In Deep Water:

Adel Islamic Bank’s

Governance Saga
This case study was developed by Asian Institute of Finance (AIF).

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In Deep Water:
Adel Islamic Bank’s Governance Saga

Adel Islamic Bank, one of the newcomers to the Islamic finance industry,
was mired in controversies after less than 3 years into operations. The bank
had gone ahead with the launching of their new Islamic deposit product
based on tawarruq concept without first getting prior approval from the
Monetary Authority on February 2013.

The CEO, Mr. Mustafa Jamal, had made a presentation of the proposed
product to the board and had convinced them to go ahead with the product
launch as heavy investment had already been made in product promotions
including flyers, advertisements and promotional materials. “We plan to
kick-start a nationwide roadshow to promote this new product as well as
existing ones. And as the figures show, this deposit product would enable the
bank to meet Basel III liquidity reqiurements,” he argued with full conviction
to the board. “This product has received full endorsement from the Shariah
Committee,” he added. After much convincing, the board caved in to the
CEO’s proposal and signed off the product.

Three months into the product launch, Adel Islamic Bank was slapped with
a hefty fine from the Authority for being deficient in its governance and
compliance as had been set out in the Procedures on Corporate Governance
for Islamic Banks1; after a series of investigation was conducted on Adel
Islamic Bank. The investigation was triggered off by a number of complaints
lodged by individuals who alleged that the financial products and services
offered by the bank were not shariah-compliant. What started off as a
routine investigation, quickly turned into a coporate governance crisis. Mr.
Mustafa Jamal, who was already in a hot seat after the Board and Shariah
Committee came down hard on him, has now been asked to submit a full
report on these allegations by the Monetary Authority.

1
These procedures mirror that of the Guidelines on Corporate Governance for Islamic Institutions
issued by Bank Negara Malaysia.

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 In Deep Water: Adel Islamic Bank’s Governance Saga

BACKGROUND OF ADEL ISLAMIC BANK

Adel Islamic Bank is a wholly-owned subsidiary of Rubio International Bank

and began its operation as the Islamic banking arm of the parent bank in
2009. Adel Islamic Bank was later incorporated as a standalone Islamic
bank in 2010. Adel Islamic Bank’s mission is to provide exceptional financial
products and services that create value in line with Shariah principles. Rubio
International Bank’s decision to enter the Islamic financial services market
with the launch of its Islamic subsidiary was in response to the growing
demand for Shariah-compliant banking.

Adel Islamic Bank offers several core banking products and services such as
savings account, credit card and financing. Leveraging on its parent bank’s
infrastructure and resources, Adel Islamic Bank has a wide network of
branches and ATMs across the country. In September 2012, the bank was
granted a merchant banking license. This allowed Adel Islamic Bank to deal
with money market instruments, trade in debt securities and offer various
capital market advisory services.

BOARD OF DIRECTORS

The first board meeting was held on April 15, 2010 to review further the
Memorandum of Association (MOA) and the Articles of Association (AOA).
The agendum discussed and decided upon, inter alia, the appointment of
the Chairman amongst the Board of Directors and the establishment and
appointment of Shariah advisors as per the provision made in the MOA
and AOA. In addition, the Board of Directors also discussed and agreed
upon sound and prudent policies and practices that Adel Islamic Bank must
implement.

In the said meeting, it was decided that there would be 8 board

members altogether. The board members also agreed that their ultimate

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 In Deep Water: Adel Islamic Bank’s Governance Saga

responsibility is to ensure maximisation of shareholders’ value and

safeguarding the interests of every stakeholder. Thus, they were of the
view that they needed to get involved in the day-to-day operations of the
bank. The board members were thus given the authority to interfere with
the management’s decisions.

The Board was aware that the Authority’s Procedures on Corporate

Governance for Islamic Banks must be strictly observed. Pursuant to and
in accordance with the said Procedures, all board members are assumed
to discharge major responsibilities of the board of directors. However,
the Board felt that Accounting and Auditing Organization for Islamic
Financial Institutions (AAOIFI) standards should be the main reference for
the operations of the bank. One of the board members, Mr. Ali Abdullah
advocated that adopting AAOIFI standards would give Adel Islamic bank
a competitive business advantage in the international market. Mr. Ali
Abdullah’s view was supported by majority of the board members. Hence,
a general consensus was made to apply AAOIFI standards, disregarding the
objection made by another board member, Miss Salina Jamaluddin. She
highlighted that the operations of the bank must be conducted prudently
within the framework of relevant laws and policies of the home country.
“AAOIFI standards are only used voluntarily as basis of internal guidelines
by Islamic banks in this country,” she added.

The Board also took a decision on the establishment of several board

committees, inclusive of the Nominating Committee, the Risk Management
Committee, the Audit Committee and the Shariah Committee. These
specialised board committees were assigned to oversee major functional
areas and address specific matters, which require detailed review and
in-depth consideration. The board recognised that competent executive
management was critical to the bank’s successful operation. Since the bank
was new, the board considered appointing junior management officers, who
were relatively competent to administer the day-to-day affairs of the bank
but with globally recognised qualifications.

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 In Deep Water: Adel Islamic Bank’s Governance Saga

Composition of Board of Directors

The composition of the board must reflect its independent role, without
any single individual or minority members dominating the decision making
process of the bank. The board should also have directors with a sufficient
mix of competencies and experience. The board for Adel Islamic Bank
comprised of 8 personnel from an array of educational and experience
background. The board members were as follows:

a. Mr. Tan Kiat Seng, a non-Muslim graduate from Harvard Law School
who has been involved in the niche area of dispute resolution in Islamic
finance for more than 5 years. He is a non-independent non-executive
director.
b. Miss Salina Jamaluddin holds a Master’s degree in management
from Singapore Management University Business School and is an
independent non-executive director.
c. Mr. Ramon Agarwal holds a PhD in Business Administration from
Wharton School, University of Pennsylvania (USA) and had served the
Ministry of Finance in the finance division for more than 10 years. He
is an independent non-executive director.
d. Mr. Jeffrey Tang is a member of the Institute of Certified Public Accounts.
He is a non-independent non-executive director. He was formerly the
President of Rating Corporation Berhad and is currently the managing
director for Takaful Sincerity.
e. Mr. Ali Abdullah has 50 years of experience in the domestic and
international Islamic finance industry. He had served as a Finance
Director at Islamic Development Bank in Jeddah for 10 years. He is an
independent executive director.
f. Dato’ Rahman Ramli graduated with a Master’s degree in Public
Administration from Edinburgh University. He also sits on the board
of the Pilgrimage Fund. He is the chairman of the Board and a non-
independent executive director.
g. Mr. Mustafa Jamal has an MBA in finance from Princeton University and
a BBA degree in finance from University Malaya. He is the managing
director / Chief Executive Officer of Adel Islamic Bank. He is a non-
independent executive director.

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 In Deep Water: Adel Islamic Bank’s Governance Saga

h. Datin Siti Shamsuddin has more than 20 years of experience as the

Deputy Chief Regulatory Officer of the Stock Exchange. Currently, she is
an Advisor to the Anti-Corruption Commission. She is the Chief Financial
Officer and a non-independent non-executive director.

Datin Siti was declared a non-independent director by the Nominating

committee because she had more than 5% equity related to the bank. In
addition, Madam Sakinah Shukri was appointed as the company secretary
during this meeting. Madam Sakinah has a law degree from the International
Islamic University Malaysia with 15 years of experience in the financial sector.
As the company secretary, she was responsible to the board for ensuring
that board procedures are followed and that applicable rules and regulations
are complied with.

Appointment of Directors
All directors and the CEO of Adel Islamic Bank had fulfilled the ‘fit and proper’
criteria. However, Mr. Ali Abdullah was involved in a minor fraud offence
when he was running a financing company some 8 years ago. He has since
repented and is now a changed man and has gained the trust of many people.

Mr. Mustafa Jamal was appointed as the CEO after a consensus was
reached by the Board members who felt him to be very competent.
The CEO was expected to be directly responsible for the day-to-day
operations of Adel Islamic Bank. The same expectation was put upon
the rest of the non-Independent directors. The duration of the CEO’s
term of appointment was determined by the Board to be not more than
5 years. Whereas for the other directors, the terms of appointment can
last until 10 years even if they were found guilty of not discharging their
responsibilities diligently.

Mr. Ali Abdullah, who has an accounting degree, was a practising

accountant at Balti Young & Company. He was initially reluctant to accept his
appointment as a Board member after knowing that Balti Young & Company
was chosen by Adel Islamic Bank to perform the bank’s financial audit. He

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 In Deep Water: Adel Islamic Bank’s Governance Saga

has not disclosed his position at Balti Young & Company to the rest of the
Board members but has decided to do so in the next Board meeting after
he had settled this matter with his firm.

The Nominating Committee is empowered to disqualify board members

including the CEO, if they were found not to be in compliance with the ‘fit
and proper’ criteria based on the Procedures on Corporate Governance for
Islamic Banks. In addition, if any of the board members were found to be
negligent in discharging their duties, the Nominating committee is required to
recommend to the Board members for onward removal of the said director.

COMPOSITION OF THE SHARIAH COMMITTEE

A Shariah Committee was formed to ensure that the operations of Adel

Islamic Bank comply with Shariah principles at all times. Hence, the
Committee was expected to perform an overseeing role on all Shariah
matters related to the business operations and activities of Adel Islamic
Bank. The main functions and responsibilities of the Shariah Committee
are as follows:

• Advise the Board on Shariah matters in the bank’s business operations

• Endorse Shariah policies and procedures by ensuring that such policies
and procedures are in line with Shariah principles
• Endorse and validate relevant documentations to ensure that financial
products and services offered by the bank are in compliance with
Shariah principles.
• Prepare written Shariah opinions in circumstances where the bank
submits applications to the Monetary Authority for new product
approval. The Shariah Committee must also provide endorsement and
decision with regards to the Shariah compliance on the concept and
mechanism or structure of every new product.

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 In Deep Water: Adel Islamic Bank’s Governance Saga

Adel Islamic Bank adopted the Shariah Governance Charter2 issued by the
Monetary Authority. As per requirement in the Charter, all members of
the Shariah Committee, except Mr. Shah Neezan, have either a Shariah
or Fiqh Muamalat degree and have high value proposition on Islamic law
of transactions and Shariah laws. Names of the committee members are
listed below:

• Mr. Shah Neezan, who has a master’s degree in financial engineering,

was appointed to sit in the Shariah Committee to provide appropriate
assistance and advice to the other Shariah advisors on matters relating to
banking and finance. Mr. Shah Neezan’s appointment was not disputed
as the Board was of the view that this did not contravene the provisions
of the Shariah Governance Charter.
• Mr. Johan Abdullah currently sits on the Shariah Committee of Nazih
Islamic Bank. When he was approached by Adel Islamic Bank, he was
reluctant to turn down the offer as the remuneration offered was
better than what he was getting from Nazih Islamic Bank. After much
consideration, Mr. Johan Abdullah decided to submit his resignation
letter to the latter, but would only do so after the successful launch of
the latest project by Nazih Islamic Bank.
• Datin Rokiah Mansor is a well-respected Shariah advisor and is also the
wife of Dato’ Rahman Ramli, one of the board members. She holds a
bachelor degree in finance and a master’s in Islamic finance from Oxford
University. She was previously the Chief Finance Officer of Salaam Islamic
Bank and is thus considered as an industry expert within the Islamic
finance community.
• Mr. Azmeer Khaleed being the most outspoken person amongst
the Shari’ah Committee members was unanimously elected as the
Chairman. A graduate from Al-Azhar University with a distinction in
Shari’ah law and he has 5 years’ working experience in Dubai as a
Shariah advisor for one of the Islamic banks there.

2
The Shariah Governance Charter issued by the Monetary Authority was adopted from the Shariah
Governance Framework drawn up by Bank Negara Malaysia.

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 In Deep Water: Adel Islamic Bank’s Governance Saga

• Dr Isnaini Mustaq is a lecturer in the Kulliyyah of Islamic Revealed

Knowledge of IIUM, a well-known international university in Malaysia.
She has done extensive research and had published papers in a number
of leading academic journals in the areas of Islamic finance for the
past 15 years. She has a bachelor degree in human science, a master’s
in Islamic Studies and a PhD in Shari’ah. Unknown to the Board, a
petition under bankruptcy law was filed against Dr Isnaini prior to her
appointment at Adel Islamic Bank. The case was filed in response to a
debt in which her husband failed to repay and for which she was the
guarantor.

The Shariah Committee members were fully aware that Adel Islamic
Bank had engaged a renowned Shariah consultancy firm based in Kuala
Lumpur. The bank seeks advice from the said firm every four months
with the purpose of double checking Shariah compliancy of the bank’s
operations. Their role was comparable to that of an external auditor.

Duties and responsibilities of the Shariah Committee were governed

by the Shariah Governance Charter. As such the Committee members
were required to attend at least 75% of Shariah Committee meetings
in each financial year. It was also decided by the board that Mr. Tan
Kiat Seng must attend the Shariah Committee meetings, considering his
legal background. His presence would enlighten the Shariah Committee
members on the existing legal and regulatory framework. This decision
to have Mr. Tan Kiat Seng attend Shariah Committee meetings was
thought to be helpful in aiding the decision making process of the
committee. As a representative of the board, Mr. Tan Kiat Seng was able
to communicate directly with the Shariah Committee to ensure that the
board’s and Shariah Committee’s priorities are similar.

As per the requirement of the Shariah Governance Charter, the Shariah

Committee was expected to assess the work carried out through Shariah
review, Shariah audit, Shariah research and Shariah risk management.
However, due to lack of resources, the Committee had taken on the
task of performing all these functions except for Shariah audit as they
wanted to ensure transparency prevails in the whole operation of Adel
Islamic Bank.

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 In Deep Water: Adel Islamic Bank’s Governance Saga

MORE COMPLIANCE ISSUES AS THE SAGA CONTINUES

a. Credit Card Facility (Bay’ al-Inah)

In the pipeline, together with the launch of the Islamic deposit product was
a credit card facility based on Bay’ al-Inah principle. The deadline for the
launch of this credit card was set for 30th May 2013. Before it can be offered
to the general public, the product must first be endorsed and validated by the
Shariah Committee with regard to Shariah-compliance. A Shariah Committee
meeting with full attendance was held two days before the deadline.

While all members had participated in the deliberations on the matter,

Mr. Shah Neezan opted to remain silent throughout the meeting, as he
felt inferior in the presence of experts in the field of Shariah. He only gave
commentaries and suggestions pertaining to operational issues. After an
extensive deliberation, committee members concluded that a number of
unresolved matters still remain, which amount to uncertainty of the product.
Hence, they arrived at the decision that the product did not comply with
Shariah principles.

Management was however unhappy with this decision and immediately

brought this matter to the attention of the Board. Management arguing
that the proposed credit card facility is similar to the ones already being
offered by Salaam Islamic Bank and Nazih Islamic Bank and as such the
Shariah Committee should have given their endorsement. Another Shariah
Committee meeting was called to review, and perhaps reverse the earlier
decision. It was reported that only the Chairman of the committee, Mr.
Azmeer Khaleed, was unable to attend.

In the second sitting to review the credit card facility, the committee
members reversed their earlier decision and endorsed the product, subject
to certain conditions. The Shariah Committee’s real concern was related with
a new circular issued by the Monetary Authority, which requires complete
independence of the two sales in the Bay’ al-Inah structure. The legal
documents presented to the Shariah Committee, however, did not meet the
conditions for the validity of Bay’ al-Inah contract. Mr. Tan Kiat Seng, who
was in attendance, assured the Shariah Committee that the documentation
presented to them had sufficiently provided for independence of the two

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 In Deep Water: Adel Islamic Bank’s Governance Saga

sales contracts. The Shariah Committee endorsed the product but “subject to
the condition that the legal documentation ensures complete independence
of the two contracts”.

b. Al-Ijarah Thumma al-Bay’ (AITAB)

Fortune Limited was a printing company registered under the Company
Act and established in 2004. In 2010, it entered into a leasing contract
(based on Al-Ijarah Thumma al-Bay’) with Adel Islamic Bank for the purpose
of purchasing printing equipment. The term of the lease was 36 months,
beginning August 1, 2010. The total payable by Fortune Limited was $1.5
million. The leasing contract clearly stated that in the event Fortune Limited
defaults in payment, it will be charged accordingly. The contract, however,
was silent in the event of default by the supplier of the printing equipment.
The supplier not only failed to deliver on time as per agreement, but
some manufacturing defects were also found on some of the equipment
delivered to Fortune Limited. Not satisifed with this substandard products
received, Fortune Limited lodged a formal complaint. As a result, the Shariah
Committee was called to deliberate on this matter.

During the meeting, the committee ruled that the bank failed to put in
writing specific clauses with regards to material or equipment defects.
Hence, the committee took on the view that the Adel Islamic Bank was only
entitled to $1 million where $500,000 was to be considered as unearned
profit. The board members disputed against this ruling, contending that as
the contract was silent on the default on part of the supplier or failure of
the supplier to supply the goods in an agreed form and shape, the bank
should not be penalised for this.

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 In Deep Water: Adel Islamic Bank’s Governance Saga

The Shariah Committee opined that Adel Islamic Bank International could
force Fortune Limited to pay the full amount on the condition that the
bank would also raise the disputed matter with the supplier. In the case of
successful negotiations and a discount received from the supplier, Fortune
Limited should be compensated for its lack of complete satisfaction with
the printing equipment received. It was later discovered that Adel Islamic
Bank had received full payment from Fortune Limited. The bank had also
successfully negotiated a discount from the supplier but failed to pass on
the benefit to Fortune Limited.

c. Bay’ Bithaman Ajil (BBA)

Adel Islamic Bank entered into a property purchase agreement and a
property sale agreement (based on Bay’ Bithaman Ajil or BBA) with One
Heart Development on April 6, 2011. Under the said contract, Adel Islamic
Bank would purchase 10 lots of land from One Heart Development for the
price of $4 million payable immediately after the purchase. The same lots
of land were later resold to One Heart Development for $8.5 million on the
basis of deferred terms. The condition “must buy back option” was included
in the agreement indicating that One Heart Development must buy back
the land from Adel Islamic Bank. This buy back option was reviewed by
the Shariah Committee in its January 2013 regular monthly meeting. The
committee ruled that the condition to repurchase the land was against the
Monetary Authority’s new Shariah guidelines and hence, must be removed
from the contract. The Board remained reluctant to this ruling as there was
a high risk attached to it and was of the view that the said condition of the
contract must be maintained as the contract was entered into prior to the
new Shariah guidelines on BBA.

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 In Deep Water: Adel Islamic Bank’s Governance Saga

THE FALLOUT

One day after Adel Islamic Bank was slapped with a fine, the bank announced
that it had begun an internal review. Five days later, Adel Islamic Bank
decided to postpone its Q2 2013 earnings conference call. After an extensive
and thorough investigation, the Audit Committee concluded that the bank’s
internal controls were inadequate and a number of Shariah governance
issues were highlighted. A number of corrective actions were taken by the
board including the appointment of a new CEO and recommended that a
risk management system as a safety valve prior to the Shariah Committee
certification should be developed.

Adel Islamic Bank faced a further blow when Mr. Shah Neezan resigned from
the Shariah Committee. Mr. Shah Neezan said in a statement announcing
his resignation: “The lapses in Shariah governance of Adel Islamic Bank were
not due to the incompetencies of the Shariah Committee members but
because of the heavy pressure exerted on them by bank’s management”.
According to him, replacing the CEO was merely to window dress the whole
fiasco and that Mr. Mustafa Jamal was unfortunately made the scapegoat.

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