A new Shariah governance framework came into effect in Malaysia April 2020. The goal of this framework is to strengthen public confidence in the integrity, management and business operations of the Islamic financial institutions. The focus of this article is on Takaful and the value an actuary can add to the Shariah Committee.

One question we are always asked by companies in the process of setting up Takaful operations is who is in charge of the Takaful operation, the Board of Directors or the Shariah Committee? The reality is that both are vital to the success of the Takaful operation, and they must work together. The duty of the Board of Directors to the Shariah Committee is to ensure that the infrastructure is established in the Takaful operation for the Shariah Committee to succeed. This includes:

• Ensuring effective implementation of Shariah governance policies including reporting arrangements and Shariah non-compliance risk management.   Thus the Board must ensure the infrastructure be set up such that the Shariah Council can succeed.
• Ensuring any rulings by Bank Negara Malaysia’s Shariah Advisory Council (SAC) as well as the Takaful operator Shariah Committee’s own rulings and decisions or advice are implemented within all business and functional lines, including any business or risk implications arising from such implementation. The Board therefore must ensure Shariah policies, whether from the SAC or the Shariah Committee, be taken seriously and the Board be aware of the business or risk implications from such implementation. This requirement implies that a bridge is needed between the Shariah and business and risk management.
• Overseeing the implementation of the internal control framework to prevent Shariah non-compliance and any rectification measures to resolve incidences or circumstances that may result or have resulted in Shariah non-compliance.
• Overseeing the performance of senior management and other officers entrusted to implement the Shariah governance framework such that the Board is satisfied that the measures of their performance are aligned with Shariah governance objectives. Stated differently, the KPI of senior management must not be purely on business objectives but also on Shariah governance objectives. This should go well beyond the generic “ensure we observe the Shariah at all times” as such a KPI would be as useful as “ensure the operations have good profits every year”. The devil is in the details, which is the goal of proper KPI!
• Promoting a sound corporate culture which reflects the importance of adhering to Shariah requirements in product development and marketing, strategy formulation, business operations, risk management practices and other aspects that promote end-to-end compliance with Shariah. This implies that the Board must ensure that the Shariah Committee understand product development and marketing, business operations and risk management practices in sufficient detail to understand HOW to ensure Shariah compliance in these technical fields. The alternative of course is to ensure all technical staff have an in depth understanding of how Shariah concepts affect their work and operations.

It is also required that the Directors must continuously develop and strengthen his knowledge and understanding on Islamic finance in order to perform his duties. To be precise, most useful will be developing the knowledge and understanding of how Islamic finance affects product development and marketing, strategy formulation, business operations and risk management of the Takaful operations. This is particularly important as the Board remains fully accountable for any decisions and implications resulting from delegating responsibility to the Shariah Committee.

These requirements make it clear that the duties of the Board will be greatly eased with the addition of someone on the Shariah Committee who understands the technical side of Takaful operations as well as a basic understanding of Shariah. From the point of view of the Shariah Committee the Shariah Committee would be well served to have a technical person onboard to assist with duties such as:

• Providing a decision or advice on the application of any rulings of the SAC or standards on Shariah matters that are applicable to the operations, business, affairs and activities of the Takaful operation. The first step in learning a new skill is “knowing what you don’t know”. It is impossible for a Shariah scholar to join a Shariah Committee and understand all the technical details of the running of Takaful operations, especially the actuarial science forming the heart of much of the technical operations (especially once IFRS 17 starts). Just as a marketing officer or other member of management can understand the basics of actuarial science by being around actuaries for a length of time, a Shariah scholar can similarly develop such an awareness through regular interactions. However, it would be impossible for a non-actuarial member of management to replace the work of a qualified actuary, and similarly the Shariah scholar will not be able to grasp all of the technical concepts underlying the Takaful operation without very in depth actuarial training. Thus there is a real risk of some potential aspects of the operations, business affairs and activities of the Takaful operation being missed out when applying a new Shariah standard without an actuary being at minimum very closely involved with the Shariah Committee. 
• Establishing a robust methodology to guide its decision-making process, taking into account relevant business and risk practices in arriving at a decision or advice.
• Immediately updating the Board on any matters where the Shariah committee has reason to believe that any Shariah issues or matter may affect the safety and soundness of the Takaful operation.
• Deciding or advising to place additional restrictions on the operations, business, affairs and activities of the Takaful operation in applying an SAC ruling.
• Continuously developing a reasonable understanding of the business and operations of the Takaful operation and keep abreast with relevant market and regulatory developments.

Bank Negara has set several rules for being appointed to the Shariah Committee:

• Must be Muslim
• Must satisfy the requirements for being fit and proper. The requirements for fit and proper are per Bank Negara guidelines and ensures the person has personal integrity and reputation, competency and capability as well as financial integrity. 
• Is either a Shariah qualified person OR an expert who possesses skills, knowledge and experience relevant to support the roles and responsibilities of the Shariah committee

Of course it would be preferable for the expert (such as actuary) to be as close to Shariah qualified as possible, which means a bachelor’s degree in Shariah, solid knowledge in Shariah and strong proficiency in oral and written Arabic.

The link between the technical governance of the Takaful operation via the Board and the Shariah governance goes beyond the allowance for technical experts on the Shariah Committee. Bank Negara further encourages that the Board appoint a Shariah Committee member to the Board to foster closer relations. Whilst there could be challenges to a formal appointment of a Shariah scholar to the Board this does show the seriousness with which Bank Negara sees the relationship between technical and Shariah governance.

An actuary, being an expert on the technical side such as product development and risk management will understand the advantages of new and innovative product structures and designs. Being on the Shariah Committee will allow the actuary to be an integral part of deliberations and development of new Shariah models and structures to facilitate Takaful innovation. Thus the time is now for actuaries to take their place on Shariah Committees in order to ensure the Board as well as Shariah Committee fulfill their duties as part of the Takaful operation and help Takaful innovate into new and exciting market segments.

We would love your thoughts and comments. Please email the author at Hassan.Odierno@actuarialpartners.com or https://www.linkedin.com/in/hassan-scott-odierno/