When we discussed the organisational structural difference between conventional and Islamic financial institutions, we mentioned that Shariah board members are not full-time employees of the Islamic financial institutions and that in order to smoothen the Shariah compliance process, most Islamic financial institutions have an internal Shariah department. We will discuss the overall role of the internal Shariah department in this post.

The staff of the internal Shariah department are full time employees of the institution but report directly to the Shariah board although they may have a dotted reporting line to the management of the institution. The number of staff in this department varies depending on the size of the institution in question e.g. in a small financial institution there may only be one staff member working in the internal Shariah department, whereas if it is a large institution, the internal Shariah department may reach over 20 staff. Staff working in this department are expected to have a combination of knowledge in the following disciplines: Shariah, Economics, Finance, Accounting and Law, depending on their specific role.

The Head of the internal Shariah department usually acts as the Secretary General to the Shariah board and is required together with the rest of the department, to act as a liaison between the management of the bank and the Shariah board. In some jurisdictions, the Secretary General may additionally be a member of the Shariah board.

The internal Shariah department is usually divided into two distinct functions which are as follows:

1) Advisory/Review – The staff in this function are required to give Shariah input on all the day to day Shariah issues faced by the Islamic financial institution. Staff in this function deal with the various departments of the Islamic financial institution and respond to any Shariah queries and review structures, products and transactional documents from a Shariah perspective. This team in liaison with the Secretary General, decide what matters need to be raised to the Shariah board and are responsible for presenting the relevant matter Islamic financial institutions in a clear manner to the Shariah board. We will go into further detail regarding this function in a future post Insha Allah. 

2) Audit –  The staff in this function are required to audit the Islamic financial institutions on an ongoing basis to identify any Shariah compliance breaches as well as identify any possible gaps & risks present within the institution from a Shariah perspective. The audit reports produced by this function are raised to the Shariah board periodically, so that the Shariah board can decide on any corrective action that needs to be taken. We will go into further detail regarding this function in a future post Insha Allah.

Shariah departments may have staff conducting other related functions such as training, research etc. but as mentioned earlier, the main functions are the two we discussed above.

From the above discussion, we have highlighted another clear difference between Islamic & conventional financial institutions. Conventional financial institutions do not have any requirement to have any sort of internal Shariah department whereas for Islamic financial institutions having a qualified internal Shariah department is crucial in ensuring a smooth Shariah compliance process.


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