- Every staff or stakeholder must implement Shariah Compliance requirements to achieve the Compliance Environment
The prevalent Islamic Banking is running on the basis of Shariah principles so the foremost importance is given to Shariah Compliance in Islamic Banking. For Shariah implementation; the Shariah Board, consists of learned and seasoned Shariah Scholars, exists in every Islamic Bank to provide guidelines and verdicts to implement strict Shariah compliance through Shariah Compliance Department, which acts as Secretariat of the Shariah Board and guides the bank’s management towards Shariah Compliance.
It should be noted that without effective and efficient Shariah Compliance Mechanism, Islamic Banking is nothing but same as conventional banking. The reason is that when Islamic banks claim themselves as “Islamic Bank” then they emphasize that they are following Shariah principles. Therefore; there is an ethical and spiritual responsibility to run the Islamic Bank according to Shariah principles. In case of non Shariah Compliance, the prohibited element may be mixed in income of the bank and in this case, the profit distribution to the customers will not be purely Shariah Compliant so it will be the breach of promise by the bank emphasizing Shariah Compliance.
Here the question arises: Is the implementation of Shariah Compliance only the responsibility of Shariah Board & Shariah Compliance Department? The answer is No. It should be realized that the Shariah Compliance in Islamic Banking is not only the responsibility of Shariah Compliance Department but the responsibility of all the stake holders and staff of the bank, from top to bottom. BOD, Executive Management, Middle Management and all other staff are equally liable to implement Shariah compliance in the bank. Shariah Compliance Department has the responsibility to guide the management and staff towards Shariah compliance and to ensure the activities as Shariah compliant but the actual requirement of Shariah compliance activities depends upon the enthusiasm and will of the management and staff of the bank.
The Central Bank i.e. State Bank of Pakistan issued comprehensive Shariah Governance Framework (SGF) in 2018 and issued its revised version in 2024 in order to strengthen Shariah Compliance Environment in Islamic Banking Industry. SGF defines responsibilities of BOD, Executive Management, Shariah Board, Shariah Compliance Department, Product Development, Internal Shariah Audit, and External Shariah Audit etc.
As per SGF; the ultimate responsibility is given to BOD of the bank and there is a requirement from BOD to fully understand and consider the Shariah Compliance requirements. BOD is required to introduce an effective mechanism to implement requirements of Shariah Governance Framework and instructions of Shariah Board by introducing effective Shariah Compliance Framework for the effective communication between different functions of the bank for the sake of Shariah Compliance. BOD has the responsibility to appoint efficient Shariah Board, as per Fit & Proper Criteria, as given in SGF. SBP insists for at least two BOD – Shariah Board meetings in a year to discuss the Shariah Compliance matters. In this way; the effective coordination, may be developed between BOD and Shariah Board, which helps and supports in implementation of Shariah Compliance Environment in the bank. For effective Shariah Compliance, SBP also advised BOD and Shariah Board to develop Self-Assessment Mechanism (for annual evaluation of Shariah Board Members) by defining Self-Assessment Parameters. The Shariah Board Members will evaluate themselves on the basis of these pre-defined parameters and presented to BOD and SBP.
After BOD’s roles and responsibilities; SGF highlights the responsibilities of Executive Management which makes necessary policies and procedures to run the operations of the bank. This segment has main responsibility to implement SGF so according to SGF, Executive Management is responsible to formulate Shariah Compliance Environment by following and implementing Shariah Compliance requirements as given by the regulator and Shariah Board. The Executive Management must ensure that all procedure manuals, product related documents and agreements etc. must be approved from Shariah Board and must be communicated to every concerned staff as when staff has not adequate and proper knowledge and understanding of the product and its documents and agreements etc., then the staff may violate Shariah Compliance requirements.
SGF requires that Executive Management must ensure Islamic Banking Training of the staff with the coordination of Shariah Compliance Department and Learning & Development Unit of Human Resource Department. SGF insisted the management to arrange Islamic Finance trainings for BOD and Key Executives for better implementation of Shariah Compliance Environment. In addition to BOD & Key Executives Training, SGF also focuses upon Shariah Board’s training with respect to developments in Islamic Banking & Finance.
After the discussion regarding the responsibilities of BOD and Executive Management, SGF discusses the role of Shariah Board which has the authority to consider and supervise all Shariah related matters. The Shariah Board has the authority to issue Shariah verdicts regarding Shariah matters. The Shariah Board has the responsibility to ensure that the bank is functioning as per comprehensive Shariah Compliance Framework, as created by the management. The Shariah Board has the responsibility to review and give approval of all procedure manuals, all documents and agreements etc. of products and services. The Shariah Board has the access to all sources of information.
The Shariah Board has the responsibility to review all Shariah Compliance Review Reports, Internal & External Shariah Audit Reports and give corrective actions accordingly. SGF required that the keeping in view the situation of Shariah Compliance Environment, the Shariah Board issued Annual Report. As the one Shariah Board Member is designated as Resident Shariah Board Member (RSBM) who is appointed on a full time basis and resides in the bank for the purpose to check and review all transactions and activities and provide guidance accordingly. RSBM facilitates and guides Shariah Compliance Department in all Shariah compliance aspects.
After RSBM, SGF explains the responsibility of Shariah Compliance Department (SCD) which is responsible to implement the guidelines and instructions of Shariah Board. SCD acts as a Secretariat of Shariah Board and Conduit between Management and Shariah Board. SCD has the responsibility to conduct Shariah Compliance Reviews to ensure that all functions effectively following the Shariah Compliance requirements and establishing the Shariah Compliance Environment. SCD has also the responsibility to convey Shariah Audit reports to Shariah Board and get corrective actions from Shariah Board and then implement those corrective actions. SCD also has the responsibility of facilitation to Training Unit of Human Resources Department regarding Islamic Finance Training & Development with respect to developing training material and organizing training activities. SCD has the mandate to ensure the delivery of necessary Islamic Finance training to the Islamic Banking staff with the periodic refreshers keeping in view the latest developments in this field.
SGF also describes the role of Product Development Department as it is responsible to develop products and services keeping in view the market needs and requirements. This department develops the product manuals, policies and related documents and agreements etc. and gets review from SCD and then gets approval from concerned authorities, RSBM and Shariah Board accordingly. After approval from Shariah Board, the certain product or service is implemented and practiced.
Beside SCD, the Internal & External Shariah Audits are also conducted to review and check post transactions and activities keeping in view the Shariah compliance requirements and then submit the report to SCD for further submission to Shariah Board.
It is evident from the above mentioned Shariah Governance Framework that SBP provides the comprehensive prudent mechanism for implementation of effective Shariah Compliance Environment. Therefore; it is the responsibility of every staff or stakeholder in the bank to implement Shariah Compliance in his/her own capacity so if every staff or stakeholder, from top level to bottom level, follows the Shariah compliance requirements then the idea scenario may be achieved.
The Author is Head of Shariah Compliance, Bank Makramah Limited