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DEVELOPMENT OF SHARIAH GOVERNANCE AND AUDIT IN ISLAMIC COOPERATIVE SECTOR
Supiah Salleh i, Zurina Shafii ii, Mustafa Mohd Hanefah, Muhammad Iqmal Hisham Kamaruddin, Nurazalia Zakaria & Nur Amni Mahmud Sabri
i (Corresponding author). Faculty of Economics and Muamalat, Universiti Sains Islam Malaysia.
ii Faculty of Economics and Muamalat, Universiti Sains Islam Malaysia. [email protected]
Abstract
This study focuses on development of Shariah governance and audit in Islamic Cooperatives in Malaysia. Suruhanjaya Koperasi Malaysia (SKM) governs Islamic cooperatives, which aim to stimulate the development of co-operatives in accordance with Shariah. SKM provides guidelines for Islamic cooperatives to manage the operation of institutions. The development of Shariah governance and audit is essential to complement the Shariah compliance mechanism that already in place and practised internally in the microfinance institutions. Strong regulations, framework and guidelines are needed to uphold the practice of Shariah compliance. Roundtable discussions was used as methodology of the study with the industry practitioners in Islamic Cooperatives. Apart from that, this study also used current guidelines in Islamic Cooperatives as benchmarking practices. SKM published few guidelines related to Shariah governance to assist the operation of cooperatives. Based on the finding, there is an existence of gap in regulation, framework, and guidelines in governing Shariah compliance principles in Islamic Cooperatives. This is crucial since regulation, framework and guidelines in Shariah governance and audit in Islamic Cooperatives will increase the level of trust of the stakeholders that the activities and operations are Shariah-compliant. Also, giving the standardize framework it will contribute towards managing the risk of the microfinance institutions and, within the grander scheme of things, contribute to the growth of the industry and the economy by providing adequate disclosure for the stakeholders to make informed decisions.
Keywords: Shariah audit, Shariah Governance, gaps, microfinance institutions
INTRODUCTION
Cooperative sectors in Malaysia have emerged in the Islamic financial contracts and continues to grow since many cooperatives operate Shariah contract activities in their institutions. The development of a Shariah-compliant cooperative sector is growing
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rapidly as a result of the spill over effect of Malaysia’s rapid growth of the Islamic finance industry from the 1980s to the present (Rose et al., 2018.). The Shariah governance and Shariah audit practice is mainly to increase the Shariah compliance and enhance the integrity of the cooperative sector. The elements in Shariah governance such as members, Shariah Committee, Internal audit and management are incorporated to develop Shariah governance of cooperative sectors. Meanwhile, Shariah audit is carried out to provide independent assessment and objective assurance with the goal of adding value to the institutions (Bank Negara Malaysia, 2010)
In order to develop Shariah governance and Shariah audit, there are several issues and challenge occurred during the process of establishing and executing. Mostly the issues are on staff, system and operation, standard operating procedures and skillset for the staff. It is crucial to identify issues and challenge of Shariah governance and audit in cooperative sector so that the responsible party can solve and improve the structure in the institutions. The study involve interview with practitioner that include regulators, internal auditors of cooperative, external auditors, Shariah officers of cooperative and Shariah expert. The findings from this study will facilitate the regulators, management of auditor to address the issues. The purpose of this paper is to identify the issues and challenges Shariah governance and audit in cooperative sector.
In this study, the researchers focused on credit cooperatives, as it is the largest cooperative in Malaysia. This study heavily relies on the corporate governance (CG) study, which has been used as a model for implementing in the cooperative sector where appropriate. Apart from that, this study will be focusing on problems with Shariah governance and auditing in the cooperative sector. This is crucial since regulation, framework and guidelines in Shariah governance and audit in Islamic Cooperatives will increase the level of trust of the stakeholders that the activities and operations are Shariah-compliant. Also, giving the standardize framework it will contribute towards managing the risk of the microfinance institutions and, within the grander scheme of things, contribute to the growth of the industry and the economy by providing adequate disclosure for the stakeholders to make informed decisions.
96 METHODOLOGY
This study used qualitative method that reviews and gathers inputs and feedbacks from interview session. One of the benefits of interview is that they highlight the individuality and human perspective that is not addressed or analysed by the quantitative method. In addition, interviews enable social cues such as voice, intonation, body language of the interviewee. This help the interviewer to gain a lot of extra information that can be added to the verbal answer of the interviewee on a question. (Opdenakker, 2006). By doing interview, the respondent will express their opinion as much as they can compare to quantitative that is more limited. Other advantages are, there is no significant time delay between questions and answers in face-to-face interviews. (Opdenakker, 2006) The researcher and the participants could really interact to what the other explains or does. Interview allows researchers to understand better about the participants’ opinions, ideas, and experience in their own words.
A sample of knowledgeable and expert in cooperative sector include regulators, internal auditors of cooperative, external auditors, Shariah officers of cooperative and Shariah expert. An expert must competent and not only in Shariah aspect but knowledgeable in cooperatives activities also. The initial number of targeted samples was 10 but the study manages to ger 5 interviewee for this study. The respondents are consisting from a representative from regulators, an internal auditor of cooperative, an external auditor, Shariah officer and Shariah expert. Despite the fact that the number of interviewers is limited, the researchers believe the sample to be representative.
RESULTS AND DISCUSSIONS Shariah Governance and audit
In order to achieve the objective of the study, the participants of the interview were guided by five series of questions. During the first part of the interview, the participants are required to briefly explain background of Shariah governance in their own cooperative. The results coming from auditor, Shariah expert, regulators and representative from cooperative. Based on the finding, the regulator is still developing
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the structure of Shariah policy and mentioned that cooperative must have Shariah Committee in the institutions. This is in line with previous study by Asiah (2018) where Shariah governance is still new for the cooperative sector, the SWOT analysis results in his study identified a number of weaknesses and threats that need to be highlighted with a proper approach for each Ar-Rahnu service provider. However, the current strategy can still be strengthened (Asiah et al., 2018). The idea of a Shariah Governance and audit cannot be fully implemented in the cooperatives since some aspects are not properly explained from the point of view of governance, management, and products in the cooperative itself, as per prior study that found GP 28 Garis Panduan Tadbir Urus Syariah (2015) needs improvement.
Secondly, the finding showed that cooperative must conduct Shariah audit since most of the institutions are offering Islamic financing contract. From these results, researcher can confirm that most respondents are aware that if the cooperative conduct business activities based on Shariah rules and principles it is important for them to appoint Shariah auditor and perform Shariah audit to ensure Shariah compliance.
Shariah auditor competency
The next issues found during the interview is on the competency of auditor to perform audit work. Majority of the respondents agreed that auditor must be competence, has skills and knowledge before conduct audit work. In the direction of increase stakeholder trust, public confidence in Islamic financial institutions, management and business operations of the cooperative, the cooperative must have effective model of Shariah governance and audit including the components in the framework. Shariah auditor competency’s is very vital to ensure the findings is reliable and trusted.
This study also concludes that lack of knowledge and experience are crucial in performing duties related to Shariah. Good quality of audit findings can be achieved if Shariah auditor are competence to conduct their job. In order to conduct Shariah audit functions in cooperative sector, the auditor and the board audit committee must both be competent and knowledgeable in the field. Cooperatives sector operate without a dedicated Shariah expert may think about hiring or contracting a Shariah advisor to look into a Shariah audit. This remains true for the implementation of Shariah audit
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which institutions must conduct independently to make sure their practises comply with shariah.
Needs of Shariah Audit
Based on the interview, Shariah audit should be conducted in cooperatives sectors as they claim business are operated according to Shariah principles. The action of auditor take initiative to conduct audit is consider as regulatory motivation that can gives alarm to the employee to always conduct operations as per standard operating procedures (SOP) and comply with Shariah principles. Apart from that, the needs of Shariah audit can ensure cooperatives sector minimize Shariah non-compliance risks.
Furthermore, the findings showed all respondents agree that reducing the risk of Shariah non-compliance is one factor why Shariah audits must be conducted in cooperative. Shariah non-compliance risk is the risk of financial loss resulting from a failure to abide by the Shariah rules and regulations established by the regulator since it will tarnish the institution’s reputation. Shariah compliance is the primary element and determining aspect of how the cooperative functions. The cooperatives are at risk of not being compliant if they don’t conduct their business and other operations in accordance with Shariah principles and values. Moreover, cooperatives can improve the reputation of their institution’s and gain stakeholder’s trust. This was also explained in a prior study conducted in 2018, where the potential of Shariah non-compliance exposed institutions to the risk of a por institutional reputation while also affecting the public’s trust in cooperatives (Asiah et al., 2018).
In addition, the findings reveal that the cooperative sector is actually impacted by number of issues. Certain audit results are usually discovered when the Shariah audit performs an audit in accordance with audit scope. The Shariah auditor will provide the institutions with an audit report whenever they find any issues with internal controls or shariah non-compliance issues. With all these audit findings, cooperatives can reduce Shariah non-compliance risk while also strengthening internal controls. Normally, the Shariah auditor will make recommendations and include follow-up for the audit findings.
99 CONCLUSION
This paper provides an overview of the current issues and challenges in the development of Shariah governance and auditing in the cooperative sector. The cooperative sector is still at the stage of infancy in developing the framework and process of Shariah governance and audit. Even though SKM has issued GP 28 Garis Panduan Tadbir Urus Syariah (2015), there are still lots of improvement that need to be done. Issues such as the importance of having Shariah committee in each of the cooperative’s institutions are deem significant since the cooperatives offers Islamic finance contract. The current governance structure in cooperative sector shows that the existence of Shariah advisory is available at the regulatory level but not in each of the cooperative institutions offering Islamic contract. It is important to have Shariah committee at the institutions level since it provides greater commitment and transparency in complying with Shariah. Furthermore, this is to ensure that all Islamic financing contracts offered by the cooperatives are properly endorsed by the Shariah committee and it comply with all the Shariah principles. Secondly, among the challenges identified in this study is on the important of implementing Shariah audit functions in the Islamic cooperatives sector. Shariah audit is a function that provides an independent assessment on the quality and effectiveness of the institution’s internal control, risk management systems, governance processes as well as the overall compliance of the operations, business, affairs, and activities with Shariah. Therefore, by implementing Shariah audit functions it will enhance the integrity of the institutions in terms of Shariah at the higher level. Thirdly, lack of Shariah knowledge and expertise in most Islamic cooperatives sector has become one of the challenges in Shariah governance and audit. Trainings and human capital development are required to increase knowledge of Shariah among the cooperatives staff. By highlighting the issues and challenges in this research it can help regulators or management of the cooperative sector get some insight and take fast action if the issues affect the cooperative institutions. This study may be useful to a future researcher in collecting data on problems and challenges in Shariah governance and audit in cooperative sector
100 REFERENCES
Asiah, A., Shah, B., Hab, H., Jabatan, K., Islam, M., & Sharif, D. (2018). Kepatuhan Syariah Dalam Tadbir Urus Ar-Rahnu Shariah Compliance in the Governance of Al-Rahnu. In Faculty of Syariah and Law (Vol. 1, Issue 2).
http://journal.kuis.edu.my/muwafaqat
Bank Negara Malaysia. (2019). Shariah Governance Policy Document.
Opdenakker, R. (2006). Advantages and Disadvantages of Four Interview Techniques in Qualitative Research. http://www.qualitative-research.net/fqs/
Rose, R. H., Samad, R., & Shafii, Z. (n.d.). Shari’ah Governance Practices in Credit Cooperatives in Malaysia 1.
