Shariah Audit is a way of assessing or ascertaining whether the practice of the financial institutions conforms to the relevant Shariah standards and guideline.
The standards and guideline as referred to here is the standards as issued by the Shariah Supervisory Board, the Shariah guideline of the institution, and the relevant policies and procedures of each product and transaction.
How is Shariah Audit being done?
Shariah Audit is done by way of the Shariah auditor reviewing the actual transaction documentation of that particular product to make sure that the process and the sequencing of the transaction conforms to what has been approved by the relevant Shariah Board and also the standards as applicable.
So for instance, let’s say in an Ijarah product, a leasing product, the actual or the process flow of the transaction has to follow strictly the overall process flow of an Ijarah transaction.
So before the leasing between the lessor and lessee can happen, the lessor must, or needs to have in possession an asset before being able to lease it out to the lessee.
So in a banking model, the bank will, at the request of the lessee/ at the request of the customer, will go and purchase a property, let say for instance, and then immediately after the purchase of the property by the bank, the bank will lease it out to the lessee, over the period of time, over the period of the leasing time.
So, the sequencing of the transaction has to flow in accordance with the proper process.
So, the sale and purchase has to happen first, and then only the leasing can happen.
Another example in a commodity murabaha transaction, whereby the customer seeks to obtain cash instead of financing an asset.
So, the Bank has to first purchase commodity from the commodity supplier.
After owning the commodity, the Bank can only sell the commodity to the customer at the deferred sale price, principal plus profit.
And then only after selling the commodity to the customer, the customer would be able to sell that commodity to another commodity broker or buyer in the market.
So the process has to follow properly, from number 1 to number 2 and number 3.
What sometimes happen in the practice of financial institutions, is they tend to skip in between. So, they do step 1, they buy the commodity from the commodity supplier first, they immediately sell to the commodity buyer, and then only they transact between the parties, which is therefore incorrect.
So in a nutshell, Shariah audit is a way of ascertaining and confirming that the practice of the financial institution, is in compliance with the relevant Shariah standards and the direction of the Shariah Board.
This is to ensure that a good governance is achieved in that institution.
If you are interested to get us to help you with Islamic finance consultancy and Shariah advisory, feel free to contact us. Our team are looking forward to grow your brand with Shariah compliance products and services.