Corporate Governance and Shariah Compliance in Institutions Offering Islamic Financial ServicesThe structures and processes established within an Instiution Offering Islamic financial Services (IIFS) for monitoring and evaluating Shariah compliance rely essentially on arrangements internal to the firm. By being incorporated in the institutional structure, a Shariah Supervisory Board (SSB) has the advantage of being close to the market. Competent, independent, and empowered to approve new Shariah-conforming instruments, an SSB can enable innovation likely to emerge within the institution. The paper reviews the issues and options facing current arrangements for ensuring Shariah compliance by IIFS. It suggests a framework that draws on internal and external arrangements to the firm and emphasizes market discipline. In issuing its fatwas, an SSB could be guided by standardized contracts and practices that could be harmonized by a self-regulatory professionals' association. A framework with the suggested internal and external features could ensure adequate consistency of interpretation and enhance the enforceability of contracts before civil courts. The review of transactions would mainly be entrusted to internal review units, which would collaborate with external auditors responsible for issuing an annual opinion on whether the institution's activities met its Shariah requirements. This process would be sustained by reputable entities such as rating agencies, stock markets, financial media, and researchers who would channel signals to market players. This framework would enhance public understanding of the requirements of Shariah and lead to a more effective utilization of options available to stakeholders to achieve continuing improvements in Islamic financial services.

This paper reviews Institutions Offering Islamic Financial Services (IIFS) corporate governance (CG) challenges and suggests options to address them. It first points out the importance of CG for IIFS, where it would require a distinct treatment from convention CG and highlights three cases of distress of IIFS. It then dwells on prevailing CG arrangements addressing IIFS' needs to ensure the consistency of their operations with Islamic finance principles and the protection of the financial interests of a stakeholders' category, namely depositors holding unrestricted investment accounts. It raises the issues of independence, confidentiality, competence, consistency and disclosure that may bear on pronouncements of consistency with Islamic finance principles. It also discusses the agency problem of depositors holding unrestricted investment accounts. The paper argues for a governance framework that combines internal and external arrangements and relies significantly on transparency and disclosure of market relevant information.

More than 200 Islamic financial institutions (IFI) are operating in 48 countries. Their combined assets exceed $200 billion with an annual growth rate between 12% and 15%. The regulatory regime governing Islamic financial institutions varies significantly across countries. A number of international organizations have been established with the mandate to set standards that would strengthen and eventually harmonize prudential regulations as they apply to IFI. The paper contributes to the discussion on the nature of the prudential standards to be developed. It clarifies the risks IFI are exposed to and the type of regulation that would be needed to systemically manage them. It considers that the industry is still in a development process whose eventual outcome is the convergence of the practice of Islamic financial intermediation with its conceptual foundations. Accordingly, the paper contrasts the risks and regulation that would be needed in the case of Islamic financial intermediation operating according to a) core principles, and b) current practice. Implications for approaches to capital adequacy, licensing requirements and reliance on market discipline are outlined. An organization of the industry that would allow it to develop in compliance with its principles and prudent risk management, and facilitate its regulation is proposed.

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This paper focuses on the corporate governance (CG) arrangements of Institutions offering Islamic financial services (IIFS) aimed at protecting stakeholders' financial interests. Many IIFS CG issues are common with those of their conventional counterparts. Others are distinctive. In particular they offer unrestricted investment accounts that share risks with shareholders but without a voting right. This paper first reviews internal and external arrangements put in place by IIFS to protect stakeholders' financial interests. It discusses shortcomings notably in terms of potential conflict of interest between shareholders and holders of unrestricted investment accounts. It then suggests a CG framework that combines internal and external arrangements to provide safeguards to unrestricted investment account holders without overburdening IIFS' financial performance. The paper uses a review of 13 IIFS and regulatory information from countries where IIFS have developed the most.