Corporate Governance And Shariah Compliance In Institutions Offering Islamic Financial Services

Abstract

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.

‘Fatwa Repositioning’: The Hidden Struggle for Shari’a Compliance Within Islamic Financial Institutions

“…It has often been mentioned in extant literature that Shari'a scholars lack expertise in the banking sector (Farook and Farook, 2011, Karim and Archer, 2007, El Tiby, 2011, Grais and Pellegrini, 2006b, Grais and Pellegrini, 2006a, Ghoul, 2008 which makes it easy for bankers to get Shari'a certification from jurists by reengineering the complex financial products in a way that seems Shari'a compliant (El-Gamal, 2005, El-Gamal, 2006). Karim and Archer (2007) asserted that in many cases Islamic banks did not select Shari'a scholars based on their knowledge and expertise in the areas of banking and Shari'a but exclusively on their market reputation.…”

The Role of the Participatory Depositor in the Governance of Islamic Banks

“…In this way, the so-called 'Shariah risk', i.e. the risk that a transaction judged to be Shariah compliant by the scholars of an Islamic Bank may be unlawful according to the scholars of another Islamic Bank, is prevented, despite the fact that both banks operate in the same country (Grais & Pellegrini, 2006;Casper, 2012;Ginena, 2014). As far as the two European cases are concerned, there is clearly no central authority to which to entrust this function.…”

“…The Shariah Supervisory Board performs the following three principal functions (Grais & Pellegrini, 2006;Casper, 2012, Ginena & Hamid, 2015Mohamad, Sori & Rasid, 2017): The certification function of the SSB is considered the most relevant for the Islamic Bank, as it is necessary to prove the bank's religious integrity and for it to have a good reputation. The certification takes place through the discussion and issuance of opinions on the effective compatibility of the implemented transactions and of the various Islamic financial products that are offered with the Shariah's approval.…”

Centralisation of corporate governance framework for Islamic financial institutions

“…In addition, it defeats the purpose of maq a Á sid al-Sharīʿah (objectives of Islamic law), namely, the preservation of public interest (Hassan and Mahlknecht, 2011;Zuhaili, 2013). Moreover, the General Council for Islamic Banks and Financial Institutions (CIBAFI) has also reported that out of a set of 6,000 fatwas issued by IFIs worldwide, inconsistent fatwas across the globe only accounted for 10 per cent or approximately 600 fatwas (Grais and Pellegrini, 2006;Devi, 2008). In other words, strong evidence exists to indicate the existence of a near consensus among Sharīʿah scholars on a majority of Sharīʿah issues in Islamic banking.…”