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Hassan test bank chapter 5

islamic banking (Bahauddin Zakariya University)

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Chapter – 5
CORPORATE GOVERNANCE FOR
ISLAMIC FINANCIAL INSTITUTIONS
_________________________________________

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True / False Questions

1. There is no difference between the conceptual understanding of the meaning

of corporate governance in Islamic law and the conventional conception of corporate
governance.
Answer: False
Diff: 2
Page Ref: 170
LO: 1

2. There is an inclusive and generally accepted definition for corporate

governance that can be applied to all contexts.
Answer: False
Diff: 1
Page Ref: 170
LO: 1

3. Corporate governance has been defined in different contexts and jurisdictions

according to the goal it is designed to achieve.
Answer: True
Diff: 2
Page Ref: 170
LO: 1

4. The board of directors lays down Sharī‘ah compliant rules and procedures for
the smooth-running of the company.
Answer: False
Diff: 2
Page Ref: 172
LO: 1

5. In contrast to the Anglo-American model of corporate governance, the Franco-

German model emphasises the interests of the shareholders.
Answer: False
Diff: 2
Page Ref: 172
LO: 2

6. The Franco-German model incorporates the interests of shareholders and non-

shareholders but with more emphasis on the non-shareholders who are considered as
the stakeholders.
Answer: True
Diff: 3
Page Ref: 172
LO: 2

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7. The Anglo-American model is closer and of more relevance for Islamic

finance as it aims to align management’s interests with shareholders’ interests.
Answer: True
Diff: 2
Page Ref: 172
LO: 2

8. Under the Islamic paradigm of corporate governance only selected

stakeholders such as executive management are able to serve on the Sharī‘ah
supervisory board to ensure transparency, accountability, fairness, and mutual
consultation.
Answer: False
Diff: 2
Page Ref: 173
LO: 2

8. Accountability in business transactions includes true and fair disclosure and

transparency so that the interests of all stakeholders, particularly management and
employees, will be protected.
Answer: False
Diff: 3
Page Ref: 174
LO: 2

9. IFSB and AAOIFI standards are intended to guide conventional, as well as

Islamic financial institutions across the world, to be more competitive.
Answer: False
Diff: 2
Page Ref: 174
LO: 2

10. The role of corporate governance in Islamic financial institutions includes

establishing a harmonious relationship among the shareholders, board of directors,
management, stakeholders, and, above all, with God.
Answer: True
Diff: 2
Page Ref: 174
LO: 3

11. Sharī‘ah governance and corporate governance are so close and cannot be
separated in an Islamic corporate entity.
Answer: True
Diff: 2
Page Ref: 174, 177
LO: 3

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12. The primary objective of Sharī‘ah audit in corporate governance is to ensure

the compliance of Islamic financial institutions with the Sharī‘ah board verdicts.
Answer: True
Diff: 2
Page Ref: 177
LO: 3

13. The Sharī‘ah system of governance was introduced to replace the corporate
governance of conventional financial institutions.
Answer: False
Diff: 2
Page Ref: 177
LO: 3

14. The Sharī‘ah system of governance was introduced to complement the

adaptable standards of corporate governance and streamline the non-compatible
standards according to the philosophical foundation of corporate governance in Islam.
Answer: True
Diff: 2
Page Ref: 177
LO: 3

15. The scope of the Sharī‘ah governance system of a jurisdiction is uniform

across the wide spectrum of Islamic countries.
Answer: False
Diff: 3
Page Ref: 179
LO: 3

16. The first Sharī‘ah board was established in 1976 by the Faisal Islamic Bank of
Saudi Arabia.
Answer: False
1 Diff: 3
Page Ref: 182
LO: 3

17. The institutionalisation of Sharī‘ah governance in Islamic financial institutions

is carried out through hisbah and collective ijtihad models.
Answer: True
Diff: 2
Page Ref: 182
LO: 3

18. The emphasis of the modern scholar’s model (collective ijtihad model)
utilized in the institutionalisation of Sharī‘ah governance in Islamic financial
institutions is on Sharī‘ah advisory and consultancy.
Answer: True
Diff: 2
Page Ref: 183

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LO: 3
19. The prominent Sharī‘ah board for the Organisation of Islamic Conference
(OIC) is the Council of the Islamic Fiqh Academy based in Jeddah, Saud Arabia.
Answer: True
Diff: 2
Page Ref: 183
LO: 3

20. The International Islamic Fiqh Academy, based in Jeddah issues resolutions
exclusively on Islamic banking and finance issues.
Answer: False
Diff: 2
Page Ref: 183
LO: 3

21. The function of the Sharī‘ah supervisory board is linked to its advisory role in
ensuring Sharī‘ah compliance of new products.
Answer: False
Diff: 2
Page Ref: 183
LO: 3

22. The establishment of Sharī‘ah board at the macro level must be in form of an
international set up.
Answer: False
Diff: 2
Page Ref: 184
LO: 3

23. In the event of any conflict between the decision of the Sharī‘ah board of an
Islamic financial institution and the Sharī‘ah Supervisory Council of the Central
Bank, the resolution of the latter prevails.
Answer: True
Diff: 2
Page Ref: 184
LO: 3

24. The Internal Sharī‘ah Compliance Unit (ISCU) is entrusted with the
responsibility of verification of processes, services and transactions to ensure the
compliance with the resolutions/pronouncements of the Sharī‘ah Board.
Answer: True
Diff: 2
Page Ref: 184
LO: 3

25. The power to appoint Sharī‘ah scholars to the Sharī‘ah board is vested in the
Sharī‘ah Supervisory Council of the Central Bank of the concerned country.
Answer: False
Diff: 3
Page Ref: 186

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LO: 3
26. Being well-versed in fiqh al-mu‘amalat and usul al-fiqh (principles of Islamic
jurisprudence) is a pre-requisite for scholars aspiring to be on the Sharī‘ah Boards of
Islamic financial institutions.
Answer: True
Diff: 3
Page Ref: 186
LO: 3

27. Non-experts in fiqh al-mu‘amalat and usul al-fiqh may be appointed as

members of the Sharī‘ah board with the purpose of strengthening the board in
complex banking and finance operations.
Answer: True
Diff: 2
Page Ref: 188
LO: 3

28. The composition of the Sharī‘ah board is determined by the Council of the
Islamic Fiqh Academy.
Answer: False
Diff: 2
Page Ref: 187
LO: 3

29. There is no standard practice in determining how many members a Sharī‘ah

board should have.
Answer: True
Diff: 1
Page Ref: 187
LO: 3

30. According to AAOIFI’s governance standards, the Sharī‘ah supervisory board

shall be composed of at least five members
Answer: False
Diff: 2
Page Ref: 187
LO: 3

31. A clear differentiation between the roles of the Sharī‘ah compliance officer
and the Sharī‘ah coordinator in all Islamic financial institutions is always observed.
Answer: False
Diff: 3
Page Ref: 188
LO: 3

32. It is common in modern practice for the secretary of the Sharī‘ah board or the
Sharī‘ah compliance officer to perform the task of Sharī‘ah coordination.
Answer: True
Diff: 2
Page Ref: 188

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LO: 3
33. The main purpose of Sharī‘ah review is to ensure total compliance with the
resolutions and specific instructions, where applicable, of the Sharī‘ah board.
Answer: True
Diff:1
Page Ref: 188
LO: 3

34. A standard Sharī‘ah review that includes external Sharī‘ah audit is sufficient
to carry out the compliance with the Sharī‘ah resolutions and other rules concerning
products and services of the Islamic financial institutions.
Answer: False
Diff: 3
Page Ref: 189
LO: 3

35. The major difference between the functions of the internal audit department
of IFIs and the internal Sharī‘ah audit department is that the former reports to the
Shari‘ah board while the latter reports to the audit committee.
Answer: False
Diff: 3
Page Ref: 189
LO: 3

36. According to AAOIFI Governance Standards, the Sharī‘ah compliance

process is always carried out by an independent division regardless of the
organisational structure adopted by individual Islamic financial institutions.
Answer: False
Diff: 3
Page Ref: 189
LO: 3

37. IFSB-10 requires any internal Sharī‘ah review/audit/ unit/department to

undertake the important task of effectively verifying the extent of Sharī‘ah
compliance
Answer: True
Diff: 2
Page Ref: 189
LO: 3

38. While the internal audit department of IFIs reports to the audit committee, the
internal Sharī‘ah audit reports to the Sharī‘ah board.
Answer: True
Diff: 2
Page Ref:189
LO: 3

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39. A report must be produced indicating whether the IFI has complied with the
Sharī‘ah requirements in the financial year under review.
Answer: True
Diff: 1
Page Ref: 189
LO: 3

40. Diverse approaches for corporate governance in IFIs are adopted in different
jurisdictions.
Answer: True
Diff: 2
Page Ref: 190
LO: 4

41. The existing international standard-setting bodies that have issued guidelines
on corporate governance and risk management for financial institutions which have
addressed the specifics of the Islamic finance industry.
Answer: False
Diff: 1
Page Ref: 190
LO: 4

42. IFSB and AAOIFI Standards are specifically meant for the IFIs.
Answer: True
Diff: 2
Page Ref: 190
LO: 4

43. The IFSB issued its guidelines with regards to the takaful industry under the
assumption that there is a single model of corporate governance that can work well for
every country and in all types of business.

Answer: False
Diff: 1
Page Ref: 205
LO: 5

44. The major two stakeholders in the takaful business managed by the takaful
operator are the shareholders and the management.
Answer: False
Diff: 2
Page Ref: 206 - 207
LO: 5

45. The challenge faced by the takaful operator is to apply a fairly balanced
approach where due attention is given to the participants while seeking to create value
for the shareholders.
Answer: True
Diff: 2
Page Ref: 206 - 207

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LO: 5

46. A governance committee is proposed by IFSB in order to resolve the conflict

between the interest of the shareholders and that of the takaful participants.
Answer: True
Diff: 3
Page Ref: 207
LO: 5

47. Although the takaful operator is appointed by the shareholders, the

participants' approval remains a condition for such an appointment to be of use.
True: False
Diff: 2
Page Ref: 206
LO: 5

Multiple Choice Questions

1. Major definitions of corporate governance are given by:

a) Organization for Economic Corporation and Development (OECD)
b) International Chamber of Commerce (ICC)
c) the Cadbury Report
d) all of the above
Diff: 2
Page Ref: 170-171
LO:1

2. The following are common features shared by the majority of corporate

governance' definitions EXCEPT:
a) a system of relationships defined by structures and processes
b) relationships with different and in some cases contrasting interests
c) stakeholders, by and large, play a passive role in the direction and
control of the company
d) rights and responsibilities are properly distributed among the
stakeholders
Diff: 2
Page Ref: 171
LO: 1

3. _________ defined Corporate Governance to be “a set of relationships

between a company’s management, its board, its shareholders and other
stakeholders. Corporate governance also provides the structure through which
the objectives of the company are set, and the means of attaining those
objectives and monitoring performance are determined”.
a) Organization for Economic Corporation and Development
(OECD)
b) International Chamber of Commerce (ICC)

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c) the Cadbury Report

d) none of the above
Diff: 3
Page Ref: 170
LO: 1

4. The two basic models of corporate governance from the conventional

viewpoint are based respectively on:
a) the Anglo-American model and the Turkish model
b) the Anglo-American model and the Franco-German model
c) the Franco-German model and Southeast Asian model
d) Southeast Asian model and the Eastern model

Diff: 2
Page Ref: 172
LO: 2

5. The Anglo-American model accomplishes its scheme though a number of

mechanisms such as:
a) shareholder representation on the Board of Directors
b) manager compensation scheme
c) external market discipline
d) all of the above
Diff: 2
Page Ref: 173
LO: 2

6. Which one of the following models tends to emphasise the stakeholder-value

system?
a) the Anglo-American model
b) the middle Eastern model
c) the Franco-German model
d) the Southeast Asian model
Diff: 1
Page Ref: 172
LO: 2

7. Which of the following statement regarding the role of corporate governance

in Islamic financial institutions is false?
a) to promote sound and stable conventional as well as Islamic
financial industry that can be globally competitive
b) to promote prudent and transparent practices in the management of
Islamic financial institutions
c) to protect the interest of all stakeholders including the investors,
depositors and workers and the general public
d) to ensure the proper discharge of the corporate social responsibility
role of the Islamic financial institutions
Diff: 2

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Page Ref: 174

LO: 2

8. The foundational dimension of corporate governance from the Islamic

perspective is based on the:
a) concept of tawhid (unity of God)
b) principle of shurah (mutual consultation)
c) Islamic legal rules on harmonious relationship and mutual benefits in
commercial transactions
d) all of the above
Diff: 2
Page Ref: 175
LO: 3

9. Setting the overall policy and strategy in corporate governance of Islamic

financial institutions is the responsibility of:
a) senior management
b) board of directors
c) Sharī‘ah boards
d) shareholders
Diff: 3
Page Ref: 176
LO: 3

10. The objective(s)/responsibility(ies) of the internal auditing in corporate

governance is to:
a) evaluate the accuracy of the quality and quantity of information
b) ensure that the policies set by the board are followed by the
management (compliance)
c) provide clear laws and regulations that cater for the needs of Islamic
financial institutions
d) all of the above
Diff: 2
Page Ref: 177
LO: 3

11. The primary objective/responsibility of Sharī‘ah board in corporate

governance of Islamic Financial Institutions (IFIs) is to:
a) oversee compliance with its verdict
b) set overall policy and strategy
c) elect Board Members
d) all of the above
Diff: 2
Page Ref: 177
LO: 3

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12. The IFSB-10 gives the following primary duties of the Sharī‘ah Board in an
Islamic financial institution EXCEPT:
a) advising the Board of Directors on Sharī`ah-related matters.
b) reviewing and endorsing Sharī`ah-related policies and guidelines
c) providing operational guidelines for financial institutions
d) overseeing the computation and distribution of zakah and any other
fund to be channelled to charity
Diff: 3
Page Ref: 180
LO: 3
13. The major areas covered by the Sharī`ah Governance System in financial
institutions offering Islamic services include:
a) issuance of relevant Sharī`ah pronouncements/resolutions
b) dissemination of the Sharī`ah resolution to the Sharī`ah Review Unit
c) preparation of an Annual Sharī`ah Compliance Review Report
d) all of the above
Diff: 3
Page Ref: 181
LO: 3

14. ___________ is the model used for the institutionalisation of Sharī‘ah

governance in Islamic financial institutions that places more emphasis on
Sharī‘ah-compliance.
a) shourah model
b) collective ijtihad model
c) hisbah model
d) takaful model
Diff: 3
Page Ref: 182 - 183
LO: 3
15. __________ is the model used for the institutionalisation of Sharī`ah
governance in Islamic financial institutions that focuses on Sharī`ah advisory
and consultancy.
a) hisbah model
b) collective ijtihad model
c) shourah model
d) takaful model
Diff: 2
Page Ref: 183
LO: 3
16. In modern Islamic financial institutions, the Sharī`ah Board is responsible for:
a) product development and certification
b) certification of products
c) issuance of resolutions on matters brought before it
d) all of the above
Diff: 2
Page Ref: 183
LO: 3

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17. All of following are organs of the sharī`ah governance system EXCEPT:
a) Islamic Banking Associations
b) Sharī`ah supervisory board at the micro level
c) Sharī`ah supervisory council of the central bank at the macro level
d) internal Sharī`ah compliance unit
Diff: 2
Page Ref: 183
LO: 3
18. __________ is the highest and most visible organ of an Islamic financial
institution
a) General Council of Islamic Banks and Financial Institutions
b) the Sharī‘ah supervisory board (“Sharī‘ah Board”)
c) corporate board of directors
d) Islamic Financial Services Board
Diff: 3
Page Ref: 183
LO: 3

19. It is a common practice to have __________ members in the Sharī‘ah Board

a) less than three
b) between three and six
c) between seven and ten
d) more than ten
Diff: 2
Page Ref: 187
LO: 3

20. Which of the following statements regarding the Sharī‘ah Board of AAOIFI is
False?
a) the Sharī`ah board is composed of not more than twenty members
b) board members are appointed by the board of trustees
c) board members are appointed for a five year term period
d) board members are appointed from sharī`ah boards of IFIs who are
members of AAOIFI and the Sharī‘ah Supervisory Boards of Central
Banks
Diff: 3
Page Ref: 187
LO: 3

21. The minimum qualification of the members of the Sharī‘ah board include:
a) being well-versed in fiqh al-mu‘amalat
b) having practical knowledge and considerable expertise in the
application of usul al-fiqh in modern financial transactions
c) some IFIs in some jurisdictions include some additional qualification
related to their business
d) all of the above
Diff: 2
Page Ref: 187 - 188

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LO: 3

22. ------------------ organizes the Sharī`ah governance process which mainly

consists of the corporate interaction between the Sharī`ah board and the
Internal Sharī`ah Compliance Unit (ISCU) or external Sharī`ah audit review
and other organs of the Islamic financial institutions
a) the Islamic Financial Services Board
b) the Sharī`ah coordinator
c) the Sharī`ah compliance officer
d) the regulator of the Islamic financial institution
Diff: 2
Page Ref: 188
LO: 3

23. The internal Sharī‘ah audit of Islamic financial institutions reports to the:
a) audit committee
b) Sharī‘ah board
c) board of directors
d) all of the above
Diff: 2
Page Ref: 189
LO: 3

24. The Sharī‘ah Board must produce a Sharī‘ah report periodically or annually to
explain its position on:
a) the overall business performance and profitability
b) fatwa on matters brought before it such as proposed products and
transactions.
c) the level of IFIs of Sharī‘ah compliance
d) all of the above
Diff: 3
Page Ref: 189
LO: 3

25. According to IFSB-10, the Sharī‘ah report may be in any of the following
forms except:
a) financial performance report
b) a fact-finding report
c) (an ex-ante) report in relation to product design and development;
d) an annual Sharī`ah compliance report
Diff: 2
Page Ref: 189
LO: 3

26. The fact-finding reports and product design and development reports are
submitted to the
a) board of directors

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b) audit committee
c) management of the IFI
d) all of the above
Diff: 2
Page Ref: 189
LO: 3

27. The internal Sharī‘ah audit/review report on the products offered to customers
is submitted to the
a) audit committee
b) shareholders
c) senior management of the IFI
d) all of the above
Diff: 1
Page Ref: 189
LO: 3

28. The annual Sharī‘ah compliance report is submitted to

a) the board of directors (BOD) who distributes same to the shareholders
at the AGM
b) members of the public including the investment account holders (IAH)
c) the supervisory authority in the jurisdiction may have access to the
report
d) all of the above
Diff: 2
Page Ref: 189
LO: 3

29. Major requirement(s) for good corporate governance within the context of
takaful (Islamic insurance) include:
a) a set of organisational arrangements whereby the actions of the
management of takaful operators are aligned with the interests of its
stakeholders
b) provision of proper incentives for the organs of governance to pursue
that are in the interests of the stakeholders and facilitate effective monitoring
c) compliance with the Sharī`ah rules and principle.
d) all of the above

Diff: 3
Page Ref: 203
LO: 5

30. Which of the following is not an objective of the IFSB guiding principles on
governance for takaful (Islamic insurance)?
a) To provide benchmarks for use by takaful supervisors in adapting and
improving regulatory regimes or establishing new ones;
b) To address regulatory issues, such as risk management and financial
stability, for the takaful industry;
c) To provide liquidity enhancement to the financial system

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d) To provide appropriate levels of consumer protection in terms of both

risk and disclosure
Diff: 2
Page Ref: 204
LO: 5

31. Which of the following is not one of the three parts of the IFSB guiding
principles for the takaful industry?
a) Reinforcement of relevant good governance practices as prescribed in
other relevant internationally recognised governance standards
b) Promotion of strong business and legal environments that support
corporate governance
c) A balanced approach that considers the interests of all stakeholders and
their fair treatment
d) A drive for a more comprehensive prudential framework for takaful
undertaking
Diff: 3
Page Ref: 204
LO: 5

32. According to the IFSB guiding principles, takaful operators shall:

a) adopt and implement procedures for appropriate disclosures that
provide takaful participants with fair access to material and relevant
information
b) have in place an appropriate governance structure that represents the
rights and interests of takaful participants
c) adopt an appropriate code of ethics and conduct to be complied with by
their officials at all levels
d) all of the above
Diff: 3
Page Ref: 207
LO: 5

Short answers

Question 1:
Discuss the common features shared by the majority of corporate governance
definitions.

Most definitions of corporate governance have certain features in common. These

include:
• A system of relationships defined by structures and processes
• Relationships with different and, in some cases, conflicting interests
• All the stakeholders, one way or the other, are involved in the direction and control
of the company
• Rights and responsibilities are properly distributed among the stakeholders
Page Ref: 171 LO: 1

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Question 2
What are the differences (if any) between the conventional definition of
corporate governance and the definition of corporate governance in Islam?

The slight difference lies in the inclusion of Sharī‘ah governance in the corporate
governance structure of IFIs. The Sharī‘ah governance organ ensures strict
compliance with the Sharī‘ah in all the activities carried out by all other stakeholders
in the management of the company, and is usually represented by the Sharī‘ah
supervisory board in the governance structure of an IFI.
This key organ (the Sharī‘ah supervisory board) which is added to the stakeholders is
crucial in the business and the continued existence of the entity, since it lays down
Shari‘ah-compliant rules and procedures for the smooth running of the company. The
board is composed of Sharī‘ah scholars who are well-versed and competent in
Sharī‘ah matters, particularly aspects of economics and finance. The board supervises
and ensures the Sharī‘ah compliance of new products. They have both consultative
and supervisory functions.
Page Ref: 171-172 LO: 1

Question 3
Discuss briefly the two basic models of corporate governance from the conventional
perspective and their relevance for Islamic finance.

The two basic models of corporate governance from the conventional perspective are:
1- The Anglo-American model which emphasizes the interests of the
shareholders. This model accomplishes its aims through a number of
mechanisms, including shareholder representation on the board of directors,
management compensation schemes, and external market discipline.
2- The Franco-German model, which is a form of a stakeholder-value system,
emphasizes cooperative relations between stakeholders, and employee protection
and welfare. It incorporates the interests of shareholders and non-shareholders
alike with more emphasis on the latter, who are considered to be stakeholders.
Staff representatives serve on the board.

The Anglo-American model is of great relevance for Islamic finance as it aims to

align management’s interests with shareholders’ interests. By the nature of the modes
of Islamic finance, the shareholders are considered to be important stakeholders akin
to partners in a joint-venture company. Thus, a model that promotes the shareholder
value system by aligning the interests of shareholders with those of management
represents the underlying principle of most Islamic modes of finance, such as
mudarabah (trust financing) and musharakah (joint-venture contract).
Page Ref: 172-173 LO: 2

Question 4
Describe the roles of corporate governance in Islamic financial institutions
include:

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The roles of corporate governance in Islamic financial institutions include:

• Establishing a harmonious relationship among the shareholders, board of
directors, management, stakeholders, and, above all, God
• Promoting prudent and transparent practices in the management of Islamic
financial institutions
• Protecting the interest of all stakeholders including the investors, depositors,
staff, and the general public
• Ensuring the proper discharge of the corporate social responsibility role of
Islamic financial institutions
• Promoting a sound and stable Islamic financial industry that can compete
globally with conventional financial institutions in ensuring standard practices.
Page Ref: 174 LO: 2

Question 5
Describe the primary duties of the Sharī‘ah board in an IFI

The primary duties of the Sharī‘ah board in an IFI are:

 Advising the board of directors on Sharī‘ah -related matters.
 Reviewing and endorsing Shari‘ah-related policies and guidelines.
 Endorsing and validating relevant documentation for new products and
services, including contracts, agreements, or other legal documentation used in
an IFI’s business transactions.
 Overseeing the calculation and distribution of zakat and any other funds to be
channeled to charity.
 Assisting and advising relevant parties that serves the IFI, such as its legal
counsel, auditor or other consultants, upon request.
 Putting on record, in written form, any opinion that it gives on Shari‘ah-related
issues.
Page Ref: 180 LO: 3

Question 6
Identify the major areas covered by the Sharī‘ah Governance System in financial
institutions offering Islamic services (The Organs of the Sharī‘ah Governance
System).

The major areas covered by the Sharī‘ah Governance System in financial institutions
offering Islamic services include:
 Issuance of relevant Sharī‘ah pronouncements/resolutions.
 Dissemination of the Sharī‘ah resolution to the Sharī‘ah Review Unit
 Preparation of an Annual Sharī‘ah Compliance Review Report.
 Recording and reporting the findings of the internal Sharī‘ah
compliance unit (ISCU).
Page Ref: 181 LO: 3

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Question 7
Describe the various forms of Sharī‘ah reports that the board must produce to
explain its position on the overall business and products of the IFI, and its legal
ruling, or fatwa, on matters brought before it.

According to IFSB-10, the Sharī‘ah reports could take any of the following forms:
• a fact-finding report
• (an ex-ante) report in relation to product design and development
• (an ex-post) internal Shari‘ah audit/review report on the products offered to
customers
• an annual Shari‘ah compliance report.

These reports have different purposes and are submitted to different bodies in the
governance of the IFIs:
• The fact-finding reports and product design and development reports are
submitted to the IFI’s management.
• The internal Shari‘ah audit/review report on the products offered to customers
is submitted to the audit committee.
• The annual Shari‘ah compliance report is submitted to the BoD, which
distributes it to the shareholders at the AGM. Members of the public,
including investment account holders_(IAH), and the supervisory authority in
the jurisdiction may also have access to this report
Page Ref: 189 LO: 3

Question 8
Is there a need to provide standards for Sharī‘ah governance for IFIs despite the
existence of various relevant international standard-setting bodies?

The existing international standard-setting bodies that have issued guidelines on

corporate governance and risk management for financial institutions include the
Organization for Economic Cooperation and Development (OECD), the International
Organization of Securities Commissions (IOSCO) and the Basel Committee on
Banking Supervision (BCBS). These standards do not address the specifics of the
Islamic finance industry, hence the need to provide standards for Shari‘ah governance
for IFIs.
As most IFIs operate under the regulatory regimes and banking laws of their
respective jurisdictions, the corporate standards of other countries are applicable to
them provided they do not contradict the Shari‘ah. The IFSB and AAOIFI standards
are fundamentally Sharī‘ah governance standards specifically meant for the IFIs
Page Ref: 190 LO: 4

Question 9
What are the three major requirements that good corporate governance within
the context of takaful should encompass?

According to the IFSB, good corporate governance within the context of takaful
should encompass the following three major requirements.

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• A set of organizational arrangements whereby the actions of the management

of takaful operators are aligned, as far as possible, with the interests of its
stakeholders.
• Provision of proper incentives for governance bodies such as the BoD, the
Shari‘ah supervisory board and management to pursue objectives that are in
the interests of their stakeholders and facilitate effective monitoring, thus
encouraging takaful operators to use resources more efficiently.
• Compliance with Sharī‘ah rules and principles.37

These three major requirements cover Sharī‘ah and corporate governance, which are
the two major aspects of corporate governance in Islamic financial services. Takaful
operators must implement policies that agree with the interests of all stakeholders in
the industry.
Page Ref: 203 LO: 5

Question 10
What are the objectives of the IFSB guiding principles on governance for takaful
(Islamic insurance)?

The objectives of the IFSB guiding principles are to:

 provide benchmarks for use by takaful supervisors in adapting and
improving regulatory regimes or establishing new ones;
 address regulatory issues, such as risk management and financial
stability, for the takaful industry;
 provide appropriate levels of consumer protection in terms of both risk
and disclosure
 support the orderly development of the takaful industry in terms of
acceptable business and operational models, and the design and
marketing of takaful products.
Page Ref: 204 LO: 5

Question 11
Discuss the IFSB proposal to resolve conflicts of interest among stakeholders in
takaful undertakings

The IFSB proposes a governance committee responsible for implementing the

governance framework through the induction of all stakeholders. According to the
IFSB guidelines, the objectives of the governance committee should be as follows:
 Developing and recommending to the board of directors a set of effective
corporate governance policies and procedures applicable to the takaful
undertaking, including the formulation of appropriate business conduct and
ethics codes for employees and agents.
 Developing and recommending to the board of directors the additional
governance structure and processes applicable to the takaful operator, and
reviewing and reassessing their effectiveness.

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 Overseeing and monitoring the implementation of the governance policy

framework by working with management, the audit committee, and the
Shari‘ah supervisory board.
 Monitoring the financial management of the takaful undertaking, particularly
with respect to reserving and distribution of underwriting and/or investment
profit.
 Providing the board of directors with reports and recommendations based on
its findings in exercising its functions.
Page Ref: 207 LO: 5

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