The Independence Of The Shariah Committee Of Islamic Financial Institutions In Malaysia: Legal Analysis
Keywords: Shariah CommitteeIslamic bankingIslamic LawIslamic FinanceIndependenceGovernance
In general, independence means ‘not subject to the control or influence of another’ (Bryan, 2004). Another definition is ‘the freedom and ability to make your own decisions in life, without having to ask other people for permission, help, or money’ (Fox, 2006). According to the standard issued by Accounting and Auditing Organisation for Islamic Financial Institutions (hereinafter referred to as “AAOIFI”), it defines independence as an attitude of mind which does not allow the viewpoints and conclusions of its possessor to become reliant on or subordinate to the influences and pressures of conflicting interest. The independence is achieved through organizational status and objectivity (AAOIFI, Governance Standard for IFIs No. 5: Independence of Sharia Supervisory Board, paragraph 2). This AAOIFI’s standard emphasizes intellectual freedom of the SC in providing an opinion or making a decision without relying or influencing by any other party or any pressure that could lead to a conflict of interest.
SC has a function to monitor all the bank’s activities and products and make sure that the activities and products are
AAOIFI also has issued standard definition as guidance to the IFIs. Pursuant to definition given by AAOIFI, it can be seen that the element of an independent body of specialized jurists in Islamic commercial jurisprudence is very crucial. At the same time the standard allows the board to appoint other member who are expert in the field of Islamic financial institutions and with knowledge of Islamic transaction. The standard also clearly states the duty of SC namely, the duty of directing, reviewing and supervising the activities of the IFI in ensuring
Hassan, Rizwan and Sohail (2017) opine that SC is an independent authority that is not working on the umbrella of other authorities. It also has no any fear from the upper level management. According to Laldin (2008), the independence of the SC is divided into intellectual independence and organization independence. Intellectual freedom refers to the ability of the SC to make an objective decision free form any influence. This can be achieved via precise screening and analysis on the issue brought before them. Accordingly, the SC needs to engage themselves in the operation of the IFIs, particularly the creation of new products until the day of issuance. Hence, the SC is capable to audit the institution comprehensively, to access to important information and to understand the product in terms of its purpose, its effect on the society and achieve the objectives of
In preserving the independence of the SC, AAOIFI’s standard emphasizes five things as the pillars of the independence including the objectivity, continuous assessment, basis of SC independence, resolution of issues of independent impairment and the responsibility for implementation of this standard as guidance for IFIs. In achieving the objectivity which refers to the sustainability of independent mental attitude of this body in implementing
The second point is regarding the need for the members of SC to constantly evaluate their relationship with the IFIs in order to identify any situations that affect or will affect their independence in performing
Next, the standard elucidates the basis of the independence of the SC which is derived from the Islamic
According to Hammad (2006), the duties should be performed objectively, with integrity, avoid bias in judgment, tolerance and avoid extremism in religion. Among the methods that can be used are; (a) Doing exhaustive research and thorough understanding of the subject or the problem by using all possible methods and not hurry to issue a ruling; (b) Tolerating in accepting ijtihad (juristic inference) or opinion of jurists of any
In Malaysia, the duties, responsibilities and accountability of the SC have been prescribed by the statutes governing the IFIs as well as the Guidelines issued by Central Bank of Malaysia (hereinafter referred to as “CBM”). In the early stage of the implementation of Islamic banking and financial business in Malaysia, the statutes have provided the duties of the SC in a general manner. The SC is assigned with the duties and responsibilities to advise the Islamic banks and the takaful operators on the operations of its Islamic financial business in order to ensure that the operation of the institutions free from any element which is not allowed in
IFSA also grants permission to CBM to specify standards relating to the duties and functions of the SC (IFSA, section 29(2)(a)(i)). Accordingly, the SC and its members shall observe such duties and functions as set out by CBM (IFSA, section 29(5)). CBM has specified standards on such duties and functions of the SC in
Hence, to what extents the existing legislations governing IFIS provides provisions which deal with the independence of SC established by IFIs in Malaysia. To what extent the existing legislations guaranteed the independence of SC?
This research is carried out to answer two questions: (a) to what extend the existing legislations governing the independence of the SC in Malaysia? (b) What are the issues arising from the existing legislations governing the independence of the SC in Malaysia?
Purpose of the Study
The objectives of this article are: (a) to analyse the provisions of legislations governing the independence of the SC in Malaysia. (b) To analyse the legal issues pertaining to the independence of SC in Malaysia.
This study adopts the legal research method in order to achieve the objectives of the study. The data used were largely library-based consisting of primary data which was collected from statutes passed by Parliament of Malaysia and the guidelines issued by CBM which regulate the Islamic financial system in Malaysia. In order to achieve the objective of this study, descriptive and exploratory data analysis method is used in explaining the independence aspects of the SC stipulated by the existing legislations in Malaysia. The analytical and critical analysis method is used in order to analyse the issues pertaining to the independence of SC in Malaysia.
In relation to the independence of SC in Malaysia, the existing legislations governing IFIs has provides several provisions in ensuring the independence of SC. According to SGF, the duties and responsibilities of SC are (SGF, Appendix 4): (i) Responsibility and accountability all
Based on the above duties and responsibilities laid down by the SGF, it can be seen that the first matter emphasized by the SGF is the explanation relating to the responsibility and accountability of the SC. As the SC is the only qualified party to ascertain on
SGF has laid down several principles to be observed by IFIs in ensuring the independence of the SC (Ali & Oseni, 2017). The most important party in ensuring the independence of the SC relies on the BoD. The SC is required to make a thorough decision on
However, there are several issues which reflect to the independence of SC of IFIs as follows:
The appointment and reappointment of the member of the SC of IFIs
In Malaysia, the procedures of an appointment of SC and the procedures for reappointment of the member of SC is pursuant to the legislations governing IFIs (Hussain, Hassan & Azhar, 2016a). SGF provides that the appointment and reappointment of SC shall be made by the BoD. Both appointments are also subject to the approval of CBM and the SAC of CBM (SGF, paragraph 3.8 of Part 2). The processes start with a selection process handled by the IFIs to make sure that the suggested individual is qualified and considered fit and proper to be selected and appointed as a member of SC (SGF, Appendix 2). At this stage, the Nomination Committee (hereinafter referred to as “NC”) of the IFIs plays a significant task in assessing the proposed individual in order to ensure that such candidate meets the requirements prescribed by SGF and qualified for appointment as SC (Guidelines on Corporate Governance for Licensed Islamic Banks, Appendix 2) (Central Bank of Malaysia, 2007). If the candidate is qualified, the NC will suggest the candidate to the BoD. The BoD, upon recommendation by NC, shall nominate the appointment of the proposed candidate to CBM (SGF, Appendix 2). Notably, based on the procedures, it can be seen that, the final decision at institution level as to who shall be nominated to CBM is the responsibility of the BoD (Guidelines on Corporate Governance for Licensed Islamic Banks, Appendix 2) (Central Bank of Malaysia, 2007).
Next, application must be submitted to CBM for approval from CBM and the SAC before a proposed candidate is appointed as a member of the SC. Prior written approval of CBM and the SAC is necessary before the appointment is made by IFI. In this regard, CBM may also impose necessary conditions it deems fit. Failure to observe any stipulations shall nullify the approval (SGF, Appendix 2). Finally, after obtaining written approval, the appointment of the member of the SC shall be made by the BoD (SGF, Appendix 2). The same goes to the reappointment of SC members. Since the appointment is made by the BoD, it is questionable to what extent such appointment by the BoD may not affect the SC in carrying out their duties?
It would be good if the appointment is made based on the selection process by shareholders which can be carried out during the General Meeting of the institution. This method permits the representatives to choose the entrusted persons to be appointed as SC. This can also evade any influence by the management board during the appointment since the management board does not have the authority to appoint or to dismiss them. Another basis is to guarantee the effectiveness and the freedom of the SC to perform their tasks.
In contrast, in the case of appointment is made by the BoD, it will create a connection concerning the two parties which could lead to internal coerce from the BoD on the SC. Integrity should be continuously observed by the IFI. Therefore, the selection of SC made by the shareholders is an alternative to safeguard the independence of the SC in exercising their duties.
Another thing related to the appointment is the remuneration of SC. According to SGF, the BoD shall remunerate the SC members suitably as recommended by its Remuneration Committee. Such payment shall reflect, and be appropriate with, the accountability, duties and responsibilities of the SC. However, the SGF silence on which fund to be paid as remuneration to SC. Remuneration payable should not from profits because it may invite suspicions from the public that the resolution made by the SC is driven by financial rewards that will determine how much they will earn.
The position of the SC in the organisation structure of IFIs
Undoubtedly every IFI has its own organizational structure and may vary from other IFIs. The question arises, to whom the SC are accountable in discharging their duties and responsibilities? SGF provides that the SC shall functionally report to the BoD (SGF, paragraph 1.6 of Part 2). Accordingly, they are responsible to the BoD. At the same time, one of their duties is to advise the BoD and the IFIs on the
The author of an opinion that, the best position is by putting SC parallel to the BoD in the organization structure that has the capacity to advise the BoD and IFIs in ensuring
The independence of SC in issuing Shariah deliberation
From one perspective, the above provision is good and parallel with the function of the SAC as the highest authoritative body in the ascertainment of Islamic law pertaining to Islamic financial business. It also good to ensure the uniformity of
The appointment of member of the SC as a member of the BoDs of IFIs
The BoDs is ultimately accountable and responsible for the implementation of
Alternatively, SGF suggests that the BoDs may consider appointing at least one member of the SC as a member of the BoDs that could function as a ‘bridge’ between the BoDs and the SC. In addition, the existence of a director with
In addition, Guidelines on Corporate Governance for Licensed Islamic (BNM/RH/GL 002-1) (hereinafter referred to as “GP1-i”) (Central Bank of Malaysia, 2007) requires that the board should encompass of directors who as a group provide a combination of core expertise for instance finance, accounting, legal, business management, information technology and investment management (GP1-i, paragraph 2.20 of Part 2). The appointment of a member of SC with expertise in the field of
It seems good for the IFIs to adopt this approach which could serve as a ‘bridge’ between the BoD and the SC. It is also in line with one of the roles of BoDs as IFSA stipulates that, the BoDs shall have due regard to any decision of the SC on any
Even though the approach is very good to be practiced in the IFIs, the consequences that may result upon a member of the SC being appointed as a member of the BoDs should also be addressed in order to avoid any issue on conflict of interest. According to GP1-i, there are three types of Directors namely, Executive Director, Non-Executive Director and Independent Director (GP1-i, paragraphs 2.24-2.26 of Part 2). A member of the SC is eligible to be appointed as Independent Non-Executive Director. Accordingly, such member is subject to the limitations as stipulates in the GP1-i. However, as independent director, such a member is not barred from having less than 5% equity interest directly or indirectly in the Islamic bank or in its related companies. The question is to what extent such a member is free from any conflict of interest while making decision relating to the
It would be good if the law, in particular, SGF provides a guidance to the IFIs in selecting the appropriate member of the SC as a member of the BoD. What is most significant is that there should be a mechanism to ensure that the appointed member will be able to perform the duties effectively and be free from any element which may lead to conflict of interest. Hence, recommendation by SGF to appoint a member of the SC as a member of the BoD is a very good approach which could serve as a ‘bridge’ between the BoD and the SC of the IFI. In addition, it will strengthen the relationship between the two parties which is very important in ensuring
In conclusion, it can be summarized that the Malaysian government extremely emphasizes on the independence of SC in carrying out its duties and responsibilities. It can be seen that the independence of the SC is the legal requirement to ensure the credibility of the SC. However, there are several loopholes of the existing legislations which need to be addressed by the respective authority. Necessary steps are needed as suggested above to guarantee the independence of SC in carrying out their duties and responsibilities.
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31 December 2018
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Hussain, M. A. (2018). The Independence Of The Shariah Committee Of Islamic Financial Institutions In Malaysia: Legal Analysis. In A. Abdul Rahim, A. A. Rahman, H. Abdul Wahab, N. Yaacob, A. Munirah Mohamad, & A. Husna Mohd. Arshad (Eds.), Public Law Remedies In Government Procurement: Perspective From Malaysia, vol 52. European Proceedings of Social and Behavioural Sciences (pp. 912-922). Future Academy. https://doi.org/10.15405/epsbs.2018.12.03.93