Foundations of Shariah Governance of Islamic Banks

Praise for Foundations of shar ′ah Governance of Islamic Banks

"The Islamic banking industry, worth over 2 trillion dollars, represents a fast growing phenomenon in an otherwise depressing context of global finance. What is the source of this relative stability and resilience? shar ′ah compliance makes Islamic banking distinct, as it operates not only within a framework of certain well defined ethical imperatives but also has the unique feature of making finance asset based, leading to generation of real goods and services in society, and not simply financial expansion.

Foundations of shar ′ah Governance of Islamic Banks is a timely effort to bring into sharp focus this unique dimension of Islamic Banking. It contains a well–researched, fully documented, fairly detailed and authentic exposition of the key concepts of shar ′ah, Islamic guidelines for banking governance and some of the major efforts made over the last four decades to develop operational mechanisms to make banking shar ′ah–compliant. This book is an essential read for those who want to understand Islamic banking, and more so, for those engaged in the Islamic Banking industry anywhere in the world."
Khurshid Ahmad, Professor, Chairman, Institute of Policy Studies, Islamabad, Ex– Senator, Federal Minister for Planning, and Deputy Chairman, Planning Commission, Pakistan

"shar ′ah compliance lies at the heart of Islamic finance and is what makes it unique. The book provides a comprehensive treatment of the shar ′ah governance issues covering basic shar ′ah principles applied in Islamic finance and the processes through which these are operationalized in practice. The volume is a valuable source of information for anyone who would like to study diverse aspects of processes and practices related to shar ′ah governance in the contemporary Islamic financial industry."
Habib Ahmed, Professor of Islamic Finance, Durham University Business School

"In this ground–breaking work, Karim Ginena and Azhar Hamid have accomplished what others have only hinted at and, by doing so, have rendered a valuable service to the growing Islamic financial services industry. With scholarly attention to detail, and a fine understanding of the global context in which Islamic finance operates, the authors have provided a roadmap for governance that should find wide appreciation in corporate and regulatory circles worldwide."
Shaykh Yusuf DeLorenzo, shar ′ah board member of the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI)

"An important academic and practical related addition to the new discipline. Tools such as shar ′ah risk assessment grid and audit checklists are particularly helpful. This book serves as a useful implementation guide and takes a fresh approach compared to the current boring, descriptive texts."
Shahul Hameed bin Mohamed Ibrahim, Associate Professor of Islamic Accounting, INCEIF, Malaysia

"Islamic banks by definition have to operate in accordance with shar ′ah law, but how is this enforced? This study explores the practical issues in shar ′ah governance which involves both external audit and internal controls. As the interpretation of Islamic commercial law is inevitably subjective, shar ′ah board members often have legitimate differences of opinion. The authors examine how these can be reconciled to reduce shar ′ah risk."
Rodney Wilson, Emeritus Professor of Economics, Durham University, UK and INCEIF, Malaysia

Part I

Chapter 1

The Roots, Characteristics, and Objectives of Shar ′ah and the Islamic Economic System

1.1         Shar ah, the Qur n, and Sunnah

1.2         What is Fiqh?

1.3         Performing Ijtih d and Differences in Juristic Opinions

1.4         Shar ah Rulings

1.4.1      Obligation–Creating Shar ah Rulings

1.4.2       Declaratory Shar ah Rulings

1.5         The Subject of a Shar ah Ruling

1.6         Characteristics of Shar ah

1.7         Objectives of Shar ah

1.8         The Islamic Economic System and its Characteristics

1.9         Objectives of Shar ah Relating to Property

Chapter 2

Corporate and Shar ′ah Governance of Islamic Banks

2.1         Corporate Governance Gains Prominence

2.2         Hisba System and an Islamic Perspective on Corporate Governance

2.3         OECD and Islamic Principles of Corporate Governance

2.4         Importance of Corporate Governance to Banking Sector

2.5         The Financial Crisis and Corporate Governance Challenges

2.6         Developing Countries and Corporate Governance Issues

2.7         Corporate Governance Concerns for Islamic Banks

2.8         IFSB and AAOIFI Issue Guidance

2.9         Adapted Corporate Governance Understanding

2.10       Stakeholders of Islamic Banks and their Governance Responsibilities

2.11       Connecting Risk Management, Corporate Governance, and Shar ah Compliance

2.12       Shar ah Governance Model

2.13       Importance of Shar ah Governance

2.14       Shar ah Supervision vs Governance

2.15       Shar ah Risk Definition

2.16       Shar ah Risk and Possible Implications

2.16.1    Credit Risk

2.16.2    Legal and Compliance Risk

2.16.3    Reputational Risk

2.16.4    Market Risk

2.17       Shar ah Risk Causes and Events

2.17.1    Internal Causes

2.17.2    External Causes

2.18       Shar ah Risk Management

2.19       Shar ah Compliance Responsibility of BOD and Senior Management

Appendix 2.1: Operational Risk Loss Event Types

Chapter 3

Legal and Regulatory Aspects of Shar ah Governance

3.1         Institutional Arrangements

3.2         Shar ah and Common Law Encounters in English Courts

3.2.1      The Islamic Investment Company of the Gulf (Bahamas) Ltd v Symphony Gems N.V. & others

3.2.2      Shamil Bank of Bahrain E.C. v Beximco Pharmaceuticals Ltd & Others

3.2.3      Investment Dar Co KSCC v Blom Developments Bank Sal

3.3         Lessons Learned from Cases and the Desirability of a Secular Interpretation of Shar ah

3.4         Malaysia: A Common Law Jurisdiction of Choice?

3.5         Role of Banking Supervisors in Shar ah Governance

3.6         Regulatory Approaches to Shar ah Governance

3.6.1      Hands–off

3.6.2      Nominal

3.6.3      Engaged

3.6.4      Proactive

3.6.5      Committed

Appendix 3.1: Legal and Regulatory Framework for IFSI in Jurisdictions with Known IIFS presence

Chapter 4

The Internal Shar ah Control System

4.1         Internal Shar ah Control Definition and Objectives

4.2         Shar ah Control System Components

4.2.1      Shar ah Control Culture

4.2.2      Shar ah Risk Identification and Assessment

4.2.3      Shar ah Control Activities

4.2.4      Shar ah Associated Information and Communication

4.2.5      Shar ah Monitoring of Activities

4.2.6      Evaluation of Internal Shar ah Control System by Banking Supervisors

4.3         Internal Shar ah Audit Function

4.3.1      Purpose, Responsibility, and Authority

4.3.2      ISAF in Practice

4.3.3      Importance of Independence and Objectivity

4.3.4      Planning for Shar ah Audit

4.3.5      Engagement Program Execution

4.3.6      Communicating Findings

4.3.7      Following Up and Post–Engagement

4.3.8      Shar ah Audit Quality Assurance Program

4.4         Proficiency and Due Professional Care of ISAF Staff

4.5         Professional Shar ah Audit Body

4.6         Shar ah Governance Manual

Appendix 4.1: Sample Shar ah Governance Manual (Also available on the book companion website at www.wiley.com/go/shariahgovernance)

Appendix 4.2: Sample Shar ah Audit Checklists (Also available on the book companion website at www.wiley.com/go/shariahgovernance)

Appendix 7.1: Performance Evaluation Form for SSB Members (Also available on the book companion website at www.wiley.com/go/shariahgovernance)

Appendix 9.1: Application Form for the Appointment of an External Shar ah Audit Office (Also available on the book companion website at www.wiley.com/go/shariahgovernance)