Assoc.Prof.Dr.Younes SoualhiChairman, Shari’ah Board

HSBC Amanah (Malaysia) & Shari’ah Boardmember , Munich Re Re Takaful

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Contents1.Definition.2.Scope.3.Shari’ah framework.4.Techniques and modes ofimplementation.5.Case studies.6.Conclusions.

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Shari’ah audit is theexamination of an IFI’scompliance with the Shari’ah inall it activities.

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Scope

Shari’ahaudit

FinancialStatements

Operation-al

aspects

Structure

Statutoryrequirem

-ents

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Shari’ah Framework

Permissibilityof trade.

Trading inreal

commodities

Profit andloss sharing

Prohibition ofriba

prohibition ofgharar

&maysir.

prohibition ofharam

commodities.

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MUSHARAKAH PARTNERSHIP

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CustomerBank

Home

10% 90%

10%

90%

%

Initial Capital

Profit shared based oncapital contribution

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MUDHARABAH (MODUS OPERANDI)

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MUDARIBMUDARIB(Manager(Manager--Bank)Bank)

ProfitProfit

RABB AL MALRABB AL MAL(Capital provider(Capital provider--

Depositors)Depositors)

CAPITALCAPITAL

LossesLosses

• Shared between mudarib + rabb almal

• Profit sharing according to acontractually agreed ratio

• Profit sharing cannot be a fixedamount/a fixed percentage ofcapital contribution

• Born solely by rabb almal

• Mudarib will only bepersonally liable if theloss is caused by hisnegligence

Work with capitalWork with capital Provide capitalProvide capital

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Takaful (WAKALAH MODEL)

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-retakaful-reserves-claims-investment income-stabilization reserves

TakafulParticipants

Contribute

Risk Fund

Manage

Takaful Operator

Wakalahfee

Surplus

1st

contractTabarru`

2nd Contract

Wakalah

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PHASES OF THE SHARI’AH AUDIT

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A) PLANNING PHASE

I) Understand the business of the IFI.II) Identifying the Appropriate

Techniques, Resources and Scope.III) Developing the Audit Plan and

Program.

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B) EXAMINATION PHASE

Actual Fieldwork

Deploy the right auditing techniqueTo gather the required evidence

To enable reasonable conclusions to be reached

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AUDITING TECHNIQUES

Examination of papers

Interviewing

Direct Observation

Benchmarking

Surveys

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AUDITING TECHNIQUES

Case Studies

Flow Charting

Statistical analysis

Walkthrough

Questionnaires

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C) REPORTING PHASE

The most important part of the auditcycle.

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AUDIT REPORT FORMAT1. Title2. Executive Summary3. Introduction to Report4. Objectives and scope of audit5. Timing6. Methodology and Approach7. Summary of Key Findings8. Recommendations9. Management Response10. Conclusions11. Appendices12. Glossary

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SAMPLE AUDIT PROGRAM INEXCEL FILE

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REVIEW OF OPERATIONALFRAMEWORK

1.1 Objectives:-To examine the extent of an IFIs compliance,

in all it’s activities, with the Shari’ah.E.g. : Contracts, Agreements, Policies, Products

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SAMPLE OF SHARI’AH AUDITFINDINGS

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SAMPLE OF SHARI’AH AUDITFINDINGS

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INTERNAL ORGANS WITHIN THEORGANIZATION

The Shari’ah Supervisory Board (SAB)Independent body of specialized jurists in Shari’ah.

The Internal Shari’ah Review TeamEnsures that the decisions of the (SAB) are adhered to.

The Audit and Governance CommitteeOversee the financial reporting and the internal controlprocesses.

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Bodies if Shari’ah Audit

Shari’ahaudit

Shari’ahCommittee

Shari’ahDepartment

Internalauditor

Externalauditor

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SHARI’AH AUDIT IN MALAYSIA AS ACASE POINT

Started in 1983 with the establishmentof Bank Islam Malaysia Berhad (BIMB)Dual-banking system was introducedin 1993BNM (Central Bank) offer 3 newIslamic Banking licenses to foreignIslamic banks in 2004-2005

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NATIONAL LEVEL SHARIAH ADVISORYCOUNCIL (SAC)

Highest Shari’ah authority on Islamic banking in MalaysiaStreamline and harmonize the Shari’ah interpretationsAdvice BNM on Islamic banking and takaful operationSource of reference by the court of arbitratorCo-ordinate Shari’ah issues with respect to Islamicbanking and financeAnalyze and evaluate Shari’ah aspects of newproducts/schemes

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SHARI’AH COMMITTEEAdvise Board of DirectorsEndorse Shari’ah compliance manualEndorse and validate pertinent documentsAssist parties that seek advice on Shari’ah mattersAdvice IFI to seek clarificationProvide written Shari’ah opinionAssist SAC on referenceReport to the Board of Directors

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SHARI’AH AUDIT IN PAKISTAN AS A CASE STUDYState Bank of Pakistan (SBP) has adopted a Shari’ahcompliance based on international best practices whichconsist of:a. A central Shari’ah board that advises SBP on issues referred

to it by Islamic Banksb. Appointment of a Shari’ah Adviser in Islamic banksc. Periodic internal Shari’ah review by Islamic Banking

Institutions (IBI)d. Shari’ah compliance audit of IBIs by SBP as a part of

inspection

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CONCLUSIONSShari’ah audit must be done vigorously and with accuratedisclosure to ensure full compliance to Sha’riah principles.Internal auditors, together with shari’ah boards andShari’ah department s of their respective IFS mustcomplement each other for a better performance in thefuture.External auditors must equip themselves with thenecessary knowledge of shari’ah before auditing anyparticular IFI.Some auditing standards such as AAOIFI’s can be used as aguidelines in the auditing process.COFFIS

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