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GlOBAL ISLAMIC FINANCE FORUM

KUALA LUMPUR 26-29 MARCH 2007

FINANCIAL REGULATORS FORUM IN ISLAMIC FINANCE

Panel Discussion 2: Optimal Shariah Governance in Islamic Finance: Reporting Perspective
March 28, 2007
Dr. Syed Musa Alhabshi Principal Consultant Amanie Business Solutions 1

Shariah Governance: By Whom? For Whom? REGULATORS SC & BNM SUPERVISION & SHARIAH ADVISORY COUNCILS IFI SHARIAH SUPERVISORY BOARD & SHARIAH COMMITEE INVESTMENT ACCOUNT HODERS & SHAREHOLDERS EXTERNAL AUDITORS BOARD OF DIRECTORS AUDIT & GOVERNANCE COMMITEE 2 .

Optimality – Trade Off Considerations • Opportunistic vis-a-vis Efficiency Behavior • Agency (conflict) vis a vis Stewardship Relationship (congruence) • Rule vis a vis Principle Based Approach • Regulation vis a vis Governance Mechanism • Internalization vis a vis Transaction costs • Proprietary (confidentiality) vis a vis Transparency (Disclosure) • Economic Decision Usefulness vis a vis Reporting Accountability • Public confidence vis a vis Market discipline • Investor vis a vis Stakeholder Perspectives • Investment Account Holders vis a vis Shareholders Interest • Profitability vis a vis liquidity objectives 3 .

Procedure & Documentation Positioning. Efficiency and Equitable Conflict Resolution and Arbitration 4 .Areas of Concern: • • • • • • • Product Endorsement & Approvals System. Branding and Promotion Disclosures & Reporting Risk Assessment & Management Performance.

Reliable & Equitable Sound. Governance & Opinion Policy. Sustainable & International Acceptance Counter Party Interest Counter Party Interest Investors (Shareholders & IAH) & Stakeholders Investors ( Shareholders & IAH). Valid. Equitable Lawful & Valid Lawful.Levels of Shariah Compliance Behavior Levels Activity Assurance For Whom Product Transaction Entity Endorsement Endorsement Policy. Governance & Regulation Lawful. Stable. Valid. Stakeholders & Public Interest National Policy 5 .

FINANCIAL REPORTING. AUDITING & GOVERNANCE FRAMEWORK SHAREHOLDERS SHAREHOLDERS AAOIFI IFSB AUDIT AUDIT COMMITTEE COMMITTEE INVESTMENT INVESTMENT ACCOUNT ACCOUNT HOLDERS HOLDERS ISLAMIC ISLAMIC FINANCIAL FINANCIAL INSTITUTION INSTITUTION SHARI’AH SHARI’AH SUPERVISORY SUPERVISORY BOARD BOARD OTHER OTHER STAKEHOLDERS STAKEHOLDERS REGULATORY AUTHORITIES GOVERNANCE GOVERNANCE COMITTEE COMITTEE 6 .

Reporting & Communication Channels Audit & Governance Committee Express Shariah Opinion on IFI True & Fair Opinion Shariah Board/Shariah Committee External Auditor Formulate Policy Shariah Endorsement Internal Audit ATTEST Shariah Review Islamic Financial Institution INTERNAL CONTROL SYSTEM Testing for Shariah Compliance 7 Internal Shariah Review .

Auditing & Governance Standards Shari’ah Goals. Opinions & Rulings Propounded by Shari’ah Scholars Prudential Guidelines & Standards Promulgated By IFSB to Ensure Risk Management & Disclosure Framework Related to Capital Adequacy.Multi-Disciplinary Perspectives on Role of Shariah Review. Audit & Governance Financial. Monetary Authorities or Supervisory Agencies 8 . Reports and other Useful Information Required by AAOIFI & Relevant International Financial Reporting. Corporate Governance & Market Discipline SHARIAH COMPLIANCE BEHAVIOR Regulatory requirements by Central Banks. Statements.

internal control processes and activities of IFI are Shariah Compliant Statement of Corporate Governance 9 . Opinions & Policies Shariah rulngs & basis Approved Products & Services SC & BNM SAC SC & BNM Supervisory Review Conduct supervision of IFI on Shariah compliance Specific Guidelines & Reports on Shariah compliance SHARIAH SUPERVISORY BOARDS & SHARIAH COMMITTEE Formulate and review IFI Shariah opinions and policies Undertake financial audit to express true and fair opinion Comprehensive Shariah Supervisory Report EXTERNAL AUDITORS External Audit report BOARD OF DIRECTORS AUDIT & GOVERNANCE COMMITTEE Structure.Shariah Governance Assurance Framework Promulgate National Shariah Rulings.

THANK YOU & WASSALAM 10 .