Sharīʿah compliance is one of the main factors that many stakeholders are most concerned with when it comes to Islamic financial institutions (IFI’s), and takāful operators (TOs) are no exception. No products, operations or business activities can be considered Sharīʿah compliant without fulfilling certain Sharīʿah rules and requirements. There are a number of practical ways to achieve the Sharīʿah compliance function, including among others, audit and review. As one
of the initiatives of Bank Negara Malaysia (BNM) to introduce a robust regulatory framework, the Sharīʿah audit function is a major requirement in its Shariah Governance Framework for Islamic Financial Institutions (SGF). The Sharīʿah
audit function refers to independent assessment and objective assurance designed to add value and improve TOs’ compliance with the Sharīʿah. More recently, the Islamic Financial Services Act (IFSA 2013) includes a provision for the Sharīʿah audit function and requires each institution to appoint a person, subject to approval of the appointment by BNM, to conduct an audit on Sharīʿah compliance.
In order for TOs to assess whether sound and effective internal controls have been implemented, a comprehensive internal audit plan must be developed. To achieve this and move forward, TOs need a handbook that serves as a concise reference providing basic information such as audit areas, their Sharīʿah and regulatory justifications, nature and levels of risk involved. This manual is a response to this requirement based on a collaborative effort between the International Shari’ah Research Academy for Islamic Finance (ISRA) and Malaysian Takaful Association (MTA).
This manual is organised as follows:
• Overview of the Sharīʿah audit manual
• Part A: Takāful Sharīʿah audit scope
• Part B: Sharīʿah and regulatory basis for takāful auditable areas
• Part C: Internal Control Questionnaires
The introductory part explains the main purpose of this manual, highlights the essence of Sharīʿah compliance, and outlines Sharīʿah non-compliance events. It also outlines the scope and limitations of the Sharīʿah audit manual as well as its legal proviso, rationale, audit approaches and the relevant Sharīʿah principles and standards.
Part A on takāful audit scope applies a business-perspective approach focusing on auditable areas outlined in BNM’s guidelines on the takāful operational framework.
It outlines, under each audit scope, the objectives, main policies and processes and relevant risks. The main audit areas presented in the guidelines are:
• the takāful operational model
• segregation of funds
• management of takāful funds
• valuation of liabilities
• claims management
• management of surplus
• management of operating costs
• management of income
• payment and charges on surrender
• deficiency and loss rectification
• disclosure and transparency.
In addition to these audit areas, the manual applies a value-based approach by adding Sharīʿah governance, human resources, Sharīʿah non-compliant income and other miscellaneous financial issues to the audit areas to ensure the audit is comprehensive enough to further strengthen the internal control system for Sharīʿah compliance.
Part B on the Sharīʿah and regulatory bases presents the objectives of each audit area and the references for them from both primary and secondary Sharīʿah sources. It also presents regulations and guiding principles that provide adequate grounds for the audit areas highlighted in Part A. Further, it also provides readers with the levels of risk involved. The determination of these risks and their levels depends largely on the assessment of the impact of Sharīʿah non-compliant events.
Part C is an internal control questionnaire that outlines relevant questions for consideration in the process of internal Sharīʿah audit.
Keywords: Sharīʿah audit, audit areas, internal control, takāful operators (TOs).