Displaying items by tag: Islamic Finance

The Shariah Supervisory Board (SSB) is the central organ of Islamic financial institutions’ shariah governance structures (IFIs). Different countries and jurisdictions have adopted different governance structures, and can be broadly classified into three major models.

The first model is the decentralised shariah governance structure in which no central shariah council is established at the national level. This structure only requires the formation of an SSB or shariah committee at the respective IFIs. Countries like Singapore, the United Kingdom and Turkey have all adopted this model.

The second model is a centralised shariah governance structure, which only requires the establishment of a central shariah authority for Islamic financial products and services without a dedicated SSB at the institutional level. The Kingdom of Morocco, for example, regards the Higher Council of Ulamas as the sole entity with full authority to issue fatwas on various shariah issues. A specialised committee comprising nine members and one coordinator is formed under the country’s Higher Council of Ulamas to deal with Islamic finance issues.

The two-tier shariah governance structure is the third model, which necessitates a central shariah council at the national level and a shariah committee at the institutional level. Malaysia, Brunei, Pakistan, UAE and Bahrain are among the countries that have adopted this structure.

Different legal frameworks, varying levels of shariah expertise, and the unique needs of the respective countries frequently cause differences in shariah governance structures between countries and jurisdictions.

Indonesia has implemented a two-tiered shariah governance structure. At the national level, the national shariah board (Dewan Syariah Nasional (DSN)), appointed by the Indonesian Council of Scholars (Majlis Ulama Indonesia), serves as the highest shariah authority for any matters related to shariah compliance for IFIs in the country. The board is charged with issuing fatwas on Islamic financial products and services, as well as supervising the SSB's implementation of fatwas at their respective IFIs. It also has the authority to recommend the appointment and termination of SSBs in IFIs.

At the institutional level, each IFI appoints an SSB with at least two members to ensure full compliance with shariah principles and fatwas issued by Indonesia's national shariah board. They must also conduct a regular shariah compliance review and provide shariah opinions and reports on shariah compliance and supervision.

A member of the SSB is appointed by the shareholders of the respective IFIs at the Annual General Meeting (AGM), with approval from Indonesia's Financial Services Authority (FSA) and a recommendation from the national shariah council. An appointed member of a shariah supervisory board in one IFI may also serve on the shariah supervisory boards of four other IFIs.

Despite sharing a similar shariah governance structure with some jurisdictions, Indonesia's shariah governance practices differ from the majority of jurisdictions in the following ways:

First, the Indonesian Council of Scholars (Majlis Ulama Indonesia (MUI)), an independent non-government authority, appoints the national shariah board (Dewan Syariah Nasional (DSN)). In contrast to other countries, the central shariah board is usually appointed by a sovereign authority or a central bank.

Second, a member of Indonesia's national shariah board may serve on the SSB. Other countries, such as Malaysia and Brunei, restrict such practice.

Third, the Indonesian SSB should have at least two members. International best practices such as the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI) and Islamic Financial Services Board (IFSB), on the other hand, require at least three members for the SSB, whereas Malaysia requires at least five members in an IFI.

Fourth, an SSB member could not serve in more than five IFIs. Malaysia, on the other hand, restricts to a maximum of three SSB memberships in any given period. Multiple memberships are not restricted in some countries.

Fifth, the SSB is required to conduct shariah reviews on a regular basis. Thus, the shariah review and shariah audit functions in Indonesia, to some extent, are entrusted and performed by the SSB.

Based on the foregoing, the shariah governance practices in Indonesian IFIs have raised some concerns, particularly the issue of multiple memberships of SSBs due to a lack of a shariah scholar pool with the necessary shariah and finance qualifications. Furthermore, the SSB’s role in IFIs is not supported by proper and adequate shariah-compliant functions. In addition, the country lacks a dedicated shariah governance framework. While the republic has issued a number of regulations outlining various aspects of shariah governance, they are dispersed across various legislations, acts, guidelines, and circulars

Dr Mohammad Mahbubi Ali is the head of economics, finance, Waqf and Zakat at the International Institute of Advanced Islamic Studies (IAIS) Malaysia. He can be contacted at This email address is being protected from spambots. You need JavaScript enabled to view it..

Published in: Islamic Finance News (IFN), 16 August 2022

https://www.islamicfinancenews.com/indonesian-shariah-governance-practices-and-issues.html?access-key=11e7a6a3701b0a2593faef99048a2c86

Foyasal Khan: It was indeed a great opportunity for me to attend virtually   a seminar organized by International Institute of Advanced Islamic Studies (IAIS) Malaysia, a reputed independent Islamic think-tank based in Kuala Lumpur, held on Friday, July 15, 2022, that internationally launched the 2022 Islamic Well-Being Index (IWI 3.0-2022). The full Index included 33 Muslim majority counties for which data on religiosity (Deen) is available from World Values Surveys. Maldives, an archipelagic country located in Southern Asia with 540,542 population, stood first in the index with a score of 0.736 while Malaysia and Indonesia shared second place with a score of 0.735. One of interesting features is that women are seen to play large roles in contributing to societal well-being in these three societies.

Genesis of the Islamic Well-Being Index: The index is based on the research conducted by Dr. Daud Abdul-Fattah Batchelor, an Adjunct Fellow at IAIS Malaysia. The approach taken to calculate the Index follows has been detailed in this author’s 2021 article “An Enhanced Islamic Well-Being Index (IWI 2.0-2021) for Muslim Countries,” based on the Higher objectives of Islamic Law (Maqāṣid al-Sharīʿah) published in Volume 12(2) of Islam and Civilisational Renewal, the flagship journal of IAIS Malaysia. This is a much-enhanced version of “A New Islamic Rating Index of Well-Being for Muslim Countries,” published in 2013 in   the same journal. In 2021, Indonesia, Tunisia, and Malaysia became the top three performing countries in the index.

International launches Event of IWI: A world-renowned scholar of Islamic jurisprudence Professor Dato’ Dr. Mohammad Hashim Kamali, Founding CEO of IAIS Malaysia delivered welcoming remarks while Mr.  Ahmad Badri bin Abdullah, the Acting Deputy CEO of IAIS Malaysia, moderated the discussion. After a 45-minutes keynote presentation by Dr. Daud, four designated discussants shared their observations and remarks. They  were: Prof. Dr. Abdelaziz Berghout , a Former Deputy Rector  and presently Dean of International Institute of Islamic Thought and Civilisation (ISTAC) of IIUM Malaysia; Mr. Azizi Bin Che Seman, Department of Syariah & Economics, Academy of Islamic Studies, University of Malaya; Dr. Alwani Binti Ghazali, Senior Lecturer, Department of Akidah & Islamic Thought, Academy of Islamic Studies; and Dato’  Dr.Ghazali Dato Yusoff,  a leading businessman from Malaysia and chairman of IRAN-ASEAN Business Council. All the discussants congratulated Dr. Daud for his huge efforts in quantifying Islamic Well-Being beside highlighting some limitations and suggesting some points for further improvement of the index. They also thanked IAIS Malaysia for organizing this seminar.

Prof. Hashim Kamali said, in his welcoming remark, that this data-driven index to evaluate the Islamic Well-Being of Muslim Majority Countries, which was first released in 2013, is done based on a more up-to-date approach rooted in the core principles of Maqāṣid al-Sharīʿah, as articulated by Imam Abu Hamid al-Ghazali. It provides insights and practical guidelines for countries seeking to advance to higher levels of development. He expects that the IWI will provide practical insights for countries that aspire to move to a higher state, and leading countries in   the Maqāṣid fields could serve as role models for lagging counties. On behalf of IAIS Malaysia, he expressed his willingness to provide all support for the publication of this index on an annual basis with much updated methods and data.

Major findings of the 2022 IWI: The composite index has been calculated using each of the parameters chosen to represent each  maqsad (objective). Five components of Maqāṣid al-Sharīʿah i.e Religion, life, Intellect, family and wealth have been presented into two broad dimensions: Deen (religiosity) and non-Deen constituted by other four components. In the overall composite index, among the 33 counties, 5 countries scored more than 0.70, 13 countries scored between 0.60 and 0.69, 14 countries scored between 0.50 and 0.59, and Albania appeared as the least performing country with a score of 0.486. The performance of Bangladesh, the 3rd largest Muslim country in the world, with a score of 0.603 is better than Pakistan and Turkey.

2022 IWI FOR SELECTED MUSLIM COUNTRIES

Non-Deen dimensions of the index included fifty majority Muslim countries. These countries were assessed for the four Maqasid fields of Life, Intellect, Family and Wealth. Based on the composite average value for these Non-Deen Maqasid, the top five performing countries were: Kazakhstan (1), Tunisia (2), Kosovo (3), Kyrgyzstan (4) and Albania (5). Top three countries in the Protection of Life Objective are UAE  (1),  Albania (2) and Jordan (3). Top three countries in the Protection of the Intellect Objective are Kyrgyzstan (1), Albania (2), and Bosnia and Herzegovina (3). Top three countries in the Protection of the Family Objective are Tunisia (1), Iran (2), Kazakhstan and Syria (both 3). Top three countries in the Protection of Wealth Objective are Palestine (1), Burkina Faso (2), Malaysia and UAE (both 3).

Non-Deen Average Index in IWI 3.0 and HDI: To date, the Human Development Index (HDI) is the most accepted index that measures key dimensions of human development since the 1990s. Therefore, the Non- Deen Average Index in IWI 3.0 should have a correlation with HDI results. But we find a clear departure from this trend. Rather we find some surprising results that are hardly convincing. For example, Saudi Arabia and Turkey are significantly ahead of Tunisia and Senegal in terms of HDI scores. In 1990, Saudi Arabia and Turkey scored 0.70 and 0.58 respectively while Tunisia and Senegal scored 0.57 and 0.37 respectively in HDI. Over the years, following the same trend, Saudi Arabia, Turkey, Tunisia and Senegal scored 0.85, 0.79, 0.73 and 0.51 respectively in the 2017 HDI. Now on the Non -Deen Average Index in IWI 3.0, we see that Tunisia (ranked 2nd, score 0.760) and Senegal (ranked 24th, score 0.618) are better than Saudi Arabia (ranked 29th, score 0.572) and Turkey (ranked 30th, score 0.561). As the two most influential Muslim nations, Saudi Arabia and Turkey may not accept these results. Therefore, the author of the IWI must make very convincing arguments from a methodological point of view and choose indicators that reflect the true reality.

Last Comment: Applying the concept of Maqāṣid al-Sharīʿah to measure Islamic wellbeing of Muslim countries is still a relatively recent exercise. Hence, it is expected to take time to reach a consensus on important aspects of the measurement. In the meantime, engaging serious and genuine research in this area would surely be an important step towards measuring Islamic wellbeing in the Muslim countries. On this account, Dr. Daud’s IWI is an excellent addition to the literature on measuring Islamic wellbeing.

Certainly, IWI has the potential to emerge as one of the indexes to represent Islamic wellbeing. For this to happen, the index needs to be institutionalized and a grand strategy is needed for this purpose. The definition and indicators of Islamic wellbeing as proposed by Dr. Daud needs to be validated through multiple focus group discussions to build a broad consensus. This will help institutionalize the index. Finally, organizational support for funding index development and application, including conducting periodic surveys of all Muslim countries, is very crucial to fill data gaps and improve survey focus and accuracy.

Author: Dr. Foyasal Khan is an Economist based in Dhaka, Bangladesh, and Ph.D. holder in economics from the International Islamic University Malaysia. He can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it.

Dr. Daud Abdul-Fattah Batchelor (centre) presenting the 2022 Islamic Well-Being Index

There are many financial products offered in the market catering to a person's preparation to protect themselves and their loved ones from financial shocks caused by undesirable events. For Muslims, these include takaful protection schemes, inheritance instruments and others.

When promoting such products, one should not use fearmongering techniques because they are contrary to their original principles. Although the intention is to raise awareness about some issues, this may confuse people on some aspects of Islamic jurisprudence.

This can be seen in misunderstandings regarding the Islamic jurisprudence on faraid. For example, when advertisements state that if a Muslim does not take a particular financial product, that person will leave his family in suffering as the property will be divided according to faraid as the process takes time, compounded by the absence of a "stopper" heir (son) and others.

It can cause misunderstandings in the Islamic law of inheritance. In reality, faraid is a part of the distribution management of a deceased's property, which is implemented after factoring in the deceased's funeral expenses, debts, wills, jointly acquired property (acquired by husband and wife during the subsistence of marriage) and heirs who disagree on the share they will receive.

The provision in Islamic law of inheritance comes with a great responsibility as Allah states in the Quran, "Men are in charge of women by (right of) what Allah has given one over the other and what they spend (for maintenance) from their wealth." (An-Nisa ', 4:34).

Anyone who deliberately becomes irresponsible towards his or her dependents will be punished in the hereafter. If a person consumes the property of orphans under his or her care unjustly, they will be punished by Allah as the Quran states, "Indeed, those who devour the property of orphans unjustly are only consuming into their bellies fire. And they will be burned in a blaze" (An-Nisa', 4:10).

Among the real issues in managing a deceased's property include getting the right information on the property and disputes on other claims before faraid, such as the claim of will or jointly acquired property. Other issues are generations of heirs, a monitoring system to the new guardian and others, which need to be dealt with by different agencies. These are reasons why the implementation of some faraid cases can take a long time and cost more.

These issues originate from human weaknesses, such as stubbornness or lack of responsibility, greed and bureaucracy. By identifying and resolving these issues, people can understand the wisdom of the Islamic law of inheritance.

Therefore, solving such issues should be channelled in appropriate platforms and not by promoting financial products in such a way that lead to confusion about faraid.

Islam celebrates the good intentions of individuals who manage their financial matters based on care and love towards others.

For example, by participating in takaful protection schemes, bequeathing to adopted children, giving hibah (gifts) to spouses and parents and others.

This is the true and genuine objective of Islamic financial products. Islamic financial planning has its advantages and rules.

The wisdom prescribed in such a way is for the benefit of all parties. In the case of Saad bin Abi Waqas R.A., who intended to bequeath his entire property, the Prophet stated that only one-third of a person's property is allowed in a will as it is better to leave the heir in sufficiency (reported by al-Bukhari).

The same is with today's takaful protection schemes, which are based on the principles of ta'awun (helping each other) and tabarru' (sincere donation), and limited to certain rules when implemented. In promoting them, one should not over claim the products beyond the original concepts, which can cause frustration to consumers once they realise they are not benefiting from some protection under the scheme.

A person should make a financial plan according to his ability, not forced or following market trends. Muslims need to understand that the principles in Islamic financial products are different from their conventional counterparts.

The principles and laws in Islamic matters contain great wisdom and a symbol of piety of a Muslim to the Creator.

The writer is Senior Research Officer, Centre for Economics and Social Studies, Institute of Islamic Understanding Malaysia (IKIM)

Published in: New Straits Times on Friday, 16 April 2021

Source NST: https://www.nst.com.my/opinion/columnists/2021/04/682677/muslims-must-have-good-grasp-principles-islamic-financial-planning