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SHARIAH AUDIT COMMITTEE
SHARIAH AUDIT COMMITTEE

Dr. Abdullah Moh’d Ayedh

(abdullah.mohammed@usim.edu.my)

Lesson Outcome
Lesson Outcome

Describe the main purpose and content of Shariah Committee

Report.

Discuss the changes that BNM have made to the format and

content of the Shariah Committee Report.

Compare and contrast between the requirements of Bank Negara Malaysia and AAOIFI on Shariah Committee Report

Background
Background

Shariah Committee is one of the important CG organs in IFIs.

One of the statutory requirement is to establish Shariah Committee in all IFIs.

SGF superseded (replaced) the BNM/GPS1 that was issued in

2004.

To meet high expectation of the key stakeholders of the IFI in

relation to Shariah compliance process.

IFIs Shariah Governance Structure
IFIs Shariah Governance Structure
Shariah BOARD RISK MANAGEMENT COMMITTEE BOARD OF BOARD AUDIT DIRECTORS COMMITTEE SHARIAH COMMITTEE MANAGEMENT Shariah Risk
Shariah
BOARD RISK
MANAGEMENT
COMMITTEE
BOARD OF
BOARD AUDIT
DIRECTORS
COMMITTEE
SHARIAH COMMITTEE
MANAGEMENT
Shariah Risk
Management Control
Function
Shariah Review
Function
Shariah Research
Function
Shariah Audit
Function
Shari’ah Governance Framework
Shari’ah Governance Framework
  • The Framework provides guidelines for all IFIs to properly structure, develop and practice Shariah compliance activities.

  • The Framework emphasized that the Board of Directors is responsible to provide overall oversight of Shari’ah governance structure and Shari’ah compliance.

  • The Framework also reiterated that the Management is responsible to ensure the executions of business and operations must be in accordance with the Shari’ah principles; and provide necessary support to the Shari’ah Committee.

  • Part of Shariah

Governance of IFIs is

the

role

of

Shariah Committee to provide oversight and

accountability on Shariah related matters.

Main Organs of Shari’ah Governance
Main Organs of Shari’ah Governance
Board of Directors • Overall oversight on Shari’ah governance structure & Shari’ah compliance • Ensure effective
Board of Directors
• Overall oversight on
Shari’ah governance
structure & Shari’ah
compliance
• Ensure
effective
communication
policy among
the
key functions of the
IFIs
Management • Ensure executions of business and operations are in accordance with Shari’ah principles • Provide
Management
• Ensure executions of
business
and
operations
are
in
accordance
with
Shari’ah principles
• Provide
necessary
support
to
the
Shari’ah Committee
Shariah Committee • Oversight accountability on Shariah related matters • The Board is expected to rely
Shariah Committee
• Oversight
accountability on
Shariah related matters
The
Board is expected
to
rely
on
Shariah
Committee on all
Shariah
decisions,
views and opinions
Main Organs of Shari’ah Governance Board of Directors • Overall oversight on Shari’ah governance structure &
Shariah Committee
Shariah Committee
SHARIAH COMMITTEE Oversee Shariah related matters Management Shariah Shariah Shariah Review Research Audit
SHARIAH COMMITTEE
Oversee Shariah related matters
Management
Shariah
Shariah
Shariah
Review
Research
Audit
Shariah Committee (SC) position in the SGF can be seen as higher than management and nearly
Shariah Committee (SC) position in the SGF can be seen as higher than
management and nearly at par with the Board of Directors (BOD).
Responsibilities & accountabilities of SC
Responsibilities & accountabilities of SC

Responsible and accountable for all its decisions, views and opinions related to Shariah matters.

Perform an oversight role on Shariah matters related to the IFI’s

business operations and activities.

Provide sufficient disclosure in the IFI’s annual financial report on the state of compliance of the IFI Shariah Committee Report.

Additional guidelines on duties, responsibilities & accountability
Additional guidelines on duties, responsibilities
& accountability

Responsibility & accountability

Advise the Board & IFI

Endorse and validate relevant documentations

Endorse Shariah policies & procedures

Assess work carried out by Shariah review & audit

Assist related parties on Shariah matters

Advise on matters to referred to the SAC

Provide written Shariah opinions

Independence of Shariah Committee
Independence of Shariah Committee

Independence

=

being

free

from

any

influence;

exercise objective judgment.

 

Their position or rank the same level of the Board of

Directors (BOD) or in other words any decision made

by the SC could not be overruled by the BOD.

BOD need to ensure that the decisions made by the SC are implemented by the IFI and ensure that decisions made by the SC are not modified without their consent.

Independence of SC
Independence of SC

Access to accurate, timely and complete information from the management to effectively perform their duties.

Shariah

non-compliant

activities

are

not

effectively

or

adequately addressed or no rectification were made by the IFI SC to report such matter to the BNM

Independence of SC
Independence of SC

Reappointment, resignation and removal of the SC are made by

the BOD.

This decision is subjected

to

the

approval by

the

BNM and

National Shariah Advisory Council of BNM.

There is the regulation that allows SC member to hold only one post within the same industry so as to maintain the level of independence and confidentiality of information amongst the

IFIs.

Independence of SC
Independence of SC

NEGATIVE LIST:

SC member should not have any relationship with the following persons that could interfere with the exercise of independent judgment:

spouse, children or siblings who were employed by the IFIs or any related companies as chief executive officer or non-independent board members.

substantial shareholder of or a partner or an executive officer or a director of any for-profit business organization that the IFI or any of its subsidiaries have received significant payments from the organization

SC member also should not be:

an employee of the IFI or any of its related companies

a SC member of another IFI within the same industry

Competency of SC
Competency of SC

Qualification

Degree

in Shariah which includes the study in Usul Fiqh

(i.e. the origin of Islamic law) or Fiqh Muamalat (i.e. Islamic transaction/commercial law).

Relevant backgrounds such as finance and law - support Shariah deliberations

Assessment of the performance of the SC members.

 

Succession

planning

program

for

the

SC

member

by

identifying, hiring and nurturing new members

Confidentiality of SC
Confidentiality of SC

Supplied by management necessary access to files, records, draft materials and conversations that is related to the work undertaken by the SC.

Each SC member is required to observe the principle of

confidentiality at all times.

Refer to list of confidential information in module.

SC is allowed to disclose sensitive information to BNM in good

faith, meaning that it must be disclosed because the IFI do not comply with Shariah principles

Shariah Committee Report (SCR)
Shariah Committee Report (SCR)

Shariah committee in IFIs required to disclose in the annual financial report on

the state of shariah compaliance of the IFIs.

BNM had issued in 2005, GP8-i (Guidelines on Financial Reporting for Licensed Islamic Banks which Contain a sample format of SCR. (see figure 5.1 page 102)

The format is simple in terms:

Only state the confirmation by ShC members that in their opinion the IFIs operations for the financial year is conformity with Shriah principles.

There is a lacks of important information:

 

No elaboration made concerning the roles and responsibilities of ShC members.

No explanation on the process undertaken by ShC members before forming their opinion.

The BNM had issued Shariah Governance Framework (SGF) for IFIs in 2011. (see figure 5.2 page 104)

Functional Gap on the role of the Board
Functional Gap on the role of the Board

According to SGF the SCR should contain:

  • 1. Introductory paragraph on the responsibilities of the SC members.

  • 2. Distinguishing the management responsibility from the ShC’s responsibilities.

  • 3. Scope paragraph outlining the scope of work for the ShC members.

  • 4. Opinion paragraph stating whether the items that have been reviewed are in

compliance with Shariah principles.

  • 5. Closing paragraph stating the confirmation by ShC members that the IFIs operations for the financial year is in confirmatory with Shariah principles.

It shows that BNM has made great improvement to the content of the

SCR.

Adopted from the AAOIFI and external auditor opinion content
Adopted from the AAOIFI and
external auditor opinion
content
Pitfall No. 3: Reasonable vs. Complete Assurance
Pitfall No. 3:
Reasonable vs. Complete Assurance
 

Report of the Auditors of

   

Report of the Shari’ah

 

IslamicBank XYZ:

 

Committee of Islamic Bank XYZ:

“We

conducted

our

audit in

The

duties

and

responsibilities

of

accordance with

approved

Shariah Supervisory Council (SSC) are

Standards on Auditing in Malaysia.

to review, appraise and advise the

These standards require that we

Directors on the operations of the

plan

and

perform

the

audit

to

Group and of the company’s business

obtain

all

information

and

in order to ensure that they do not

explanations

which

we

consider

involve any element which is not

necessary

to

provide

us

with

approved by Islam. () We,..and..,

evidence

to

give

reasonable

being two members of the SSC, do

assurance

that

the

financial

hereby confirm on behalf of the

statements are free from material

Council, that in our opinion, the

misstatements.

 

operations of the Group and of the company for the year endedhave been conducted in conformity with Shariah principles.

AAOIFI’s Guidelines on the Shariah Committee Report
AAOIFI’s Guidelines on the Shariah Committee Report

In 1999 AAOIFI issued standard on the format of the Shariah committee report (SCR) or Shariah supervisory board report (SSBR).

The standard of AAOIFI Governance Standard for Islamic Financial

Institutions (GSIFI No. 1) on Shariah Supervisory Board covers aspects such as appointment, Composition and report. By comparing GSIFI No.1 and SGF report criteria, both are quit similar.

The main differences in the content and wording for scope paragraph for BNM’s SGF and AAOIFI’s GSIFI No.1:

BNM’s SGF

AAOIFI’s GSIFI No.1

Scope

Scope

“ We have assessed the work carried out by

“We conducted our review which included

Shariah review and Shariah audit which included examining, on test basis, each type

examining, on a test basis of each type of transactions, the relevant documentation and

of transactions, the relevant documentation

procedures adopted by the Example IFIs

and procedures adopted by the ABC IFIs.”

Why do IFIs need Shari’ah Audit?
Why do IFIs need Shari’ah Audit?
Responsibilities of SAC or SSB Evaluating and approving Islamic financial products, prepare draft of Shari’ah opinions,
Responsibilities of SAC or SSB
Evaluating and approving Islamic financial products,
prepare draft of Shari’ah opinions, prepare contracts
in collaboration with legal advisor of the bank etc.
So far Shari’ah advisors are not carrying out thorough
and comprehensive internal Shari’ah review or audit
on the operations of IFIs due to their restricted scope
of work.
As required by the Companies Act, IFIs are
also subjected to financial audit conducted
by external auditors which are normally
carried out by professional accounting firms.
Context Shari’ah Committee of the IFIs normally expressed their opinions on the Shari’ah compliance of the
Context
Shari’ah Committee of the IFIs normally expressed
their opinions on the Shari’ah compliance of the
products and services offered (ex-ante compliance).
However, a comprehensive and well-guided audit of
the Shari’ah legal contracts, documentations and
operations so far has not been properly conducted
(ex-post compliance).
Without such auditing function, there is
a functional gap of Shari’ah compliance
in the Islamic financial system.