ifsb standard guidelines capital adequacy standard, risk management and governance ifsb standards...

IFSB Standard Guidelines

Capital Adequacy Standard, Risk Management and Governance

IFSB Standards – IRTI Distance Learning Program

IFSB Standards – IRTI Distance Learning Program 2

The IFSB, which is based in Kuala Lumpur, was officially inaugurated on 3rd November 2002 and started operations on 10th March 2003. It serves as an international standard-setting body of regulatory and supervisory agencies that have vested interest in ensuring the soundness and stability of the Islamic financial services industry, which is defined broadly to include banking, capital market and insurance. In advancing this mission, the IFSB promotes the development of a prudent and transparent Islamic financial services industry through introducing new, or adapting existing international standards consistent with Shari'ah principles, and recommend them for adoption.

I. IntroductionB

Islamic Financial Services Board

Islamic Finance Summer Course - Kazakhstan 3

IFSB-1: Guiding Principles of Risk Management for Institutions (other than Insurance Institutions) offering only Islamic Financial Services (IIFS)

IFSB-2: Capital Adequacy Standard for Institutions (other than Insurance Institutions) offering only Islamic Financial Services (IIFS)

IFSB-3: Guiding Principles on Corporate Governance for Institutions offering only Islamic Financial Services (Excluding Islamic Insurance (Takâful) Institutions and Islamic Mutual Funds

IFSB-4: Disclosures to Promote Transparency and Market Discipline for Institutions offering Islamic Financial Services (excluding Islamic Insurance (Takâful) Institutions and Islamic Mutual Funds)

IFSB-5: Guidance on Key Elements in the Supervisory Review Process of Institutions offering Islamic Financial Services (excluding Islamic Insurance (Takâful) Institutions and Islamic Mutual Funds)

B


I. Introduction


IFSB-6: Guiding Principles on Governance for Islamic Collective Investment Schemes

IFSB-7: Capital Adequacy Requirements for Sukuk, Securitisations and Real Estate investment

IFSB-8: Guiding Principles on Governance for Takâful (Islamic Insurance) Undertakings

IFSB-9: Guiding Principles on Conduct of Business for Institutions offering Islamic Financial Services

IFSB-10: Guiding Principles on Shariah Governance Systems for Institutions offering Islamic Financial Services

IFSB-11: Standard on Solvency Requirements for Takâful (Islamic Insurance) Undertakings

B


I. Introduction


GN-1: Guidance Note in Connection with the Capital Adequacy Standard: Recognition of Ratings by External Credit Assessment Institutions (ECAIs) on Shari`ah-Compliant Financial Instruments

GN-2: Guidance Note in Connection with the Risk Management and Capital Adequacy Standards: Commodity Murâbahah Transactions

GN-3: Guidance Note on the Practice of Smoothing the Profits Payout to Investment Account Holders

GN-4: Guidance Note in Connection with the IFSB Capital Adequacy Standard: The Determination of Alpha in the Capital Adequacy Ratio for Institutions (other than Insurance Institutions) offering only Islamic Financial Services

B


I. Introduction


B

Solvency Networth Islamic bank

Takaful operators

CAS

Sukuk and securitization

External rating

CAS

Alpha

External rating and retakaful

Commodity Murbaha

I. Introduction


B

Risk Management

Corporate Governance

GP - Islamic bank

GP - Islamic bank

GP - Takaful

Sharia Governance

GP – Collective funds

Liquidity risk

Sress testing

I. Introduction


BII. Capital adequacy

Repayment assurance for

debt based liabilities

Debt based depositors

Reducing moral hazard

Unrestricted investment depositors

Sufficient equity participation/

capital

Covenant reporting

Financial buffer

Monetary incentive in

the principal-agent

relationship

Restricted investment depositors

Reducing asymmetric information



Standard formula

Eligible capital

RWA(C+M)+RWA(O)-RWA(C+M)PSIACAR =



Eligible capital

• Tier 1 capital:– Common Stock– Retained Earnings

• Tier 2 capital– Undisclosed reserve– Asset revaluation reserve– General provisions– Loan loss reserves– Hybrid instruments (debt/equity)– Subordinated term debts



RWA 1 : Murabahah

• A Murābahah contract refers to an agreement whereby the IIFS sells to a customer at acquisition cost (purchase price plus other direct costs) plus an agreed profit margin, a specified kind of asset that is already in its possession.

• An MPO contract refers to an agreement whereby the IIFS sells to a customer at cost (as above) plus an agreed profit margin, a specified kind of asset that has been purchased and acquired by the IIFS based on an Promise to Purchase (PP) by the customer which can be a binding or non-binding PP.

• In a Murābahah transaction, the IIFS sells an asset that is already available in its possession, whereas in a MPO transaction the IIFS acquires an asset in anticipation that the asset will be purchased by the orderer/customer.



RWA 1 : Murabahah

• In Murābahah and MPO, the capital adequacy requirement for credit risk refers to the risk of a counterparty not paying the purchase price of an asset to the IIFS.

• In the case of market (price) risk, the capital adequacy requirement is with respect to assets in the IIFS’s possession which are available for sale either on the basis of Murābahah or MPO and also on assets which are in possession due to cancellation of PP in non-binding and binding MPO.



RWA 1 : Murabahah

Credit Risk

• the IIFS can secure a pledge of the sold asset/underlying asset or another tangible asset (“collateralised Murābahah”).

• The IIFS may employ other techniques such as pledge of deposits or a third party financial guarantee.

• the Risk Weight (RW) of collateralised Murābahah may be given preferential RW as set out below for the following types of collateralised asset:

- 75% for retail customers or working capital financing;- 35% for a Murābahah contract secured by a residential real

estate unless otherwise determined by the supervisory authorities; or

- 100% for a Murābahah contract secured by a commercial real estate or 50% in ‘exceptional circumstances O.



RWA 1 : Murabahah

Market Risk

In the case of an asset in possession in a Murābahah transaction and an asset acquired specifically for resale to a customer in a non-binding MPO transaction, the asset would be treated as inventory of the IIFS and using the simplified approach the capital charge for such a market risk exposure would be 15% of the amount of the position (carrying value), which equates to a RW of 187.5%



RWA 2 : Salam

• A Salam contract refers to an agreement to purchase, at a predetermined price, a specified kind of commodity which is to be delivered on a specified future date in a specified quantity and quality. The IIFS as the buyer makes full payment of the purchase price upon execution of a Salam contract or within a subsequent period not exceeding two or three days as deemed permissible by its SSB.

• In certain cases, an IIFS enters into a back-to-back contract, namely Parallel Salam, to sell a commodity with the same specification as the purchased commodity under a Salam contract to a party other than the original seller. The Parallel Salam allows the IIFS to sell the commodity for future delivery at a predetermined price (thus hedging the price risk on the original Salam contract) and protects the IIFS from having to take delivery of the commodity and warehousing it.



RWA 2 : Salam

Credit Risk

The credit RW is to be applied from the date of the contract made between both parties until the maturity of the Salam contract, which is upon receipt of the purchased commodity.Based on customer’s rating or 100% RW for unrated customer. No netting of Salam exposures against Parallel Salam exposures.



RWA 2 : Salam Market Risk• The price risk on the commodity exposure in Salam can be measured in

two ways:- the simplified approach - maturity ladder approach,

• Under the simplified approach, the capital charge will equal to 15% of the net position in each commodity, plus an additional charge equivalent to 3% of the gross positions, long plus short, to cover basis risk and forward gap risk. The 3% capital charge is also intended to cater for potential losses in Parallel Salam when the seller in the original Salam contract fails to deliver and the IIFS has to purchase an appropriate commodity in the spot market to honour its obligation.



RWA 2 : Salam Under the maturity ladder approach, the net positions are entered into seven time-bands as set out below. The net positions are entered into seven time-bands as set out below:

Time-band

0 – 1 month

1 – 3 months

3 – 6 months

6 – 12 months

1 – 2 years

2 – 3 years

Over 3 years



RWA 2 : Salam The calculation of capital charge is made in the following three steps:

(a) The sum of short and long positions that are matched will be multiplied by the spot price for the commodity and then by the appropriate spread rate of 1.5% for each time band.

(b) The residual or unmatched net positions from nearer time bands may be carried forward to offset exposures in a more distant time-band, subject to a surcharge of 0.6% of the net position carried forward in respect of each time-band that the net position is carried forward.

(c) Any net position at the end of the carrying forward and offsetting will attract a capital charge of 15%.



RWA 3 : Istishna• An Istisnā` contract refers to an agreement to sell to or buy from a

customer a non-existent asset which is to be manufactured or built according to the ultimate buyer’s specifications and is to be delivered on a specified future date at a predetermined selling price.

• The IIFS as the seller has the option to manufacture or build the asset on its own or to engage the services of a party other than the Istisnā` ultimate buyer as supplier or subcontractor, by entering into a Parallel Istisnā` contract

• The exposures under Istisnā` involve credit and market risks. Credit exposures arise once the work is billed to the customer, while market (price) exposures arise on unbilled work-in-process (WIP).



RWA 3 : Istishnaa) Full Recourse Istisnā`

The receipt of the selling price by the IIFS is dependent on the financial strength or payment capability of the customer for the subject matter of Istisnā`, where the source of payment is derived from the various other commercial activities of the customer and is not solely dependent on the cash flows from the underlying asset/project; and

b) Limited and Non-recourse Istisnā`

The receipt of the selling price by the IIFS is dependent partially or primarily on the amount of revenue generated by the asset being manufactured or constructed by selling its output or services to contractual or potential third party buyers. This form of Istisnā` faces “revenue risk” arising from the asset’s ability to generate cash flows, instead of the creditworthiness of the customer or project sponsor.



RWA 3 : IstishnaCredit Risk• The receivable amount generated from selling of an asset based on an

Istisnā` contract with full recourse to the customer (buyer) shall be assigned a RW based on the credit standing of the customer as rated by an ECAI that is approved by the supervisory authority. In case the buyer is unrated, a RW of 100% shall apply.

• For limited and non recourse Istisnā` . When the project is rated by an ECAI, the RW based on the credit rating of the buyer is applied to calculate the capital adequacy requirement. Otherwise, the RW shall be based on the ‘Supervisory Slotting Criteria’ approach for Specialised Financing (Project Finance) as set out below

Supervisory Categories Strong Good Satisfactory Weak

External Credit Assessments

BBB- or better

BB+ or BB BB- to B+ B to C-

Risk Weights 70% 90% 115% 250%



RWA 3 : IstishnaMarket Risk

a) Istisnā` with Parallel Istisnā`

There is no capital charge for market risk to be applied, subject to there being no provisions in the Parallel Istisnā` contract that allow the seller to increase or vary its selling price to the IIFS, under unusual circumstances. Any variations in a Parallel Istisnā` contract that are reflected in the corresponding Istisnā` contract which effectively transfers the whole of the price risk to an Istisnā` customer (buyer), is also eligible for this treatment.

b) Istisnā` without Parallel Istisnā`

A capital charge of 1.6% (equivalent to a 20% RW) is to be applied to the balance of unbilled WIP inventory to cater for market risk



RWA 4 : Ijarah• In an Ijārah contract (either operating or IMB), the IIFS as the lessor

maintains its ownership in the leased asset whilst transferring the right to use the asset, or usufruct, to an enterprise as the lessee, for an agreed period at an agreed consideration.

• All liabilities and risks pertaining to the leased asset are to be borne by the IIFS including obligations to restore any impairment and damage to the leased asset arising from wear and tear and natural causes which are not due to the lessee’s misconduct or negligence.

• Thus, in both Ijārah and IMB, the risks and rewards remain with the lessor, except for the residual value risk at the term of an IMB which is borne by the lessee.

• The lessor is exposed to price risk on the asset while it is in the lessor’s possession prior to the signature of the lease contract, except where the asset is acquired following a binding promise to lease



RWA 4 : IjarahIn an IMB contract, the lessor promises to transfer to the lessee its ownership in the leased asset to the lessee at the end of the contract as a gift or as a sale at a specified consideration, provided that

a) the promise is separately expressed and independent of the underlying Ijārah; or

b) a gift contract is entered into conditional upon fulfilment of all the Ijārah obligations, and thereby ownership shall be automatically transferred thereupon.



RWA 4 : IjarahCredit Risk

• In a Promise to Lease (which can only be binding), when an IIFS is exposed to default on the lease orderer’s obligation to execute the lease contract, the exposure shall be measured as the amount of the asset’s total acquisition cost to the IIFS, less the market value of the asset as collateral subject to any haircut, and less the amount of any ‘urbūn received from the lease orderer.

• The applicable RW shall be based on the standing of the obligor as rated by an ECAI that is approved by the supervisory authority, and in the case the obligor is unrated, a RW of 100% shall apply.



RWA 4 : IjarahMarket Risk

In the case of an asset acquired and held for the purpose of either operating Ijārah or IMB, the capital charge to cater for market (price) risk in respect of the leased asset from its acquisition date until its disposal can be categorised into the following:

(a) Non-binding Promise to Lease The asset for leasing will be treated as inventory of the IIFS and using the simplified approach the capital charge applicable to such a market risk exposure would be 15% of the amount of the asset’s market value (equivalent to a RW of 187.5%).

(b) Binding Promise to Lease In a binding PL, an IIFS is exposed to default on the lease orderer’s obligation to lease the asset in its possession. In the event of the lease orderer defaulting on its PL, the IIFS will either lease or dispose of the asset to a third party.



RWA 4 : IjarahThe IIFS will have recourse to any hamish jiddiyyah paid by the customer, and

(i) may have a right to recoup from the customer any loss on leasing or disposing of the asset after taking account of the hamish jiddiyyah, or

(ii) may have no such right, depending on the legal situation. In both cases, this risk is mitigated by the asset in possession as well as any hamish jiddiyyah paid by the lease orderer party.



RWA 5 : Musharakah• A Mushārakah is an agreement between the IIFS and a customer to

contribute capital in various proportions to an enterprise, whether existing or new, or to ownership of a real estate or moveable asset, either on a permanent basis, or on a diminishing basis where the customer progressively buys out the share of the IIFS (“Diminishing Mushārakah”).

• Profits generated by that enterprise or real estate/asset are shared in accordance with the terms of Mushārakah agreement whilst losses are shared in proportion to the respective contributor’s share of capital party.



RWA 5 : MusharakahThree main categories of Mushārakah:

1. Private commercial enterprise to undertake trading activities in foreign exchange, shares and/or commodities. This type of Mushārakah exposes the IIFS to the risk of underlying activities, namely foreign exchange, equities or commodities.

2. Private commercial enterprise to undertake a business venture (other than (1)). This type of Mushārakah exposes the IIFS to the risk as an equity holder, which is similar to the risk assumed by a partner in venture capital or a joint-venture, but not to market risk. As an equity investor, the IIFS serves as the first loss position and its rights and entitlements are subordinated to the claims secured and unsecured creditors.

3. Joint ownership of real estate or movable assets party.



RWA 5 : Musharakah1. Private commercial enterprise to undertake trading activities in the

foreign exchange, share and/or commodity

- The RW of a Mushārakah that invests in quoted shares shall be measured according to the equity position risk approach where positions in assets tradable in markets will qualify for treatment as equity position risk in the trading book, which would incur a total capital charge of 16% (equivalent to 200% RW).

- The capital charge can be reduced to 12% (equivalent to 150% RW) for a portfolio that is both liquid and well-diversified, subject to meeting the criteria as determined by the supervisory authorities



RWA 5 : Musharakah2. Private commercial enterprise to undertake business venture other than

trading activities in the foreign exchange, share and/or commodity

Credit Risk:

Simple risk-weight method400% RW of the contributed amount* to the business venture less any specific provisions (If there is a third party guarantee, the RW of the guarantor shall be substituted for that of the assets for the amount of any such guarantee)

Slotting Method

Supervisory Categories Strong Good Satisfactory Weak

Risk Weights 90% 110% 135% 270%



RWA 5 : Musharakah3. Joint ownership of real estate or movable assets (Mushārakah with Ijārah

sub-contract, Mushārakah with Murābahah sub-contract)

Credit RiskBased on lessee’s (for Ijārah sub-contract) or customer’s (for Murābahah sub-contract) rating or 100% RW for unrated lessee or customer

Market RiskRefer to the market risk capital charge requirements as set out under the sub-contracts 2



RWA 5 : Mudharabah• A Muḍārabah is an agreement between the IIFS and a customer whereby

the IIFS would contribute capital to an enterprise or activity which is to be managed by the customer as the (labour provider or) Muḍārib.

• Profits generated by that enterprise or activity are shared in accordance with the terms of the Muḍārabah agreement whilst losses are to be borne solely by the IIFS unless the losses are due to the Muḍārib’s misconduct, negligence or breach of contracted terms.

• A Muḍārabah financing can be carried out on either:a) restricted basis, where the capital provider allows the Muḍārib to

make investments subject to specified investment criteria or certain restrictions such as types of instrument, sector or country exposures; or

b) an unrestricted basis, where the capital provider allows the Muḍārib to invest funds freely based on the latter’s skills and expertise.



RWA 5 : Mudharabah1. Private commercial enterprise to undertake trading activities in foreign

exchange, shares or commodities

- The RW of a Muḍārabah that invests in quoted shares shall be measured according to equity position risk approach where positions in assets tradable in markets will qualify for treatment as equity position risk in the trading book, which would incur a total capital charge of 16% (equivalent to 200% RW) )

- The capital charge can be reduced to 12% (equivalent to 150% RW) for a portfolio that is both liquid and well-diversified, subject to meeting the criteria as determined by the supervisory authorities A basis, where the capital provider allows the Muḍārib to invest funds freely based on the latter’s skills and expertise.



RWA 5 : MudharabahPrivate commercial enterprise to undertake a business venture (other than (1))

i.Simple risk-weight method: The RW shall be applied to the exposures (net of specific provisions) based on equity exposures in the banking book. The RW under the simple risk-weight method for equity position risk in respect of an equity exposure in a business venture shall entail a 400% for shares that are not publicly traded.

However, funds invested on a Muḍārabah basis may be subject to withdrawal by the investor at short notice, and in that case may be considered as being as liquid as shares that are publicly traded. The applicable RW in such a case is 300%.

ii.Slotting Method expertise.



RWA 5 : MudharabahMuḍārabah Investment in Project Finance

Prior to certification where funds are already advanced by the IIFS to the Muḍārib :

- Risk weight is based on the rating of either the ultimate customer or the

Muḍārib - Otherwise, 400% RW is applied to unrated Muḍārib.

After certification where amount receivable by the IIFS from the Muḍārib in respect of progress payment due to the Muḍārib from the ultimate customer:

- Risk weight is based on the credit standing of the ultimate customer on the amounts receivable by the IIFS from the Muḍārib

- Otherwise, 100% RW for unrated ultimate customer.



RWA 6 : SukukSukūk is certificates that represent the holder’s proportionate ownership in an undivided part of an underlying asset where the holder assumes all rights and obligations to such asset ultimate customer.

Externally Rated SukūkApplicable risk weight will be based on the ECAI ratings in accordance with the Standardised Approach

Non Rated SukūkApplicable risk weight will be based on the underlying contract or on that of the issuer if there is recourse to the issuer



Operational riskThe proposed measurement of capital to cater for operational risk in IIFS may be based on either the Basic Indicator Approach or the Standardised Approach as set out in Basel II


BIII. Risk management

The unique risk of the Islamic Banks1. Credit Risk2. Benchmark Risk3. Rate of Return Risk4. Liquidity Risk5. Operational Risk6. Legal Risk7. Withdrawal Risk8. Fiduciary Risk9. Displaced Commercial Risk



Risk classifications1. Financial risks include:

- Market risk, the risk originating in instruments and assets traded in well-defined markets

- Interest rate risk, the exposure of a bank’s financial conditions to movements of interest rate.

- Credit risk, the risk that counterparty will fail to meet its obligations timely and fully in accordance with the agreed terms

2. Non-financial risks include:- Operational risk, the risk that arises due to insufficient liquidity for normal

operating requirements reducing the ability of banks to meet its liabilities when it falls due.

- Regulatory risk, the risk that arises from changes in regulatory framework of the country

- Legal risk, the risk relate to risks of unenforceability of financial contracts



Credit risk• Credit risk would take the form of settlement /payment risk arising when

one party to a deal pays money (e.g. in a Salam or Istishna’ contract) or delivers assets (e.g. in a Murabahah contract) before receiving its own assets or cash, thereby, exposing it to potential loss.

• In case of profit-sharing modes of financing the credit risk will be non-payment of the share of the bank by the entrepreneur when it is due

• This problem may arise for banks in the case due to the asymmetric information problem in which they do not have sufficient information on the actual profit in the firm.

• As Murabahah contracts are trading contracts, credit risk arises in the form of counterparty risk due to nonperformance of a trading partner.

• The non-performance can be due to external systematic sources



Benchmark risk• As Islamic banks do not deal with interest rate, it may appear that they do

not have market risks arising from changes in the interest rate. Changes in the market interest rate, however, introduce some risks in the earnings of Islamic financial institutions.

• Financial institutions use a benchmark rate, to price different financial instrument. Specifically, in a Murabahah contract the mark-up is determined by adding the risk premium to the benchmark rate (usually the LIBOR). The nature of fixed income assets is such that the mark-up is fixed for the duration of the contract. As such if the benchmark rate changes, the mark-up rates on these fixed income contracts cannot be adjusted.

• As a result Islamic banks face risks arising from movements on market interest rate.



Rate of return risk• This risk is associated with overall balance sheet exposures where

mismatches arise between the assets and liabilities of Islamic financial institutions.

• Revenue and expenses are generally accounted for an accrual basis when deriving the exposure and the Islamic financial institutions are exposed to the expectation of IAH when allocating their profits.



Liquidity risk• As mentioned above, liquidity risk arises from either difficulties in

obtaining cash at reasonable cost from borrowings or sale of assets.• The liquidity risk arising from both sources is critical for Islamic banks.• As interest based loans are prohibited by Shariah, Islamic banks cannot

borrow funds to meet liquidity requirement in case of need.• Furthermore, Shariah does not allow the sale of debt, other than its face

value.• Thus, to raise funds by selling debt-based assets is not an option for

Islamic financial institutions.



Operational risk• Given the newness of Islamic banks, operational risk in terms of person

risk can be acute in these institutions. • Operational risk in this respect particularly arises as the banks may not

have enough qualified professionals (capacity and capability) to conduct the Islamic financial operations.

• Given the different nature of business the computer software available in the market for conventional banks may not be appropriate for Islamic banks.

• This gives rise to system risks of developing and using informational technologies in Islamic banks.



Legal risk• Given the different nature of financial contracts, Islamic banks face risks

related to their documentation and enforcement.• As there are no standard form of contracts for various financial

instruments, Islamic banks prepare these according to their understanding of the Shariah, the local laws, and their needs and concerns.

• Lack of standardized contracts along with the fact that there are no litigations systems to resolve problems associated with enforceability of contracts by the counterparty increase the legal risks associated with the Islamic contractual agreements.



Withdrawal risk• A variable rate of return on saving/investments deposits introduces

uncertainty regarding the real value of deposits.• Asset preservation in terms of minimizing the risk of loss due to a lower

rate of return may be an important factor in depositors’ withdrawal decisions.

• From the bank’s perspective, this introduces a ‘withdrawal risk’ that is linked to the lower rate of return relative to other financial institutions.



Fiduciary risk• A lower rate of return than the market rate also introduces fiduciary risk,

when depositors/investors interpret a low rate of return as breaching of investment contract or mismanagement of funds by the bank (AAOIFI 1999).

• Fiduciary risk can be caused by breach of contract by the Islamic bank.• For example, the bank may not be able to fully comply with the Shariah

requirements of various contracts.• While, the justification for the Islamic banks’ business is compliance with

the Shariah, an inability to do so or not doing so willfully can cause a serious confidence problem an deposit withdrawal.



Displaced commercial risk• This risk is the transfer of the risk associated with deposits to equity

holders.• This arises when under commercial pressure banks forgo a part of profit to

pay the depositors to prevent withdrawals due to a lower return (AAOIFI 1999).

• Displaced commercial risk implies that the bank though may operate in full compliance with the Shariah requirements, yet may not be able to pay competitive rates of return as compared to its peer group Islamic banks and other competitors problem an deposit withdrawal.

• Depositors will again have the incentive to seek withdrawal.• To prevent withdrawal, the owners of the bank will need to apportion part

of their own share in profits to the investment depositors



IdentificationIdentification

MonitoringMonitoring

MeasurementMeasurement

MitigationMitigation

A full cycle of risk management process

... It is about a perpetual improvement continuous learning process ...


BIV. Governance

Governance• Comprehensive governance policy framework which sets out the strategic

roles and functions of each organ of governance and mechanisms for balancing the IIFS’s accountabilities to various stakeholders.

• Acknowledge IAHs’ right to monitor the performance of their investments and the associated risks, and put into place adequate means to ensure that these rights are observed and exercised.

• Appropriate mechanism for obtaining ruling from sharia scholars, applying fatwa and monitor sharia compliance in all aspects of their products, operations and activities.

• Adequate and timely disclosure to IAH and the public of material and relevant information on the investment account that they manage.


BIV. Governance

Sharia governanceP 1.1 : The structure should be commensurate and proportionate

with the size, complexity and nature of its business.

P 1.2 : Sharia board should have: clear terms of reference, operating procedures and reporting, and professional ethics and conduct.

P 2.1 : Any person mandated with overseeing the sharia governance fulfil the fit and proper criteria.

P 2.2 : Continuous professional development of persons serving on its sharia board, ISCU and ISRU.

P 2.3 : Formal assessment of the effectiveness of the sharia board as a whole and of the contribution by each member to the effectiveness of the sharia board.


B

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