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8/9/2019 Shariah Scholars as an Independent Director : A Proposal
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Shariah Scholars as an Independent Director: A Proposal
By: Ezry Fahmy
1.0Shariah scholars in IFIs
Malaysian rules and regulations have spelled out several provisions in relation to the
establishment ofShariah Advisory Committee (SAC) in the islamic financial institutions
in Malaysia. The existence of Shariah Advisory Committee (SAC) or Shariah
Supervisory Board (SSB) is one of the most important governance mechanisms of an
Islamic Financial Institution (IFI) to ensure the Islamic Financial Institutions (IFIs) are
compliance with Shariah.
It is important for the SSB to understand their roles and responsibilities as well as the
process of how an SSB should reviews the performance of a given IFIs. The roles and
responsibilities of the SSB of IFIs as define by the AAOIFI connotes a greater duty of not
only endorsing and approving the Banks products but ensuring its compliance through
directing, supervising and importantly reviewing its operations. This actually has no
difference than what define by IBA 1983 whereby the function of the Shariah committee
is more than just an advisory role on the banks operation1. Thus the SSB are considered
to be responsible in most aspects of the banks operational.
The Shariah scholars who act as advisors grounded in endorsement of all products
and services of their respective IFIs, without whom the compliance of the product to the
Shariah would be questionable2. This critical role is indiscriminate to all financial
products, be it banking, takaful, capital markets, wealth management and so forth.According to AAOIFI standard, Shariah advisers can be defined primarily as
"specialized jurists, particularly infiqh muamalah and Islamic finance, entrusted with the
1Mohd Hairul et. al.(2009) The Practice of Shariah Review as Undertaken by Islamic Banking Sector in Malaysia.
International Review of Business Research Papers. 5(1). p. 294-306.2 Aznan Hasan. (2009) How Shariah boards add value. Retrieved on March 8, 2010 from
http://www.thefreelibrary.com/How+Shariah+boards+add+value.-a0212386367
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duty of directing, reviewing and supervising the activities related to Islamic finance to
ensure they are in compliance with Shariah rules and principles. The views of the
Shariah adviser shall be binding in the specific area of supervision".3
1.1Role and responsibilities ofShariah scholars
As what explained above whereby the roles and responsibilities of the Shariah
scholars as SSB in respective IFIs has a lot to do with ensuring the operational side of
IFIs are Shariah compliance. Therefore, indirectly the Shariah advisor control what
dos and donts in the IFIs operational sides and their authority in approving products and
services more or less determine the path of the IFIs in terms of growth and sustainability.
Consequently, there should be no chance for conflict of interest between the Shariah
advisor and the IFIs!
Another question mark that we feel important to raise is whether the endorsement
in the yearly annual report where the Shariah advisor claims that we hereby confirm
that all the business activities fulfill the Shariah requirement. Personally, we have a
doubt; because it lacks the criteria of being independent. Our premise is that, the Shariah
officer/advisor works in the organization, paid by the organization and where the one
who approves the many products offered by the bank. Therefore, it does not seem right to
have people from inside to make such claim. Even the financial reports are being
validated by an external auditor.
2.0 Comprehend the position of Independent director and Shariah Scholars
Analyzing such statement above indirectly questioning why it is in the first place
there is a need of independent director especially for Shariah scholars? As what
explained above whereby the roles and responsibilities of the Shariah scholars as SAC
in respective IFIs has a lot to do with ensuring the operational side of IFIs are Shariah
3AAIOIFI, Accounting and Auditing Organization for Islamic Financial Institutions. (1999), Governance Standard for
Islamic Financial Institutions. No. 1 - Sharia Supervisory Board: Appointment, Composition and Report.
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compliance. Therefore, indirectly the Shariah advisor control what dos and donts in the
IFIs operational sides and their authority in approving products and services more or less
determine the path of the IFIs in terms of growth and sustainability. Consequently, there
should be no chance for conflict of interest between the Shariah advisor and the IFIs!
But currently, majority IFIs in the Islamic finance industry appointed the Shariah
scholars and pays them as advisor for the IFIs. Therefore, there is a direct relationship
between the Shariah advisor and the IFIs their working with. This kind of relationship
reflects that the Shariah Advisory Committee (SAC) as not totally independent as what
the bankers ought to be. Especially when such issues rise when in some cases like
products and services by Malaysias IFIs, which are often, deemed not Shariah
complaint in the more austere Gulf. These kind of issues being used by the critics as they
called Fatwa Shopping where the bankers phone up a Shariah scholar that are willing
to give them a Fatwa to seal of approval, confirming the product is Shariah compliant by
offer them a sum of money4. Such claim analogically may be viewed as a glass of water
with half empty or half filled. But on the other side, this kind of case will happen as long
as the Shariah scholars are attached with the respective IFIs.
3.0 Independent director in IFIs
The idea of having one ofShariah scholar as independent director in IFIs mainly
because to ensure there are sound policies, procedures and effective and efficient
monitoring systems with proper checks and balances can be done especially regards to
Shariah matters in IFIs operational process. An independent director can be explained
as5:
a) not been employed by the Company
b) not, and is not affiliated with a company that is an advisor or consultant to the
Company
c) not affiliated with a significant customer or supplier of the Company
4John Foster. (2010). How Sharia-compliant is Islamic banking?. BCC News. Retrieved on March 23, 2010, from
http://news.bbc.co.uk/2/hi/business/8401421.stm5Bursa Malaysia. (n.d). Corporate Governance Guide: Towards Boardroom Excellence. p.22
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d) no personal service contracts with the Company
e) not affiliated with a non-profit organization that receives significant funding
from the Company
f) not employed as an executive of another company where any of theCompany's executives serve on that company's board of directors
g) not a member of the immediate family of an individual who is, or has been
during the past five years, employed by the Company
h) not a controlling person of the Company
In simple words, an independent director is one who is independent of management
and free from any business or other relationship that could interfere with the exercise ofindependent judgment or the ability to act in the best interests of a listed company
6. The
purpose of identifying and appointing independent directors especially the Shariah
scholar is to ensure that the board includes directors who can effectively exercise their
best judgment for the exclusive benefit of the IFIs, judgment that is not clouded by real or
perceived conflicts of interest.
In IFIs case, the business operational processes represent Islamic business
organization, it portrays the image of Islam, thus any actions or decisions have direct and
indirect impact towards the teachings and religion of Islam. By having a Shariah scholar
in as the independent director, the Shariah scholar can help the board to provides
expertise and guidance on conformance to the Shariah principles in all matters of the IFI
business operations.
Having a Shariah background person in the board of director and being independent
will give good impression to the public. A Shariah scholar is a person with good
reputation and character as well as possesses the necessary qualifications and expertise,
particularly in fiqh muamalah and Islamic jurisprudence, and has experience and/or
exposure in Islamic finance brings greater confidence from the public towards the IFIs.
6Bursa Malaysia. (n.d). Corporate Governance Guide: Towards Boardroom Excellence. p.23.
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