takaful feature : shariah governance - the importance of shariah knowledge in shariah governance

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AIR Magazine Article October 2009

Takaful feature : Shariah governance - The importance ofShariah knowledge in Shariah governance

The development of Shariah knowledge is important not only to the Shariah committee and Shariahdepartment but also to the product department, writes Mr Zaharudin Muhammad, Researcher with theInternational Shariah Research Academy for Islamic Finance (ISRA) and Member of Shariah Committee forHSBC Amanah Takaful and Alliance Islamic Bank.

Shariah compliance is considered the raison dtre of Islamic finance,without which the whole industry will be at stake. The integrity of anyIslamic takaful product greatly depends on its compliance with therequirements of the Shariah, and any deficiency in this aspect willsurely affect the confidence of the stakeholders and, hence, theindustrys market and profit.

It is thus extremely important to ensure that an adequate frameworkis developed to preserve the Shariah integrity of Islamic financialproducts. The central element of such a framework is adequateknowledge of Shariah principles.

A Shariah governance framework without adequate Shariahknowledge is like a fine race car without a skilled driver; thatcombination will not even be a contender in any race, much less a

winner.

Unfortunately, most players in the industry now concentrate on theadequate acquisition of the Shariah knowledge for their ShariahCommittees and their talent development without giving sufficientattention to other relevant departments like Islamic productdevelopment, for example.

To date, most articles and papers about Shariah governance haveconcentrated on developing the Shariah expertise of the ShariahCommittee members. In this article, however, I shall discuss how we

can ensure smooth Shariah governance by developing Shariahknowledge, not just for the Shariah Committees, but also for otherportfolios like the heads of Shariah departments and the heads ofIslamic product development.

The normal product development processNew product development starts with collaboration between theproduct department and the marketing department. The aim, ofcourse, is to create new financial products that will generateadditional income for the institution.

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For a new product concept to be certified Shariah-compliant, thenormal process would involve discussions by one or two membersfrom the Shariah Committee with the new product development team.Discussions are mostly informal in nature and are basicallyunstructured.

If, through these informal discussions, the new product is determinedto be Shariah-compliant, the process will move fromconceptualisation to actual product development. Throughout the newproduct development process, the Shariah department will play acrucial role in making sure that the product meets the various Shariahrequirements prior to formal submission to the Shariah Committee.

The normal practice in Malaysia is that once the new product hasbeen endorsed by the Shariah Committee, it is then submitted toBank Negara Malaysia (BNM) for approval.

This is the normal process for new products as practiced by most

takaful institutions. However, there are companies that lack formalShariah departments, mostly due to the small size of their business.In such instances, new product development flows directly from thenew product department to the Shariah Committee without thebenefits of input and scrutiny from the non-existent Shariahdepartment.

Level of Shariah knowledge requiredTo generate fully Shariah-compliant products, it is crucial that keyindividuals in the institution have degrees of Shariah knowledge thatvary depending on the level of involvement within the institution.

The contention of this article is that development of Shariahknowledge is not only important to the Shariah Committee andShariah department, but to the product department as well. The lattermust at least have basic knowledge of the principles related toShariah rules, such as basic knowledge of the elements of riba(interest or usury), gharar (ambiguity) and other prohibitions of theShariah.

My suggestions on what levels of Shariah knowledge are required toimprove takaful institutions are as follows:

Shariah Committee: Members must be expert in Shariah,possessing mastery of the basic intellectual tools necessary forijtihad. At the very least, they should have a Shariah studiesbackground and have the ability to refer any issue back to thereferences for Islamic jurisprudence, such as classical books of fiqh,etc.

Heads of Shariah departments must have adequate knowledgerelated to Shariah jurisprudence and its sources. At the very least,




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such persons should have a background in Islamic studies, if not inShariah studies. The difference between the two is that Islamicstudies have a broader scope, focusing on Islamic knowledge ingeneral, including areas such as Islamic doctrine, while Shariahstudies focus on Islamic jurisprudence or Islamic legal provisions thatrelate directly to Islamic finance practices, including takaful.

Heads of product departments should have knowledge of principlesrelated to Shariah jurisprudence. The minimum requirement shouldbe knowledge of the elements prohibited by the Shariah, such as riba,gharar, etc.

There is no denying that it is difficult to find persons having the fullqualifications mentioned above, but at least we know our core targetfor improving the takaful industry by improving the staff talent to avoidviolations of the Shariah and risks to profit.

Risks resulting from insufficient Shariah knowledge

The following risks are expected to occur when Shariah knowledge isinadequate:

Shariah non-compliance: Shariah compliance is the most importantelement of Islamic finance. Islamic finance institutions that are notShariah-compliant in all activities are a contradiction in terms. ByShariah governance rules, products and related areas, such asadvertisements, will be rejected if they are not Shariah-compliant.This will consequently affect the companys profit and waste thestaffs time and labour.

Lost profits: According to Shariah rules, any profit earned bymethods that are not Shariah-compliant must be cleared bychanneling them to the charity fund, which is distributed to the poor,orphans, etc. This may occur when the company does not have aShariah department nor has one with insufficient Shariah knowledge.Non-Shariah-compliant profit is mostly found when the company isaudited by the government or by the Shariah Committee itself. It isconsidered a loss of companys profit, for if it were Shariah-compliant,the company would be allowed to keep it.

Waste of staff time: The product development process frombeginning to end is a lengthy one. If the result is non-Shariah-compliant, the product will be rejected by the Shariah Committee. Thetime taken to develop it, usually one to three months, will have to bewritten off as a loss. Such a result is not unexpected if the head of theproduct department lacks knowledge of Shariah principles, butsometimes the prohibited elements involved in rejected products areprohibitions known to all Muslims.

Passivity: One risk of insufficient knowledge is passivity in exploringnew, suitable models because, realistically speaking, takaful cannot




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be based on a single, one-size-fits-all template. A variety of models isneeded in order to develop products that meet various human needs.Islam has not come with a single model and forced humanity to followit exclusively. The authentic Islamic methodology is that human needsmust be evaluated in light of Shariah principles; whatever fulfills themwithout violating Shariah prohibitions is considered acceptable, evenif it is not in line with any previous Shariah model.

To require various products tailored to respond to various demands to conform to a single model will raise unnecessary doubts inpeoples minds about the relevance of the Shariah to all times andplaces. A variety of models cannot be properly provided withoutadequate Shariah knowledge.

Why is Shariah compliance so important to Muslims?Shariah compliance is of central importance to Muslims because theybelieve that the rules are appointed by God. The fundamentalpurpose for the rules of transactions is to ensure that neither party

trespasses on the rights of the other.

Shariah compliance ensures that the rights of both parties involved inthe transactions are safe and secure, and will have a positive effecton economic growth and social harmony.

According to Muslim belief (aqidah), God appointed the rules beforecreating humanity itself, based upon impartial considerations thatbalance the interests of all parties. By contrast, man-made lawssecure and protect the interests of the privileged minorities who makethem or can influence the lawmakers.

Thus, riba is prohibited by the Shariah because it reduces the poor toeconomic slavery. But at the same time, Islam provides solutions topreserve the rights of creditors by assigning unable debtors a right tozakat (alms). Also, tazir law penalises debtors who refuse to settletheir debts by making them responsible for any losses suffered bycreditors as a result of delayed repayment.

Thus, the purpose of Shariah rules is to ensure that all human rightsare preserved and to maintain the overall well-being of society.

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Published: 10/18/2009 2:42:52 PM

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takaful feature : shariah governance - the importance of shariah knowledge in shariah governance

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