Volume13.Issue42 Wednesday, 12 October 2016
Daily Cover Story
Islamic Finance news
GLOBAL: The Islamic Finance Council UK (UKIFC) and International Shari’ah Research Academy for Islamic Finance (ISRA) are urging governments and Shariah financial institutions around the world to implement mandatory independent audit of Shariah compliance in Islamic finance, in the wake of louder calls for trust, transparency and accountability from financial market participants.
“Ensuring and maintaining the integrity of the Shariah is paramount to sustaining future confidence and growth in the Islamic finance sector. By providing an additional check, external Shariah audit will play an important role toward providing reassurance to scholars, financial institutions and customers,” explained Omar Shaikh, an advisory board member of the UKIFC.
In the aftermath of the 2008 financial crisis, corporate governance in financial institutions has been under strict scrutiny as authorities and market players scramble to fix a failed system, appease stakeholders and work to prevent another collapse. Just like their conventional counterparts, Islamic financial institutions too have not escaped the spotlight; they are, however, subjected to arguably more stringent criteria as Islamic financial institutions have an added layer of Shariah governance.
As it stands, most Islamic financial institutions worldwide self-regulate Shariah compliance through their in-house boards of scholars; depending on jurisdictions, Islamic financial institutions may also need to comply with a centralized Shariah supervisory authority whose authority is binding. The current mechanism is raising flags as to whether the current model of governance is fit for purpose.
The UKIFC and ISRA in their External Shariah Audit Report noted that there is currently no independent third party publicly reaffirming the view of Shariah supervisory boards (SSB) on Shariah compliance. “This immediately raises a number of questions, most fundamentally: Are the SSB members inadvertently in danger of being in an impaired position in that they are being asked to audit products they themselves have designed and signed off as compliant? Is there a need for an additional independent external check on Shariah compliance; and if so, then what should be its scope? If the work of internal Shariah auditors is to be relied on, how independent are they, and what is their level of expertise in conducting an audit?”
Out of the many nations with Islamic finance jurisdictions, only a few have issued specific guidelines for external Shariah audit: Oman and Pakistan. Bahrain is poised to be the next one to adopt external Shariah audit regulations following the issuance of a related consultation paper by the Central Bank of Bahrain (CBB).
“We strongly believe that the next step in creating robustness in this industry and in safeguarding all relevant stakeholders is an appropriate external Shariah audit framework – which many central banks, including the CBB, are considering introducing in the near future,” commented Dr Ahmed Abdul Hameed AlShaikh, the deputy director of the Bahrain Institute of Banking & Finance.