Shariah Compliance: Irregularities Detected While Inspecting Branch and Remedial Measure
ِكُلٍّ جَعَلْنَا مِنكُمْ شِرْعَةً وَمِنْهَاجًا
To each of you We prescribed a law and a method.
[5. Sura Mayeedah : 48]
SHARIAH & IT`S OBJECTIVES
شريعة is an Arabic word : It means
The way, Road
Path, Destination
Rules, Law
Source of Water
Fountain, Pond
DEFINITION OF ISLAMIC SHARIAH
Shari’ah is the set of rules derived from both the Holy Quran and the authentic traditions (Sunnah) of the Prophet (pbuh) and the scholarly opinions (Ijtehad) based on Quran and Sunnah.”
CHARACTERISTIC OF SHARIAH
Divine
Eternal
Universal
Exclusive
Spiritual
Moral guidance
Flexibility
Changing Situations
FUNDAMENTAL SOURCES OF SHARIAH LAWS
Fundamental Sources
- The Holy Qur’an
- The Hadith/Sunnah
- Ijma- Consensus of Opinion
- Qiyas –Analogy
Supplementary Sources
- Ijtihad- Scholarly Opinions
- ‘Qawl Al-Sahabi’ -Sayings of Companion
- Urf A’am’- Customary Practices of the People
- ‘Istihsan’ – Juristic Preference
- ‘Saddan Al-Jarayeh’- Blocking the Means
- Fath Al-Jaryeh- Opening the Means
- ‘Maslaha Mursala’- Extended Analogy
“An Islamic bank is a financial institution whose statutes, rules and procedures expressly state its commitment to the principle of Islamic Shariah and to the banning of the receipt and payment of interest on any of its operations”
OIC’s definition consists of two approaches:
Commitment to the principles of Islamic Shariah (Positive)
Banning of receipt & payment of interest (Negative)
ORGANS OF SHARIAH
ORIGIN OF AUDIT
The word audit is derived from a Latin word “audire” which means “to hear”.
Definition of Audit
An audit is a systematic and independent examination of books, accounts, statutory records, documents and vouchers of an organization to ascertain how far the financial statements as well as non-financial disclosures present a true and fair view of the concern.
SHARIAH AUDITING DEFINITION
According to AAOIFI,
Shari’a review is an examination of the extent of an IFI’s compliance, in all its activities, with the Shari’a. This examination includes contracts, agreements, policies, products, transactions, memorandum and articles of association, financial statements, reports (especially internal audit and central bank inspection), circulars, etc. The objective of a Shari’a review is to ensure that the activities carried out by an IFI do not contravene the Shari’a.
BRPD-3, 2016 , CHAPTER-8 SHARIAH AUDIT:
AT A GLANCE …
BRPD-3, 2016 , Chapter-8 : Shariah Audit:
ICC in respect to Shari`ah compliance in banks/windows of banks operating based on Islamic Shari`ah needs to be ensured separately through Shari`ah audit.
Shariah Audit Process
As per BRPD-3, 2016 , Chapter-8 : Shariah Audit:
At the end of each year, the Head of the Shari`ah Supervisory Committee’s’ (SSC)/ICC secretariat will set out a Shari`ah audit plan for the next year. This would be a high level Shari`ah audit plan, which will be approved by the member-secretary, SSC and should have concurrence of the SSC.
This will be a risk based plan where sensitive areas, including a higher percentage of Shari`ah violations, will be given priority
The deficiencies identified during the Shari`ah audit should be notified to the appropriate level and also be reported to the member-secretary of SSC, and to the ACB, with a copy to the MD/CEO.
At the end of each quarter, there should be a summary report on the Shari`ah audit findings and corrective actions taken, which should be forwarded to the SSC, ACB, Board of Directors and MD/CEO.
At the end of each quarter, there should be a summary report on the Shari`ah audit findings and corrective actions taken, which should be forwarded to the SSC, ACB, Board of Directors and MD/CEO.
Based on the review of monitoring reports the Shari`ah audit team should also conduct surprise checks on the branches/windows where regular deficiencies are identified.
Depending on the gravity of deviation from Shari`ah compliance, the member-secretary of SSC will categorize the branches/windows into high, medium and low risk categories, and the frequency of Shari`ah audit shall be as under:-
Risk Category Frequency of Shari`ah audit
High Half-yearly
Medium At least once a year
Low As decided by Shari`ah Board/ SSC
- The Shari`ah audit should check at least a percentage of the Income of the Bank/windows as decided by the Shari`ah Board/ SSC.
- An adequate number of personnel, having thorough knowledge in Islamic Banking operations and ICT literacy, are to be posted as Shari`ah auditors.
SCOPE OF SHARIAH AUDIT
As per BRPD-3, 2016, Chapter-8 the scope of Shariah Audit is as follows:
Investment portfolio of the branches.
Foreign Exchange portfolio of the branches.
General Banking portfolio of the branches.
Sanction process of investment limit/proposals related files of the clients and terms and condition incorporated by the Head Office.
Personnel Management
All agreements, Transactions, principles, products, memorandum and Articles of Association, Manuals, Financial Statements and circular of the bank.
- Others.
SHARI`AH VIOLATION IN DEPOSIT PORTFOLIO OF THE BANK
- Not disclose about bearing of loss, if any, by the depositors.
- Negligence to Distribute of close Mudaraba accounts’ Profit.
- Any ambiguity in the agreement.
- Lakhopoti, kotipoti, Double Benefit etc. Scheme?
MAJOR SHARI`AH VIOLATIONS IN INVESTMENT PORTFOLIO
- Cash Facility Provided in Bai Murabaha and Bai-Muajjal
- Old investment liability adjusted by creating new investment A/C
- Existence of the supplier not found
- Cash memo obtained in the name of the investment client
- Investment given on the Shari`ah prohibited item
- Amount of cash memo is less than the investment
- Charging of rent on the asset before it becomes usable/ rentable
18 TYPES MINOR VIOLATIONS
- Client received the goods instead of the Branch from the sellers directly
- No record of possession of goods by the branch
- Cash memo/Bill/Challan/Transport receipt not found
- Letter of Authority not taken in case of MPI
- Letter of Authority not taken in case of dealership
- Post purchase inspection report by the Branch not found
- Delivery of asset was not made to the client in case of HPSM
- Charging of profit at agreement stage in case of Bai Salam
- Selling of Bai Salam goods through the client without engaging him as selling agent
- Amount of cash memo exceeds the investment
- Agreement kept blank
- Postdated cash memo obtained
- Investment Client himself is applicant of TT/DD/PO
- Engagement of buying agent in Bank’s unapproved items
- Investment made to the client without engagement of buying agent
- Engagement of buying agent in case of local and single supplier
- Cash memo not taken from actual seller or supplier
- Back dated cash memo obtained
SHARI`AH VIOLATION SPECIALLY IN FOREIGN EXCHANGE PORTFOLIO
- Creation of double deal in case of Murabaha Import Bills (MIB) and Murabaha Post Import investment (MPI).
- Non existence of goods in case of Bai Salam (Export).
- Purchasing foreign and local export bills on discount basis which is not inconformity with the principles of Islamic Shari`ah.
- Improper charging of profit at agreement stage in Bai Salam.
VULNERABLE AREAS OF SHARIAH VIOLATION: ATTENTION OF SHARIAH AUDITORS IS NEEDED
- Paper Shariah compliance instead of real buying and selling of goods in Bai mechanism of investment.
- Common and careless practice of buying agency system in Bai mode of investment.
- Taking compensation amount (realized or realizable) into bank’s regular income or using it for provision purpose or retaining it with the bank instead of spending in charity.
- Applying new rate of profit after executing the contract with the customer.
- Giving or taking of fund especially foreign currency (treasury operations) on interest based mechanism without getting opinion of SSC.
- Random and careless practice of purchasing clients liability with other bank.
- Random practice of converting client’s Murabaha liability into HPSM without getting opinion of SSC.
3 TYPES LACKING OF OTHER ACTIVITIES RELATED TO SHARI’AH
- Lacking in Offer and Acceptance with the Supplier
- Lacking in sending officials to the spot (outside of the branch) to receive/inspect (in case of buying agency) the goods and handover to the client
- Lacking in collecting Cash Memos directly by the branch from the suppliers
6 TYPES LACKING OF OTHER ACTIVITIES
- Lacking in giving or/and taking Inter-branch cooperation
- Lacking in establishing separate queue or counter for the Woman Clients
- Lacking in establishing an effective and efficient purchase cell in the branch
- Lacking in conducting dars regularly
- Lacking in housekeeping & discipline
- Lacking in performing salat in congregation timely
ADVERSE IMPACTS OF SHARI`AH VIOLATION
- Distortion of Islamic Banking and finance.
- Increase of doubtful income.
- Increase of overdue/non performing asset.
- Dissatisfaction among the people.
- Mixing up Haram with the livelihood (rijq).
- Utilization of fund in unproductive and unapproved sectors.
- Negative impression about Islamic Banking.
- Decreasing of Deposit.
- Failure of Islamic Banking System.
- Negative impact on the moral standard of the employees of the bank.
- Dissatisfaction of Allah (SWT).
CONSEQUENCES & DISCIPLINARY PRACTICE AGAINST SHARI`AH VIOLATOR IN IBBL
Consequences & Disciplinary Practice
- ACR Marking: Total 12 marks (4 traits x 3 marks
- In the section `Ground for Punishment’ of The Human Resources Policy Manual of Bank, it is mentioned that “Disregard and violation of the principles of Shari`ah in the conduct of business’’ is a punishable offence.
- HRD takes various steps against the violating officials of the Bank. Such as:
- Issuing Explanation by HRD to the
- Increment held up
- Promotion Held up
- Suspension/Dismiss/termination from the job.
STEPS TO BE TAKEN TO STOP SHARI`AH VIOLATION
- Preventive Measures
- Corrective Measures
- Development Measures
HIGHLIGHTS OF OFFSITE & ONSITE SHARI`AH AUDIT IN IBBL
- Deals of every three months are checked as maximum as possible through Off-site Inspection.
- Branch are suggested to regularize (where applicable)/ to make the deal adjusted by the client if irregularities/lapses are found through off-site.
- Investment under HPSM, MPI, Bai-sarf, MDB mode where probability of Shari`ah violation is minimum, are checked on test basis & other modes like Mura TR, Mura Com., Baim Com., SBIS, HDS, SHDS, RDS, etc. are checked/audited as maximum as possible
- Every inspection team collects the issues of problems/difficulties/hurdles faced by the branch in respect of Shari`ah compliance from every branch & submit/place a summery with probable solution before bi-monthly general meeting/ brain storming sessions of Muraquibs at Shari`ah Secretariat.
- Selected Muraquibs/members of inspection team conduct an exclusive workshop/training session on Shari`ah Compliance in banking operations at selected branch premises during the period of On-site Shari`ah Inspection of the branch as per office order.
SHORTFALL IN DOCUMENTATION
Contributor:
M. Rahmatullah, Faculty Member
Islami Bank Training & Research Academy