Shariah Supervisory Board (SSB)- – The DNA of Islamic Banks

Muath Mubarak

Shariah plays a vital role in the fast developing Islamic Finance Market. Central to this fast growing segment of the international banking and finance scene is the Shariah Supervisory Board (SSB) which can be defined as the group of Shariah scholars supervising and guiding Islamic Banks & Financial Institutions in their daily operations. The SSB is significant in that their decisions and rulings have implications on every business deal Islamic Financial Institutions (IFIs) engage in. A minimum of Three Shariah scholars is a must to form a SSB and they will be positioned at the top level with a high degree of authority. The Board of Directors (BOD) will be ultimately responsible for the bank’s leadership and the SSB will be responsible for the Shariah compliance of the bank.

The SSB is the differentiating constituent between Conventional and Islamic Banks. To call an entity a Shariah compliant bank, the SSB is a must. Depending on the volume of the financial transactions of an Islamic bank, the SSB may appoint an In-house Shariah scholar or will create an independent department within the bank to look into Shariah related matters on a daily basis An in-house Shariah scholar or department will assist the main SSB to guide the bank from a Shariah perspective.

The SSB’s main function is to ensure Shariah compliance of the bank including products and day-to-day operations. Internationally, The Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) and the Islamic Financial Services Board (IFSB) have issued a number of guidelines and standards with regard to the Shariah compliance.

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Different Models of SSB

There are different models of SSBs in the world. The following three are the main models followed by Islamic banks and financial institutions globally.

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  1. Centralized SSB – The Central Bank / regulators of the country will form a SSB to supervise and monitor the country’s Islamic banks and financial institutions. For example, Bank Negara (Central Bank of Malaysia) has its main SSB to guide the country’s Islamic banks.
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  1. Decentralized SSB – Each and every Islamic bank will have their own SSB at the banking level. Most of the Middle East & Asian Islamic banks follow this model of individual separate SSB for Islamic banks. For example, In United Arab Emirates (UAE) – Dubai Islamic Bank (DIB) & Emirates Islamic Bank have their own individual SSBs.
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  1. Outsourced SSB –Islamic banks will outsource the Shariah Compliance Audit function. Matters like the external financial audits are done by independent organizations. The Shariah compliance audit will be carried out by specialised Shariah consultancy companies. This model is mostly practiced by European Islamic Banks.

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Sharia Governance Framework (SGF)

Shariah Governance Frameworks exist in different countries in varying degrees depending on the maturity of the Islamic Finance market. SGF covers Islamic Banks’ compliance levels to ensure transparency and consistency independent of the Shariah Supervisory Board.

SGF  covers the following aspects:

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  • Rules & Conditions for the appointment of Shariah Scholars
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  • Criteria for Shariah scholars (Qualification & Experience)
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  • Minimum Number of Sittings (in a year) or minimum number of consultation hours
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  • Multiple Membership & Maximum number of IBs to be served & guidelines for it
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  • Consistency & Timeliness
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  • Transparency of Shariah Reporting
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  • Rules & Conditions for Shariah Compliance Audit (SCA)
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  • Guidelines for External & Internal SCA
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  • Procedures and appointment for External SCA
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  • Independent Shariah Report in annual financial statements
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  • Reporting to the Central Bank

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Shariah Non-Compliance Risk

Shariah non-compliance risk is the risk that arises from IBs’ failure to comply with the Shariah rules and principles prescribed by SSB / Advisor of the IBs.

Shariah compliance is critical to IBs’ operations and such Compliance requirements must filter throughout the organization and their products and activities. As a majority of the fund providers use Shariah-Compliant banking services as a matter of principle, their perception regarding IBs’ compliance with Shariah rules and principles is of great importance to sustainability of IBs. In this regard, Shariah compliance is considered as falling within a higher priority category in relation to other identified risks.

IBs shall ensure that they comply at all times with Shariah rules and Principles as advised by the SSB, with respect to their products, investments, services and activities. This means that Shariah compliance considerations are taken into account whenever the IBs accept deposits and investment funds and carry out investment services for their customers.

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Future Smart Mufti with Al Technology

Islamic Banks are taking initiatives in advisory and respond to the Frequently Asked Questions (FAQs) by Smart Mufti with Artificial Intelligence (AI) technology. This is just the start of the tech savvy generation in embedding the DNA to the system, process, approval and supervision of Islamic Banks.

 

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