- 17 hours ago
The Tabung Haji RCI has sparked a national conversation, but its implications go well beyond one institution.
As Malaysia strengthens its position as a global Islamic finance hub, are our governance frameworks evolving as quickly as the institutions they oversee? Is Shariah governance today focused only on product compliance, or should it also play a bigger role in safeguarding institutional integrity, fiduciary responsibility and public trust?
Join Tehmina Kaoosji as she speaks with Ratna Sha'erah Kamaludin, Executive Director of AIBIM, and Prof Dr Aishath Muneeza, INCEIF University Malaysia, on the lessons this moment holds for Islamic finance, board governance and Malaysia's long-term competitiveness.
As Malaysia strengthens its position as a global Islamic finance hub, are our governance frameworks evolving as quickly as the institutions they oversee? Is Shariah governance today focused only on product compliance, or should it also play a bigger role in safeguarding institutional integrity, fiduciary responsibility and public trust?
Join Tehmina Kaoosji as she speaks with Ratna Sha'erah Kamaludin, Executive Director of AIBIM, and Prof Dr Aishath Muneeza, INCEIF University Malaysia, on the lessons this moment holds for Islamic finance, board governance and Malaysia's long-term competitiveness.
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00:02Hello, I'm Tamina Khosji and this is Niagara Spotlight. Today on Future Affairs, our spotlight
00:07falls on governance and trust in Islamic finance. Now, Malaysia has built one of the world's most
00:12sophisticated Islamic finance ecosystems, but the Tabunghaji Royal Commission of Enquiry,
00:18the RCI, raises an urgent question. Has governance kept pace? So, the institution manages over
00:2595.3 billion ringgit in savings while carrying a religious and public mandate to almost 10 million
00:32Malaysians, with around 53% of depositors holding less than 1,300 ringgit in their individual's
00:39accounts. Now, the RCI report into TH's management and operations from 2014 to 2020 revealed so far
00:4710.2 billion ringgit in overall losses and that seven of TH's 14 troubled investments suffered
00:53total losses. So, the question becomes, who then is responsible for ensuring the financial
01:00integrity behind Sharia compliance? And do institutions like Tabunghaji require a governance
01:06model designed specifically for the risks they carry? Today, we examine what this moment could
01:11mean for the future of Islamic finance in Malaysia. Welcoming to the studio's warmly, Ratna Shah-Era
01:18Kamaluddin, who is Executive Director with IBIM, the Association of Islamic Banking and Financial
01:23Institutions Malaysia, together with Professor Dr. Aishat Munizah, Professor and Associate Dean at
01:30INSEEF University. A very warm good morning to the both of you. Thank you so much for being here
01:35today. Good morning. Thank you for having us. Not at all. So, Puan Ratna, perhaps we could start off by,
01:41of course, re-emphasizing that Malaysia's Islamic finance framework is often viewed as one of the
01:46the world's most mature. And of course, then the Tabunghaji RCI has also prompted some questions about
01:53good governance, but also whether it depends on just, of course, having the right rules or the fact
02:00that institutions now, as we mature even further, require stronger safeguards. Some thoughts on this
02:07and also what the feeling has been at the grassroots. Okay. Thank you, Tamina.
02:14Well, it is true that Malaysia is always regarded as one of the most mature
02:23in the world, in Islamic finance. And it is widely recognized for its comprehensive ecosystem,
02:30supported by robust regulations, sharia governance, talent development, and active participation across
02:39the banking, capital markets, and tekaful sectors in Malaysia. So, for this RCI Tabunghaji,
02:49yes, it's on the watch. You know, everybody is talking about this. But I would argue that the
02:56RCI Tabunghaji exposes both governance design, as well as governance execution. Right. So, a balance
03:07between the both and not just one or the other. Yes, yes. So, but more fundamentally, a weakness in the
03:13governance design, which allow for execution, or execution failures, you may say, or a governance
03:25execution failure that revealed governance gaps design. So, actually, both. It exposes both.
03:35Good governance is not just about having the right policies, the committees, or structures on paper.
03:43It is about whether those structures create effective accountability, independent challenge,
03:50and timely decision making. You see, when the execution failures persist over time,
03:57it may suggest that the governance framework did not provide the necessary checks and balance
04:04to identify, to escalate, and address the issues early. So, that is why governance design and governance
04:12execution must go hand in hand. Yeah. Yeah, absolutely. And also, the IFSB, the Islamic Financial
04:20Services Board, according to their guidelines, as well, governance needs to be outcome-driven,
04:25and not just the checklist of sorts. So, perhaps, this episode does serve as a wider reminder to not only
04:33escalate these processes in the sense that it needs to be in place far beyond the time where it becomes
04:41a concern. Yeah, if I may add, the RCI Tabung Haji, I look at it at a different angle for
04:51a different lesson
04:52for us. You know, the issue is not simply about bad people or poor execution. The RCI actually reported
05:03identified weaknesses. They identified weaknesses in boardroom appointments, in political involvement,
05:12conflicts of interest, blah, blah. But it also put up recommendations. So, that is where the Islamic finance
05:20industry needs to look into, which is very important. Exactly. And sooner rather than later. Yeah.
05:28Thanks, Puan Ratna. Now, Prof Aishat, so, of course, the crucial question might also then become
05:34the reach of Sharia oversight. In your opinion, now, if a distribution may be Sharia-compliant in principle,
05:41but however, the financial position supporting that distribution may come under scrutiny, how could a
05:49Sharia oversight committee then be expected to adjudicate? Thank you very much for that question.
05:56I think it's a very important question because as a Sharia committee member, in my experience,
06:05we can't say that whenever there is an issue related to risk, it is the job of risk experts.
06:12Likewise, when it is something related to accountability, we can't say that it is the job of audit.
06:20And when it is Sharia, we can't say it is just the job of the Sharia committee and leave it
06:25up to there,
06:26because everything is interconnected. This doesn't mean that the job of the external Sharia,
06:34external auditors should be done by the Sharia committee. Likewise, the Sharia committee doesn't
06:39need to do its own evaluation. It's not their job and it's not their expertise as well. Now, having said
06:46that, in a Sharia committee, let's assume that the issue before it is to determine whether a distribution
06:54is permissible or not. So, in that case, if the permissibility of that distribution is depending upon
07:02the distributability policy of the institution as well as the financial position of that particular
07:11company, then of course we can't ignore the numbers. This simply means that we have to ask as Sharia
07:19committee members whether the evidence present to us is reliable or not. Likewise, we have to see whether
07:27that evidence is already audited or not. And whatever is presented should be verified by a competent
07:35person so that the Sharia decision could be made based on that. Now, again, when it comes to the role
07:42of the Sharia committee, the role of the Sharia committee is not only looking at the form but deciding
07:49on the substance and the outcome of the transactions as well. So, this means that we can't work as a
07:57Sharia
07:57committee, we can't work in silo. We have to have an integrated Sharia governance approach and this
08:04doesn't mean that the Sharia committee will have to be the accountant. This simply means that there should
08:10be an accountant or a lawyer, whoever can give verified information available to Sharia committee so that
08:18they can take the decision. And in any case, we can't say the job of the Sharia committee is to
08:28put
08:28the rubber stamp and say it is Sharia compliant. It goes beyond that because in all of the processes,
08:35the Sharia element should be embedded and this is what the Sharia committee is supposed to ensure.
08:43Exactly. And Sharia approval ultimately is so meaningful that it has to be multi-dimensional,
08:50ongoing and rigorous enough. That brings me to asking Puan Ratna. Now, of course,
08:55Islamic finance has always emphasized the principle of amana, which is the obligation, of course, towards
09:02safeguarding the entrusted wealth or what is of value, right? So, yet institutions today are also
09:09expected to meet increasingly rigorous areas of both governance, corporate governance, there's
09:15disclosure, there's also risk management standards. Now, taking all of this together, how can boards
09:21ensure these two responsibilities, neither more important than the other, actually can harmoniously be
09:30conducted? Okay, I think we should now look, we should now stop viewing amana and corporate governance as
09:38two separate concepts. Because in reality, good corporate governance is how amana is translated into
09:47action within an institution, especially in Islamic finance. We talk a lot about amana. But put simply,
09:55governance provides the structure, while amana provides the purpose and the values behind every
10:02decision. We can put it like amana is a moral compass of the decision making. So, governance tells us what
10:10processes, controls, accountabilities, mechanism needs to be in place. But amana ensures that those powers and
10:18responsibilities are exercised with integrity, fairness and genuine sense of responsibility towards the
10:26stakeholders. Okay, I would like to bring into the Islamic finance industry, where in the context of Bank
10:34Negara Malaysia, Sharia governance policy document in 2019, amana is a trust, the stewardship and the
10:43accountability before Allah subhanahu wa ta'ala and stakeholders. It's not merely stated as a value.
10:50It is embedded through the governance structure, through the accountability framework and control
10:58functions that Islamic banks must establish. So basically, in the Islamic finance industry,
11:05amana is already embedded in the operations, in the decision making. So the policy actually aims to
11:13strengthen Sharia governance and integrate Sharia consideration, like Prof Aisha mentioned, into
11:20business and the risk strategies across the institution. So, if I may add, it's also, I would also wear,
11:28this is where the values-based intermediation, the VBI plays an important role. The VBI actually
11:35encourages us to move beyond a narrow compliance mindset. The question is no longer just, is this
11:44transaction Sharia compliant? But the more important question is, are we protecting the wealth? I can
11:50mention just now, are we protecting the wealth that has been entrusted to us?
11:55Yeah, are we managing all these responsibilities? And ultimately, perhaps, it's not a question even
12:02of adequate safeguards, but emphasising as comprehensive as possible safeguards at all times,
12:10right? That would perhaps serve those who work in the arena of Islamic financial governance the best
12:17moving forward. Thank you very much for the conversation so far, Puan Ratna, as well as Prof Aisha.
12:23We do take a slight quick break now. We will come back with the rest of the conversation,
12:27focusing on Islamic finance and the need for governance and trust. See you then.
12:41Welcome back to Niagara Spotlight. Still with me, Tamina Kaosji. And today's topic of discussion
12:45focuses around governance and trust in Islamic finance. Prof Aisha, moving into the rest of the
12:52conversation now. So you have also previously chaired the Hajj Pilgrimage Fund at Maldives
12:57Hajj Corporation. Now, drawing from those experiences and your insights further, if returns paid to,
13:04let's say, one generation of depositors leave an institution with reserves that later require
13:11massive intensive rebuilding, how can Islamic finance then adjudicate over this dilemma?
13:19This question is quite close to me because I have previously chaired the Tabung Hajj of our country,
13:25Maldives Hajj Corporation. Now, when we look at Hajj funds, it's not merely a general ordinary fund.
13:35It's a fund related to people's aspiration. Now, this aspiration is a religious aspiration to go to
13:41Hajj. And therefore, people not only give their money one time in a lump sum basis,
13:49but all throughout their life, they've been saving for this big aspiration which they want to fulfill.
13:57Now, with this money comes the concept of Amanah. Now, just now, Puan Ratna has very clearly explained
14:04what Amanah means in the context of Sharia governance. Now, I would say when it comes to Hajj fund management,
14:13there should be the concept of dual Amanah concept. Now, the first Amanah is towards the today's depositors
14:21who are putting the money. And the second type of Amanah which is owed is to the future depositors
14:28who will be putting the money. Now, we have to balance it. If we can't balance those two layers of
14:35Amanah,
14:36it would be very difficult to achieve equilibrium. And this is the situation we are facing right now.
14:44And I think it's very important to bring into this discussion the concept of intergenerational equity or fairness.
14:54Now, intergenerational equity or fairness in this sense means that today, if we have the ability to give
15:01more profit to the depositors who are in there, are we going to do that? So if we do that,
15:08actually,
15:09who is taking the liability for that? Who is paying for that? The generation to come? Yes. So we need
15:16to bring
15:16balance into it and consider when decision is taken that we need to consider more than what is there for
15:25today. Tomorrow matters as well. And not only tomorrow, tomorrow and tomorrow and tomorrow,
15:31and also the next generation to come matters as well. So this is something we have to consider.
15:38Absolutely. And Islamic finance, of course, underpins so much of the principles along avoiding harm.
15:45So that taken into consideration. Juan Ratna, now then, casting the net wider as well and the lens,
15:53Malaysia also competes with many other jurisdictions that Saudi Arabia, the UAE, even Indonesia,
16:00for leadership in Islamic finance. So as international investors are also placing greater emphasis on
16:06both governance as well as institutional credibility, could stronger governance drawing from this moment in
16:14time actually be quite the opportunity, reversing the lens a little?
16:20Okay, absolutely. In fact, I would argue that the governance can be Malaysia's next competitive
16:26advantage in Islamic finance. I mean, historically, the countries have competed, you know, we have
16:32competed on the size of the Islamic finance assets. We've competed on the breadth of our products
16:39or our market share. But I think going forward, I believe the differentiator would be increasingly be
16:47on the trust, institutional credibility and governance quality. So in the recent Sassana Symposium 26,
16:57hosted by Bank Negara, the governor himself aptly observed that Malaysia has in the past demonstrated
17:05considerable resilience in the face of successive challenges. So these are important acknowledgement
17:12of the progress that Malaysia has made. And today, you know, as you said, the international investors are not
17:20only asking whether an institution is profitable or is it Sharia compliant, they are asking how decisions are made,
17:30how are the risks managed, and is there accountability, is the institution transparent? The question goes along this line.
17:41And whether the institution can be trusted to protect the stakeholders' interests in the long run.
17:49Exactly. And when it comes to the finer details, according to AOFI, there's also now the provision of
17:56both Sharia compliance and even fiduciary ratings. So it is no longer a question of trust based on spiritual guidance,
18:06but also it is quantifiable. So from there, Prof Aishath, a little deep dive into regulatory parameters.
18:15Now, Tabunghaji is not a bank, of course, though, but it does receive deposits, it manages a large
18:22investment portfolio which naturally carry risks that require pretty sophisticated financial oversight.
18:29Now, ought an institution with this type of financial footprint have the ability to remain under a bespoke
18:38statutory framework or do we need to revisit and think more beyond about standards applied to general
18:48Islamic financial institutions so that it is more harmonized?
18:53I think the question shouldn't be whether we have to apply the rules which we apply to financial institutions
18:59or banks to Tabunghaji. Because at the end of the day, we have to look at the risk profile of
19:05Tabunghaji,
19:06which will obviously have similarities of a bank as well. But that doesn't mean that we have to treat
19:14Tabunghaji as a bank and apply everything, all the rules that we have to apply to a bank to Tabunghaji.
19:21So the question we have to ask ourselves today would be what type of governance framework would
19:26be more suitable to operate Tabunghaji as it is without eroding the essence of it?
19:34So I would say that when we compare Tabunghaji with other Islamic financial institutions,
19:41whether it is commercial financial institutions or social financial institutions, Tabunghaji is quite unique.
19:49As you have mentioned rightly about the functions of it,
19:53we don't have similar entities that have similar functions other than Tabunghaji.
19:59So my answer would be definitely we need to come up with a framework,
20:04we can learn from the banking sector what works for them and what could be replicated by customizing
20:11it to Tabunghaji that would definitely work. But the paramount consideration in this case
20:18should be given to the risk profile, the unique risk profile of Tabunghaji.
20:23And of course then appropriate and adequate risk oversight management, right?
20:29Puan Ratna, now the RCI has also renewed discussions around other issues including board composition,
20:37there's also independence as well as competency. Digging a little deeper and looking across the
20:43breadth of the Islamic finance industry today, what capabilities ought boards to prioritize moving
20:51forward? Since of course not only regarding this issue but many others, there's an increasingly
20:56sophisticated financial architecture and regulatory framework.
21:02Okay, the Islamic finance industry currently already has taken significant steps to strengthen
21:10board composition. So there is, you know, it's not that there are lack of that, they are already
21:17strengthening board composition. We recognize that the future institutions will be far more sophisticated
21:25and technology driven. So going forward, the boards should prioritize, I can say, on three capabilities.
21:34One is the future ready expertise across finance, across technology and Sharia governance, and then strong
21:41independent judgment to provide effective challenge, and strategic foresight to oversee emerging risks and
21:49opportunities opportunities in a rapidly changing environment. Yep. So basically Islamic finance institutions,
21:56we have progressed, strengthened the board composition to reflect the industry's increasing sophistication,
22:02where today it brings together diverse expertise in finance, risk, technology, sustainability,
22:09ability, Sharia governance, positioning them to oversee the future challenges and opportunities effectively.
22:17We also have strong governance and independent judgment, and the strategic foresight and emerging risk oversight.
22:23So the Islamic finance industry has already taken these steps to strengthen, you know, the board composition.
22:32And Prof Aishat, moving into landing the conversation, now Tabunghaji sits at a unique intersection between
22:40Islamic finance, social finance, and also being, of course, a public institution in Malaysia.
22:45You've written about governance gaps in Islamic social finance. Does this episode in particular point to
22:52a need for clearer governance standards for institutions such as Tabunghaji moving forward?
23:00Yeah. So what I believe is that when we talk about governance, the first thing that would come to our
23:06mind would be the principles of responsibility, accountability, fairness, and transparency.
23:13Of course, these are basic governance principles that should be embedded in any organization,
23:19whether it's a social financial institution or any other type of financial institution as well.
23:24But unfortunately, when we say good governance, it is always related to commercial financial institutions in
23:33the context of financial institutions. When it is social or quasi-social, normally we don't give so much emphasis
23:41in good governance and we don't have rules which are specifically dedicated for these financial institutions.
23:49For example, in this conversation, we've talked about IFSP's role, even IO fee,
23:56they have governance standards. But if you look at those governance standards even, there is a gap.
24:01When it comes to social finance, considering their special risk portfolio,
24:06there aren't governance standards which are laid down still or enacted at this stage, which is quite sad and this
24:15is what I've been advocating for.
24:18Now, coming back to your question, when it comes to governance standards specific to Tabunghaji,
24:24I would say we need to emphasize at least three important principles. Number one, the dual concept of Amanah. Number
24:34two, intergenerational fairness.
24:37And number three, the most important one would be human governance. Now, people believe that by putting additional rules to
24:46institutions like Tabunghaji,
24:47they will become better because we are equating institutions like Tabunghaji to financial institutions,
24:54which have primary regulatory authorities, secondary regulatory authorities, international standards to apply.
25:01They have cross-border transactions, so on and so forth. But we can't do that. We have to think within
25:07the context
25:08and find out an amicable or customized solution for the entity we are talking about. And human governance simply means
25:18that
25:18by having the corporate governance, it's not enough. We have to govern the humans operating that institution as well.
25:26They have to have good ethical values, good akhlaq, good moral values, so that everything becomes easier within the context
25:34of governance.
25:35Human governance, of course, being the one that requires perhaps the most oversight.
25:41Prof Aisha, Puan Ratna, thank you very much for your insights. And so far, we hope this is useful,
25:46not just to the Islamic financial institutions, but the wider Malaysian community at large.
25:51Tania, just one last thing to say. Yes, certainly.
25:53Following from what Prof Aisha mentioned, so to us, governance is not merely about compliance to the rules.
26:01It is about designing institutions where this amana is protected, even when individuals, incentives,
26:10circumstances are not perfect. So that is where, you know, we have to think about it, how to embed all
26:18this
26:18human governance, which is the most difficult.
26:21Exactly. And once that can be harmonized, perhaps in the future, there will be less or absolutely no
26:28opportunity for such repetitions. Thank you very much indeed.
26:31Well, that's all we have time for today. And the lesson from Tabunghaji is clearly that trust cannot
26:35rest on compliance alone. I'm Tamina Kausji, signing off for now. Thank you so much for
26:41watching Niagara Spotlight. We'll be back next week with more business analysis and economic insights.
26:46Have a productive week ahead.
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