By : Ust Hj Zaharuddin Hj Abd Rahman
( this article was published in NST Business Times on 19th July 2006 )
Islam teaches Muslims how to conduct every aspect of their lives including financial and economic affairs. The Holy Qur'an makes it clear that entering into transactions that involve riba (or interest) is Haraam (or forbidden). The Qur'an states: "O you who believe! Fear Allah (God) and give up what remains of your demand for interest, if you are indeed a believer." (Qur'an 2:278). One Hadith states: From Jabir (peace be upon him) - the Prophet (peace and blessings of Allah be upon him) cursed the receiver and payer of interest, the one who records it and the two witnesses to the transaction and said: "They are all alike in guilt". (reported in Muslim, Tirmidhi and Ahmad)
Therefore, generally we all know that, the main difference between Islamic Bank and conventional is the sources of law which governing these banks. The functions and operating modes of conventional banks are based on fully manmade principles, while Islamic Banks are based on the Shariah Principles.
The credibility of the Islamic banking activities is highly dependent on the credibility of the Shariah advisers (A. Banaga, External Audit & Corporate Governance in Islamic Banks, 1994); the credibility of Shariah advisers may also depend on the perceptions and confidence of the bank managers in their role. In order to ensure the modern application of banking system is in line with Shariah requirements, it is strongly stressesed that the objectives of the establishment of Islamic Bank are to achieve Falaah (the success in the world and in the hereafter). The objectives of Islamic banks may therefore differ greatly from the conventional bank's objectives. (Abdul Rahim, Corporate Governance: An Islamic Paradigm, pg 20).
There should be a Shariah Supervisory Board for any institutional Islamic investment body, and that Board should consist of trustworthy scholars who are highly qualified to issue fatawa (religious rulings) on financial transactions. In addition, they ought to have considerable experience with knowledge of modern dealings and transactions. The Articles of Association, prospectuses, or statutes (depending on the type of activity) should provide for the existence of a Shariah board, whose fatawa (Shariah judgment ) and resolutions should be binding upon the financial institution's management. It should be independent and free to give opinions on proposed contracts and transactions. The role of the Shariah supervisory board should be concurrent with that of the financial institution itself in the sense that it should be formed from the moment the financial institution is incorporated, and that it should provide continued supervision and permanent checking of contracts, transactions, and procedures. This should be expressly provided for in the Articles of Association or the prospectus. (Nizam Yaquby, http://www.islamic-banking.com/)
At present, every Islamic banks and windows have their own Shariah Boards; however a survey of the members of these boards would reveal that practical banking and product knowledge is very limited, thus there is a strong need for training. This puts a serious constraint on the ability of Shariah scholars to issue well-informed rulings on financial products and activities. The Shariah scholars themselves conscious of these difficulties. They are using a number of ways to acquire the necessary background information before issuing a fatwa (Shariah judgment). One way is to discuss an issue in meetings/workshops attended by both Shariah scholars and financial experts or experienced Bankers. (Munawar Iqbal, Thirthy Years of Islamic Banking, pg 108)
As an Islamic Bank, we are demanded to be clearly clean form any kind of Riba (Usury), Zulm (oppression) and Gharar (uncertainty). The expertise to identify these three prohibited elements in today's wide range of developed banking and financial transaction is indeed, a difficult task. No new product can be adopted until it is cleared by Shariah scholars. Even after a new product is put into use, Shariah auditing of the operations of financial institutions is very important to ensure that the actual practice complies with the requirements of Shariah. This is important not only for religious reasons but also for purely business considerations because some of the Islamic Banks' clients might not have their confidence in their operations unless Shariah scholars approved their activities.
As said before, the task, not only focus on the Shariah aspects but also includes business aspect, market scenario and operations. We can easily discover a product, which is purely Shariah compliant but it is hardly marketable or its structure turns to be very complex to understand and promote. On the other hand we also may find a very marketable product but is prohibited by the Shariah. Thus, all Islamic bank in the world especially Malaysia has to think on ways to produce more Shariah experts whom are also knowledgeable in the financial environment and its operation. The existing bankers and practitioners also must be educated thoughtfully with the Shariah knowledge and principle, so they can easily understand and could implement it in daily operations in a manner, which is explained by the Shariah scholars.
Shariah advisory roles are vital in Islamic Banks. They are very different from conventional Bank. In a conventional Bank they might have their legal adviser or business adviser; however these advisers are dissimilar from Islamic Banks' Shariah Advisers. It is because, the management of the conventional bank is not bound whether to take any advice given by their legal and business adviser or not; whereas Islamic Banks' management are obligated to adhere with the decision made by their Shariah Advisers when the product proposed or any operational issues defined contradicts with the Shariah principle.
Another area is in the development of more Shariah based banking practitioners where going forward there is a vital need for active and continued participation from these Shariah practitioners in bridging the gap between the Shariah scholars and the banking practitioners. The key aim here is to reduce the gap between Shariah and the business world thus reducing the possibility of misinterpretation in the application of the Shariah code. Our moral and ethical standards far transcend that of conventional with the active participation from the Shariah Scholars in overseeing the activities of the Islamic bankers (which is not present in conventional banks), which is a priceless difference.
For readers information, from our experience and knowledge, the normal process that Islamic banks or the Islamic windows of Conventional banks (Conventional banking which offering Islamic products) need to undergo in order to ensure that their products and operations are Shariah compliant can be simplified as below :-
1. In-house Shariah officers or advisers (who are supposed to acquire the official Shariah expertise background) will make an early inspection into the products. They will check on whether the pillars and concepts of the products are fully implemented according to Shariah. They will also ensure that the process flow of the products is in line with Shariah. All standard contracts should be reviewed thoroughly where a need to discuss them with lawyers may arise to determine that all the crucial Shariah requirements can be fitted in the standard contracts and at the same time abide by the provision of Malaysia laws.
If the result is unsuccessful, alternatives or solutions shall be explored to fulfill the Shariah obligations and the Malaysia Civil Laws. Thus, the determination, alertness and Shariah qualification of an internal Shariah officer is a vital factor in ensuring the clean operations of an Islamic bank.
2. The outcome of the reviewed done and the suggestions by the In-House Shariah officers together with other Bankers will be tabled in the official meeting with the Shariah Committees (External and Independent Shariah Advisers approved by Bank Negara Malaysia). A thorough, comprehensive presentation on the review will be carried out during the meeting. The contract's contents, forms, process flow, transactions, and others will be deal with in details. This process requires the credibility and honesty of bank officers to disclose all the operational and technical part of Islamic Bank operations. Thus, the In-house Shariah officers should well acknowledge, understand and ensure that all presentations are truthful and thoroughly done because all of these will be made accountable to them in front of Allah s.w.t in the hereafter.
Normally, the Shariah Committees members are dependent on the information given to them by the internal officers. Therefore, any mistake, or misunderstanding on the information given will result in a wrong fatawa.
3. If a new product has not yet been inserted in the list of approved products' by the Bank Negara Malaysia (BNM) Shariah Advisory Board, it has to be first brought forward to the Bank Negara Malaysia for the approval by Shariah Advisory Board of BNM. The Shariah screening will again be carried out firstly by Shariah Officers in Jabatan Perbankan Islam & Takaful, BNM anda after that each product will be tabled in the BNM, Shariah Advisory Board for deliberation.
4. After been approved, a training session will be conducted to explain on the concepts and the implementation part of the product for bank officers especially for those involve in the marketing and who have to deal directly with consumers.
The process looks simple, but indeed it is very much complicated because most of the bank officers come from conventional background where they acquire limited knowledge on the Shariah concepts. Therefore, it is not surprising when people claims that Islamic banks are indeed not Islamic, because sometimes the bank officers that have been appointed to meet customers are those who do not understand the Shariah concepts laid down for the products, and consequently given the wrong explanations on the products.
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