Proposal on Sharia Scholars

Committee Members Appointment,

Composition, Qualification
Remuneration and Reporting

Interest Free Banking Division

April, 2019
Table of Content

Accronym--------------------------------------------------------------------------------- Error! Bookmark not defined.

Definition of Terms -------------------------------------------------------------------------------------------------------- 3

Executive Summary ------------------------------------------------------------------------------------------------------- 4

Introduction ------------------------------------------------------------------------------------------------------------------ 5

The role of sharia scholars --------------------------------------------------------------------------------------------- 6

Standards by international standard setting bodies ----------------------------------------------------------- 7

Industry overview on the subject matter --------------------------------------------------------------------------- 9

Conclusion ------------------------------------------------------------------------------------------------------------------ 10

The way forward ----------------------------------------------------------------------------------------------------------- 10

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Acronym & Abbreviation

AAOIFI Accounting and Auditing Organization for Islamic Financial Institution

BOD Board of Directors

IFB Interest Free Banking

IFSB Islamic Financial services Board

SC Sharia Committee

Definition of Terms

Fiqh Knowledge of the legal rule pertaining to conduct, which has been

derived from specific evidence in the sharia

Muammalat Affairs which have a monetary aspect, such as, business transactions,

debt, contract, service and labor, and the other term. (Monetary

dealings)

Shari’a Divine Islamic law as revealed in the quran and the sunnah.

Usul al-Fiqh the science of deducing Islamic laws from evidence found in the

Sources of Islamic law

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Executive Summary
The purpose of this proposal is to providing guidance on the establishment 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 recommended a full fledge sharia
advisory model composed of three scholars with minimum diploma certificate having a big
name among targeted group. However, 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.

Another crucial point to consider is the current address of the candidates’. Regional
diversification candidate members will help the Bank to catch potential customers at their
place easily. Therefore, it is better selecting two of the members out of Addis Ababa.

Last but not least; the line of reporting of the committee will be commendable to the EMC and
in respect to Salary, per diem, allowance and other benefits recommended to commensurate
with the industry practice.

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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 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 mainly involves appointment, composition, qualification, remuneration

and reporting 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.

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The role of Sharia Scholars Committee Members
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/ new products and services proposals, answering queries,

recommending appropriate solutions and issuing pronouncements and instructions for
Shari’a-compliance.
 Developing/ Reviewing product manuals and submit for EMC approval, along with
sample documentation, process flows etc. to simplify the execution process of the
transactions for the staff of the IFB.
 Organizing/ Providing 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 submitting for EMC approval 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 submitting for EMC endorsement and further BOD’s approval
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.

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Standards Set 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 opinions; and
 Good knowledge of written Arabic, as he or she needs to be very consversant with
the primary sources of sharia.

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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).

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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.

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Conclusion and Recommendation:
Conclusion:
The following conclusions are drawn:

 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.

Recommendation and 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 full fledge sharia advisory model composed of three members to
meet the minimum requirement opined by international standard setting bodies.
 The appointment of sharia committee shall be made in writing (appointment letter)
and with terms of reference clearly set out. The appointment letter is helpful in
determining the form of relationship, level of fiduciary duties, and chain of
accountability between sharia committee, the Bank and other stakeholders.
 It is very advisable to select two scholars outside Addis Ababa. 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, reputation and known with a big name.
 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

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 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.

Annex 1

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 Industry Sharia scholar appointment Practice schedule

S.N Param Private Banks

eter OIB UB COOP NIB WB ABBA BOA AWA DB
Y SH
1. Eligibility Criteria
1.1 Educati Diplo Degree Diplom Diplom Diplom Degree Degree
onal ma 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 by know known known known known known known known by
ments targeted n by by by by by by by targeted
target targete targete targete targete targete customer
customers targete
ed d d d d d s
custo custom custom custom custom custom d
mers ers ers ers ers ers custom
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

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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

Annex 2
Industry Resource mobilization performance schedule

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 ‘000

IFB windows in Private Banks

S.N Particular Deposit on Deposit on Profit on
2016/17 2017/18 2017/18
1 Oromia International Bank 2,190,000 3,010,000 223,000
2 United Bank 346,900 644,120 17,700
3 Cooperative Bank of Oromia 478,490 2,220,000 14,840
4 NIB International Bank 322,300 718,000 NA
5 Wegagen Bank NA 420,000 5,000

6 Abbay Bank 107,000 290,000 NA

7 Bank of Abyssinia NA 235,000 NA

8 Awash Bank NA 651,000 NA

9 Dashen Bank NA 136,000 (8,000)

Sub Total 3,444,690 8,324,120 252,540

IFB window in Public Bank
10 CBE 6,900,000 9,810,000 8,500
Grand Total 10,300,000 18,100,000 261,040
Growth Rate 75.72%

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