NH-2016-q2

NEWHORIZON July – December 2016
ANALYSIS
to share risk in transactions
undertaken by them involving
investment of bank funds to
finance a customer’s requirement;
• Islamic banks cannot engage in
transactions that are associated
with extreme uncertainty,
speculation or gambling (gharar
and maysir);
• Business transactions conducted
by Islamic banks must be backed
by real assets that are capable of
producing income for the benefit
of the real economy;
• Islamic banks are required to
maintain the moral purity of
all transactions and business
undertaken by them;
• Islamic banks are required to
show care for the Maqasid Al
Shari’ah, which has to do with
achieving the well-being of
society as a whole.
Customers in Islamic banks expect
that products and services will be in
strict compliance with the Shari’ah
requirements. Islamic banks risk serious
damage to their reputation and even
failure if they fail to comply with Shari’ah
requirements.
Islamic banks have to establish a board or
committee of qualified Shari’ah scholars/
advisors, called the ‘Shari’ah Supervisory
Board’, to certify that ‘Islamic’ products
and services developed by Islamic banks
are Shari’ah compliant before these are
offered to the public, and that the bank’s
operations are also Shari’ah compliant. It
has been pointed out however, that this
does not exclude the board of directors
and staff at all levels, in particular
senior management, from also being
responsible for developing, implementing
and maintaining adequate systems and
controls to ensure continuing compliance
with all Shari’ah requirements in all
areas of operations. This responsibility
is overseen by an internal Shari’ahcompliance
audit department set up by
the senior management and the Shari’ah
supervisory board of the Islamic bank
as part of the corporate governance
structure.
The foregoing discussion attempts to
highlight the nature and importance
of good corporate governance for
businesses generally and for banks in
particular under both the conventional
governance framework and the Islamic
model for Islamic financial institutions
offering Shari’ah-compliant products and
services.
There is a question as to whether or not
boards of directors and managements
should be liable for Shari’ah noncompliance
and failure to pay attention
to Maqasid al Shari’ah. The following
points need to be borne in mind when
attempting to answer this question.
1. Customers of Islamic banks
expect that products and services
will be in strict compliance with
the Shari’ah requirements. That
is indeed the reason for the
existence of the Islamic bank
in the first place. However,
where an Islamic bank offers
products and services marketed
as being Shari’ah compliant,
but are found not to be so, the
board of directors and senior
management must be liable. This
would represent failure to ensure
compliance with stakeholders’
religious beliefs. It is the
responsibility of the board of
directors working in conjunction
with the Shari’ah supervisory
board, internal Shari’ah audit unit
and senior management to ensure
Shari’ah compliance in terms of
product development, pricing
and service delivery.
Many Islamic bank leaders need
to pay more attention to the
basic moral foundation of their
institutions and activities and the
methods by which the activities
are conducted as often, they are
done simply on the need for
legal compliance. The leaders
appear to be more pre-occupied
with maximising profit for
shareholders and themselves
and on products and structures
to give the same returns as
conventional banking rather
than with respect for economic
justice and social benevolence
as enshrined under the Maqasid
al Shari’ah.
2. Where, however, there are
economy-wide impediments
of a general nature that relate
to the legal framework, fiscal
instruments and objectives
and the inadequacy of the
financial infrastructure that
prevent full implementation
of Shari’ah-compliant
governance and operational
structures for Islamic banks,
boards of directors and
senior management cannot be
blamed for aspects of Shari’ah
non-compliance in banking
operations. In Nigeria today,
for example, where Jaiz Bank,
is the first and so far, the only
full-fledged non-interest Islamic
bank to exist, the biggest
challenge is the absence of
Shari’ah-compliant liquidity
management instruments.
In that absence the bank is
compelled to invest their
excess liquidity in riba-based
treasury instruments purely as
a survival strategy, although
the income from such sources
is donated to charity in
line with the principles of
purification of ‘impure’ income
under darura as advocated
by Shari’ah scholars. The
board of directors and senior
management cannot, therefore,
be held liable for infractions
of Shari’ah requirements for
Islamic banks under difficult
operating environments such as
this.
www.islamic-banking.com IIBI 35