Presentasi Sharia Governance in Oman a
Sultanate
of Oman
SHARIA GOVERNANCE, SHARIA AUDIT AND
SHARIA COMPLIANCE IN OMAN AND MIDDLE
EAST
Muhammad Iman Sastra Mihajat, Ph.D
Head of Sharia Audit and Sharia Compliance
محمد إيمان ساسترا ميحاجات.د
رئيس التدقيق واللتزام الشرعي
Sultanate
of Oman
HIS MAJESTY SULTAN QABOOS BIN
SAID
Islamic Banking in Oman
The implementation of Islamic banking, finance and investment in the Sultanate of
Oman, effected by the Royal Decree 69/2012 of December 6, 2012 Amending Some
Provisions of the Banking Law promulgated by Royal Decree 114/2000, as well as
the Central Bank of Oman’s Circular IB 1 of December 18, 2012, which adopted the
relevant Islamic banking framework.
The Sultanate of Oman has established within the last four years the legal and
regulatory framework which applies to Islamic banks and to the Islamic “windows”
of conventional banks that are licensed to operate in the Sultanate. Oman was the
last country in the six-nation Gulf Cooperation Council to introduce Islamic finance.
HIS MAJESTY SULTAN QABOOS BIN
SAID
Sultanate
of Oman
• The Islamic banks began operating in the Sultanate after the Central Bank of Oman
(CBO) had put the necessary legislation (Circular IB 1 of December 18, 2012) in place.
Capital Market Authority (CMA) of Oman, has recently licensed business activity of
Bank Nizwa and Izz International Bank (Al Izz Islamic Banking), which are primarily
focused on retail Islamic banking especially consumer finance, they may at a later
stage under the provisions of their license offer asset management, investment funds,
wealth management and Sukuk products. Swiss private bank, Bank Sarasin, and Alpen
Capital LLC (Oman), an investment bank, through their joint venture Sarasin-Alpen LLC,
Oman, have already received approval from the CMA to market Sukuk and other
Islamic capital market products and services to clients in Oman.
• Central Bank of Oman operates in accordance with Islamic Shari’ah with a capital base
of RO100 million, while Bank Muscat earmarked RO150 million as capital for Meethaq –
its own Islamic banking outlet. Al Ahli Bank has announced the establishment of its
Islamic banking outlet, to be known as Al Hilal.
Sultanate
of Oman
WHAT IS SHARIAH
GOVERNANCE?
IFSB-10
Guiding Principles on Shariah Governance Systems for Institutions Offering Islamic
Sultanate
of Oman
Financial Services defines:
“A set of institutional and organisational arrangements through which Islamic financial institutions
ensure that there is an effective independent oversight of Shariah compliance over the issuance
of relevant Shariah pronouncements, dissemination of information and an internal Shariah
compliance review.”
This requires:
1.A set of institutional and organisational
arrangement – Board of Directors, Shariah
committee, Shariah division, internal audit function.
2. An effective independent oversight on Shariah
compliance
Function
s
Common Corporate
Governance
Additional for IFI
Governance
Board of Directors
Shariah Committee
Control
Internal Audit Division,
External Auditor
Compliance
Regulatory and Financial
Compliance Division
Internal Shariah Review, Shariah
Review by Shariah Committee,
Shariah Audit
Internal Shariah Compliance (Research)
3.Shariah pronouncements, disseminations of info and Risk
an internal Shariah review – ex-ante and ex-post aspects Managem
ent
of the Shariah compliance framework.
Risk Management Division
(Credit, Market and
Operational Risk)
Shariah Compliance Risk Management
Sultanate
of Oman
IMPLICATIONS OF SHARIAH NON‐
COMPLIANCES?
NON-FINANCIAL
FINANCIAL
• Shariah
due to
(‘aqad)
• Capital
impact
• Against the commands of Allah
SWT
non-compliant income
invalidation
of
contract
adequacy
ratio
Sultanate
of Oman
• Impediment of Allah’s SWT
blessing or barakah
(CAR)
IMPA
CT
OF
SNC
مخالف
ة
REGULATORY
• Jeopardize business reputation
MODELS OF SHARIAH
GOVERNANCE
Sultanate
of Oman
Sultanate
of Oman
SHARIAH COMPLIANCES
PROCESS
SHARIAH GOVERNANCE FRAMEWORK’S
MODEL
Shariah
Principle in Islamic
finance
BOARD
BOARD RISK
MANAGEMENT
COMMITTEE
SHARIAH SUPERVISORY
BOARD
Oversight accountability on
Shariah related matters
Overall oversight on
Shariah compliance &
review
BOARD AUDIT
COMMITTEE
CEO
GM – Head of
Islamic Banking
Internal Sharia Reviewer (Head of Sharia)
❖Ensure executions of business & operations are in accordance
with Shariah rules & principles
❖Provide necessary support to the Shariah committee
Shariah Risk Unit
Identify, measure, monitor,
report & control Shariah
non-compliance risk
Shariah Compliance Unit
Review business operations
on a regular basis to ensure
Shariah compliance
Shariah Research
Unit
Conduct comprehensive
Shariah research prior to
submission to the Shariah
committee
Shariah Audit Unit
Provide independent
assessment & objective
assurance designed to value
add & improve IFI’s
compliance with Shariah
Sultanate
of Oman
SHARIAH REVIEW AND SHARIAH AUDIT
FUNCTIONS
Shariah Compliance Review
Objective
Scope
Shariah Audit
❖ To ensure that the activities and
operations carried out by the IFI do
not contravene with the Shariah
❖ To provide an independent assessment &
objective assurance to ensure a sound
and effective internal control system for
Shariah compliance
❖ Overall business operations, including
the end‐to‐ end product development
process (from product structuring to
product offering)
❖ All aspects of the IFI’s business operations
& activities, including:
➢ audit of financial statements;
➢ compliance audit on organisational
structure, people & IT application
systems; and
Process
❖ Planning the review program (including
scope, reporting, rectification and
objectives,
follow‐up actions followed by the
execution of the program);
❖ Documentation of the processes
involved;
❖ Communicating the outcome &
highlighting any non‐compliances to
the Shariah Committee & the
management; and
❖ Rectifying any instances of Shariah non‐
compliance to prevent such events from
recurring
❖ Developing a comprehensive internal
Sharia Compliance review
➢ review of adequacy of the Shariah
governance process.
❖ Understanding the business activities of
the IFI – to allow for better scoping of an
audit exercise;
❖ Developing a comprehensive internal
audit program;
❖ Obtaining and making reference to
relevant sources (e.g. HSSA’s published
rulings, the SSB’S decisions, etc)
❖ Communicating results or findings to the
Board Audit Committee and the Shariah
Committee; and
❖ Providing recommendations on rectification
measures taken as well as following‐up on
the implementation by the IFI.
Sultanate
of Oman
OTHER KEY INTERNAL FUNCTIONS
Apart from Shariah review & audit IFIs are also expected to establish other functions that complement
and provide necessary support to Shariah compliance functions within the organisation
Objectives
SShariah
hariahriskrisk
mmanagement
anagement contr
ol
control
SShariah
hariahresearch
functi
research
on
function
❖ Identification
& assessment of
Scope
& Functions
❖ Form part of IFIs integrated risk
mgmt control function
❖ Ensure proper deliberation of Shariah
related matters
❖ Perform in-depth research on
Shariah including providing day-today Shariah advice & consultancy
Shariah risk would be systematically
controlled & monitored
❖ Perform by qualified Shariah
officers
❖ May seek input from experts on
technical matters
Sharia
hsecreta
Shariah
functi
riat
secretariat
on
Function
/
Sharia
Coordinator
❖ Provide necessary support to Shariah
committee & IFI in implementing
Shariah governance
❖ Coordinating meetings, compiling
papers, disseminating Shariah
decisions
❖ Engaging with relevant parties that
need assistance
Sultanate
of Oman
Sultanate
of Oman
The Importance of Shariah Governance in
Islamic Banking and Finance
13
Shariah governance within the
ambit of corporate governance…
Q
Corporate governance refers to the method by which a corporation is
directed, administered or controlled
Q
Since Islamic FI in many ways is similar to the conventional FI, the
existence of a proper framework of corporate governance is a matter of
dire necessity
Q
However, different from conventional FI, Islamic FI has the responsibility to
ensure the compliance with the Shariah principles in its products,
instruments, operations, practices, management etc
14
Sultanate
of Oman
Shariah governance within the ambit
of corporate governance…
Q
Hence, Shariah governance is another component that is peculiar exclusively to
Islamic FI
Q
Principle 3.1 of the “IFSB Guiding Principles on Corporate Governance”
states that an appropriate mechanism must be created to ensure the
compliance with the Shariah principles
Q
Similarly, Principle 7.1 of the “IFSB Guiding Principles on Risk
Management” states that Islamic FI shall have in place adequate systems and
controls, including Shariah Board/advisor to ensure compliance with the
Shariah principles
15
Sultanate
of Oman
The importance of Shariah
governance in Islamic banking &
finance…
Sultanate
of Oman
Q
Shariah compliance is the backbone of Islamic banking & finance
Q
It gives legitimacy to the practices of Islamic banking & finance
Q
It also boosts the confidence of the shareholders and the public that all the
practices and activities are in compliance with the Shariah at all times
16
The importance of Shariah
governance in Islamic banking &
finance…
Sultanate
of Oman
Q
The existence of non-Shariah compliant element would not just affect the
confidence of the public to Islamic banking & finance
Q
But might also expose Islamic FI to risks e.g. fiduciary and reputational risks
Q
The compliance with the Shariah principles will be achieved by having a
proper Shariah governance framework
17
Sultanate
of Oman
Models of Shariah Governance in Oman
and Middle East
18
Models of Shariah governance in Oman and
Middle East…
Oman Model
KUWAIT Model
BAHRAIN Model
U.A.E. Model
QATAR Model
19
Sultanate
of Oman
Q
1) Oman
Model
The establishment of Higher Sharia Supervisory
Sultanate
of Oman
Authority (HSSA) at Central Bank of Oman (CBO)
(higher level)
Q
Shariah Board is the sole authority in matters pertaining
to Islamic finance
Q
Requirement for the establishment of Shariah advisor for
the Islamic financial institution
20
Q
Oman
Model
Any member of HSSA of CBO is not allowed to serve
Sultanate
of Oman
Islamic Financial Institution in Oman
(different from Malaysia and Pakistan)
Q
Q
Restriction imposed – a Shariah Supervisory Board is
allowed to serve only one financial institution
at IFI level, Internal Sharia
Department which comprise of
Internal Sharia Reviewer (Head of
Sharia, Sharia Scholar), Sharia
Compliance, Sharia Audit and Sharia
21
2) Kuwait Model
Q
Kuwait is practicing self regulation of Islamic financial
institutions
Q
There is no Shariah Advisory Council at the Central
Bank of Kuwait
Q
Section 10, Chapter 3, Central Bank of Kuwait Law
32/1968 provides that every Islamic financial
institution shall have its own Shariah Supervisory
Board
Sultanate
of Oman
22
Kuwait Model
Sultanate
of Oman
In the case of conflict of opinions among members of the
Shariah Supervisory Boards concerning a Shariah
ruling,
the Board of Directors of the designated Islamic FI may
transfer the matter to the “Fatwa Board” in the Ministry
of Awqaf and Islamic Affairs (this is not compulsory)
Q
Q
The Fatwa Board in the Ministry of Awqaf and Islamic
Affairs shall be the final authority on the matter
Q
This Fatwa Board is an external body to the Central
Bank of Kuwait
23
Kuwait Model
Sultanate
of Oman
Q
No restriction is mentioned/found in the law
Q
From the existing practice, it can be said that there is no
restriction for the members of the Fatwa Board to serve
in any Islamic financial institution
Q
Similarly, there is also no limitation to serve as a
member of Shariah Supervisory Board of more than one
Islamic financial institution
24
3) Bahrain Model
Sultanate
of Oman
Establishment of National Shariah Board of the Central
Bank of Bahrain – to serve and to verify the Shariah
compliance of its own products only
Q
Q
All other Islamic financial institutions shall establish
“Shariah Supervisory Committee” and comply with the
AAOIFI's Governance Standards for Islamic
Financial Institutions No. 1 and No. 2
Q
No restriction for the member of National Shariah Board
to serve any financial institution, also no limitation to
serve only one institution
25
4) U.A.E. Model
Q
Establishment of “Higher Shariah Authority” to supervise
Islamic banks, financial institutions and investment
companies (Art. 5, Federal Law No. 6 of 1985)
Q
This Authority shall be accorded the final authority in
Shariah matters in Islamic banking and finance
Q
Formation of Shariah Supervision Authority at the
financial institution level (Art. 6 of the same Law)
Q
Nothing is mentioned about any restriction
Sultanate
of Oman
26
5) Qatar Model
Sultanate
of Oman
Q
Practicing self regulation of Islamic banks
Q
No Shariah Advisory Board at Central Bank of Qatar. But
has “Supreme Shariah Council” attached to Awqaf
Ministry – any issue can be directed to the Council for
clarification
Q
Central Bank of Qatar appoints Shariah scholars to solve
any problem encountered on case-to-case basis
Q
No restriction on Shariah advisors to be a member of
Shariah Board in more than one Islamic FI
27
Sultanate
of Oman
In summary…
COUNTRY
SHARIAH AUTHORITY
Central
Bank
IFI
FINAL
AUTHORITY
RESTRICTION
Oman
HSSA
SSB
HSSA
Kuwait
UAE
Bahrain
Qatar
n/a
HSA
NSB
N/A
SSB
SSA
SSC
SSB
SSB*
HSA
NSB
1)Members of HSSA cannot serve IFI
2)One SSB can only serve one IFI in
same category (Banking & Takaful)
No restriction is mentioned
No restriction is mentioned
No restriction is mentioned
No restriction is mentioned
*In case of dispute: Fatwa Board in the Ministry of Awqaf and Islamic Affairs
28
Personal Reflection…
Q
Sultanate
of Oman
Restriction by not allowing–
Members of HSSA to serve any Islamic FI (e.g.
Oman)
Q
Shariah advisors to serve more than one Islamic FI
(e.g. ADVANTAGES
DISADVANTAGES
Oman)
Q
Avoiding conflict of interest
•
Obsoleteness of the knowledge of the
members of SAC: Macro vs. Micro
•
Preserving secrecy and
confidentiality
•
Depriving the market from good brains
•
Allowing for more new brains to
enter the market
•
No interaction between experienced and
inexperienced Shariah advisors
•
Q
The need to balance between “Pros” and “Cons”
29
Sultanate
of Oman
Governance Relating to Shariah
Supervisory Board
30
Q
Q
What is “Shariah Supervisory
Board”?
An independent body of specialised jurists in fiqh al- muamalat (Islamic
commercial jurisprudence). However, the Board may include a member
other than those specialised in fiqh al-muamalat, but who should be an
expert in the field of Islamic financial institutions and with the duty of
directing, reviewing and supervising the activities of the Islamic financial
institution in order to ensure that they are in compliance with Islamic
Shariah rules and principles
The fatwa and rulings of the Shariah Supervisory Board shall be binding
on the Islamic financial institution
31
Sultanate
of Oman
Among common practice…
Sultanate
of Oman
Q
Appointment of “In-house Shariah Supervisory Board” members
Q
Some Islamic financial institutions have established their own dedicated
“Shariah Review and Audit Department” or unit to support Shariah Supervisory
Board
Q
Main responsibility of the SSB with the assistance of the department
Q
Q
Ex-ante and ex-post Shariah rulings, and
Monitoring and supervising
32
is on –
Composition…
Q
The AAOIFI Standard requires at least 3 individuals
Q
Legal/statutory requirement varies–
Q
Q
Q
Sultanate
of Oman
From 1 individual, or
At least 3 individuals
In contemporary practice, most of the Islamic financial
institutions appoint between 3 to 6 members to the Board
33
Qualification…
Sultanate
of Oman
Q
A member of a Shariah Committee shall be an individual.
A company, institution or body shall not constitute a Shariah Committee
Q
The member of the Shariah Committee shall at least either have
qualification or possess necessary knowledge, expertise or experience in:
Q
Q
Q
Islamic jurisprudence (Usul al-Fiqh); or
Islamic transaction/commercial law (Fiqh al-Muamalat)
Paper qualification on the above will not be mandatory as long as the
candidate has the necessary expertise or experience in the above areas
34
Qualification… (Oman)
Sultanate
of Oman
Members of the SSB must:
1. Be Muslims.
2. Be independent of the management of the bank.
3. Not be engaged with any Shari’a supervisory board of any local banks.
4. Be of a good repute and character and known not to have been involved in any unethical and/or inappropriate
practices like crimes, fraud or dishonesty.
5. Possess the necessary qualifications, expertise and experience, particularly in Fiqh al Muamalat Islamic Banking
System and its operations, Islamic Finance and Usul Fiqh.
6. Be a holder of academic qualifications in the field of Shari’a – minimum of bachelor degree – that include study of
Usul Al-Fiqh and Fiqh al Muamalat from a recognized institution.
7. Have accumulated overall experience of 10 years or more (in teaching, research, Fatwa issuance, etc.) to be
eligible to become members of a SSB.
8. Be able to read and converse in Arabic, and it is highly recommended that they have reasonable understanding of
English.
9. Members of the SSB other than Shari’a scholars must be individuals generally recognized for their expertise in
their respective field (e.g. economics, law, banking, accounting, finance, etc.).
35
Roles and Responsibilities…
Sultanate
of Oman
Q
The Shariah in Islamic finance has a crucial role not only in governing
financial transactions and operations, but also in monitoring and
supervising the roles of all players within the financial system
Q
Hence, the role of the SSB mainly must cover ex-ante Shariah rulings
as well as ex-post Shariah rulings
Q
Tasks include reviewing and certifying the permissibility of all contracts,
documentation and products
36
Roles and Responsibilities…
Sultanate
of Oman
Q
Execution periods (interim)
Q
Confirming the consistency and compliance level of the practices to Shariah
rulings made (Shariah audit)
Q
Advising and monitoring the manner of disposing the non-Shariah compliant
earnings
Q
Issuing a Shariah supervisory report certifying that all transactions conducted
by the Islamic FI comply with Shariah (normally incorporated in the annual
report of the Islamic FI)
37
Some Concerns…
Q
A situation of conflict of interest may occur–
Q
Q
Q
Sultanate
of Oman
when a product or instrument of the Islamic FI is brought up for approval from the central
bank’s higher Shariah body,
where a Shariah advisor sitting in the central bank’s higher Shariah body also serves
that particular Islamic FI
Issues of concern: secrecy and confidentiality of trade secrets when a Shariah
advisor serves more that one Islamic FI in same industry
38
Sultanate
of Oman
Propositions for a Better Shariah
Governance
39
The way forward in Shariah governance
in Islamic finance industry…
Q
The need to apply the best practices in Shariah governance for the
Islamic FI
Q
There is no hard and fast rule, no single model which is applicable for all
Q
Taking into account the level and pace of Islamic finance development, it may
vary from one country to another
40
Sultanate
of Oman
The way forward in Shariah governance in
Islamic finance industry…
Q
The Islamic financial services industry is notably still in its infancy stage
Q
Therefore, any rigid, rule-based approach adopted in haste aiming at
strengthening the governance of the industry may jeopardise and hinder its
potential and healthy growth
Q
However, some common elements that underlie good governance and best
practices may be drawn to facilitate the creation and optimise a healthy and
viable environment for Shariah governance without impeding further growth of
the industry
Sultanate
of Oman
Some thoughts for
consideration…
Sultanate
of Oman
1) Shariah Advisory Council vis-à-vis Shariah Supervisory
Board of Islamic FI
2) Composition and Qualification
3) Scope of Supervisory Responsibilities
4) Internal & External Shariah Review/Audit
42
Shariah Advisory Council vis-à-vis Shariah
Supervisory Board of Islamic FI
Sultanate
of Oman
Q
The establishment of regulator’s/central bank’s Shariah Advisory Council by way of
promulgation of law
Q
To accord the final Shariah authority to the Shariah Advisory Council in matters
relating to Islamic banking and finance
Q
To appointment of its members from various related background e.g. Shariah, legal,
economic, finance etc with the members shall consist mainly Shariah scholars
43
Shariah Advisory Council vis-à-vis Shariah
Supervisory Board of Islamic FI
Sultanate
of Oman
Q
To allow the regulator’s/central bank’s Shariah Advisory Council members
to serve in the Islamic FI’s SSB
Q
However, to limit the membership in Islamic FI by appointing only one
Shariah advisor from regulator’s/ central bank’s Shariah Advisory Council
to its SSB– in order to avoid concentration
Q
To classify the industries into Islamic banking and takaful and to allow
Shariah advisor to serve only one Islamic FI in the same category
44
Composition and Qualification
Sultanate
of Oman
Q
To consider a combination of internal Shariah advisor (Shariah personnel)
as member secretary and external Shariah advisors
Q
External Shariah advisors should not be less than 3
Q
Qualification–
Q
Q
Q
To identify the criteria for recognising a person as a qualified Shariah advisor in
Islamic finance
To have a professional body or industry association that will set professional standards
for Shariah advisors serving the Islamic financial services industry
To introduce continuous professional development and assessment (like
CPD/CPE points) for Shariah advisors
45
Composition and Qualification
Q
External Shariah firm can be consulted to develop products, but
permanent SSB is indispensable
Q
To establish procedures in managing the SSB–
Q
Q
Q
Sultanate
of Oman
Appointment of members
Meeting and consultation procedures Q Report on Shariah
compliance review Q Record & publication of Shariah rulings
The SSB also could issue recommendations on how the institution could
best fulfill its social role as well as promote Islamic finance
46
Scope of Supervisory Responsibilities
Need to focus the Shariah supervisory process into both
macro as well as micro analysis to the operations and practices of the
Islamic FI
Q
Q
Should not be limited only to products development process and its
verification, but also to cover the banking practices and conduct of the
Islamic FI as a whole
Q
It is noted that although almost all SSBs have access to the ex-ante
Shariah rulings, but the practice of ex-post Shariah rulings is a matter
of concern/not being looked into thoroughly by the SSBs of some
Islamic FIs
47
Sultanate
of Oman
Internal & External Shariah Review/Audit
Sultanate
of Oman
•
•
•
• Q
To perform a Shariah compliance review– both internal and
external
Q To give due emphasis and more focus on the conduct of
external ex-post Shariah compliance review
Q To have close working relationship between Audit Committee
& the internal auditor/Shariah reviewer with the external auditor
to enhance the external auditor’s capabilities in conducting
such Shariah compliance review as part of the audit works
Q
Need to have a format for Shariah compliance review
48
Sultanate
of Oman
Conclusion
49
In conclusion…
Sultanate
of Oman
Q
The importance of Shariah governance in Islamic FIs is undeniable
Q
Proper mechanism & framework need to be created to enable proper advisory
and supervisory role of HSSA/SSB
Q
Integration between the HSSA and SSB of Islamic FIs should be facilitated to
provide a conducive environment for a better Shariah governance
Q
The scope of advice and supervision must include both micro and macro issues
of Islamic FIs
50
In conclusion…
Q
Proper framework should be put in place to ensure optimal Shariah
governance of Islamic FIs–
Q
Q
Q
Q
Sultanate
of Oman
on the appointment of HSSA & SSB members, relationship between the two
bodies, membership, procedures etc
on the scope of advice and supervision, it should be a holistic approach, looking
not only at particular contracts or structures, but on the operations of Islamic FI as
a whole, covering before, during and after the execution of all products and
structures
on the internal and external Shariah compliance review/audit, there is dire need
for a proper framework and guidelines
Constant enhancement on the framework is necessary to ensure optimal
Shariah governance in Islamic finance
51
Sultanate
of Oman
Muhammad Iman Sastra Mihajat, Ph,D
Head of Sharia Audit and Sharia Compliance
Al Yusr | Islamic Banking Unit
Oman Arab Bank S.A.O.C.
PO Box 2010, Ruwi-112, Muscat, Sultanate of Oman
Cell: +968 977 97232 Fax: +968 24 125 126
Website: www.alyusr.om
of Oman
SHARIA GOVERNANCE, SHARIA AUDIT AND
SHARIA COMPLIANCE IN OMAN AND MIDDLE
EAST
Muhammad Iman Sastra Mihajat, Ph.D
Head of Sharia Audit and Sharia Compliance
محمد إيمان ساسترا ميحاجات.د
رئيس التدقيق واللتزام الشرعي
Sultanate
of Oman
HIS MAJESTY SULTAN QABOOS BIN
SAID
Islamic Banking in Oman
The implementation of Islamic banking, finance and investment in the Sultanate of
Oman, effected by the Royal Decree 69/2012 of December 6, 2012 Amending Some
Provisions of the Banking Law promulgated by Royal Decree 114/2000, as well as
the Central Bank of Oman’s Circular IB 1 of December 18, 2012, which adopted the
relevant Islamic banking framework.
The Sultanate of Oman has established within the last four years the legal and
regulatory framework which applies to Islamic banks and to the Islamic “windows”
of conventional banks that are licensed to operate in the Sultanate. Oman was the
last country in the six-nation Gulf Cooperation Council to introduce Islamic finance.
HIS MAJESTY SULTAN QABOOS BIN
SAID
Sultanate
of Oman
• The Islamic banks began operating in the Sultanate after the Central Bank of Oman
(CBO) had put the necessary legislation (Circular IB 1 of December 18, 2012) in place.
Capital Market Authority (CMA) of Oman, has recently licensed business activity of
Bank Nizwa and Izz International Bank (Al Izz Islamic Banking), which are primarily
focused on retail Islamic banking especially consumer finance, they may at a later
stage under the provisions of their license offer asset management, investment funds,
wealth management and Sukuk products. Swiss private bank, Bank Sarasin, and Alpen
Capital LLC (Oman), an investment bank, through their joint venture Sarasin-Alpen LLC,
Oman, have already received approval from the CMA to market Sukuk and other
Islamic capital market products and services to clients in Oman.
• Central Bank of Oman operates in accordance with Islamic Shari’ah with a capital base
of RO100 million, while Bank Muscat earmarked RO150 million as capital for Meethaq –
its own Islamic banking outlet. Al Ahli Bank has announced the establishment of its
Islamic banking outlet, to be known as Al Hilal.
Sultanate
of Oman
WHAT IS SHARIAH
GOVERNANCE?
IFSB-10
Guiding Principles on Shariah Governance Systems for Institutions Offering Islamic
Sultanate
of Oman
Financial Services defines:
“A set of institutional and organisational arrangements through which Islamic financial institutions
ensure that there is an effective independent oversight of Shariah compliance over the issuance
of relevant Shariah pronouncements, dissemination of information and an internal Shariah
compliance review.”
This requires:
1.A set of institutional and organisational
arrangement – Board of Directors, Shariah
committee, Shariah division, internal audit function.
2. An effective independent oversight on Shariah
compliance
Function
s
Common Corporate
Governance
Additional for IFI
Governance
Board of Directors
Shariah Committee
Control
Internal Audit Division,
External Auditor
Compliance
Regulatory and Financial
Compliance Division
Internal Shariah Review, Shariah
Review by Shariah Committee,
Shariah Audit
Internal Shariah Compliance (Research)
3.Shariah pronouncements, disseminations of info and Risk
an internal Shariah review – ex-ante and ex-post aspects Managem
ent
of the Shariah compliance framework.
Risk Management Division
(Credit, Market and
Operational Risk)
Shariah Compliance Risk Management
Sultanate
of Oman
IMPLICATIONS OF SHARIAH NON‐
COMPLIANCES?
NON-FINANCIAL
FINANCIAL
• Shariah
due to
(‘aqad)
• Capital
impact
• Against the commands of Allah
SWT
non-compliant income
invalidation
of
contract
adequacy
ratio
Sultanate
of Oman
• Impediment of Allah’s SWT
blessing or barakah
(CAR)
IMPA
CT
OF
SNC
مخالف
ة
REGULATORY
• Jeopardize business reputation
MODELS OF SHARIAH
GOVERNANCE
Sultanate
of Oman
Sultanate
of Oman
SHARIAH COMPLIANCES
PROCESS
SHARIAH GOVERNANCE FRAMEWORK’S
MODEL
Shariah
Principle in Islamic
finance
BOARD
BOARD RISK
MANAGEMENT
COMMITTEE
SHARIAH SUPERVISORY
BOARD
Oversight accountability on
Shariah related matters
Overall oversight on
Shariah compliance &
review
BOARD AUDIT
COMMITTEE
CEO
GM – Head of
Islamic Banking
Internal Sharia Reviewer (Head of Sharia)
❖Ensure executions of business & operations are in accordance
with Shariah rules & principles
❖Provide necessary support to the Shariah committee
Shariah Risk Unit
Identify, measure, monitor,
report & control Shariah
non-compliance risk
Shariah Compliance Unit
Review business operations
on a regular basis to ensure
Shariah compliance
Shariah Research
Unit
Conduct comprehensive
Shariah research prior to
submission to the Shariah
committee
Shariah Audit Unit
Provide independent
assessment & objective
assurance designed to value
add & improve IFI’s
compliance with Shariah
Sultanate
of Oman
SHARIAH REVIEW AND SHARIAH AUDIT
FUNCTIONS
Shariah Compliance Review
Objective
Scope
Shariah Audit
❖ To ensure that the activities and
operations carried out by the IFI do
not contravene with the Shariah
❖ To provide an independent assessment &
objective assurance to ensure a sound
and effective internal control system for
Shariah compliance
❖ Overall business operations, including
the end‐to‐ end product development
process (from product structuring to
product offering)
❖ All aspects of the IFI’s business operations
& activities, including:
➢ audit of financial statements;
➢ compliance audit on organisational
structure, people & IT application
systems; and
Process
❖ Planning the review program (including
scope, reporting, rectification and
objectives,
follow‐up actions followed by the
execution of the program);
❖ Documentation of the processes
involved;
❖ Communicating the outcome &
highlighting any non‐compliances to
the Shariah Committee & the
management; and
❖ Rectifying any instances of Shariah non‐
compliance to prevent such events from
recurring
❖ Developing a comprehensive internal
Sharia Compliance review
➢ review of adequacy of the Shariah
governance process.
❖ Understanding the business activities of
the IFI – to allow for better scoping of an
audit exercise;
❖ Developing a comprehensive internal
audit program;
❖ Obtaining and making reference to
relevant sources (e.g. HSSA’s published
rulings, the SSB’S decisions, etc)
❖ Communicating results or findings to the
Board Audit Committee and the Shariah
Committee; and
❖ Providing recommendations on rectification
measures taken as well as following‐up on
the implementation by the IFI.
Sultanate
of Oman
OTHER KEY INTERNAL FUNCTIONS
Apart from Shariah review & audit IFIs are also expected to establish other functions that complement
and provide necessary support to Shariah compliance functions within the organisation
Objectives
SShariah
hariahriskrisk
mmanagement
anagement contr
ol
control
SShariah
hariahresearch
functi
research
on
function
❖ Identification
& assessment of
Scope
& Functions
❖ Form part of IFIs integrated risk
mgmt control function
❖ Ensure proper deliberation of Shariah
related matters
❖ Perform in-depth research on
Shariah including providing day-today Shariah advice & consultancy
Shariah risk would be systematically
controlled & monitored
❖ Perform by qualified Shariah
officers
❖ May seek input from experts on
technical matters
Sharia
hsecreta
Shariah
functi
riat
secretariat
on
Function
/
Sharia
Coordinator
❖ Provide necessary support to Shariah
committee & IFI in implementing
Shariah governance
❖ Coordinating meetings, compiling
papers, disseminating Shariah
decisions
❖ Engaging with relevant parties that
need assistance
Sultanate
of Oman
Sultanate
of Oman
The Importance of Shariah Governance in
Islamic Banking and Finance
13
Shariah governance within the
ambit of corporate governance…
Q
Corporate governance refers to the method by which a corporation is
directed, administered or controlled
Q
Since Islamic FI in many ways is similar to the conventional FI, the
existence of a proper framework of corporate governance is a matter of
dire necessity
Q
However, different from conventional FI, Islamic FI has the responsibility to
ensure the compliance with the Shariah principles in its products,
instruments, operations, practices, management etc
14
Sultanate
of Oman
Shariah governance within the ambit
of corporate governance…
Q
Hence, Shariah governance is another component that is peculiar exclusively to
Islamic FI
Q
Principle 3.1 of the “IFSB Guiding Principles on Corporate Governance”
states that an appropriate mechanism must be created to ensure the
compliance with the Shariah principles
Q
Similarly, Principle 7.1 of the “IFSB Guiding Principles on Risk
Management” states that Islamic FI shall have in place adequate systems and
controls, including Shariah Board/advisor to ensure compliance with the
Shariah principles
15
Sultanate
of Oman
The importance of Shariah
governance in Islamic banking &
finance…
Sultanate
of Oman
Q
Shariah compliance is the backbone of Islamic banking & finance
Q
It gives legitimacy to the practices of Islamic banking & finance
Q
It also boosts the confidence of the shareholders and the public that all the
practices and activities are in compliance with the Shariah at all times
16
The importance of Shariah
governance in Islamic banking &
finance…
Sultanate
of Oman
Q
The existence of non-Shariah compliant element would not just affect the
confidence of the public to Islamic banking & finance
Q
But might also expose Islamic FI to risks e.g. fiduciary and reputational risks
Q
The compliance with the Shariah principles will be achieved by having a
proper Shariah governance framework
17
Sultanate
of Oman
Models of Shariah Governance in Oman
and Middle East
18
Models of Shariah governance in Oman and
Middle East…
Oman Model
KUWAIT Model
BAHRAIN Model
U.A.E. Model
QATAR Model
19
Sultanate
of Oman
Q
1) Oman
Model
The establishment of Higher Sharia Supervisory
Sultanate
of Oman
Authority (HSSA) at Central Bank of Oman (CBO)
(higher level)
Q
Shariah Board is the sole authority in matters pertaining
to Islamic finance
Q
Requirement for the establishment of Shariah advisor for
the Islamic financial institution
20
Q
Oman
Model
Any member of HSSA of CBO is not allowed to serve
Sultanate
of Oman
Islamic Financial Institution in Oman
(different from Malaysia and Pakistan)
Q
Q
Restriction imposed – a Shariah Supervisory Board is
allowed to serve only one financial institution
at IFI level, Internal Sharia
Department which comprise of
Internal Sharia Reviewer (Head of
Sharia, Sharia Scholar), Sharia
Compliance, Sharia Audit and Sharia
21
2) Kuwait Model
Q
Kuwait is practicing self regulation of Islamic financial
institutions
Q
There is no Shariah Advisory Council at the Central
Bank of Kuwait
Q
Section 10, Chapter 3, Central Bank of Kuwait Law
32/1968 provides that every Islamic financial
institution shall have its own Shariah Supervisory
Board
Sultanate
of Oman
22
Kuwait Model
Sultanate
of Oman
In the case of conflict of opinions among members of the
Shariah Supervisory Boards concerning a Shariah
ruling,
the Board of Directors of the designated Islamic FI may
transfer the matter to the “Fatwa Board” in the Ministry
of Awqaf and Islamic Affairs (this is not compulsory)
Q
Q
The Fatwa Board in the Ministry of Awqaf and Islamic
Affairs shall be the final authority on the matter
Q
This Fatwa Board is an external body to the Central
Bank of Kuwait
23
Kuwait Model
Sultanate
of Oman
Q
No restriction is mentioned/found in the law
Q
From the existing practice, it can be said that there is no
restriction for the members of the Fatwa Board to serve
in any Islamic financial institution
Q
Similarly, there is also no limitation to serve as a
member of Shariah Supervisory Board of more than one
Islamic financial institution
24
3) Bahrain Model
Sultanate
of Oman
Establishment of National Shariah Board of the Central
Bank of Bahrain – to serve and to verify the Shariah
compliance of its own products only
Q
Q
All other Islamic financial institutions shall establish
“Shariah Supervisory Committee” and comply with the
AAOIFI's Governance Standards for Islamic
Financial Institutions No. 1 and No. 2
Q
No restriction for the member of National Shariah Board
to serve any financial institution, also no limitation to
serve only one institution
25
4) U.A.E. Model
Q
Establishment of “Higher Shariah Authority” to supervise
Islamic banks, financial institutions and investment
companies (Art. 5, Federal Law No. 6 of 1985)
Q
This Authority shall be accorded the final authority in
Shariah matters in Islamic banking and finance
Q
Formation of Shariah Supervision Authority at the
financial institution level (Art. 6 of the same Law)
Q
Nothing is mentioned about any restriction
Sultanate
of Oman
26
5) Qatar Model
Sultanate
of Oman
Q
Practicing self regulation of Islamic banks
Q
No Shariah Advisory Board at Central Bank of Qatar. But
has “Supreme Shariah Council” attached to Awqaf
Ministry – any issue can be directed to the Council for
clarification
Q
Central Bank of Qatar appoints Shariah scholars to solve
any problem encountered on case-to-case basis
Q
No restriction on Shariah advisors to be a member of
Shariah Board in more than one Islamic FI
27
Sultanate
of Oman
In summary…
COUNTRY
SHARIAH AUTHORITY
Central
Bank
IFI
FINAL
AUTHORITY
RESTRICTION
Oman
HSSA
SSB
HSSA
Kuwait
UAE
Bahrain
Qatar
n/a
HSA
NSB
N/A
SSB
SSA
SSC
SSB
SSB*
HSA
NSB
1)Members of HSSA cannot serve IFI
2)One SSB can only serve one IFI in
same category (Banking & Takaful)
No restriction is mentioned
No restriction is mentioned
No restriction is mentioned
No restriction is mentioned
*In case of dispute: Fatwa Board in the Ministry of Awqaf and Islamic Affairs
28
Personal Reflection…
Q
Sultanate
of Oman
Restriction by not allowing–
Members of HSSA to serve any Islamic FI (e.g.
Oman)
Q
Shariah advisors to serve more than one Islamic FI
(e.g. ADVANTAGES
DISADVANTAGES
Oman)
Q
Avoiding conflict of interest
•
Obsoleteness of the knowledge of the
members of SAC: Macro vs. Micro
•
Preserving secrecy and
confidentiality
•
Depriving the market from good brains
•
Allowing for more new brains to
enter the market
•
No interaction between experienced and
inexperienced Shariah advisors
•
Q
The need to balance between “Pros” and “Cons”
29
Sultanate
of Oman
Governance Relating to Shariah
Supervisory Board
30
Q
Q
What is “Shariah Supervisory
Board”?
An independent body of specialised jurists in fiqh al- muamalat (Islamic
commercial jurisprudence). However, the Board may include a member
other than those specialised in fiqh al-muamalat, but who should be an
expert in the field of Islamic financial institutions and with the duty of
directing, reviewing and supervising the activities of the Islamic financial
institution in order to ensure that they are in compliance with Islamic
Shariah rules and principles
The fatwa and rulings of the Shariah Supervisory Board shall be binding
on the Islamic financial institution
31
Sultanate
of Oman
Among common practice…
Sultanate
of Oman
Q
Appointment of “In-house Shariah Supervisory Board” members
Q
Some Islamic financial institutions have established their own dedicated
“Shariah Review and Audit Department” or unit to support Shariah Supervisory
Board
Q
Main responsibility of the SSB with the assistance of the department
Q
Q
Ex-ante and ex-post Shariah rulings, and
Monitoring and supervising
32
is on –
Composition…
Q
The AAOIFI Standard requires at least 3 individuals
Q
Legal/statutory requirement varies–
Q
Q
Q
Sultanate
of Oman
From 1 individual, or
At least 3 individuals
In contemporary practice, most of the Islamic financial
institutions appoint between 3 to 6 members to the Board
33
Qualification…
Sultanate
of Oman
Q
A member of a Shariah Committee shall be an individual.
A company, institution or body shall not constitute a Shariah Committee
Q
The member of the Shariah Committee shall at least either have
qualification or possess necessary knowledge, expertise or experience in:
Q
Q
Q
Islamic jurisprudence (Usul al-Fiqh); or
Islamic transaction/commercial law (Fiqh al-Muamalat)
Paper qualification on the above will not be mandatory as long as the
candidate has the necessary expertise or experience in the above areas
34
Qualification… (Oman)
Sultanate
of Oman
Members of the SSB must:
1. Be Muslims.
2. Be independent of the management of the bank.
3. Not be engaged with any Shari’a supervisory board of any local banks.
4. Be of a good repute and character and known not to have been involved in any unethical and/or inappropriate
practices like crimes, fraud or dishonesty.
5. Possess the necessary qualifications, expertise and experience, particularly in Fiqh al Muamalat Islamic Banking
System and its operations, Islamic Finance and Usul Fiqh.
6. Be a holder of academic qualifications in the field of Shari’a – minimum of bachelor degree – that include study of
Usul Al-Fiqh and Fiqh al Muamalat from a recognized institution.
7. Have accumulated overall experience of 10 years or more (in teaching, research, Fatwa issuance, etc.) to be
eligible to become members of a SSB.
8. Be able to read and converse in Arabic, and it is highly recommended that they have reasonable understanding of
English.
9. Members of the SSB other than Shari’a scholars must be individuals generally recognized for their expertise in
their respective field (e.g. economics, law, banking, accounting, finance, etc.).
35
Roles and Responsibilities…
Sultanate
of Oman
Q
The Shariah in Islamic finance has a crucial role not only in governing
financial transactions and operations, but also in monitoring and
supervising the roles of all players within the financial system
Q
Hence, the role of the SSB mainly must cover ex-ante Shariah rulings
as well as ex-post Shariah rulings
Q
Tasks include reviewing and certifying the permissibility of all contracts,
documentation and products
36
Roles and Responsibilities…
Sultanate
of Oman
Q
Execution periods (interim)
Q
Confirming the consistency and compliance level of the practices to Shariah
rulings made (Shariah audit)
Q
Advising and monitoring the manner of disposing the non-Shariah compliant
earnings
Q
Issuing a Shariah supervisory report certifying that all transactions conducted
by the Islamic FI comply with Shariah (normally incorporated in the annual
report of the Islamic FI)
37
Some Concerns…
Q
A situation of conflict of interest may occur–
Q
Q
Q
Sultanate
of Oman
when a product or instrument of the Islamic FI is brought up for approval from the central
bank’s higher Shariah body,
where a Shariah advisor sitting in the central bank’s higher Shariah body also serves
that particular Islamic FI
Issues of concern: secrecy and confidentiality of trade secrets when a Shariah
advisor serves more that one Islamic FI in same industry
38
Sultanate
of Oman
Propositions for a Better Shariah
Governance
39
The way forward in Shariah governance
in Islamic finance industry…
Q
The need to apply the best practices in Shariah governance for the
Islamic FI
Q
There is no hard and fast rule, no single model which is applicable for all
Q
Taking into account the level and pace of Islamic finance development, it may
vary from one country to another
40
Sultanate
of Oman
The way forward in Shariah governance in
Islamic finance industry…
Q
The Islamic financial services industry is notably still in its infancy stage
Q
Therefore, any rigid, rule-based approach adopted in haste aiming at
strengthening the governance of the industry may jeopardise and hinder its
potential and healthy growth
Q
However, some common elements that underlie good governance and best
practices may be drawn to facilitate the creation and optimise a healthy and
viable environment for Shariah governance without impeding further growth of
the industry
Sultanate
of Oman
Some thoughts for
consideration…
Sultanate
of Oman
1) Shariah Advisory Council vis-à-vis Shariah Supervisory
Board of Islamic FI
2) Composition and Qualification
3) Scope of Supervisory Responsibilities
4) Internal & External Shariah Review/Audit
42
Shariah Advisory Council vis-à-vis Shariah
Supervisory Board of Islamic FI
Sultanate
of Oman
Q
The establishment of regulator’s/central bank’s Shariah Advisory Council by way of
promulgation of law
Q
To accord the final Shariah authority to the Shariah Advisory Council in matters
relating to Islamic banking and finance
Q
To appointment of its members from various related background e.g. Shariah, legal,
economic, finance etc with the members shall consist mainly Shariah scholars
43
Shariah Advisory Council vis-à-vis Shariah
Supervisory Board of Islamic FI
Sultanate
of Oman
Q
To allow the regulator’s/central bank’s Shariah Advisory Council members
to serve in the Islamic FI’s SSB
Q
However, to limit the membership in Islamic FI by appointing only one
Shariah advisor from regulator’s/ central bank’s Shariah Advisory Council
to its SSB– in order to avoid concentration
Q
To classify the industries into Islamic banking and takaful and to allow
Shariah advisor to serve only one Islamic FI in the same category
44
Composition and Qualification
Sultanate
of Oman
Q
To consider a combination of internal Shariah advisor (Shariah personnel)
as member secretary and external Shariah advisors
Q
External Shariah advisors should not be less than 3
Q
Qualification–
Q
Q
Q
To identify the criteria for recognising a person as a qualified Shariah advisor in
Islamic finance
To have a professional body or industry association that will set professional standards
for Shariah advisors serving the Islamic financial services industry
To introduce continuous professional development and assessment (like
CPD/CPE points) for Shariah advisors
45
Composition and Qualification
Q
External Shariah firm can be consulted to develop products, but
permanent SSB is indispensable
Q
To establish procedures in managing the SSB–
Q
Q
Q
Sultanate
of Oman
Appointment of members
Meeting and consultation procedures Q Report on Shariah
compliance review Q Record & publication of Shariah rulings
The SSB also could issue recommendations on how the institution could
best fulfill its social role as well as promote Islamic finance
46
Scope of Supervisory Responsibilities
Need to focus the Shariah supervisory process into both
macro as well as micro analysis to the operations and practices of the
Islamic FI
Q
Q
Should not be limited only to products development process and its
verification, but also to cover the banking practices and conduct of the
Islamic FI as a whole
Q
It is noted that although almost all SSBs have access to the ex-ante
Shariah rulings, but the practice of ex-post Shariah rulings is a matter
of concern/not being looked into thoroughly by the SSBs of some
Islamic FIs
47
Sultanate
of Oman
Internal & External Shariah Review/Audit
Sultanate
of Oman
•
•
•
• Q
To perform a Shariah compliance review– both internal and
external
Q To give due emphasis and more focus on the conduct of
external ex-post Shariah compliance review
Q To have close working relationship between Audit Committee
& the internal auditor/Shariah reviewer with the external auditor
to enhance the external auditor’s capabilities in conducting
such Shariah compliance review as part of the audit works
Q
Need to have a format for Shariah compliance review
48
Sultanate
of Oman
Conclusion
49
In conclusion…
Sultanate
of Oman
Q
The importance of Shariah governance in Islamic FIs is undeniable
Q
Proper mechanism & framework need to be created to enable proper advisory
and supervisory role of HSSA/SSB
Q
Integration between the HSSA and SSB of Islamic FIs should be facilitated to
provide a conducive environment for a better Shariah governance
Q
The scope of advice and supervision must include both micro and macro issues
of Islamic FIs
50
In conclusion…
Q
Proper framework should be put in place to ensure optimal Shariah
governance of Islamic FIs–
Q
Q
Q
Q
Sultanate
of Oman
on the appointment of HSSA & SSB members, relationship between the two
bodies, membership, procedures etc
on the scope of advice and supervision, it should be a holistic approach, looking
not only at particular contracts or structures, but on the operations of Islamic FI as
a whole, covering before, during and after the execution of all products and
structures
on the internal and external Shariah compliance review/audit, there is dire need
for a proper framework and guidelines
Constant enhancement on the framework is necessary to ensure optimal
Shariah governance in Islamic finance
51
Sultanate
of Oman
Muhammad Iman Sastra Mihajat, Ph,D
Head of Sharia Audit and Sharia Compliance
Al Yusr | Islamic Banking Unit
Oman Arab Bank S.A.O.C.
PO Box 2010, Ruwi-112, Muscat, Sultanate of Oman
Cell: +968 977 97232 Fax: +968 24 125 126
Website: www.alyusr.om