Shariah Governance - A Few Ideas

Career Progression of Shariah Officers

The proposed journey of a Shariah officer involves two main phases: the Islamic banking sector and the takaful industry. In the first journey, the officer will begin with three years of experience in Shariah audit, followed by three years in Shariah risk management, three years in Shariah review, and finally three years in Shariah advisory. This comprehensive 12-year experience will provide a solid foundation in both sectors.

The rationale behind the three-year duration for each phase is as follows: the first year allows for a period of adjustment and familiarization with the specific requirements of the role, while the second and third years enable the officer to operate on autopilot, applying their expertise and skills effectively.

Starting with Shariah audit is crucial as it equips the officer with the necessary skills to validate and assess Shariah compliance. These skills will prove invaluable when conducting risk assessments in Shariah risk management and testing in Shariah review. The final phase of Shariah advisory allows the officer to apply the knowledge and experience gained in audit, risk management, and review to provide expert guidance and advisory services.

By pursuing both Islamic banking and takaful, the officer can gain the best of both worlds, acquiring a comprehensive understanding of both sectors and becoming a well-rounded Shariah professional.

Career Progression for Shariah Officers to C-Suite Position

Below is a proposed career progression for Shariah officers aiming to reach C-level positions (non-Shariah):

a. Shariah Review - Chief Compliance Officer:

? Shariah Review (3 years)

? Financial Crime Testing (3 years) - covering anti-money laundering and related areas

? Financial Crime Advisory (3 years)

? Regulatory Compliance Testing (3 years)

? Regulatory Compliance Advisory (3 years)

b. Shariah Audit - Chief Internal Auditor:

? Shariah Audit/Branch Audit (6 years) - gaining a comprehensive understanding of the banking business and Shariah audit

? Credit Audit (6 years) - focusing on lending across retail, commercial, corporate, and complex financing structures

? Treasury Audit (3 years) - acquiring knowledge of assets, liabilities, and market risk

c. Shariah Risk - Chief Risk Officer:

? Shariah Risk/Operational Risk (6 years) - developing an in-depth understanding of banking operations and Shariah risk (often combined with operational risk)

? Credit Risk (6 years) - specializing in assessing credit risk across retail, commercial, corporate, and complex financing structures

? Market Risk (3 years) - gaining expertise in managing assets, liabilities, and market risk

The number of years mentioned above is a proposed term and can vary based on individual preferences and career trajectories. It is anticipated that within 10-15 years, we may witness the emergence of the first batch of CCOs, CIAs, or CROs with a Shariah background.

This proposed career progression is subject to individual preferences, industry developments, and organizational requirements.

Selection Process for SC

Let us examine the process of selecting a candidate for the SC(SC). We will not delve into the eligibility and fit and proper criteria, as they are already covered in the Shariah governance and fit & proper policy. As known, the head of Shariah, representing the management, initiates the search for SC candidates. But what factors are considered in this process? Here is a brief overview:

1. Current SC members: This involves identifying SC members who currently serve at one institution and are qualified to serve at two other institutions. This is the easiest route as data on SC members is publicly available, and it is a practical approach since the appointment has already been approved by the regulatory authority.

2. Alma mater of the head of Shariah: This refers to lecturers who may have taught the head of Shariah at the degree, master's, or Ph.D. level.

3. Recommendations by other SC members: This is based on the networking of SC colleagues who may identify potential individuals with the talent and potential to become SC members.

4. Group structure: In cases where there is a financial group, the SC member at the bank level may also be appointed to serve at the subsidiary level.

5. New candidates: The head of Shariah actively scouts and researches new talent for potential SC members.

A Proposed Composition of SC

(a) Specialization perspective

1. Chairman: A specialist in Usul Fiqh and Qawaid Fiqh, providing overall guidance and leadership to the committee.

2. SC Member 1: A specialist in Fiqh Hanafi, contributing expertise in Hanafi jurisprudence to the committee's discussions and decisions.

3. SC Member 2: A specialist in Fiqh Maliki, offering insights from the Maliki school of thought to enhance the committee's deliberations.

4. SC Member 3: A specialist in Fiqh Shafi'i, providing valuable perspectives based on the Shafi'i school of thought to ensure comprehensive Shariah compliance.

5. SC Member 4: A specialist in Fiqh Hanbali, bringing in-depth knowledge of Hanbali jurisprudence to enrich the committee's understanding and decision-making process.

(b) Experienced industry practitioners perspective

1. Chairman: Ph.D. in Fiqh Muamalat with expertise in Islamic finance and extensive industry experience.

2. SC Member 1: Experienced Shariah Advisory Officer with a deep understanding of application of Shariah requirements in Islamic finance products.

3. SC Member 2: Experienced Shariah Reviewer with a strong background in conducting compliance testing on Shariah requirements.

4. SC Member 3: Experienced Shariah Risk Officer with expertise in Shariah risk management.

5. SC Member 4: Experienced Shariah Auditor with a thorough understanding of Shariah auditing processes and procedures.

This alternative approach ensures a well-rounded SC with members possessing specialized knowledge in Fiqh Muamalat, practical experience in Shariah advisory, review, risk management, and auditing. Such a diverse and skilled committee can effectively oversee and guide IFIs in adhering to Shariah principles.

The SC should ideally consist solely of individuals who are trained in Shariah. If the SC requires legal opinions, the internal legal counsel can be consulted as the subject matter expert. Similarly, for accounting opinions, the chief financial officer can provide expertise. When it comes to business strategy, the CEO is the appropriate person to consult, and for in-depth knowledge of products, the product manager can offer valuable insights. Compliance issues related to Shariah matters can be addressed by the chief compliance officer, while the company secretary can provide advice on corporate governance. Actuarial matters can be handled by the relevant actuarial expert within the organization. In summary, subject matter experts in non-Shariah areas can be sourced from internal officers when needed, but the SC should primarily consist of individuals with Shariah expertise.

Continuous Professional Development for SC

Let's explore several external continuous development courses for SC members:

1. Certified Shariah Advisor (CSA) or Certified Shariah Practitioner (CSP) by the Association of Shariah Advisors in Islamic Finance (ASAS): This post-graduate course, which takes around 2-3 years to complete, offers exemptions to SC members with a Shariah background on certain subjects. It is worth noting that most SC members are sponsored by Islamic Financial Institutions (IFIs) for this course. It would be interesting to observe if there are arrangements among IFIs to jointly fund the course for SC members.

2. IBFIM's Islamic Finance Qualifications Framework: This framework includes the Associate Qualification in Islamic Finance (AQIF), Intermediate Qualification in Islamic Finance (IQIF), and Certified Qualification in Islamic Finance (CQIF). SC members can specialize in banking, takaful, or capital markets as they progress from IQIF to CQIF.

3. AICB's Chartered Banker Framework: SC members can choose modules in the foundation stage (Level 1) in credit, compliance, or anti-money laundering (AML). They can then specialize in Level 2 in areas such as audit, risk, business credit, retail credit, AML, or regulatory compliance. Level 3 offers three subjects - bank risk management, commercial lending and bank strategy, and operation and technology - for SC members to be awarded the title of Chartered Banker.

4. Shariah Conferences and Muzakarah Shariah: SC members can benefit from attending conferences and discussions organized by Kuala Lumpur Islamic Finance Forum (KLIFF), Jabatan Kemajuan Islam Malaysia (JAKIM), universities such as INCEIF University, Institute of Islamic Banking and Finance of IIUM, Islamic Banking and Finance Institute of Malaysia (IBFIM) or Securities Commission of Malaysia. These events expose them to dialogue and debate on emerging Shariah issues. Notably, the Bank Rakyat Ishar (International Shariah Scholars Roundtable) has gained recognition that holds an annual roundtable.

A proposed route for continuous professional development of Shariah committee

To ensure the continuous professional development of Shariah Committee (SC) members, the following route is proposed:

1. Enroll in AICB Chartered Banker Program: The suggested route includes the following stages:

o Level 1: Certificate in Financial Services

o Level 2: Bank Business Credit Practices and/or Bank Retail Credit Practices

o Level 3: Commercial Lending

The focus on credit is essential because the banking business model revolves around borrowing and lending. Starting from a conventional perspective is recommended as Islamic banking practices are built upon conventional banking principles. By understanding the foundation of conventional banking, SC members can better navigate the Islamic banking perspective.

2. IBFIM Islamic Finance Qualification Framework: SC members can pursue the following stages:

o AQIF (Associate Qualification in Islamic Finance)

o IQIF (Intermediate Qualification in Islamic Finance)

o CQIF (Certified Qualification in Islamic Finance)

If SC members serve in the banking and takaful industry, they can specialize in banking and takaful during the IQIF and CQIF stages. Building a strong foundation in conventional banking through the Chartered Banker route will facilitate a smoother transition to the Islamic banking perspective.

3. CSA/CSP (Certified Shariah Advisor/Certified Shariah Practitioner): SC members can consider enrolling in this program, which may cover similar subjects offered in the Chartered Banker or IBFIM routes. With a solid foundation from both routes, navigating the CSA/CSP program will be more manageable. Compliance with regulatory requirements, if made compulsory, can be achieved through this certification.

While pursuing any of the three proposed routes, SC members can attend Shariah conferences to stay updated on emerging Shariah issues. These conferences provide a platform for continuous learning and engagement with industry experts.

Succession Plan for SC

In proposing a succession plan for the Shariah committee, it is suggested leveraging the talents available within institution itself. One approach is to consider the heads of the Shariah function as the next in line to succeed as members of the committee. Typically, an IFI (IFI) would have four heads of the Shariah function - advisory, review, audit, and risk. This approach has several advantages. Firstly, these individuals possess in-depth knowledge of the IFI's banking processes, operations, and stakeholders. They have already reviewed and advised on policies, procedures, and products, making them well-rounded candidates for the Shariah committee. Additionally, this approach offers cost savings as there would be no need for extensive awareness training on banking operations and processes.

Currently IFIs can consider their own Shariah talents to be appointed as SC candidate upon their retirement provided the two-year gap is complied with. Interestingly, other IFIs could also tap into the talent pool of heads of Shariah functions from different institutions without the need to observe the two-year gap period.

Looking ahead, the SC may primarily consist of internal Shariah officers who have developed their talent, skills, and deep knowledge of banking operations, services, and products within the institution. Moreover, the industry already boasts a talent pool of individuals with 13+ years of experience in review, risk, audit, and advisory roles. It should be our aspiration to have a young and talented Shariah committee, with members as young as 33 years old and at least 10+ years of experience.

Shariah Compliance Function

There are currently two different Shariah functions performing advisory roles within the Islamic financial institution (IFI). The Shariah department is responsible for providing day-to-day advice on Shariah matters based on the rulings of the Shariah Advisory Council (SAC) and decisions or advice from the Shariah committee. Their role also includes ensuring proper dissemination of the Shariah committee's decisions or advice within the IFI. On the other hand, the Shariah review function is responsible for informing and providing updates to the board, Shariah committee, and senior management on the latest developments in legal and regulatory requirements in Islamic finance, particularly related to SAC rulings. Both functions are considered advisory in relation to SAC rulings. The Shariah department provides advice on the application of existing SAC rulings, while the Shariah review function advises on the application of new SAC rulings on an as-needed basis.

However, this setup can be confusing in practice as business units may seek advice from the compliance function, which can provide both regulatory and shariah compliance guidance. This creates a potential conflict with the advisory function performed by the shariah department. Furthermore, if business units approach compliance for shariah advice while the shariah department provides research to support their submission paper to SC, it still remains conflicted as the shariah department should be involved in the product development process from the very beginning. It is as if the business units seek shariah research papers from the shariah department but turn to compliance for shariah advice. In essence, both functions are providing shariah advice, one through research and the other through compliance. To address these challenges, a viable and compromised solution would be to consolidate these functions into a shariah compliance function. This consolidation would be more aligned with the role of the compliance function compared to the current shariah review function.

The term "Shariah compliance function" better reflects its purpose and avoids the connotation of performing merely post-event reviews. By leveraging the existing advisory function of the compliance department, which includes disseminating new regulations, including SAC rulings, the rebranded Shariah compliance function can adopt similar methodologies for disseminating Shariah committee decisions and advice. This consolidation would complement the compliance function, which already provides day-to-day advice on regulatory requirements. This approach would enhance efficiency and provide a streamlined process for business units to obtain comprehensive advice – regulatory compliance and Shariah compliance from a single function.

The main concern here is whether the proposed consolidation would comply with the Shariah governance (SG) policy. As per the policy, a secretariat function should be established to provide secretarial support to the Shariah Committee (SC), including advisory and research functions for day-to-day management advice. Additionally, the secretariat function is responsible for administrative and secretarial support to the SC. However, based on a broad interpretation, the policy does not explicitly require the secretariat function to be established as a single unit or department. This allows for the possibility of carving out the advisory and research function and incorporating it into the proposed enlarged shariah compliance function. This consolidated function would encompass both the shariah advisory and research functions within the compliance advisory scope, as well as the shariah review within compliance testing. It is important to note that the advisory and research function, which is now under the compliance function, would still serve as part of the secretariat function, responsible for research and advisory tasks. Additionally, this consolidation presents an opportunity to leverage compliance tools, particularly the standardized advisory approach of disseminating SC decisions, by mirroring the compliance practices. This effectively designates the Chief Compliance Officer (CCO) as the senior officer in charge of Shariah advisory and research, and they will be referred to as compliance officers. On the other hand, the Company Secretary (CS) assumes the role of the senior officer responsible for administrative and secretarial support to the Shariah Committee (SC).

To ensure consistency and best practices, the secretariat function should be placed under the company secretary, who can apply the same level of governance and oversight to the Shariah committee as is applied to the board of directors. This will help maintain consistency and ensure that the Shariah committee operates in line with established board best practices.

Right sizing audit on Shariah governance

In order to enhance effectiveness and efficiency, the right sizing of audit engagements on Shariah governance is crucial. The audit may be conducted thematically or by department, based on a risk-assessed audit cycle.

The scope of Shariah audit includes assessing the functions of the board of directors and the requirements of the Shariah committee in Shariah governance, as well as the secretariat of the Shariah committee or the Shariah department, senior management functions, and control functions such as Shariah risk and Shariah review.

It is possible to combine the audit of the board of directors with the audit of the company secretarial function, as they both provide functional support to the board. Similarly, the audit of the Shariah risk function can be combined with the audit of the risk management function or the operational risk function, depending on the structure and complexities of the Islamic financial institution (IFI). The audit of Shariah review can be combined with the audit of the compliance function. The audit of senior management roles and the Shariah compliance culture in Shariah governance can be integrated into the audit of the respective divisions and departments of the IFI, in addition to auditing internal controls of Shariah requirements in the divisions and departments.

The risk-assessed audit cycle will be based on the master departments, namely corporate secretarial, risk management, and compliance function. The remaining auditable scope includes the Shariah committee and the Shariah department, which can be audited in one engagement, as the Shariah department provides functional support to the Shariah committee.