International Conference on4th

2016Islamic Business

Quaid-e-Azam Auditorium,IIUI Faisal Masjid Campus,

Islamabad, Pakistan20 - 22

February, 2016

ICIB

Islamic Economics, Finance, Entrepreneurial Development & Public Policy for the Ummah’s Socio-economic WellbeingUnder 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.

Organized By:

Collaborators:

Ministry of PlanningDevelopment & Reform

riphahinternational

university centre of

islamic business

riphah

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) 5949 907)Mr. Ehtesham Rashid (ehtesham.rashid@riphah.edu.pk; +92 (345) 2569 620)

© ISRA 2016.

PROF. DR. MOHAMAD AKRAM LALDIN

Executive Director, ISRA

Shariah Scholars, Shariah Governance and Maqasid Al-Shariah Application in

Islamic Finance

© ISRA 2016.

4. Maqāṣid al-sharīʿah: Islam’s Vision in

Finance

Presentation Outline

1. Introduction

2. Shari’ah Scholars and Islamic Finance

3. Governance for Shari’ah Compliance

Framework

5. Applying Maqasid al-Shari’ah in Industry

Development (Cont’d)

6. Conclusion

© ISRA 2016.

• 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.

1. Introduction

© ISRA 2016.

2. Shari’ah Scholars and Islamic Finance

Development

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.’

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.’

© ISRA 2016.

• 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.

2. Shari’ah Scholars and Islamic Finance

Development (Cont’d)

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

Shari’ah Scholars play a key role in Islamic financial

practices to supervise and monitor the practices of

Islamic financial institutions

© ISRA 2016.

• 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.

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3. Governance for Shari’ah Compliance

Framework

Ensure strict Shari’ah-compliant

Instil public confidence

Promote operational/financial

stability

Importance of Shari’ah

Governance

Principles of Islamic finance place great

emphasis on strong corporate governance

values & structure, transparency,

disclosure of information & strict

adherence to Shari’ah principles…

© ISRA 2016.

• 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.

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

3. Governance for Shari’ah Compliance Framework (Cont’d)

© ISRA 2016.

Malaysian initiatives Towards a proper Shari’ah Governance

Framework . . .

BNM GPS1

Guidelines on the Governance

of Shariah Committee for the

Islamic Financial Institutions

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

CENTRAL BANKING ACT

2009 – Empowering the

role of SAC in

supervising Islamic

banking industry in

Malaysia

IBA 1983 - 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.

© ISRA 2016.

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

© ISRA 2016.

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):

• Islam encourages wealth to be employed in productive activities.

• Commercial and financial activities are viewed positively as mechanism to circulate wealth in society.

1. The circulation of wealth in the society, from

creation to distribution

• 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

2. Advocating fair and transparent financial

practices

• 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.

3. Promoting socio-economic justice

© ISRA 2016.

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.

© ISRA 2016.

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.

© ISRA 2016.

• 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.

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Islamic Financial

System

Shari’ah

6. Conclusion

© ISRA 2016.

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Thank You