According to IFSB’s guiding principle on shari’a governance system, shari’a governance

system refers to the set of institutional and organizational arrangements through which an
IFB ensures that there is effective independent oversight of shari’a compliance over each of
the following structure and processes:

 Issuance of relevant sharia pronouncements/ resolutions

 Dissemination of information on such sharia pronouncements/resolutions to the
operative personnel of the IFB who monitor the day to day compliance with sharia
pronouncements/resolutions vis a vis every level of operations and each transaction
 An internal sharia compliance review/audit for verifying that sharia compliance has
been satisfied, during which any incident of non compliance will be recorded and
reported, and as far as possible, addressed and rectified.
 An annual sharia compliance review/audit for verifying that the internal sharia
compliance review/audit has been duly noted by the sharia committee

Sharia governace complements the corporate governace process as a whole.

Line of reporting and communication

Lack of effective communication between the directors, sharia committee, and management
can be an obstacle to an effective corporate governance structure. Lines of reporting and
effective corporate communication are key factors that ensure good performance. For
effective communication, it suggested the gap between the BOD and sc by having each
member in the committee of other. The Board is encouraged to consider appointing at least
one member of sc as a member of board that could serve as a bridge between the board and
sc.

Direct line goes to the BOD to ensure independency and transparency.

Introduction

Sharia compliance is the backbone of IFB window. It is not only gives legitimacy to the
practices of IFB window, but also boosts the confidence of the public that all the practices
and activities are in compliance with sharia at all times. The existence of non sharia
compliant element would not just affect the confidence of the public but might also expose
IFB window to fiduciary and reputational risks. Compliance with the Islamic finance principles
will be achieved through having a proper sharia governance framework in place with the
proper appointment of sharia committee.
The role of sc is crucial for the success of IFB operation. They ensure that all products and
services are in accordance to sharia. Their presence can be said to be the main pillar and
hallmark of IFB window.

The importance of SC

The following should constitute the main functions of the Shari’a board of an IFI:

Governance of sharia scholars in IFB windows

Sharia is an extra layer in overall operations or governance of IFB windows. However, there
is no uniform model that is currently being followed around the country. Every Bank has its
own model for ensuring sharia compliance. However, there are broadly two types of model;
one as single sharia advisor and second as full fledge sharia advisory committee composed
of three and more members.

The following section will discuss the role and responsibilities expected from sharia scholars
in both kinds of model.

a. Reviewing transaction proposals, answering queries, recommending appropriate solutions

and issuing pronouncements and instructions for Shari’a-compliance.

b. Developing product manuals, along with sample documentation, process flows etc. to
simplify the execution process of the transactions for the staff of the IFI.

c. Organizing and supervising training of the staff to ensure Shari’a-compliance in

implementation of the transactions.

d. Supervising Shari’a audit of the executed transactions to ensure that the transactions have
been implemented in line with the instructions of the Shari’a board, and to segregate any
Shari’a repugnant income that the IFI may have realized through transactions not fulfilling the
basic requirements of Shari’a-compliance.

e. Reviewing and approving Shari’a-related aspects in the bylaws, rules and regulations, all
manuals and policies adopted by the IFI.

f. Ensuring that the profit and loss is calculated according to the rules of Shari’a under the
terms of the agreements with the depositors and the approved policies.

g. Examining and approving the financial statements and annual accounts of the IFIs and
issuing Shari’a-compliance reports, at least annually, expressing the extent of adherence of
the management to the pronouncements, instructions and advice issued by the Shari’a
board.

h. Examining all activities conducted in the IFI, whether directly linked to banking or of an
ancillary or allied nature, including those activities that are only of operational or procedural
nature, on the touchstone of Shari’a principles and advising the management accordingly.
Can a single Shari’a consultant handle all these responsibilities? Is it appropriate to assign all

these duties and functions to a single person, or is there a need for establishing a full-fledged

Shari’a board for this purpose? In this regard, different Banks have adopted different

strategies and mechanisms. While some are functioning under the guidance of a single

Shari’a advisor, others have established Shari’a boards which collectively share the burden

of guiding and advising these IFIs. However, due to the diversity and vast scope of the duties

and functions that are related to Shari’a in an IFI, and the need for collective logical

reasoning on the new issues and products that arise from time to time, a single Shari’a

advisor will not be able to carry out these duties in a befitting manner. Therefore, Bunna

international Bank S.C shall opt to form full-fledged Shari’a boards for fatwa and supervision

of their activities from Shari’a perspective.

Standards of sharia compliance by international standard setting bodies

1. IFSB Principles on Shari’a Governance Systems for Institutions Offering Islamic

Financial Services

In order to promote the stability and soundness of the IFB window operation, the IFSB has

developed Guiding Principles on Shari’a Governance. The standard clearly states that

Shari’a Governance System refers to a set of institutional and organizational arrangements

through which an institution offering Islamic financial services ensures that there is an

effective independent oversight of Shari’a compliance. This Standard is aimed at facilitating

and better understanding Shari’a governance issues, providing an enhanced degree of

transparency in terms of issuance, and the audit/ review process for compliance with Shari’a

rulings; and providing greater harmonization of the Shari’a governance structures and

procedures across jurisdictions. These guiding principles are broadly divided into five parts;

Part I relates to the general approach to a Shari’a governance system. Part II deals with the

area of competence, suggests various measures to ensure reasonable expertise and skill-

sets in Shari’a boards, and to evaluate their performance and professional development. Part
III aims at safeguarding the independence of Shari’a boards. Part IV focuses on the

importance of observing and preserving confidentiality by the organs of Shari’a governance

while Part V is about improving consistency in terms of the professionalism of members of

the Shari’a board for enhancing their credibility and confirming their integrity through a set of

best practices. IFSB through these Guiding Principles clearly stipulates that Shari’a

compliance is the shared responsibility of Shari’a board and management of the institution

along with suggesting four necessary elements for Shari’a board:

i. Competence;

ii. Independence;

iii. Confidentiality; and

iv. Consistency.

2. AAOIFI Governance Standards

AAOIFI has also introduced a few new standards for oversight of Shari’a governance in IFB

window operation. These standards broadly cover Shari’a supervisory body (appointment,

composition and reporting), Shari’a review, auditing and governance committee,

independence of Shari’a supervisory board, statement on governance principles, corporate

social responsibility conduct and disclosure for IFB window operation. Moreover standards

on (i) stipulation and ethics of fatwa in the Institutional framework, (ii) code of ethics, and (iii)

audits are closely associated with Shari’a compliance in IBFIs.

Source:

 “Guiding Principles on Shari’a Governance Systems for Institutions Offering Islamic

Financial Services,” Islamic Financial Services Board, (December 2009).

 Laldin, A. “Overview of Shari’a Governance in Malaysia and Globally,” International

Shari’a Audit Conference & Workshop, (2011).

 Proposal on Sharia Scholar’s/s’ Appointment,
Composition, Qualification and Reporting

Executive Summary

The proposal elaborates the importance of sharia governance system for the success of the
then Bunna International Bank IFB operation. For the proper Sharia governance system,
appointing fit and competent sharia scholars plays a significant role. For this reason, various
international best practices and the current local IFB industry trends in connection with sharia
scholar appointments are taken into consideration.

Based on the facts derived from data collected, it is preferred a full fledge sharia advisory
model composed of three scholars with minimum diploma certificate having a big name
among targeted group. The situation on the ground might not permit to get candidates who
qualified both in sharia and banking business. In such a case, sharia related paper
qualification shall be compromised as long as the candidate has the necessary expertise or
experience.

It is also recommended to consider their current address. Appointing two of scholars’ who
resides out of Addis would have a selling effect to attract customers at their region easily.

Last but not least; Salary, per diem, allowance and other benefits recommended to
commensurate with the industry practice.
Introduction

Sharia compliance is the backbone of IFB window. It is not only gives legitimacy to the

practices of IFB window, but also boosts the confidence of the public that all the practices

and activities are in compliance with sharia at all times. The existence of non sharia

compliant element would not just affect the confidence of the public but might also expose

IFB window to fiduciary and reputational risks. Compliance with the Islamic finance principles

will be achieved through having a proper sharia governance framework in place with the

proper appointment of sharia committee.

Sharia governance involves appointment, composition and qualification of sharia committee,

the observance process, sharia coordination, sharia compliance review, sharia audit and

sharia report which is part of annual report of the bank. Hence, this document focuses on

appointment, composition, qualification and other sharia scholars’ related issues.

The role of sharia scholars

The role of SC is crucial for the success of IFB operation. They ensure that all products and

services are in accordance to sharia. Their presence can be said to be the main pillar and

hallmark of IFB window.

Sharia is an extra layer in overall operations or governance of IFB windows. However, there

is no uniform model that is currently being followed around the country. Every Bank has its

own model for ensuring sharia compliance. However, there are broadly two types of model;

one as single sharia advisor and second as full fledge sharia advisory committee composed

of three and more members.

The following are the roles and responsibilities expected from sharia scholars in both kinds of

model:
  Reviewing transaction proposals, answering queries, recommending appropriate

solutions and issuing pronouncements and instructions for Shari’a-compliance.

 Developing product manuals, along with sample documentation, process flows etc. to

simplify the execution process of the transactions for the staff of the IFB.

 Organizing and supervising training of the staff to ensure Shari’a-compliance in

implementation of the transactions.

 Supervising Shari’a audit of the executed transactions to ensure that the transactions

have been implemented in line with the instructions, and to segregate any Shari’a

repugnant income that the IFB may have realized through transactions not fulfilling

the basic requirements of Shari’a-compliance.

 Reviewing and approving Shari’a-related aspects in the rules and regulations, all

manuals and policies adopted by the IFB.

 Ensuring that the profit and loss is calculated according to the rules of Shari’a under

the terms of the agreements with the depositors and the approved policies.

 Examining and approving the financial statements and annual accounts of the IFB

and issuing Shari’a-compliance reports, at least annually, expressing the extent of

adherence of the management to the pronouncements, instructions and advice

issued by them.

Standards by international standard setting bodies

1. IFSB Principles on Shari’a Governance Systems for Institutions Offering

Islamic Financial Services

In order to promote the stability and soundness of the IFB window operation, the IFSB has

developed Guiding Principles on Shari’a Governance. The standard clearly states that

Shari’a Governance System refers to a set of institutional and organizational arrangements

through which an institution offering IFB window operation ensures that there is an effective
independent oversight of Shari’a compliance. This Standard is aimed at facilitating and better

understanding Shari’a governance issues, providing an enhanced degree of transparency in

terms of issuance, and the audit/ review process for compliance with Shari’a rulings; and

providing greater harmonization of the Shari’a governance structures and procedures across

jurisdictions. These guiding principles are broadly divided into five parts; Part I relates to the

general approach to a Shari’a governance system. Part II deals with the area of competence,

suggests various measures to ensure reasonable expertise and skill-sets in Shari’a boards,

and to evaluate their performance and professional development. Part III aims at

safeguarding the independence of Shari’a boards. Part IV focuses on the importance of

observing and preserving confidentiality by the organs of Shari’a governance while Part V is

about improving consistency in terms of the professionalism of members of the Shari’a board

for enhancing their credibility and confirming their integrity through a set of best practices.

IFSB through these Guiding Principles clearly stipulates that Shari’a compliance is the

shared responsibility of Shari’a Committee and management of the institution along with

suggesting four necessary elements for Shari’a committee:

i. Competence;

ii. Independence;

iii. Confidentiality; and

iv. Consistency.

The guiding principle expects a member of sharia committee to have:

 Strong skills in the philosophy of Islamic law (Usul al-Fiqh), as he or she must know

exactly the appropriate Fiqh methodologies for driving juristic opnioins; and

 Good knowledge of written Arabic, as he or she needs to be very consversant with

the primary sources of sharia.

IFSB also recommended that a member of sharia committee be able to converse in English,

as this could help improve the clarity of communication between him or her and stakeholders

of the IFB window.

2. AAOIFI Governance Standards

AAOIFI has also introduced a few new standards for oversight of Shari’a governance in IFB

window operation. These standards broadly cover Shari’a supervisory body (appointment,

composition and reporting), Shari’a review, auditing and governance committee,

independence of Shari’a supervisory board, statement on governance principles, corporate

social responsibility conduct and disclosure for IFB window operation. Moreover standards

on (i) stipulation and ethics of fatwa in the Institutional framework, (ii) code of ethics, and (iii)

audits are closely associated with Shari’a compliance in IBFIs.

AAOIFI in its governance standard requires any financial institutions’ (IFB windows’) sharia

supervisory board (sharia Committee):

 Appointed by shareholders at annual meeting.

 At least 3 members

 Experts in Islamic commercial jurisprudence.

 May include 1 member with expertise in Islamic finance (rather than jurisprudence).

 May not include significant shareholder or member of Board of Directors.

 May engage external consultants to assist duties.

 Terms of engagement to be agreed with the institution and included in letter of

appointment.

And their main functions include:

 Directing, reviewing and supervising institution’s activities to ensure Shari’a

compliance.
  Shari’a advice and guidelines

 Shari’a approval on products and services.

 Shari’a review.

Source:

 “Guiding Principles on Shari’a Governance Systems for Institutions Offering Islamic

Financial Services,” Islamic Financial Services Board, (December 2009).

 Laldin, A. “Overview of Shari’a Governance in Malaysia and Globally,” International

Shari’a Audit Conference & Workshop, (2011).

Industry overview on the subject matter

The following facts are deduced from reviewing information gathered on industry practice

(please refer annexure 1 and 2 for further detail)

 There are three Banks (United, Wogagen and Abbay Banks) operate in a single

sharia advisory model. But two of them (Abbay and wogagen Banks) are on the way

to appoint full fledge Sharia advisory committee.

 Resource mobilization performance of Banks operates in a single sharia advisory

model is not satisfactory. (they share only 16% out of total deposit mobilized by IFB

private Bank windows )

 Dashen and Ormia International Banks’ advisory committee composed five members

whereas cooperative Bank of Oromia composed four members. They collectively

mobilized 64%.
 Awash Bank and Bank of Abysinia met the minimum full fledge sharia advisory model

composition criteria set by international standard setting organization. (Three

members in each committee)

 Salary payment for scholars range from Birr 10,000.00 up to Birr 23,000.00. However,

Average payment for the industry is Birr 16,750.00.

 Two Banks pay Birr 2,000.00 (not exceeding total payment Birr 4,000.00 per month)

per meeting.

 Cooperative Bank of Oromiya covers their Housing allowance as per Branch Manager

II housing allowance payment.

 There is a trend to cover per diem and other travel expenses per Board of members

and/or executive management payment scale.

 Diploma certificate is the minimum educational requirement for eligibility criteria

whereas Banks chasing scholars with a big name is the primary prerequisite. They

used recommendations and referrals as a nomination strategy.

 Fiqh, muammalat, Islamic economics, Islamic Finance, Usul al fiqh and other sharia

related professions are the primary focus of attention.

 They are challenged to get sharia scholars who are competent enough both on sharia

related and banking business knowhow.

 All Banks preferred full fledge sharia advisory model structured their sharia committee
to report directly to BOD.
  Almost all sharia scholars appointed in those Banks resides in Addis Ababa.

Conclusion

 Sharia scholars’ role is to make sure that all products and services are in accordance
with sharia to keep up the confidence of customers and other stakeholders.

 The industry is heavily reliant on sharia scholars in the seal of sharia compliance.

 The appointment of Sharia scholars varies from Bank to Bank.

 Due to the diversity and vast scope of the duties and functions that are related to
Shari’a in an IFB, and the need for collective logical reasoning on the new issues and
products that arise from time to time, a single Shari’a advisor will not be able to carry
out those duties in a appropriate manner

 Appointing Sharia scholar is the major component of sharia governance system which
is also puts in a supplementary component to the existing corporate governance
system.

The way forward

From the information gathered, thorough discussions made with other Banks’ concerned IFB
Heads and the conclusion drawn; the following points have been forwarded:

 It is better to choose the full fledge sharia advisory model composed of three
members to meet the minimum requirement opined by international standard setting
bodies.

 It is very advisable to select two scholars from countryside. It helps the Bank to get
customers in their place easily.

 A member must have a respectable character and be of good conduct in terms of

honesty, integrity and reputation.
 The BOD shall nominate and fix their remuneration via nomination and remuneration
committee and develop fit and proper criteria.

 Lack of effective communication between the directors, sharia committee, and

management can be an obstacle to an effective structure. Lines of reporting and

effective corporate communication are key factors that ensure good performance.

For effective communication, it suggested the gap between the BOD and scholars by

having each member in the committee of other. The Board is encouraged to consider

appointing at least one member of sc as a member of board that could serve as a

bridge between the board and scholars.

 SC Direct line shall go to the BOD to ensure independency and transparency

 The Bank shall develop sharia compliance manual (charter). Sharia committee will not

be able to discharge its duties and functions unless the Bank develops a sharia

compliance manual which shall determine the duties and functions of the sharia

committee and responsibilities of the BOD and management.

 The Bank is here advised to understand that the extent of cooperation that sharia

committee receives from the management is the determinant factor for the success of

IFB window.

 Salary, per diem, allowances and other benefits should be commensurate with the

industry practice

 Sharia related paper qualification shall not be mandatory as long as the candidate

has the necessary expertise or experience in the field.

S.N Param Private Banks
eter OIB UB COOP NIB WB ABBA BOA AWA DB
Y SH
1. Eligibility Criteria
1.1 Educati Diploma Degree Diplom Diplom Diplom Degree Degree
onal a a a
Backgro
und
1.2. Working NA NA NA NA NA NA NA NA NA
Experie
nce
1.3. Other Well Well Well Well Well Well Well Well Well
Require known known by known known known known known known known by
ments by targeted by by by by by by targeted
customer targete targete targete targete targete customer
targete targete
s d d d d d s
d custom custom custom custom custom d
custom ers ers ers ers ers custom
ers ers
2. Composition & Number
2.1. Professi Islami Islamic Islamic Islamic Sharia Sharia Sharia,
onal c study Bankin Bankin & scholar Islamic
Banki g g Islamic Finance,
ng Financ usul al
e fiqh (
Islamic
jurisprude
nce)
2.2. Employ Privat Private Private Private Private Private
ment e
2.3. Others
2.4. Number 5 1 4 1 (on 1 (on 3 3 5
of proces proces
Member s to s to
form form
s
SAC) SAC)
3. Role of the Entity
3.1. Advisor X X X X X X X X
y
3.2. Oversig NA NA NA NA NA NA X NA
ht
3.3. Decisio NA NA NA NA NA NA X NA
n
Making
3.4. Others
4. Governance Structure
4.1. Reporti BOD BOD BOD BOD BOD BOD BOD BOD
ng to x
Operati
on
4.2. Reporti President Presid Presid Presid Presid Presid IFB
ng to Y ent ent ent ent ent
Admin
5. Remuneration
5.1. Regular Net Branch Net Net Gross 10,000 Gross Br
20,00 manag 20,000 20,000 23,000 . 21,000
0 er 1
scale
(20,00
0)
5.2. Allowan Housin 2,000 2,000 per
ce g per meeting
allowa meetin not
nce g not exceeding
exceed Br 4,000
ing Br per month
4,000
per
month
5.3. Others Overti Trainin Training,
me, g week per diem
Transp days as per
ort Br 150 BOD
weeke
nd Br
175.
Per
diem
same
as
BOD &
Ex Mgt
Can a single Shari’a consultant handle all these responsibilities? Is it appropriate to assign all
these duties and functions to a single person, or is there a need for establishing a full-fledged
Shari’a board for this purpose? In this regard, different Banks have adopted different
strategies and mechanisms. While some are functioning under the guidance of a single
Shari’a advisor, others have established Shari’a boards which collectively share the burden
of guiding and advising these IFIs. However, due to the diversity and vast scope of the duties
and functions that are related to Shari’a in an IFI, and the need for collective logical
reasoning on the new issues and products that arise from time to time, a single Shari’a
advisor will not be able to carry out these duties in a befitting manner. Therefore, Bunna
international Bank S.C shall opt to form full-fledged Shari’a boards for fatwa and supervision
of their activities from Shari’a perspective.