reports to SC Mostly report to SC

9. IFSB-INCEIF EXECUTIVE FORUM Sound Governance Practices: Promoting Stability in Islamic Finance EXAMPLES OF COMMON NON CONFORMANCES Non Shariah Compliance Issues Example in Tawarruq  Selling commodity which is not in existence.  Dual Agency Commodity Murabahah  Roll over (qalb al-dayn) in debt restructuring  How indebtedness is established, big number of contracts be excuted Example in Murabahah and Ijarah No clear contract, prices and contracting parties in the legal doc. ‘Inah issue

10. IFSB-INCEIF EXECUTIVE FORUM Sound Governance Practices: Promoting Stability in Islamic Finance EXAMPLE OF NON PERFORMANCES  Failure to achieve projected and budgeted profit, lack of profit maximization, low profit compared to cost.  Non Compliance to Regulatory policies/requirement.  Exposure to risks such as credit risk, market, operation, NPF recovery etc.  Lack of talented performing staff and the issue of staff turnover.

11. IFSB-INCEIF EXECUTIVE FORUM Sound Governance Practices: Promoting Stability in Islamic Finance CHALLENGES  Does conformance affect smooth performance or the other way around?  Does conformance slow down performance, because of Shariah approval requirement?  Shariah Review under Shariah Division or Compliance Division

12. IFSB-INCEIF EXECUTIVE FORUM Sound Governance Practices: Promoting Stability in Islamic Finance How to Harmonize Conformance and Performance  Shariah Governance Framework/ Shariah Compliance Manual of Each IFI  Shariah conformance should be embedded in Key Performance Indicators.  Product Manual, SOP, Shariah Audit  Reporting of Shariah division, directly to CEO.

13. IFSB-INCEIF EXECUTIVE FORUM Sound Governance Practices: Promoting Stability in Islamic Finance Cont’.. Harmonization between Conformance and Performance  Should Shariah Head Division, join Management Committee Meeting? Credit Committee.  Should a Shariah Committee become a Board Member? Or permanent invitee/invitee in BOD.

14. IFSB-INCEIF EXECUTIVE FORUM Sound Governance Practices: Promoting Stability in Islamic Finance Thank you Drazman.net