Product Development and Research personnel must know the Shariah and product requirement and also possess accounting expertise to equip them to customize and implement adequate solutions.
The benefit of a joint Product Development and Shariah Compliance Department is that combining the two functions creates a synergy that facilitates the bank’s overall operations and fulfillment of objectives. When product departments are independent, business teams review transactions and the clients from a business perspective alone, they come up with solutions on their own, and put them before the Shariah experts — more often than not, these solutions are not the best alternatives or even not Shariah-compliant since the business department is focused primarily on the commercial side of the transaction.
The wrong solutions mean numerous process cycles before the solutions are consistent with the client’s demand and Shariah principles. On the other hand, when the product development team has a Shariah background in addition to product development expertise, it is in a much better position to customize solutions that are effective and fall within Shariah parameters. It also increases the time to market aspect of the solution to the customers.
Another limitation with business teams is that Shariah-compliant product development expertise never really thrives because of high employee turnover. Every few years an employee leaves the bank with all his learning and is replaced with a new individual usually from a conventional banking background who needs to be trained all over again. In order to ensure quicker turnaround times and quicker solutions a combined product development and Shariah compliance and research department is key. It allows solutions to be delivered in as little as two to three days whereas two separate departments using a hit and miss approach fail to adequately serve clients. The joint product development and Shariah compliance department ensures consistent Shariah-compliance because the team not only structures the products but also the process flows with the business team’s help. These processes get documented as a step by step guide for future reference.
There is a general misconception that a Shariah department must only be represented by a Shariah scholar or group of scholars. The right approach is to include a variety of experts on the panel such as chartered accountants, business management specialists, and lawyers, to name a few, who work alongside the scholars to create and deliver effective solutions. These specialists must also be well versed in AAOIFI Standards and all the laws of sale and contracts in order to be strong supports to the business. Such a proactive approach means fewer errors and, therefore, fewer charity penalties post audit. It is a tried and tested method that promotes the bank’s growth by turning around solutions in a matter of days.
The main concepts of all new products must be approved by the Shariah Board, an entity separate from the Product Development and Shariah Compliance Department. Thereafter, the Shariah Advisor is entitled to approving any other products based on an already approved theme. For existing products, the involvement of the Shariah Advisor and/or the Shariah Board depends on the level of change required. If the modification is a repetition or a change undertaken earlier, then the bank already has the approval in place to execute the transaction. If it is a minor change which does not affect the Shariah essence of a contract it need not be referred back to the Shariah Advisor or Shariah Board. For major changes, the Shariah Advisor must be referred to and upon his discretion the Shariah board may or may not be involved.
Importantly, neither the Shariah Advisor nor the Shariah Board are the bank’s employees. The Shariah Advisor serves the bank in an advisory capacity only, however, he must visit the bank almost daily to ensure regular interaction. The Shariah Board should consist of at least three members with a senior scholar serving as its Chairman. The Shariah Board should ideally meet every quarter or at least twice a year to review overall matters related to the Shariah, approve new products and ideas, examine the issues highlighted during Shariah audits, and provide direction to the bank for enhancing Shariah compliance. The Product Development and Shariah Compliance Department must report to the Shariah Advisor and the Shariah Board to have continuous supervision.
In addition to monitoring specialized product design, the Shariah compliance team’s role includes reviewing and monitoring the Islamic bank’s:
▪ Pool Management and profit distribution procedures
▪ Investment banking transactions
▪ Funding, financing, investment and foreign exchange related activities