Application of Three Lines of defense in Islamic Financial Institution

Abstract

The underlying principle and concept of Islamic Financial Institution (IFI) is Shariah. Shariah itself consists of aqidah (faith and belief), akhlaq (moral and ethics) and fiqh (law). These three components are the foundation of all IFI’s activities, including risk management activities. One of the concepts used in risk management is three lines of defense. The three lines of defense’s concept provide a clarity regarding roles and responsibilities of various risk functions within an organization. IFI should adopt the concept of three lines of defense as part of their Enterprise Risk Management framework to strengthen the effectiveness of their risk management function. The author proposes three lines of defense model for an IFI in this paper. The foundation of the proposed model is Shariah while its pillars are knowledge and Islamic culture.