بسم الله الرحمن الرحيم

05 Dhul Qa’dah 1444 /26 May 2023

All praise is due to Allah, the Cherisher, Sustainer, Nourisher and Provider of the entire creation. May peace, blessings and salutations be upon our Beloved Prophet Muhammed ﷺ.

One of my esteemed teachers presented us with an opportunity to respond to 5 questions posed by a Global Media House and News Agency.

1. As a Shariah scholar, how would you assess the success of Shariah screening of the products and services Islamic banks and financial institutions offer?

A:  There is a system proposed by Muhammad Hanif in one of his articles, which he proposes a quantitative approach of a shariah-compliance rating of the Islamic Financial Industry. He proposes to develop a Shariah-compliance grading system for the Islamic financial services industry (IFSI), with a concentration on banks. (Sharīʿah-compliance ratings of the Islamic financial services industry: a quantitative approach | Emerald Insight, 2017)

The following major considerations justify shariah-compliance rankings of IFIs, particularly banks, due to their leadership role based on asset volume:

• Customers’ trust and confidence in the IFSI as a Shariah-compliant financial system would be boosted via a rating system, similar to how financial ratings improve investor confidence in a securities or institution.

• Given the higher score allotted for them, a ranking system would put pressure on an Islamic bank’s management to boost the use of Shariah-based financial contracts. It would also encourage them to implement a method to decrease the severity of Shariah infractions.

• Based on Shariah compliance concerns, the ranking system will separate high-quality, elite-class institutions from those of lower quality, and will serve as a reference point in future institution-building under the IFS.

• The rating method will identify the relative position of listed institutions, allowing customers to select the best.

Classification and score allocation

This study has grouped banking operations into four major categories for Sharīʿah-compliance rankings:

• Portfolio construction (34 per cent): Deposits, financing and investments (participatory modes and asset-based financing).

• Access to finance (18 per cent): Share in financing of underprivileged segments including low-income groups and rural economy, screening of customers in the light of Sharīʿah and established CSR principles.

• Reputation (12 per cent): Disclosures and opinions of stakeholders.

• Sharīʿah governance (36 per cent): Sharīʿah board, internal control and Sharīʿah audit, charitable operations, human resources, product development and organization.

2. It is said that IBs and IFIs are only as good as their Shariah boards because Shariah boards are the ones that give legitimacy to these by ensuring Shariah compliance and maintaining trust in the eyes of customers. Have there been instances of IBs or IFIs differing with their Shariah boards or prominent Shariah scholars to push non-compliant products or instruments?

A: This statement is legitimate statement. What are Shariah boards? A Sharia Board (also known as Shari`ah Supervisory Board, Advisory Board or Religious Board) certifies Islamic financial products as being Shari`ah- compliant (i.e. in accordance with Islamic law). Compliance with Shari`ah law is the underlying reason for the existence of Islamic finance. (School, 2015)

Islamic banks and conventional banking institutions that offer Islamic banking products and services should establish a Shariah Supervisory Board (SSB) to advise them on whether their products comply, and to ensure that their operations and activities comply with Shari`ah principles.

These standards set out by Shariah board set out the status quo of the bank. Whatever the bank achieves in terms of compliance within Shariah is mostly due to the Shariah boards which set out and control this status quo.

In my research I have not come across a scenario where IFIs differ with their Shariah Boards to push non-compliant products, however I can imagine this being the case, where IFIs would like to promote non-compliant products however as it is not-compliant they would not be able to bypass the Shariah board as it goes against the status quo set.

3. What are the major issues Shariah scholars have to grapple with today, especially in a context where IBs and IFIs may want greater leeway in going for controversial contracts like tawarruq or bay al wafa where there is no unanimous agreement among the scholars?

A: Tawarruq is monetization, basically it is the process of purchasing a commodity for a deferred price and selling it to a 3^rd party for a spot price in order to obtain cash. This is the classical form of tawarruq, some also term it as a reverse Murabahah. A sale with the right of redemption, literally, a sale of honour. Typically, such a sale takes place when a commodity is sold on the condition that the seller be allowed to redeem the commodity upon paying its price; and the buyer agrees to honour the condition. These are 2 controversial contracts which many people nowadays would try to take advantage of. Hence, scholars will notice that many a times people will push for such contracts even without good reason.

Tawarruq can sometimes not meet the validity of purpose requirement as a sale contract. t. In fact, the ultimate goal of Tawarruq for whoever is providing the liquidity is to exchange spot money for a higher amount in the future, thus the financier is taking advantage of the need for liquidity of the client be it an individual or institutions to charge interest implicitly. If they were interested in a commodity then the mark-up would be justifiable, but clearly the goal is cash liquidity. (Fa-Yusuf and Ndiaye, 2017)

The Hanbali scholar, ibn Taymiyyah, and his student ibn al-Qayyim had strongly disapproved of Tawarruq and included it in the same category as the Inah sale.

These are just some of the issues and scholars will face similar situations in the future.

4. Besides internal Shariah audit, do you think there is a need for external Shariah audit as well?

A: The Auditing Standard for Islamic Finance Institutions (ASIFI) No. 6 “External Shari’ah Audit (Independent Assurance Engagement on an Islamic Finance Institution’s Compliance with Shari’ah Principles and Rules)” has been released by the AAOIFI’s Governance and Ethics Board (AGEB). AGEB finalized this standard after significant discussions, deliberations, and industry consultations in the form of public hearings and written expert views, as well as input from the Shari’ah perspective.

The Chairman of the Board, Dr. Ishrat Husain commented, “This standard provides comprehensive guidance to professionals who perform external Shari’ah audits of Islamic Financial Institutions in line with the global best practices”. He further added “The Board recognizes that external Shari’ah audit is a crucial governance organ for the Islamic finance industry and therefore we hope that this standard would strengthen public confidence, enhance the quality and uniformity of practices, and harmonize the global IFIs auditing process…..” (Aaoifi.com, 2020)

A direct external Shari’ah audit and an attestation external Shari’ah audit are both covered by the norm. It also describes the topic matter and material relevant to such engagements, as well as providing guidance on crucial procedures and concerns. In keeping with industry best practices, the standard also offers reporting formats for generating the external Shari’ah auditor’s report.

Based on this, we can see that after some consideration it was published by ASIFI and AAOFI, guidelines on how to perform external audits and scholars and leaders within AAOFI feel it necessary and crucial for the Islamic Finance industry for external shariah audits to take place. Hence in line with this, there seems to be a need for external shariah audits in order to enhance the quality of practices and so forth.

5. Going forward, what do you think the main challenges would be for the Shariah scholars of the future?

A:  Some of the main challenges that Shariah scholars will face in the future include:

• Pressure from liberal Muslims pushing for more contemporary fatwas, this is dangerous as many a times some people look for ways to kick out the tradition as they regard it to be “out-dated”, sadly we starting to witness this within our Muslim communities.
• Contemporary forms of transactions and “currency” eg. Crypto-currency.
• Progressing in Islamic Finance with the era while at the same time keeping to the Shariah and tradition.
• Issues with regards to student loans.

May Allah accept our efforts from us and grant us understanding In Sha Allah!

References

Sharīʿah-compliance ratings of the Islamic financial services industry: a quantitative approach | Emerald Insight. (2017). ISRA International Journal of Islamic Finance. [online] Available at: https://www.emerald.com/insight/content/doi/10.1108/IJIF-10-2017-0038/full/html#sec005 [Accessed 12 Oct. 2021].

School, R. B., 2015. In: Islamic Finance Study Guide. s.l.:s.n.

Aaoifi.com. (2020). Accounting and Auditing Organization for Islamic Financial Institutions. [online] Available at: http://aaoifi.com/announcement/aaoifi-officially-issues-auditing-standard-no-6-on-external-shariah-audit/?lang=en [Accessed 12 Oct. 2021].

‌Fa-Yusuf, H.S. and Ndiaye, N.D. (2017). Issues with the Use of Tawarruq in Malaysia. Journal of Islamic Banking and Finance, 5(2).

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