Sultanate of Oman
.
تاجاحيم ارتساس ناميإ دمحم د
يعرشلا مازتللاو قيقدتلا سيئر
Muhammad Iman Sastra Mihajat, Ph.D
Head of Sharia Audit and Sharia Compliance
SHARIA GOVERNANCE, SHARIA AUDIT AND SHARIA COMPLIANCE IN OMAN AND MIDDLE
Sultanate of Oman
Sultanate of Oman
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.
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
Sultanate of Oman
IFSB-10 Guiding Principles on Shariah Governance Systems for Institutions Offering Islamic 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
3.Shariah pronouncements, disseminations of info and an internal Shariah review – ex-ante and ex-post aspects
WHAT IS SHARIAH
GOVERNANCE?
Governance Board of Directors Shariah Committee
Control Internal Audit Division,
External Auditor Internal Shariah Review, Shariah Review by Shariah Committee, Shariah Audit
Compliance Regulatory and Financial
Compliance Division Internal Shariah Compliance (Research)
Risk
Sultanate of Oman IMPLICATIONS OF SHARIAH NON‐
COMPLIANCES?
due to invalidationnon-compliant of
• Against the commands of Allah
SWT
• Impediment of Allah’s SWT blessing or barakah
• Jeopardize business reputation
FINANCIAL NON-FINANCIAL
Sultanate of Oman
Sultanate of Oman
Sultanate of Oman Shariah
Principle in Islamic finance
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
BOARD
Overall oversight on Shariah compliance &
review
Shariah Compliance Unit
Review business operations on a regular basis to ensure
Shariah compliance
Shariah Risk Unit
Identify, measure, monitor, report & control Shariah
non-compliance risk
SHARIAH SUPERVISORY BOARD
Oversight accountability on Shariah related matters
Shariah Audit Unit
Provide independent assessment & objective assurance designed to value
add & improve IFI’s compliance with Shariah
Shariah Research Unit
Conduct comprehensive Shariah research prior to submission to the Shariah
committee
SHARIAH GOVERNANCE FRAMEWORK’S
MODEL
CEO
Sultanate
❖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)
❖Planning the review program (including objectives,
scope, reporting, rectification and 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
❖All aspects of the IFI’s business operations & activities, including:
➢ audit of financial statements;
➢ compliance audit on organisational structure, people & IT application systems; and
➢ 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
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ShariaShariah risk
management
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
Scope & Functions ❖ Form part of IFIs integrated risk
mgmt control function
❖ Identification & assessment of Shariah risk would be systematically controlled & monitored
❖ Perform in-depth research on Shariah including providing day-to- day Shariah advice & consultancy
❖ Perform by qualified Shariah officers
❖ May seek input from experts on technical matters
❖ Coordinating meetings, compiling papers, disseminating Shariah decisions
❖ Engaging with relevant parties that
❖ Ensure proper deliberation of Shariah related matters
❖ Provide necessary support to Shariah committee & IFI in implementing Shariah governance
Sultanate of Oman
Sultanate of Oman
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
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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
Shariah governance within the ambit
Sultanate of Oman
The importance of Shariah
governance in Islamic banking &
finance…
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
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The importance of Shariah
governance in
Islamic banking &
finance…
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
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Sultanate of Oman
Models of Shariah governance in Oman and
Middle East…
Oman Model
KUWAIT Model
BAHRAIN Model
U.A.E. Model
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1) Oman
Model
Q The establishment of Higher Sharia Supervisory
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
Sultanate of Oman
Q Any member of HSSA of CBO is not allowed to serve
Islamic Financial Institution in Oman (different from Malaysia and Pakistan)
Q Restriction imposed – a Shariah Supervisory Board is
allowed to serve only one financial institution
Q
at IFI level, Internal Sharia
Department which comprise of
Internal Sharia Reviewer (Head of
Sharia, Sharia Scholar), Sharia
Compliance, Sharia Audit and Sharia
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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
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Kuwait Model
Q 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 The Fatwa Board in the Ministry of Awqaf and Islamic
Affairs shall be the final authority on the matter
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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
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3) Bahrain Model
Q 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 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
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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
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5) Qatar Model
Q Practicing self regulation of Islamic banksQ 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
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In summary…
COUNTRY SHARIAH AUTHORITY FINAL
AUTHORITY
RESTRICTION
Central
Bank IFI
Oman HSSA SSB HSSA 1)Members of HSSA cannot serve IFI
2)One SSB can only serve one IFI in same category (Banking & Takaful)
Kuwait n/a SSB SSB* No restriction is mentioned
UAE HSA SSA HSA No restriction is mentioned
Bahrain NSB SSC NSB No restriction is mentioned
Sultanate of Oman
Personal Reflection…
Q Restriction by not allowing–Q Members of HSSA to serve any Islamic FI (e.g.
Oman)
Q Shariah advisors to serve more than one Islamic FI
(e.g.
Oman)ADVANTAGES DISADVANTAGES
• 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
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Sultanate of Oman
What is “Shariah Supervisory
Board”?
Q 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
Q The fatwa and rulings of the Shariah Supervisory Board shall be binding
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Among common practice…
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 is on –
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Composition…
Q The AAOIFI Standard requires at least 3 individualsQ Legal/statutory requirement varies–
Q From 1 individual, or Q At least 3 individuals
Q In contemporary practice, most of the Islamic financial
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Qualification…
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 Islamic jurisprudence (Usul al-Fiqh); or
Q Islamic transaction/commercial law (Fiqh al-Muamalat)
Q Paper qualification on the above will not be mandatory as long as the
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Qualification… (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.
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
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)
Sultanate of Oman
Some Concerns…
Q A situation of conflict of interest may occur–Q when a product or instrument of the Islamic FI is brought up for approval from the central
bank’s higher Shariah body,
Q where a Shariah advisor sitting in the central bank’s higher Shariah body also serves
that particular Islamic FI
Q Issues of concern: secrecy and confidentiality of trade secrets when a Shariah
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Sultanate of Oman
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
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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
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Some thoughts for
consideration…
1) Shariah Advisory Council vis-à-vis Shariah Supervisory Board of Islamic FI
2) Composition and Qualification
3) Scope of Supervisory Responsibilities
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Shariah Advisory Council vis-à-vis Shariah
Supervisory Board of Islamic FI
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,
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Shariah Advisory Council vis-à-vis Shariah
Supervisory Board of Islamic FI
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
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Composition and Qualification
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 To identify the criteria for recognising a person as a qualified Shariah advisor in
Islamic finance
Q To have a professional body or industry association that will set professional standards
for Shariah advisors serving the Islamic financial services industry
Q To introduce continuous professional development and assessment (like
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Q External Shariah firm can be consulted to develop products, but
permanent SSB is indispensable
Q To establish procedures in managing the SSB–
Q Appointment of members
Q Meeting and consultation procedures Q Report on Shariah
compliance review Q Record & publication of Shariah rulings
Q The SSB also could issue recommendations on how the institution could
best fulfill its social role as well as promote Islamic finance
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Scope of Supervisory Responsibilities
Q Need to focus the Shariah supervisory process into bothmacro as well as micro analysis to the operations and practices of the Islamic FI
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
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Internal & External Shariah Review/Audit
• 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
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In conclusion…
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
Sultanate of Oman
In conclusion…
Q Proper framework should be put in place to ensure optimal Shariah
governance of Islamic FIs–
Q on the appointment of HSSA & SSB members, relationship between the two
bodies, membership, procedures etc
Q 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
Q on the internal and external Shariah compliance review/audit, there is dire need
for a proper framework and guidelines
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
