4th ICIB Ministry of Planning Development & Reform Conference Secretariat: Mr. Ikram Ullah Khan Mr. Ehtesham Rashid

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1 ICIB 4 th International Conference on Islamic Business 2016 Quaid-e-Azam Auditorium, IIUI Faisal Masjid Campus, Islamabad, Pakistan February, 2016 Organized By: riphah international university riphah centre of islamic business Collaborators: Islamic Economics, Finance, Entrepreneurial Development & Public Policy for the Ummah s Socio-economic Wellbeing Under the above theme, the speakers / paper presenters will discuss the vision of Islamic economics, business and finance, public policy for entrepreneurial development and to enhance social inclusion and good governance, meaning how to develop Islamic countries economies giving fair opportunity to all segments of the society and provide them not only suitable jobs / employment but also dignity and respect in the society and falah in this world and the Hereafter. As it is possible only through application of the principles of the Shariah, in letter and spirit, in all socio-economic disciplines and business and finance affairs, Shariah compliance of all institutions, products and activities would also be covered in the Theme of the ICIB-2016 event. Ministry of Planning Development & Reform Conference Secretariat: Riphah Centre of Islamic Business (RCIB) Riphah International University, 274-Peshawar Road, Rawalpindi. Mr. Ikram Ullah Khan (Ikramullah.khan@riphah.edu.pk; +92 (333) ) Mr. Ehtesham Rashid (ehtesham.rashid@riphah.edu.pk; +92 (345) )

2 Shariah Scholars, Shariah Governance and Maqasid Al-Shariah Application in Islamic Finance PROF. DR. MOHAMAD AKRAM LALDIN Executive Director, ISRA

3 Presentation Outline 1. Introduction 2. Shari ah Scholars and Islamic Finance 3. Governance for Shari ah Compliance Framework 4. Maqāṣid al-sharīʿah: Islam s Vision in Finance 5. Applying Maqasid al-shari ah in Industry Development (Cont d) 6. Conclusion

4 1. Introduction Islamic finance uses the Shari ah as the backbone of its system. The Shari ah does not only contain the principles and foundations upon which the financial system is established, it also provides guidance for setting the industry s direction. In Islamic finance practices, Shari ah scholars play a role as interpreters of the Shari ah, who are charged with guiding the industry. To ensure, the credibility of Shari ah scholars and practices, there is a trend at local and international levels to develop standards and guidelines for the best practice of Shari ah advisory and supervision. The framework of Shari ah governance has been set up to meet that objective. Islamic finance in its operations aims to follow the Shari ah s technical requirements as well as its values and principles as defined in the concept of maqāṣid al-shari ah.

5 2. Shari ah Scholars and Islamic Finance Development AAOIFI (2010) Guidelines on Governance Standards for Islamic Financial Institutions (GSIFI): Shari ah Supervisory Board is a specialized jurists, particularly in fiqh mu amalah and Islamic finance, entrusted with the duty of directing, reviewing and supervising the activities related to Islamic finance in order to ensure that they are in compliance with Shari ah rules and principles. The OIC Fiqh Academy Resolution Number 17 (19/3): Shari ah Board is a group of specialist scholars in the field of Islamic jurisprudence, particularly transactional jurisprudence (mu amalah), whose number will not be less than three, chosen from those who have the aptitude and knowledge of the practical realities, whose work is to pronounce verdicts and revise whatever needs to be revised, in order to confirm and ensure that all the transactions conducted by the Islamic financial institutions comply with the rulings and fundamentals of the Shari ah, and to publicize the decisions to the public, and whose decisions are binding upon the Islamic financial institutions.

6 2. Shari ah Scholars and Islamic Finance Development (Cont d) The existence of group of scholars to supervices the IFI Shari ah compliance practice has been institutionalized and formalized in the structure of Islamic financial institutions as Shari ah board, or Shari ah Committee, or Shari ah Advisory Board depending on the jurisdictions of Islamic finance practices. Shari ah Scholars play a key role in Islamic financial practices to supervise and monitor the practices of Islamic financial institutions 1. Inception & Conceptualization of Islamic finance Instrument. 2. Structuring the Product according to Shari ah. 3. Legal Documentation. 4. Execution & Implementation of Islamic Instrument 5. Audit & Review 6. Restructuring if Needed 7. Recovery Mechanisms & Dispute Resolution

7 3. Governance for Shari ah Compliance Framework 6 Formalization of the role played by Shari ah scholars in Islamic finance is systematized in a structure of Shari ah governance. Shari ah governance refers to structures and processes adopted by IFI s to ensure compliance with Shari ah rules and principles. Importance of Shari ah Governance Ensure strict Shari ah-compliant Instil public confidence Promote operational/financial stability Principles of Islamic finance place great emphasis on strong corporate governance values & structure, transparency, disclosure of information & strict adherence to Shari ah principles

8 3. Governance for Shari ah Compliance Framework (Cont d) For IFI s, Shari ah governance is part of corporate governance as IFI s has the responsibility to ensure the compliance with the Shari ah principles in its products, instruments, operations, practices, management etc Issuance of Standards: IFSB 3: Guiding Principles on Corporate Governance for IIFS IFSB 10: Guiding Principles on Shari ah Governance System for IIFS Principle 3.1 of the IFSB Guiding Principles on Corporate Governance states that an appropriate mechanism must be created to ensure the compliance with the Shari ah principles. Principle 7.1 of the IFSB Guiding Principles on Risk Management states that Islamic FI shall have in place adequate systems and controls, including Shari ah Board/advisor to ensure compliance with the Shari ah principles.

9 Malaysian initiatives Towards a proper Shari ah Governance Framework... CENTRAL BANKING ACT 2009 Empowering the role of SAC in supervising Islamic banking industry in Malaysia Shariah Governance Framework for Islamic Financial Institutions 2011 IFSA 2013 Shariah Committee performs statutory rolein advising Islamic financial institutions to ensure its business, affairs and activities comply with Shariah Breach of duties may attract enforcement actions by Bank including imposition of administrative monetary penalty BNM GPS1 Guidelines on the Governance of Shariah Committee for the Islamic Financial Institutions IBA provision for establishment of Shariah Advisory Body approved by BNM in articles of association -a licensing condition However, in certain jurisdictions such guidelines are not available, and a clear framework on Shari ah governance is nowhere to be found which creates some uneasiness among industry players and leaves Shari ah advisors without clear guidelines to be followed.

10 4. Maqāṣid al-sharīʿah: Islam s Vision in Finance Islamic Finance aims to achieve the goals as defined in Maqasid al-shari ah of achieving Maslahah and avoiding Mafsadah that would bring benefits to the individual and the community. All Shari ah rulings are designed to protect those benefits and facilitate improvement and perfection of the conditions of human life on earth and hereafter

11 4. Maqāṣid al-sharīʿah: Islam s Vision in Finance (Cont d) Maqāṣid al-sharīʿah in Islamic finance are the overall goals and meanings that the Shariʿah aims to achieve via its principles and rulings related to the financial activities and transactions. It is usually framed in the context of wealth preservation (hifz al-mal): 1. The circulation of wealth in the society, from creation to distribution Islam encourages wealth to be employed in productive activities. Commercial and financial activities are viewed positively as mechanism to circulate wealth in society. 2. Advocating fair and transparent financial practices Freedom in contract to be conducted within the atmosphere of fairness, equity, justice, honesty, truthfulness and high morality between transacting parties. Any contract stipulated and agreed upon by both parties, arising from that consciousness, should be respected and enforced 3. Promoting socioeconomic justice IF aims at Economic justice through wealth circulation, efficiency in resources utilisation, fulfilling society s basic needs, elimination of poverty, and improving human well-being.

12 5. Applying Maqasid al-shari ah in Industry Development The maqāṣid al-sharīʿah fulfilment paradigm argues for the entire Islamic finance development enterprise to be driven more by distinct missions and values as elaborated in the goals and objectives of Shariʿah. Systematic efforts should also be directed to apply the concept in a more creative movement that would reflect Islamic values in financial dealings and would effectively deliver Islamic objectives in financial sphere. Islamic finance should be directed towards a bigger agenda of creating a new financial system: addressing human economic life reforming the adverse situation of the world economy supplementing the weaknesses in current practices, and offering a new and better perspective in guiding man to achieve the ultimate well-being.

13 5. Applying Maqasid al-shari ah in Industry Development (Cont d) Shari ah scholars as one of the key stakeholders in Islamic finance development is expected to put effort in: 1. Constructing new concepts in finance in the spirit, way and goals of Islam (maqasid al-shari ah). 2. Managing the challenges in the industry such as Shari ah standard and regulations, innovation in product development and human capital development; and 3. Preparing Islamic finance to the global integration to be adopted as an International financial system Shari ah scholars need to have a comprehensive understanding of Shariʿah in a multi-disciplinary perspective transgressing the legal compliance technicalities to strategize the structure of the industry as well as apply the Islamic vision in financial sphere.

14 6. Conclusion Shari ah Islamic Financial System The dramatic expansion of Islamic finance might be seen as a success story which shows the world that Islam and the Shari ah can contribute positively to solving modern finance needs. This also shows that Islamic finance is viewed as an attractive system in financial system and hence has potential to be viable alternative to conventional financial system and adopted across the globe. Nevertheless, the challenge remains whether Islamic finance is really able to offer a better alternative to conventional finance. More systematic efforts should be exerted to direct Islamic finance to achieve the objective of Shari ah. 13

15 Thank You 14