Indonesia’s Islamic finance architecture master plan and Islamic banking road map for 2015-2019 focuses on accelerating the market share of Islamic banks, rather than strengthening sharia governance practices.
haria is the backbone of Islamic banking. Ensuring sharia compliance is imperative to maintaining the confidence level of stakeholders and the public at large. Inadequate attention to sharia compliance in its entirety may trigger negative repercussions on the Islamic banking industry, such as massive withdrawal, financial loss and legal disputes. Effective sharia non-compliance risk management is therefore essential to mitigate sharia non-compliance.
A sharia audit plays a significant role as the third line of defense in safeguarding the sharia compliance aspect of Islamic banking activities and operations. The Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) governance standard for Islamic financial institutions (IFI) defines a sharia audit as an “independent department or part of internal audit examining and evaluating extent of compliance with sharia rules, fatwas, instructions issued by the IFI’s fatwas and Sharia Supervisory Board [SSB].”
The Sharia Governance Framework (SGF) of Malaysia’s Bank Negara Malaysia (BNM) defines sharia audit as a “periodical assessment conducted from time to time, to provide an independent assessment and objective assurance designed to add value and improve the degree of compliance in relation to IFI business operations, with the main objective of ensuring a sound and effective internal control system for sharia compliance”.
The main objective of a sharia audit is to provide an independent assurance on the extent of Islamic banking compliance with sharia principles, including contract execution, utilization of funds, investment activities and purification mechanism. This differs from a conventional audit, which is mainly designed to form an opinion on the truth and fairness of financial statement of corporations.
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