(continued from the previous week)
The Islamic bank must have two types of training in place — one mandatory Islamic banking orientation and concept training for all the staff of the bank and a second type of more advanced and specialized product trainings for different functional areas. Ideally, every new employee must go through a basic orientation session covering a list of mandatory modules on Islamic banking products. The bank should also run a number of specialized courses ranging from shorter courses to advance and longer duration expert level courses; deliver face-to-face training and video training — modules should be designed based on specific job requirements. For instance, apart from the general orientation course, the Relationship Manager’s training should be different from the Branch Manager’s.
It is also very important that the bank conduct customer training workshops and general awareness seminars to educate clients on Islamic banking products and procedures. So the bank’s training arm undertakes internal as well as external training. The employees of the department must be up to date with all the latest products and how they work as they themselves are key resources in training new and existing staff. Team members must be assigned different training functions where it should be one group’s responsibility to ensure training takes place.
ADVISORY AND SUPPORT SERVICES
In order to promote Islamic banking, the bank may offer advisory and support services to other institutions as well. It can organize workshops and seminars to spread awareness of the Islamic financial system, offer alternative solutions and highlight common mistakes and the ways to avoid them. It could host forums for Shariah Advisors to update them of the latest research findings in the field.
CORPORATE SOCIAL RESPONSIBILITY
The Shariah department can also contribute towards CSR activities. Some banks have created Waqf based trusts independent to the bank which efficiently manage the distribution of charity to reliable and deserving institutions.
Ideally the Shariah department should partner with other Islamic financial institutions to launch Islamic finance initiatives and publish research papers and articles on Islamic obligations and rites — all of this goes towards promoting public awareness of the ethos of the Islamic value system which in turn goes a long way in determining the direction of the overall economy.
Refer: Pages 69 and 70 of Meezan Bank Annual Report 2012 (Section: Corporate Social Responsibility)
APPENDIX: SELECTIONS FROM THE ACCOUNTING AND AUDITING ORGANIZATION FOR ISLAMIC FINANCIAL INSTITUTION’S (AAOIFI) GOVERNANCE STANDARD FOR ISLAMIC FINANCIAL INSTITUTIONS
Governance Standard for Islamic Financial Institutions No. 1
Shari’a Supervisory Board: Appointment, Composition and Report
The purpose of this Governance Standard for Islamic Financial Institutions (GSIFI) is to establish standards and provide guidance on the definition, appointment, composition and report of the Sharia’ supervisory board for ensuring compliance of the Islamic financial institution in all its dealings and transactions with Islamic Shari’a Rules and Principles.
Definition of Shari’a Supervisory Board
The Shari’a supervisory board is an independent body of specialized jurists in fiqh almua’malat (Islamic commercial jurisprudence). However, the Shari’a supervisory board may include a member other than those specialized in fiqh almua’malat, but who should be an expert in the field of Islamic financial institutions and with knowledge of fiqh almua’malat. The Shari’a supervisory board is entrusted 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 Shari’a Rules and Principles. The fatwas and rulings of the Shari’a supervisory board shall be binding on the Islamic financial institution.
Governance Standard for Islamic Financial Institutions No. 2
The purpose of this Governance Standard for Islamic Financial Institutions (GSIFI) is to establish standards and provide guidance to assist Shari’a Supervisory Boards (SSB) of Islamic Financial Institutions (IFIs) in performing Shari’a reviews to ensure compliance with Islamic Shari’a Rules and Principles as reflected in the fatwas, rulings and guidelines issued by them. The appointment, composition and report of the SSB is dealt with in AAOIFI Governance Standards for Islamic Institutions No.1 Shari’a Supervisory Board: Appointment, Composition and Report.
This standard should be read in conjunction with ASIFI No.1: Objective and Principles of Auditing with particular reference to paragraph 7 and ASIFI No.2: The Auditors Report with particular reference to paragraph 17. It follows that the objective of this standard as well as those of ASIFIs No.1 and No.2 requires close coordination between the SSB and the external auditor.
Definition and Principles of Shari’a Review
Shari’a review is an examination of the extent of an IFI’s compliance, in all its activities, with the Shari’a. The examination includes contracts, agreements, policies, products, transactions, memorandum and articles of association, financial statements, reports (especially internal audit and central bank inspection), circulars etc.
The SSB shall have complete and unhindered access to all records, transactions and information from all sources including professional advisers and the IFI employees.
Governance Standard for Islamic Financial Institutions No. 3
Internal Shari’a Review
The purpose of this Governance Standard for Islamic Financial Institutions (GSIFI) is to establish standards and provide guidance on the Internal Shari’a review in institutions which conduct business in conformity with Islamic Shari’a rules and principles. The standard covers:
▪ Internal Shari’a review
▪ Independence and objectivity
▪ Professional proficiency
▪ Scope of work
▪ Performance of the internal Shari’a review work
▪ Management of the internal Shari’a review
▪ Quality assurance and
▪ Elements of an effective internal Shari’a review control system
The standard also covers responsibility for its implementation
The internal Shari’a review shall be carried out by an independent division/department or part of the internal audit department, depending on the size of the Islamic financial institution (IFI). It shall be established with an IFI to examine and evaluate the extent of compliance with Islamic Shari’a rules and principles, fatwas, guidelines and instructions issued by the IFI’s Shari’a supervisory board (SSB), hereafter referred to as Sharia’ rules and principles.
The primary objective of the internal Shari’a review is to ensure that the management of an IFI discharge their responsibilities in relation to the implementation of the Shari’a rules and principles as determined by the IFI’s SSB.
Internal Shari’a Review
The internal Shari’a review is an integral part of the organs of governance of the IFI and operates under the policies established by the IFI. It shall have a statement of purpose, authority and responsibility (charter). The charter shall be prepared by management and shall be consistent with Islamic Shari’a rules and principles. The charter shall be approved by the SSB of the IFI and issued by the board of directors. The charter shall be regularly reviewed.
Governance Standard for Islamic Financial Institutions No. 4
Audit & Governance Committee for Islamic Financial Institutions
The purpose of this Governance Standard for Islamic Financial Institutions (GSIFI) is to define the role and responsibilities of an Audit & Governance Committee (AGC) for an Islamic financial institution (IFI). The standard also highlights the requirements for establishing such a committee for an IFI and specifies the pre-requisites of an effective AGC.
Importance of AGC
The importance of the AGC (known internationally as the Audit Committee) for an IFI emanates from its role in:
(a) Achieving the fundamental objectives of an IFI by enhancing greater transparency and disclosure in financial reporting; and
(b) Enhancing the public’s confidence of the IFI as genuine in its applications of Shari’a rules and principles.
Functions of the AGC
The AGC has gained widespread acceptance as a prerequisite for organizations seeking to demonstrate a commitment to higher standards of corporate governance. The AGC assists the board of directors in exercising independent and objective monitoring through the following functions:
(a) Preserving the integrity of the financial reporting process.
(b) Safeguarding the interests of shareholders, investors and other corporate stakeholders.
(c) Providing additional assurance on the reliability of financial information presented to the board of directors, if the AGC is to be considered effective.
(d) Acting as an independent link between the IFI’s management and its stakeholders.
Governance Standard for Islamic Financial Institutions No. 5
Independence of Shari’a Supervisory Board
The purpose of this standard is to provide guidance for members of Shari’a Supervisory Boards (SSBs) of Islamic Financial Institutions (IFIs) pertaining to its independence, monitoring of such independence and ways to resolve issues of independence.
Independence for the purpose of this standard is “an attitude of mind which does not allow the viewpoints and conclusions of its possessor to become reliant on or subordinate to the influences and pressures of conflicting interests. It is achieved through organizational status and objectivity.” The principle of objectivity imposes obligations on SSB members to be fair, intellectually honest and free of conflict of interests. (neutral)
Importance of Independence of SSBs
The importance of the independence of SSB members for an IFI emanates from its role in:
(a) Enhancing the public confidence in the IFI as compliant in its applications of Shari’a rules and principles.
(b) Achieving the fundamental objectives of an IFI by enhancing independence and objectivity.
SSB members have a responsibility to the public who rely on the services provided by them that require independence. The public includes clients, credit grantors, governments, employers, employees, investors and others who rely on the objectivity and integrity of SSB members to ensure Shari’a compliance with regard to activities.
Governance Standard for Islamic Financial Institutions No. 6
Statement on Governance Principles for Islamic Financial Institutions
Governance practices play a vital role in ensuring that businesses are run in a prudent and sound manner. A loss of confidence in financial institutions has the potential to create severe economic dysfunction, adversely affecting the general community in which they operate.
Financial institutions are different from other types of businesses due to their public purpose. There are more stakeholders in banks and other financial services institutions than in other businesses. Indeed, in an Islamic financial institution (IFI), the list of stakeholders is even wider. The interest of Rab al Maal and providers of other forms of capital are exposed to the risk of being prejudiced if government practices are focused on benefits to owners or equity-holders.
Those charged with governance of IFIs are held to the highest fiduciary standards since they are accountable not to the equity-holders who appointed them but also for the safety of all key stakeholders as well as the community the IFI serves.
Financial institutions that develop strong governance practices win public confidence and thereby promote trust amongst their equity-holders, investors and other parties dealing with them. In IFIs, governance practices are also expected to lead to enhanced Shari’a compliance structures.
Rationale for establishment of the framework
A Statement on Governance Principles for Islamic financial institutions is necessary in order to support the development of sound governance practices within its IFIs as well as establish the basis for standards setting by AAOIFI on individual aspects of governance.
This Statement on Governance principles represents the framework for governance in IFIs and forms part of the pronouncement of the AAOIFI.
The purpose of the Statement is as follows:
(a) To lay down the key principles and concepts relevant to governance in IFIs.
(b) To assist IFIs as well as their stakeholders to appreciate the respective roles of those charged with governance.
(c) To establish the foundation upon which the development of future governance or compliance standards will take place.
(d) To provide the necessary inter-linkage between the various current and future standards applicable to IFIs.
The Statement recognizes the complexity of the concept of governance structures and therefore focuses on the principles on which it should be based.
The governance principles are founded on the need for structures leading to enhance compliance, transparency, accountability, fairness and equitable treatment of stakeholders.
Governance Standard for Islamic Financial Institutions No. 7
Corporate Social Responsibility
Conduct and Disclosure for Islamic Financial Institutions
The purpose of this Governance Standard for Islamic Financial Institutions (GSIFI) is to establish standards on the definition of Corporate Social Responsibility (CSR) for Islamic Financial Institutions, provide both mandatory and recommended standards to implement CSR in all aspects of the Islamic Financial Institution’s (IFI) activities and provide guidance on disclosure of CSR information to the IFI’s stakeholders.
Definition of Corporate Social Responsibility for Islamic Financial Institutions
Corporate Social Responsibility (CSR) for IFIs refers to all activities carried out by an IFI to fulfill its religious, economic, legal, ethical and discretionary responsibilities as financial intermediaries for individuals and institutions.
Religious responsibility refers to the overarching obligation of IFIs to obey the laws of Islam in all its dealings and operations. Economic responsibility refers to the obligation for Islamic banks to be financially viable, profitable and efficient. Legal responsibility refers to the obligation of IFIs to respect and obey the laws and regulations of the country of operation. Ethical responsibility refers to the obligation of the IFIS to respect the mass of societal, religious and customary norms which are not codified in law.
Discretionary responsibility refers to the expectation from the stakeholders that IFIs will perform a social role in implementing Islamic ideals over and above the religious, economic, legal and ethical responsibilities.
This standard does not focus on economic or legal responsibilities of IFIs as it is assumed that the management/accounting structure and other accounting and governance standards are designed to fulfill economic responsibilities, while legal responsibilities are codified and enforced by the state and its functions.
Missed the previous parts? Access them here...
The Shariah Compliance Report (Part 1 of 3)
The Shariah Compliance Report (Part 2 of 3)