Indonesia
New Regulation Related to CG in IFI’s (2014): Will It Solve the Existing
Challenge and Issue
RAHMA SUCI SENTIA
Abstract
The issue
of islamic corporate governance (CG) is very crucial given its central role in
islamic financial institution (IFI)’s development. The rapid increase in the
Indonesian IFI, especially banking and good support from government as
regulator (Bank Indonesia and OJK), over the years has triggered a question
whether its corporate governance has improved respectively. To answer this, the
good corporate governance (GCG) indicator based on AAOFI, IFSB, other benchmark
country framework (BNM), research papers are used. Furthermore, it is complimented
by deeper analysis on the ability the newest Indonesia CG guideline (OJK
Regulation No.8/POJK.03/2014) to tackle the existing CG issue and challenge in
islamic perspective. It is hoped
that this paper will encourage OJK and IFI in Indonesia to develop more sound
and comprehensive CG especially in term sharia governance.
Keywords: Good Corporate Governance, Sharia Governance, Indonesia, OJK Regulation,
Islamic Financial Institution, Islamic Bank
1.
Introduction
The issue of CG in IFI has been a long interest of
the world scholars. Research on the topic have been done in analytical as well
as in its technical aspect.
CG has main functions: to assurance the existence of
‘TARIF’ (Transparency, Accountability, Responsibility, Independence, and
Fairness) in company. It is aimed to ensure the interest of all stakeholder. CG also can be tool to influence the
performance of corporation. In islamic context, comprehensive islamic
compliance make confidence to the public and the financial market on the
credibility of Islamic finance operations.
The responsibility to develop GCG not solely in the
hand of Board or Supervisory Sharia Board only, rather, participation from the
employee as well as customer are highly needed, nonetheless,
enforcement from regulator is very crucial in this effort.
In 2014, Financial Service Regulatory in Indonesia
(OJK) published new regulation related to the soundness of islamic bank, that
cover the GCG framework in islamic bank. However the question remains: Is the
new regulation in IFI followed by its comprehensive GCG? Has the current GCG run
its role properly (check and balance the shariah along the procedure)? In this
paper, the indicator GCG in islamic perspective will be elaborated, followed by
assessment of Indonesia’s CG issue and challenge, and closed by conclusion.
2.
Good
Corporate Governance in Islamic Perspective and Its Indicator
There are several CG Guideline/Framework in islamic
perspective (AAOFI, IFSB, BNM SGF) and many paper has published and moreover
recently aftermath of the financial crisis 2008-2009. There is no single
definition of GCG in islamic perspective; however the same notions of GCG is
shared among many scholar and framework.
The GCG is said to be sustainable if there is sustainable
process to check and balance the system, procedure in company as generally, or
the sharia compliance in IFI especially. In another words, GCG in islamic perspective
consider the creation of enabling environment by strengthening market
discipline in the financial sector, moral integrity as well as users of fund,
an appropriate social-political environment with equitably enforced legal and
institutional check to ensure the fulfilment of contract and promises (Chapra,
2002). Thus, the ability of IFI to maintain and improve the shariah procedure
in the long term, without jeopardising can be categorized as Good Corporate Governance.
The goal of GCG is to avoid unjust among stakeholder.
In regards, the indicator of GCG, its indicator
seems to be convergent, that is the existence of Shariah Board as one of indicator.
In
many research paper, such as Chapra (2002) discussed the indicator that need to
be taken is to make the Board and the Management more effective and accountable
in the performance of their role and to enable the shareholders and depositors
to play a greater role in protecting their interest. Although the latest
indicator is significance but it is quite similar to conventional concept.
However recently, the existence of sharia risk, sharia
audit, sharia review function, are mainly used as indicator GCG, for example,
by BNM[1]
and State Bank of Pakistan[2].
It is obvious that Sharia governance
is the priority today. Some regulators concern to build on sharia based with
corporate governance best practice and enact specific regulations or guideline
for the different sector of the industry for as systematic development (IFDR,
2014).
Moreover, some recent research show that Sharia
Governance indicator have impacted to IFI, for example:
·
Ramli (2015) show the impact of the issuance of the Shariah Governance
Framework (SGF) by the Central Bank of Malaysia in 2011. The result shows that
based on disclosure of Annual Report, The BOD and SSB show the higher
disclosure, followed by Sharia Risk Management, Sharia Audit, Management,
Internal Sharia Reviewer, Sharia Secretariat, and Sharia Research respectively.
It has indicated the importance of CG and SG framework to encourage good
governance practices in relation to Sharia matters by Islamic financial
institutions (IFIs).
·
Shafii (2013) found recent issuance of Shariah Governance Framework by
Bank Negara Malaysia has shown a significant impact towards the establishment
of the Shariah audit and consequently, towards the role of the Shariah
Committee, particularly on the knowledge of the implementation process of the
product in the organization and the internal control that should be imposed.
It is better to conclude that GCG definition and
indicator in islamic perspective is wider than general CG concept in
conventional.
3.
Assessment
on IFIs GCG in Indonesia
3.1
Indonesia’s
GCG is still based on Shariah Board
Figure
1: The Current Indonesia GCG Guideline to Islamic Bank
Source: OJK
Letter No 10/SEOJK.03/2014, processed by author
Based
on the OJK new regulation, here is the GCG framework which is applied by IFI (limited
to islamic banks only). From the figure above we can see that Indonesia’s CG
consisted of General framework (quite similar to conventional) with additional
points about SSB and sharia compliance in funding and financing. The newest
just consider GCG assessments as an integral part to assessment the soundness
of islamic bank. Compared to previous regulation in 2010, actually there is
no significance change in GCG guideline for islamic bank in Indonesia.
Figure 2: Development Process of GCG Guideline to Islamic Bank in
Indonesia
Source: OJK Website, processed by author
The
previous research which examined the GCG using the previous regulation 2010
found that there was still lack of GCG in IFI especially related to its nature
(islamic perspective). The research of Darmadi (2011) and Siswantoro (2011) showed
that top three disclosure and focus in Islamic commercial bank were still BOC, BOD[3],
and Supervisory Sharia Board(SSB). As the newest regulation is quite similar to
previous, will the future GCG be better to tackle the issue and challenge CG in
islamic perspective?
Otherwise, the trend of Indonesia’s CG value in
global islamic finance is enough satisfying. Indonesia is
the top ten GCG. Between 2013 and 2014, there is an increase in CG value from
30 point to 47, 6 (IFDR, 2014). Not like other SSB that facing issue related to
independence of SSB, SSB in Indonesia is most likely independence. Their
responsibilities is limited to ask the explanation from IFI, cross check fatwa
used, review SOP, exam the sample. Fatwa shopping is not main issue because
fatwa is made by National Sharia Board in Islamic Council (independent
institution). Moreover, their fatwa is not binding until OJK published the
regulation that accept the fatwa in islamic finance product.
The fact above can explain why Indonesia’s GCG can
be categorized, to some extent, as good. When most of countries which
experience islamic finance growing problem may face the ‘fatwa shop’, Indonesia
may be able to tackle it.
3.2
Issue
Break Down: Going Beyond Supervisory Shariah Board to Shariah Function
It seems to be early to conclude Indonesia IFI is in
a good shape, besides, in academic, it is good to be prepared for the worst.
There is possibility that the problem in Indonesia’s is hidden, which means it cannot
be seen from the existence qualified Shariah Board. One possibility is that problem
might be in the no existence length arm in shariah function and the lack of comprehensive
regulation. There are two main reason why we have to look to this point.
First, the existence of Shariah Function can give
sign how consistency one company is to prevent non-sharia compliance problem in
operation. Sharia function should be from external side e.g. audit committee in
sharia principle and also from internal side e.g. internal sharia review. An
IFI which do not provide significant structure on sharia function could face
unfavourable condition when they build more comprehensive product. Beside that
it can give sign whether the check and balance has been realized or not.
Second, the existence of framework from regulator
can enforce the IFI to establish more sound CG. At least, IFI will fulfil the
minimum requirement CG from regulator. Based on the history, Indonesia’s CG in
islamic bank was not good before the existence of regulation. If there is law
enforcement from regulator, the IFI may be encouraged to establish good CG in
their internal company. For instance, Siswantoro
(2010) researched that the BSM’s risk management committee did not consist of
an independent commissioner in 2007. However, in the following year after
regulation, it was CG compliance. Moreover, in 2010 (after the second regulation)
all islamic bank complied with the regulation. There is trend that after the
regulation, there was an increase in implementing CG in islamic bank..
These two main possibility problem clearly cannot be
solved through the newest OJK regulation. The multiple analysis is done by
compared the newest Indonesia regulation to other framework (AAOFI, IFSB, and
other benchmark country framework) to find the CG potential issue that may
exist in Indonesia. Here is the problem breakdown.
Figure 2: Issue
Break-Down
Source: Author Analysis
(OJK Regulation compared to CG proposed
IFSB 3,6,8,10; AAOFI; BNM Framework. See further comparison in appendix 3)
From the figure
above, it can be concluded that Sharia Governance is still not become Indonesia
focus in establishing the Good Corporate Governance. The failure of existence
of Sharia Governance guideline create the failure of Comprehensive Sharia
Function in IFI.
1. Limited Supervisory Sharia Board (SSB)
Ability
The
problem that still exists on SSB in Indonesia is whether the
SSB is expected to have sufficient knowledge on finance in general and Islamic
finance in particular. Moreover, in formal structure, SSB become the only man
behind to ensure the sharia compliance. However, it is fact that there is a
limit of ability to understand and ensure all process sharia compliance if it
just is done by SSB team itself only.
2.
No existence of Sharia Review
Sharia
review work which involve planning, designing, executing, preparing and
reviewing will assist the work process
of SSB in forming and expressing opinions on the extent of Shariah
compliance. The failure of its
existence means the failure to form strong and independence basis of SSB's
report in institutional annual financial report.
3. No existence of specific audit and
governance committee
In
Indonesia, there is just three committees which supervise islamic bank: audit,
risk management and remuneration and nomination. They also do not have special
duty related to sharia rule.
4. No special consideration related to IAH
(Investment Account Holder)
In term of
possibility of conflict of interest between IAH and shareholder, it is very
obvious in Indonesia. In banking, the percentage
of liability account (depositor) is bigger than shareholder. Moreover, the
portion of mudharabah account (IAH) in Indonesia is big which show IAH has
special room in islamic banking business.
5. The low enforcement to Board and
Management to enhance their sharia capacity
The question is ‘Are the Board and
the Management expected to have reasonable understanding on Shariah
principles?’ Board and management should be sensitive to the issue of
non-sharia compliance, and it is just possible if there is a responsible to
fulfil the minimum understanding of sharia principle. With such minimum
capability, it seems to be possible for top management to implement ‘tone at
the top[4]’
in their working place and encourage their employee to aware to sharia aspect
in their business too.
6. No existence of the Sharia Compliance
Function in Internal IFI
1) The failure to conduct internal Shariah
review on a continuous basis
The internal review/control system in
term of sharia is not really run. The current sharia review rely on the sharia
board, and it cannot guarantee all aspect is really followed the sharia
procedure. However, in tem of regulation, Indonesia does not have specific
regulation that encourage company should provide specialist internal. The
failure to implement this may lead to failure to exam and evaluate the extent
of company's compliance to sharia.
2) No existence of independent Shariah Audit
function to undertake regular Shariah audit on annual basis.
In term auditing, the numbers of follow
up upon sharia audit funding are still low. Regulation do not give special mandate
in IFI related to sharia audit nature. The problem will exist, for example,
when there is the wrong accounting in IFI that cause the product become not
sharia compliance. The lack of understanding of sharia make the accountant may
not consider it and sharia internal auditor should tackle that issue. Some
cases in Indonesia related to false in accounting is found at the end by
regulator (OJK), not by the internal audit or audit committee.
Good general CG framework is not enough to guarantee
the better CG in IFI. The solution is to establish the SG framework which
enforce IFI to effectively provide the check-balance organ, or function in
their organization. The clearly indicated that their major challenges of
implementing effective shariah governance are due to lack of expertise and resources.
However, the existence of clear sharia framework will encourage industry,
education centre, and human resource themselves to fulfil the requirement. Indonesia can take lesson from Malaysia, although the sharia function
is still not fully implemented, the SGF framework has encouraged industry to fulfil
the sharia function standard step by step.
4.
Conclusion
Good corporate governance of IFI in Indonesia is not
able to only depend on the existence of a competent Sharia Board and islamic
compliance principle in funding and financing. It should be upon a reliable whole function in
checking and balance any possible issue in day to day monitoring. This analysis
paper, however has limitation. This paper only focuses on analysing the
existing regulation in tackling the existing issue and challenge on GCG. Hence
it may not reflect the actual issue and challenge in practice. However this
paper gives suggestion to regulator to establish more clearly framework related
to sharia nature in IFI.
References
AAOFI-Governance
and Auditing Standards. (2012). 4 Annual IIBI-ISRA Thematic Workshop. London,
United Kingdom
A Comparative Analysis of Shari’ah
Governance in Islamic Banking Institutions across Jurisdictions (2013). ISRA Research Paper
Besar, Mohd Hairul Azrin Haji.
Sukor, Mohd Edil Abd. Muthalib, Nuraishah Abdul & Gunawa, Alwin Yogaswara.
The Practice of Shariah Review as Undertaken by Islamic Banking Sector in
Malaysia. Malaysia
Chapra, MU. Ahmed, H. (2002).
Corporate Governance in Islamic Financial Institutions. Islamic Research and
Training Institute (IRTI). Jeddah.
Darmadi, Salim. (2011). Corporate
Governance Disclosure in the Annual Report: An Exploratory Study on Indonesian
Islamic Banks. http://ssrn.com/abstract=1956254
Alwyni, Farouk Abdullah. (2015).
Corporate governance in global Islamic financial institutions. Islamic Finance News. Accessed July
2015
IFDR (Islamic
Finance Development Report). (2014). ICD Thomson Reuters
International Federation of Accountants. (2007). Tone at The Top
and Audit Quality
Malik, Muhammad Shaukat. Malik, Ali
& Mustafa, Waqas. (2011). Controversies that make Islamic banking
controversial: An analysis of issues and challenges. American Journal of
Social and Management Sciences
PBI No 11/33/PBI/2009 Tentang
Pelaksanaan Good Corporate Governance Bagi Bank Umum Syariah dan Unit Usaha
Syariah
POJK No 8/POJK.03/2014 Tentang
Penilaian Tingkat Kesehatan Bank Umum Syariah dan Unit Usaha Syariah
POJK No 18/POJK.03/2014 Tentang
Penerapan Tata Kelola Terintegrasi Bagi Konglomerasi Keuangan
Ramli, N.M. Majid, A.S.A. Muhamed,
N.A.M. & Yaakub N.A (2015) Shariah Governance Disclosure Index and
Institutional Ownership of Islamic Financial Institutions in Malaysia.Journal
of Islamic Finance and Business Research.Vol. 3. No. 1. March 2015 Issue.
Pp. 1 – 13
Shafii, Zurina. Abidin, A.Z.
Salleh,Supiah. Jusoff, K. & Kasim,N. (2013). Post Implementation of Shariah
Governance Framework: The Impact of Shariah Audit Function towards the Role of
Shariah Committee. Middle-East Journal of Scientific Research 13
SEOJK No 10/SEOJK.03/2014 Tentang
Penilaian Tingkat Kesehatan Bank Umum Syariah dan Unit Usaha Syariah
Siswantoro, Dodik (2012). A Critique
of Islamic Banks Good Corporate Governance Report in Indonesia. Journal of
Islamic Business and Management Vol.2 No.2, 2012
Sulaiman, Maliah. Majid, N.A. &
Ariffin, N.M. (2015). Corporate Governance of Islamic Financial Institutions in
Malaysia. Volume 4 Ethics, Governance and Regulation in Islamic Finance. ISBN: 978-9927-118-24-1
Appendix 1: Governance Framework for Shariah Compliance for IFIs
Source: Omar Mustafa Ansari (E&Y)
Appendix 2: Key Sharia Function
Model
Source:
Dr Hurriyah El Islamy (CIMB Group), 2015
Appendix
3: AAOFI, IFSB, BNM, OJK CG Framework/Guideline
|
AAOFI
|
IFSB
|
BNM
|
OJK
|
|
SSB: Appointment,
Composition, Report
|
General Governance Approach of IIFS
|
Board structure and
functioning
|
BOC
|
|
Sharia Review
|
Rights of Investment Account Holders (IAH)
|
Nominating committee
|
BOD
|
|
Internal Sharia Review
|
Compliance with Islamic Shariah rules and principles
|
Remuneration committee
|
Committee
|
|
Audit and Governance
Committee (Including Related to Sharia Principle)
|
Transparency of financial reporting in respect of investment accounts
|
Risk management committee
|
Supervisory Sharia Board
(SSB)
|
|
Independence of Sharia Board
|
|
Audit committee/audit and
governance committee
|
Sharia Compliance in Funding
and Financing
|
|
Statement for Governance
Principle for IFIs
|
|
SSB
|
Conflict of Interest
|
|
Corporate Social
Responsibility
|
|
Risk management
|
Compliance
|
|
|
|
Internal audit and control
|
Internal Audit
|
|
|
|
Related parties transaction
|
External Audit
|
|
|
|
Management report
|
Limited Fund in Financing
|
|
|
|
Non-adherence to guidelines
|
Transparency, GCG Report, and
Internal Report
|
|
|
|
Customers/investment account
holder
|
|
|
|
|
Governance committee (related
to Sharia)
|
|
|
|
|
Shariah compliance
|
|
Source:
AAOFI, IFSB, BNM SGF, processed
[1] Bank Negara Malaysia
(BNM) Shari'ah Governance Framework for
Islamic Financial Institutions was
published in 2010
[2]
State Bank of Pakistan (SBP) Shariah Governance Framework for Islamic
Banking Institutions was published in April
2014.
[3] The Board of Directors in the context of Indonesia’s two-tier board
system is absolutely different from that in the unitary system. The BOD in
Indonesian firms is equal to top management in unitary board systems
[4]
Tone at the top is the ultimate responsibility of the organization’s leadership
– lead from the top by giving consistent messages on the importance of quality (International Federation of Accountants, 2007). In the contexof this
paper, the quality is refer to sharia compliance.
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