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Muhammad Zeeshan Farrukh has around 13 years of research, study, practice and teaching experience of Islamic Economics, Banking and Finance out of which more than ten years' core working experience of Product Development and Management, Shariah Compliance Marketing and Training and Development in Islamic Banking. At present, he is working as Team Leader -- Research, Training and Development Unit in Islamic Banking Group of National Bank of Pakistan.

He is associated with different periodicals and journals as Board Member and Reviewer.

The major qualifications are MBA and CIFP (Malaysia). Beside these, he has also done courses in Islamic Studies, Islamic Law and Islamic Jurisprudence. He holds membership of Chartered Institute of Islamic Finance Professionals (CIIF), Pakistan Institute of Management (PIM) and Pakistan Society of Development Economists (PSDE).

His field of interest and research is Islamic Economics and Finance and he has written various articles/papers based upon Islamic Economics and Finance which have been published and presented in different periodicals and conferences.


As we all know that Islamic Financial Industry is developing day by day worldwide, there is a need to set adequate and proper policies and regulatory framework to run this industry in an appropriate and smooth manner. In this respect, the suitable Shariah Governance System is mandatory for the industry for effective Shariah compliance.

According to Islamic Financial Services Board (IFSB), Malaysia (IFSB), "Shariah Governance System" refers to the set of institutional and organizational arrangements through which an IIFS ensures effective independent oversight of Shariah compliance over each of the following structures and processes:

(a) Issuance of relevant Shariah pronouncements/resolutions which refers to a juristic opinion on any matter pertaining to Shariah issues in Islamic finance.

(b) Dissemination of information on such Shariah pronouncements/resolutions to the operative personnel of IIFS who monitor the day-to-day compliance of operations and transactions. Such a task would normally be undertaken by a designated "internal Shariah compliance unit/department (ISCU), or at least a Shariah compliance officer who is part of the IIFS's compliance team.

(c) An internal Shariah compliance review/audit for verifying that Shariah compliance.

(d) An annual Shariah compliance review/audit for verifying that the internal Shariah compliance review/audit has been appropriately carried out and its findings have been duly noted by the Shariah board. The Shariah board who issued the Shariah Pronouncements/resolutions can take charge of this process, having received feedback and reports from the internal Shariah compliance review unit (ISRU). This task may be assigned to an appropriately competent external auditor or external Shariah firm.

Islamic Financial Services Board (IFSB), Malaysia proposes comprehensive Shariah Governance System having five parts and nine principles. These guiding principles may be adopted by IIFS (Institutions Offering Islamic Financial Services) and regulatory bodies in different jurisdictions according to their own social, economic, political and business environments. The brief introduction of these guidelines is as under:


Principle 1.1: The shariah governance structure adopted by the iifs should be commensurate and proportionate with the size, complexity and nature of its business.

At present, there are various Shariah governance structures and models that have been adopted in different jurisdictions according to the decision of supervisory authorities in this respect, the certain authorities takes steps to ensure properly functioning Shariah Governance System by formulating general consultative process, issue circulars and directives relating to Shariah-compliant products and impose the requirement of minimum number of members of the Shariah board, who must also meet certain "fit and proper" criteria. In some jurisdictions, supervisory authorities have also created Shariah board that works together to issue standardized Shariah pronouncements/resolutions.

In line with internationally recognized corporate governance standards, IIFS should exercise proper discretion in choosing Shariah governance structures so that they appropriately safeguard the fulfillment of fiduciary duties including good faith, care, skill and diligence towards all their stakeholders. IIFS should construct Shariah board with a mixture of experience and competencies. Shariah board has at least three members with different schools of jurisprudence; different lengths of experience and different nationalities with exposure in the areas of commerce or finance.

Principle 1.2: Each iifs must ensure that the shariah board has:

- clear terms of reference regarding its mandate and responsibility;

- well-defined operating procedures and lines of reporting; and

- good understanding of, and familiarity with, professional ethics and conduct.

In order for the Shariah board to have a precise chain of command and accountability towards the respective stakeholders of the IIFS, it has to be equipped with:

(i) the appropriate powers to carry out its role and functions;

(ii) well-organized operating procedures with regard to meetings, the recording of meetings, decision-making processes and to whom its decisions will be passed for effective implementation, including processes to review those decisions whenever necessary; and

(iii) a sound code of ethics and conduct that would enhance the integrity, professionalism and credibility of the members of the Shariah board.


Principle 2.1: The iifs shall ensure that any person mandated with overseeing the shariah governance system fulfills acceptable fit and proper criteria.

In view of the importance of the persons responsible for the Shariah Governance System in IIFS, the certain "fit and proper" criteria should be imposed on members of the Shariah board as well as officers of the ISCU and ISRU.

With respect to good character i.e. honesty, integrity, fairness and reputation, IIFS should put in place a transparent process for the appointment of Shariah board. In most jurisdictions, the regulatory framework requires the appointment by BOD. In other jurisdictions, where no such clear regulation exists, IIFS may leave this task to the Shariah board, to conduct their own self-screening, or upon the senior management. Here, it is recommended that a certain committee can nominate the Shariah board for the shareholders to approve like good governance practice i.e. Nomination Committee or Audit Committee nominates the external auditor for further approval from shareholders.

IIFS should ensure that members of the Shariah board have appropriate competence and ability to understand the technical requirements of the business, the inherent risks therein, and the management processes for smooth functioning. These may include but not limited to:

(i) fulfillment of certain qualifications and experience;

(ii) physically, mentally and emotionally fitness;

(iii) scrutiny of any conviction for negligence, incompetence, fraud or mismanagement; and

(iv) sound knowledge of the business and the responsibilities of the position.

Principle 2.2: The iifs shall facilitate continuous professional development of persons serving on its shariah board, as well as its iscu and isru, if any.

In order to enhance the professionalism and effectiveness of members of the Shariah board, ISCU or ISRU, the IIFS should arrange continuous professional development including relevant policies and procedures, and all applicable legal and regulatory requirements so that they are equipped with the latest trends and developments.

The arrangement of exchange of knowledge and expertise between members of the Shariah board and internal Shariah officers with the BOD, senior management, and other staff and time to time training for other departments of IIFS would lead to further development of capabilities of personnel of IIFS.

Principle 2.3: There should be a formal assessment of the effectiveness of the shariiah board as a whole and of the contribution by each member to the effectiveness of the shariah board.

The members of the Shariah board shall be known about the certain expectations. In this context, IIFS shall set certain objective and performance criteria in consultation with the Shariah board.

IIFS may also allow the Shariah board to carry out a self-assessment, based on pre agreed criteria for the purpose to check the efficiency of individuals as expected from them. The assessment process should be transparent and free from any influence or force on the Shariah board that affects the independence of Shariah Board.


Principle 3.1: The Shariah board should play a strong and independent oversight role, with adequate capability to exercise objective judgment on Shariah-related matters. No individual or group of individuals shall be allowed to dominate the Shariah board's decision-making.

In some jurisdictions, the appointment and/or termination of the Shariah board or its members are approved and announced from the supervisory authority. The strength and independence of the Shariah board could be enhanced by appointing persons from different backgrounds.

IIFS shall have in place an appropriate and transparent process for resolving any differences of opinion between the BOD and the Shariah board. This process should be formalized to resolve certain differences without compromising the binding nature of the pronouncements/resolutions of the Shariah board.

The members of the Shariah board should not any blood or intimate relationship with IIFS, its related companies or its officers that could interfere in independent judgment of the Shariah board. In case of Shariah advisory firms, there should not be any relationship in terms of having common shareholders or common directors. In case of existence of any relationship, it should be properly disclosed to the concerned or public.

IIFS should ensure the adequate ability to perform duties of a member of Shariah Board in case of their representation in multiple Shariah Boards by making proper guidelines in this respect.

Principle 3.2: In order to fulfill their responsibilities, the Shariah board should be provided with complete, adequate and timely information prior to all meetings and on an ongoing basis.

IIFS must provide separate and independent access to certain information to Shariah Board to perform their duties effectively. Such information should be supplied in a complete and easy manner that may fulfill the purpose of Shariah Board to obtain such information.

Where the Shariah board has its own secretariat, the appointment and removal of members of the secretariat should be done in consultation with the Shariah board.

IIFS should make a procedure for the Shariah board to take further independent professional advice on legal, accounting, financial or valuation issues etc.


Principle 4.1: Shariah board members should ensure that internal information obtained in the course of their duties is kept confidential.

As a matter of professional ethics, the members of Shariah Board, internal Shariah officers or Shariah advisory firms should not use or pass any such information as it could be harmful for IIFS particularly from competitive point of view. In this respect, the non-disclosure agreement or a letter of undertaking should be obtained.

Examples of confidential information are development of new products and services; the opinions or decisions of the senior management; internal correspondence, conversations and presentation etc. before the Shariah board or Shariah advisory firms and points of discussion in meetings between Shariah Board or Shariah advisory firms and IIFS; several views of certain parties in meetings etc; the status of certain transactions or activities not yet finalized; internal practices, procedures, content and conversations; actions of fellow member of the Shariah board or Shariah advisory firm etc.

In case of leakage of information in this respect, IIFS should have risk management controls to mitigate the expected damages. The procedures for disciplinary and administrative actions against the Shariah Board or its members should also be placed in this respect.


Principle 5.1: The IIFS should fully understand the legal and regulatory framework for issuance of Shariah pronouncements/resolutions in the jurisdiction where it operates. It should ensure that its Shariah board strictly observes the said framework and, wherever possible, promotes convergence of the Shariah governance standards.

IIFS should know about the procedures for dissemination or issuance of Shariah pronouncement/resolution to the press or the general public.

Being an owner of the intellectual property of certain Shariah pronouncements/resolutions, IIFS may restrict dissemination of certain Shariah pronouncements, by making policy or by mentioning in terms of reference, to stop leakage of business intelligence and internal information to inappropriate parties.

A majority of Shariah boards mentions the permissibility or non-permissibility in their Shariah pronouncements/resolutions at the time of execution of transaction or a product that the IIFS wishes to offer. In some cases, Shariah pronouncements/resolutions also have supporting evidence that could be examined by other members of the Shariah board but the general public cannot understand or aware of the basis due to technical pronouncement or level of difficulty in understanding. By providing wider access for such pronouncements/resolutions, the strong public support and appreciation of the Shariah boards' roles can come through better awareness.
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Publication:Pakistan & Gulf Economist
Date:Jun 26, 2016

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