The document discusses internal control and compliance mechanisms in Islamic banks. It notes that modern banking activities involve high risks, so effective internal control systems and corporate governance are important. Bangladesh Bank has introduced six core risk areas for the banking sector. The document outlines the structure of an internal control unit and defines internal control. It discusses key factors like the board of directors, audit committee, and management committee. It also describes the functions of various internal control and compliance departments, including auditing, monitoring, and ensuring regulatory compliance. Finally, it identifies some reasons why controls may not always work as intended.

1. Internal Control & Compliance
Mechanism in Islamic Banks
Presented by
Md. Fariduddin Ahmed
Advisor
Export Import Bank of Bangladesh Limited
Former
Managing Director & Chief Executive Officer
Export Import Bank of Bangladesh Limited
Islami Bank Bangladesh Limited

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The diversified and complex financial activities of Modern
Banking are no longer limited within the geographical
boundary of a country. Since its activities involve high risk,
the issues of effective internal control system, corporate
governance, transparency, accountability have become
important matter to ensure smooth performance of the banking
industry throughout the world.
Considering the gravity and risk in Banking Sector,
Bangladesh Bank has so far introduced 06 (Six) core Risk in
Banking arena.
Importance of the Core Risk Management

3. The Core Risk Tree
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4. The structure of the internal control unit dedicated to
conduct the internal control tasks
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5. Definition of Internal Control
Internal Control is the process effected by an organization’s Board of
Directors, Management and other personnel. This process is designed to:
 Provide reasonable assurance regarding the achievement of
objectives in the effectiveness;
 Efficiency of operation;
 The reliability of financial reporting; and
 Compliance with applicable laws, regulations and internal policies.
Internal Control involves the policies and procedures established and
implemented to:
 Manage & Control a particular risk; or
 Business activities; or
 Combination of risks; or
 Business activities
To which the organization or business activities is exposed or in which it
is engaged.
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6. Key Factors of Internal Control and Compliance
Environment
The Key factors/players of the control environment are:
 Board of Directors
 Sharia’h Supervisory Committee
 Audit Committee
 Management Committee
 Organizational and Procedural Control
 Internal control & Control mechanism
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7. Functions of Internal Control & Compliance Division
 Conduct periodic audits in different branches/offices
 Carry out surprise checks in the sensitive areas
 Conduct special investigation in case of gross employee
misconduct or major violation
 Identify deviation in the operational processes from set
policies and procedures
 Recommend process improvement as & when necessary
 Recommend to the Head of Internal Control regarding the
effectiveness of the control system of individual
branch/office as well as whole of the organization
Functions of Audit & Inspection Department
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8. Functions of Internal Control & Compliance Division
 Establish monitoring mechanism/procedures to ensure high
risks areas are regularly reviewed
 Ensure all limits set internally or externally are properly
followed and appropriate reports are generated regularly
 Review operational performances against key control issues
of individual offices
 Analyze various reports and assess key risk areas
 Recommend to Head of Internal Control to send audit/
inspection team in the areas where regular deficiencies are
identified.
Functions of Monitoring Department
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9. Functions of Internal Control & Compliance Division
 Responsible to ensure timely dissemination of all regulatory
updates
 Obtain clarifications from regulatory authorities
 Provide training and guidance as and when necessary on
regulatory issues
 Maintain all relevant circulars and regulatory guidelines
 Maintain strong liaison with the regulatory authorities
 Ensure regulatory requirements are properly incorporated in
the operational tasks
 Assist Head of Internal Control in establishing compliance
culture.
Functions of Compliance Department
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10. Why Controls Don’t Always Work
 Inadequate knowledge of policies or governing regulations. “I
didn’t know that!”
 Inadequate segregation of duties. “We trust ‘A’ who does all
of those things”.
 Inappropriate access to assets. Passwords shared, cash not
secured…..
 Form over substance. “You mean I’m supposed to do
something besides initial/sign it?”
 Control override. “I know that’s the policy, but we do it this
way.” “Just get it done, I don’t care how!”
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