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The Role of Shariah Board in Islamic Banks

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This study theoretically examines the role of shariah board in supervising Islamic banks, in particular the responsibility and the authority of the board members

This study theoretically examines the role of shariah board in supervising Islamic banks, in particular the responsibility and the authority of the board members

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  • 1. 2nd “Islamic Finance in a Challenging Economy: Moving Forward” Sasana Kijang, Bank Negara Malaysia THE ROLE OF SHARIAH BOARD IN ISLAMIC BANKS: A CASE STUDY OF MALAYSIA, INDONESIA AND BRUNEI DARUSSALAM Nurhastuty Wardhany Shaista Arshad 27th November 2012 | 13 Muharram 1434H
  • 2. 1 THE ROLE OF SHARIAH BOARD IN ISLAMIC BANKS: A CASE STUDY OF MALAYSIA, INDONESIA AND BRUNEI DARUSSALAM Nurhastuty Wardhany 1 & Shaista Arshad 2 ABSTRACT This study theoretically examines the role of shariah board in supervising Islamic banks, in particular the responsibility and the authority of the members. Furthermore, this paper attempts to examine whether or not the proportion of responsibility and authority are equal. This is achieved by comparing the role of shariah board in Indonesia with the role of shariah board in Malaysia and Brunei Darussalam. These countries in the South East Asian region adopt centralized models of Shari‟ah governance. This study is qualitative research and theoretically based on shariah board and shariah government framework from AAOIFI and IFSB. The comparison is based on the following criteria; the appointment, the qualification, process flow, review and audit, governance, legislation, and remuneration. Evidence from our analysis suggests that both Indonesia and Malaysia are equally proportionate. Hence, the equality between the responsibility and the authority is important in supporting shariah board in supervising Islamic banks. The paper suggests that the central bank of Indonesia needs to strengthen the shariah board so that the fatwas are prevailing onto Islamic banks. Key words: Shariah Board, Shariah Governance Framework 1 Nurhastuty Wardhany is a Master candidate in Islamic Finance at INCEIF. 2 Shaista Arshad is a recent postgraduate student from INCEIF in Master in Islamic Finance.
  • 3. 2 1. INTRODUCTION The development of Islamic finance has given rise to a new trend in the way business and economics are being conducted. The uniqueness of the spiritual values based on the Quran and Hadith forms the basis of Islamic finance. With the root source being every clear and irrefutable, the identity of Islamic finance should not have any room for doubt. When the Ummah is passionate about Islamic Financial Institutions, the question of compliance to Shariah rule from Islamic Financial Institutions is bound to arise. Does the Islamic Financial Institution apply the rules as ordained by the Quran and Sunnah? Can the Ummah trust Islamic Financial Institutions to have good compliance and integrity? All these questions and hesitancy should be answered with conviction, and in this case, the Shariah Board is answerable. The shariah board has a unique relationship with Islamic financial institutions (IFIs), as they are responsible for monitoring the compliance of Shariah rules in their transactions, issuance of Shariah products. Furthermore, as a representative of the various Ulamas, the Shariah board has the authority to issue Fatwas regarding the products and practices employed by banks and other institutions. The members of the Shariah board are made up of unique individuals who have immense knowledge of both Islamic Jurisprudence and finance. Furthermore, in playing their role, Shariah Board members need to have a strong commitment in developing Islamic Financial Institutions within the shariah framework. Shariah Board can be said to be an element of corporate governance for IFIs. Corporate governance in IFIs is slightly different from conventional corporate governance. Refering to the IFSB-3 the concept of corporate governance in IFIs „is a set of organisational arrangements whereby the actions of the management of institutions offering Islamic financial services are aligned, as far as possible, with the interest of its stakeholders; provision of proper incentives for the organs of governance such as the BOD, Shari’ah Supervisory Board and management to pursue objectives that are in interests of stakeholders and facilitate effective monitoring, thereby encouraging IIFS to use resources more efficiently; and comply with Islamic Shari’ah rules and principles‟ (IFSB, 2006, pp.33)
  • 4. 3 This paper attempts to evaluate the structure of Shariah Boards in IFI‟s in South East Asian, in terms of their organization, monitoring process, and fatwa issuing and shariah product approval process. We further endeavour to learn the roles of Shariah boards in Indonesian and Malaysian markets and Brunei Darussalam, concerning the above-mentioned structure and to understand whether the Shariah board has independence in their decision making from the board of directors of Islamic financial institutions. The paper is divided into 7 sections, beginning with an introduction, followed by a brief exploration of Shariah governance. In Section 3, the roles of the Shariah board in Malaysia are evaluated. Section 4 and 5 highlight the roles of the Shariah board in Indonesia and Brunei Darussalam respectively. After which, an analytical comparison is made between these three countries in Section 6. Lastly, a conclusion is drawn up with reference to limitations and potential avenue for further research is suggested. 2. SHARIAH GOVERNANCE A well-established Shariah Governance framework is important for a comprehensive regulatory and supervisory infrastructure. Islamic banks will have to adhere to this framework for guidance on the compliancy of their practices, hence making it vital for the future of Islamic finance. The significance of Shariah governance is highlighted by the fact that if we have an inadequate infrastructure the compliance of Islamic finance to Islamic laws can be challenged. According to the Islamic Financial Services Board, Shariah Governance Framework refers to the set of institutional and organisational arrangements through which an IFI ensures that there is effective independent oversight of Shari`ah compliance over each of the following structures and processes (1)the issuance of relevant Shari‟ah pronouncement/resolutions; (2) dissemination of information on such Shari‟ah resolutions to the operative personnel of the IFI; (3) an internal Shari‟ah compliance review or audit; (4) to an annual shari‟ah compliance review or audit for verifying the internal shari‟ah review. The Shariah Governance System is demanding the establishment of a Shariah Advisory Board to ensure that Islamic banking products and operations match Shariah principles. There are some guiding principles on the Shari‟ah
  • 5. 4 Governance System by Islamic Financial Services Board (IFSB) which are ex-ante and ex-post process, the issue of competence, independence, confidentiality and consistency. Furthermore, the shariah scholars appointed play a crucial role in the effective Shari‟ah governance system. The Shariah board plays a fundamental role in ensuring and enhancing the credibility of IFIs as well as having the authority to issue fatwa via collective ijtihad (ISRA, p.707, 2011). The roles of the Shariah board can be categorised as: the Shari‟ah board at the macro and the micro levels. At the macro level, there are the Shari‟ah boards at the central bank or regulatory authority level. Shari‟ah boards at this level play significant roles in the aspect of harmonisation, standardisation of fatwa and act as the highest Shari‟ah authority of IFIs (ISRA, p.708, 2011). The Shariah board at the micro level can be an internal Shariah boards in IFIs or as a Shariah advisory firms. The Shari‟ah board at the micro level have a responsibilities such as participating in product development and structuring activities, reviewing and approving matters related with Shariah, issuance of fatwa and Shari‟ah auditing, issuance of an annual certification of Shariah compliance (McMillen, 2006 in ISRA, p.709, 2011) and ensuring the Shari‟ah compliance of IFIs‟ investment in shares, equities, sukuk and other business avenues (Ayub, 2007 in ISRA, p.709, 2011) and the computation of zakat. Generally, the roles of the Shari‟ah board involve three main areas, i.e., the issuance of fatwa via collective ijtihad, supervision (raqabah) and review (mutabaah) (ISRA, p.709, 2011). 3. THE ROLE OF SHARIAH BOARD IN MALAYSIA Islamic banking services in Malaysia are offered through three types of governance structures: (1) stand-alone Islamic banks; (2) Islamic banking windows within conventional banks; and (3) Islamic banking subsidiaries of conventional banks (Moody‟s Global Banking Report, 2008). To enrich the insight regarding the Role of Shariah Board in Malaysia, five Islamic banks are added as reference and representatives of industry practices. The five Islamic banks are CIMB Islamic, Maybank Islamic, RHB Islamic, Hong Leong Islamic and Standard Charterd Bank
  • 6. 5 Malaysia. These five Islamic banks were chosen as representative industry practices as they are the leading Islamic banks in industry from market share. 3.1. Appointment of the Shari’ah Committee Based on Shariah Governance Framework, the appointment of the Shariah Committee has two steps. First, the board shall, upon recommendation of its Nomination Committee, nominate the appointment of the members of the Shariah Committee. And then, the appointment and reappointment of a Shariah Committee member shall obtain prior written approval of the Bank and the SAC. In approving the appointment and reappointment, the bank may impose necessary conditions it deems fit in addition to the requirements in the Framework. In the case of the Shariah the Yang di-Pertuan Agong or King, on the recommendation of the finance minister pursuant to the Central Bank of Malaysia Act 2009 (ISRA, 2011, p. 715), appoints board of Bank Negara Malaysia. If we refer to the annual reports from CIMB Islamic, Maybank Islamic, RHB Islamic, Hong Leong Islamic and Standard Chartered Bank Malaysia, these banks do not disclose the process of appointment of the SAC. Unlike the appointment of the Board of Directors, Islamic bank have the discretion to disclose this information. Only Standard Chartered informs through the website that the SAC was chosen by BOD‟s mandate. 3.2. Qualification of the Shari’ah Committee There are some criteria regarding the qualification of the shari‟ah committe according to Shari‟ah Governance Framework BNM which are: (1) a member of a shariah committee shall be a muslim individual; (2) the majority of members in the shariah committee shall at least hold bachelor‟s degree in Shariah, which includes study in Usul Fiqh or Fiqh Muamalat; (3) it is reasonable to expect that the majority members of the shariah committee should be able to demonstrate strong proficiency and knowledge in written and verbal Arabic, and have good understanding in Bahasa Malaysia and the English language; (4) the shariah committee may comprise of experts from relevant backgrounds such as finance and law; (5) the Shariah Committee preferably shall comprise members of diverse backgrounds in terms of qualification, experience and knowledge (SGF, p.30).
  • 7. 6 All of the five Islamic banks selected have already published the profile of each SAC member on their website and annual reports. The profiles of the members fulfill the requirements by SGF BNM from education background, experience as shari‟ah board and others. 3.3. Product Process Flow Product development covers both pre-product approval (i.e. process of product structuring and developing prior to introduction to the market) and post-product approval process (i.e. process after the product has been offered to the customers and transactions have been carried out). 3.4. Shari’ah Review & Audit The Shariah review function refers to regular assessment on Shariah compliance in the activities and operations of the IFI by qualified shariah officer(s), with the objective of ensuring that the activities and operations carried out by the IFI do not contravene with the Shariah (SGF, p.22). Shariah audit refers to the periodical assessment conducted from time to time to provide an independent assessment and objective assurance designed to add value and improve the degree of compliance in relation to the IFI‟s business operations, with the main objective of ensuring a sound and effective internal control system for Shariah compliance. Internal auditors, who have acquired adequate Shariah-related knowledge and training, shall perform the function. As for the Islamic banks selected, firstly, CIMB Islamic establishes a Shariah Advisory Department that has a duty ensuring that the shari‟ah requirements are achieved and undertakes periodic compliance reviews. Second, RHB Islamic established a shariah framework within their bank that requires the presence of a shariah department head. Shariah department head is to ensure compliance of day-to-day operations and has sub-unit which are shari‟ah compliance & review and shari‟ah advisory, department & secretariat. Third, Standard Chartered has country assurance and audit and group internal audit to do shariah compliance reviews based on shariah compliance manuals. Lastly, Hong Leong and Maybank do not disclose this information on their annual reports.
  • 8. 7 3.5. Shari’ah Governance The Shariah governance framework of an IFI shall, at the minimum, comprise the following: (i) the board oversight on Shariah compliance aspects of the IFI‟s overall operations; (ii) a Shariah Committee with qualified members who are able to deliberate Islamic finance issues brought before them and provide sound Shariah decisions; (iii) effective management responsibilities in providing adequate resources and capable manpower support to every function involved in the implementation of Shariah governance, (iv) an internal Shariah review that is conducted on a continuous basis; (v) a regular Shariah audit, at least on an annual basis, verifying that the IFI‟s key functions and business operations comply with Shariah; (vi) a Shariah risk management process to identify all possible Shariah non-compliance risks and, where appropriate, remedial measures that need to be taken to reduce the risk; (vii) an internal Shariah research team to conduct research on Shariah; and (viii) issuance and dissemination of Shariah decisions to the relevant stakeholders. CIMB Islamic Maybank Islamic RHB Islamic Hong Leong Islamic Standard Chartered (i) The Board √ √ √ √ √ (ii)A Shari‟ah Committee √ √ √ √ √ (iii) Effective management √ √ √ √ √ (iv) Internal Shariah Review √ Internal audit √ Internal audit √ group internal audit (v) Regular Shariah Audit √ √ √ √ √ (vi) Shariah Risk Management √ √ √ √ Not disclosed (vii) Internal Shari‟ah Research √ assume under shariah department Not disclosed √ assume under shariah department Not disclosed Not disclosed (viii) Shariah decision to stakeholder Not disclosed* Not disclosed* Not disclosed* Not disclosed* Not disclosed*
  • 9. 8 RHB has set up a Group Shariah Committee to tackle shariah risk governance or as an effort to do shariah risk management by handling matters relating to shariah principles and rulings. Hong Leong minimumly discloses regarding shariah board. There are no information about the appointment, profile of shariah board, shariah review, shariah audit and shariah risk management. The annual report of 2011 looks like a conventional one with just additional reference to their five scholars. For issuance and dissemination of shari‟ah decision to internal or external stakeholder, there is no explicit description regarding this. 3.6. Legislative Infrastructure The recent amendment of the Central Bank Act 1958 has further enhanced the existing legislative infrastructure for Islamic finance including the Islamic Banking Act 1983, the Takaful Act 1984 and the Government Funding Act 1983, by setting out a legal framework for the further development of the Islamic financial system in Malaysia (Rosly, 2011, p.2). 3.7. Remuneration Internal shariah board or shariah advisory gets remuneration from Islamic banks. Islamic banks disclose the amount of remuneration for shariah board. Meanwhile, for centralized shariah board there is no explicit information regarding this. 3.8. Others The Shariah Committee meetings shall be held at least once in every two months (SGF, appendix 5). From the below information, Hong Leong and CIMB Islamic do not fulfill this requirement. CIMB Islamic Maybank Islamic RHB Islamic Hong Leong Islamic Standard Chartered No. of board members 6 4 5 5 6 Duration of board‟s service Not disclosed Not disclosed Not disclosed 2 years term Not disclosed Structure of meetings 4 times in a year 11 times in a year 8 times in a year Not disclose 11 times in a year Shariah Report √ √ √ √ √ Concurrent position Not disclosed Not disclosed Not disclosed Not disclosed Not disclosed
  • 10. 9 Duties, Responsibilities & Accountability of the Shariah Committee (SGF, appendix 4) CIMB Islamic Maybank Islamic RHB Islamic Hong Leong Islamic Standard Chartered 1.Responsibility & accountability √ √ √ √ √ 2. Advise to the board & IFI √ √ √ - √ 3. Endorse Shariah policies & procedures √ √ √ - √ 4. Endorse & validate relevant documents √ √ √ √ √ 5. Assess work carried out by Shariah review & Shariah audit √ √ √ - √ 6. Assisst related parties on Shariah matters √ √ √ √ √ 7. Advise on matters to be referred to the SAC √ √ √ - √ 8. Provide written Shariah opinions √ √ √ √ √ In general, the shariah boards in the Islamic banks have fulfilled the requirements of the Shariah Governance Framework except Hong Leong Islamic. Moreover, shariah board play a bigger role than just an obligation of conducting training programmes on Shariah related latters, advising the bank on the computation and distribution of zakat and so on (Maybank, 2011). 4. ROLE OF SHARIAH BOARD IN INDONESIA Islamic banking services in Indonesia are offered through three types of governance structures: (1) Full-fledged Islamic Banks; (2) Islamic windows under conventional banks; (3)Islamic rural banks. To enrich the insight regarding the role of Shariah Board in Indonesia, five good corporate governance report of Islamic banks and one annual reports are added as reference and representatives from industry practices. The five Islamic banks are Bank Muamalat Indonesia, Bank Mega Syariah, Bank BRI Syariah, Bank Bukopin Syariah and Bank Syariah Mandiri. These five Islamic banks were chosen as representative industry practices because they are the leading Islamic banks in industry in terms of market share.
  • 11. 10 4.1. Appointment of the Shari’ah Committee Sharia banking committee is a forum comprising experts in the field of sharia muamalah and/or economic experts, financial experts, and banking experts, whose tasks include assisting Bank Indonesia in implementing fatwa of the Indonesian Council of Ulama into stipulations formulated in Bank Indonesia Regulations. Bank Indonesia determines the number and composition as well as other matters related with the Committee membership (Bank Indonesia Regulation No.10/32/PBI/2008). The procedure to appoint shariah supervisory board is: (1) bank is obliged to submit proposal on candidate member of SSB for Bank Indonesia approval before these members hold their position; (2) appointment of SSB members by the Shareholder General meeting is effective after Bank Indonesia approval is obtained; (3)Submission of proposal on candidate members of SSB as reference to point no.1 is made after having obtained recommendation from the Indonesian Islamic Scholar Board (Bank Indonesia Regulation No.11/3/PBI/2009 article 37). Bank Mega Syariah follows the procedure by central bank to appoint SSB and discloses the permission number from national shariah board, Indonesia Ulama Council and shareholder general meeting. 4.2. Qualification of the Shari’ah Committee Members of SSB are expected to fulfill three requirements, which are integrity, competency and financial reputation. Integrity comprises of (1) possession of good character and moral values; (2) possession of commitment for complying with sharia banking stipulations and other prevailing legislations; (3) possession of commitment for development of sound and sustainable Bank; and not being listed in the Disqualified List as regulated in the stipulations concerning the fit and proper test determined by Bank Indonesia. Competency comprises at least possessing knowledge and experience in the field of mu‟amalah sharia and knowledge in the field of banking and/or finance in general. Financial reputation comprises (1) not being included in the list of non-performing credits; and (2) never having been declared as having been bankrupt or being a shareholder, member of Board of Commissioners, or member of Board of Directors who has been declared guilty in causing a company to become bankrupt in the last 5 years prior to nomination.
  • 12. 11 Centralized sharia board or sharia banking committee is expected to fulfill two requirements which are integrity and competency. Integrity comprises (1) possessing good character and moral values; (2) possessing commitment for developing sharia banking; (3) possessing vision and mission for developing sharia banking; (4) possessing adequate time for implementation of tasks as Committee member. Competency comprises (1) possessing good understanding in the field of sharia mu‟amalah and/or the fields of economy, finance and banking; (2) possessing good understanding of prevailing legislation. Bank Bukopin Syariah does not disclose the profile of SSB even the chairman of SSB is prominent Islamic scholar but it should dislose the education background and experience. Bank Mega Syariah and Bank BRI Syariah do not disclose too the profile of SSB in GCG report. This is possible since the appointment SSB should be approved national shariah board. Only Bank Syariah Mandiri discloses the profile of SSB in annual report 2011. 4.3. Product Process Flow The national shariah board Indonesia ulamas council must first approve any new product or new service launched by banks. The Sharia supervisory board in sharia bank is an intermediary between sharia bank and national sharia board. Working mechanism for product approval starts from sharia department or internal department in sharia bank suggest a product to the board of directors. Board of directors will discuss with sharia boards. Sharia supervisory board will bring the new product to the daily implementing agencies. Daily implementing agencies will accept question or new product and discuss for 20 days and the result of discussion will bring to the plenary national shariah council for approval. If yes, it will deliver back to the daily implementing agencies and forward to the sharia supervisory board. Moreover, the SSB will bring back to the sharia bank giving the answer or result. 4.4. Shari’ah Review & Audit Central bank does not have any regulation yet regarding the shariah review and the shariah audit but there is an emphasis for sharia supervisory board to review the banks activity from a shariah compliance perspective. In addition, to fulfill this requirement, the sharia supervisory board is
  • 13. 12 supported by an internal audit. According to the central bank‟s regulation, internal audit is obligated to report to the sharia supervisory board regarding shariah compliance in the bank‟s activity (Bank Indonesia regulation no.11/33/PBI/2009). In addition to this, the topic about shariah audit has established through certification of Indonesian Institute of Accountant (Ikatan Akuntan Indonesia). External auditor and internal auditor who do audit in shariah bank could use Statement of Financial Accounting Standards (Pernyataan Standar Akuntansi Keuangan) for Shariah Banking Accounting (Akuntansi Perbankan Syariah) which has already provided by Indonesian Institute of Accountant. In addition, sharia bank when conducting external audit choose public accountant that proven legally able to do sharia audit such as certificate of sharia audit. If we see the industry practices from GCG report, Bank Muamalat Indonesia establishes shariah compliance department under compliance and risk management division. This department has responsibility to do shariah review. This department has four members in sharia review unit and each of members need to have competencies in sharia based on education background nationally or internationally. Every two months, sharia review should report to the SSB regarding the duty to monitor bank activities in comply sharia principles. Additionally, every six months, sharia review should inform the SSB opinion to other business units. In the case of Bank Mega Syariah, the GCG report mentions that internal audit function has responsibility to ensure that the bank‟s activity in line with sharia compliance. Besides having support from sharia supervisory board, the one of the members of the audit committee in Bank Mega Syariah is a sharia scholar. This means when internal audit reports to the committee audit, the committee able to handle and to monitor the work of internal audit. Meanwhile for Bank BRI Syariah, there is not explicitly description that internal audit perform a shariah review even the position of committee audit is involved Islamic scholars. Based on annual report Bank Syariah Mandiri, internal audit should report regarding sharia compliance by doing sample and reviewing SOP. Bank Bukopin does not disclose about this.
  • 14. 13 4.5. Shari’ah Governance Indonesia does not have any Shariah Governance Framework yet. Central bank gives detail rule by issuing circular letter to all commercial banks conducting business based on shariah principles in Indonesia. One of the circular letters is about Good Corporate Governance for Sharia Bank and Sharia Windows under conventional bank (Bank Indonesia legislation Number: 11/33/PBI/2009). According to this circular letter, Good Corporate Governance must be implemented in : (1) duty and responsibilities Board of Commissioner and Board of Director;(2) completed committees & functions for internal control; (3) duty and responsibilities sharia supervisory board; (4) application of compliance, internal audit and external audit function; (5) maximum limit to distribute fund; (6) financial and non-financial transparency. Muamalat Indonesia Mega Syariah BRI Syariah Bukopin Syariah Syariah Mandiri duty and responsibilities Board of Commissioner and Board of Director √ √ √ - √ completed committees & functions for internal control √ √ √ - √ duty and responsibilities sharia supervisory board √ √ √ - √ application of compliance, internal audit and external audit function √ √ √ - √ financial and non-financial transparency. √ √ √ √ √ Bukopin syariah discloses name of Board of Commisioner, Board of Director, Sharia Supervisory Board but lack of information about duty and responsibilities and profile and also there is no any information regarding internal department from compliance, internal audit etc. Generally, all sharia banks have fulfilled the requirements from central bank regarding corporate governance for sharia banks.
  • 15. 14 4.6. Legislative Infrastructure LEGISLATION INFRASTRUCTURE FOR SHARIA BANKS The Law No.10 of 1998 Conventional banks are allowed to have UUS (sharia units). The Law No.21 of 2008 Sharia Banking Bank Indonesia Regulation (PBI) No.11/33/PBI/2009 GCG implementation for Sharia Commercial Banks and Sharia Business Units Bank Indonesia Regulation No.11/3/2009 About Full Fledged Sharia Bank 4.7. Remuneration National Sharia Council gets operasional funding by Government (Ministry of Finance), Bank Indonesia and community contributions. National Sharia Council accepts monthly contribution funds from the Islamic financial institutions of his amanah. National Sharia Council should be accounted for donations to the Indonesian Ulemas Council meanwhile for sharia banking committee that assist central bank to make operational legislation regarding fatwa national sharia council shall be borne by central bank including the budget and cost (Bank Indonesia regulation No.10/32/PBI/2008). 4.8. Others Muamalat Indonesia Mega Syariah BRI Syariah Bukopin Syariah Syariah Mandiri No. of board members 3 3 3 2 3 Duration of the board‟s service Not disclosed Not disclosed Not disclosed Not disclosed Not disclosed Structure of meetings 12 9 20 11 16 SC‟s Report Not disclosed Not disclosed Not disclosed Not disclosed √ Concurrent position Chairman has four role as SAC & member has double role Chairman has four role as SAC 2 members has double role as SAC Chairman & member has double role as SAC Member has three role as SAC
  • 16. 15 Total number of sharia supervisory board shall be no less than two people or no more than 50% of the total number of members of Board of Directors. All sharia banks have fulfilled this requirement (Bank Indonesia Regulation Number. 11/3/PBI/2009). Sharia supervisory board obliges to hold meeting once in a month (Bank Indonesia Regulation Number. 11/33/PBI/2009). Sharia supervisory board members can only hold concurrent positions as a SSB member in no more than four other sharia financial institutions (Bank Indonesia Regulation Number. 11/3/PBI/2009). From above table, Mega Syariah and Bukopin Syariah do not fulfill the requirement from central bank. Duties, Responsibilities & Accountability of the Shariah Committee Bank Indonesia Regulation Number. 11/33/PBI/2009 Muamalat Indonesia Mega Syariah BRI Syariah Bukopin Syariah Syariah Mandiri 1.Giving advices and recommendations to Board of Directors as well as supervise bank activities √ √ √ - √ 2.Assessing and ensuring fulfillment of Sharia principles on operational guidelines & product issued by bank √ √ √ - √ 3.Supervising development process of Bank new products; √ √ √ - √ 4. Obtaining fatwa (decrees) from the National Sharia Board for Bank new products that do not yet have fatwa √ √ √ - √ 5. Periodically conducting reviews of fulfillment of sharia principles on the mechanism of fund accumulation and fund channeling as well as bank service provision √ √ √ - √ 6. Requesting data and information related to sharia aspects from Bank work units in the framework of executing its tasks √ √ √ - √ Bukopin Syariah does not disclose the role of shariah board in GCG report 2011. Generally, the shariah boards in all shariah banks has played role optimally and fulfilled the requirements from central bank.
  • 17. 16 5. THE ROLE OF SHARIAH BOARD IN BRUNEI DARUSSALAM Islamic banking services in Brunei are full-fledged Islamic banks. To improve the understanding regarding the Role of Shariah Board in Brunei, two Islamic banks are added as reference and representatives from industry practices through their website. The two Islamic banks are Perbadanan Tabung Amanah Islam Brunei (TAIB) and Bank Islam Brunei Darussalam (BIBD). 5.1. Appointment of the Shari’ah Committee According to the Shariah Financial Supervisory Board Order 2006, the centralized board or Shariah Financial Supervision Board is appointed by His Majesty, the Sultan and Yang Dipertuan with recommendation from the Ministry of Finance and the deputy board is appointed by the Ministry of Finance with approval from the Sultan. Brunei Islamic financial institutions are obliged to appoint board of Islamic scholars called “Shariah Supervisory Board”. The Shariah Supervisory Board is appointed by the general assembly of shareholders and recommended by the Board of Directors meeting. The SSB is not only independent from the Board of Directors but also allowed to attend the Board of Directors‟ meeting to discuss the religious aspects of their decision (AAOIFI, 2005 in Hassan, 2007). 5.2. Qualification of the Shari’ah Committee The SSB members are specialized jurists in Islamic jurisprudence and experts in the Islamic Finance (AAOIFI 2005, in Hassan, 2007). For Syariah Financial Supervisory Board, there is no explicitly criteria for qualification but the member of the board should consist the permanent secretary of Ministry of Finance, the Mufti Kerajaan for Brunei Darussalam, 6 members appointed by His Majesty the Sultan and the deputy of board appointed by Ministry of Finance with Sultan approval. 5.3. Product Process Flow Every financial institution shall apply to the Syariah Financial Supervisory Board for approval with respect to its submission that its Islamic product is in accordance with Hukum Syara’ before
  • 18. 17 it enters into any business transaction with respect thereto (Syariah Financial Supervisory Board Order 2006). 5.4. Shariah Review & Audit There is no any explicitly information regarding shari‟ah review and audit in website and financial report from Islamic banks in Brunei but since Brunei adopt rules by AAOIFI, it should have an internal review or internal audit to do shariah review. 5.5. Shariah Governance The important element of shariah governance in Brunei is SSB and centralized shariah board. There is centralized fatwa and centralized appointment of Shariah committees of Islamic bank. 5.6. Legislative Infrastructure Domestic Islamic and conventional banking activities are governed by the Islamic Banking Act 1999 and the Banking Order 2006 under the supervision of the Ministry of Finance, Financial Institution Division. With the introduction of the new Islamic Banking Order, all Islamic banks in the country are required to have a Shariah advisory Body comprising at least 3 Muslim religious scholars (Venardos, 2010). 5.7. Remuneration The Minister may, with the approval of His Majesty the Sultan and Yang Di-Pertuan, make regulations which are necessary or expedient for giving effect to and carrying out the provision of this Order, including the prescription of fees, and of any other thing required to be or which may be prescribed under this Order, and for the due administration thereof (Syariah Financial Supervisory Board Order 2006). 5.8. Others Unfortunately, the website of Perbadanan Tabung Amanah Islam Brunei does not provide annual report or GCG report and does not provide SSB information meanwhile Bank Islam Brunei Darussalam Berhad provides information regarding SSB. There are five shariah supervisory board and from their profile, the SSB are an expert in Usul Fiqh and Fiqh Muamalat.
  • 19. 18 6. COMPARATIVE ANALYSIS OF MALAYSIA, INDONESIA, BRUNEI DARUSSALAM ON THE ISSUES OF SHARIAH BOARD Malaysia, Indonesia and Brunei Darussalam are three countries of South East Asian that have centralized models of Shariah Governance. The centralized models of Shariah governance is required institutions to ensure shariah compliance but the government still control by establishing shariah advisory on a central level. According to Asyraf Wajdi Dusuki (2011), centralized Shariah Governance structures comprise shariah advisory at the regulator‟s level, centralized fatwa, issue guidelines on the governance of shariah committee for the Islamic financial institution (IFI), conduct shariah compliance review and centralized appointment of shariah committees of IFI. 6.1 Appointment of the Shariah Committee & Issue of Independence of Shariah Board Those three countries (Malaysia, Indonesia and Brunei), have same procedure in appointment of shariah supervisory board which is the appointment of SAC should be approved by central bank/ministry of finance in one side and approved by the General Meeting of Shareholders. Malaysia is different in point the appointment comes from the Board of Directors with the approval of shareholders at general meeting meanwhile Indonesia and Brunei appointment made by shareholders during general meeting. The issue of independence is the method of appointment will affect the independence of shariah board. The optimum independent is shariah board appointed by shareholders during general meeting with recommendation of BODs, and the shariah board is allowed to attend the BOD‟s meetings to discuss the religious aspects of their decision (Abu Ghudda & Abdul Sattar, 2001 in ISRA, 2011). In this case, Indonesia and Brunei have complied with the optimum procedure to appoint SSB. 6.2 Qualification of the Shariah Committee and Issue of Competency Legislation in Malaysia and Indonesia have required certain and specific criteria regarding SSB. The five Islamic banks in Malaysia and five Islamic banks in Indonesia through their profile disclose this qualification so that the background of education and experience as shariah supervisory board is known. Moreover, the conclusion from bank‟s disclosure shows that SSB is already competent to supervise Islamic banks from shariah prespective. Unfortunately, Islamic
  • 20. 19 banks in Brunei do not disclose much about this since there is no GCG report from their website or annual report. 6.3 Product Process Flow The difference between the process flow for Malaysia and Indonesia lies in the way it is categorized. The SGF issued by Bank Negara, Malaysia covers both pre-product and post- product approval process. Meanwhile, the Shariah Advisory Council in Indonesia formulates the problems brought to the National Sharia Council plenary meetings. The pre- and post- product approval revolves around structuring a process that is comprehensive and true to Shariah standards. They should be transparent in nature and approved by all on the committee. Furthermore, it is the responsibility of the Committee to ensure that the product implementation is in compliance with Shairah principles and that a Shariah review and governance report should be drawn up to insure that IFIs are able to monitor the consistency of the compliance of the product. Conversely, in Indonesia, the National Islamic Council first needs to legitimatize a fatwa issued by the Daily Implementing Agencies. They then conjure an opinion on whether the IFI has fulfilled all the Shariah requirements as issued by the National Islamic Council. Hence, product development reports by the Shariah Advisory Council or the Daily Implementing Agencies are forwarded to the National Islamic Council who will look into the matter and release their stances on the matter. 6.4 Shariah Review and Audit If we follow the AAOIFI standard regarding shariah review and shariah audit, there are differences in the two but there is also an opinion that shariah review is same with shariah audit. Malaysia distinguishes these two functions of internal control but from industry practices that are written in annual reports, only two banks have shariah unit to do shariah review or shariah compliance, one banks use internal audit to do shariah review and the rest do not notify about this. The main difference is that Indonesia does not have guidelines for Shariah review yet but the legislation emphasises the duty of Shariah supervisory board to do shariah review with internal
  • 21. 20 audit support. In addition, from the industry practices that are written in the GCG report, one of the shariah banks established shariah compliance unit that is responsible to do shariah review. Another shariah banks mentions that internal audit has a responsibility to do shariah review. The rest of the shariah banks have internal audit without any emphasis in their report on the obligation to do shariah review. In addition to this, the committee audit members of those sharia banks are some of them Islamic scholars who turn out to be SSB in other shariah banks. The logical reason behind this that the committee audit will monitor the work of internal audit while performing shariah review. On the other hand, Brunei is assumed to have adopted AAOIFI. Unfortunately, the lack of transparency in website, GCC report or annual report, makes it difficult to know the shariah review or shariah audit function of Islamic banks in Brunei. 6.5 Shariah Governance Interestingly, Indonesia does not have any Shariah Governance Framework. The central bank gives detail rule by issuing circular letter to all sharia banks to do good corporate governance based on the regulation. According to the circular letter, the concept of good corporate governance for sharia bank comprises (1) duty and responsibilities Board of Commissioner and Board of Director;(2) completed committees & functions for internal control; (3) duty and responsibilities sharia supervisory board; (4) application of compliance, internal audit and external audit function; (5) maximum limit to distribute fund; (6) financial and non-financial transparency. Most of the sharia banks have already fulfilled the requirements except one of the bank chosen in this study. Meanwhile, the BNM Shariah Governance Framework consists of six sections that state that IFIs are free to establish their own Shariah governance framework so long as it meets the basic requirements of the guidelines. Members of the Shariah board are responsible for the compliance of shariah rules. Most of the Islamic banks have already fulfilled the requirement of Shariah Governance Framework except for internal shariah research point and issuance & dissemination of shariah decision to the stakeholder. Brunei has a concept of good corporate governance for Islamic banks by ordering Islamic banks to have SSB.
  • 22. 21 6.6 Legislative Infrastructure In Malaysia, the recent amendment of the Central Bank Act 1958 has further enhanced the existing legislative infrastructure for Islamic finance including the Islamic Banking Act 1983, the Takaful Act 1984 and the Government Funding Act 1983, by setting out a legal framework for the further development of the Islamic financial system in Malaysia (Rosly, 2011, p.2). In Brunei, domestic Islamic and conventional banking activities are governed by the Islamic Banking Act 1999 and the Banking Order 2006 under the supervision of the Ministry of Finance, Financial Institution Division meanwhile in Indonesia the Law No.21 of 2008 regulates sharia banking. 6.7 Remuneration Shariah supervisory boards in Malaysia and Indonesia gets remuneration from Islamic bank and those are disclosed in annual report or GCG report meanwhile for Brunei is unknown. Centralized shariah board gets remuneration from central bank. 6.8 Others In Indonesia, SSB are expected to hold meeting monthly meanwhile Malaysia expects SSB to hold meeting every two months and there are some of Islamic banks that still do not fulfil this requirement in both countries. Indonesia has some SSB that play a role as shariah board for more than one institution. According to the Bank Indonesia regulation, this is allowed for up until four positions in different IFIs. The problem arising with this the issue of confidentiality, as there is a possibility that there will be confidentiality issues when shariah board members hold role in two or more different Islamic banks or IFIs in same industry. Malaysia is stricter about this by prohibiting Islamic banks to appoint any member of shariah board already present in other IFI of the same industry (Section 19 of the BNM/GPS). 7. CONCLUSION The sacred sources of the Shari' ah, the Qur'an and the Sunnah, have provided Muslims with a set of eternal principles, but their application to the practical situations of each age requires the
  • 23. 22 exercise of ijtihad. This means consultations in which the individual deliberations of many scholars play a vital role in reaching many firm conclusions. This exercise sometimes brings different answers from different Shariah Supervisory Boards with regard to the same question. The Shari' ah Supervisory Boards, being comprised of a number of Islamic scholars, decide the matter placed before them after mutual deliberations, which is tantamount to collective ijtihad. The role of the Shariah Board in Malaysia and Indonesia do not differ greatly from one another. The biggest difference between the two countries is the framework of the Islamic banking business from the legislation and the environment of business itself. Malaysia government plays a proactive role by issuing shariah governance framework in January 2011 and giving chance to the industry to adjust with it in 6 months. Brunei and Indonesia from legislation framework can be said still in developing corporate governance for Islamic banks. The most important thing is whatever kind of legislation that is settled by central bank is the willingness of industry to follow the regulation. This study is limited to only three countries in the South East Asian region, leaving room for much further development. Further research can include a larger scale study involving different countries and different models of governance framework. Similarly, the number of Islamic banks is limited by their market share ratio in the market; this caused several other Islamic banks to be eliminated from the study. Further development can have a larger number of banks included to enrich the depth of this study.
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